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Prudential plc Annual Report 2013
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Delivering long-term value
The Group has delivered a strong performance in 2013,
with our key financial metrics of IFRS operating profit,
cash and new business profits all seeing double-digit
growth. We have met all six of the 2013 ‘Growth and Cash’
objectives set in 2010, and the strength and sustainability
of our performance have allowed the Board to recommend
the rebase of our dividend upwards for the third time in
four years.
Creating value
Customers
These results are possible because we provide
customers with products and services of value to them.
Across Asia, we deliver health and protection products
to families at an affordable price in markets where
there are limited social safety nets. In the US, our range
of variable annuities is providing income to retirees
in the world’s largest retirement market. In the UK,
we have a history of more than 165 years of providing
savings and protection to policyholders whatever the
prevailing economic conditions.
We believe the Group is well positioned to continue
to deliver good value to customers and attractive
returns to shareholders while continuing to manage
capital prudently.
23mlife customers worldwide
Investors
59%total shareholder return achieved in 2013
Employees
22,308
employees worldwide
Societies
The directors’ report of Prudential plc for the year ended 31 December 2013 is set out on pages 1 to 12, 63 to 87
and 333 to 374 and includes the sections of the Annual Report referred to in these pages.
£18.5m
total community investment spend
Contents
For an overview of our 2013 performance
Group Chief Executive’s report page 06
For information about our strategy
and operating principles
Our strategy page 16
For information about our Board of directors
Board of directors page 64
Long-term
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View our report online www.prudential.co.uk
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Chief Financial Officer’s report
on our 2013 financial
performance
Group Chief Risk Officer’s report
on the risks facing our business
and our capital strength
54 Corporate responsibility review
86 Additional disclosures
87
Index to principal directors’
report disclosures
94 Directors’ remuneration policy
107 Annual report on remuneration
120 Supplementary information
Group overview
03–12
04 Chairman’s statement
06 Group Chief Executive’s report
Strategic report
13–61
14 Who we are
15 How our business works
16 Our strategy
17 Implementing our strategy
18 Measuring our performance
20
Our businesses and their
performance
Governance
63–87
64 Board of directors
69 Corporate governance report
69 Board
73 Board committees
83
84 Shareholders
Corporate governance codes
Remuneration report
89–123
90
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Annual statement from the
Chairman of the Remuneration
Committee
Our executive remuneration
at a glance
Financial statements
125–293
European Embedded Value (EEV)
basis results
295–332
Additional information
333–374
334
Additional unaudited
financial information
362 Risk factors
367 Glossary
371 Shareholder information
373 How to contact us
Group overviewStrategic reportGovernanceRemuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information Prudential plc Annual Report 20130607Prudential plc Annual Report 2013 Group overview Prudential plc Annual Report 2013Group overviewGroup Chief Executive’s reportFocus on customers &distribution United States:build on strengthfocusUnited Kingdom:optimiseAsset management:accelerateAsia:Balanced metrics and disclosures DisciplinedcapitalallocationProactive risk management by our no-guarantees Elite Access variable annuity product, which delivered sales volumes of £2,585 million ($4,045 million) in 2013, three times those achieved in 2012. In the UK, we continue to focus on value over volume, with retail APE sales lower by 12 per cent as the market adjusts to the post-Retail Distribution Review environment, while retail new business profits were 3 per cent lower year-on-year, as we have partially offset the impact of lower volumes through pricing and product actions. M&G has delivered strong net inflows of £9.5 billion (2012: £16.9 billion including one institutional debt mandate of £7.6 billion) as it benefits from record levels of retail sales from Continental Europe, while Eastspring Investments, our Asia asset management business, reported stable net inflows5 of £1.6 billion (2012: £1.6 billion).Our balance sheet continues to be defensively positioned and at the end of the period our IGD surplus6 was estimated at £5.1 billion, equating to coverage of 2.8 times.2013 ‘Growth and Cash’ objectivesThe Group has now delivered all six of the 2013 ‘Growth and Cash’ objectives we set out at our 2010 investor conference. —At full year 2013, Asia delivered new business profits of £1,460 million, ahead of its objective of doubling 2009 new business profits to £1,426 million.£2,954mIFRS operating profit17%increase on 2012We had already achieved five of the six objectives early. To recap: —At full year 2012, we more than doubled Asia’s 2009 IFRS operating profit from £465 million to £988 million12 (2013 objective: £930 million), achieving this objective a year earlier than planned; —We also exceeded Asia’s 2013 cash objective of £300 million, delivering £341 million at full year 2012, again achieving this objective a year earlier than planned; —At the half year stage in 2013, we achieved two further objectives: delivering cumulative net cash remittances to the Group of almost £4.1 billion over the three and a half year period from 2010 against our end-2013 target level of £3.8 billion; —Also at the half year stage in 2013, our US business remitted £294 million to Group, exceeding its 2013 cash remittance objective of £260 million; and —Lastly, as announced at the investor conference in December 2013, the UK achieved its 2013 cash remittance objective of £350 million by remitting £355 million to the Group.The successful delivery of all of our 2013 ‘Growth and Cash’ objectives highlights the continued disciplined implementation of the Group’s strategy. I am pleased to report a strong performance in 2013. This performance has enabled us to deliver all of our six 2013 ‘Growth and Cash’ objectives. Over the four-year period we gave ourselves to achieve these objectives, the Group’s performance has been transformed, with all our business units now making significant contributions to both earnings and cash generation from a starting point where in 2008 most of the Group’s earnings and cash were coming from our historic UK business.In December 2013, we defined a new set of objectives that we aim to achieve by 2017. We are entering this new period with confidence in the prospects of the Group and the capacity of our teams across Asia, the US and the UK to execute. With our 2013 results, we have made a positive start towards our newly launched 2017 objectives. The Group’s strategy remains unchanged and is focused on capturing three significant opportunities across our three geographic markets: (i) in Asia, the significant and growing protection needs of the emerging middle class, particularly in our ‘sweet spot’ markets of South-east Asia; (ii) in the US, the financial needs of the ‘baby-boomers’ as they transition into retirement; and (iii) in the UK, meeting the savings and retirement income needs of an ageing population. Our disciplined execution of this strategy has continued to drive profitable growth and higher cash generation, underlining our commitment to delivering both ‘Growth and Cash’. Group performance1Our Group IFRS operating profit2 based on longer-term investment returns increased by 17 per cent during the year to £2,954 million (2012: £2,520 million). Asia life operating profit2 was up 17 per cent3 to just over a landmark £1 billion, with collective double-digit growth from our four largest operations of Hong Kong, Singapore, Indonesia and Malaysia and increasingly material contributions from some of our smaller but fast-growing businesses such as the Philippines, Thailand and Vietnam. On an underlying basis4, Asia life IFRS operating profit was up 20 per cent3. US life IFRS operating profit increased 29 per cent to £1,243 million (2012: £964 million), reflecting our focus on driving fee income from our variable annuity business and a full year’s contribution of insurance income from REALIC. UK life IFRS operating profit was broadly in line with the prior year at £706 million (2012: £703 million) despite lower business volumes. M&G delivered record operating profit of £395 million, an increase of 23 per cent, reflecting continued strong third-party net inflows combined with favourable market movements in the period, which together have increased external funds under management by £14 billion to £126 billion (2012: increase of £20 billion to £112 billion).Free surplus generation2 from our life and asset management businesses, a key indicator of the actual cash generation from our life in-force book and from our large asset management activities, was 15 per cent higher at £3,099 million, before reinvestment in new business, reflecting the benefits we derive from the increased scale of our in-force life portfolio and a growing contribution from our asset management businesses. Investment in new business of £637 million (2012: £618 million) has increased far less rapidly than new business profits, highlighting the capital-efficient nature of our growth. Net cash remittances from our businesses to the Group increased by 12 per cent to £1,341 million (2012: £1,200 million).New business profit was up 16 per cent to £2,843 million (2012: £2,452 million), mainly led by 15 per cent growth in Asia, with strong contributions from both agency and bancassurance channels and 24 per cent growth from the US, reflecting the positive impact of pricing and product actions as well as the beneficial impact of rising interest rates. APE sales increased by 5 per cent to £4,423 million (2012: £4,195 million), led mainly by our Asian business, which saw double-digit sales growth on a constant exchange rate basis in eight markets: Thailand up 79 per cent, China up 41 per cent, Hong Kong up 21 per cent, Vietnam up 20 per cent, Singapore, Indonesia and the Philippines up 18 per cent and Korea up 14 per cent. Jackson APE sales were higher at £1,573 million (2012: £1,462 million), reflecting the excellent progress achieved ‘I am pleased to report a strong performance in 2013. This performance has enabled us to deliver all of our six 2013 ‘Growth and Cash’ objectives.’Tidjane ThiamGroup Chief ExecutiveStrong performance through focus on long-term opportunitiesGroup Chief Executive’s reportThe Group’s strategy remains unchanged and is focused on capturing three significant opportunities across our three geographic markets. Our disciplined execution of this strategy has continued to drive profitable growth and higher cash generation, underlining our commitment to delivering both ‘Growth and Cash’.For more information on Prudential’s strategy and operating principlesOur strategy page 16Our strategy and operating principles 17 Prudential plc Annual Report 201316Prudential plc Annual Report 2013 Strategic reportStrategic reportOur strategyImplementing our strategyAsia:accelerateFocus on customers &distribution United States:build on strengthfocusUnited Kingdom:optimiseAsset management:Implementing our strategyOur strategy is designed to create sustainable economic value for our customers and our shareholders. It is focused on three long-term opportunities: The significant protection gap in Asia; The transition of US baby boomers into retirement; and The UK ‘savings gap’ and ageing population in need of returns and income.Our strategyBalance sheet strength and proactive risk management enable us to make good our promises to customers and are therefore key drivers of long-term value creation and relative performance. We have continuously strengthened our capital position since 2008, in spite of the financial crisis and the challenging macroeconomic environment that followed. Management actions that have been taken over this period include: The sale of our capital-intensive Taiwan agency business in 2009, improving our IGD capital position; The establishment of £1.9 billion of credit default reserves1 in the UK annuity business; and Controlling sales of US variable annuities in a manner which appropriately balances value, volume, capital generation and balance sheet risk.We rigorously allocate capital to the highest-return product and geographical locations with the shortest payback periods, in line with our risk appetite. This has had a positive and significant impact, so that over the last five years, new business capital investment has declined by 6 per cent, while new business profits have increased by 77 per cent. This has, in turn, transformed the capital dynamics of our Group: for example, the free capital generated from our existing life and asset management operations reached £3.1 billion in 2013 compared to £2.1 billion five years ago. This transformation enabled our business operation to remit £1,341 million to the Group, nearly double the level of remittance five years ago.We aim to have clarity and consistency internally and externally in the performance indicators that drive our businesses. Alongside this we develop our financial disclosures to enable our external stakeholders to fairly assess our long-term performance. We have three objectives: To demonstrate how we generate profits under the different accounting regimes; for example, in the IFRS sources of earnings disclosures within the Chief Financial Officer’s report; To show how we think about capital allocation via a number of metrics that highlight the returns we generate on capital invested in new business, including internal rates of return, payback periods and new business profitability; and To highlight the cash generation of our business, which over time is the ultimate measure of performance.We believe that in order to do well for our shareholders we must first do good for our customers. Hence, customers are at the centre of our operating principles. Our products are designed to provide peace of mind to our customers, whether that be in relation to saving for retirement, or insuring against the risks of illness or death. Satisfied customers are a key driver of our growth as they become our advocates, recommending our products and services to their friends and families.Distribution plays a key role in our ability to reach, attract and retain these valued customers across our regions. Building out and diversifying our distribution platform in order to reach a growing customer base will help ensure that we fully capitalise on the opportunities available to us in each of our regions.United States: build on strengthThe US ‘baby boomer’ generation is the wealthiest demographic in the global economy. Over the next 20 years they will be retiring at a rate of 10,000 per day, creating significant demand for retirement services.Asia: accelerate The Asian middle class population is forecast to double by 2020 and will then represent over half of the global middle class. This group is getting wealthier and will have significant and growing needs for protection against illness and accident.Balanced metrics and disclosures Disciplined capital allocation Proactive risk management United Kingdom: focus The UK has an ageing population and a ‘savings gap’, that is unsustainable over the long term. This will drive increasing demand for savings products and retirement income solutions.Asset management: optimise Europe is home to the second-largest retail asset management industry in the world, with over £5.8 trillion of assets. Asset managers with trusted brands and superior investment performance will see increasing demand for their products.Our strategy is underpinned by a set of key operating principles.Note1 On a statutory (Pillar 1) basis.GovernanceBoard of directors6465Prudential plc Annual Report 2013 Governance Prudential plc Annual Report 2013Board of directors ChairmanGroup Chief ExecutivePaul ManducaChairmanNationality: BritishAppointment date: October 2010Chairman from July 2012Committee membership:Chairman of the Nomination Committee (from July 2012)Tidjane ThiamGroup Chief ExecutiveNationality: FrenchAppointment date: March 2008Group Chief Executive from October 2009Skills and experiencePaul 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. From September 2005 until March 2011, Paul was a non-executive director of Wm Morrison Supermarkets Plc. During that time, he was the Senior Independent Director, a member of the Nomination Committee and Chairman of the Remuneration Committee, and prior to that he chaired their Audit Committee. 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 a former member of the Takeover Panel. Paul is the Chairman of Henderson Diversified Income Limited. Age 62.Skills and experienceTidjane was the Chief Financial Officer from March 2008 until his appointment as Group Chief Executive in 2009.Tidjane spent the first 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 Officer, 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 was appointed as their 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 and the 2013 Grand Prix de I’Economie by the French newspaper Les Echos. In January 2014, Tidjane was appointed as a British Business Ambassador by invitation from the Prime Minister. Age 51.Executive directorsNicolaos Nicandrou ACAChief Financial OfficerNationality: BritishAppointment date: October 2009John FoleyGroup Investment DirectorNationality: BritishAppointment date: January 2011Jacqueline HuntChief Executive, Prudential UK & EuropeNationality: BritishAppointment date:5 September 2013Michael McLintock Chief Executive, M&GNationality: BritishAppointment date:September 2000Skills and experienceBefore joining Prudential, Nic Nicandrou worked at Aviva, where he held a number of senior finance roles, including Norwich Union Life Finance Director and Board Member, Aviva Group Financial Control Director, Aviva Group Financial Management and Reporting Director and CGNU Group Financial Reporting Director. Nic started his career at PricewaterhouseCoopers where he worked in both London and Paris. Age 48.Skills and experienceJohn Foley has been Group Investment Director since August 2013. 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. John was appointed to the Board in January 2011 and held the position of Group Chief Risk Officer until July 2013. 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 57.Skills and experienceJackie Hunt was appointed as Director and Chief Executive of Prudential UK & Europe on 5 September 2013. Before joining Prudential, Jackie was a Director and Chief Financial Officer of Standard Life from May 2010. She joined Standard Life in January 2009 as Deputy Chief Financial Officer and before this, she held various senior management roles at Aviva, including Chief Financial Officer at Norwich Union. After qualifying as a Chartered Accountant with Deloitte & Touche in South Africa, Jackie worked for PricewaterhouseCoopers and Royal & Sun Alliance before joining Aviva in 2003.Jackie is a non-executive director of National Express Group PLC. She was previously Chair of the Prudential Financial and Taxation Committee of the Association of British Insurers. Age 45.Skills and experienceMichael 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. From 2001 to 2008, Michael also served on the Board of Close Brothers Group plc as a non-executive director. 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 has been a member of the Finance Committee of the MCC since October 2005. Age 52.
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Prudential plc Annual Report 2013
Section 1
Group overview
Chairman’s statement
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06 Group Chief Executive’s report
Prudential plc Annual Report 2013
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Chairman’s statement
Lasting value for customers and
growing returns for shareholders
‘Meeting these objectives
is a significant milestone
and a testament to our
clear and well-understood
strategy and to the efforts
of our management team.’
Paul Manduca
Chairman
It gives me great pleasure to
introduce Prudential’s 2013
Annual Report. The Group
has delivered an excellent
performance, providing value to
our customers and strong returns
to our shareholders.
This performance is underpinned by
a clear focus on our purpose as a Group.
Our businesses stand or fall by the service
that we provide to our customers and the
wider contribution that we make to the
communities and societies of which we
are a part. It is this foundation that allows
us to continue our track record of more
than 165 years of creating value for our
customers, our shareholders and,
ultimately, the countries in which we
operate. Moreover, this adherence to our
founding principles of integrity, security
and prudence, and our investment in
building quality teams everywhere we are
active, have helped us deliver one of the
strongest performances in the FTSE over
recent years.
By offering security to individuals and
families, our products provide
opportunities for customers to build better
futures for themselves and their children.
By pooling savings and investing capital
in areas such as infrastructure, we help to
stimulate the economic activity that drives
growth and creates more savings and thus
more investment, helping to propel a
virtuous circle of growth and prosperity.
Our commercial success is predicated on
our ability to make a positive social and
economic contribution.
It is this commitment to creating lasting
value for customers that enables us to
continue to deliver strong returns to our
shareholders. I am delighted to report that
all of our businesses have contributed to
our excellent performance in 2013, with
our Asia operations driving profitable
growth, while our focused businesses in
the US and the UK continue to make good
contributions.
The year marked an important step for
the Group. In 2010 we set ourselves six
demanding objectives on growth and cash
generation to reach by the end of 2013.
Meeting these objectives is a significant
milestone and a testament to our clear and
well-understood strategy and to the efforts
of our management team, led by Group
Chief Executive Tidjane Thiam.
These objectives were achieved in
a challenging global context, marked by
volatile market conditions, an uncertain
economic environment, heightened
regulation and historically low interest
rates. Low interest rates are not only a
problem for us as an insurer, but also for
many of our customers, particularly in
the UK, where they have had a significant
and negative impact on returns for savers.
There are now signs that the world’s
economy is recovering, but the picture
is still not fully clear and we shall proceed,
as ever, with care.
At our investor conference in London
in December 2013, our executive team
set themselves new objectives to reach
by 2017. Like their predecessors, these are
demanding objectives, but I am confident
that, given our recent performance and
the strength of our management team, we
will achieve them.
We are a growing business and we live in a
regulatory environment that has put financial
services firms under increasing scrutiny in the
wake of the financial crisis. We use the cash
we generate both to fund our growth and
to build the strength of our balance sheet,
ensuring that we retain prudent capital
levels on the various capital metrics that
our regulators monitor. We also work hard
to increase the return to our shareholders
prudently in the form of dividends.
The Board applies strict affordability
tests against a broad range of criteria
before making its dividend
recommendation. It is the results of these
tests, combined with the Group’s
exceptionally strong performance in the
past five years, that has enabled the Board
to take the unusual decision to recommend
the rebase of the dividend in consecutive
years, 2012 and 2013. The Board has
proposed a final dividend of 23.84 pence
per share, which brings the total dividend
for the year to 33.57 pence per share,
4.38 pence or 15 per cent higher than the
2012 total dividend.
Since I became Chairman, I have been
determined to ensure that we have a Board
that provides a channel for discussion with
shareholders, maintains a good relationship
with regulators and sets the tone for
everything the business does. A financial
services board needs to be strong in
relevant expertise, not only to support
the management team, but also to provide
Prudential plc Annual Report 2013 Group overview 05
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I am particularly proud of the fact that
so many of our people are taking part in
our corporate responsibility programmes.
Last year 8,155 colleagues gave their time
and expertise to help improve the lives of
people around the world. This commitment
makes a real and long-term difference to
others and is a clear example of the
important role we play in our communities.
Many of our employees take part in
the Chairman’s Challenge, our flagship
volunteering programme, which
encourages colleagues to participate in
projects initiated by our global charity
partners. Every year the projects
supported by the Chairman’s Challenge
increase in scope and quality and the 2013
programme has been a great success –
from Age UK’s ‘Call in time’ telephone
well-being service, which helps older
people build confidence and remain in their
homes for longer, to Plan International’s
programme to develop financial and life
skills for school children in ethnic
communities in Chiangmai, Thailand.
It is a record of which I think we can be
justifiably proud. However, it is not one
upon which we can rest. I, together with
others, will continue to work with our
outstanding corporate responsibility teams
to ensure people think of Prudential when
they look for best practice in this area.
I would like to thank all our employees
for their contribution to another successful
year for Prudential. With their
commitment, our strong management and
our clear strategy, I am confident that we
can continue to provide our customers with
value and our shareholders with growing
returns into the future, and further
strengthen the communities we serve.
Paul Manduca
Chairman
For more information on Prudential’s
strategy and operating principles
Our strategy page 16
full-year dividend
33.57p
15%increase on 2012
appropriate challenge. We took a number
of steps in 2013 to strengthen the Board
and better position it to contribute to
Prudential’s commercial success.
Philip Remnant CBE became Senior
Independent Director on 1 January,
replacing myself in that role. Anthony
Nightingale CMG joined the Board on
1 June as a non-executive director and
member of the Remuneration Committee,
replacing Keki Dadiseth, who retired from
the Board on 1 May after eight years of
valuable service. I would like to thank Keki
for his hard work and trusted advice during
his time on the Board and for the insights
he brought us on a very important region
for our company, Asia.
On 10 June, Alice Schroeder joined as
an independent non-executive director
and member of the Audit Committee.
Formerly a managing director and a senior
adviser at Morgan Stanley, Alice is highly
respected by the international investment
community and brings considerable insight
into all aspects of the global insurance
industry.
We also gained a new executive Board
member in September when Jackie Hunt
joined as Chief Executive of Prudential UK
and Europe. She came to us from Standard
Life plc, where she was Chief Financial
Officer, bringing with her a proven record
of delivery in the highly competitive UK
insurance market.
I am confident that these additions will
ensure that we have a Board that is well
placed to seize the opportunities presented
by returning global growth.
Jackie Hunt succeeded Rob Devey. I
would like to thank Rob for the contribution
he has made to the positive progress
of Prudential UK and Europe over the past
four years.
On 31 August, Michael Garrett retired
from the Board after almost nine years
as an independent director. I would like
to thank him for his long period of
service to the Group, during which his
international business experience was
of considerable value.
Besides the significant benefits
provided by our business activities,
we undertake corporate responsibility
programmes in partnership with charitable
organisations in our communities,
providing long-term funding and
deploying the expertise of our people.
Prudential plc Annual Report 2013
06
Group Chief Executive’s report
Strong performance through
focus on long-term opportunities
I am pleased to report a strong
performance in 2013. This
performance has enabled us to
deliver all of our six 2013 ‘Growth
and Cash’ objectives. Over the
four-year period we gave ourselves to
achieve these objectives, the Group’s
performance has been transformed,
with all our business units now
making significant contributions to
both earnings and cash generation
from a starting point where in 2008
most of the Group’s earnings and
cash were coming from our historic
UK business.
In December 2013, we defined a new set
of objectives that we aim to achieve by 2017.
We are entering this new period with
confidence in the prospects of the Group
and the capacity of our teams across Asia,
the US and the UK to execute. With our
2013 results, we have made a positive start
towards our newly launched 2017 objectives.
The Group’s strategy remains
unchanged and is focused on capturing
three significant opportunities across our
three geographic markets: (i) in Asia, the
significant and growing protection needs
of the emerging middle class, particularly
in our ‘sweet spot’ markets of South-east
Asia; (ii) in the US, the financial needs of
the ‘baby-boomers’ as they transition into
retirement; and (iii) in the UK, meeting
the savings and retirement income needs
of an ageing population. Our disciplined
execution of this strategy has continued
to drive profitable growth and higher cash
generation, underlining our commitment
to delivering both ‘Growth and Cash’.
Group performance1
Our Group IFRS operating profit2 based on
longer-term investment returns increased
by 17 per cent during the year to
£2,954 million (2012: £2,520 million). Asia
life operating profit2 was up 17 per cent3
to just over a landmark £1 billion, with
collective double-digit growth from our
four largest operations of Hong Kong,
Singapore, Indonesia and Malaysia and
increasingly material contributions from
some of our smaller but fast-growing
businesses such as the Philippines,
Thailand and Vietnam. On an underlying
basis4, Asia life IFRS operating profit was
up 20 per cent3. US life IFRS operating
profit increased 29 per cent to £1,243 million
‘I am pleased to report a strong
performance in 2013. This
performance has enabled us
to deliver all of our six 2013
‘Growth and Cash’ objectives.’
Tidjane Thiam
Group Chief Executive
(2012: £964 million), reflecting our focus on
driving fee income from our variable annuity
business and a full year’s contribution of
insurance income from REALIC. UK life
IFRS operating profit was broadly in line
with the prior year at £706 million (2012:
£703 million) despite lower business
volumes. M&G delivered record operating
profit of £395 million, an increase of
23 per cent, reflecting continued strong
third-party net inflows combined with
favourable market movements in the period,
which together have increased external
funds under management by £14 billion to
£126 billion (2012: increase of £20 billion
to £112 billion).
Free surplus generation2 from our life
and asset management businesses, a key
indicator of the actual cash generation from
our life in-force book and from our large
asset management activities, was
15 per cent higher at £3,099 million, before
reinvestment in new business, reflecting
the benefits we derive from the increased
scale of our in-force life portfolio and a
growing contribution from our asset
management businesses. Investment in
new business of £637 million (2012:
£618 million) has increased far less
rapidly than new business profits,
highlighting the capital-efficient nature of
our growth. Net cash remittances from our
businesses to the Group increased by
12 per cent to £1,341 million (2012:
£1,200 million).
New business profit was up 16 per cent
to £2,843 million (2012: £2,452 million),
mainly led by 15 per cent growth in Asia,
with strong contributions from both agency
and bancassurance channels and
24 per cent growth from the US, reflecting
the positive impact of pricing and product
actions as well as the beneficial impact
of rising interest rates.
APE sales increased by 5 per cent to
£4,423 million (2012: £4,195 million), led
mainly by our Asian business, which saw
double-digit sales growth on a constant
exchange rate basis in eight markets:
Thailand up 79 per cent, China up
41 per cent, Hong Kong up 21 per cent,
Vietnam up 20 per cent, Singapore,
Indonesia and the Philippines up
18 per cent and Korea up 14 per cent.
Jackson APE sales were higher at
£1,573 million (2012: £1,462 million),
reflecting the excellent progress achieved
Prudential plc Annual Report 2013 Group overview 07
The Group’s strategy remains
unchanged and is focused on
capturing three significant
opportunities across our three
geographic markets. Our disciplined
execution of this strategy has
continued to drive profitable growth
and higher cash generation,
underlining our commitment
to delivering both ‘Growth and Cash’.
Our strategy and operating principles
Asia:
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Focus on
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For more information on Prudential’s
strategy and operating principles
Proactive risk
management
Our strategy page 16
by our no-guarantees Elite Access variable
annuity product, which delivered sales
volumes of £2,585 million (US$4,045 million)
in 2013, three times those achieved in
2012. In the UK, we continue to focus on
value over volume, with retail APE sales
lower by 12 per cent as the market adjusts
to the post-Retail Distribution Review
environment, while retail new business
profits were 3 per cent lower year-on-year,
as we have partially offset the impact of
lower volumes through pricing and product
actions. M&G has delivered strong net
inflows of £9.5 billion (2012: £16.9 billion
including one institutional debt mandate of
£7.6 billion) as it benefits from record levels
of retail sales from Continental Europe,
while Eastspring Investments, our Asia
asset management business, reported
stable net inflows5 of £1.6 billion (2012:
£1.6 billion).
Our balance sheet continues to be
defensively positioned and at the end of the
period our IGD surplus6 was estimated at
£5.1 billion, equating to coverage of 2.8 times.
2013 ‘Growth and Cash’ objectives
The Group has now delivered all six of the
2013 ‘Growth and Cash’ objectives we set
out at our 2010 investor conference.
— At full year 2013, Asia delivered new
business profits of £1,460 million, ahead
of its objective of doubling 2009 new
business profits to £1,426 million.
IFRS operating profit
£2,954m
17%increase on 2012
We had already achieved five of the six
objectives early. To recap:
— At full year 2012, we more than doubled
Asia’s 2009 IFRS operating profit from
£465 million to £988 million12 (2013
objective: £930 million), achieving this
objective a year earlier than planned;
— We also exceeded Asia’s 2013 cash
objective of £300 million, delivering
£341 million at full year 2012, again
achieving this objective a year earlier
than planned;
— At the half year stage in 2013, we
achieved two further objectives:
delivering cumulative net cash
remittances to the Group of almost
£4.1 billion over the three and a half year
period from 2010 against our end-2013
target level of £3.8 billion;
— Also at the half year stage in 2013, our US
business remitted £294 million to Group,
exceeding its 2013 cash remittance
objective of £260 million; and
— Lastly, as announced at the investor
conference in December 2013, the UK
achieved its 2013 cash remittance
objective of £350 million by remitting
£355 million to the Group.
The successful delivery of all of our 2013
‘Growth and Cash’ objectives highlights
the continued disciplined implementation
of the Group’s strategy.
Prudential plc Annual Report 2013Group overviewGroup Chief Executive’s report
08
Group Chief Executive’s report continued
2017 objectives
Looking ahead, confident in the future
prospects of the Group, we announced
new objectives7 for 2017 at our investor
conference in December 2013 in London.
These objectives are:
(i) Asia underlying free surplus generation8
of £0.9 billion to £1.1 billion in 2017
(2012: £484 million);
(ii) Asia life and asset management pre-tax
IFRS operating profit to grow at a
compound annual rate of at least
15 per cent over the period 2012 to
2017 to reach at least £1,858 million in
2017 (2012: £924 million9); and
(iii) Group underlying free surplus
generation of at least £10 billion
cumulatively over the four-year period
from 2014 to end-2017.
At the end of 2013, we have made an
encouraging start towards achieving two
of these 2017 objectives. We have grown
Asia life and asset management pre-tax
IFRS operating profit by 16 per cent3 over
2012 and we have also delivered an
18 per cent3 increase in underlying free
surplus from Asia to £573 million in 2013.
We will regularly update the market on
our progress on all three objectives.
Our operating performance
by business unit
Asia
Prudential’s businesses in Asia continued
to perform well in 2013 against turbulent
markets, particularly during the second half
of the year. Significantly, we succeeded in
more than doubling the 2009 new business
profit (£713 million) by 2013, reaching
£1,460 million. We have therefore
completed all three Asia-specific financial
objectives we set ourselves in 2010 – the
IFRS profit and cash remittance objectives
were achieved last year, one year ahead of
our initial ambition. This performance
reflects the appropriateness of our
strategic choices and our discipline in
building the distribution reach necessary to
make our products and services available
to Asia’s rapidly growing middle classes so
that we can both meet their needs and
generate value for shareholders.
Operational highlights for 2013 reflect
our continued focus on our ‘sweet spot’
markets, where the macro-economic,
demographic, competitive and regulatory
environments enable us to capitalise on our
strengths and use multiple distribution
channels to provide long-term savings and
protection solutions to our customers.
These same positive long-term drivers
underpin our strong financial performance
in 2013, with Asia IFRS operating profit up
16 per cent to £1,075 million (2012:
£924 million2,3) and cash remitted to Group
2017 objectives
Asia underlying free surplus generation8
Asia pre-tax IFRS operating profit
Cumulative Group underlying free surplus generation
from 2014 to end-2017
2013
2017 objective7
£573m £0.9–£1.1bn
£1,075m > £1,858m
N/A
> £10bn
17 per cent higher at £400 million (2012:
£341 million).
In 2013 our Asia business delivered
a 14 per cent increase in APE sales on a
constant exchange rate basis (12 per cent
on actual exchange rate) to £2,125 million.
In times of currency volatility, comparison
of results using constant exchange rates
provides a better measure of underlying
performance. In this paragraph, unless
otherwise stated, movements are
expressed on a constant exchange rate
basis. Sales performance has been strong
throughout the year, achieving double-
digit growth in every quarter. Sales
through the agency channel were
16 per cent higher, with increases in active
manpower and improvements in
productivity contributing broadly equally.
Sales through bank partnerships grew by
18 per cent, excluding those from E-Sun,
where we have chosen not to provide
low-margin guaranteed products. Looking
at our performance within the region, in
Hong Kong our agency force continues to
excel. We delivered a 30 per cent increase
in agent productivity, with our with-profits
and enhanced protection products proving
to be especially popular. As a result, sales
in Hong Kong grew by 21 per cent (up
23 per cent on actual exchange rate). Our
multi-channel distribution in Singapore is
particularly effective, with increases in
active agency numbers (up 9 per cent) and
productivity (up 10 per cent), coupled with
very strong bancassurance partners in
Standard Chartered Bank (SCB), United
Overseas Bank (UOB) and Maybank,
resulting in overall APE sales growth of
18 per cent (up 20 per cent on actual
exchange rate). We continue to expand
our agency force rapidly in Indonesia, with
overall sales increasing by 18 per cent
(up 7 per cent on actual exchange rate). As
expected, we have seen average case sizes
decline as we extend our reach outside
Jakarta. However, over time, with
increasing urbanisation, our first-mover
advantage driven by our continued
distribution expansion in upcoming cities
and towns will drive long-term profitable
growth. Malaysia APE sales were up
8 per cent excluding top-up products
(up 7 per cent on actual exchange rate),
which we have decided to de-emphasise
deliberately. The 14 per cent increase
(on actual exchange rate) in bancassurance
sales from SCB and UOB in this market was
particularly encouraging.
Our other smaller ‘sweet spot’ markets
have also delivered excellent results, with
collective growth in APE sales of 39 per cent.
In the Philippines we have grown agency
activity by 49 per cent and in Vietnam we
have improved productivity by 16 per cent.
In Thailand, the Thanachart bancassurance
relationship is progressing well, delivering
£22 million of APE sales in the first eight
months of its operations. In Cambodia,
where we launched in January 2013, our
new life business has made a good start and
the relationship with our distribution partner
ACLEDA Bank is working well. We have also
opened a representative office in Myanmar.
Our joint ventures in China and India
represent different opportunities in these
two large, but quite different markets. In
China our business remains small in the
context of the market, but we are very
encouraged by the progress being made,
with APE sales growth of 48 per cent in
2013. We consider this business to have
great potential over the medium to long
term. In India, our joint venture continues to
be the market leader in the private sector,
but the market is continuously going through
fundamental restructuring and we expect
it to remain challenging for some time.
We have niche positions in the
Taiwanese and Korean markets that have
been structured to meet our operating and
financial disciplines, particularly around
products and profitability. Within this
context, both businesses are performing
well. On 16 July 2013, we announced our
intention to sell our closed-book life
insurance business in Japan for
US$85 million (£51 million at
31 December 2013 closing exchange rate),
subject to regulatory approvals.
Asia’s life new business profit grew
by 15 per cent to £1,460 million (2012:
£1,266 million), outpacing APE sales growth
of 12 per cent. The beneficial impact
of higher interest rates, primarily in
Hong Kong, was offset by the weakening
of some Asian currencies relative to UK
sterling, primarily the Indonesian rupiah.
There has clearly been downward pressure
on some of our Asian currencies relative to
UK sterling. We believe that the economic
fundamentals of these economies remain
very attractive in the long term and that the
tensions observed currently will actually
Prudential plc Annual Report 2013 Group overview 09
contribute to the long-term stabilisation and
growth of these economies by improving
their trade balances and ultimately their
current account balances. We remain
focused on managing each of our businesses
at the local level and on their performance in
local currency, which is more indicative of
their true performance and of their actual
long-term growth potential.
Life IFRS operating profit was
£1,001 million, up 17 per cent2,3, making a
positive start towards our 2017 IFRS
objective. EEV life operating profit grew by
22 per cent to £2,385 million, driven by our
strong new business growth and the
positive impact of higher interest rates on
the in-force book.
Eastspring Investments saw net
third-party inflows of £1.6 billion5, down on
the half year mainly due to market volatility
in the second half. Total funds under
management (including money market
funds) were up 3 per cent on the prior year
(10 per cent on a constant currency basis)
with net inflows and positive market
movements being offset by currency
weakness relative to UK sterling. IFRS
profits were up 7 per cent and reflect
discipline in cost management in
challenging market conditions.
I am pleased to report that the long-
running project to domesticate the Hong
Kong branch of the Prudential Assurance
Company has been successfully completed.
Asia remains a significant and attractive
opportunity for the Group, underpinned by
favourable structural trends of faster
economic growth, leading to higher
wealth, combined with growing and young
populations, high savings rates and rising
demand for protection. This is particularly
true of the rapidly growing and increasingly
wealthy Asian middle class. These
opportunities are most evident in our
‘sweet spot’ markets of South-east Asia,
including Hong Kong, where the
combination of long-term structural trends
and the breadth and depth of the
Prudential franchise and distribution
positions us well to achieve long-term
sustainable and profitable growth.
US
The US delivered a strong performance in
2013, maintaining its disciplined approach
to new business and management of the
in-force book, while also improving its
capital position. Total US IFRS operating
profit increased 30 per cent to
£1,302 million (2012: £1,003 million). Life
IFRS operating profit in 2013 increased by
29 per cent, to £1,243 million, driven by
higher fee income as a result of ongoing
positive flows and appreciation in average
account values, as well as a first full year’s
contribution from REALIC. Reflecting the
cash-generative nature of Jackson’s
EEV new business profit
£2,843m
16%increase on 2012
underlying free surplus generation
£3,099m
15%increase on 2012
business and capital formation during the
year, cash remitted to the Group totalled
£294 million, exceeding the 2013 objective
of £260 million.
During 2013, equity markets
experienced a strong rise as confidence in
the US economy began to return and an
increase in longer-dated Treasury yields
followed long-anticipated actions by the
Federal Reserve to taper bond purchases
late in the year. In the variable annuity
market, some larger variable annuity
providers have consciously pulled back,
while others are now returning. Against
this background, Jackson’s market share of
annuities with living benefits has remained
relatively steady, while it is continuing to
write new business at aggregate internal
rates of return in excess of 20 per cent and
with a payback period of two years.
Total variable annuity APE sales increased
to £1,338 million in 2013 (2012:
£1,245 million). This growth was exclusively
driven by the rapid progress of Elite Access,
our variable annuity without guarantees
launched in early 2012, which contributed
£259 million of APE sales in the period (2012:
£85 million). Excluding Elite Access, variable
annuity sales were 7 per cent lower than in
2012, which is the direct result of our
disciplined approach to the management of
the economic cycle in the variable annuity
market. The success of Elite Access has
helped increase the diversification of our
product mix, with 31 per cent of our 2013
variable annuity sales not featuring living
benefit guarantees (2012: 17 per cent). As a
percentage of total sales, variable annuities
with living benefit guarantees are at their
lowest since 2008. In addition, during the
second half of 2013 Jackson implemented
various product initiatives to continue to
balance value, volume, capital and balance
sheet strength. Net inflows for variable
annuities’ separate accounts continue to be
strongly positive at £8.0 billion
(2012: £7.8 billion), reflecting the growth in
new business sales and low, stable levels of
policy surrenders. Combined with the
additional positive impact of market
appreciation, this increased separate account
balances to £66 billion at 31 December 2013
(31 December 2012: £49 billion).
Fixed annuity APE sales of £55 million
remained relatively flat compared to 2012,
while fixed index annuity APE sales of
£91 million decreased 17 per cent.
New business profit increased
24 per cent to £1,086 million, reflecting the
benefits of our pricing and product actions,
the contribution from Elite Access and the
positive effects of higher long-term yields.
EEV life operating profit increased
by 38 per cent to £2,221 million
(2012: £1,610 million), reflecting higher
new business profits (as mentioned above)
and the increased scale of our in-force
book, which includes a first full year’s
contribution from REALIC.
Jackson’s Risk Based Capital ratio at the
end of 2013 was 450 per cent, compared to
423 per cent at the end of 2012. In 2013,
statutory capital generation was driven by
the strong operating performance. This
capital generation enabled Jackson to remit
£294 million (2012: £249 million) to Group,
while supporting its balance sheet growth.
Jackson’s strategy is unchanged. We
continue to price new business on a
conservative basis, targeting value over
volume, and our financial market hedging
remains focused on optimising the economics
of our exposures, therefore accepting a
degree of volatility in our accounting results
where they are not aligned with the
underlying economics. This approach has
enabled Jackson to deliver significant
profitable growth across the cycle while
maintaining a strong balance sheet. Since
2008 Jackson has remitted over
US$1.8 billion of cash to the Group,
demonstrating that Jackson’s recent growth
is quickly translating into profits and into cash,
the ultimate metric of our successful strategy.
UK and Europe
The UK life and pensions industry
underwent considerable regulatory and
market change in 2013, with the
appointment of two new industry
regulatory bodies, the phasing in of
auto-enrolment for company pensions and
the introduction of the voluntary ABI Code
on Retirement Choices. The
implementation of the recommendations of
the Retail Distribution Review has changed
the distribution landscape and providers,
distributors, advisers and their clients
continue to adjust to the new environment.
The Financial Conduct Authority’s
Thematic Review into the UK annuity
market, which ran throughout 2013,
Prudential plc Annual Report 2013Group overviewGroup Chief Executive’s report
10
Group Chief Executive’s report continued
concluded in February 2014 with the
announcement that it was launching a
further study to examine competition and
choice in the retirement income market as a
whole. We continue to support both
regulatory and other initiatives to improve
consumer experience and outcomes.
We continue to manage our UK
business by focusing on our strengths in
individual annuities and with-profits
products. The combined financial strength
and investment performance track record
of Prudential’s UK with-profits fund
provide a key source of differentiation in a
competitive market. The performance of
our with-profits fund in 2013 has allowed
us to add an estimated £2 billion to
with-profits policies in the year and
policyholders will typically see year-on-
year increases of between 5 per cent and
8 per cent in accumulating with-profits
policy values over the past year. Total
bonus payments are expected to top
£2.0 billion in 2014.
The onset of the Retail Distribution
Review has significantly impacted the
timing of sales volumes in the UK retail
investments markets over the last two
years. For Prudential, this resulted in very
strong sales of onshore bonds in 2012,
due to heightened activity prior to the
implementation of the Retail Distribution
Review, while in 2013 volumes returned
to levels consistent with 2011, the last
‘undisturbed’ year. Onshore bonds APE
sales of £176 million were 23 per cent lower
as a result, which contributed to an overall
decrease in retail APE sales of 12 per cent,
to £697 million (2012: £795 million).
In individual annuities, market volumes
declined 15 per cent during the year10
against a strong comparative, due to
increased activity in 2012 prior to the
introduction of Gender Neutral Pricing and
the Retail Distribution Review. Our annuity
sales sourced from internal vestings
decreased 10 per cent as more customers
are opting to defer their retirement date,
the effect of which is partly offset by higher
average fund values. The proportion of our
internal customers who chose a Prudential
annuity remained in line with 2012. Overall
APE sales from individual annuities were
14 per cent lower than in 2012.
In corporate pensions, we continue
to focus on securing new members and
incremental business from our current
portfolio of customers and on additional
voluntary contribution plans within the
public sector, where we now provide
schemes for 69 of the 99 public sector
authorities in the UK (2012: 68 schemes).
In the wholesale market, we have
continued our selective participation in bulk
annuities based on strict return criteria and
using our financial strength, superior
investment track record, extensive mortality
risk assessment experience and servicing
capabilities. Bulk annuity APE sales
amounted to £28 million (2012: APE sales of
£41 million), contributing EEV new business
profit of £30 million (2012: £39 million).
Retail new business profit of
£267 million in 2013 was 3 per cent below
2012, due to lower sales volumes, partly
offset by the positive effects of product
mix and proactive pricing actions. Overall,
new business profits were 5 per cent lower
year-over-year, reflecting lower bulk
annuity volumes and lower retail new
business profit.
IFRS life operating profit was in line with
2012 at £706 million (2012: £703 million),
and EEV life operating profit of £1,033 million
increased 19 per cent, reflecting our active
management of the in-force book.
During 2013, the UK remitted cash of
£355 million to Group (2012: £313 million),
exceeding our cash objective of delivering
£350 million.
In September 2013, Jackie Hunt joined
as Chief Executive, Prudential UK and
Europe, and became a member of the
Board of Prudential plc. Jackie was
previously Chief Financial Officer at
Standard Life plc. Jackie is focused on
delivering the strategic priorities for the
business as outlined at the December 2013
investor conference.
Our direct advice service, Prudential
Financial Planning, is seeing demand for
advice from our existing direct customers.
Adviser numbers grew to 196 advisers by the
end of 2013, in line with our expectations.
net cash remittances from business units
£1,341m
12%increase on 2012
During 2013, we commenced sales
operations in Poland, one of Europe’s
fastest-growing economies, which has an
expanding middle class and high savings
rates. We have made a good start to the
business, building an agency sales network
of 481 financial planning consultants across
12 branches. The agency sales network will
continue to be rolled out to other major
Polish cities and towns during 2014.
M&G
Equity markets in developed economies
rose to pre-crisis levels during 2013. By
contrast, emerging markets suffered a
series of setbacks as concerns about
slowing economic growth in China and the
tapering of quantitative easing in the US
weighed heavily on investor sentiment.
Against this backdrop, M&G continues
to deliver strong investment performance.
Over the three years to 31 December 2013,
21 retail funds, representing approximately
69 per cent of its retail funds under
management, produced first or second-
quartile investment returns. The
performance of funds managed on behalf
of segregated institutional fixed income
clients also remains very strong, with all
actively managed fixed income mandates
outperforming their benchmarks over
this period.
M&G has pursued business
diversification across funds, asset classes
and geographies. Its retail funds are now
registered for sale in 20 jurisdictions and
M&G has operations in 18 countries.
Net retail fund flows in Continental
Europe reached a record level of
£7.6 billion, a 46 per cent improvement on
the previous year. European retail funds
under management now total £23.7 billion,
up 64 per cent year-on-year, and represent
35 per cent of total retail funds under
management, compared with 26 per cent
at the end of 2012.
In the UK, M&G’s business has slowed
after four consecutive years as the
number-one house for net retail sales
between 2009 and 2012. M&G remained
the number-one firm for gross sales over
the calendar year 2013, thereby leading
the market for five consecutive years.
However, the business did experience
modest net outflows of £0.7 billion during
the year, largely reflecting the decision in
2012 to slow flows into two market-leading
UK corporate bond funds to protect
investment performance. Investor appetite
for equities strengthened in 2013 as
markets recovered, but in many European
countries fund buyers continue to have a
structural preference for bonds and also
favour mixed-asset funds.
It is still too early to offer a definitive
assessment of the impact of the Retail
Distribution Review, although we do
Prudential plc Annual Report 2013 Group overview expect more focus in the market on price.
In the past few weeks, platforms have
begun to disclose their own service pricing
and any special fund fees agreed with asset
managers. Those managers with strong
brands and a reputation for investment
performance will be expected to better
withstand any such pressures on asset
management fees.
M&G has continued its efforts to
diversify its fund range. During the year,
10 retail funds attracted net sales of at least
£100 million each, with the majority of
money continuing to go into the M&G
Optimal Income Fund, a flexible bond
portfolio, and into the M&G Global
Dividend Fund. Total net retail sales for
the year were £7.3 billion, including the
contribution from M&G’s associate
company in South Africa. This is the fourth
time in five years that M&G has posted net
retail inflows exceeding £7 billion. After
this very strong period of sustained net
sales, we expect business to return to less
elevated levels in 2014. Total retail funds
under management at 31 December 2013
were £67.2 billion, 22 per cent higher than
at the end of 2012 and up 251 per cent
since the end of 2008.
M&G’s institutional business recorded
net inflows of £2.1 billion during 2013,
mainly through increased sales of
alternative credit and leveraged loan
products. Net inflows of £9.0 billion in
2012, a record level, included a single
low-margin mandate of £7.6 billion. Over
the year, total institutional funds under
management increased by 3 per cent to
£58.8 billion, and have now more than
doubled since the end of 2008.
As in previous years, M&G has a strong
pipeline of institutional business still to
fund. Products designed to help fill the gap
left by the decline in long-term commercial
bank loans continue to attract considerable
interest, while opportunities to lend to
medium-sized companies and
infrastructure projects are improving.
M&G currently manages, on behalf
of Prudential and external investors,
around £24 billion of direct infrastructure
investments and provides around
£11 billion of funding to the wider UK
economy. As well as providing loans to
British business and other organisations,
these include investments in social and
economic infrastructure, (eg public and
private investment in utilities, energy,
transport, hospital and schools) and
investment in social and residential
housing, as mentioned below.
Our property business, formerly known
as PRUPIM, was rebranded M&G Real
Estate during the year. During 2013 it
completed £3.5 billion of property
transactions, covering both acquisitions
and disposals. It has also returned to the
‘The Board proposes to
rebase the full-year dividend
upwards by 4.38 pence, due
to the strong and sustained
operational and financial
performance of the Group.’
Tidjane Thiam
Group Chief Executive
UK residential property market for the
first time in 30 years with a £105 million
investment in London housing.
Fund sales, combined with a
15 per cent increase in equity market levels
and an 8 per cent rise in bond markets,
pushed total funds under management to
£244.0 billion at 31 December 2013,
7 per cent higher than at the end of 2012.
External client assets rose 13 per cent to
£126.0 billion, nearly treble their level at
the end of 2008, and accounted for
52 per cent of the total.
M&G’s operating profit rose by 23 per cent
to £395 million, a new record. Underlying
profits – excluding performance fees, carried
interest and profits from our associate
company – were up 20 per cent to
£358 million. Over the past five years,
underlying profits have grown at an
annualised rate of 15 per cent, principally
reflecting the consistent accumulation of
external assets on the back of strong net sales.
M&G’s cost/income ratio remained
unchanged at an historic low of 59 per cent,
with higher fee income offsetting a larger
cost base from increased headcount
and ongoing investment in operational
infrastructure.
M&G continues to provide capital-
efficient profits and cash generation for
the Group and remitted cash totalling
£235 million during 2013, compared with
£206 million in 2012.
M&G has been recognised for its
investment performance with numerous
awards, including Investment Manager of
11
the Year, Fixed Income Manager of the
Year and Real Estate Manager of the Year
at both the Financial News Awards 2013
and European Pensions Awards 2013.
The business remains focused on
delivering excellent investment
performance and service to its clients while
continuing to seek diversification by both
asset class and geography. It is the
commercialisation of this investment
performance through the acquisition of
new fund flows that produces attractive
profits and cash flow for the Group.
Capital and risk management
We take a disciplined approach to capital
management and have continued to
implement a number of measures over the
last few years to enable us to make our
capital work more efficiently and more
effectively for the Group. Using the
regulatory measure of the Insurance
Groups Directive (IGD), our Group capital
surplus position at 31 December 2013 was
estimated at £5.1 billion, before allowing
for the final dividend, equating to coverage
of 2.8 times.
With greater visibility on the potential
outcome of Solvency II, we are reporting an
economic capital11 surplus of £11.3 billion
(2012: £8.8 billion), which is equivalent to
an economic solvency ratio of 257 per cent
(2012: ratio of 215 per cent). This result is
based on an assumption of US equivalence,
with no restrictions being placed on the
economic value of overseas surplus, and
using our internal model, which has not yet
been reviewed or approved by the
Prudential Regulation Authority.
In July 2013, Prudential plc was listed by
the Financial Stability Board as one of nine
companies to be designated as a Global
Systemically Important Insurer. Prudential
is monitoring the development and the
potential impact of the framework of policy
measures and engaging with the Prudential
Regulation Authority on the implication of
this designation.
Dividend
The Board proposes to rebase the full-year
dividend upwards by 4.38 pence, due to
the strong and sustained operational and
financial performance of the Group,
evidenced by the achievement of all our
demanding 2013 ‘Growth and Cash’
objectives. The directors recommend a final
dividend of 23.84 pence per share (2012:
20.79 pence), which brings the total dividend
for the year to 33.57 pence, representing an
increase of 15 per cent over 2012.
The Board applies strict affordability
tests against a broad range of criteria
before making its dividend
recommendation. It is the result of these
tests, combined with the Group’s
exceptionally strong performance in the
Prudential plc Annual Report 2013Group overviewGroup Chief Executive’s report
12
Group Chief Executive’s report continued
portfolio of businesses. We believe that the
strength of our franchise in Asia, with
leadership positions across our ‘sweet spot’
markets of South-east Asia, including
Hong Kong, and our multi-channel,
multi-product platform position us well
to profitably capture this multi-decade
opportunity.
In the US and the UK, we remain
focused on meeting the needs of our
customers and continue to implement a
prudent strategy, putting value ahead of
volume. This allows us to generate
significant levels of earnings and cash in
both geographies.
Over the last five years, the overall
performance of the Group has been
transformed, with all four of our businesses
now making significant and – in Asia and
the US – growing contributions to both
earnings and cash generation, from a
starting position where the UK was by far
the main contributor to earnings and to
cash generation. This newly achieved
diversification of our cash generation lends
both strength and resilience to the Group’s
performance over the medium term.
The disciplined execution of our
strategy has enabled us to deliver all of the
six challenging 2013 objectives following
one of the worst financial crises in history.
Our confidence in the future prospects of
the Group and our ability to execute across
our businesses in Asia, the US and the UK
is encapsulated in the three new objectives
for 2017 that we announced at
our December 2013 investor conference.
We believe the Group is well positioned
to continue to deliver good value to
customers and attractive returns to
shareholders while continuing to manage
capital prudently.
Tidjane Thiam
Group Chief Executive
Full-year dividend
+15%
33.57p
29.19p
23.85p
25.19p
19.85p
2009
2010
2011
2012
2013
past five years, that has enabled the
Board to take the unusual decision to
recommend the rebase of the dividend
in consecutive years, 2012 and 2013.
It is worth emphasising here again that,
although the Board has been able to
recommend three upward rebases in the
last four years, the Group’s dividend policy
remains unchanged. The Board will
maintain its focus on delivering a growing
dividend from this new higher base, which
will continue to be determined after taking
into account the Group’s financial flexibility
and our assessment of opportunities to
generate attractive returns by investing in
specific areas of the business. The Board
believes that in the medium term a
dividend cover of around two times is
appropriate.
Outlook
In 2013, we have delivered a strong
performance.
The global macroeconomic
environment is improving, with many signs
of recovery in the US and the UK. While
the transition to a world with a more normal
US monetary policy might create some
challenging short-term market and currency
volatility in financial markets, a return to
global growth and to a more normal
interest-rate environment and the robust
nature of the long-term secular drivers we
benefit from in Asia are all positives for our
business in the medium term.
We remain focused on pursuing the
three significant opportunities – the
significant protection gap in the Asian middle
class, the transition of US ‘baby-boomers’
into retirement and the need for savings and
retirement income for an ageing population
in the UK – that are core to our strategy.
Of these, Asia remains more than ever
central to the long-term, profitable growth
opportunities for the Group. The longer-
term structural trends of a rapidly growing
and wealthier middle class with significant
unmet needs for savings and protection
remain intact and underpin our prospects
in the region. We fully recognise the
challenges that some of the economies in
the region must deal with and we are never
complacent in managing our diversified
Notes
1 The comparative results shown above and
elsewhere in this document have been prepared
using an actual exchange rate (AER) basis except
where otherwise stated. Comparative results on
a constant exchange rate (CER) basis are also
shown for the analysis of IFRS and EEV operating
profit based on longer-term investment returns in
the Chief Financial Officer’s report on our 2013
financial performance.
2 The 2012 comparative results have been adjusted
from those previously published for the
retrospective application of the new and
amended accounting standards as discussed
in note A2 in the IFRS financial statements. In
addition, following its reclassification as held for
sale during 2013, operating results exclude the
results of the Japan life insurance business. 2012
comparatives have been retrospectively
adjusted on a comparable basis.
3 Excluding the 2012 one-off gain of £51 million
from the sale of the Group’s holding in China Life
Insurance Company of Taiwan.
4 Underlying basis is calculated at constant
exchange rate.
5 Excluding money market funds.
6 Before allowing for final dividend.
7 The objectives assume exchange rates
at December 2013 and economic assumptions
made by Prudential in calculating the EEV basis
supplementary information for the half
year ended 30 June 2013, and are based on
regulatory and solvency regimes applicable
across the Group at the time the objectives were
set. The objectives assume that the existing EEV,
IFRS and Free Surplus methodology at December
2013 will be applicable over the period.
8 Underlying free surplus generated comprises
underlying free surplus generated from
long-term business (net of investment in new
business) and that generated from asset
management operations. The 2012 comparative
is based on the retrospective application of new
and amended accounting standards and
excludes the one-off gain of £51 million from the
sale of the Group’s holding in China Life
Insurance Company of Taiwan.
9 Asia 2012 IFRS operating profit of £924 million
is based on the retrospective application of new
and amended accounting standards, and
excludes the one-off gain of £51 million from the
sale of the Group’s holding in China Life
Insurance Company of Taiwan.
10 Source: Q4 2013 ABI APE Market Data.
11 The methodology and assumptions used in
calculating the economic capital result are set out
in note II of Additional unaudited financial
information. The economic solvency ratio is
based on the Group’s Solvency II internal model
which will be subject to Prudential Regulation
Authority review and approval before its formal
adoption in 2016. We do not expect to submit our
Solvency II internal model to the Prudential
Regulation Authority for approval until 2015 and
therefore these economic capital disclosures
should not be interpreted as outputs from an
approved internal model.
12 As previously published.
Prudential plc Annual Report 2013 Group overview 13
Section 2
Strategic report
14
15
16
17
18
20
34
46
54
Who we are
How our business works
Our strategy
Implementing our strategy
Measuring our performance
Our businesses and their performance
20
25
28
31
Chief Financial Officer’s report
on our 2013 financial performance
Group Chief Risk Officer’s report on the risks
facing our business and our capital strength
Corporate responsibility review
Asia
US
UK
M&G
Strategic report Prudential plc Annual Report 20132
14
Who we are
Prudential plc is an international financial services group serving around
23 million insurance customers and has £443 billion of assets under management.
We are listed on stock exchanges in London, Hong Kong, Singapore and New York.
Prudential Corporation Asia
Jackson
Prudential is a leading international life insurer in Asia, with life
and/or asset management operations in 14 markets and serving
the emerging middle class families of the region’s powerhouse
economies. We have built a high-performing platform with
effective multichannel distribution, a product portfolio centred
on regular savings and protection, award winning customer
services and a well-respected brand.
Jackson is one of the largest life insurance companies in the US,
providing retirement savings and income solutions aimed at the
77 million ‘baby-boomers’. Founded over 50 years ago, Jackson
has a long and successful record of providing advisors with the
products, tools and support to design effective retirement
solutions for their clients.
12m
life customers
Prudential Corporation Asia page 20
Prudential UK & Europe
4m
life customers
Jackson page 25
M&G
Prudential UK delivers value for the Group through a relentless
focus on the life and pensions needs of the age cohorts where
wealth is most heavily concentrated. Our expertise in areas
such as longevity, risk management and multi-asset investment,
together with our financial strength and highly respected brand,
means that the business is strongly positioned to continue
pursuing a value-driven strategy built around our core strengths.
M&G has been investing money for individual and institutional
clients for over 80 years, and has grown to be one of Europe’s
largest retail and institutional fund managers by developing its
enduring expertise in active investment. M&G has a conviction-
led and long-term approach to investment, believing the best
returns are delivered for clients through active management
by developing a deep understanding of the companies and
organisations in whose equities, bonds or property M&G invests.
7m
life customers
Prudential UK & Europe page 28
£244bn
assets under management
M&G page 31
Prudential plc Annual Report 2013 Strategic report
15
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How our business works
We provide protection and savings opportunities to our customers, social and
economic benefits to the communities in which we operate, jobs and opportunities
to our employees, and financial benefits for our investors. By offering security,
pooling savings and making investments, we help to drive the cycle of growth.
What we do and how we do it
Life insurance
Prudential provides savings,
protection and retirement products,
which offer security for individuals
and benefit societies
Markets
Operate in markets with suitable
demographics and opportunities
Products
Design products that meet our customers’
savings and protection needs
Brands and
distribution
Develop trusted brands and effective
distribution channels that enable us to
better understand and service customers’
savings and protection needs
Customers
Invest customers’ savings in a way that
reflects their personal needs and risk
tolerance. Provide financial protection
to customers for adverse events
Asset management
Prudential helps customers to
grow and protect their savings
and investments
Operate in suitable markets and identify
investment opportunities with attractive
risk-return profile
Offer valued and innovative products
underpinned by good investment
performance
Trusted brands, market span and strong
distribution links help us to attract new
monies and retain existing assets
Generate valuable returns for
our customers through good
investment performance
Leverage asset
management
capabilities to
generate value for
our customers and
shareholders
Shareholders
Generate value for shareholders through
being rewarded for managing customer
savings and through insurance profits from
the protection given to policyholders
Generate value for shareholders through
fee income from managing growing funds
under management
Delivering for our stakeholders
We create financial benefits for our investors and deliver economic and social benefits for our customers, employees
and societies in which we operate
Customers
Providing financial security
and wealth creation
Investors
Growing dividends and
share price performance
enhances shareholder value
23m
life customers
59%
total shareholder return1
achieved in 2013
Employees
Providing an environment
with equal opportunities,
career potential and reward
means that we have the best
people to deliver our strategy
Societies
Supporting societies where we
operate, through investment
in business and infrastructure,
tax revenues and community
support activities
22,308
employees worldwide
£18.5m
total community investment spend
Note
1
Total shareholder return 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.
Prudential plc Annual Report 2013
16
Prudential plc Annual Report 2013 Strategic report
Our strategy
Our strategy is designed to create sustainable economic value for our customers
and our shareholders. It is focused on three long-term opportunities:
The significant protection gap in Asia;
The transition of US baby boomers into retirement; and
The UK ‘savings gap’ and ageing population in need of returns and income.
Asia:
accelerate
The Asian middle class
population is forecast to double
by 2020 and will then represent
over half of the global middle
class. This group is getting
wealthier and will have
significant and growing needs
for protection against illness
and accident.
accelerat e
Asia:
A
s
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a
Focus on
customers &
distribution
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m
ent:
United States:
build on strength
The US ‘baby boomer’ generation
is the wealthiest demographic
in the global economy. Over
the next 20 years they will be
retiring at a rate of 10,000 per day,
creating significant demand for
retirement services.
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Asset management:
optimise
Europe is home to the second-
largest retail asset management
industry in the world, with over
£5.8 trillion of assets. Asset
managers with trusted brands
and superior investment
performance will see increasing
demand for their products.
United Kingdom:
focus
The UK has an ageing
population and a ‘savings gap’,
that is unsustainable over
the long term. This will drive
increasing demand for savings
products and retirement
income solutions.
We believe that in order to do well for our
shareholders we must first do good for our
customers. Hence, customers are at the
centre of our operating principles.
Our products are designed to provide
peace of mind to our customers, whether
that be in relation to saving for retirement, or
insuring against the risks of illness or death.
Satisfied customers are a key driver of our
growth as they become our advocates,
recommending our products and services
to their friends and families.
Distribution plays a key role in our
ability to reach, attract and retain these
valued customers across our regions.
Building out and diversifying our
distribution platform in order to reach a
growing customer base will help ensure
that we fully capitalise on the opportunities
available to us in each of our regions.
Implementing our strategy
Our strategy is underpinned by a set of key operating principles.
17
Balanced
metrics and
disclosures
We aim to have clarity and consistency
internally and externally in the
performance indicators that drive our
businesses. Alongside this we develop our
financial disclosures to enable our external
stakeholders to fairly assess our long-term
performance. We have three objectives:
To show how we think about capital
allocation via a number of metrics that
highlight the returns we generate on
capital invested in new business,
including internal rates of return,
payback periods and new business
profitability; and
To demonstrate how we generate
profits under the different accounting
regimes; for example, in the IFRS
sources of earnings disclosures within
the Chief Financial Officer’s report;
To highlight the cash generation of our
business, which over time is the ultimate
measure of performance.
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Disciplined
capital
allocation
We rigorously allocate capital to the
highest-return product and geographical
locations with the shortest payback
periods, in line with our risk appetite. This
has had a positive and significant impact,
so that over the last five years, new
business capital investment has declined
by 6 per cent, while new business profits
have increased by 77 per cent.
This has, in turn, transformed the capital
dynamics of our Group: for example, the
free capital generated from our existing life
and asset management operations reached
£3.1 billion in 2013 compared to £2.1 billion
five years ago. This transformation
enabled our business operation to remit
£1,341 million to the Group, nearly double
the level of remittance five years ago.
Proactive risk
management
Balance sheet strength and proactive risk
management enable us to make good our
promises to customers and are therefore
key drivers of long-term value creation
and relative performance. We have
continuously strengthened our capital
position since 2008, in spite of the financial
crisis and the challenging macroeconomic
environment that followed. Management
actions that have been taken over this
period include:
The sale of our capital-intensive Taiwan
agency business in 2009, improving
our IGD capital position;
The establishment of £1.9 billion
of credit default reserves1 in the UK
annuity business; and
Controlling sales of US variable
annuities in a manner which
appropriately balances value,
volume, capital generation and
balance sheet risk.
Note
1 On a statutory (Pillar 1) basis.
Prudential plc Annual Report 2013
18
Measuring our performance
To create sustainable economic value for our shareholders we focus
on delivering growth and cash while maintaining adequate capital.
Our strategy and operating principles
Asia:
acceler a t e
A
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Balanced
metrics and
disclosures
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Focus on
customers &
distribution
Disciplined
capital
allocation
Prudential takes a balanced
approach to performance
management across IFRS, EEV and
cash. We aim to demonstrate how
we generate profits under different
accounting bases, to highlight the
returns we generate on capital
invested, and to highlight the cash
generation of our business.
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Proactive risk
management
Profit, cash and capital
What we measure and why
Performance1
Commentary
IFRS operating profit2,7
IFRS operating profit is our primary measure of
profitability. This measure of profitability provides
an underlying operating result based on longer-term
investment returns and excludes non-operating items.
CAGR
+20%
£2,954m
£2,520m
£1,823m
£2,017m
£1,446m
Group IFRS operating profit
increased by 17 per cent
in 2013 compared to 2012,
reflecting strong growth
in Asia and the US, which
were up 10 per cent and
30 per cent respectively.
Group EEV operating profit
in 2013 increased by
29 per cent compared
to 2012, driven by higher
new business profits and
increased contributions
from the in-force business.
2009
2010
2011
2012
2013
CAGR
+16%
£5,580m
£3,702m
£3,981m
£4,313m
£3,093m
2009
2010
2011
2012
2013
CAGR
+15%
£2,843m
£2,452m
£2,028m £2,151m
£1,619m
EEV new business profit
increased by 16 per cent
in 2013 compared to 2012,
reflecting higher sales
and improved margins.
2009
2010
2011
2012
2013
EEV operating profit3,7
Embedded value reporting provides investors with
a measure of the future profit streams of the Group’s
long-term businesses and includes profit from our
asset management and other businesses. It is provided
as additional information to our IFRS reporting. As
with IFRS, EEV operating profit reflects the underlying
results based on longer-term investment returns.
EEV new business profit3
EEV new business profit represents a measure of the
future profitability of all new business sold in the year.
Life insurance products are, by their nature, long term
and generate profit over a significant number of years.
EEV new business profit reflects the value of future
profit streams which are not fully captured in the year
of sale under IFRS reporting.
Prudential plc Annual Report 2013 Strategic report
19
What we measure and why
Performance1
Commentary
Group free surplus generation4,7
Free surplus generation is used to measure the
internal cash generation by our business units.
For the insurance operations it represents amounts
maturing from the in-force business during the period
less investment in new business, and excludes other
non-operating items. For asset management it equates
to post-tax IFRS operating profit for the period.
Business unit remittances
Remittances measure the cash transferred from
the business units to the Group. Cash flows across
the Group reflect our aim of achieving a balance
between ensuring sufficient net remittances from
the businesses to cover the dividend (after corporate
costs), and retention of cash for reinvestment in
profitable opportunities available to the Group.
IGD capital surplus before final dividend5
Prudential is subject to the capital adequacy
requirements of the European Union Insurance Groups
Directive (IGD) as implemented by the Prudential
Regulation Authority in the UK. The IGD capital
surplus represents the aggregated surplus capital
(on a Prudential Regulation Authority consistent basis)
of the Group’s regulated subsidiaries less the Group’s
borrowings6. No diversification benefit is recognised.
2017 objectives
CAGR
+14%
£2,462m
£1,982m £2,080m
Compared to 2012,
underlying free surplus
has increased 18 per cent
in 2013, driven by growth
of the in-force portfolio.
£1,687m
£1,453m
2009
2010
2011
2012
2013
CAGR
+18%
£1,105m
£1,341m
£1,200m
£935m
£688m
2009
2010
2011
2012
2013
£5.1bn
£5.1bn
£4.3bn
£4.0bn
£3.4bn
2009
2010
2011
2012
2013
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Net business unit
remittances increased
by 12 per cent in 2013
when compared to 2012,
with all business units
completing their 2013
cash remittance objective.
We continue to operate
with a strong solvency
position, with our estimated
IGD capital surplus before
final dividend covering
the capital requirements
2.8 times.
In December 2013, the Group announced new objectives that reflect our determination to drive long-term value creation for our shareholders.
2017 objectives8
1 Asia underlying free surplus generation9 of £0.9 billion to £1.1 billion in 2017 (2012: £484 million)
2 Asia life and asset management pre-tax IFRS operating profit to grow at a compound annual rate of at least 15 per cent over
the period 2012 to 2017 (2012: £924 million10)
3 Cumulative Group underlying free surplus generation of at least £10 billion over the four-year period from 2014 to end-2017
Notes
1
The comparative results shown above and elsewhere in this document have
been prepared using actual exchange rates (AER) basis except where
otherwise stated. Comparative results on a constant exchange rate (CER)
basis are also shown for the analysis of IFRS and EEV operating profit based
on longer-term investment returns in the Chief Financial Officer’s report.
CAGR is Compound Annual Growth Rate.
The basis of IFRS operating profit based on longer-term investment returns is
discussed in note B1.3 of the IFRS financial statements. The IFRS profit before
tax attributable to shareholders has been prepared in accordance with the
accounting policies discussed in note A of the IFRS financial statements.
The EEV basis results have been prepared in accordance with the EEV
principles discussed in note 1 of EEV basis supplementary information.
Free surplus generation represents ‘underlying free surplus’ based on
operating movements, including the general insurance commission earned
during the period and excludes market movements, foreign exchange,
capital movements, shareholders’ other income and expenditure and
centrally arising restructuring and Solvency II implementation costs. In
addition, following its reclassification as held for sale during 2013, operating
results exclude the result of the Japan life insurance business. Comparatives
have been retrospectively adjusted on a comparable basis.
Estimated. As disclosed in full year 2012 results, from March 2013 the basis of
calculating Jackson’s contribution to the Group’s IGD surplus was changed.
Further detail can be found in the section ‘Capital management – Regulatory
Capital (IGD)’ of ‘Group Chief Risk Officer’s report on the risks facing our
business and our capital strength’. The prior year comparatives are
as previously reported and do not reflect the new basis.
2
3
4
5
6 Excludes subordinated debt issues that qualify as capital.
7
The comparative results have been adjusted from those previously
published for the retrospective application of the new and amended
accounting standards. In addition, following its reclassification as held for
sale during 2013, operating results exclude the result of the Japan life
insurance business. Comparatives have been retrospectively adjusted
on a comparable basis.
The objectives assume exchange rates at December 2013 and economic
assumptions made by Prudential in calculating the EEV basis
supplementary information for the half year ended 30 June 2013, and are
based on regulatory and solvency regimes applicable across the Group at
the time the objectives were set. The objectives assume that the existing
EEV, IFRS and Free Surplus methodology at December 2013 will be
applicable over the period.
Underlying free surplus generated comprises underlying free surplus
generated from long-term business (net of investment in new business)
and that generated from asset management operations. The 2012
comparative is based on the retrospective application of new and
amended accounting standards and excludes the one-off gain of £51 million
from the sale of the Group’s holdings in China Life Insurance Company
of Taiwan.
Asia 2012 IFRS operating profit of £924 million is based on the retrospective
application of new and amended accounting standards, and excludes the
one-off gain of £51 million from the sale of the Group’s holdings in China Life
Insurance Company of Taiwan.
8
9
10
Prudential plc Annual Report 2013
20
Our businesses and their performance
Asia:
accelerate
Our strategy and operating principles
Asia:
acceler a t e
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Focus on
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distribution
Disciplined
capital
allocation
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Proactive risk
management
Prudential’s strategy ‘to accelerate’
in Asia is well established and
continues to prioritise:
B Opportunities for profitable growth
over the long term;
B Products that provide effective
solutions to customers’ savings
and protection needs;
B High quality, multichannel
distribution; and
B Asset management expertise.
‘Prudential’s Asian strategy has
proved very effective. Its success
is attributable to our disciplined
focus on execution together
with a passion to innovate and
improve the services we
provide to our distributors and
customers. We aim to attract,
develop and retain the best
people in the industry who are
highly motivated by the vital role
we play in our communities. We
are very much an organisation
that does well by doing good.’
Barry Stowe
Chief Executive
Prudential Corporation Asia
Performance highlights
New business profit
IFRS operating profit1
£1,460m
£1,266m
£1,076m
£901m
£713m
£774m
£591m
£482m
£51m*
£924m
£1,075m
2009
2010
2011
2012
2013
2009
* Gain on sale of China Life Insurance Company in Taiwan
2010
2012
2011
2013
Net cash remittances
Eastspring Investments funds
under management
£400m
£341m
£52bn
£50bn
£42bn
£58bn
£60bn
£233m
£206m
£40m
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
To find out more about Prudential Corporation Asia www.prudentialcorporation-asia.com
Prudential plc Annual Report 2013 Strategic report
Performance highlights
B Objectives set in 2010 for 2013 have
been achieved
B Continued delivery across key value
creation metrics: new business profit up
15 per cent, IFRS profits up 16 per cent2,
free surplus generation up 18 per cent2
B Increased agency activity, up 8 per cent
and improved productivity, up 8 per cent
B Successfully added major new
distribution partner with Thailand’s
Thanachart Bank
Favourable economic trends
Asia (excluding Japan) is leading the world
in terms of Gross Domestic Product growth.
Over the next five years it is expected to
generate US$5.5 trillion3 of new Gross
Domestic Product, more than the US and
the other advanced economies combined.
Attractive demographics
Economic growth is translating into the
rapid increase of the Asian middle class.
Between 2009 and 2020 it is estimated
that there will be over 1.2 billion people
who will have been elevated from rural
subsistence to urban lifestyles. Families
B Commenced operations in Cambodia,
Growing Asia middle class4
opened representative office in
Myanmar
B Expanded Eastspring Investments’
platform with operation and approvals
to distribute funds in Europe
Market overview
Asia’s economic transformation has
generated material increases in personal
wealth and has created significant demand
for products that provide solutions to
individuals’ financial planning needs.
61%
28%
000m
5
4
3
2
1
0
66%
60%
61%
54%
+190%
+330%
2009
2030
2020
Asia as a percentage of world middle class
Asia as a percentage of world population5
Asia
Rest of the world
%
75
60
45
30
15
0
21
are getting smaller, life expectancies are
lengthening and the incidence of chronic
diseases is increasing significantly.
Strong demand for savings
and protection products
As people move into the middle class, their
increased wealth and higher income
provide the opportunity to make financial
plans. Typically the first stage is to provide
protection for the family and establish
a regular savings plan through a life
insurance policy.
Social welfare provisions vary by
market but generally fall well below the
levels people need to sustain their
lifestyles in the event of a personal
tragedy such as the diagnosis of a critical
illness. Also, while basic medical services
may be provided by the state, there can
be a high level of out-of-pocket expenses,
creating demand for financial solutions
to significantly improve an individual’s
experience through access to private
medical services. Therefore, critical illness
and medical riders are popular additions
to life insurance policies.
Traditionally Asians would have relied
on their children to provide for them in their
retirement, but increasingly people are
making their own financial provisions and
life insurance policies are a popular part
of a retirement plan.
Once the savings and protection
solutions are in place, there is the
opportunity to invest. Single premium
insurance policies are also important in more
developed markets and it is also likely that
customers will increasingly seek access to
different asset classes through mutual funds
as their wealth grows and their financial
needs become more sophisticated.
Share of medical expenses paid
out-of-pocket6, 2011 (%)
60
59
56 56
50
42
35 35 33 31
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Strategic reportOur businesses and their performance Prudential plc Annual Report 2013
22
Our businesses and their performance continued
Our markets
UAE
India
Korea
Japan
China
Taiwan
Hong Kong
Vietnam
Thailand
Cambodia
Philippines
Malaysia
Singapore
Indonesia
Evolving regulatory environment
Each Asian market has evolved its own
regulatory regime depending on the
heritage of the industry, experiences and
developmental priorities.
Regulators across the region are generally
keen to promote the growth of the life
insurance industry, as they appreciate the
social utility of providing financial security
to individuals and the way insurers channel
unproductive cash savings into long-term
investments in the economy. However, they
are imposing higher standards on the industry
and monitoring compliance more actively,
with increasing focus on the quality of advice
distributors provide and the suitability of the
products offered. Although assessments of
solvency can vary considerably market by
market, there is increasing convergence on
risk-based calculations.
What we do and how we do it
Although Prudential has been operating in
Asia for almost 90 years, we began building
our business in earnest in 1994 with the
establishment of Prudential Corporation
Asia. Since then Prudential Corporation
Asia has entered new markets, added
considerable agency scale and launched
bank distribution, developed product
capabilities – particularly unit-linked – and
built a customer-centric brand anchored
on the tag line ‘Always Listening, Always
Understanding’.
Today Prudential Corporation Asia is
focused on leveraging this platform to grow
in a disciplined way for the benefit of our
customers, shareholders and communities.
Success is defined by metrics that ensure
we deliver both volume and value.
Market participation
Each market is unique and our overarching
regional strategy is very specifically tailored
to opportunities that reflect the many
differences in each country, including its
stage of economic development, cultural
preferences, regulation, the competitive
landscape and our own risk appetite.
Markets with highly attractive economic
and demographic characteristics represent
the greatest potential for us, which at present
we collectively term the ‘sweet spot’. This
comprises Indonesia, Hong Kong, Singapore,
Malaysia, Vietnam, Thailand and the
Philippines. We have strong market positions
in all of them, including five countries where
we have the leading market share.
The life insurance markets in India and
China, while attractive in terms of scale, are
more challenging for non-domestic life
insurers to participate in. Working within
these constraints, Prudential Corporation Asia
has two joint ventures with leading market
shares in these countries and is very well
placed as these markets continue to develop.
Since 2008 we have de-emphasised
Korea and Taiwan, as the mass life insurance
markets are currently driven by product and
distribution options that are not attractive to
us and consequently we have concentrated
on developing successful niche positions.
In 2013 we announced our intention to sell
our Japan life business, subject to regulatory
approvals. However, the mutual fund
industries in these markets are highly
Key
Our ‘sweet spot’ markets
Other Asian markets
attractive and, through Eastspring
Investments, we are able to take advantage
of exciting growth opportunities.
We also continue to plan for the longer
term by selectively investing in new countries
where we see opportunities based on positive
demographic trends. In Cambodia our new
life business has made a good start and the
relationship with our distribution partner
ACLEDA Bank is working well. We have also
opened a representative office in Myanmar.
Life insurance distribution
Prudential Corporation Asia is well positioned
in terms of its scale and diversity of
distribution. Almost 460,000 agents produce
around 60 per cent of sales and the remaining
40 per cent comes mainly from partnership
distribution agreements that include access
to 15,700 active bank branches throughout
the region. At the core of our distribution
model is our appreciation of the importance
of face-to-face interaction and the need to
provide customers with high quality advice.
Our success with agency is driven by a
relentless focus on quality and professionalism,
starting with the initial recruitment and
training. We actively manage agency activity
(excluding India, up 33 per cent since 2009)
and agency productivity (excluding India,
up 13 per cent per annum since 2009).
We have exclusive distribution
agreements with a number of banks
including Standard Chartered Bank and
UOB. In 2013, we also added Thanachart
Bank, significantly increasing our
distribution reach in Thailand. Success in
bancassurance depends on the ability to
Prudential plc Annual Report 2013 Strategic report
23
Our ‘sweet spot’ markets
Indonesia (1)
Singapore (1)
Hong Kong (4)
Malaysia (1)
Unmatched platform with
scale and geographic reach
B 327 agency offices in 137 cities
B 62 per cent of industry’s
licensed agents
B Hi-tech agency training
and licensing
B ‘All-in-one’ product solution
combines protection,
investment and savings
B Conventional and
Takaful options
Professional agency
complemented by a unique
range of bank partners
B Full year 2013 saw active
agency numbers increase
by 9 per cent and productivity
increase by 10 per cent
B Fast growing bancassurance
with Standard Chartered
Bank, UOB and Maybank
B Market leading Prushield
product drives customer
acquisition
B Value-added services such
as ‘PRUhospital friend’
B Expanding high net
worth segment
Resilient distribution
platform
B Leading insurer with scale in
agency and bank distribution
B Full year 2013 saw 5 per cent
increase in active manpower
and a 30 per cent increase
in productivity
B Successful partnership with
Standard Chartered Bank
now in 16th year
B Product innovations drive
new customer acquisition
and repeat sales
Well positioned to capture
emerging opportunity in
Bumi segment
B 42 per cent of industry’s
Bumi agents
B Pioneer in linked policies
with riders for flexible
savings and protection
B 26 per cent7 market share
of Takaful (Sharia compliant)
life business
Philippines (1)
Vietnam (1)
Thailand (9)
Rapidly scaling up
distribution
B More than doubled agency
size in less than two years
B Expanding across country
B Improving efficiency
– 80 per cent of policies now
processed ‘straight through’
B Market leader in linked
with protection policies
Long-term industry leader
B Industry number one
since 2007
B 32 per cent of industry’s
agents; productivity
increased by 16 per cent
in full year 2013
B Building bancassurance:
eight partners and access
to 260 branches
Excellent bancassurance
platform
B Access to over 800
branches nationwide
B Rapid activation of new
partnership with
Thanachart Bank
B Launched 15 new products
on first day of partnership
( ) Prudential’s rank in insurance
market by new business APE.
Based on formal (competitors’
results releases, local regulators,
insurance associations) and
informal (industry exchange)
market share data. Thailand
market position and market
share are post-acquisition of
Thanachart Life.
Strategic reportOur businesses and their performance Prudential plc Annual Report 2013 24
Our businesses and their performance continued
Cha-Ching –
money-smart kids
A financial literacy programme that
includes three-minute cartoons
to teach children four key money
management concepts: earn, save,
spend and donate.
B Developed with world-leading
experts (Dr Alice Wilder PhD
and Turner Broadcasting)
B One of Cartoon Network’s highest
rated shows in Asia
B 60+ million page views on website
B Takes the dialogue to children aged
seven to 12, engages entire family
B Over 70,000 children have
participated in school
engagement programmes
activate relationships quickly and focus
on long-term customer solutions through
in-branch, face-to-face advice-based selling.
Products
Our product portfolio is centred on providing
a robust financial safety net to customers at
a reasonable price. The product mix reflects
this with around one third of premiums
directed to health and protection products,
one third to unit-linked products and one
third to participating products. This profile
shows that we are de-risking our customers’
lives while also de-risking the business from
the shareholders’ perspective.
Over 90 per cent of our new business
is regular premium.
Customers
Prudential Corporation Asia has over
12 million life insurance customers and
19 million in-force policies. We actively
manage customer satisfaction levels across
multiple indicators, but key statistics are the
numbers of customers who keep their policies
(our retention rate is 93 per cent), and the
number of customers who buy more policies
from us (in 2013, 40 per cent of APE sales
were from existing customers). This reflects
the success of our advice-driven approach
and shows that customers appreciate the
value of the products we provide.
Innovations in service are also important to
customer satisfaction. Some are technology
based such as e-submissions and automated
underwriting, but another key component
is innovation with the human touch such as
Indonesia’s PRUhospital friend.
Asset management
Eastspring Investments, Prudential’s asset
management business in Asia, manages
investments for Prudential’s Asia, UK and
US life companies and also has a broad
base of third-party retail and institutional
clients. It has extended distribution reach
to the US and Europe.
Eastspring Investments was awarded
the ‘Best Asset Management Company of
the Year – South-east Asia’ at The Asset
Triple A Investor and Fund Management
Awards 2013. Eastspring Investments also
received multiple accolades for its
investment capabilities, including five fund
managers across four markets rated as
top 10 ‘2013 Most Astute Investors in Asian
currency bonds’ by The Asset Benchmark
Research; and the business in Malaysia was
named ‘Best Group in Equity’ by ‘The Edge
Lipper Malaysia Fund Awards 2014’.
Corporate social
responsibility activities
Prudential is a committed member of the
communities where we operate and through
the Prudence Foundation, we drive social
responsibility activities, with a focus on
providing disaster relief, promoting financial
literacy, and children’s education.
During 2013, Prudential extended its
highly successful children’s financial literacy
programme, ‘Cha-Ching’; for example, this
has now been adopted in the Philippines as
part of the school curriculum.
In April 2013, the Prudence Foundation
announced a series of four multi-country
programmes in partnership with Save the
Children and Plan International with two
main objectives: to enable communities
to better cope with disasters, and to help
children receive a better start to their
education through the First Read initiative.
More than 170,000 people in Cambodia,
Indonesia, the Philippines, Thailand and
Vietnam are expected to benefit from these
programmes over a three-year period.
In November 2013, the Philippines
suffered one of the worst disasters in its
history, Typhoon Haiyan. Prudential has
mobilised resources and committed to
provide US$2 million (£1.25 million) to the
immediate disaster relief and longer-term
community rebuilding efforts.
Notes
1 The comparative results have been adjusted
from those previously published for the
retrospective application of the new and
amended accounting standards. In addition,
following its reclassification as held for sale at
31 December 2013, operating results exclude the
result of the Japan life insurance business.
Comparatives have been retrospectively
adjusted on a comparable basis.
2 Excluding the 2012 one-off gain of £51 million
from the sale of Group’s holding in China Life
Insurance Company in Taiwan.
3 Prudential estimates based on IMF data
– October 2013.
4 Source: The emerging middle class in
5
developing countries, Homi Kharas – Brookings
Institute (March 2010). Prudential estimates.
Source: UN Department of Economic and Social
Affairs / Population Division. World Population
to 2030. Prudential estimates.
6 World Health Organisation – Global Healthy
Expenditure Database (2011). For Hong Kong –
Food and Health Bureau, Government of Hong
Kong (2010). For Taiwan – data as of year 2006.
7 As at 30 September 2013.
Prudential plc Annual Report 2013 Strategic report United States:
build on strength
Our strategy and operating principles
U
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build o
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Balanced
metrics and
disclosures
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Focus on
customers &
distribution
Disciplined
capital
allocation
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Proactive risk
management
Asia:
acceler a t e
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25
Prudential’s strategy of ‘build on
strength’ in the US is well established
and continues to focus on:
B Capitalising on the ‘baby-boomer’
retirement opportunities;
B Maintaining a balanced product suite
throughout the economic cycle;
B Streamlining operating platforms,
driving further operational
efficiencies; and
B Conservative, economic-based
approach to pricing and
risk management.
‘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
significant macroeconomic and
financial market challenges of
the last six years and ensured
a continuation of our strong
performance in 2013.’
Mike Wells
President and Chief Executive Officer
Performance highlights
New business profit
IFRS operating profit1
£1,086m
£1,302m
£761m
£815m
£873m
£664m
£1,003m
£750m
£675m
£485m
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
Net cash remittances
Growth in statutory admitted assets
£122m*
£200m
£294m
£249m
US$
170.9bn
US$
142.8bn
US$
97.5bn
US$
107.6bn
US$
81.0bn
£80m
£39m
2009
2011
2010
* One-off release of excess surplus
2012
2013
2009
2010
2011
2012
2013
To find out more about Jackson www.jackson.com
Strategic reportOur businesses and their performance Prudential plc Annual Report 2013
26
Performance highlights
B Cash remittance of £294 million exceeded
2013 cash objective of £260 million
B Continued strong returns on
shareholder capital across all key
financial metrics
B Elite Access sales of £2,585 million
(US$4,045 million) in first full year after
launch, making Jackson the most
successful player in the non-guarantee
variable annuity market
B Successfully managed sales of variable
annuities with guarantees in line with
risk appetite
B Successfully integrated REALIC
including achievement of financial targets
B Awarded ‘World Class Certification’ by
Service Quality Measurement Group
and ‘Highest Customer Satisfaction by
Industry’ award – the eighth consecutive
year of recognition for customer service
performance in these two categories
Market overview
‘Baby-boomer’ retirement
opportunities
The United States is the world’s largest
retirement savings market with total assets
in the annuity sector of over US$2.5 trillion2.
Each year, many of the 77 million ‘baby-
boomers’ reach retirement age, which is
triggering a shift from savings accumulation
to retirement income generation of more
than US$10 trillion3 of accumulated wealth
over the next decade. This demographic
transition constitutes a significant
opportunity for those companies that are
able to provide the ‘baby-boomers’ with
long-term retirement solutions.
US economic environment
In 2013, the US economy began to see
early signs of improvements, with
unemployment rates steadily decreasing,
and the housing market continuing to show
signs of recovery. Reflecting this, the S&P
500 Index rose 30 per cent, its best
performance since a 31 per cent jump
in 1997, and longer-dated Treasury yields
also began to climb in 2013 ahead of the
reduction in the Federal Reserve’s
quantitative easing programme. While
interest rates remained well below
historical averages at year end, an upward
move in Treasury yields, if sustained, would
be beneficial to the financial performance
of the US insurance industry.
Competitive landscape
We continue to see significant shifts in
market share amongst the larger annuity
participants. Jackson’s market share of
annuities with living benefits has remained
relatively steady, while some larger players
have consciously pulled back and others
are now re-entering the market. We have
also seen a general trend of product
changes in this market that have reduced
investment flexibility and/or increased fees
for optional benefits. Several insurers with
challenging legacy blocks of variable
annuity business continue to implement
policy changes to help mitigate the risk of
their back book of business, including fee
increases on older benefits, changes to
the availability of investment options,
subsequent premium restrictions on
in-force contracts and buy back offers
to their existing policyholders. Despite
positive demographic trends, these
activities have the potential to lead to
overall contraction in the industry, and
likely further market share adjustments,
as customers and distributors seek insurers
that offer consistency, stability and
financial strength.
Regulatory environment
The financial services industry continues
to deal with a multitude of emerging
regulatory initiatives in response to the
financial crisis. Many of these broader
financial services initiatives specifically
impact the insurance industry. Within the
insurance industry, we are seeing evolving
supervisory structures, new global group
supervision standards, focus on the
reduction of systemic risk, and amplified
focus on enterprise risk management as well
as initiatives in the area of financial reporting.
While discussions are clearly still under way
across many initiatives, this is resulting in
significant resources being expended across
the industry. Finding the appropriate path
through all of the regulatory changes clearly
remains a challenge.
What we do and how we do it
Jackson’s long-term strategy consists of
capitalising on the profitable growth
opportunities created by the demands for
retirement income products due to the
demographic transitions within the world’s
largest retirement market. Jackson takes a
disciplined approach to this opportunity
by leveraging its distinctive distribution
capabilities and asset liability management
expertise to offer prudently priced annuity
products aligned with our risk appetite. We
continue to see strong consumer demand
for our products and will continue to drive
product innovation as a way of meeting
the needs of customers and generating
shareholder value. With a long-term focus
on balancing the needs of multiple
stakeholders, Jackson has forged a solid
reputation among advisers for financial
stability, innovative products and market
leading wholesale support. Our relentless
pursuit of excellence has earned us a
leading position within the industry.
Product suite
Jackson develops and distributes products
that address the retirement needs of our
customers through various market cycles.
These include variable annuities, fixed
annuities, fixed index annuities, and
separately managed accounts. As would
be expected in the current, historically low
interest rate environment, variable
annuities continue to outsell fixed rate
products. The main attraction of a variable
annuity product is the optional lifetime
guarantee where customers can access
a stream of payments with downside
Prudential plc Annual Report 2013 Strategic reportOur businesses and their performance continued 27
High-quality information technology
systems are critical for providing award-
winning customer service. We leverage
technology to minimise processing errors
and reduce the time required to process
new business and commissions. The
flexibility of our information technology
systems contributes to our ability to
manufacture, distribute and service
an unbundled product design unique
to the industry.
This focus on our operational platforms,
and the efficiencies achieved as a result,
has provided us with among the lowest
general and administration expense to
asset ratio relative to competitors.
Disciplined approach
Jackson operates within a well-defined
risk framework aligned with the overall
Prudential Group risk appetite. The type
and number of products we sell remains
balanced with the acceptance of risks we
retain. Our conservative and disciplined
economic approach to pricing is designed
to achieve both adequate returns on our
products and sufficient resources to
support our hedging programme.
Our hedge philosophy has not changed
in 2013. Jackson is able to aggregate
financial risks across the company, obtain
a unified view of our risk positions, and
actively manage net risks through
economically-based hedging programmes.
A key element of our core strategy is to
protect the company from severe economic
scenarios while maintaining adequate
regulatory capital. We benefit from the fact
that the competitive environment continues
to favour companies with good financial
strength ratings and a strong track record
of financial discipline, both key elements
of our long-term strategy.
the purchase of Reassure America Life
Insurance Company (REALIC) has
contributed significantly, to shape
Jackson’s earnings while helping to
diversify Jackson’s overall risk profile.
We continue to proactively balance
value, volume, capital and balance sheet
strength across our suite of product
offerings which allows us to compete
effectively throughout the economic cycle.
Distribution capabilities
Our distribution teams set us apart from
our competitors within the markets in
which we compete. Jackson’s wholesaling
force is the largest in the industry,
supporting thousands of advisers across
multiple channels and distribution outlets.
Our wholesalers provide extensive training
to these advisers and in 2013 focused
training efforts around its newest product,
Elite Access, with a total of 374 Elite Access
meetings and over 10,000 advisers in
attendance. Training topics included
alternative investments, economic updates
and tax and trusts education.
National Planning Holdings, an affiliate
of Jackson, is the seventh5 largest
independent broker-dealer network in the
country. Leveraging the collective strength
of the four broker-dealers within the
network, National Planning Holdings
is able to meet the specific needs of three
key distribution channels: independent
representatives, financial institutions,
and tax and accounting professionals.
We offer registered representatives and
investment advisers access to industry-
leading mutual fund/asset management
companies, insurance carriers, and to
thousands of brokerage products. National
Planning Holdings provides significant
benefits for Jackson by being an outlet
for Jackson products and providing
market intelligence.
Curian is Jackson’s retail asset
management arm, distributing investment
solutions which include separate accounts,
mutual funds, mutual fund wraps and
exchange traded funds through an online
platform. Curian gives financial advisers
efficient access to a broad range of
investment solutions that are developed
with institutional-level investment manager
due diligence, portfolio construction and
asset allocation resources.
Operational efficiencies
We support our industry-leading
distribution teams with award-winning
customer service. Jackson was awarded by
Service Quality Measurement Group, Inc.
‘World Class Certification’ in customer
satisfaction and received the ‘Highest
Customer Satisfaction by Industry’ award,
achieving the top rating for the financial
industry, for the eighth consecutive year.
Notes
1 Comparatives adjusted for retrospective
application of the accounting policy change for
deferred acquisition costs implemented in 2012.
2 According to LIMRA, US Individual Annuities
Survey Participant’s Report Q3 2013.
Source: US Census Bureau.
3
4 Based on total annuity sales, LIMRA, US
5
Individual Annuities Survey Participant’s
Report Q3 2013.
Investment News Broker-Dealer Rankings –
April 2013 (as reported at the 2013 Investor
Conference).
protection while still being able to invest
in a broad range of assets, as well as the
benefit of tax deferral on the investment
growth within the product. The breadth
of our product offering, strength of our
distribution relationships, and our ability
to maintain financial stability through the
crisis and remain as a consistent presence
within the market, have resulted in Jackson
being the number one4 writer of variable
annuities in the US.
Additionally, Jackson developed
and launched Elite Access in March 2012.
Elite Access is a variable annuity without
guarantees, offering customers tax
deferred growth and access to a wide
range of alternative investments. In less
than two years after its launch, Elite Access
is the eighth best-selling variable annuity
product in the US. As of third quarter of
2013, Jackson offers three of the top 10
best-selling variable annuity products
across the industry.
The success of Elite Access has helped
increase the diversification of our product
mix with 31 per cent (2012: 17 per cent)
of our 2013 variable annuities sales not
featuring living benefit guarantees. As a
percentage of total sales, variable annuities
with living benefit guarantees are at their
lowest since 2008.
While sales of fixed annuities and fixed
index annuities have been lower recently
in line with the market, they still make up
a significant portion of our balance sheet
and earnings. Jackson stopped selling life
insurance products in 2012; however, we
continue to look for opportunistic ‘bolt on’
acquisitions to diversify our earnings and
balance sheet risks further. Most recently,
Variable annuity sales (US$bn)
19.7
3.4
16.3
20.9
6.4
14.5
2012
2013
Without living benefits
With living benefits
Elite access sales (US$m)
+201%
4,045
1,345
2012
2013
Strategic reportOur businesses and their performance Prudential plc Annual Report 2013 28
United Kingdom:
focus
Our strategy and operating principles
Asia:
acceler a t e
A
s
s
e
t
m
o
a
p
t
i
n
a
m
g
e
is
e
ment:
U
nite
build o
d S
n s
t
a
t
r
t
e
Balanced
metrics and
disclosures
e
s
n
:
g
t
h
Focus on
customers &
distribution
Disciplined
capital
allocation
m:
o
d Kingd
fo cus
U n i t e
Proactive risk
management
The strategy in the UK business
continues to be one of ‘focus’:
B Selective participation;
B Capital discipline;
B Sustainable cash generation;
B Delivering value through cost and
persistency management; and
B Provision of market leading with-profits
investment returns to our customers.
‘Our ability to deliver value to our
customers and the resulting
market franchise served us well
in 2013 where, despite the impact
of regulatory changes, retail new
business profit was resilient,
cash generation increased and
our strong capital position was
maintained.’
Performance highlights
New business profit
IFRS operating profit
£365m
£108m
£257m
£313m
£39m
£274m
£297m
£30m
£267m
£260m
£29m
£231m
£657m
£657m
£719m
£63m
£656m
£723m
£23m
£736m
£735m
£31m
£25m
£700m
£705m
£710m
£230m
£7m
£223m
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
Jackie Hunt
Chief Executive Officer
Wholesale
Retail
Wholesale
Retail
Net cash remittances
Inherited estate
£150m*
£120m*
£284m
£300m
£297m
£313m
£355m
£6.4bn
£6.8bn
£7.0bn
£6.1bn
£8.0bn
2009
2011
2010
* One-off release of excess surplus
2012
2013
2009
2010
2011
2012
2013
To find out more about Prudential UK & Europe www.pru.co.uk
Prudential plc Annual Report 2013 Strategic reportOur businesses and their performance
29
Performance highlights
B 2013 cash objective of £350 million
achieved
B Two ‘Five Star’ ratings for excellent
service1, achieved for third
consecutive year
B Winner of the Company
of the Year award2
B Robust performance despite
significant regulatory change
B Diversified distribution model focusing
on intermediaries, Prudential Financial
Planning (our direct advice service)
and individual customers via mail, email
and telephone
B Continued strong performance of
with-profits
B Launch of Prudential Polska –
12 branches and 481 financial
planning consultants
Market overview
The changing face of saving in the UK
The UK market is 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-
Ageing population with 57 per cent of liquid assets held by over-55s
Old age dependency ratio (%) 3,4
Liquid assets5,6 by age, total c£1tn
55
53
49 51
45
40
37
35
31
30 31
32
18-54
55+
5
9
9
1
0
0
0
2
5
0
0
2
0
1
0
2
5
1
0
2
0
2
0
2
5
2
0
2
0
3
0
2
5
3
0
2
0
4
0
2
5
4
0
2
0
5
0
2
sponsored schemes and require help to
convert their wealth into sustainable lifetime
income. In contrast, the next generation of
savers is typically under-funded as the
responsibility for retirement provision has
shifted substantially away from government
and employers, and towards the individual.
These customers, and helping them
accumulate savings, constitutes a significant
opportunity for long-term savings and
retirement income providers at a time when
the ability of the state to intervene is
significantly diminished.
In the UK we focus on those areas of the
market where we are able to bring superior
value to our customers and where we enjoy
a competitive advantage, primarily in
with-profits and annuities.
The changing regulatory landscape
The UK life and pensions industry has
undergone considerable regulatory and
market change in 2013, with the
appointment of two new industry
regulatory bodies, the phasing in of
auto-enrolment for company pensions and
the introduction of the ABI Code on
Retirement Choices. The implementation
of the recommendations of the Retail
Distribution Review has changed the
distribution landscape and providers,
distributors, advisers and their clients
continue to adjust to the new environment.
The Financial Conduct Authority’s
Thematic Review into the UK annuity
market, which ran throughout 2013,
concluded in February 2014 with the
announcement that it was launching a
further study to examine competition and
choice in the retirement income market as a
whole. We continue to support both
regulatory and other initiatives to improve
consumer experience and outcomes.
These new developments 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.
What we do and how we do it
Valuable customer franchise
With a pedigree stretching back over more
than 165 years the Prudential UK business
has built the foundation of the Group’s
iconic brand and its cash, capital and credit
ratings performance. Our approach in the
UK is driven by a focus on providing
long-term value to our customers based on
our longevity and experience, multi-asset
investment capabilities and our financial
Strategic reportOur businesses and their performance Prudential plc Annual Report 2013
30
strength. Our long-standing trusted
brand favourably positions us to help
risk-averse customers save with confidence
and then to translate their accumulated
wealth into dependable retirement income,
through our range of market leading
with-profits and annuity products. Our
strong brand franchise has also been central
to our successful health and protection
associates – PruHealth and PruProtect.
We continue to focus on meeting
customer needs:
— Offering a range of ways to do business
with us through intermediaries, through
our Prudential Financial Planning partners
providing advice to customers in their
homes, or by telephone and internet;
— Innovative products such as our Income
Choice Annuity which provides an
alternative to the traditional fixed income
annuity and is especially attractive in a
low-interest rate environment;
— Our market leading PruFund investment
range with optional guarantees to suit
customers’ attitude to risk; and
— 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 2013
Financial Adviser Service Awards, where
we retained our two 5-Star ratings in the
Life & Pensions and Investment categories.
Strong product capability
Prudential is a leader in its chosen markets,
benefiting from a strong investment track
record, a financially strong with-profits
fund and a recognised reputation for
developing innovative products such as
PruFund and Income Choice Annuity.
We have a competitive advantage in
with-profits and we are confident that
demand will remain strong as customers
continue to seek products which mitigate the
volatility of the market, while still providing a
steady return over the medium to long term.
We have a well-established individual
annuity business, sourced from maturing
pension policy customers. The strength of
our with-profits proposition also continues to
drive good external demand for our Income
Choice Annuity, which offers customers
relatively attractive returns in the current
sustained low interest rate environment,
with the potential for income growth.
We provide a comprehensive range
of risk managed investments, including
with-profits bonds and pensions, which
continue to outperform competitors’
propositions. We will continue to develop
our with-profits proposition, enhancing the
range of investment choices available to
policyholders and developing our presence
in the Individual Savings Account market.
With-profits fund outperforming competitors
5, 10 and 15 year gross cumulative
return to end 20137
market, where the added complexity and
greater focus on financial strength is better
suited to our strengths.
178%
119%
117%
89%
83%
130%
101%
130%
106%
106%
88%
15 years
10 years
67%
5 years
Prudential WP
15 years
10 years
5 years
FTSE 100 index
15 years
10 years
58%
5 years
Company A WP
15 years
10 years
59%
5 years
Company B WP
15 years
10 years
42%
5 years
Company C WP
In addition to our customers, our
shareholders also continue to benefit from
the steady performance of our with-profits
based products and the cash they generate.
The chart above shows the outperformance
of our with-profit funds when compared to
those of our peers. This performance has
allowed us to add an estimated £2 billion to
with-profits policies in the year. Policyholders
will typically see year-on-year increases of
between 5 per cent and 8 per cent in
accumulating with-profits policy values over
the past year.
In Corporate Pensions, we continue
to focus on securing new members and
incremental business from our current
portfolio of customers and on additional
voluntary contribution plans within the
public sector, where we now provide
schemes for 69 of the 99 public sector
authorities in the UK.
Prudential has a solid track record and
the core capabilities to succeed in the bulk
annuity marketplace. Our ability to develop
structures and bespoke solutions puts us
at a distinct competitive advantage to
develop our participation in a market that
has around £1 trillion of liabilities where
trustees are likely to be keen to de-risk
their balance sheets.
We are selective in the transactions
undertaken based on strict return on capital
hurdle rates. Our preferred participation
segment is at the large premium end of the
Broad distribution
Prudential has developed a diversified
distribution model focusing both on
financial advisers and the individual
customer through a direct non-advised
channel and its own financial planning arm
– Prudential Financial Planning. The advent
of the Retail Distribution Review saw a
significant structural shift away from the
traditional routes to market such as
bancassurance, which when combined
with a 20 per cent reduction in the number
of financial advisers operating in the UK8,
has resulted in lower access to advice,
particularly for customers from lower
wealth demographics. We prepared well
in anticipation of these changes and are
strongly placed to remain a key and active
provider in our chosen markets, with our
chosen distribution partners.
Our direct advice channel, Prudential
Financial Planning, continues to establish its
presence, focusing primarily on the financial
planning needs of our existing direct
customer base. By the end of 2013, two years
from launch, adviser numbers reached 196.
Prudential Polska, our new life
company, opened for business in March
2013. Poland is one of Europe’s fastest
growing economies with an expanding
middle class. Headquartered in Warsaw,
the business now has 12 branches across
the country and 481 financial planning
consultants. The agency sales network will
continue to be rolled out to more major
Polish cities and towns during 2014.
Prudential UK & Europe will continue to
focus on its core strengths of with-profits and
annuities while utilising its highly regarded
brand franchise in order to help its consumers
transfer their accumulated wealth into
dependable retirement income.
Notes
1 Awarded in the Investment and Life and
Pensions categories at the Financial Adviser
Service Awards 2012 London.
2 Awarded at the 23rd annual Money Marketing
Financial Services Awards 2013.
3 UN Population Statistics, Prudential analysis.
4 Old Age Dependency Ratio = (Population Above
the Age of 65)/(Population within the age
bracket of 15 to 64)*100.
5 HMRC UK Personal Wealth Statistics based on
2008-2010 ONS Wealth and Asset Survey WAVE
2, and ONS Population data statistics.
6 Liquid wealth consists of the wealth held in
cash, banks, building societies or shares; the
18 to 54 segment also includes liquid wealth
not attributed to any particular age bracket.
7 Prudential, Financial Express. All figures to
31 December 2013. The with-profits gross
performance is gross of tax, charges and the
effects of smoothing. Cumulative returns for
company A, B and C have been calculated
internally based on annual returns gathered
from publicly available sources; these may differ
from figures quoted by the company.
8 Financial Services Authority December 2011
estimates and December 2012 figures.
Prudential plc Annual Report 2013 Strategic reportOur businesses and their performance continued 31
Prudential has a strategy of optimising
the value of M&G’s asset management
capabilities by allowing the business to
focus on the generation of superior
long-term returns for investors.
Through its proven ability to convert
investment performance into significant
fund flows, M&G is able to increase its
exposure to rising markets and so maximise
revenue from the long-term stock of funds
under management.
Asset management:
optimise
Our strategy and operating principles
U
nite
build o
d S
n s
t
a
t
r
t
e
Balanced
metrics and
disclosures
e
s
n
:
g
t
h
Focus on
customers &
distribution
Disciplined
capital
allocation
m:
o
d Kingd
fo cus
U n it e
Proactive risk
management
Asia:
acceler a t e
A
s
s
e
t
m
o
a
p
t
i
n
m
a
is
g
e
e
ment:
‘M&G’s objective is to produce
superior long-term investment
returns for its clients –
individual and institutional
investors – and its shareholder,
the Prudential Group. It is
the commercialisation of
this investment performance
through the acquisition of
new fund flows that produces
attractive profits and cashflow
for the Prudential Group.’
Michael McLintock
Chief Executive Officer
M&G
The pillars of M&G’s business that support
this strategy are:
B People – an environment that attracts,
fosters and retains talented individuals;
B Performance – an investment-led
business focused on the delivery of
long-term returns through active
investment management;
Performance highlights
M&G external net flows
Institutional
Retail
£13.5bn
£6.0bn
£7.5bn
£9.1bn
£1.7bn
£7.4bn
£16.9bn
£9.0bn*
£9.5bn
£2.1bn
£7.4bn
£7.9bn
£4.4bn
£0.5bn
£3.9bn
B Innovative investment ideas which
meet client needs and a proven ability
to convert these ideas into significant
fund flows; and
B Diversification by asset class, client
type, fund and investment strategy
and country.
M&G European retail funds
under management
£23.7bn
£14.4bn
£9.0bn
£8.2bn
£5.0bn
2010
2009
* Including £7.6 billion single mandate
2011
2012
2013
2009
2010
2011
2012
2013
Net cash remittances
IFRS operating profit1
£213m
£206m
£235m
£395m
£301m
£320m
£150m
£93m
£246m
£177m
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
To find out more about M&G www.mandg.com
Strategic reportOur businesses and their performance Prudential plc Annual Report 2013
32
Performance highlights
B Record external funds under
management of £126 billion
B 64 per cent growth in European retail
funds to £23.7 billion under management
B Record 2013 profits of £395 million
B Recognised for its investment
performance with numerous awards,
including Real Estate Manager, Fixed
Income Manager and Investment
Manager of the Year at both the
Financial News Awards 2013 and
European Pensions Awards 2013
Market overview
The European asset management market
is the second largest in the world with total
assets of £5.8 trillion2. Demand for asset
management services is expected to
continue to grow as governments and
employers increasingly pass the
responsibility for retirement planning and
other long-term savings to individuals.
Asset managers with records of strong
investment performance and well-
regarded brands are in a good position
to attract flows of new money.
The UK asset management industry,
M&G’s core market, is the second2
largest national market in the world with
£770 billion3 of assets and is a global centre
of excellence for investment management
and a major source of funding for the
UK economy.
Across its chosen markets, M&G serves
the needs of both retail and institutional
investors. Retail clients favour pooled
funds such as open-ended investment
companies which they buy directly from
M&G or more typically through an
intermediary such as an independent
financial adviser or discretionary fund
manager. Institutional clients, such as
pension funds and local authorities, invest
in multiple ways, from segregated
mandates through to pooled funds. They
are often attracted to investment strategies
originally developed by M&G for
Prudential’s long-term insurance funds.
As in previous years, M&G has a strong
pipeline of institutional business still to
fund. Products designed to help fill the gap
left by the decline in long-term commercial
bank loans continue to attract considerable
interest, while opportunities to lend to
medium-sized companies and
infrastructure projects are improving.
Regulators across Europe are seeking to
improve the quality of investment products
and advice, mainly by bringing greater
transparency to the industry. In the UK the
Retail Distribution Review has led to clearer
disclosure of investment charges, as well
as ensuring that customers rather than
providers pay for advice by outlawing
commissions for new business. The full
consequences of this guidance, which is
not fully effective until April 2014, are still
unclear. European policymakers are
considering similar changes and some
countries have already followed the
UK’s lead on commissions, such as
The Netherlands.
It is still too early to offer a definitive
assessment of the impact of the Retail
Distribution Review, although we do
expect more focus in the market on price.
In the past few weeks, platforms have
begun to disclose their own service pricing
and any special fund fees agreed with asset
managers. Those managers with strong
brands and a reputation for investment
performance will be expected to better
withstand any such pressures on asset
management fees.
M&G’s retail market position
Retail fund markets are highly fragmented,
with no single company dominating. This
reflects the competitive nature of the
business and the multiplicity of providers.
By total UK assets under management,
M&G is the second largest retail fund
manager3 with a market share of
5.5 per cent. In Europe, where M&G has
distributed funds for just over 10 years,
it has over £23 billion of assets under
management and a market share of
0.4 per cent2.
Markets backdrop over the past year
Equity markets in developed countries rose
to pre-crisis levels during 2013, while bond
markets remained relatively flat. Emerging
markets, however, suffered a series of
setbacks as concerns about slowing
economic growth in China and the tapering
of quantitative easing in the US weighed
heavily on investor sentiment.
European investors continue to favour
fixed income and mixed asset funds, while
in the UK the bond sector saw several
periods of net redemptions as savers
moved more of their money into equities.
What we do and how we do it
M&G has been managing money on behalf
of investors for more than 80 years. We
have long believed that our active
approach to investment – selecting stocks
on a conviction basis rather than following
a market index – produces superior returns
over the longer term.
In the retail market M&G operates a
range of UK domiciled funds which are
now distributed across Europe and Asia.
Today, clients outside the UK account for
more than a third of M&G’s retail assets
under management.
In the institutional market, M&G seeks
to leverage investment strategies which
have been developed originally for
Prudential’s insurance funds in order to
attract external business.
Today M&G is an international asset
manager with operations in 18 countries
and retail products which are distributed
in 20 jurisdictions.
Prudential plc Annual Report 2013 Strategic reportOur businesses and their performance continued M&G funds under management
£228bn
£116bn
£244bn
£118bn
£198bn
£109bn
£201bn
£109bn
£47bn
£48bn
£42bn
£44bn
£57bn
£55bn
£59bn
£67bn
2010
2011
2012
2013
£174bn
£104bn
£39bn
£31bn
2009
Internal
Institutional
Retail
Our success is evident in the fact that we
have achieved positive external net flows
for 11 years in a row, reflecting the
attractiveness of our diverse fund offering
and strong investment performance
delivered for our customers. M&G recorded
net flows of £9.5 billion during 2013
compared to net flows of £16.9 billion in
2012, a record level which included a single
low-margin institutional mandate of
£7.6 billion. Included in 2013 net flows are
total net retail flows of £7.3 billion, into a
diversified range of funds including 10 retail
funds that attracted net flows of at least
£100 million each during 2013.
People
Our investment edge is our people. We
employ more than 1,700 people operating
from offices across Europe, Asia and in
Southern Africa. We take pride in
attracting, developing and retaining
people of the highest calibre. In return,
they are committed to working with us to
deliver high performance in serving the
long-term needs of our customers.
Our investment teams are primarily based
in our headquarters in London, where they
benefit from the provision of high-quality
support staff and investment
infrastructure: from analysts and dealers to
operations, risk and compliance. Reflecting
the need for local expertise in real estate,
we have specialist real estate teams in Paris,
Frankfurt, Luxembourg, Singapore, Seoul
and Tokyo in addition to London.
Meeting customers’ needs
A committed focus on long-term
investment returns means that the interests
of M&G and its customers are always
aligned, whether clients are individual
savers, institutional investors or the funds
of Prudential’s insurance operations.
M&G has a strong investment brand, built
over decades and based on a reputation for
honesty, innovation and a commitment to
building long-term wealth for our investors.
Investment expertise
M&G’s investment expertise spans all the
principal asset classes – equities, fixed
income and property– so that we can
always offer investment solutions to our
clients as market conditions and investor
sentiment change.
Equities: our fund managers have the
freedom to develop their own investment
approaches. Their main strength lies in
stock selection, focusing on fundamental
company analysis. M&G’s size and
standing enables our fund managers to
develop an effective dialogue with the
management teams of the companies
in which they invest.
Fixed income: M&G is one of Europe’s
largest fixed income investors. Our fund
managers benefit from one of the region’s
largest and most experienced in-house
credit research teams, whose knowledge
covers the full range of fixed income
investment, from the management of
sovereign debt and corporate bond
portfolios, through to leveraged finance,
real estate finance, direct lending and
infrastructure.
Real estate: M&G Real Estate is a leading
global property investor and manager
covering all major real estate sectors. We
actively manage our assets, drawing on our
long heritage of expertise and knowledge
and our extensive network of contacts.
This approach enables the business to
identify and capitalise on attractive
investment opportunities. During 2013
M&G returned to the UK residential
property market for the first time in
30 years with a £105 million investment
in London housing.
A history of innovation
Since launching the UK’s first open-ended
fund in 1931, we have brought a succession
of new investment strategies to the retail
and institutional markets. In combination
with this tradition of innovative investment
thinking, M&G has a proven ability to
convert ideas into significant fund flows.
It is these two qualities in combination that
make M&G distinctive.
Recent investment success stories
include the M&G Optimal Income Fund,
one of the first truly global flexible bond
funds for retail investors. The fund has
attracted £17.3 billion of assets since its
launch in 2006. Similarly, the M&G Global
Dividend Fund, which invests in companies
around the world that consistently grow
their dividends, has reached £8.9 billion
in five years.
Recent innovations for institutional
third-party clients have focused on
investment strategies to manage long-term
inflation-linked liabilities. M&G
successfully runs the M&G Secured
Property Income Fund, a portfolio of
33
long-lease properties with in-built inflation-
related rental streams, which draws upon
our combined real estate and fixed income
investment experience. This Fund, which
has total investor commitments of over
£2.1 billion, has delivered an annualised
return of 7.4 per cent above RPI over the
five years to 31 December 2013. It had a
record year in 2013 in terms of transaction
activity, completing on nine transactions
with a total end value of £625 million.
Of this amount, £235 million were
developments, thus demonstrating the
Fund’s ability to take on sizeable
development financings – an area in which
the banks have reduced their activities.
This brings the Fund’s development
transaction total to £370 million over the
life of the fund to date.
Diversification
M&G has pursued business diversification
across:
— Asset class: expertise across equities,
fixed income, real estate and mixed-
asset strategies;
— Client type: retail customers and
institutional clients including pension
funds, sovereign wealth funds, and
Prudential’s own long-term insurance
funds;
— Investment strategy: Over 60 pooled
retail funds covering domestic, global
and emerging market strategies, 13 of
which have funds under management
of over £1 billion. Institutional clients
benefit from a wide range of pooled
and/or segregated fixed income, equity
and real estate strategies; and
— Country: M&G is an international asset
manager with operations in 18 countries.
Retail products are distributed in 20
jurisdictions, with over a third of retail
funds under management sourced from
outside the UK.
Notes
1
2
3
Excludes Prudential Capital.
Source: Lipper FMI Fund File as at
31 December 2013.
Source: Investment Management Association
as at 31 December 2013.
Strategic reportOur businesses and their performance Prudential plc Annual Report 2013 34
Chief Financial Officer’s report on our 2013 financial performance
Improving the quality
and balance of our earnings
Our strategy
Our strategy and operating principles
Asia:
acceler a t e
A
s
s
e
t
m
o
a
U
nite
build o
d S
n s
t
a
t
r
t
e
Balanced
metrics and
disclosures
e
s
n
:
g
t
h
Focus on
customers &
distribution
Disciplined
capital
allocation
p
t
i
n
a
m
g
e
is
e
ment:
m:
o
d Kingd
fo cus
U n it e
Proactive risk
management
Prudential aims to have clarity and
consistency in the performance
indicators that drive our businesses.
Alongside this, we develop our
financial disclosures to enable our
external stakeholders to fairly assess
our long-term performance. We have
three objectives:
B To demonstrate how we
generate profits;
B To show how we think about
capital allocation; and
B To highlight the cash generation
of our business.
‘The delivery of profitable
growth is predicated on our
ability to accumulate assets
through new business flows and
strong retention, with a strict
preference for products that
offer high returns and rapid
monetisation of profits to cash.’
Performance highlights
IFRS operating profit1
EEV operating profit1
CAGR
+20%
£2,954m
£2,520m
CAGR
+16%
£5,580m
£1,823m
£2,017m
£1,446m
£3,702m
£3,981m
£4,313m
£3,093m
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
Nic Nicandrou
Chief Financial Officer
Group free surplus generation8,9
Business unit remittances
CAGR
+14%
£2,462m
£1,982m £2,080m
CAGR
+18%
£1,105m
£1,341m
£1,200m
£1,687m
£1,453m
£935m
£688m
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
For more information on Prudential’s strategy and operating principles
Our strategy page 16
Prudential plc Annual Report 2013 Strategic report
35
2013 has seen Prudential maintain its
disciplined approach to value creation,
combining a focus on cash generation
with strict capital allocation, a robust
balance sheet and conservative risk
management. In doing so, 2013 has
been another year of progress,
delivering a strong financial
performance in volatile investment
markets and achieving all of the 2013
financial objectives we set in 2010. In
addition, we continue to improve the
quality and balance of our earnings
and the resilience of our business to
external shocks, through our bias for
less volatile sources of income and
increasing diversification by product,
distribution and geography.
The delivery of profitable growth is
predicated on our ability to accumulate
assets through new business flows and
strong retention, with a strict preference
for products that offer high returns and
rapid monetisation of profits to cash. As
a result, we have focused on the financial
reporting measures of IFRS operating profit
and free surplus generation that most
reflect this emphasis. During 2013, IFRS
operating profit1 increased 17 per cent to
£2,954 million and underlying free surplus
generated1 was up 18 per cent to
£2,462 million.
During 2013, global equity markets have
performed well overall, and the gradually
improving outlook in most of the major
economies has also led to a long-awaited
uplift in long-term interest rates. These are
positive developments for our business
performance, and we are well positioned
to benefit from the recovery in investment
markets, having proactively defended the
economics of our business when markets
fell. The favourable impact of appreciating
equity markets and rising yields, in
combination with our strong execution and
risk management, has benefited all of our
key operating profit and underlying capital
generation metrics in 2013.
As part of the benefits we provide to our
customers, some of our products guarantee
the value of the funds they hold with us to
protect them against declines when markets
fall. To protect ourselves from the downside
risks to the Group’s financial position
associated with these guarantees, we
hold derivatives and other instruments
to mitigate these exposures. In times of
rising equity markets these will generally
generate negative investment variances.
In addition, while higher interest rates are
beneficial to the long-term performance of
our business, they do give rise to negative
value movements on our holdings of fixed
income securities. The impact of these
collective short-term movements in
investment values, reported outside the
operating result, gave rise to a lower profit
before tax1 attributable to shareholders on
an IFRS basis of £1,635 million in 2013
(2012: £2,747 million). On an EEV basis,
which recognises the economic benefit of
movements in investment markets, profit
before tax1 attributable to shareholders
increased 14 per cent to £5,664 million
(2012: £4,957 million). In the remainder
of my report, my comments on the
Group’s operating performance exclude
these short-term market effects.
Another feature of 2013 was the
volatility in the world’s currency markets.
Following the US Federal Reserve’s
statements in 2013 implying its intention to
taper asset purchases, currencies in some
of our key Asian markets, such as Indonesia
in particular, saw significant depreciation in
the second half of the year. The US dollar
also depreciated against UK sterling as the
strength of the economic recovery in the
UK brought forward expectations of a UK
interest rate increase. As the assets and
liabilities of our overseas businesses are
translated at year-end exchange rates, the
effect of these currency movements has
been incorporated within the end-2013
reported shareholders’ equity. However,
the results of our overseas businesses are
translated using average exchange rates
for the year, as this is a reasonable
approximation of the rates prevailing at the
dates that our normal trading transactions
have taken place in these markets.
Accordingly, the full impact of the currency
movements on the operating results of
2013 is more muted. Year-on-year growth
rates in financial metrics are shown both
in UK sterling terms and on a constant
exchange rate basis to assist understanding
of reported and underlying trends.
IFRS operating profit
£2,954m
17%increase on 2012
Strategic reportChief Financial Officer’s report on our 2013 financial performance Prudential plc Annual Report 2013
36
Chief Financial Officer’s report on our 2013 financial performance continued
IFRS profits
Operating profit
Long-term business:
Asia
US
UK
Long-term business operating profit
UK general insurance commission
Asset management business:
M&G (including Prudential Capital)
Eastspring Investments
US
Other income and expenditure2
Total operating profit based on longer-term investment
returns
Short-term fluctuations in investment returns:
Insurance operations
Other operations
Other non-operating items2
Profit before tax attributable to shareholders
Tax charge attributable to shareholders’ returns
Profit for the year attributable to shareholders
Earnings per share
Actual Exchange Rate
Constant Exchange Rate
2013 £m
2012 £m1
Change %
2012 £m
Change %
10
29
–
15
(12)
19
7
51
(6)
17
883
977
703
2,563
33
371
68
39
(565)
2,509
13
27
–
15
(12)
19
9
51
(6)
18
1,001
1,243
706
2,950
29
441
74
59
(599)
906
964
703
2,573
33
371
69
39
(565)
2,954
2,520
(1,083)
(27)
(1,110)
(209)
1,635
(289)
1,346
100
87
187
40
2,747
(584)
2,163
Basic earnings per share based on operating profit after tax
Basic earnings per share based on total profit after tax
2013
pence
90.9
52.8
2012
pence1
76.9
85.1
% Change
Actual
Exchange
Rate
Constant
Exchange
Rate
18
(38)
19
(38)
IFRS operating profit
Total IFRS operating profit1 increased
by 17 per cent in 2013 to £2,954 million
(2012: £2,520 million), driven by higher
contributions from both life insurance
and asset management. This represents
a 23 per cent (2012: 23 per cent) post-tax
return on opening IFRS shareholders’
funds. Viewed on a geographical basis,
each of our Asia, US and UK regions
achieved IFRS operating profit in excess
of £1 billion for the first time in the
Group’s history.
Asia life operating profit was up
10 per cent on a reported basis, and
up 13 per cent after adjusting for the
translational impact of currency
movements. Excluding the 2012 one-off
gain of £51 million on the sale of our
holdings in China Life Insurance Company
of Taiwan, underlying growth in Asia’s life
operating profit was 17 per cent
(20 per cent at constant currency). US life
operating profit increased by 29 per cent,
including the first full year of REALIC
following its acquisition in 2012. Excluding
REALIC, profit was increased by
24 per cent, reflecting strong growth in
variable annuity fee income. UK life
operating profit was in line with 2012.
M&G (including Prudential Capital), our
UK-based asset management business,
and Eastspring Investments, our Asia asset
manager, delivered growth of 19 per cent
and 7 per cent respectively.
IFRS operating profit1 from our life
insurance operations in Asia, the US and
the UK increased 15 per cent to
£2,950 million (2012: £2,573 million).
The increase in the profitability of our life
operations reflects the growth in the scale
of our life business, driven primarily by
positive business flows. We track the
progress that we make in growing our life
book of business by reference to the scale
of our obligations to our customers, which
are referred to in the financial statements
as the policyholder liabilities. Each year
these liabilities increase as we collect
premiums and decrease as we pay claims.
The overall scale of these policyholder
liabilities is relevant in evaluating our profit
potential, in that it is reflective of our ability
to earn fees on the unit-linked element
and it sizes the risk that we carry on the
insurance element, for which Prudential
needs to be rewarded.
Prudential plc Annual Report 2013 Strategic report 37
Shareholder-backed policyholder liabilities and net liability flows4
Asia
US
UK
Total Group
2013 £m
2012 £m
Change %
Shareholder-backed
Shareholder-backed
Shareholder-backed
Policyholder
liabilities
Net liability
flows5
Policyholder
liabilities
Net liability
flows5
Policyholder
liabilities
Net liability
flows
21,931
107,411
50,779
180,121
2,349
9,635
(1,038)
21,213
92,261
49,505
10,946
162,979
1,982
9,597
(1,129)
10,450
3
16
3
11
19
–
8
5
Focusing on the business supported by
shareholder capital, which accounts for
the majority of the life profits, in the course
of 2013 we have increased policyholder
liabilities from £163.0 billion to
£180.1 billion, equivalent to an 11 per cent
rise. The consistent addition of high-quality
new business and proactive management
of the existing in-force portfolio underpin
this increase, resulting in positive net
liability flows5 of £10.9 billion in 2013 in
policyholder liabilities. Favourable
investment market and other movements
(including corporate transactions) have
contributed a further £10.6 billion to the
increase, offset by a £4.4 billion negative
foreign currency translation effect.
Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment
returns by driver1, 3
Spread income
Fee income
With-profits
Insurance margin
Margin on revenues
Acquisition costs
Administration expenses
DAC adjustments
Expected return on shareholder assets
Gain on China Life (Taiwan) shares
Operating profit based on longer-term
investment returns
Operating
profit
1,073
1,391
298
1,356
1,749
(2,039)
(1,428)
334
216
–
2,950
2013 £m
Average
liability
64,312
96,337
97,393
Margin
bps
Operating
profit
167
144
31
4,423
169,158
(46)%
(84)
1,061
1,077
311
1,027
1,655
(1,997)
(1,235)
418
205
51
2,573
2012 £m
Average
liability
61,432
78,433
95,681
Margin
bps
173
137
33
4,195
142,205
(48)%
(87)
In 2013, alongside growing the scale of our
life operating profit, we have continued to
focus on improving its quality by
maintaining our bias in favour of less
market-sensitive sources of income, such
as insurance margin and fee income, ahead
of spread income. Our emphasis on risk
products such as health and protection,
together with the acquisition of REALIC,
a closed book of traditional US life business,
has driven 32 per cent growth in our
insurance margin, increasing the
proportion of earnings that is least sensitive
to economic conditions. In addition, fee
income is up 29 per cent, reflecting both
a modest improvement in annual
management charges and a 23 per cent
increase in the average account balances
that we manage on behalf of our
customers. In contrast, the contribution
to our profits from spread income has
increased modestly by 1 per cent,
reflecting subdued customer preference
for this type of business in the current
low interest rate environment. The fact
that a higher proportion of our overall
income now comprises insurance margin
and fee income represents a healthy
evolution in both the quality and the
balance of our earnings.
The costs we have incurred in writing
new business and maintaining the in-force
life businesses have also increased but at
a more modest rate than total income,
highlighting the advantages of increased
scale as we build out our business, while
maintaining control of costs.
Our Asia life insurance business
continues to benefit from the growth of the
in-force portfolio and our focus on building
the proportion of our business that
comprises health and protection, with IFRS
operating profit1 of £1,001 million (2012:
£906 million), up 10 per cent. Adjusting for
the 2012 one-off gain on the sale of our
holding in China Life Insurance Company
in Taiwan, and currency movements,
underlying growth was 20 per cent. The
principal driver of our profitability in the
region is our health and protection
business, which delivered 68 per cent or
£679 million (2012: £589 million) of total
life profits. Indonesia IFRS operating profit,
our largest market on this measure, was up
by 23 per cent at constant exchange rates,
reflecting increased insurance and fee
income from the high level of regular
premium health and protection and
unit-linked sales in recent years. Our other
large established markets of Hong Kong,
Malaysia and Singapore also showed
collective double-digit growth in IFRS
operating profit, driven by higher insurance
margin and, in the case of Hong Kong,
higher bonus rates on with-profits
business. There was encouraging progress
in our smaller, fast-growing South-east
Asia businesses in Thailand, the Philippines
and Vietnam. Their combined IFRS
operating profit of £125 million has
increased by 166 per cent during 2013,
and now accounts for 12 per cent of the
Asia life total compared to 5 per cent in
2012. In Thailand, the inclusion of profits
since May 2013 from the acquired
Thanachart in-force portfolio, together
with profits on new business written
through our exclusive partnership with
Thanachart Bank, contributed IFRS
operating profit of £30 million.
Strategic reportChief Financial Officer’s report on our 2013 financial performance Prudential plc Annual Report 2013 38
Chief Financial Officer’s report on our 2013 financial performance continued
In the US, long-term business IFRS
operating profit was up 29 per cent in 2013
to £1,243 million (2012: £964 million),
which includes a contribution of
£128 million from REALIC (2012:
£67 million). Jackson’s total income
increased by 24 per cent to £2,514 million
(2012: £2,031 million), outpacing the
19 per cent growth in total expenses net
of deferred acquisition cost adjustments
totalling £1,271 million (2012:
£1,067 million). Fee income has become
Jackson’s main source of earnings and has
grown by 34 per cent to £1,172 million
(2012: £875 million). The uplift in fee
income is in line with the 33 per cent
growth in separate account assets in the
period to £65.7 billion (2012: £49.3 billion),
reflecting the benefit of variable annuity
premium inflows and the rise in US equity
markets since December 2012. Insurance
margin at £588 million (2012: £399 million)
is now a more significant contributor to
Jackson’s earnings following the acquisition
of REALIC’s seasoned book of term
insurance business. Spread income has
increased 4 per cent to £730 million (2012:
£702 million). We continue to focus on
improving the balance of Jackson’s profits
and diversifying its sources of earnings
and we are pleased that the earnings from
REALIC have been consistent with
expectations at the time of the acquisition.
UK long-term business IFRS operating
profit was in line with 2012 at £706 million
(2012: £703 million). The comparative
result included a £31 million profit from
writing wholesale contracts, compared
with £25 million for 2013. Excluding these
contracts, UK retail IFRS operating profit
increased 1 per cent, and included the
£27 million positive impact of a longevity
swap entered into this year to further
optimise the capital position of the
business. Consistent with our focused
product strategy in the UK, the operating
result is driven by profits from shareholder-
backed individual annuities and
with-profits business, which accounted
for 92 per cent of the retail IFRS
operating profit.
Asset management net inflows and external funds under management6
M&G
Retail
Institutional
M&G
Eastspring7
Total asset management
Total asset management (inc. MMF)
Our asset management businesses also
had a successful year, collectively
contributing 20 per cent higher operating
profit at £574 million (2012: £479 million).
Similar to the life operations, growth in our
asset management overall operating profit
also reflects the increased scale of this
business. We measure growth by
reference to funds under management,
representing the sum of net monies
received from external institutional and
retail customers, monies managed on
behalf of our life operations together with
accumulated investment returns. External
retail and institutional funds under
management, which drive the majority of
our profits, increased by 11 per cent during
the year to £148.2 billion (£133.5 billion).
The increase is driven by net new money
inflows of £11.6 billion, reflecting the
attractiveness of our broad fund offering
measured by reference to the investment
performance delivered for our customers.
This is only the fourth time in our history
that we have exceeded £10 billion net
inflows in a year (the previous three being
in 2009, 2010 and 2012) and our success is
Net inflows
External funds under management
2013 £m
2012 £m
Change %
2013 £m
2012 £m
Change %
7,342
2,148
9,490
1,575
11,065
11,587
7,842
9,039
16,881
1,626
18,507
18,281
(6)
(76)
(44)
(3)
(40)
(37)
67,202
58,787
125,989
17,927
143,916
148,212
54,879
56,989
111,868
17,630
129,498
133,502
22
3
13
2
11
11
evident in the fact that we achieved
positive external net flows for 11 years
in a row. 2012 net flows of £18.5 billion
included a single low-margin mandate
into M&G of £7.6 billion. Excluding this
amount, net flows in 2013 of £11.1 billion
were marginally higher than £10.9 billion
in 2012.
M&G’s IFRS operating profit increased
23 per cent to a new record level of
£395 million (2012: £320 million).
Underlying profits, excluding
performance-related payments and
earnings from associates, increased
20 per cent to £358 million (2012:
£298 million), reflecting both a 13 per cent
uplift in external funds under management
following a period of strong net inflows and
positive market movements, and also the
positive mix effect from the growing
proportion of higher-margin retail
business. M&G’s average fee income
across all the external and internal funds it
manages was up slightly at 37 basis points
(2012: 36 basis points), with higher income
helping to absorb the current phase of
increased headcount and infrastructure
investment, maintaining a cost-income
ratio at 59 per cent (2012: 59 per cent).
Our Asia asset management business,
Eastspring Investments, has also seen the
combination of net inflows and more
favourable equity market conditions,
partially offset by adverse currency
movement, contribute to a 7 per cent
increase in IFRS operating profit1 to
£74 million (2012: £69 million). Higher
funds under management resulted in a
10 per cent uplift in revenue, outstripping
a 5 per cent increase in expenses, which
included ongoing investment to expand
the Eastspring Investments platform into
new markets.
In the US, our asset management
businesses, PPM America and Curian,
and our broker-dealer network, National
Planning Holdings, collectively generated
IFRS operating profits of £59 million (2012:
£39 million). Curian’s profit increased from
£15 million in 2012 to £29 million in 2013
due to higher average assets under
management, particularly reflecting the
addition of assets managed for Jackson’s
Elite Access product.
Prudential plc Annual Report 2013 Strategic report 39
IFRS short-term fluctuations
IFRS operating profit is based on longer-
term investment return assumptions. The
difference between actual investment
returns recorded in the income statement
and these longer-term returns is reported
within short-term fluctuations in
investment returns. In 2013 for our
insurance operations these total negative
£1,083 million, comprising negative
£204 million for Asia, negative £625 million
in the US and negative £254 million in
the UK.
In Asia, the negative short-term
fluctuations of £204 million primarily reflect
net unrealised movements on bond
holdings following rises in bond yields
across the region during the year. Negative
short-term fluctuations of £625 million in
the US mainly represent the net unrealised
value movement on derivatives held to
manage the Group’s exposure to market
movements following rises in equity
values. Jackson hedges the guarantees
offered under its variable annuity
proposition on an economic basis and,
thus, accepts a degree of variability in its
IFRS results in the short term in order to
achieve the appropriate economic result.
The negative fluctuations of £254 million in
the UK include net unrealised movements
on fixed-income assets supporting
the capital of the shareholder-backed
annuity business.
Free surplus generation
Our ongoing focus on disciplined capital
allocation to new business opportunities
that offer the most attractive mix of returns
and short payback periods means we have
continued to produce significant amounts
of capital, which we measure by reference
to free surplus generated. Free surplus
generation is a financial metric we use to
measure the internal cash generation of
our business operations. For the insurance
operations it represents amounts maturing
from the in-force business during the
period, net of amounts reinvested in
writing new business, and for asset
management it equates to post-tax IFRS
profit for the year.
Free surplus generation
Free surplus generation:8,9
Asia
US
UK
M&G (including Prudential Capital)
Underlying free surplus generated from in-force life business and asset management
Investment in new business
Underlying free surplus generated
Market related movements, timing differences and other movements
Net cash remitted by business units
Total movement in free surplus
Free surplus at 1 January
Free surplus at end of year
Holding company cash10
Net cash remitted by business units:
Asia
US
UK
M&G
Prudential Capital
Net cash remitted by business units
Net central outflows
Corporate activities/other (including foreign exchange)
Dividend paid
Net movement in holding company cash
Holding company cash at 1 January
Holding company cash at end of year
2013 £m
2012 £m
883
1,168
702
346
3,099
(637)
2,462
(807)
(1,341)
314
3,689
4,003
827
1,054
532
285
2,698
(618)
2,080
(612)
(1,200)
268
3,421
3,689
2013 £m
2012 £m
400
294
355
235
57
1,341
(315)
1,026
605
(781)
850
1,380
2,230
341
249
313
206
91
1,200
(289)
911
(76)
(655)
180
1,200
1,380
Strategic reportChief Financial Officer’s report on our 2013 financial performance Prudential plc Annual Report 2013
40
Chief Financial Officer’s report on our 2013 financial performance continued
In 2013, our life in-force and asset
management businesses generated
£3,099 million of underlying free surplus
before reinvestment in new business.
This is 15 per cent higher than the
£2,698 million generated in 2012, with
higher contributions from all four of our
business operations. For our life insurance
businesses, the growth in underlying free
surplus generated reflects the increased
scale of our in-force portfolio, which is a
clear indication of our continued success in
capturing profitable new business flows in
those markets where growth opportunities
are most attractive, and highlights the
benefits of targeting low-strain, high-return
business with a fast payback profile.
We reinvested £637 million of the free
surplus generated in the period into writing
new business (2012: £618 million),
equivalent to a re-investment rate of
21 per cent, which is in line with recent
periods. The amount of free surplus we
reinvested in Asia increased 6 per cent to
£310 million (2012: £292 million), while
new business profit increased 15 per cent.
This reflects improvements in mix and
pricing actions taken as a result of our
strategic focus on more capital-efficient
products and the impact of higher interest
rates in the period. In the US, new business
investment increased to £298 million
(2012: £281 million), primarily due to
higher volumes of new business and the
increase in capital requirements from
235 per cent of the US Risk Based Capital
Company Action Level to 250 per cent (see
section ‘Capital management – regulatory
capital (IGD)’ of the Group Chief Risk
Officer’s report on the risks facing our
business and our capital strength).
Reinvestment levels in the UK remained
low at £29 million (2012: £45 million),
principally reflecting changes to business
mix, with a higher proportion of with-
profits APE sales.
Of the remaining free surplus generated
By 31 December 2013 cumulative net
after reinvestment in new business,
totalling £2,462 million (2012:
£2,080 million), £1,341 million was
remitted from the business units to Group.
This cash was used to meet central costs
of £315 million (2012: £289 million) and
dividend payments of £781 million (2012:
£655 million). The total free surplus stock
deployed across our life and asset
management operations at the end of 2013
was £4,003 million. We retain capital in the
businesses both to finance future growth
and to enable them to withstand the effect
of adverse investment market shocks. As
the business grows in size, so does the level
of capital needed to meet these objectives,
leading to an increase in the absolute value
of free surplus held at 31 December 2013
compared to the £3,689 million held at
31 December 2012.
Cash remitted to the Group in 2013
increased by 12 per cent to £1,341 million
(2012: £1,200 million), with well-balanced
contributions from across the Group. Asia’s
remittances increased 17 per cent to
£400 million (2012: £341 million),
demonstrating the highly cash-generative
nature of recent volume growth, driven
by the focus on health and protection
products. The 2013 remittance of
£294 million from the US represents an
increase of 18 per cent on 2012, reflecting
both growth in the size of the in-force
portfolio and an additional contribution
from REALIC following its acquisition in
2012. The UK insurance operations have
continued to make sizeable remittances
at £355 million (2012: £313 million),
supported by shareholder transfers from
the with-profits fund. M&G net
remittances increased 14 per cent to
£235 million (2012: £206 million), reflecting
its relatively capital-light business model
that facilitates high dividend payouts
to Group.
remittances of £4.6 billion have been
delivered by business operations since the
beginning of 2010, exceeding the
cumulative 2010 to 2013 net remittance
objective of £3.8 billion. These remittances
have been supported by strong underlying
free surplus generated across all four
business operations, totalling in excess of
£8.2 billion over the same period since the
start of 2010.
Net central outflows increased to
£315 million in 2013 (2012: £289 million),
with higher corporate costs and higher
net interest payments offset by lower
Solvency II costs and higher tax receipts.
After central costs, there was a net cash
inflow before dividend of £1,026 million in
2013, compared to £911 million in 2012.
Dividend payments in 2013 were
£781 million, up 19 per cent from
£655 million in 2012 following the decision
to rebase the full year dividend upwards
by 4 pence in 2012.
Outside of the normal recurring central
cash flow items, the holding company
generated £605 million in cash (2012: net
payments of £76 million). This £605 million
included the proceeds from the issue of
US$700 million and £700 million (total
£1,124 million) of hybrid debts in 2013.
Offsetting these were payments of
£397 million for the acquisition of
Thanachart Life, and we paid £31 million
to capitalise the two new legal entities in
Hong Kong in anticipation of the
domestication of the Hong Kong branch
business. In addition, the holding company
incurred £83 million of other cash
payments in 2013, including payments
in respect of amounts due to the UK tax
authorities following the settlement
reached in 2010 on historic tax issues, and
amounts totalling £30 million paid to the
Financial Services Authority over issues
related to the terminated AIA transaction.
£4.6bn
cumulative net remittances
to the Group since 2010
Prudential plc Annual Report 2013 Strategic report 41
EEV profits
Operating profit
Long-term business:
Asia
US
UK
Long-term business operating profit
UK general insurance commission
Asset management business:
M&G (including Prudential Capital)
Eastspring Investments
US
Other income and expenditure11
Total operating profit based on longer-term investment
returns
Short-term fluctuations in investment returns:
Insurance operations
Other operations
Effect of changes in economic assumptions
Other non-operating items11
Profit before tax attributable to shareholders
Tax charge attributable to shareholders’ profit
Profit attributable to shareholders
Earnings per share
Actual Exchange Rate
Constant Exchange Rate
2013 £m
2012 £m1
Change %
2012 £m1
Change %
22
38
19
27
(12)
19
7
51
(6)
29
1,891
1,630
866
4,387
33
371
68
39
(626)
4,272
26
36
19
29
(12)
19
9
51
(6)
31
2,385
2,221
1,033
5,639
29
441
74
59
(662)
1,951
1,610
866
4,427
33
371
69
39
(626)
5,580
4,313
(792)
(27)
(819)
821
82
5,664
(1,306)
4,358
423
87
510
(2)
136
4,957
(1,188)
3,769
Basic earnings per share based on operating profit after tax
Basic earnings per share based on total profit after tax
2013
pence
165.0
171.0
2012
pence1
124.9
148.3
% Change
Actual
Exchange
Rate
Constant
Exchange
Rate
32
15
33
17
EEV operating profit
On an EEV basis, Group operating profit1
based on longer-term investment returns
was £5,580 million in 2013, 29 per cent
higher than the £4,313 million earned in
2012. This represents a 19 per cent (2012:
16 per cent) return on opening EEV
shareholders’ funds. The improvement
reflects higher profits on life business,
which generated new business profit of
£2,843 million (up 16 per cent) and
£2,796 million (up 42 per cent) from our
growing in-force portfolio, and higher
contributions from our asset management
businesses.
In Asia, EEV life operating profit was
up 22 per cent to £2,385 million (2012:
£1,951 million), with in-force profits up
35 per cent to £925 million (2012:
£685 million), benefiting from increased
scale and the recent rise in interest rates
in some of our key territories. The
contribution from operating experience
and assumption changes was £81 million
(2012: £97 million), driven by favourable
persistency and claims experience in
Hong Kong and Indonesia. Asia new
business profit was 19 per cent higher at
constant exchange rate, at £1,460 million,
reflecting volume growth from the
continued build-out of our agency and
bancassurance distribution, with both
channels growing their respective
contribution to new business profit by over
20 per cent at constant currency, and
management actions to improve product
mix, geographic mix and pricing. Our
seven ‘sweet spot’ ASEAN15 markets,
including Hong Kong, continue to drive the
growth in this metric, increasing their
contribution to new business profit by
21 per cent, underpinned by a 17 per cent
rise from health and protection in these
markets, both on constant exchange rate.
The impact of weakening Asian currencies
relative to UK sterling, primarily the
Indonesian rupiah, reduced the Asia overall
reported growth rate to 15 per cent.
We are particularly encouraged by the
progress of some of our smaller businesses
such as the Philippines (new business profit
up 31 per cent), Thailand (up 90 per cent),
Vietnam (up 19 per cent) and China (up
42 per cent), as well as further growth in
our larger markets of Hong Kong (up
69 per cent, benefiting from higher interest
rates as well as pricing actions) and
Indonesia (up 11 per cent at constant
currency, 1 per cent on actual exchange
rate). The mechanics of our new business
profit reporting are such that the rise in
long-term interest rates has benefited
Hong Kong’s new business profitability
given the high proportion of with-profit
products in the sales mix, and has
depressed Indonesia’s profitability given
the predominance of health and
protection. When assessing the economics
of all our new business using internal rates
of return and payback periods, the returns
achieved across all of Asia’s product and
geographical locations remain attractive.
Strategic reportChief Financial Officer’s report on our 2013 financial performance Prudential plc Annual Report 2013 42
Chief Financial Officer’s report on our 2013 financial performance continued
Jackson’s EEV operating profit
increased by 38 per cent to £2,221 million
(2012: £1,610 million) due to higher profits
from our existing book as we continue to
manage the business for value, and growth
in new business profits. 2013 experience
and operating assumption changes
contributed positive £527 million towards
in-force profits compared to £325 million
in 2012. Within these amounts, swap
transactions undertaken from 2010 to
more closely match the overall asset and
liability duration contributed enhanced
profits with an overall spread gain of
£274 million (2012: £205 million).
Improved persistency contributed
£134 million (2012: £66 million) to the life
in-force total. US new business profit
improved significantly, up 24 per cent to
£1,086 million (2012: £873 million),
reflecting the benefit of Jackson’s product
and pricing actions, the contribution from
sales of Elite Access and the favourable
impact of the 130 basis points rise in
10-year Treasury yields since the end of
2012, the latter accounting for around two
thirds of the overall increase. These effects
more than offset the impact of Jackson’s
deliberate steps to slow sales of variable
annuities with guarantees, which declined
7 per cent in 2013.
In the UK, EEV life operating earnings
increased by 19 per cent to £1,033 million
(2012: £866 million), reflecting both higher
in-force and new business profits. Life
in-force profit increased to £736 million
(2012: £553 million), reflecting improved
returns on the opening embedded value
(up £65 million to £547 million), and the
non-recurrence of £52 million net charged
to the annuity business in 2012 following
strengthened mortality assumptions. It
also includes a contribution of £122 million
relating to the benefit arising from the
reductions announced in UK tax rates
from 23 to 20 per cent, compared with
£87 million from the 2 per cent tax rate
reduction in 2012. In the UK, new business
profit was 5 per cent lower at £297 million
(2012: £313 million), partly reflecting a
lower level of wholesale business in 2013.
In UK retail, new business profit was down
slightly at £267 million (2012: £274 million),
on 12 per cent lower sales volumes
following the market disruption caused by
the application of the recommendations
of the Retail Distribution Review, offset in
part by the positive effects of business mix
and pricing activity.
The internal rates of return achieved
on new business remain attractive at over
20 per cent across all of our business
operations, and the average surplus
undiscounted payback period for business
written in 2013 was three years for Asia,
two years for the US and two years for
the UK.
£2,843m
EEV new business profit
16%increase on 2012
EEV non-operating profit
EEV operating profit is based on longer-
term investment returns and excludes the
effect of short-term volatility arising from
market movements and the effects of
changes from economic assumptions.
These items are captured in non-operating
profit which benefited the 2013 results by a
net £84 million (2012: £644 million).
EEV short-term fluctuations
Short-term fluctuations in investment
returns reflect the element of non-
operating profit which relates to the
difference between the actual investment
returns achieved and those assumed in
arriving at the reported operating profit.
Short-term fluctuations in investment
returns for insurance operations of
negative £792 million comprise negative
£405 million for Asia, negative £422 million
for our US operations and positive
£35 million in the UK.
In Asia, negative short-term fluctuations
of £405 million principally reflect
unrealised movements on bond holdings in
the year. In the US, the favourable impact
of market movements on the expected
level of future fee income from the variable
annuity separate accounts is more than
offset by the net value movements on
derivatives held to manage the Group’s
equity and interest rates exposure, to give
overall negative fluctuations of £422 million
in 2013.
Effect of changes in economic
assumptions
Improved long-term yields compared to
last year have a beneficial impact on the
future earnings that we expect to generate
from our existing book of business. Once
this and other changes in investment
market conditions are factored into the
EEV calculations they give rise to a profit
of £821 million in 2013 (2012: negative
£2 million), more than offsetting the
effects of short-term fluctuations above.
Capital position, financing
and liquidity
Capital position
We continue to operate with a strong
solvency position, while maintaining high
levels of liquidity and capital generation.
At 31 December 2013 our IGD surplus is
estimated at £5.1 billion before deducting
the 2013 final dividend, equivalent to
available capital covering our capital
requirement 2.8 times. 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 the natural offsets
in our portfolio of businesses which
dampen the effects of movements in
interest rates.
Jackson’s Risk-Based Capital ratio at
the end of 2013 was 450 per cent, having
earlier in the year remitted £294 million to
Group while supporting its balance sheet
growth and maintaining adequate capital.
All of our subsidiaries continue to
hold strong capital positions on a local
regulatory basis. During 2013, Prudential
completed the long-running project for
approval to domesticate the Hong Kong
branch business of the PAC with-profits
fund, which has an effective date of
1 January 2014. The value of the
estate of our UK with-profits fund as
at 31 December 2013 is estimated at
£8.0 billion prior to the effect of this
transfer (2012: £7.0 billion). The value
of the shareholders’ interest in future
transfers from the UK with-profits fund is
estimated at £2.7 billion (31 December
2012: £2.1 billion). Despite the continued
volatility in financial markets, Prudential
UK’s with-profits fund performed well,
achieving a 10 per cent pre-tax investment
return for policyholder asset shares
during 2013.
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 2013 we have
maintained sizeable credit default reserves
at £1.9 billion (31 December 2012:
£2.1 billion), representing 47 per cent of
Prudential plc Annual Report 2013 Strategic report £5.1bn
estimated IGD capital surplus,
covering capital requirements
2.8times
the portfolio spread over swaps, compared
with 40 per cent at 31 December 2012.
In 2013, Prudential plc was designated
by the Financial Stability Board as a global
systemically important insurer (G-SII). At
the same time, the International
Association of Insurance Supervisors (IAIS)
announced details of its assessment
methodology and proposed policy
measures for G-SIIs, covering enhanced
supervision, effective resolution and
higher loss absorption capacity. We
continue to monitor these developments.
With greater visibility on the potential
outcome of Solvency II, we have for the
first time published our economic capital
position based on our Solvency II internal
model. This result is based on an
assumption of US equivalence, with no
restrictions being placed on the economic
value of overseas surplus, and the internal
model on which these calculations are
based has not yet been reviewed or
43
approved by the Prudential Regulation
Authority. Other key elements of the basis
which are likely to be updated in future as
Solvency II regulations become clearer
relate to the liability discount rate for UK
annuities, the impact of transitional
arrangements and the credit risk
adjustment to the risk-free rate. Therefore,
the results represent an estimate of our
Solvency II capital position, assessed
against a draft set of rules, with a number of
key working assumptions, and the eventual
Solvency II capital position will change as
we iterate both the methodology and the
internal model to reflect final rules and
regulatory feedback.
On this basis, our economic capital12
surplus is £11.3 billion (2012: £8.8 billion),
which is equivalent to an economic
solvency ratio of 257 per cent (2012: ratio
of 215 per cent). The economic solvency
position is shown to be robust to a range
of market sensitivities.
Financing and liquidity
Shareholders’ net core structural borrowings and ratings
Shareholders’ borrowings in holding company
Prudential Capital
Jackson surplus notes
Total
Less: Holding company cash and short-term
2013 £m
Mark to
market
value
392
–
38
430
IFRS
basis
4,211
275
150
4,636
EEV
basis
4,603
275
188
5,066
IFRS
basis
3,126
275
153
3,554
investments
(2,230)
–
(2,230)
(1,380)
Net core structural borrowings of
shareholder-financed operations
2,406
430
2,836
2,174
2012 £m
Mark to
market
value
536
–
43
579
–
579
EEV
basis
3,662
275
196
4,133
(1,380)
2,753
Our financing and liquidity position
remained strong throughout the period.
Our central cash resources amounted to
£2.2 billion at 31 December 2013, up from
£1.4 billion at 31 December 2012, and we
retain a further £2.1 billion of untapped
committed liquidity facilities.
The Group’s core structural
borrowings at 31 December 2013 totalled
£4,636 million (2012: £3,554 million) on an
IFRS basis and comprised £4,211 million
(2012: £3,126 million) of debt held by
the holding company and £425 million
(2012: £428 million) of debt held by the
Group’s subsidiaries, Prudential Capital
and Jackson.
The increase in the holding company
debt of £1,085 million primarily arises from
the two debt issues that took place in 2013,
raising £1,124 million of cash for the Group.
In January 2013 Prudential issued a
US$700 million (£429 million net of costs),
5.25 per cent perpetual Innovative Tier 1
hybrid under this programme, primarily to
Asian retail investors, and in December
2013 issued a £700 million (£695 million
net of costs) 5.7 per cent lower Tier 2
subordinated bonds.
Both these debt issuances were raised
under our £5 billion medium term note
programme, which covers both core
borrowings as included in the table above,
and non-core borrowings, which tend to be
shorter in nature. Under this programme,
at 31 December 2013 the outstanding
subordinated debt was £1,535 million,
US$2,000 million and ¤20 million.
In addition to its net core structural
borrowings of shareholder-financed
operations set out above, the Group has
access to liquidity via the debt capital
markets and has in place an unlimited
global commercial paper programme.
As at 31 December 2013, we had issued
commercial paper under this programme
totalling £175 million, US$1,948 million,
¤335 million and AU$8 million.
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
2015 and 2018. Apart from small
drawdowns to test the process, these
facilities have never been drawn, and there
were no amounts outstanding at
31 December 2013. The medium-term
note programme, the commercial paper
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 flexible funding capacity.
Strategic reportChief Financial Officer’s report on our 2013 financial performance Prudential plc Annual Report 2013 44
Chief Financial Officer’s report on our 2013 financial performance continued
Prudential manages the Group’s core
debt within a target level consistent with
its current debt ratings. At 31 December
2013, the gearing ratio (debt, net of cash
and short-term investments, as a
proportion of IFRS shareholders’ funds
plus net debt) was 20 per cent, compared
to 17 per cent at 31 December 2012.
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 on Prudential and its subsidiaries
are on stable outlook.
The financial strength of PAC is rated
AA by Standard & Poor’s, Aa2 by Moody’s
and AA by Fitch.
Jackson National Life Insurance
Company’s financial strength is rated AA
by Standard & Poor’s, A1 by Moody’s and
AA by Fitch.
Prudential Assurance Co. Singapore
(Pte) Ltd’s (Prudential Singapore) financial
strength is rated AA by Standard & Poor’s.
Shareholders’ funds
Operating profit based on longer-term investment returns
Items excluded from operating profit
Total profit before tax
Tax and non-controlling interests
Profit for the year
Exchange movements, net of related tax
Unrealised gains and losses on Jackson securities classified as
available-for-sale13
Dividends
Other
Net (decrease) increase in shareholders’ funds
Shareholders’ funds at beginning of the year
Shareholders’ funds at end of the year
Return on shareholders’ funds14
IFRS
EEV
2013 £m
20121 £m
2013 £m
20121 £m
2,954
(1,319)
1,635
(289)
1,346
(255)
(1,034)
(781)
15
(709)
10,359
9,650
23%
2,520
227
2,747
(584)
2,163
(216)
387
(655)
116
1,795
8,564
10,359
23%
5,580
84
5,664
(1,306)
4,358
(1,077)
–
(781)
(87)
2,413
22,443
24,856
19%
4,313
644
4,957
(1,188)
3,769
(469)
–
(655)
161
2,806
19,637
22,443
16%
During 2013 most equity markets recorded
strong positive movements, although
volatility increased through the period
on speculation about the timing of the
slowdown in the US Federal Reserve’s
quantitative easing programme. This also
led to a sharp rise in US yields to
3.1 per cent at 31 December 2013,
compared to 1.8 per cent at the end of
EEV shareholders’ funds, equivalent to
£24.9bn
971p
per share
2012, with yields in many other global
markets following higher. Higher yields
generate adverse value movements on our
holdings of fixed-income securities, which
have given rise to negative short-term
investment variances in some of our
operations. However, these higher yields
are also expected to generate higher
investment returns going forward, whose
estimated positive future value is also
included within the non-operating results
on the EEV basis of reporting and offsets
the effect of the negative short-term
investment variances.
In addition, fears of a broad economic
slowdown returned during the year,
particularly in emerging markets, as a
consequence of the anticipated end to US
quantitative easing. As a result, several
developing countries have experienced
marked currency depreciation against the
major global currencies. While Prudential
is well diversified by currency, this effect,
combined with the appreciation of UK
sterling in 2013 on better economic data,
has a translational impact on conversion
of local balance sheets to UK sterling.
Taking these non-operating movements
into account, the Group’s EEV shareholders’
funds have increased by 11 per cent during
2013 to £24.9 billion (31 December 2012:
£22.4 billion). On a per share basis EEV at
31 December 2013 stood at 971 pence, up
from 878 pence at 31 December 2012.
Under IFRS, the effect of potential
higher future returns will only be
recognised as they are earned, meaning
there is no offset available against
short-term investment variances in the
current period. IFRS shareholders’ funds at
31 December 2013 of £9.7 billion were,
therefore, 7 per cent lower than at the
previous year end (31 December 2012:
£10.4 billion).
Corporate transactions
Agreement to sell Japan life business
On 16 July 2013 the Group reached an
agreement to sell its closed book life
insurance business in Japan, PCA Life
Insurance Company Limited, to SBI
Holdings Inc. for US$85 million (£51 million
at 31 December 2013 closing exchange
rate). The transaction is subject to
regulatory approval and is expected to
complete in the second quarter of 2014.
Consistent with the classification of the
business as held for sale, the IFRS and EEV
carrying values have been set to
£48 million, representing the estimated
proceeds, net of related expenses of
£3 million. The IFRS loss of £102 million
(2012: profit of £17 million) and EEV loss
of £35 million (2012: profit of £21 million)
comprises the 2013 reduction on
re-measuring the carrying value of
the business and its trading results.
Prudential plc Annual Report 2013 Strategic report 45
10 The detailed Holding Company cash flow is
disclosed in note IIIa of Additional unaudited
IFRS financial information.
11 Refer to the EEV basis supplementary
information – Operating profit based on
longer-term investment returns and
summarised consolidated income statement,
for the breakdown of other income and
expenditure, and other non-operating items.
12 The methodology and assumptions used in
calculating the economic capital result are set
out in note II of Additional unaudited financial
information. The economic solvency ratio is
based on the Group’s Solvency II internal model
which will be subject to Prudential Regulation
Authority review and approval before its formal
adoption in 2016. We do not expect to submit our
Solvency II internal model to the Prudential
Regulation Authority for approval until 2015 and
therefore these economic capital disclosures
should not be interpreted as outputs from an
approved internal model.
13 Net of related charges to deferred acquisition
costs and tax.
14 Operating profit after tax and non-controlling
interests as percentage of opening shareholders’
funds. For IFRS reporting purposes, the Group
adopted amended accounting standards in
2013. Accordingly, the IFRS elements and EEV
basis shareholders’ interest for the comparative
results have been adjusted for the retrospective
application of this adoption of IFRS accounting
policies for the purpose of the calculation above
as discussed in note A2 of the IFRS financial
statements and in note 1 of EEV basis results. In
addition, following its reclassification as held for
sale during 2013, operating results exclude the
results of the Japan life insurance business.
2012 comparatives have been retrospectively
adjusted on a comparable basis. For the purpose
of the calculation above, Japan has been
removed from opening shareholders’ funds.
15 Association of South-east Asian Nations.
Acquisition of Thanachart Life
On 3 May 2013, the agreement we entered
into in November 2012 to establish an
exclusive 15-year partnership with
Thanachart Bank Public Company Limited
(Thanachart Bank) to develop jointly their
bancassurance business in Thailand was
launched. At the same time, Prudential
Thailand completed the acquisition of
Thanachart Life Assurance Company
Limited (Thanachart Life), a wholly-owned
life insurance subsidiary of Thanachart
Bank. 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.
The consideration for the transaction
is THB 18.981 billion (£412 million), of
which THB 17.500 billion (£380 million)
was settled in cash on completion in
May 2013, with a further payment of
THB 0.946 billion (£20 million) in July 2013
for adjustments to reflect net asset value
as at the completion date. In addition, a
deferred payment of THB 0.535 billion
(£12 million) is payable 12 months after
completion. The THB 18.981 billion
(£412 million) includes the amounts
attributable to the acquisition of the
distribution rights associated with the
exclusive 15-year bancassurance
partnership agreement with Thanachart
Bank. No goodwill arose on this acquisition.
Domestication of Hong Kong branch
On 1 January 2014, the Group completed
the process of domestication of the Hong
Kong branch of The Prudential Assurance
Company Limited. The branch was
transferred on 1 January 2014 to two new
Hong Kong-incorporated Prudential
companies, one providing life insurance
and the other providing general insurance
– Prudential Hong Kong Limited and
Prudential General Insurance Hong Kong
Limited. On the Prudential Regulation
Authority’s pillar 1 peak 2 basis,
approximately £12.1 billion of assets,
£12.0 billion of liabilities, net of reinsurers’
share (including policyholder asset share
liabilities, and £1.2 billion of inherited
estate) and £0.1 billion of shareholders’
funds (for the excess assets of the
transferred non-participating business)
have been transferred.
Dividend
The Board proposes to rebase the full-year
dividend upwards by 4.38 pence, due to
the strong and sustained operational and
financial performance of the Group,
evidenced by the achievement of all our
demanding 2013 ‘Growth and Cash’
objectives. The directors recommend a
final dividend of 23.84 pence per share
(2012: 20.79 pence), which brings the total
dividend for the year to 33.57 pence,
representing an increase of 15 per cent
over 2012.
The Board applies strict affordability
tests against a broad range of criteria
before making its dividend
recommendation. It is the result of these
tests, combined with the Group’s
exceptionally strong performance in the
past five years, that has enabled the Board
to take the unusual decision to recommend
the rebase of the dividend in consecutive
years, 2012 and 2013.
It is worth emphasising here again that
although the Board has been able to
recommend three upward rebases in the
last four years, the Group’s dividend policy
remains unchanged. The Board will
maintain its focus on delivering a growing
dividend from this new higher base, which
will continue to be determined after taking
into account the Group’s financial flexibility
and our assessment of opportunities to
generate attractive returns by investing in
specific areas of the business. The Board
believes that in the medium term a
dividend cover of around two times
is appropriate.
Notes
1
For IFRS reporting purposes, the Group adopted
new and amended accounting standards in
2013. Accordingly, the IFRS elements and EEV
basis shareholders’ interest for the comparative
results have been adjusted for the retrospective
application of this adoption of IFRS accounting
policies, as discussed in note A2 of the IFRS
financial statements and in note 1 of EEV basis
results. In addition, following its reclassification
as held for sale during 2013, operating results
exclude the result of the Japan life insurance
business. Profit before tax continues to include
these results. 2012 comparatives have been
retrospectively adjusted on a comparable basis.
2 Refer to note B1.1 in IFRS financial statements for
the breakdown of other income and
expenditure, and other non-operating items.
3 For basis of preparation see note 1(a) of
Additional IFRS unaudited financial
information.
Includes Group’s proportionate share of the
liabilities and associated flows of the insurance
joint ventures in Asia.
4
5 Defined as movements in shareholder-backed
policyholder liabilities arising from premiums
(net of charges), surrenders/withdrawals,
maturities and deaths.
Includes Group’s proportionate share in PPM
South Africa and the Asian asset management
joint ventures.
6
7 Net inflows exclude Asia Money Market Fund
(MMF) inflows of £522 million (2012: net outflows
£226 million). External funds under
management exclude Asia MMF balances
of £4,296 million (2012: £4,004 million).
8 Free surplus generation represents ‘underlying
free surplus’ based on operating movements,
including the general insurance commission
earned during the period and excludes market
movements, foreign exchange, capital
movements, shareholders’ other income and
expenditure and centrally arising restructuring
and Solvency II implementation costs.
9 Following its reclassification as held for sale
during 2013, operating results exclude the
results of the Japan life insurance business.
2012 comparatives have been retrospectively
adjusted on a comparable basis.
Strategic reportChief Financial Officer’s report on our 2013 financial performance Prudential plc Annual Report 2013 46
Group Chief Risk Officer’s report on the risks facing our business
and our capital strength
Managing risk to generate
competitive advantage
Our strategy and operating principles
Asia:
acceler a t e
A
s
s
e
t
m
o
a
p
t
i
n
a
m
g
e
is
e
ment:
‘We generate shareholder value
by selectively taking exposure
to risks that are adequately
rewarded and that can be
appropriately quantified
and managed.’
Pierre-Olivier Bouée
Group Chief Risk Officer
U
nite
build o
d S
n s
t
a
t
r
t
e
Balanced
metrics and
disclosures
e
s
n
:
g
t
h
Focus on
customers &
distribution
Disciplined
capital
allocation
m:
o
d Kingd
fo cus
U n it e
Proactive risk
management
As a provider of financial
services the management
of risk lies at the heart of our
business, and effective risk
management capabilities represent
a key source of competitive
advantage for the Group. We generate
shareholder value by selectively
taking exposure to risks that are
adequately rewarded and that can
be appropriately quantified and
managed. We retain material risks
only where consistent with our risk
appetite and risk-taking philosophy,
that is: (i) they contribute to value
creation; (ii) adverse outcomes can
be withstood; and (iii) we have the
capabilities, expertise, processes and
controls to manage them.
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.
Group Risk Framework
Our Group Risk Framework describes our
approach to risk management, including
provisions for risk governance arrangements;
our appetite and limits for risk exposures;
policies for the management of various risk
types; risk culture standards; and risk
reporting. It is under this framework that the
key arrangements and standards for risk
Prudential retains material risks only
where consistent with our risk
appetite and risk-taking philosophy,
that is:
B They contribute to value creation;
B Adverse outcomes can
be withstood; and
B We have the capabilities, expertise,
processes and controls to manage them.
For more information on Prudential’s
strategy and operating principles
Our strategy page 16
management and internal control that support
Prudential’s compliance with statutory and
regulatory requirements are defined.
Risk governance
(Unaudited)
Our Group Risk Framework requires that all
our 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.
Primary responsibility for strategy,
performance management and risk control
lies with the Board, which has established
the Group Risk Committee to assist in
providing leadership, direction and
oversight in respect of the Group’s
significant risks, and with the Group Chief
Executive and the Chief Executives of each
of the Group’s business units.
Risk taking and the management
thereof forms the first line of defence and
is facilitated through both the Group
Executive Committee and the Balance Sheet
and Capital Management Committee.
Risk control and oversight constitutes
the second line of defence, and is achieved
through the operation of the Group
Executive Risk Committee and its
sub-committees which monitor and keep
risk exposures under regular review. These
committees are supported by the Group
Chief Risk Officer, with functional
oversight provided by Group Risk, Group
Compliance and Group Security.
Prudential plc Annual Report 2013 Strategic report
47
Group Risk has responsibility for
establishing and embedding a capital
management and risk oversight framework
and culture consistent with our risk
appetite that protects and enhances the
Group’s embedded and franchise value.
Group Compliance provides verification of
compliance with regulatory standards and
informs the Board, as well as the Group’s
management, on key regulatory issues
affecting the Group. 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.
Risk appetite and limits
(Audited)
The extent to which we are willing to take
risk in the pursuit of our objective to create
shareholder value is defined by a number
of risk appetite statements, operationalised
through measures such as limits, triggers
and indicators. These appetite statements
and measures are approved by the Board
on recommendation of the Group Risk
Committee and are subject to annual review.
We define and monitor aggregate risk
limits based on financial and non-financial
stresses for our earnings volatility, liquidity
and capital requirements as follows:
Earnings volatility: the objectives of the
limits are to ensure that:
a
b
c
The volatility of earnings is consistent
with the expectations of stakeholders;
The Group has adequate earnings (and
cash flows) to service debt, expected
dividends and to withstand unexpected
shocks; and
Earnings (and cash flows) are managed
properly across geographies and are
consistent with funding strategies.
The two measures used to monitor the
volatility of earnings are EEV operating
profit and IFRS operating profit, although
EEV and IFRS total profits are also
considered.
Liquidity: the objective is to ensure that
the Group is able to generate sufficient
cash resources to meet financial obligations
as they fall due in business as usual and
stressed scenarios.
Capital requirements: the limits aim to
ensure that:
a
b
c
The Group meets its internal economic
capital requirements;
The Group achieves its desired target
rating to meet its business objectives;
and
Supervisory intervention is avoided.
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.
We also define risk appetite statements
and measures (ie limits, triggers, indicators)
for the major constituents of each risk type
as categorised and defined in the Group
Risk Framework, where appropriate. These
appetite statements and measures cover
the most significant exposures to the
Group, particularly those that could impact
our aggregate risk limits. The Group Risk
Framework risk categorisation is shown in
the table below.
Group Risk Framework risk categorisation
Category
Risk type
Definition
Financial risks
Market risk
Credit risk
Insurance risk
The risk of loss for the Group’s business, or of adverse change in the financial situation,
resulting, directly or indirectly, from fluctuations 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 financial position,
resulting from fluctuations in the credit standing of issuers of securities, counterparties
and any debtors in the form of default or other significant 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 sufficient cash resources or to meet
financial obligations as they fall due in business as usual and stress scenarios.
Non-financial 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 significantly change the
fundamentals that drive the business’s overall strategy.
Strategic risk
Ineffective, inefficient or inadequate senior management processes for the development
and implementation of business strategy in relation to the business environment and the
Group’s capabilities.
Strategic reportGroup Chief Risk Officer’s report on the risks facing our business and our capital strength Prudential plc Annual Report 2013 48
Our risk appetite framework forms an
integral part of our 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
diversification effects between business
units) relative to the aggregate risk limits.
Risk policies
(Audited)
Risk policies set out specific requirements
for the management of, and articulate the
risk appetite for, key risk types. There are
policies for credit, market, insurance,
liquidity, operational and tax risk, as well
as dealing controls. They form part of the
Group Governance Manual, which was
developed to make a key contribution to
the sound system of internal control that
we are expected to maintain under the UK
Corporate Governance Code and the Hong
Kong Code on Corporate Governance
Practices. Group Head Office and business
units confirm that they have implemented the
necessary controls to evidence compliance
with the Group Governance Manual.
Risk culture
(Unaudited)
We work to promote a responsible risk
culture in three main ways:
a
b
c
By the leadership and behaviours
demonstrated by management;
By building skills and capabilities
to support management; and
By including risk management (through
the balance of risk with profitability and
growth) in the performance evaluation
of individuals.
The remuneration strategy at Prudential
is designed to be consistent with its risk
appetite, and the Group Chief Risk Officer
advises the Group Remuneration
Committee on adherence to our risk
framework and appetite.
Risk reporting
(Unaudited)
An annual ‘top-down’ identification of our
top risks assesses the risks that have the
greatest potential to impact the Group’s
operating results and financial condition.
The management information received by
the Group Risk Committees and the Board
is tailored around these risks, and it also
covers ongoing developments in other key
and emerging risks. A discussion of the key
risks, including how they affect our
operations and how they are managed,
follows below.
Key risks
Market risk
(i) Investment risk
(Audited)
In Prudential UK, investment risk arises
from the assets in the with-profits fund.
This risk impacts the shareholders’
interest in future transfers and is driven
predominantly by equities in the fund
as well as by other investments such
as property and bonds. The fund’s
large inherited estate – estimated at
£8.0 billion as at 31 December 2013
(31 December 2012: £7.0 billion) – can
absorb market fluctuations and protect
the fund’s solvency. The inherited
estate is partially protected against falls
in equity markets through an active
hedging policy.
In Asia, our shareholder exposure to
equities relates to revenue from unit-linked
products and, from a capital perspective,
to the effect of falling equity markets on its
with-profits businesses.
In Jackson, investment risk arises in
relation to the assets backing the policies.
In the case of the ‘spread business’,
including fixed annuities, these assets are
generally bonds. For variable annuities
business, these assets include equities as
well as other assets such as bonds. In this
case the impact on the shareholder comes
from value of future mortality and expense
fees, and additionally from guarantees
embedded in variable annuity products.
Shareholders’ exposure to these
guarantees is mitigated through a hedging
programme, as well as reinsurance. Further
measures have been undertaken including
re-pricing initiatives and the introduction of
variable annuities without guarantees.
Furthermore, it is our philosophy not to
compete on price; rather, we seek to sell at
a price sufficient to fund the cost it incurs to
hedge or reinsure its risks and to achieve an
acceptable return.
The Jackson IFRS shareholders’ equity
and US statutory capital are sensitive to
the effects of policyholder behaviour on
the valuation of GMWB guarantees.
Jackson hedges the guarantees on its
variable annuity book on an economic
basis, and thus accepts variability in its
accounting results in the short term in
order to achieve the appropriate economic
result. In particular, under Prudential’s
Group IFRS reporting, the measurement of
the Jackson variable annuity guarantees is
typically less sensitive to market
movements than the corresponding
hedging derivatives, which are held at
market value. However, depending on the
level of hedging conducted regarding a
particular risk type, certain market
movements can drive volatility in the
economic result which may be less
significant under IFRS reporting.
(ii) Interest rate risk
(Audited)
Long-term rates have declined over recent
periods in many markets, falling to historic
lows. Products that we write are sensitive
to movements in interest rates, and while
we have already taken a number of actions
to de-risk the in-force business as well as
re-price and restructure new business
offerings in response to historically low
interest rates, persistently low rates may
impact policyholders’ savings patterns
and behaviour.
Interest rate risk arises in our UK
business from the need to match cash flows
for annuity payments with those from
investments; movements in interest rates
may have an impact on profits where
durations are not perfectly matched. As
a result, we aim to match the duration of
assets and liabilities as closely as possible
and the position is monitored regularly. The
with-profits business is exposed to interest
rate risk as a result of underlying
guarantees. Such risk is largely borne
by the with-profits fund but shareholder
support may be required in extremis.
In Asia, 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 flows to match exactly those relating
to policyholder liabilities. While this
residual asset/liability mismatch risk can
be managed, it cannot be eliminated.
Jackson is exposed to interest rate risk
in its fixed, fixed index and variable annuity
books. Movements in interest rates can
influence the cost of guarantees in such
products, in particular the cost of
guarantees may increase when interest
rates fall. Interest rate risk across the entire
business is managed through the use
of interest rate swaps and interest rate
options.
(iii) Foreign exchange risk
(Audited)
We principally operate in Asia, the US and
the UK. The geographical diversity of our
businesses means that we are inevitably
subject to the risk of exchange rate
fluctuations. Our international operations
in the US and Asia, which represent a
significant proportion of our operating
profit and shareholders’ funds, generally
write policies and invest in assets
denominated in local currency. Although
this practice limits the effect of exchange
rate fluctuations on local operating results,
it can lead to significant fluctuations in our
consolidated financial statements when
results are expressed in UK sterling.
We retain revenues locally to support
the growth of our business, and capital is
held in the local currency of the business
Prudential plc Annual Report 2013 Strategic reportGroup Chief Risk Officer’s report on the risks facing our business and our capital strength continued 49
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 where a significant cash
remittance is due from an overseas
subsidiary to the Group, this exposure is
hedged where we believe it is economically
optimal to do so. We do not have appetite
for significant shareholder exposures to
foreign exchange risks in currencies
outside the local territory. Currency
borrowings, swaps and other derivatives
are used to manage exposures.
Credit risk
(Audited)
We invest in fixed income assets in order to
match policyholder liabilities and enter into
reinsurance and derivative contracts to
mitigate various types of risk. As a result,
we are exposed to credit and counterparty
credit risk across our business. We employ
a number of risk management tools to
manage credit risk, including limits defined
on an issuer/counterparty basis as well as
on average credit quality, and collateral
arrangements in derivative transactions.
The Group Credit Risk Committee
oversees credit and counterparty credit
risk across the Group.
(i) Debt and loan portfolio
(Audited)
Our UK business is primarily exposed
to credit risk in the shareholder-backed
portfolio, where fixed income assets
represent 33 per cent or £26.8 billion
of our exposure. Credit risk arising from
£48.0 billion of fixed income assets is
largely borne by the with-profits fund,
although shareholder support may be
required should the with-profits fund
become unable to meet its liabilities. Our
UK business is exposed to a lesser extent
to £7.2 billion of fixed income assets in
our unit-linked business.
The debt portfolio at our Asia business
totalled £18.6 billion at 31 December 2013.
Of this, approximately 66 per cent was in
unit-linked and with-profits funds with
minimal shareholders’ risk. The remaining
34 per cent is shareholder exposure and is
invested predominantly (71 per cent) in
investment grade bonds.
Credit risk arises in the general account
of our US business, where £30.3 billion of
fixed income assets back shareholder
liabilities including those arising from fixed
annuities, fixed index annuities and life
insurance. Included in the portfolio are
£2.3 billion of commercial mortgage-
backed securities and £1.8 billion of
residential mortgage-backed securities, of
which £0.9 billion (52 per cent) are issued
by US government sponsored agencies.
The shareholder-owned debt and loan
portfolio of the Group’s asset management
operations of £2.0 billion as at
31 December 2013 is principally related to
Prudential Capital operations. Prudential
Capital generates revenue by providing
bridging finance, managing investments
and operating a securities lending and cash
management business for the Prudential
Group and our clients.
Further details of the composition of our
debt portfolio, and exposure to loans, can
be found in the IFRS financial statements.
agreements between the individual Group
entities and relevant counterparties in place
under each of these master agreements.
Our exposure to derivative
counterparty and reinsurance
counterparty credit risk is managed using
an array of risk management tools,
including a comprehensive system of
limits. Where appropriate, we reduce our
exposure, purchase credit protection
or make use of additional collateral
arrangements to control our levels of
counterparty credit risk.
(ii) Group sovereign debt and bank
debt exposure
(Audited)
Sovereign debt1 represented 15 per cent or
£10 billion of the debt portfolio backing
shareholder business at 31 December 2013
(31 December 2012: 15 per cent or
£10.2 billion). 44 per cent of this was rated
AAA and 92 per cent investment grade
(31 December 2012: 38 per cent AAA,
92 per cent investment grade). At
31 December 2013, the Group’s total
holding in continental Europe shareholder
sovereign debt1 was £531 million.
78 per cent of this was AAA rated
(31 December 2012: 79 per cent AAA
rated). Shareholder exposure to the
Eurozone sovereigns of Italy and Spain is
£54 million (31 December 2012:
£52 million). We do not have any sovereign
debt exposure to Greece, Cyprus, Portugal
or Ireland.
Our bank exposure is a function of our
core investment business, as well as of the
hedging and other activities undertaken to
manage our various financial risks. Given
the importance of our relationship with our
banks, exposure to the banking sector is a
key focus of management information
provided to the Group risk committees and
the Board.
The exposures held by the shareholder-
backed business and with-profits funds in
sovereign debt and bank debt securities
at 31 December 2013 are given in Note
C3.3(b) of the Group’s IFRS financial
statements.
(iii) Counterparty credit risk
(Audited)
We enter into a variety of exchange traded
and over-the-counter derivative financial
instruments, including futures, options,
forward currency contracts and swaps
such as interest rate swaps, inflation 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 International Swaps and
Derivatives Association Inc. master
agreements and we have collateral
Insurance risk
(Audited)
The processes of determining the price
of our products and reporting the results
of our long-term business operations
require us to make a number of
assumptions. In common with other
industry players, the profitability
of our businesses depends on a
mix of factors including mortality
and morbidity levels and trends,
persistency, investment performance,
unit cost of administration and new
business acquisition expenses.
We continue to conduct research
into longevity risk using data from our
substantial annuity portfolio. The
assumptions that we make about future
expected levels of mortality are
particularly relevant in our 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.
Morbidity risk is mitigated by
appropriate underwriting and use of
reinsurance. Our morbidity assumptions
reflect our recent experience and
expectation of future trends for each
relevant line of business.
Our persistency assumptions reflect
recent experience for each relevant line of
business, and any expectations of future
persistency. Persistency risk is mitigated
by appropriate training and sales processes
and managed proactively post sale. Where
appropriate, allowance is also made for the
relationship – either assumed or historically
observed – between persistency and
investment returns, and for the resulting
additional risk.
Liquidity risk
(Audited)
Our parent company has significant
internal sources of liquidity which are
sufficient 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
Prudential plc Annual Report 2013Strategic reportGroup Chief Risk Officer’s report on the risks facing our business and our capital strength
50
facilities, expiring between 2015 and
2018. In addition, the Group has access to
liquidity via the debt capital markets. We
also have in place an unlimited commercial
paper programme and have 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 we have assessed
these to be sufficient.
Operational risk
(Unaudited)
We are exposed to operational risk
through the course of running our
business. We are dependent on the
successful processing of a large number
of transactions, utilising various legacy
and other IT systems and platforms,
across numerous and diverse products.
We also operate under the ever-evolving
requirements set out by different
regulatory and legal regimes
(including tax), as well as utilising a
significant number of third parties to
distribute products and to support
business operations.
Our IT, compliance and other
operational systems and processes
incorporate controls that are designed to
manage and mitigate the operational risks
associated with our activities. Although
we have not experienced a material failure
or breach in relation to our legacy and
other IT systems and processes to date,
we have been, and likely will continue
to be, subject to computer viruses,
attempts at unauthorised access and
cyber security attacks.
We have 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
our corporate insurance programme.
Global regulatory risk
(Unaudited)
Global regulatory risk is considered a key
risk and is classified as a business
environment risk under the Group Risk
framework risk categorisation.
The European Union (EU) is
developing a new prudential regulatory
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 although its
implementation was delayed pending
agreement on a directive known as
Omnibus II which, once adopted, will
amend certain aspects of the Solvency II
Directive. The new approach is based on
the concept of three pillars – minimum
capital requirements, supervisory review
of firms’ assessments of risk, and
enhanced disclosure requirements.
Specifically, Pillar 1 covers the
quantitative requirements around own
funds, valuation rules for assets and
liabilities and capital requirements. Pillar 2
provides the qualitative requirements for
risk management, governance and
controls, including the requirement for
insurers to submit an Own Risk and
Solvency Assessment 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 us to make
use of our internal economic capital
models if approved by the Prudential
Regulation Authority.
In November 2013, representatives
from the European Parliament, the
European Commission and the Council
of the European Union reached an
agreement on the Omnibus II Directive,
which is currently expected to be
adopted in early 2014. As a result,
Solvency II is now expected to be
implemented as of 1 January 2016,
although the European Commission and
the European Insurance and
Occupational Pensions Authority are
continuing to develop the detailed rules
that will complement the high-level
principles of the Solvency II and
Omnibus II Directives, which are not
currently expected to be finalised until
mid-2015.
There is significant uncertainty
regarding the final outcome of this
process. In particular, certain detailed
aspects of the Solvency II rules relating to
the determination of the liability discount
rate for UK annuity business remain to be
clarified and our capital position is
sensitive to these outcomes. Further, the
effective application of a number of key
measures incorporated in the Omnibus II
Directive, including the provisions for
third-country equivalence, are expected
to be subject to supervisory judgement
and approval. There is a risk that the effect
of the measures finally adopted could be
adverse for us, including potentially a
significant increase in the capital required
to support our business and that we may
be placed at a competitive disadvantage
to other European and non-European
financial services groups. We are actively
participating in shaping the outcome
through our involvement in industry
bodies and trade associations, including
the Chief Risk Officer and Chief Financial
Officer Forums, together with the
Association of British Insurers and
Insurance Europe.
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 coordinated centrally
to achieve consistency in the
understanding and application of the
requirements. We are continuing our
preparations to adopt the regime when
it comes into force on 1 January 2016 and
are undertaking in parallel an evaluation
of the possible actions to mitigate its
effects. We regularly review our range
of options to maximise the strategic
flexibility of the Group. This includes
consideration of optimising our domicile
as a possible response to an adverse
outcome on Solvency II.
Over the coming months we will
remain in regular contact with the
Prudential Regulation Authority as we
continue to engage in the ‘pre-application’
stage of the approval process for the
internal model. In addition, we are
engaged in the Prudential Regulation
Authority’s ‘Individual Capital Adequacy
Standards Plus’ (ICAS+) regime, which
is enabling our UK insurance entities to
leverage the developments made in
relation to the Solvency II internal model
for the purpose of meeting the existing
ICAS regime.
Currently there are also a number
of other global regulatory developments
which could impact the way in which we
are supervised in our many jurisdictions.
These include the Dodd-Frank Act in the
US, the work of the Financial Stability
Board on Global Systemically Important
Insurers (G-SIIs) 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 financial
services industry within the United States
that, among other reforms to financial
Prudential plc Annual Report 2013 Strategic reportGroup Chief Risk Officer’s report on the risks facing our business and our capital strength continued services entities, products and markets,
may subject financial institutions
designated as systemically important
to heightened prudential and other
requirements intended to prevent or
mitigate the impact of future disruptions in
the US financial system. The full impact of
the Dodd-Frank Act on our businesses is
not currently clear. However, many of its
provisions have a delayed effectiveness
and/or require rule making or other
actions by various US regulators over
the coming years.
In July 2013, the Financial Stability
Board announced the initial list of nine
insurance groups that have been
designated as G-SIIs. This list included
Prudential as well as a number of our
competitors. The designation as a G-SII
is likely to lead to additional policy
measures being applied to the designated
group. Based on a policy framework
released by the IAIS concurrently with
the initial list, these additional policy
measures will include enhanced
Group-wide supervision. This enhanced
supervision is intended to commence
immediately and will include the
development by July 2014 of a Systemic
Risk Management Plan under supervisory
oversight and implementation thereafter
and by the end of 2014, a Group
Recovery and Resolution Plan and
Liquidity Risk Management Plan. The
G-SII regime also introduces two types of
capital requirements, the first, a Basic
Capital Requirement, designed to act as
a minimum Group capital requirement
and the second, a Higher Loss Absorption
requirement for conducting non-
traditional insurance and non-insurance
activities. The IAIS released a
consultation paper on the Basic Capital
Requirement in December 2013 and we
will participate in the field testing of the
proposals (expected in the first half of
2014). We are monitoring the
development of, and the potential impact
of, the framework of policy measures and
engaging with the Prudential Regulation
Authority on the implications of this
designation. The IAIS currently expects
to finalise the Basic Capital Requirement
and Higher Loss Absorption proposals
by November 2014 and the end of 2015
respectively. Implementation of the
regime is likely to be phased in over a
period of years with the Basic Capital
Requirement expected to be introduced
between 2015 and 2019. The Higher Loss
Absorption requirement will apply
from January 2019 to the insurance
groups identified as G-SIIs
in November 2017.
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 currently expected that some
prescriptive requirements, including
group capital requirements will be
included in the framework. A revised draft
ComFrame proposal was released for
consultation in October 2013. The IAIS
will undertake a field testing exercise from
2014 to 2018 to assess the impacts of the
quantitative and qualitative requirements
proposed under ComFrame. ComFrame
is expected to be implemented in 2019.
Risk factors
(Unaudited)
Our disclosures covering risk factors can
be found at the end of this document.
Risk mitigation and hedging
(Unaudited)
We manage our actual risk profile against
our tolerance of risk. To do this, we
maintain risk registers that include details
of the risks we have identified and of the
controls and mitigating actions we employ
in managing them. Any mitigation
strategies involving large transactions
such as a material derivative transaction
involving shareholder business are subject
to review at Group level before
implementation.
We use a range of risk management and
mitigation strategies. The most important
of these include: adjusting asset portfolios
to reduce investment risks (such as
duration mismatches or overweight
counterparty exposures); using derivatives
to hedge market risks; implementing
reinsurance programmes to manage
insurance risk; implementing corporate
insurance programmes to limit the impact
of operational risks; and revising business
plans where appropriate.
estimated IGD capital surplus covering
capital requirements
£5.1bn
2.8times
51
Capital management
Regulatory capital (IGD)
(Audited)
Prudential is subject to the capital
adequacy requirements of the European
Union Insurance Groups Directive (IGD)
as implemented by the Prudential
Regulation Authority in the UK. The IGD
capital surplus represents the aggregated
surplus capital (on a Prudential Regulation
Authority consistent basis) of the Group’s
regulated subsidiaries less the Group’s
borrowings. No diversification benefit is
recognised.
Our capital position remains strong.
We have continued to place emphasis on
maintaining the Group’s financial strength
through optimising the balance between
writing profitable new business,
conserving capital and generating cash.
We estimate that our IGD capital surplus
is £5.1 billion at 31 December 2013
(before taking into account the 2013 final
dividend), with available capital covering
our capital requirements 2.8 times.
This compares to a capital surplus of
£5.1 billion at the end of 2012 (before
taking into account the 2012 final
dividend), albeit this was calculated on
a different basis.
The movements in 2013 mainly
comprise:
— Net capital generation (net of market
movements) mainly through operating
earnings (in-force releases less
investment in new business, net of tax)
of £2.1 billion; and
— Subordinated debt issuance of
£1.1 billion;
offset by:
— The impact of the Thanachart
acquisition cost, net of IGD
contribution, £0.3 billion;
— Reduction in respect of Jackson IGD
of £1.2 billion, as described below;
— Reduction in the shareholders’ interest
in future transfers from the UK’s
with-profits fund asset allowance
(as discussed below) of £0.2 billion;
— Final 2012 dividend of £0.5 billion and
interim 2013 dividend of £0.3 billion;
— External financing costs and other
central costs, net of tax, of £0.6 billion;
and
— 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.
Prudential plc Annual Report 2013Strategic reportGroup Chief Risk Officer’s report on the risks facing our business and our capital strength
52
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
evolves over time into a more meaningful
risk-sensitive measure.
There is broad agreement that
ultimately it would be beneficial to replace
the IGD regime with a regime that is more
risk-based. Solvency II aims to provide
such a framework and is expected to be
implemented on 1 January 2016. 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 profits 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. Our economic capital surplus,
based on outputs from our Solvency II
internal model, is shown below.
(Unaudited)
In March 2013, we agreed with the PRA to
amend the calculation of the contribution
Jackson makes to the Group’s IGD2 surplus.
Until then, 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.
Post this change, the contribution of
Jackson to IGD surplus now equals the
surplus in excess of 250 per cent of
Company Action Level. This is more in line
with the level at which we have historically
reported free surplus, which had been set
at 235 per cent of Company Action Level,
and which has been raised to 250 per cent
in the first half of 2013 to align with IGD. 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. The impact of this
change, when it was introduced in March
2013, was a reduction in IGD surplus of
£1.2 billion.
We continue to have further options
available to manage available and required
capital. These could take the form of
increasing available capital (for example,
through financial reinsurance) or reducing
required capital (for example, through the
mix and level of new business) and the use
of other risk mitigation measures such as
hedging and reinsurance. A number of such
options were utilised through the last
financial crisis in 2008 and 2009 to enhance
the Group’s IGD surplus. One such
arrangement allowed the Group to
recognise a proportion of the shareholders’
interest in future transfers from the UK’s
with-profits business and this remained
in place, contributing £0.4 billion to the IGD
at 31 December 2012. We are phasing this
out in two equal steps, reducing the credit
taken to £0.2 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 2013 was
£1.9 billion. This credit risk allowance
represents 47 per cent of the bond portfolio
spread over swap rates, compared to
40 per cent as at 31 December 2012.
Stress testing
(Unaudited)
As at 31 December 2013, stress testing of
our IGD capital position to various events
has the following results:
— An instantaneous 20 per cent fall in
equity markets from 31 December 2013
levels would reduce the IGD surplus by
£50 million;
— A 40 per cent fall in equity markets
(comprising an instantaneous
20 per cent fall followed by a further
20 per cent fall over a four-week period)
would reduce the IGD surplus by
£250 million;
— A 100 basis points reduction (subject to
a floor of zero) in interest rates would
reduce the IGD surplus by £50 million;
and
— Credit defaults of 10 times the expected
level would reduce IGD surplus by
£600 million.
We believe that the results of these stress
tests, together with our strong underlying
earnings capacity, our established hedging
programmes and our additional areas of
financial flexibility, demonstrate that we
are in a position to withstand significant
deterioration in market conditions.
We also use an economic capital
assessment to monitor our capital
requirements across the Group, allowing
for realistic diversification benefits, and
continue to maintain a strong position. This
assessment provides valuable insights into
our risk profile.
Economic capital position
(Unaudited)
Following provisional agreement on the
Solvency II Omnibus II Directive on
13 November 2013, Solvency II is now
expected to come into force on 1 January
2016. Therefore our economic capital
results are based on outputs from our
Solvency II internal model. Although the
Solvency II and Omnibus II Directives,
together with draft Level 2 ‘Delegated
Acts’, provide a viable framework for the
calculation of Solvency II results, there
remain material areas of uncertainty and in
many areas the Group’s methodology and
assumptions are subject to review and
approval by the Prudential Regulation
Authority, the Group’s lead regulator. We
do not expect to submit our Solvency II
internal model to the Prudential Regulation
Authority for approval until 2015, and
therefore the economic capital position
disclosed below should not be interpreted
as output from an approved internal model.
At 31 December 2013 the Group has an
economic capital3 surplus of £11.3 billion
(2012: £8.8 billion) and an economic
solvency ratio of 257 per cent
(2012:215 per cent) before taking into
account the 2013 final dividend.
Between full year 2012 and full year
2013, the Group economic capital surplus
increased by £2.5 billion from £8.8 billion
to £11.3 billion. The total movement over
the year was equivalent to a 42 percentage
point increase in the Group economic
solvency ratio, driven by:
— Model changes of £0.1 billion: a positive
impact to Group surplus arising from
a number of modelling enhancements
and refinements;
— Operating experience of £2.1 billion:
generated by in-force business, new
business written in 2013, the beneficial
impact of management actions taken
during 2013 to de-risk the business,
and small impacts from non-market
assumption changes and non-market
experience variances over the year; and
— Non-operating experience of
£0.9 billion: mainly arising from positive
market experience during 2013.
Offset by:
— Other capital movements of £0.6 billion:
a reduction in surplus from the
acquisition of Thanachart Life and the
preparation for sale of the Japanese
life business, the negative impact of
exchange rate movements, an increase
in surplus from new subordinated debt
issuances and a reduction in surplus
due to dividend payments in 2013.
These results are based on outputs from
our current Solvency II internal model,
assessed against a draft set of rules and
with a number of key working assumptions.
Further explanation of the underlying
methodology and assumptions is set out
in note II of Additional unaudited financial
Prudential plc Annual Report 2013 Strategic reportGroup Chief Risk Officer’s report on the risks facing our business and our capital strength continued Capital allocation
(Unaudited)
Our approach to capital allocation is to
attain a balance between risk and return,
investing in those businesses that create
shareholder value. In order to efficiently
allocate capital, we measure the use of,
and the return on, capital.
We use a variety of metrics for
measuring capital performance and
profitability, 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.
information. By disclosing economic capital
information at this stage, the directors of
Prudential plc are seeking to provide an
indication of the potential outcome of
Solvency II based on the Group’s current
interpretation of the draft rules. An update
of the capital position based on the
Solvency II internal model will be reported
annually going forward, and will evolve to
reflect changes to the Solvency II rules,
ongoing refinements to our internal model
calibrations, and feedback from the
Prudential Regulation Authority on
Prudential’s approach to implementing
this new capital regime. Against this
background of uncertainty, it is possible
that the final outcome of Solvency II could
result in a fall in the Group solvency ratio,
relative to the results shown above.
Stress testing
At 31 December 2013, stress testing
the economic capital position gives the
following results and demonstrates the
Group’s ability to withstand significant
deteriorations in market conditions:
— An instantaneous 20 per cent fall in
equity markets would reduce surplus by
£0.3 billion but increase the economic
solvency ratio to 260 per cent;
— An instantaneous 40 per cent fall in
equity markets would reduce surplus by
£1.0 billion but increase the economic
solvency ratio to 258 per cent;
— A 100 basis points reduction in interest
rates (subject to a floor of zero) would
reduce surplus by £1.3 billion and
reduce the economic solvency ratio to
225 per cent;
— A 100 basis points increase in interest
rates would increase surplus by
£0.8 billion and increase the economic
solvency ratio to 284 per cent; and
— A 100 basis points increase in credit
spreads would reduce surplus by
£1.3 billion and reduce the economic
solvency ratio to 254 per cent.
53
Notes
1 Excludes Group’s proportionate share in joint
ventures and unit-linked assets and holdings of
consolidated unit trusts and similar funds.
2 Jackson previously reported IGD on an
intervention level set at 75 per cent of US Risk
Based Capital Company Action level (CAL).
In March 2013 it was agreed with the PRA that
going forward Jackson’s IGD will be reported on
an intervention level set at 250 per cent of CAL.
3 The methodology and assumptions used in
calculating the economic capital result are set
out in note II of Additional unaudited financial
information. The economic Solvency ratio is
based on the Group’s Solvency II internal model
which will be subject to Prudential Regulation
Authority review and approval before its formal
adoption in 2016. We do not expect to submit our
Solvency II internal model to the Prudential
Regulation Authority for approval until 2015 and
therefore these economic capital disclosures
should not be interpreted as outputs from an
approved internal model.
Prudential plc Annual Report 2013Strategic reportGroup Chief Risk Officer’s report on the risks facing our business and our capital strength 54
Helping build
strong communities
Our corporate responsibility strategy
Serving our
customers
Supporting
local
communities
Wellbeing and protection
Helping provide resources, such as clean water
and shelter that are essential for health and a
thriving future
Education and life skills
Strengthening knowledge in numeracy
and financial literacy, while improving
employment training
Disaster readiness and relief
Providing financial, physical and infrastructure
support to help prevent disasters, and to deal
with their impact
Performance highlights
employees volunteer worldwide
1 in 3
US$2m
donated to disaster relief in the
Philippines following Typhoon Haiyan
Valuing our
people
Protecting the
environment
‘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
determination to continue
delivering a strong, sustainable
financial performance.’
Paul Manduca
Chairman
Our long-term sustainable approach
to business is reinforced by our
Group-wide corporate responsibility
strategy. While we believe that
corporate responsibility is best
managed on the ground by those
closest to the customer and local
stakeholders, our Group approach is
underpinned by four global themes:
B Servingourcustomers;
B Valuingourpeople;
B Supportinglocalcommunities;and
B Protectingtheenvironment.
total community investment spend
£18.5m
3,400
employees donate through payroll
giving across the Group
Prudential plc Annual Report 2013 Strategic reportCorporate responsibility review 55
Our corporate responsibility
approach
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. In seeking
to match the long-term liabilities we
have towards our customers with
similarly long-term financial assets,
we provide capital that finances
businesses, builds infrastructure
and fosters growth in both developed
and developing markets.
Ourlong-termsustainableapproachto
businessisreinforcedbyourGroup-wide
corporateresponsibilitystrategy.Whilewe
believethatcorporateresponsibilityisbest
managedonthegroundbythoseclosestto
thecustomerandlocalstakeholders,our
Groupapproachisunderpinnedbyfour
globalthemes:
— Serving our customers: weaimto
providefairandtransparentproducts
thatmeetourcustomers’needs;
— Valuing our people:weaspireto
retainanddevelophighlyengaged
employees;
— Supporting local communities:
weseektomakeapositivecontribution
toourcommunitiesthroughlong-term
partnershipswithcharitable
organisationsthatmakeareal
difference;and
— Protecting the environment:
wetakeresponsibilityforthe
environmentinwhichweoperate.
Thesethemesprovideclaritytoour
businessesastohowtheyshouldfocus
theircorporateresponsibilityefforts
andresourcesinthecontextoftheir
individualmarkets.
Thisreviewgivesanoverviewofour
activitiesandprogress.Prudentialalso
publishesanannualCorporate
ResponsibilityReport,whichwillbe
availableonlineatwww.prudential.co.uk
insummer2014.
Serving our customers
Prudentialhasbeenmeetingpeople’s
needsformorethan165yearsandtoday
weservearound23millioninsurance
customersindiversemarkets.
Ineachofourbusinesses,weare
focusedonprovidingforadistinctset
ofcustomers’needs:thesignificantand
growingdemandforsavingandprotection
ofthemiddleclassinAsia,theretirement
incomerequirementsofbabyboomersin
theUSandtheageingpopulationinthe
UK,whichneedsbothtosavemoreand
toaccesssecureincomeinretirement.
Wewantourcustomerstostaywithus
forthelongterm.Weknowthismeanswe
mustconstantlylistentothemtounderstand
theirchangingneeds,andthatwemust
providethemwithfairandtransparent
products–andcustomerservice–that
maintaintheirtrustandfaithinus.
Asia
Aspartoftheprocessoflisteningand
understandingourcustomers’needs,
PrudentialCorporationAsialauncheda
numberoftailoredproductsandservicesin
2013.PrudentialHongKongintroduced
PRUmyhealthcrisismulti-care,whichoffers
comprehensivefinancialprotectionagainst
criticalillness.Itistheonlyall-in-oneproduct
inHongKongtooffercompleteprotection
againstthefinancialimpactofcritical
illnessesformultiplestagesandmultiple
incidencesofmajorillness,coveringan
extensiverangeofconditions.
PrudentialSingaporeintroducedthe
PRUVantageiPadapplication,acustomer
engagementtooltohelpcustomersbetter
understanddifferentinvestmentconcepts
andwhattolookforwhenconsidering
investing.Prudentialwasthefirsttolaunch
thisstate-of-the-artinteractiveclient
engagementtoolinthemarket,allowing
quickandeasyaccesstoproduct
informationandinvestmentconcepts.Since
itslaunch,theapplicationhasbeenwell
receivedbycustomersandagents.
Atpresent,morethantwo-thirdsofthe
agencyforceisusingthistoolaspartoftheir
salesandcustomerengagementprocess.
US
IntheUS,thesqueezeonthecostofliving
andmarketvolatilityhasledmanypeople
tobeunpreparedastheyapproach
retirement.InJacksonin2013we
continuedtodevelopeducational
programmes,designedtohelpexistingand
potentialcustomersunderstandhow
bettertopreparefortheirfinancialfuture.
TheCenterforFinancialInsight,anew
onlinethoughtleadershipcommunity,
launchedonJackson’swebsiteinMarch
2013.Itisaneducationalresource
designedtoprovideinformationfor
investors,offeringinsightsonmany
aspectsoffinancialplanningfrombasic
terminologyandfundamentalinvestment
conceptstoinformationoninvestment
vehiclesandtrends.
Jackson’seducationaleffortsincludea
focusonalternativeinvestmentstrategies,
agrowingareainportfolioplanning.
Jacksonalsolaunchedaseriesof
alternativeeducationaltrainingdays
designedtodemonstratetherolethat
alternativeinvestmentscanplayinhelping
investorspotentiallygrowreturnsand
manageriskintheirportfolios.
UK
Annuitiesremainakeyproduct
forPrudentialUK,andin2013weworked
closelywiththeAssociationofBritish
InsurersonthelaunchoftheCodeof
RetirementChoices.Thismeansthatwe
aremorefocusedthaneveronensuring
thatcustomerslookingtotakeincomefrom
theirpensionsmakeinformedchoices.Our
UKbusinesspaidout£3billioninincometo
UKannuitantsin2013.
Wearecommittedtorespondingto
customerconcernsquicklyandefficiently
andweaimtomaintainloyaltyby
continuingtoimproveourservice
year-on-yearforbothcustomersand
intermediaries.Thisfocusoncontinuingto
deliverexcellentcustomerservicewas
recognisedatthe2013FinancialAdviser
ServiceAwards,whereweretainedour
twofive-starratingsintheLife&Pensions
andInvestmentcategories.Inthemost
recentdatapublishedbytheFinancial
OmbudsmanService,PrudentialUK
continuedtoperformwellandwasplaced
secondinthe‘lifeandpensionand
decumulation’peergroup.
IntheUKwealsobelieveinfindingways
toimprovethefinancialcapabilityofthe
nextgenerations.PrudentialUKworksin
partnershipwithvariousorganisationsto
deliverfront-linefinancialeducation
trainingtoadultsandchildren,helping
Strategic reportCorporate responsibility review Prudential plc Annual Report 2013 56
peoplebecomemoreinformedabout
theirfinancialneedsandcommunity
organisationstoprovidefinancial
educationinfuture.
InpartnershipwiththePersonalFinance
EducationGroupwehavedevelopeda
QualityMarkforfinancialcapability
teachingresources,givingreassuranceto
teachersthattheyareusingreliablematerial.
Asset management
M&G,Prudential’sUKandEuropeanasset
managementbusiness,isalong-term,
activeinvestorthattakesseriouslyits
responsibilitytolookafterourcustomers’
assets,oftenworkingcloselywiththe
managementofthecompaniesinwhichit
invests.Activevotingisanintegralpartof
M&G’sinvestmentapproach.Webelieve
thatexercisingourvotesbothaddsvalue
andprotectsourinterestsasshareholders.
TheM&Gwebsiteprovidesanoverviewof
votinghistory:www.mandg.co.uk/
Corporate/CorporateResponsibility/
CorporateGovernance/Votinghistory.jsp
M&Gcontinuestoprovidemarket
insightstoclients,intermediariesand
othersthroughanumberofchannels,
includingaprogrammeofroadshowsand
events,suchasMeettheManagersand
theAnnualInvestmentForum,anditsBond
Vigilantesblog.
Valuing our people
AtPrudential,wefosteranenvironmentin
whichourpeoplefindvalueandmeaning
intheirwork,anddeliveroutstanding
performanceforourcustomers,
shareholdersandcommunities.Thisis
achievedthroughourfocusondiversityand
inclusion,talentdevelopment,employee
engagement,andperformanceandreward.
Diversity and inclusion
Asaninternationalprovideroffinancial
services,operatingindiversemarketsand
cultures,Prudentialrecognisesits
obligationstosupportinghumanrights
asaconsequenceofitsprinciplesofacting
responsiblyandwithintegrity.
Weprovideopportunitiesforour
employeesregardlessoftheirgender,
ethnicity,disabilitystatus,age,religion,
caringresponsibilitiesorsexualorientation.
Ourdiversityandinclusionpoliciesare
guidedbytheprinciplesoftheUN’s
UniversalDeclarationofHumanRightsand
theInternationalLabourOrganisation’s
corelabourstandards.Thesearealso
incorporatedintoourGroupCodeof
BusinessConduct,whichsetsexpected
standardsofemployeebehaviouracross
theGroup,andinourGroupOutsourcing
andThirdPartySupplyPolicy.
Wemaintainaninclusiveculturethatis
sensitivetotheneedsofemployees.We
makeappropriatedisabilityadjustmentsas
required,andprovidetrainingandcareer
developmentopportunitiesforall.Wealso
givefullandfairconsiderationand
encouragementtoallapplicantswith
suitableaptitudeandabilities.
Thereareseveralinitiativesacrossour
businessesthatmaintainourcommitment
todiversityandinclusion.Examples
include:payconsistencyreviews,engaging
withrecruitmentfirmstomitigatebias,
providingtrainingformanagersand
non-managerialstaff,andrunning
apprenticeshipschemes.Inaddition,we
havecollaborativepartnershipswith
organisationsthatfurtherthediversityand
inclusionagenda,includingDiversityand
InclusioninAsiaNetwork,andPeckham,
anAmericannon-profitcommunity
rehabilitationorganisation.
ThegenderdiversityacrossPrudential
asof31December2013isshownbelow.
Talent development
Weofferarangeofprogrammesthat
enableourpeopletocontinuetogrow
anddevelop.Themajorityoftheseare
managedbyourbusinessunits,while
GroupHumanResourcesfocuseson
tailoredprogrammesforseniorleaders
acrosstheorganisation,succession
planningforseniorroles,anddevelopment
ofouroverallleadershiptalentpipeline.
ColleaguesbasedintheUKhavejoined
ThePearlsProgrammerunbyAn
InspirationalJourney,aUK-based
developmentinitiativedesignedtosupport
womeninmiddletoseniormanagement
positions,inbuildingconfidence,
capabilitiesandcontacts.
theleadershipskillsofthesenior
executivepopulationthroughthe
deliveryofthe‘topoftheclass’
LeadershipDevelopmentSeries,and
thelaunchoftheJacksonDevelopment
ZoneintheUSoffersaflexiblework
environmentwhereuniversitystudents
cangainreal-lifeworkexperienceand
careeropportunities.Career
developmentcentreswithinPrudentialUK
enablecolleaguestoconsiderhowthey
wanttodeveloptheircareers,andM&G
hascontinuedtorunprogrammesto
developindividualswiththepotentialto
excel,supportingjuniortalentintowider
andmoreseniorroles.AtGrouphead
office,allemployeeshaveaccessto
sessionsthatfocusoncross-cultural
awareness,buildingeffectivepartnerships
andself-motivation,whiletargetedtalent
developmentinitiativesaimtosupportthe
developmentofseniormanagersand
futureleaders.
Employee engagement
Anarrayofinitiativesareinplacetodrive
employeeengagement.Theseinclude:
PrudentialCorporationAsiausing
employeesurveyresultstodeliveron
feedbackreceivedin2012,and
PrudentialUKutilisinganonline‘health
manager’tool,anemployeeassistance
helpline,occupationalhealthsupport,and
locally-organisedwellbeingandsporting
activities.GroupHeadOfficealso
convenedaWellbeingandEngagement
Forum,wherecolleaguesreview,develop
andimplementvariousengagement
initiatives.
Withinourbusinessesthereareseveral
Thesuccessofourengagementefforts
examplesofourcontinuingcommitment
totalentdevelopment.Prudential
CorporationAsiahasfurtherimproved
Gender diversity
Headcount*
Total Male Female
9
7
11
7
6
9
2
1
2
76
62
14
22,308 10,138 12,170
Non-executive
directors(including
theChairman)
Executivedirectors
GroupExecutive
Committee(includes
executivedirectors)
Seniormanagers
(doesnotincludethe
Chairman,directors,
andGECmembers)
Wholecompany
(includesthe
Chairman,directors,
andGECmembers)
* Excludes joint ventures.
hasbeenrecognisedinternallyand
externally.In2013,engagementsurveysin
variousbusinessunitshaveagainshown
excellentresults,andseveralofour
businesseshavewonprestigiousawards.
Forexample,in2013ourSingapore
businesswontheAsiaBestEmployer
awardandthePhilippinesemployee
engagementprogramme‘PRUblicService
–AlltheWay’receivedanAwardof
ExcellenceatthePhilippineQuillAwards.
PPMA(oneofourUS-basedindirect
subsidiaries)wasawardedthe‘#1Top
WorkplaceinChicago’byChicagoTribune
andWorkplaceDynamics,PrudentialUK
wasawardedaBusinessintheCommunity
BigTickforourfocusoncolleague
engagement,andM&Gwasonceagain
namedasoneofthebestplacestoworkin
theCitybythewebsite‘HereistheCity
News’.Inaddition,ourbusinessesinthe
UKhavealong-standingrelationshipwith
theunionUnite.
Weencouragevolunteering,through
whichouremployeescansupportour
communitiesandacquirenewskills.See
page58forfurtherdetail.
Prudential plc Annual Report 2013 Strategic reportCorporate responsibility review continued Performance and reward
AtPrudential,weofferrewardpackages
thatattract,retainandmotivatetalented
peopletosupportahigh-performing
culture.Eachindividualcontributesto
thesuccessoftheGroupandshouldbe
rewardedaccordingly.
Rewardislinkedtothedeliveryof
businessgoalsandexpectedbehaviours,
andthereisanemphasisonobjectives
beingmetinanappropriatemanner.
Toensurethis,employeesarenotonly
regularlyassessedon‘what’theyhave
achieved,butalsoon‘how’theydidso.
Thereareseveralrecognitioninitiatives
runningacrossourbusinesses,including
the‘HighFiveRecognitionProgram’in
theUS,whichallowsassociatestochoose
fromalistof‘badges’foractionssuch
asteamwork,innovationandinspiration,
toformallyrecognisewhencolleagues
havegoneaboveandbeyond
expectations.Similarly,atGrouphead
officethePrudentialStarawardsare
madetoindividualsnominatedbytheir
colleaguesforoutstandingexamples
ofexecution,impactandengagement.
Wecontinuetobelieveinthe
importanceofenablingouremployees
tohavetheopportunitytobenefitfrom
theGroup’ssuccessthroughshare
ownership,andoperateemployeeshare
plansacrosstheUKandAsia.
Supporting local communities
Theinherentlong-termsocialvalueof
ourbusinessisaugmentedbycommunity
investmentsineachofthemarketswhere
weoperate.Weprovidesupportto
charitableorganisationsboththrough
funding,andtheexperienceand
expertiseofouremployees.
Weestablishlong-termrelationships
withourcharitypartnerstoensure
thattheprojectswesupportare
sustainableandweworkcloselywith
themtoensurethatourprogrammes
continuouslyimprove.
Thediversityofourmarketsmeans
thatourprogrammesvaryfromregion
toregion,butasharedfocusforour
communityinvestmentiseducationand
lifeskills.Theseactivitiesincludefinancial
education,supporttoimprovesocial
mobilityandemployeevolunteering.
Education and life skills
InAsia,thePrudenceFoundationwas
establishedin2011asanumbrellato
coordinateallcommunityinvestmentand
charitableactivityintheregion.The
Foundationfocusesonthreekeypillars;
Children,EducationandDisaster
PreparednessandRelief,andundereachof
theseithasregionalflagshipprogrammes.
ThePrudenceFoundationhas
supportedFirstRead,SavetheChildren’s
uniqueprogrammethatworkswithparents
ofpre-schoolchildreninthePhilippines
andCambodiatoprovidethemwith
knowledge,skillsandmaterialstosupport
theirchildren’sliteracyandnumeracy.
Overthreeyears,theprogrammeswill
benefitnearly150,000childrenaged
0to6yearsandtheirparents.Theywillalso
benefitalmost850,000community
membersindirectlythroughtheexpected
sharingofknowledgeandresources.
Wesupporttheeducationalneedsof
Asianfamiliesandhavecontinuedto
extendourlong-standingcommitmentto
financialliteracy.ThePrudenceFoundation
launchedCha-Chingin2011tohelp
parentsinstil‘money-smartskills’in
childrenagedsevento12.Theprogramme
hasgainedinternationalrecognitionfor
promotingfinancialliteracyandwon
severalindustryawards.Overthepastyear
ithasgrowntobecomeoneofthetop-rated
children’stelevisionprogrammesinAsia.
Atitscore,Cha-Chingconsistsofa
seriesofthree-minuteanimatedmusic
videosfeaturingsixbandmembers
developedwithCartoonNetworkand
DrAliceWildertohelpchildrenlearnthe
fundamentalmoneymanagement
conceptsofearn,save,spendanddonate.
TheepisodesairdailyonCartoon
Network,thenumberonechildren’s
channelinAsia,insevencountries:Hong
Kong,Indonesia,Malaysia,thePhilippines,
Singapore,ThailandandVietnam.
In2013,SeasonThreeofCha-Ching
premieredwiththreenewmusicvideos.A
newonlinegame,Cha-ChingSaverWorld
Tour,andCha-Ching’sfirstmobile/tablet
game,Cha-ChingBandManager,
completedtheseason.Theprogramme
materialshavebeendevelopedintoBahasa
Indonesia,TraditionalChinese,
VietnameseandThai,whilethesongshave
57
beenrecomposedandsunginThaiand
BahasaIndonesiathusfar.
Inadditiontoengagingchildrenthrough
televisionandonlineplatforms,thelearning
conceptshavebeenintegratedintotailored
programmesforschoolsinpartnershipwith
financialeducationfocusedNon-
GovernmentOrganisations(NGOs)like
JuniorAchievement.ThePhilippines
DepartmentofEducationhasincorporated
Cha-Chingintothecurriculumofpublic
primaryschoolsandhasjustcompletedits
firstyear.Prudentialisexploringwaysin
whichthisapplicationofCha-Chingcanbe
broughttoothermarkets.
Youthunemploymentisahugesocial
challengeinmanyeconomies,prompting
demandforinitiativesthatcandrive
educationalimprovementinordertohelp
getyoungpeopleintowork.
PrudentialUKpilotedanapprenticeship
programmein2013for47youngpeople,
providinganopportunitytolaunchacareer
inthefinancesector.
Wehavenowcommittedtoafour-year
annualschemeof40apprenticeshipswith
theaimofkeepingasignificantnumberof
apprenticesoninpermanentrolesafter
theyhavecompletedthescheme.
Ourthree-yearpartnershipwith
Greenhousehasallowedover1,000
disadvantagedyoungpeopletoparticipate
weeklythroughtheirbasketball
programme.Greenhouseusessportto
encourageeducationalperformance
amongteenagersfromsomeofLondon’s
mostdeprivedareas.Sportcoacheswork
fulltimeinschoolstohelpyoungpeople
improvetheirhealthandfitness,while
mentoringthemtoincreasetheir
engagementwiththeireducationand
community.Throughtheseintensivesport
programmesparticipatingteenagershave
improvedschoolattendanceandbetter
classroomdiscipline,aswellasshowing
significantprogressinmathsandEnglish.
Wehaveembarkedonanew
partnershipwithSavetheChildrento
supporttheirFASTprogrammeinLondon.
Thisaimstoimprovebasiceducational
attainmentfor3,000ofthemostdeprived
childrenbycoachingparentstohelpthem
supporttheirchildren’slearning.
IntheUS,Jacksonhasopenedanew
downtownEastLansingofficenexttothe
MichiganStateUniversity(MSU)campus
withtheaimofofferingstudentsreal-life
workexperiencethatcouldpotentiallylead
tocareeropportunitiesaftergraduation.The
JacksonDevelopmentZonehasalsobecome
thenewhomefortheJacksonNational
CommunityFund,offeringstudentsandthe
communityopportunitiestovolunteer
alongsideJacksonemployees.Thiswillnot
onlybenefitthebusiness,butwillalso
encourageemployees,MSUstudentsand
localcommunitypartnerstocollaborate.
Strategic reportCorporate responsibility review Prudential plc Annual Report 2013 58
Disaster relief and preparedness
Unfortunatelymanyofourcommunitiesin
Asiaareexposedtoapproximately
75percentoftheworld’snaturaldisasters.
Formanyyearswehavesupportedlocal
initiativestoaidreliefeffortsfollowing
disastersandwealsomaintainadisaster
relieffundwhichcanbeactivatedin
emergencies.Ourcommitmenttodisaster,
reliefalsooftengoesbeyondfinancialaid,
withourpeoplehelpingontheground.
ThePrudenceFoundationisworking
withNGOstohelpcommunitiestobe
betterpreparedwithvitalskillsbefore
disastersstrike.InthePhilippines,
Thailand,VietnamandIndonesia,around
23,000youngpeopleandtheirteachers
willreceivetraininginlifesavingskillsand
knowledgeaboutpreparingfordisasters,
workingwithSavetheChildrenand
PlanInternational.
Prudentialhasbeenanemergency
partnerofSavetheChildren’sEmergency
Fundforanumberofyearsandhas
committedtoafurtherthreeyears.
TyphoonHaiyan,whichstruckthe
PhilippinesinNovember2013,caused
widespreadlossoflifeaswellasdestruction
tohomes,businessesandinfrastructure.
Rebuildingcostsareestimatedtobe
£3.6billion.WehaveworkedwithNGOs
intheregiontoprovideemergencyrelief.
Immediatedonationsweremadeand
mechanismsestablishedforemployees
acrosstheGroupwhowishedtocontribute,
whichwerematchedbytheGroup.Inthe
longertermwewilllookathowPrudential
canassistwithrebuildinginitiativesinthose
areasaffected.ThePrudenceFoundation
haspledgedatotalof£1.25milliontothe
reliefandcommunity-rebuildingeffortin
thePhilippines.
Chairman’s Challenge
and employee volunteering
Manyofouremployeesplayanactiverole
intheircommunitiesthroughvolunteering,
charitabledonationsandfundraising.Inthe
UK,USandinAsiaweofferouremployees
theopportunitytosupportcharities
throughpayrollgiving.
Werecognisethatemployee
volunteeringbringsbenefitnotonlyto
thecharitiesbutalsotothedevelopment
ofourpeople,andweactivelyencourage
colleaguestoparticipateinour
programmes.In2013,8,155employees
acrosstheGroupvolunteeredintheir
communitiesonarangeofprojects.
Ofthese,almost5,000employees
volunteeredthroughPrudential’sflagship
internationalprogramme,theChairman’s
Challenge.Theprogrammeencourages
peoplefromacrosstheGrouptovolunteer
onprojectsinitiatedbyourglobalcharity
partners,includingPlanInternational,Help
AgeInternationalandJuniorAchievement.It
allowsustosupportmanydifferentcharities
withvolunteersaswellasfinancialsupport.
Prudentialdonates£150toourcharity
partnersforeveryemployeewhoregisters
fortheprogramme.Charitypartnersuse
thismoneytoseed-fundcharitableprojects
forPrudentialvolunteers.
EachyearemployeesacrosstheGroup
votefortheshortlistedprojecttheybelieve
hasmadethegreatestimpact.
Inadditiontovolunteeringeffortson
behalfofChairman’sChallenge,our
employeesaroundtheGroupvolunteered
onanumberofcharitableprojects.
PrudentialCorporationAsiaemployees
donatedover25,000hoursoftheirtimeto
supportanumberofcharitableactivities
acrossourmarketsinSouth-eastAsia.An
exampleisthe‘InvestinginYourFuture’
programme,whichteacheswomensound
moneymanagement,suchasthekey
considerationswhenmakingfinancial
decisions,balancingthefamilybudget
andhowtoplanfordifferentlifestages.
FemalevolunteersfromPrudentialdonate
theirtimeandexpertisetodeliverthe
seminarsandsofarover38,000women
inChina,India,IndonesiaandVietnam
havebenefited.
Jacksonemployeesvolunteered
approximately9,000hoursoftheirtime
buildinghouses,mentoringchildren,
feedingtheelderlyandimproving
communities.In2013,theJNCFand
JacksoninActionwerehonouredwiththe
FirstPlaceawardfortheUSPresident’s
VolunteerServiceAwardsfor5,000
servicehourswithJuniorAchievement.
Inaddition,Jacksonisafinalistinthe
NashvilleBusinessJournal’sCorporate
GivingAwards.
In2013,PrudentialUKemployeesspent
approximately14,500hoursengagedin
volunteeringactivities.Thisincluded
mentoringschoolchildren,supporting
theelderlyandskills-sharingwithlocal
charities.
AtM&G,employeeshavespentover
1,000hoursactivelyinvolvedininitiatives
withcommunityorganisations,charities
andschoolsinandaroundChelmsfordand
London–withaparticularfocusonhelping
thedisadvantagedinthosecommunities.
Ithasalsomaintaineditssponsorshipof
the‘WomeninInvestmentManagement’
eventtargetedatfemalestudents,and
continuedtosupportunderprivileged
studentsthroughtheSocialMobility
Foundationintheformofbothmentoring
andinternships.
Prudential plc Annual Report 2013 Strategic reportCorporate responsibility review continued 59
Colorado;andNashville,Tennessee.
Weplantobroadenthescopeofour
sustainabilityreportingin2014.
During2013weembarkedonamajor
projecttocapturegreenhousegas
emissionsforallglobaloperationsin
accordancewiththeCompaniesAct2006
(StrategicandDirectors’Reports)
Regulations2013.Wenowreport
greenhousegasdatafor389leases
coveringapproximately517,934square
metresofofficespacein26countries.
WithintheUKoccupiedpropertiesthe
continuedimplementationofISO14001
hasgivenustheframeworkwithwhichto
implementfurtherinitiativesacrossour
portfolio.Thesehaveincludedtheinstallation
ofmoreefficientlightinginanumberofour
buildings,theintroductionofmoreefficient
airconditioningsystemsandcontinued
monitoringofourbuildings’runningtimes
tomaximiseefficiencies.AsofJune2013,
allwastegeneratedfromUKoccupied
propertieswasdivertedfromlandfill.
Inourglobaloperationswehave
implementedprojectstoreduceourimpact
ontheenvironmentasaresultofenergyuse.
Reducing our impact:
property investment portfolio
M&GRealEstates’approachto
ResponsiblePropertyInvestment(RPI)
enablesittomanageandrespondtothe
growingrangeofenvironmentalandsocial
issuesthatcanimpactpropertyvalues.It
alsohelpsM&Gtoprotectandenhance
fundandassetperformanceforitsclients.
RPIiswellintegratedwithinour
day-to-dayinvestmentpractices.Itenables
ustoadaptandrespondtothechallenges
andopportunitiesposedbyvariousissues,
suchasrisingenergyandresourcecosts,
greaterlegislativedemandsandstronger
tenantandinvestorrequirements.
M&GRealEstates’focusondelivering
energyreductionsacrossitsmanaged
portfoliohasachievedsomesignificant
results.Forexample,intheUK,M&Ghas:
1
2
ReducedCO2emissionsatUKoffices
andshoppingcentresby11percent,
savingoccupiers£430,000;
RolledoutGreenLeasestoour
managedofficeportfoliosandworked
withMarks&SpencertoincludeGreen
LeaseMemorandaofUnderstandingat
theirstores;and
3
Submitted76percentoffundsunder
managementtotheGlobalRealEstate
SustainabilityBenchmark.
M&GRealEstates’progresscanbefoundin
itsannualResponsiblePropertyInvestment
reportatwww.mandg.co.uk/-/media/
Literature/UK/Institutional/MG-Real-Estate-
RPI-Report-2013-Online-Version.pdf
Prudential RideLondon
TheinauguralRideLondonevent,sponsored
byPrudential,tookplaceinAugust2013.
Theworld-classfestivalofcyclingtook
placeoveraweekendinAugust2013and
attracted65,000cyclistswhocollectively
raised£7millionforcharity.Theexpectation
for2014isthatthenumbersofcyclists
takingpartwillincrease.
Charitable arts sponsorships
Prudentialhasaproudtraditionasa
supporterofthearts.IntheUK,wesupport
anumberofcharitableinstitutionsincluding
theRoyalOperaHouse,theNational
Theatre,theNationalGallery,HollandPark
OperaandtheBritishMuseum.Witheach
oftheseinstitutionsweseektofocusour
partnershipsoneducationandaccessto
theartsforthewidercommunity.
Charitable donations
Wecalculateourcommunityinvestment
spendusingtheinternationallyrecognised
LondonBenchmarkingGroupstandard.
Thisincludescashdonationstoregistered
charitableorganisations,aswellasacash
equivalentforin-kindcontributions.
In2013,theGroupspent£18.5million
supportingcommunityactivities,an
increaseof47percenton2012.This
reflectsthestronggrowthandcash
generationofourbusinessandthe
increasedprioritisationofcommunity
investmentacrosstheGroup.
Thedirectcashdonationstocharitable
organisationsamountedto£15.9million,
ofwhichapproximately£4.7millioncame
fromourEUoperations,whichare
principallyourUKinsuranceoperation
andM&G.Theremaining£11.2millionwas
contributedtocharitableorganisationsby
JacksonNationalLifeInsuranceCompany
andPrudentialCorporationAsia.
Thecashcontributiontocharitable
organisationsfromourEUoperations
isbrokendownasfollows:education
£1,878,000;social,welfareand
environment£2,493,000;cultural
£226,000andstaffvolunteering£111,000.
Political donations
ItistheGroup’spolicynottomakedonations
topoliticalpartiesnortoincurpolitical
expenditure,withinthemeaningofthose
expressionsasdefinedinthePoliticalParties,
ElectionsandReferendumsAct2000.The
Groupdidnotmakeanysuchdonationsor
incuranysuchexpenditurein2013.
Protecting the environment
Werecognisethatmanagingourbuildings
efficientlyandminimisingourgreenhouse
gasemissionsisnotonlybeneficialtothe
environmentbutalsomakesgood
businesssense.
Ourstrategyfocusesonreducingthe
environmentalimpactoftheproperties
weoccupyaswellasthepropertieswe
managethroughM&GRealEstateLimited
(previouslyknownasPrudentialProperty
InvestmentManagersLimited),whichisa
top-25globalrealestatefundmanager.
Themanagementofenvironmental
issuesisanintegralpartofmanagingthe
totalrisksfacedbyourbusiness.Inaddition
tomeetinglegalrequirements,ourkey
environmentalobjectivesareto:
a
Continuouslyimproveenvironmental
performance;
b
Reduceemissionsandwaste;
c
Raiseawarenessamongemployees;
d
e
Strivetoensurethatoursuppliers
adheretothesameenvironmental
standards;and
Protectshareholders’andother
stakeholders’interestsbycareful
managementofourenvironmentalimpacts.
Reducing our direct impact:
occupied properties
Wemonitorenergyconsumptionand
carbondioxideemissionsgloballyforall
siteswherewehaveoperationalcontrol.
Wealsomeasurewaterconsumption,
waste,paperuseandrecyclingintheUK
andatJackson’smainpremisesinNorth
AmericainLansing,Michigan;Denver,
Strategic reportCorporate responsibility review Prudential plc Annual Report 2013 60
Prudential plc – greenhouse gas emissions statement
Wehavecompiledourgreenhousegas
emissionsdatainaccordancewiththe
CompaniesAct2006(Strategicand
Directors’Reports)Regulations2013.
Thedatapresentedbelowisnowmore
comprehensivethaninpreviousyearsand
representsourbaselineyearforcarbon
reporting.
Wehaveincludedfullreportingforall
Scope1(directemissionssuchas
combustionofgasforheating)and2
(indirectemissionsforconsumptionof
electricity,heatandsteam)emissions
whereoperationalcontroloftheemissions
ofthesourcesconcernedwas
demonstrated.Wehavealsoreportedona
numberofScope3emissionsasamatterof
bestpractice.Theseareemissionsarising
asaconsequenceoftheactivitiesofthe
Company,butoccurfromsourcesnot
ownedorcontrolledbytheCompany.
Forthepurposeofthe2013report,
theseScope3emissionsinclude:waste
generatedinoperationsandbusinesstravel
bookedfromUKemployees.Wewillwork
withourbusinessunitstoreviewtheextent
ofourScope3reporting.
Assessment parameters
baseline year
1October2012to30September2013
Consolidation approach
Operationalcontrol
Boundary summary
Allentitiesandallfacilitiesunderoperationalcontrol(includingthoseowned)wereincluded
Consistency with the financial
statements
ThisperioddoesnotcorrespondwiththeDirectors’Reportperiod(January2013toDecember2013).
Thereportingperiodwasbroughtforwardbythreemonthstoimprovetheavailabilityofinvoicedata
(whichoftenlagsbyonemonthormoreaftertheusageperiod)andreducetherelianceonestimated
data.Prudentialownsassets,whichareheldonitsbalancesheetinthefinancialstatements,over
whichitdoesnothaveoperationalcontrol.Theseareexcludedfromthedatabelow.Assetsnot
includedonthebalancesheetbutheldunderanoperatingleaseandwherewehaveoperational
controlareincluded
Emission factor data source
DEFRA2013–obtainedfromwww.ukconversionfactorscarbonsmart.co.uk
Assessment methodology
TheGreenhouseGasProtocolRevised‘ACorporateAccountingandReportingStandard
(RevisedEdition)’2004
Materiality threshold
5percent
Intensity ratio
TonnesofCarbonDioxideEquivalentpermetresquared(NetLettableArea)
Greenhouse gas emissions source 2013
Scope 1 CO2e emissions total
Fuel combustion
Vehicle fleet
Fugitive emissions
UKOccupied
UKInvestments
ContinentalEuropeOccupied
ContinentalEuropeInvestments
USOccupied
NorthAmericaInvestments
AsiaOccupied
AsiaInvestments
UKOccupied
UKInvestments
ContinentalEuropeOccupied
ContinentalEuropeInvestments
USOccupied
NorthAmericaInvestments
AsiaOccupied
AsiaInvestments
UKOccupied
UKInvestments
ContinentalEuropeOccupied
ContinentalEuropeInvestments
USOccupied
NorthAmericaInvestments
AsiaOccupied
AsiaInvestments
(tCO2e)
tCO2e per m2
21,918
0.0067
1,216
12,099
111
41
1,448
2,716
35
266
1,421
0
94
0
39
0
1,004
0
305
575
0
0
437
111
0
0
0.0155
0.0054
0.0097
0.0003
0.0136
0.0110
0.0001
0.0021
0.0182
0.0000
0.0083
0.0000
0.0004
0.0000
0.0030
0.0000
0.0039
0.0003
0.0000
0.0000
0.0041
0.0004
0.0000
0.0000
Prudential plc Annual Report 2013 Strategic reportCorporate responsibility review continued Greenhouse gas emissions source 2013
Scope 2 CO2e emissions total
Purchased electricity
Statutory total CO2e emissions (Scope 1 & 2)*
Scope 3 CO2e emissions
Waste generated in operations
Business travel
Scope 1, 2 and 3 total
UKOccupied
UKInvestments
ContinentalEuropeOccupied
ContinentalEuropeInvestments
USOccupied
NorthAmericaInvestments
AsiaOccupied
AsiaInvestments
UKOccupied
UKInvestments
ContinentalEuropeInvestments
USOccupied
NorthAmericaInvestments
AsiaInvestments
BookedbyUKemployeesonly
* Statutory carbon reporting disclosures required by the Companies Act 2006.
61
(tCO2e)
tCO2e per m2
133,209
0.04069
11,212
32,671
2,092
256
25,813
18,120
27,305
15,740
155,127
10,404
50
522
230
116
41
47
9,398
165,531
0.1433
0.0145
0.1829
0.0020
0.2424
0.0735
0.0849
0.1220
0.0474
0.0032
0.0006
0.00023
0.0001
0.00005
0.00017
0.00002
0.003
0.051
Accountability and governance
The Board
TheBoardregularlyreviewstheGroup’s
corporateresponsibilityperformance
andscrutinisesandapprovestheGroup
CorporateResponsibilityreportand
strategyonanannualbasis.
Code of Business Conduct
Considerationofenvironmental,socialand
communitymattersisintegratedinourCode
ofBusinessConduct.Ourcodeisreviewed
bytheBoardonanannualbasis.Referto
page71formoreinformation.
Local governance
InM&G,JacksonandPrudentialUKthere
aregovernancecommitteesinplace–with
seniormanagementrepresentation–that
agreestrategyandspend.InAsia,the
PrudenceFoundationhasbeenestablished
asaunifiedcharitableplatformtoalignand
maximisetheimpactofcommunityefforts
acrosstheregion.
Supply chain management
Prudentialrecognisesthatitsownsocial,
environmentalandeconomicimpactsgo
beyondtheproductsandservicesit
suppliestoincludetheperformance
ofitssuppliersandcontractors.
Itisourpolicytoworkinpartnership
withsupplierswhosevaluesandstandards
arealignedwithourGroupCodeof
BusinessConduct.
ProcurementpracticesinPrudentialUK
havebeensuccessfullyaccreditedwiththe
CharteredInstituteofPurchasingand
Supplycertification,anindustrybenchmark
ofrecognisedgoodpractice.
Signing of strategic report
SignedonbehalfoftheBoardofdirectors
Tidjane Thiam
Group Chief Executive
11 March 2014
Strategic reportCorporate responsibility review Prudential plc Annual Report 2013 62
Prudential plc Annual Report 2013 63
Section 3
Governance
64 Board of directors
69 Corporate governance report
69 Board
73 Board committees
74 Audit Committee report
78 Nomination Committee report
80 Risk Committee report and risk governance
83 Remuneration Committee report
83 Corporate governance codes
84
Shareholders
86 Additional disclosures
87
Index to principal directors’ report disclosures
3
Governance Prudential plc Annual Report 2013
64
Board of directors
Chairman
Paul Manduca
Chairman
Nationality: British
Appointment date: October 2010
Chairman from July 2012
Committee membership:
Chairman of the Nomination
Committee (from July 2012)
Skills and experience
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.
From September 2005
until March 2011, Paul was a
non-executive director of Wm
Morrison Supermarkets Plc.
During that time, he was the Senior
Independent Director, a member
of the Nomination Committee and
Chairman of the Remuneration
Committee, and prior to that he
chaired their Audit Committee.
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.
Group Chief Executive
Tidjane Thiam
Group Chief Executive
Nationality: French
Appointment date: March 2008
Group Chief Executive
from October 2009
Skills and experience
Tidjane was the Chief Financial
Officer from March 2008 until his
appointment as Group Chief
Executive in 2009.
Tidjane spent the first 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 Officer, Europe.
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 a former member of the
Takeover Panel.
Paul is the Chairman of
Henderson Diversified Income
Limited. Age 62.
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 was appointed as their
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 and the 2013 Grand
Prix de I’Economie by the French
newspaper Les Echos. In January
2014, Tidjane was appointed as a
British Business Ambassador by
invitation from the Prime Minister.
Age 51.
Prudential plc Annual Report 2013 Governance 65
Executive directors
Nicolaos Nicandrou ACA
Chief Financial Officer
John Foley
Group Investment Director
Nationality: British
Appointment date:
October 2009
Nationality: British
Appointment date:
January 2011
Jacqueline Hunt
Chief Executive,
Prudential UK & Europe
Michael McLintock
Chief Executive,
M&G
Nationality: British
Appointment date:
5 September 2013
Nationality: British
Appointment date:
September 2000
Skills and experience
Before joining Prudential, Nic
Nicandrou worked at Aviva, where
he held a number of senior finance
roles, including Norwich Union Life
Finance Director and Board
Member, Aviva Group Financial
Control Director, Aviva Group
Financial Management and
Reporting Director and CGNU
Group Financial Reporting
Director. Nic started his career at
PricewaterhouseCoopers where
he worked in both London and
Paris. Age 48.
Skills and experience
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.
From 2001 to 2008, Michael
also served on the Board of Close
Brothers Group plc as a non-
executive director.
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 has been a member of the
Finance Committee of the MCC
since October 2005. Age 52.
Skills and experience
John Foley has been Group
Investment Director since August
2013. 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.
John was appointed to the Board
in January 2011 and held the
position of Group Chief Risk
Officer until July 2013. 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 57.
Skills and experience
Jackie Hunt was appointed as
Director and Chief Executive
of Prudential UK & Europe on
5 September 2013. Before joining
Prudential, Jackie was a Director
and Chief Financial Officer of
Standard Life from May 2010.
She joined Standard Life in January
2009 as Deputy Chief Financial
Officer and before this, she held
various senior management roles
at Aviva, including Chief Financial
Officer at Norwich Union. After
qualifying as a Chartered
Accountant with Deloitte & Touche
in South Africa, Jackie worked for
PricewaterhouseCoopers and
Royal & Sun Alliance before joining
Aviva in 2003.
Jackie is a non-executive
director of National Express Group
PLC. She was previously Chair of
the Prudential Financial and
Taxation Committee of the
Association of British Insurers.
Age 45.
GovernanceBoard of directors Prudential plc Annual Report 2013 66
Executive directors continued
Independent non-executive directors
Independent non-executive directors continued
Barry Stowe
Chief Executive,
Prudential Corporation Asia
Michael Wells
President and CEO,
Jackson
The Hon. Philip Remnant
CBE ACA
Senior Independent Director
Sir Howard Davies
Independent
non-executive director
Nationality: American
Appointment date:
November 2006
Nationality: American
Appointment date:
January 2011
Skills and experience
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
Officer of Jackson for the last nine
years. During this period he has
led the development of Jackson’s
variable annuity business and has
been responsible for IT, strategy,
operations, communications,
distributions, Curian and the retail
broker dealers. Age 53.
Skills and experience
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. From October 2008
to October 2011, Barry was a
director of the Life Insurance
Marketing Research Association
(LIMRA) and the Life Office
Management Association (LOMA).
Barry is a member of the Board
of Directors of the International
Insurance Society. 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 56.
Nationality: British
Appointment date:
October 2010
Committee memberships:
Chairman of the Risk Committee
(from October 2010),
Audit Committee
(from November 2010),
Nomination Committee
(from July 2012)
Skills and experience
Sir Howard is Chairman of the
Phoenix Group, and a Professor
at Institut d’Etudes 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. In
addition, Sir Howard is an
independent director of Morgan
Stanley Inc. and a director of the
National Theatre. Age 63.
Nationality: British
Appointment date:
1 January 2013
Committee memberships:
Remuneration Committee
(from January 2013),
Audit Committee
(from January 2013),
Nomination Committee
(from January 2013)
Skills and experience
Philip Remnant was a senior
adviser at Credit Suisse
until December 2013. Philip 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.
He is 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).
Age 59.
Alexander Johnston (Alistair)
Kaikhushru Nargolwala FCA
Anthony Nightingale CMG
CMG FCA
Independent
non-executive director
Independent
non-executive director
SBS JP
Independent
non-executive director
Nationality: British
Appointment date:
January 2012
Audit Committee
(from January 2012)
Nationality: Singaporean
Committee memberships:
Remuneration Committee
(from January 2012),
Risk Committee
(from January 2012)
Appointment date: January 2012
Nationality: British
Appointment date: 1 June 2013
Committee membership:
Remuneration Committee
(from June 2013)
Chairman of the Audit Committee
Committee membership:
Ann Godbehere FCGA
Independent
non-executive director
Nationality: British
Appointment date:
August 2007
Committee memberships:
(from October 2009),
Risk Committee
(from November 2010),
Nomination Committee
(from July 2012)
Skills and experience
Ann began her career in 1976
with Sun Life of Canada, joining
Skills and experience
Alistair was a partner of KPMG
from 1986 to 2010. He joined
Mercantile & General Reinsurance
KPMG (then Peat Marwick
Group in 1981, where she held a
Mitchell) in 1973 and held a
Skills and experience
Kai Nargolwala was the non-
executive Chairman of Credit
Skills and experience
Anthony Nightingale was
Managing Director of the Jardine
Suisse Asia Pacific until December
Matheson Group from 2006 to
2011, having joined Credit Suisse
2012. He joined that Group in 1969
number of management roles rising
number of senior leadership
in 2008 as a member of the
to Senior Vice President and
Controller for life and health and
property/casualty businesses in
North America in 1995. In 1996,
Swiss Re acquired Mercantile &
General Reinsurance Group and
Ann became Chief Financial
Officer of Swiss Re Life & Health,
North America. In 1997, she was
made Chief Executive Officer of
Swiss Re Life & Health, Canada.
She moved to London as Chief
and held a number of senior
positions before joining the Board
of Jardine Matheson Holdings in
positions. These included Vice
Executive Board and CEO of the
Chairman of UK Financial Services
Asia Pacific region.
and Head of UK Insurance Practice,
From 1998 to 2007, Kai worked
1994. Anthony is now a non-
International Managing Partner
for Standard Chartered PLC where
executive director of Jardine
– 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-
he was a Group Executive Director
Matheson Holdings and of other
responsible for Asia Governance
Jardine Matheson group
and Risk. His responsibilities
companies. These include Dairy
included developing strategy and
Farm, Hongkong Land, Jardine
business performance across Asia,
Cycle & Carriage, Jardine Strategic
executive director of the Foreign &
as well as strategic merger and
and Mandarin Oriental.
Commonwealth Office from 2005
acquisition activity. Prior to that, he
Anthony is also a commissioner
to 2010 and chaired the audit
spent 19 years at Bank of America
of Astra International, a non-
Financial Officer of Swiss Re Life &
committee until 2009. He was an
and from 1990 was based in Asia
executive director of Schindler
Health Division in 1998 and joined
Association Member of BUPA
the Property & Casualty Business
until January 2012.
as Group Executive Vice President
Holding AG and China Xintiandi
and Head of the Asia Wholesale
Limited, and a senior adviser to
Group, based out of Zurich, as
Chief Financial Officer on its
Alistair is a member of the
Strategy and Development Board
Banking Group. From 2004 to
2007, he was a non-executive
Academic Partnerships
International and Dickson
establishment in 2001. From 2003
and a Visiting Professor at Cass
director at Tate & Lyle plc and at
Concepts. He is a Hong Kong
until February 2007, Ann was
Chief Financial Officer of the
Swiss Re Group.
Business School. He is also a
Visa International, where he served
representative to the APEC
Trustee of the Design Museum in
on the Asia Pacific Board.
Business Advisory Council and
London and a Trustee of Create
Kai is currently a non-executive
Chairman of The Hong Kong-APEC
From its nationalisation in 2008
Arts. Age 61.
until January 2009, Ann was
Interim Chief Financial Officer and
Executive Director of Northern
Rock. Ann is a non-executive
director of British American
Tobacco p.l.c., Rio Tinto plc,
Rio Tinto Limited, UBS AG,
Arden Holdings Limited, Atrium
Underwriting Group Limited
and Atrium Underwriters Limited.
Age 58.
director and lead independent
director of Singapore
Trade Policy Study Group. He is
also a member of the Securities
Telecommunications Limited, a
and Futures Commission Committee
member of the Board of the Casino
on Real Estate Investment Trusts,
Regulatory Authority of Singapore,
a council member of the
a non-executive director of PSA
Employers’ Federation of Hong
International Pte. Limited,
Kong, a member of the UK-ASEAN
Chairman of the Governing Board
Business Council Advisory Panel,
of the Duke-NUS Graduate
a non-official member of the
Medical School and a director and
Commission on Strategic
Chairman of Clifford Capital Pte.
Development in Hong Kong and
Limited. Kai was appointed as a
Chairman of the Mission to Seamen
director of Credit Suisse Group AG
in Hong Kong. Anthony is a past
in April 2013 and became a
chairman of the Hong Kong
member of the Singapore Capital
General Chamber of Commerce.
Markets Committee of the
Age 66.
Monetary Authority of Singapore
in January 2014. Age 63.
Prudential plc Annual Report 2013 GovernanceBoard of directors continued 67
Executive directors continued
Independent non-executive directors
Independent non-executive directors continued
Barry Stowe
Chief Executive,
Michael Wells
President and CEO,
Prudential Corporation Asia
Jackson
The Hon. Philip Remnant
CBE ACA
Sir Howard Davies
Independent
Senior Independent Director
non-executive director
Nationality: American
Appointment date:
November 2006
Nationality: American
Appointment date:
January 2011
Nationality: British
Appointment date:
1 January 2013
Committee memberships:
Remuneration Committee
(from January 2013),
Audit Committee
(from January 2013),
Nomination Committee
(from January 2013)
Nationality: British
Appointment date:
October 2010
Committee memberships:
Chairman of the Risk Committee
(from October 2010),
Audit Committee
(from November 2010),
Nomination Committee
(from July 2012)
Skills and experience
Skills and experience
Skills and experience
Barry Stowe is the Chief Executive
Mike Wells is President and CEO
Philip Remnant was a senior
of Prudential Corporation Asia, a
of Jackson National Life Insurance
adviser at Credit Suisse
Skills and experience
Sir Howard is Chairman of the
Phoenix Group, and a Professor
position he has held since October
Company (‘Jackson’). Mike has
until December 2013. Philip was
at Institut d’Etudes Politiques
2006. Before joining Prudential, he
served in a variety of senior and
previously a Vice Chairman of
was President, Accident & Health
strategic positions at Jackson over
Credit Suisse First Boston (CSFB)
(Sciences Po). He is also Chairman
of the UK Government’s Airports
Worldwide for AIG Life
the last 15 years, including
Europe and Head of the UK
Commission. He chairs the
Companies. He joined AIG in 1995,
President of Jackson National Life
Investment Banking Department.
International Advisory Board
and prior to that was President and
Distributors. Mike has been Vice
Philip was seconded to the role of
of the China Securities Regulatory
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. From October 2008
to October 2011, Barry was a
director of the Life Insurance
Chairman and Chief Operating
Director General of the Takeover
Officer of Jackson for the last nine
Panel, which administers the UK’s
years. During this period he has
code on takeovers and mergers,
led the development of Jackson’s
from 2001 to 2003, and again in
variable annuity business and has
2010. He served on the Board of
Commission and is a member
of the International Advisory
Board of the China Banking
Regulatory Commission. In
addition, Sir Howard is an
been responsible for IT, strategy,
Northern Rock plc from 2008 to
independent director of Morgan
operations, communications,
2010, and from 2007 to 2012 was
Stanley Inc. and a director of the
Marketing Research Association
distributions, Curian and the retail
Chairman of the Shareholder
National Theatre. Age 63.
(LIMRA) and the Life Office
broker dealers. Age 53.
Management Association (LOMA).
Barry is a member of the Board
of Directors of the International
Insurance Society. 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 56.
Executive, which manages the
relationships between the UK
Government and the businesses in
which it is a shareholder.
He is 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).
Age 59.
Ann Godbehere FCGA
Independent
non-executive director
Nationality: British
Appointment date:
August 2007
Committee memberships:
Chairman of the Audit Committee
(from October 2009),
Risk Committee
(from November 2010),
Nomination Committee
(from July 2012)
Skills and experience
Ann began her career in 1976
with Sun Life of Canada, joining
Mercantile & General Reinsurance
Group in 1981, where she held a
number of management roles rising
to Senior Vice President and
Controller for life and health and
property/casualty businesses in
North America in 1995. In 1996,
Swiss Re acquired Mercantile &
General Reinsurance Group and
Ann became Chief Financial
Officer of Swiss Re Life & Health,
North America. In 1997, she was
made Chief Executive Officer of
Swiss Re Life & Health, Canada.
She moved to London as Chief
Financial Officer of Swiss Re Life &
Health Division in 1998 and joined
the Property & Casualty Business
Group, based out of Zurich, as
Chief Financial Officer on its
establishment in 2001. From 2003
until February 2007, Ann was
Chief Financial Officer of the
Swiss Re Group.
From its nationalisation in 2008
until January 2009, Ann was
Interim Chief Financial Officer and
Executive Director of Northern
Rock. Ann is a non-executive
director of British American
Tobacco p.l.c., Rio Tinto plc,
Rio Tinto Limited, UBS AG,
Arden Holdings Limited, Atrium
Underwriting Group Limited
and Atrium Underwriters Limited.
Age 58.
Alexander Johnston (Alistair)
CMG FCA
Independent
non-executive director
Nationality: British
Appointment date:
January 2012
Committee membership:
Audit Committee
(from January 2012)
Kaikhushru Nargolwala FCA
Independent
non-executive director
Nationality: Singaporean
Appointment date: January 2012
Committee memberships:
Remuneration Committee
(from January 2012),
Risk Committee
(from January 2012)
Anthony Nightingale CMG
SBS JP
Independent
non-executive director
Nationality: British
Appointment date: 1 June 2013
Committee membership:
Remuneration Committee
(from June 2013)
Skills and experience
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 Office 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. He is also a
Trustee of the Design Museum in
London and a Trustee of Create
Arts. Age 61.
Skills and experience
Kai Nargolwala was the non-
executive Chairman of Credit
Suisse Asia Pacific until December
2011, having joined Credit Suisse
in 2008 as a member of the
Executive Board and CEO of the
Asia Pacific 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 Pacific 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. Kai was appointed as a
director of Credit Suisse Group AG
in April 2013 and became a
member of the Singapore Capital
Markets Committee of the
Monetary Authority of Singapore
in January 2014. Age 63.
Skills and experience
Anthony Nightingale was
Managing Director of the Jardine
Matheson Group from 2006 to
2012. He joined that Group in 1969
and held a number of senior
positions before joining the Board
of Jardine Matheson Holdings in
1994. Anthony is now a non-
executive director of Jardine
Matheson Holdings and of other
Jardine Matheson group
companies. These include Dairy
Farm, Hongkong Land, Jardine
Cycle & Carriage, Jardine Strategic
and Mandarin Oriental.
Anthony is also a commissioner
of Astra International, a non-
executive director of Schindler
Holding AG and China Xintiandi
Limited, and a senior adviser to
Academic Partnerships
International and Dickson
Concepts. He is a Hong Kong
representative to the APEC
Business Advisory Council and
Chairman of The Hong Kong-APEC
Trade Policy Study Group. He is
also a member of the Securities
and Futures Commission Committee
on Real Estate Investment Trusts,
a council member of the
Employers’ Federation of Hong
Kong, a member of the UK-ASEAN
Business Council Advisory Panel,
a non-official member of the
Commission on Strategic
Development in Hong Kong and
Chairman of the Mission to Seamen
in Hong Kong. Anthony is a past
chairman of the Hong Kong
General Chamber of Commerce.
Age 66.
GovernanceBoard of directors Prudential plc Annual Report 2013 68
Independent non-executive directors continued
Alice Schroeder
Independent
non-executive director
Lord Turnbull KCB CVO
Independent
non-executive director
Nationality: American
Appointment date: 10 June 2013
Committee membership:
Audit Committee
(from June 2013)
Skills and experience
Alice Schroeder began her career
as a qualified accountant at Ernst
& Young in 1980 where she worked
for 11 years before leaving to
join the Financial Accounting
Standards Board as a manager.
From September 1993, she worked
at various investment banks
leading teams of analysts
specialising in property-casualty
insurance before joining Morgan
Stanley, where she became a
Managing Director in 2001,
heading the Global Insurance
Equity Research team. In May
2003, Alice became a senior
adviser at Morgan Stanley, leaving
in November 2009. She is a highly
respected analyst and the author
of the official biography of Warren
Buffett, Chairman and CEO of
Berkshire Hathaway.
Alice is an independent board
member of Cetera Financial Group
and an independent director of
WebTuner Corp. She is a member
of the National Association of
Corporate Directors,
WomenCorporateDirectors and a
board member of The Committee
of 200 Foundation. Age 57.
Nationality: British
Appointment date: May 2006
Committee memberships:
Chairman of the Remuneration
Committee
(from June 2011),
Risk Committee
(from November 2010),
Nomination Committee
(from June 2011)
Skills and experience
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 69.
Prudential plc Annual Report 2013 GovernanceBoard of directors continued 69
Corporate governance report
Strong and appropriate governance
supporting business growth
‘The composition of the Board
remains key to achieving the
Group’s strategic objectives.’
Dear shareholder
Good governance is central to how
we do business at Prudential. The
Board ensures that our governance
policies, structures and processes
are strong and appropriate, and play
a key part in supporting the growth
of the business.
In a world of ever-increasing
complexity and connectedness,
governance requirements are
continually developing. As well
as complying with relevant codes,
we are always well prepared for
new developments, keeping
abreast of upcoming changes and
ensuring that our governance is
adjusted accordingly.
A vital part of good governance is
transparency, and we are committed
to reporting on our governance
as clearly as possible, ensuring
that it remains the best available,
and continues to make a strong
contribution to the long-term
success of the Group.
Paul Manduca
Chairman
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Board
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 significant 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.
The Board has terms of reference which
specifically set out matters reserved for
its decision. These 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 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 the UK Corporate
Governance Code (‘UK Code’), is chaired by
the Chairman. The terms of reference for the
Board and its committees are regularly
reviewed to ensure that they remain in line
with best practice and the committees
continue to have appropriate authority to
fulfil their responsibilities, without creating
unnecessary duplication of work.
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 comprised
of 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.
Roles and responsibilities
The roles of the Chairman and Group Chief
Executive are separate and clearly defined.
The scope of these roles is approved and
kept under regular review by the Board
so that no individual has unfettered
decision-making powers.
Roles
Chairman
The Chairman is responsible for the
leadership and governance of the Board,
and ensuring that sufficient time is available
for discussion of all agenda items. The
Chairman facilitates the contribution of
the non-executive directors and fosters
constructive relationships between the
non-executive and executive directors
by promoting a culture of openness
and debate.
Group 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.
Senior Independent Director
The principal responsibilities of the Senior
Independent Director are to act as a conduit
to the Board for the communication of
shareholder concerns when other channels
may be inappropriate and to lead the
non-executive directors in carrying out the
performance evaluation of the Chairman.
Non-executive directors
The non-executive directors are
independent of management, bringing
effective and constructive challenge to the
deliberations of the Board.
Prudential plc Annual Report 2013
70
Corporate governance report continued
The full biographical details of the directors,
including the skills and experience they bring
to the Board, can be found on pages 64 to 68.
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 applied
across all businesses which covers both
executive director and senior management
succession and development, and also
through the work of the Nomination
Committee as described more fully on page 78.
The Board considers annually the outcome
of the review and any actions arising from
the review are implemented as part of the
management development agenda.
Board performance evaluation
The 2013 performance evaluation of the Board
and its principal committees was internally
facilitated through the use of a questionnaire
and carried out by the Chairman and Group
Company Secretary. The findings were
presented to the Board in February 2014 and
an action plan is being agreed to address any
areas identified by the review. In accordance
with the UK Code, it is intended that the 2014
review will be carried out by external facilitators.
The performance of the non-executive
2012 Board performance evaluation
directors and the Group Chief Executive
is evaluated by the Chairman in individual
meetings. Philip Remnant, the Senior
Independent Director, led 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.
Diversity
The Group seeks, through its diversity policy,
to encourage the recruitment and retention
of talented individuals from a diverse range
of backgrounds. 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 in the recruitment
process extends to the Board and is an
important diversity 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.
A summary of the Board’s progress against a number of actions arising from its 2012
effectiveness review can be found below:
Theme
Action taken
Information flows to the Board
and principal committees
Improvements to Board papers continued with a view
to streamlining and enhancing the flow of information
to the Board and its committees facilitating effective
decision making
Senior leadership
Further opportunities for the Board to meet senior
leadership across the Group were included in the
programme of business for the Board and will
continue to be included going forward
Delegation of authority
The Board reviewed the delegations of its authority,
confirming that these continued to be appropriate for
the business carried out by the Group
Review of terms of reference
A review of the terms of reference was carried out in
order to ensure that these remained in line with best
practice and that the committees continued to have
appropriate authority to fulfil their responsibilities
without creating duplication of activities
Committee membership
Philip Remnant and Alice Schroeder were appointed to
the Audit Committee following the regular review of
membership for the principal committees
Diversity
Board composition
Regional experience
Sector
Chairman (6%)
Executive (44%)
Non-executive (50%)
United Kingdom (44%)
Global (31%)
Asia (13%)
United States (12%)
Government/regulatory
(12%)
Other financial services
(19%)
Finance (38%)
Insurance (31%)
Tenure of non-executive directors
0–3 years (62%)
4–6 years (13%)
7–9 years (25%)
Male (81%)
Female (19%)
Board gender composition
Prudential plc Annual Report 2013 Governance 71
Group governance
The Board is responsible for establishing a
system of internal control and for reviewing
its effectiveness. To achieve this, the Board
has established frameworks for internal
governance, risk and corporate
responsibility. The system is designed to
manage rather than eliminate the risk of
failure to achieve business objectives and
can only provide reasonable and not
absolute assurance against material
misstatement or loss.
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 Code and Corporate
Governance Code issued by the Hong
Kong Stock Exchange (the ‘HK Code’),
as well as the relevant provisions of the
Sarbanes-Oxley Act. In complying with
the UK Code, the Group follows the 2005
Turnbull Guidance relating to the sections
of the UK Code dealing with risk
management and internal control.
The Chief Executive and Chief Financial
Officer of each business unit, as well as the
senior management in Group Head Office,
annually certify compliance with the
Group’s governance, internal control and
risk management requirements. The risk
management function reviewed any
matters identified by the certification
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
identified and reported by other Group
Head Office oversight functions, and the
findings from the work of the internal audit
function, which executes risk-based audit
plans throughout the Group. The results
were reviewed by the Audit Committee
as described on page 75.
In line with the Turnbull Guidance,
the certification provided above does not
apply to certain material joint ventures
where the Group does not exercise full
management control. In these cases,
the Group satisfies itself that suitable
governance and risk management
arrangements are in place to protect
the Group’s interests. However, the
relevant Group company which is party
to the joint venture must, in respect
of any services it provides in support
of the joint venture, comply with the
requirements of the Group’s internal
governance framework.
Governance framework
Group governance framework:
Documents the Group’s internal control
policies and processes in an online manual,
including the Group’s risk framework,
Code of Business Conduct and detailed
policies on key operational and financial
risks. Business units are also required to
follow any additional processes necessary
to comply with local statutory and
regulatory requirements.
Group risk framework: Describes the
Group’s approach to risk management and
the key risk arrangements and standards
for risk management and internal control
which support compliance with the
Group’s internal, statutory and regulatory
requirements. The strategic report
provides further detail on Prudential’s risk
appetite and exposures on pages 46 to 53
and corporate responsibility activities
on pages 54 to 61. 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 page 81.
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.
Internal control
The Board reviewed the effectiveness of
the system of internal control in February
2014, covering all material controls,
including financial, operational and
compliance controls, risk management
systems and the adequacy of the
resources, qualifications and experience of
staff of the Group’s accounting and
financial reporting function. The Board
confirms that there is an ongoing process
for identifying, evaluating and managing
the significant risks faced by the Group,
which has been in place throughout the
period and up to the date of this report, and
confirms that the system remains effective.
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 briefings 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
financial services companies, the Group’s
governance arrangements and its investor
relations programme as well as its
remuneration policies.
Throughout their period in office,
directors are regularly updated on the
Group’s businesses and the regulatory and
industry-specific environments in which it
operates, as well as on their legal and other
duties and obligations as directors, where
appropriate. 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
external advisers where appropriate. In
order to enhance their knowledge and
effectiveness throughout their term in
office, non-executive directors serving on
key committees are updated regularly on
matters specific to the relevant committee
and receive presentations from senior
executives on topics of interest to them.
Ongoing professional development was
undertaken by all directors during 2013.
This included a number of sector-specific
and business issues, as well as legal,
accounting and regulatory changes and
developments. A number of business unit
chief executive officers, together with
relevant senior executives, gave
presentations to the Board during the
course of the year on the challenges and
opportunities currently faced by their
business unit. In addition, senior managers
within certain head office functions
presented to the Board key issues currently
facing their function. 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 also received
updates and briefings relevant to their
duties as directors of a company listed
on the Hong Kong Stock Exchange.
Terms of appointment for
non-executive directors
Non-executive directors are appointed on
the understanding that they serve an initial
term of three years. Subject to review by
the Nomination Committee, it would be
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Prudential plc Annual Report 2013
72
Corporate governance report continued
expected that they would serve a
second term of three years. In both
instances, non-executive directors remain
subject to annual election at the Annual
General Meeting. After six years of service,
non-executive directors may be appointed
for a further year, up to a maximum of
three years, subject to rigorous annual
review by the Nomination Committee and
annual election at the Annual General
Meeting. Good governance does not
support the practice of serving longer
than nine years on the Board as a
non-executive director.
The terms and conditions of all
directors’ appointments are available for
inspection at the Company’s registered
office during normal business hours and
at the Annual General Meeting.
Re-election
Jackie Hunt, Anthony Nightingale and
Alice Schroeder will stand for election for
the first time at the 2014 Annual General
Meeting. In keeping with the provisions of
the UK Code, all other directors will stand
for re-election.
The Board believes that the non-
executive directors bring a wide range
of business, financial and international
experience to the Board and its committees.
Independence
The independence of the non-executive
directors is determined with reference
to the UK and HK Codes. Prudential
is required to affirm 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 conflicts of interest.
Throughout the year, the non-executive
directors were considered by the Board
to be independent in character and
judgement and met the criteria for
independence as set out in the UK and
HK Codes. The Company has received
confirmation of independence from
each of the independent non-executive
directors as required by the Hong Kong
Listing Rules.
Alistair Johnston was a partner in the
Group’s auditor, KPMG, from 1986 to
2010. However, he did not audit the
Prudential Group and he no longer has any
financial 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 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.
Conflicts of interest
Directors have a statutory duty to avoid
conflicts of interest with the Company.
The Company’s Articles of Association
allow its directors to authorise conflicts of
interest and the Board has adopted a policy
and effective procedures to manage and,
where appropriate, approve conflicts or
potential conflicts of interest. Under these
procedures, directors are required to
declare all directorships or other
appointments to companies which are
not part of the Group, along with other
appointments which could result
in conflicts or could give rise to a
potential conflict.
The Nomination Committee, or the
Board where appropriate, evaluates and
approves each such situation individually,
where applicable, and the Nomination
Committee annually reviews such
declarations prior to the publication of the
Annual Report.
Directors’ interests
Individual directors’ interests are
set out on page 116 of the directors’
remuneration report.
External appointments
Directors may hold directorships or other
significant 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, review or advisory
groups and charitable trusts, provided that
they are able to demonstrate satisfactory
time commitment to their role at Prudential
and that they discuss any new appointment
with the Chairman prior to accepting. This
ensures that they do not compromise their
independence and that any potential
conflicts of interest and any possible issues
arising out of the time commitments
required by the new role can be identified
and addressed appropriately. The major
commitments of our non-executive
directors are detailed in their biographies
on pages 66 to 68.
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 that they do not lead
to any conflicts of interest.
In line with the UK Code, executive
directors would not be expected to hold
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
on page 118.
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 financial
exposure which may be incurred in their
capacity as such, is also provided. These
include qualifying third-party indemnity
provisions (as defined by the Companies
Act 2006) for the benefit of directors of
Prudential plc and other such persons
including, where applicable, in their
capacity as directors of other companies
within the Group. These indemnities were
in force during 2013 and remain in force.
In addition, the Company’s Articles
of Association permit the directors and
officers of the Company to be indemnified
in respect of liabilities incurred as a result
of their office.
Meetings
The Board met on 10 occasions during
the year, which included one meeting
held at the Group’s overseas operations
in Thailand. These meetings enable the
directors to develop a fuller understanding
of the Group’s operations and to meet with
the senior management.
One overseas strategy event was held
in the US and the Board also met on one
additional occasion to address business
outside of the usual scheduled meetings.
Where a director was unable to attend
Board meetings, their views were
canvassed by the Chairman prior to
the meeting.
Table 1 (overleaf) details the number of
Board and Committee meetings attended
by each director during the year.
During the year, the Chairman met with
the non-executive directors without the
executive directors being present on
seven occasions.
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
directors is governed by the relevant
provisions of the Companies Act 2006,
the UK and HK Codes and the Company’s
Articles of Association.
In the ordinary course of business,
Board and committee papers are provided
approximately one week in advance of
each meeting.
Prudential plc Annual Report 2013 Governance 73
Board
(scheduled)
10
Board
(additional)
1
Overall
attendance
10
10
10
7
10
3
10
10
10
0
10
7
10
10
10
6
10
6
10
1
100%
1
1
1
1
n/a
1
1
1
1
1
1
1
1
1
n/a
1
n/a
1
100%
100%
100%
100%
100%
100%
100%
100%
25%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Table 1
Number of meetings held
Chairman
Paul Manduca
Executive directors
Tidjane Thiam
Nic Nicandrou
Rob Devey1
John Foley
Jackie Hunt2
Michael McLintock
Barry Stowe
Mike Wells
Non-executive directors
Keki Dadiseth3
Howard Davies
Michael Garrett4
Ann Godbehere
Alistair Johnston
Kai Nargolwala
Anthony Nightingale5
Philip Remnant
Alice Schroeder6
Lord Turnbull
Notes
1 Rob Devey was eligible to attend eight meetings during the year, up until his resignation on 5 September 2013.
Jackie Hunt was eligible to attend three meetings during the year, from the date of her appointment.
2
3 Keki Dadiseth was eligible to attend four meeting during the year, up until his resignation on 1 May 2013.
4
Michael Garrett was eligible to attend eight meetings during the year, up until his resignation on
31 August 2013.
5 Anthony Nightingale was eligible to attend six meetings during the year, from the date of his appointment.
6 Alice Schroeder was eligible to attend six meetings during the year, from the date of her appointment.
Corporate governance framework
Board
Audit Committee
Risk Committee
Group Chief Executive
Remuneration
Committee
Nomination
Committee
Group Executive
Committee
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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.
Board committees
Corporate governance framework
The Board has established Audit,
Remuneration, Nomination and Risk
Committees as principal standing
committees of the Board. These
committees form a key element of the
Group’s corporate governance framework.
During the year, the Board constituted
a Group Disclosure Committee with the
purpose of assisting the Company in
fulfilling its obligations for the release of
any inside information under the various
listing requirements to which the Company
is subject. A Standing Committee was also
constituted with authority to deal with
business requiring attention between
scheduled Board meetings.
The committee chairmen report to
the Board on matters of significance after
each meeting. Each Board committee has
written terms of reference which were
reviewed during the course of the year
to ensure that these remained in line with
best practice and that each committee
continued to have suitable delegated
authority to fulfil their responsibilities
without creating duplication of activities.
Copies of the updated terms of reference
can be found on the Company’s website.
The committees have access to the
services of the Group Company Secretary
and may seek external professional advice
at the Company’s expense.
The effectiveness of the committees is
considered annually as part of the overall
performance review of the Board. Details
of the evaluation process are set out more
fully on page 70.
A report on the activities undertaken
by each committee during the course
of the year is set out on pages 74 to 83.
Prudential plc Annual Report 2013
74
Audit Committee report
‘Ensuring that the new reporting
requirements were suitably
implemented was a key focus
for the Committee during 2013.’
Ann Godbehere
Chairman of the Audit Committee
Membership
Director
Number of meetings held
Ann Godbehere
(Chairman)
Howard Davies
Alistair Johnston
Philip Remnant
(appointed 1 January 2013)
Alice Schroeder1
(appointed 10 June 2013)
Meetings
attended
12
12
12
12
12
6
Note
1 Alice Schroeder was eligible to attend six
meetings during the year, from the date of her
appointment.
Biographical details of the members can be
found on pages 66 to 68.
The Board determined that Ann
Godbehere, the Committee Chairman, has
recent and relevant financial experience for
the purposes of the UK Code and the Hong
Kong Listing Rules. In March 2013, the
Board designated Ann Godbehere as its
Audit Committee financial expert for the
purposes of the Sarbanes-Oxley Act. This
will be reviewed during 2014 in conjunction
with the publication of Form 20-F.
Role and responsibilities
of the Committee
The Committee’s role is to assist the
Board in meeting its responsibilities
for the integrity of the Group’s
financial reporting, including the
effectiveness of the internal control
and risk management systems,
and for monitoring the effectiveness
and objectivity of the internal and
external auditors.
The principal responsibilities
of the Committee are to:
— Monitor the integrity of the financial
statements, including the review of
half and full-year results, the Annual
Report and accounts and other
significant financial announcements
and review the critical accounting
policies, going concern assumption
and key judgemental areas
contained therein;
— Consider and advise the Board in
meeting its obligation to report that
the Annual Report is fair, balanced
and understandable, and provides
the information necessary for
shareholders to assess the
Company’s performance, business
model and strategy;
— Monitor the framework and
effectiveness of the Group’s systems
of internal control, including the
Turnbull compliance statement and
Sarbanes-Oxley procedures;
— Monitor auditor independence and
the external auditor’s plans and
audit strategy, the effectiveness
of the external audit process, the
external auditor’s qualifications,
expertise and resources, and
make recommendations to the
Board for the re-appointment of
the external auditor;
— Approve the internal audit plan and
resources, and monitor the audit
framework and effectiveness of the
internal audit function;
— Monitor the effectiveness of
compliance processes and
controls, and performance against
the group compliance plan;
— Review the anti-money laundering
procedures in place, as well as the
review of procedures operated for
handling allegations from whistle-
blowers; and
— Review the effectiveness of the
business unit audit committees.
In performing its duties, the
Committee has access to employees
and their financial or other relevant
expertise across the Group.
Meetings
The Committee held 11 scheduled meetings
and one additional meeting during the year
and worked closely with the Risk Committee
to ensure that any pertinent areas of overlap
were appropriately addressed. The Chairman
of the Risk Committee is a member of the
Audit Committee and the Committee
Chairman is a member of the Risk
Committee. The cross-membership helps
ensure that both committees work together
effectively to cover all relevant issues.
The Chairman of the Board, the Group
Chief Executive, the Chief Financial Officer,
the Group Chief Risk Officer, the Group
General Counsel and head of Group-wide
Internal Audit, as well as other senior staff
from the Group Finance, Internal Audit, Risk,
Compliance and Security functions attended
the meetings by invitation 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.
How the Committee discharged
its responsibilities in 2013
During the year, the Committee undertook
the following work:
Financial reporting
The Committee assessed whether suitable
accounting policies had been adopted
Prudential plc Annual Report 2013 Governance 75
throughout the accounting period and
whether management had made appropriate
estimates and judgements over recognition,
measurement and presentation of the
results. The Committee also focused on
material transactions, clarity of disclosures,
significant audit adjustments, the going
concern assumptions, compliance with
accounting standards and obligations under
applicable laws, regulations and governance
codes. The Committee further considered
changes to the Annual Report requirements,
including the introduction of the new
strategic report, additional disclosures of
the Audit Committee report and the fair,
balanced and understandable requirement
under the UK Code, providing advice to
the Board in respect of this last requirement.
In preparing the Annual Report, the Group
has taken the opportunity to reassess the
structure of the narrative sections and the
Committee’s work in this area included
consideration and discussions with
management so that the narrative sections
provide an enhanced description of the
Company’s business and results.
Accounting policy changes on
consolidated investment holdings
(IFRS 10), accounting for joint ventures and
associated undertakings (IFRS 11 and
IFRS 12), fair value measurement (IFRS 13)
and accounting for the Group’s defined
benefit pension schemes (revised IAS 19)
were also considered. In addition, the
Committee considered the impact that the
acquisitions of REALIC and Thanachart Life
would have on the financial statements.
Key assumptions and judgements
in respect of the Group’s investments,
insurance liabilities, and deferred
acquisition costs are important, and in this
regard, the main areas of focus were:
— Oversight of the assumptions applied and
operation of internal controls in respect
of the items shown below, and more
generally, in the preparation of the results;
— Specific assumptions for:
– Mortality and credit risk for UK
annuity business;
– Economic and policyholder behaviour
assumptions affecting the
measurement of Jackson guarantee
liabilities and amortisation of deferred
acquisition costs;
— Non-recurrent adjustments to Asia
policyholder liabilities; and
— Investment and derivative valuations,
in particular considering the results
of independent valuations by the
external auditor.
The Committee also considered
judgemental matters regarding provisions
for certain open tax items.
The Committee received detailed
papers from management regarding Group
capital, Group liquidity, subsidiary capital
and subsidiary liquidity prior to
recommending to the Board that it could
conclude that the financial statements
should continue to be prepared on the
going concern basis.
As part of its assessment of the
explanation of performance, the
Committee considered judgemental aspects
of the Group’s reporting of non GAAP
metrics and in relation to the Group’s
supplementary reporting on the European
Embedded Value (EEV) basis, specifically:
— The appropriateness of the economic
assumptions underpinning the projected
rates of return and risk discount rates;
— The appropriateness of changes to EEV
operating assumptions and the level of
operating experience variances; and
— Disclosures to explain the proposed
change from 2014 so that the EEV
results will be prepared on a post-tax
only basis.
The Committee considered the effects of
volatility in equity market movements, and
changes in interest and foreign currency
translation rates on the Group’s results,
accounting presentation and disclosure.
For all of the above areas, the Committee
received input from management and
the external auditor prior to reaching
its conclusions.
Confidential reporting
The Committee is responsible for reviewing
the Group’s whistle-blowing procedures
and received, as a standing item, reports on
concerns raised through these channels,
as well as any management action taken
in response.
The Confidential Helpline Policy (the
‘Policy’) is kept under regular review by the
Committee and is maintained as part of the
Group Governance Manual. No material
changes to the Policy have been made
during the course of 2013, although it has
been updated to reflect the latest guidance
issued by the Institute of Business Ethics.
The Committee also met with the head
of Group Security, who is responsible for
the Policy, without the presence of
management, in respect of its
responsibilities for reviewing whistle-
blowing procedures and any concerns
regarding such issues.
Business unit audit committees
Every business unit has its own audit
committee which provides oversight to the
respective business unit and supports the
work of the Committee. Any relevant
matters discussed at business unit level are
reported 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 Finance, Risk, Compliance and
Group-wide Internal Audit, and by the
external auditor.
In 2013, the standard terms of reference
for the business unit audit committees
were updated in line with revised
provisions included in the Committee’s
terms of reference. These will be adopted
in 2014 by the business unit audit
committees, with minor variations, to
address local requirements or the particular
requirements of the business.
The Committee Chairman also
reviewed and approved the appointments
to the business unit audit committees.
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.
Effectiveness of the business unit
audit committees
An annual assessment of the business
unit audit committees was carried out
by Group-wide Internal Audit in order
to ensure that these committees
continued to function effectively and
provide appropriate support to enable
the Committee to fulfil its
responsibilities.
The assessment was conducted by
the internal audit teams in each of the
business units and considered whether
each of the committees was fulfilling its
responsibilities as documented in their
terms of reference. Attendance rates
by committee members and evidence
of the committees’ coverage of key
business unit issues, as well as the
appropriate escalation of concerns
to the Committee formed part of the
criteria used for the evaluation. The
assessment further factored in the
suitability of the business unit audit
committee structures and the
appropriateness of the membership
on each committee.
The results of the assessment
concluded that the business unit audit
committees continued to operate
effectively and the Committee
considered a report on the findings
at its meeting in December.
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Prudential plc Annual Report 2013
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Audit Committee report continued
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
financial reporting.
Group-wide Internal Audit
Group-wide Internal Audit is a fundamental
function which supports the Committee in
meeting its legal and regulatory
responsibilities and also in complying with
provisions of the UK and HK Codes. The
independent assurance provided by the
function formed a key part of the
Committee’s deliberations on the systems
of internal control and risk management.
Each of the Group’s business units has
an internal audit team, the heads of which
report to the Head of Group-wide Internal
Audit. Internal audit resources, plans,
budgets and its work are overseen by both
the Committee and the relevant business
unit audit committee. The Head of Group-
wide Internal Audit reports functionally
to the Committee and for management
purposes to the Group Chief Executive.
As part of its remit, the Committee
periodically meets with the head of
Group-wide Internal Audit without the
presence of management.
During the year, the Committee
considered the following matters:
Effective Internal Audit in the Financial
Services Sector
In July 2013, the Chartered Institute of
Internal Auditors (CIIA) issued
recommendations on Effective Internal
Audit in the Financial Services Sector.
Group-wide Internal Audit benchmarked
their current structure and practices
against the guidelines and the results of the
benchmarking were also externally quality
assured. While largely compliant, a
programme of enhancement is scheduled
to be completed to deliver full compliance
in 2014. Aligned with the CIIA guidance for
effective Internal Audit in the Financial
Services Sector, the revised Charter of
Group-wide Internal Audit has been
published on the Company’s website. In
addition, the Committee has formally
assessed that Group-wide Internal Audit
has sufficient resources to discharge its
mandate.
Internal auditor performance
In addition to periodic external effectiveness
reviews (such as that conducted by PwC in
2012), the Committee regularly assesses the
performance and effectiveness of the
internal audit function, and did so during the
course of the 2013. The assessment was
performed by Group-wide Internal Audit
Quality Assurance and conducted in
accordance with the CIIA’s professional
practice standards. For 2013, the assessment
concluded that Group-wide Internal Audit
complies with the requirements of internal
audit policies, procedures and practices,
and standards in all material respects and
is aligned with its mandated objectives.
As such, the Committee determined that
Group-wide Internal Audit continued to
operate effectively.
Group Compliance
The Committee received regular reports
from Group Compliance, who is
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 identification,
mitigation and reporting of regulatory risks
arising from both current business activities
and from changes in the regulatory
environment.
During 2013, the Committee also
considered and approved changes to the
Group Compliance Policy, the Anti-Money
Laundering and Counter Terrorist Policy
and the Group Sanctions Policy to take
account of changes in the relevant legal
and regulatory environments.
External audit
The Committee is responsible for
overseeing the relationship with the
external auditor, KPMG Audit Plc,
monitoring its performance, objectivity
and independence, to ensure that its
coverage is focused and that suitable
overlap with the work of internal audit
is achieved. As part of its remit, the
Committee met with the external auditor
without the presence of management
on two occasions during the year.
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. A key
component of this assessment is the
consideration that the auditor is sufficiently
robust in its challenge. The review of the
effectiveness of the external audit process
was conducted through a questionnaire-
based exercise administered by Group
Finance. This was circulated to key
stakeholders involved in the statutory
audit, including committee members,
executive management, finance, Group-
wide Internal Audit and risk functions
across the Group. A report on the principal
findings of the review was considered by
the Committee in May 2013, alongside a
response to the review prepared by KPMG.
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
confirmation of its independence in line
with industry standards.
Re-appointment of auditor
The Group operates a policy under which
at least once every five years a formal review
is undertaken by the Committee to assess
whether the external audit should be
re-tendered. The external audit was last put
out to competitive tender in 1999 when the
present auditor was appointed. Since 2005,
the Committee has annually considered the
need to re-tender the external audit service
and it again considered this in February
2014, concluding that there was nothing
in the performance of the auditor which
required a change.
The Committee acknowledges the
provisions contained in the UK Code in
respect of audit tendering, along with the
current proposals of the UK Competition
Commission and the European Union. The
Committee intends to comply with these
changes and will finalise its decision on
the timeline for completing a tender of the
external audit service when legislative
requirements become final.
In line with the Auditing Practices
Board Ethical Statements and the
Sarbanes-Oxley Act, a new lead audit
partner was appointed in respect of the
2012 financial year.
Following its review of the external
auditor’s effectiveness and independence,
the Committee has recommended to the
Board that KPMG be re-appointed as
auditor of the Company. Due to a legal
reorganisation within KPMG, the specific
entity being appointed for 2014 will be
KPMG LLP rather than KPMG Audit Plc
as currently. The Board has, therefore,
decided to put KPMG Audit Plc’s parent
entity, KPMG LLP, forward to be appointed
as auditor and a resolution concerning their
appointment will be put to a shareholder
vote at the Annual General Meeting on
15 May 2014.
Prudential plc Annual Report 2013 Governance Auditor independence
The Committee’s responsibility
to monitor the independence and
objectivity of the external auditor
is supported by the Auditor
Independence Policy (the ‘Policy’),
which is reviewed by the Committee
annually. The Policy sets out the
circumstances in which the external
auditor may be permitted to undertake
non-audit services.
Changes to the Policy were agreed
during 2013, which implemented the
Financial Reporting Council’s prohibition
on the use of the internal audit function
to provide direct assistance to the
external auditor and the provisions
relating to the introduction of a
mandatory audit tender.
The four key principles of the Policy
specify that the auditor should not:
— Audit its own firm’s work;
— Make management decisions
for the Group;
— Have a mutuality of financial interest
with the Group; or
policies and procedures regarding
independence and quality control,
and sought annual confirmation of
KPMG’s independence in line with
industry standards.
The Policy has two permissible
service types, including those that
require specific approval by the
Committee on an engagement basis
and those that are pre-approved by
the Committee with an annual limit.
In accordance with the Policy, the
Committee approves these permissible
services, classified as either audit or
non-audit services, monitoring the
annual limit on an ongoing basis.
All non-audit services undertaken
by the auditor were agreed prior to
the commencement of work and were
confirmed as permissible for the
external auditor to undertake under the
provisions of the Sarbanes-Oxley Act.
The main non-audit services
provided by KPMG in 2013 included:
— Financial risk management services
such as actuarial, forensic and
enterprise resource management;
— Be put in the role of advocate
for the Group.
— Reports on internal controls not
required by legislative authority;
The Committee regularly reviewed the
external audit strategy and received
reports from the auditor on its own
— Tax compliance and advisory
services; and
— Due diligence services.
77
Fees payable to the auditor
The fees payable to the external auditor
for the year ended 31 December 2013
amounted to £15.2 million, of which
£3.6 million was payable in respect of
non-audit services. Non-audit services
accounted for 24 per cent of total fees
payable.
Additional information can be found
in note B3.4 to the financial statements
on page 163.
Dialogue with the regulator
Ongoing dialogue with the Prudential
Regulatory Authority (PRA) was
maintained through the usual cycle
of close and continuous meetings with
the Committee Chairman and relevant
members of management. Discussions
focussed on the Committee’s
responsibilities on matters of financial
reporting, audit and compliance.
The meetings were also used to better
understand the PRA’s areas of focus and
how these might impact the responsibilities
of the Committee.
Training
The Committee received detailed
presentations on a range of topics
including updated financial accounting
developments, the new reporting
requirements, briefings on developments
in the regulatory environment, and
received the minutes of both the Disclosure
Committee and the Assumptions Approval
Committee for information. Further
information on the Disclosure Committee
appears on page 73. The Assumptions
Approval Committee reviewed the key
assumptions to be used for financial
reporting, business planning, forecasting
and the IAS 19 valuation of the three UK
defined benefit pension schemes.
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Nomination Committee report
‘Maintaining the right balance
of skills and knowledge is
key to achieving the Group’s
strategic objectives and the
Committee focussed on
these in considering new
appointments to the Board.’
Paul Manduca
Chairman of the
Nomination Committee
Membership
Director
Number of meetings held
Paul Manduca
(Chairman)
Howard Davies
Ann Godbehere
Philip Remnant
(appointed 1 January 2013)
Lord Turnbull
Meetings
attended
4
4
4
4
4
4
Biographical details of the members can
be found on pages 64 to 68.
Role and responsibilities of the
Committee
The purpose of the Committee is to
assist the Board in ensuring that it
maintains the appropriate balance
of skills, knowledge and diversity
to support the Group’s strategic
objectives, and that a clear and
transparent appointment process
for directors is in place.
The principal responsibilities
of the Committee are to:
— 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;
— Identify and nominate candidates
for appointment to the Board,
based on merit and against
objective criteria;
— Make recommendations to the
membership of the Audit, Risk,
Remuneration and Nomination
Committees in consultation
with the chairmen of those
committees;
— Consider and, where necessary,
authorise any actual or potential
situational conflicts arising out
of a proposed new appointment,
changes in the circumstances
of an existing appointment or
those of a director’s connected
person; and
— Develop, where appropriate, and
periodically review, any objectives
established for the implementation
of diversity on the Board and
monitor progress toward the
achievements of those objectives.
Meetings
The Committee met on four occasions
during the year.
The Group Chief Executive is closely
involved in the work of the Committee and
was invited to attend and contribute to
meetings. The Group HR Director was also
invited to attend meetings.
How the Committee discharged its
responsibilities in 2013
During the year, the Committee undertook
the following work:
Board composition
The Committee reviewed the composition
of the Board and, in particular, the
non-executive directors, to ensure that the
balance of skills, experience and
knowledge continued to be appropriate for
the Group’s business to meet the strategic
objectives. The Committee also considered
whether any additional skills and
experience would be needed, either to
complement those already on the Board, or
to plan for filling vacancies due to the future
retirement of non-executive directors.
Succession planning
The Committee reviewed the succession
plans for both executive and non-executive
appointments to the Board, taking into
account the strategic objectives of the
Group and the future retirement of
directors, as well as the level of diversity
desirable for a Group with such a global
reach. Further information on the diversity
of the Board can be found on page 70. The
process included consideration of the
anticipated demands of the business and
the skills and knowledge required to
successfully deliver against these.
Appointment of directors
Two new non-executive directors and one
executive director were appointed during
the course of the year.
The Committee initiated the
recruitment process for two non-executive
directors to replace Keki Dadiseth and
Michael Garrett who retired in 2013, and
made recommendations to the Board on
the appointment of Alice Schroeder and
Anthony Nightingale (details of the process
are set out in the box opposite). Korn Ferry
Whitehead Mann and Ridgeway Partners
were appointed to assist in the searches
leading to the appointment of Alice
Schroeder and Anthony Nightingale
respectively. Neither of the search
consultancies used in the process
undertook any other significant work
for Prudential.
With the assistance of Egon Zehnder,
the Committee also led the search process
for the appointment of Jackie Hunt as
Prudential plc Annual Report 2013 Governance 79
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Conflicts of interest and
independence
The Board has delegated authority to the
Committee to consider, and where
necessary authorise, any actual or potential
conflicts of interest arising in respect of the
directors. The Committee considered
potential conflicts of interest as they arose
during the course of the year and in respect
of the appointments of new directors.
The Committee also supports the Board
in its annual consideration of the Conflicts
of Interest Register, which is carried out
prior to the publication of the Annual
Report, and considers the independence
of the non-executive directors, in the
context of the criteria set out in the UK
and HK Codes.
Chief Executive, Prudential UK & Europe.
Egon Zehnder assisted Prudential in finding
candidates for a number of executive
positions below Board level during the
course of the year.
Appointment of
non-executive directors
Alice Schroeder and Anthony
Nightingale were appointed as
non-executive directors during the
course of the year, following the
scheduled retirement of Keki Dadiseth
and Michael Garrett as part of the
continuous refreshment of the Board.
The Committee evaluated the skills
and knowledge required in order to
ensure the Board was appropriately
balanced to meet the needs of the
Group and agreed role specifications
setting out the key attributes expected
in the successful candidates.
The search consultancies shared
with the Nomination Committee a long
list of potential non-executive directors.
The Committee reviewed the potential
candidates provided by Korn Ferry
Whitehead Mann and Ridgeway
Partners, agreeing a shortlist of
individuals meeting the key skills,
knowledge and personal attributes,
as identified by the Committee. The
Committee members and Group Chief
Executive then met with the identified
candidates, further evaluating them
against the needs of the business
and the Board.
The Committee gave consideration
to the external commitments of the
candidates to ensure they could
dedicate sufficient time to meet the
demands of the role and that they were
suitably independent of the Group to
fulfil the role of a non-executive
director. On completion of the process,
the Committee agreed to recommend
Alice Schroeder and Anthony
Nightingale to the Board for appointment.
Prudential plc Annual Report 2013
80
‘The Committee continued
to strengthen the Group
risk framework, taking
a more universal approach
to the Group’s risks that went
beyond the management
of financial risk.’
Howard Davies
Chairman of the Risk Committee
Membership
Director
Number of meetings held
Howard Davies (Chairman)
Ann Godbehere
Kai Nargolwala
Lord Turnbull
Meetings
attended
5
5
5
5
5
Biographical details of the members can
be found on pages 66 to 68.
Role and responsibilities of the
Committee
The Committee is responsible for
assisting the Board in providing
leadership, direction and oversight
of the Group’s overall risk appetite,
risk tolerance and risk management
framework.
The principal responsibilities
of the Committee are to:
— Review the Group’s 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;
— 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;
— Oversee the Group’s processes
and policies for determining risk
tolerance and reviewing
management’s measurement and
effectiveness of the Group’s risk
tolerance levels;
— Receive and review Group-wide
Internal Audit reports on the risk
management function;
— Assist the Board in reviewing
the risks inherent in the business
plans; and
— 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.
Meetings
The Committee met on five occasions during
the year and continued to maintain close links
with the Audit Committee. The Chairman of
the Audit Committee is a member of the Risk
Committee and the Committee Chairman
is a member of the Audit Committee. This
cross-membership facilitates an effective
linkage between both committees, ensuring
that any risk assurance relevant to financial
reporting is referred to that Committee.
The Chairman of the Board, the Group
Chief Executive, the Chief Financial
Officer, the Group Chief Risk Officer, the
Group-wide Internal Audit Director and
the Group General Counsel are invited
to attend the meetings, as is the Chief
Operating Officer, Group Risk and Director
of Risk Advisory and Technical Analysis.
How the Committee discharged its
responsibilities in 2013
During the year, the Committee undertook
the following work:
Group risk framework
The Committee continued its granular
review of the Group risk framework,
expanding and strengthening it in respect
of the Group’s significant investment
portfolios and taking account of
Prudential’s wider stakeholders.
Extensive ‘road-testing’ of the
framework was carried out during the
course of 2012 and 2013, with the
Committee receiving regular feedback on
the implementation in the business units.
Once the Committee was satisfied that
the strengthened framework was both
appropriate for the business and
functioning robustly, it was recommended
to the Board for approval.
Key Group risks
The Committee continued to monitor the
Group’s key risks against the changing
economic backdrop and strategic
objectives approved by the Board in June.
The Committee determined that the
principal risks to the Group remained
largely unchanged and continued to
provide oversight to management’s actions
in respect of these risks.
The Committee reviewed the adequacy
of capital levels in respect of the principal
risks to the Group, including the levels
of capital buffers for unforeseen risks.
Regulatory and economic
capital models
The development and finalisation of the
model used in the preparation of the Group’s
Pillar I disclosures required under Solvency II
were areas of focus for the Committee. The
appropriateness of the underlying model and
the assumptions forming the basis of the
Economic Capital Model were further key
Prudential plc Annual Report 2013 GovernanceRisk Committee report 81
areas of consideration for the Committee and
both items formed a notable part of the
Committee’s deliberations over the course
of 2013.
Stress testing
Alongside the Committee’s regular review
of the Reverse Stress Test Exercise, Prudential
also participated in the industry-wide stress
testing carried out by the PRA.
The Committee considered the impact of
the additional testing on the operation of the
business units, approving the proposed
timeline for the coordinated exercise and
governance process for signing off the results.
Dialogue with the regulator
Ongoing dialogue with the PRA was
maintained through the usual cycle
of close and continuous meetings with the
Committee Chairman and Group Chief
Risk Officer. Discussions focussed on the
Pillar I disclosures under Solvency II and
the Economic Capital Model, which sets
out the Group’s approach to risk appetite
and the Group risk framework.
The meetings were also used to better
understand the PRA’s areas of focus and
how these might impact the responsibilities
of the Committee.
Training and support
The Committee regularly received updates
from Group Risk, Group-wide Internal
Audit and the Group Treasurer on industry
and market developments and their impact
on Prudential.
The Committee received the minutes
of the Group Executive Risk Committee,
along with any matters escalated by the
other risk management committees.
In performing its duties, the Committee
has access to the Group Chief Risk Officer,
as well as other employees and their
relevant expertise across the Group.
Risk governance
Principles and objectives
Risk is defined as the uncertainty that
Prudential faces in successfully implementing
its strategies and objectives. This includes all
internal or external events, acts or omissions
that have the potential to threaten the success
and survival of Prudential.
The control procedures and systems
established within the Group are designed
to manage rather than eliminate the risk of
failure to meet business objectives. They
can only provide reasonable and not
absolute assurance against material
misstatement or loss and focus on aligning
the levels of risk-taking with the
achievement of business objectives.
Material risks will only be retained where
this is consistent with Prudential’s risk
appetite framework and its philosophy
towards risk-taking. 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.
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. The diagram below
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 significant risks, and with the Group
Chief Executive and the chief executives of
each of the Group’s business units.
Risk objectives
In keeping with this philosophy, the Group
has five objectives for risk and capital
management which are as follows:
1 Framework
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;
2 Monitoring
Establish a ‘no surprises’ risk management
culture by identifying the risk landscape,
assessing and monitoring risk exposures
and understanding change drivers;
3 Control
Implement suitable risk mitigation strategies
and remedial actions where exposures are
deemed inappropriate, and manage the
response to potentially extreme events;
4 Communication
Effectively communicate the Group’s risk,
capital and profitability position to both
internal and external stakeholders; and
5 Culture
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
Compliance
Group
Security
Group
Risk
Group-wide
Internal Audit
Key
Board-level committees
Executive personnel
Exec/Management committees
GHO functions
Direct reporting line
Regular communication
and escalation
GEC
BSCMC
GERC
TAC
GCRC
GORC
GCC
STOC
Group Executive Committee
Balance Sheet & Capital Management Committee
Group Executive Risk Committee
Technical Actuarial Committee
Group Credit Risk Committee
Group Operational Risk Committee
Group Compliance Committee
Solvency II Technical Oversight Committee
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Risk Committee report continued
Risk management — the first line of defence
Risk management — the first line of defence
Risk-taking and the management thereof forms the first line of defence and is facilitated through both the Group Executive Committee and the Balance
Sheet and Capital Management Committee.
Group Executive Committee (GEC)
Purpose: Supports the Group Chief Executive in the executive
management of the Group and is comprised of the chief executives
of each of the Group’s major business units, as well as a number of
functional specialists.
Balance Sheet and Capital Management Committee (BSCMC)
Purpose: Supports the Chief Financial Officer 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. The BSCMC is comprised of a number of functional specialists.
Meets: Usually fortnightly
Meets: Monthly
Risk oversight — the second line of defence
Risk oversight — the second line of defence
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 Officer or the Group Chief Risk Officer, which monitor and keep risk exposures under regular review.
Group Executive Risk Committee (GERC)
Purpose: Oversees the Group’s risk exposures, including market, credit, liquidity, insurance and operational risks,
and also monitors the Group’s capital position.
Reports to: Group Chief Executive
Meets: Monthly
Group Credit
Risk Committee
(GCRC)
Purpose: Reviews the
Group’s investment and
counterparty credit risk
positions.
Reports to: GERC
Meets: Monthly
Group Operational
Risk Committee
(GORC)
Purpose: Overseas the
Group’s operational risk
exposures.
Reports to: GERC
Meets: Quarterly
Technical Actuarial
Committee (TAC)
Purpose: Sets the
methodology for
valuing Prudential’s
assets, liabilities and
capital requirements
under Solvency II and
the Group’s internal
economic capital basis.
Reports to: GERC
Meets: Usually
monthly and more
often as required
Solvency II Technical
Oversight Committee
(STOC)
Purpose: Provides
ongoing technical
oversight and advice to
the Board and executive
in respect of their duties
with regard to the
Group’s Internal Model.
Reports to: GERC
Meets: Usually 10
times annually
Group Compliance
Committee
(GCC)
Purpose: Oversees the
effectiveness of risk and
capital management for
all financial and
non-financial risks
faced by Prudential
Group and has
responsibility to
consider Group-wide
regulatory compliance
risks and controls.
Responsibility for these
risks has moved to the
GORC from January
2014.
Reports to: GERC
Meets: Every two
months
The Group-level risk committees are supported by the Group Chief Risk Officer, 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 verification of compliance with regulatory standards and informs the Board, as well
as 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
Independent assurance — the third line of defence
Group-wide Internal Audit (GwIA)
The third line of defence comprises the Group-wide Internal Audit function, which provides independent and objective assurance to the Board, Audit and
Risk Committees and the Group Executive Committee, to protect the assets, sustainability and reputation of the organisation.
Prudential plc Annual Report 2013 Governance 83
Reporting
The 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 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 Committee and the Board.
Key economic capital metrics, as well as
risk-adjusted profitability information, are
included in the business plans which are
reviewed by the Group Executive Risk
Committee, the Committee and the Board.
Routine internal reporting by the
business units varies 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 Committee
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 89 to 123.
Corporate governance codes
In line with its listings on the London and
Hong Kong stock exchanges, Prudential
applies the principles of the UK and
HK codes.
The Board confirms that it has complied
with all relevant provisions set out in the UK
and HK Codes throughout the accounting
period. With respect to Code Provision
B.1.2(d) of the HK Code, the responsibilities
of the Remuneration Committee do not
include making recommendations to the
Board on the remuneration of non-executive
directors. In line with the principles of the UK
Code, fees for non-executive directors are
determined by the Board.
The principles of the UK and HK Codes
have been applied as set out earlier in the
corporate governance report and also in the
directors’ remuneration report, which can
be found on pages 89 to 123. The UK Code
can be viewed on the Financial Reporting
Council’s website, with the HK Code
available on the website of the Hong Kong
Stock Exchange.
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Prudential plc Annual Report 2013
84
Shareholders
Communication with shareholders
Being a major institutional investor,
Prudential is very aware of the importance
of maintaining a good relationship 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 December 2013, the
conference was held in London and new
Growth and Cash targets for 2014 to 2017
were published.
The latest analysts’ and brokers’ reports
are circulated regularly to Board members.
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 financial
calendar. The shareholder information
section on pages 371 to 372 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 15 May 2014 at 11.00am.
The Annual General Meeting is an
important forum for both institutional and
private shareholders and all shareholders
are encouraged 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.
Prudential 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 Group’s website.
Details of the 2013 AGM, including the
major items discussed at the meeting and
the results of the voting, can be found on the
Group’s website. All directors in office at the
time of the Annual General Meeting held on
16 May 2013 attended the meeting, with the
exception of Keki Dadiseth, who was unable
to do so due to a prior commitment.
In accordance with the relevant
legislation, shareholders holding 5 per cent or
more of the fully paid up issued share capital
are able to require the directors to hold a
general meeting. Written shareholder
requests should be addressed to the Group
Company Secretary at the registered office.
Company constitution
Prudential is governed by the Companies
Act 2006, other applicable legislation and
regulation, and provisions in its Articles
of Association. Any change to the Articles
of Association must be approved by special
resolution of the shareholders. There were
no changes to the constitutional documents
during 2013.
The Memorandum and Articles
of Association are available on the
Group’s website.
Share capital
The issued share capital as at
31 December 2013, which is set out in Note
C10 on page 257, consisted of 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 branch
registers in Ireland or Hong Kong.
Issued share
capital
2,560,381,736
2,557,242,352
Number of
accounts on
the register
57,013
60,522
2013
2012
Prudential 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.
Prudential has maintained a sufficiency of
public float 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.
Rights and obligations
The rights and obligations attaching to the
Company’s shares are set out in full in the
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,
participants are the beneficial owners of
the shares but not the registered owners,
the voting rights are normally exercisable
by the registered owner in accordance with
the relevant plan rules. Trustees may vote
at their discretion, but do not vote on any
unawarded shares held as surplus assets.
As at 11 March 2014, Trustees held
3 per cent of the issued share capital under
the various plans in operation.
Rights to dividends under the various
schemes are set out in the directors’
remuneration policy section of the
remuneration report.
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 Conduct Authority
(FCA) and the Hong Kong Stock Exchange,
as well as under the Rules of some of the
Group’s employee share plans.
All directors are required to hold
a number of shares under guidelines
approved by the Board, which they
would also be expected to retain as
described on page 100 of the directors’
remuneration report.
Significant shareholdings
The following notifications have been
disclosed under the FCA’s Disclosure and
Transparency Rules in respect of notifiable
interests exceeding 3 per cent in the voting
rights of the issued share capital.
As at 31 December 2013
Capital Group
Companies, Inc.
BlackRock, Inc.
Norges Bank
Investment Managers
% of total
voting rights
10.12
5.08
4.03
No further notifications have been received
between the end of 2013 and the date of
this report.
Prudential plc Annual Report 2013 Governance 85
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Authority to issue shares
The directors require authority from
shareholders in relation to the issue of
shares. Whenever shares are issued, these
must be offered to existing shareholders
pro rata to their holdings, unless the
directors have been given authority by
shareholders to issue shares without
offering them first to existing shareholders.
Prudential 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 offering them to existing
shareholders, in line with relevant
regulations and best practice.
Disapplication of statutory pre-emption
procedures is also sought for rights issues.
The 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 15 May 2014.
Details of shares issued during 2013
and 2012 are given in Note C10 on page 257.
In accordance with the terms of a
waiver granted by the Hong Kong Stock
Exchange, Prudential confirms that it
complies with the applicable law and
regulation in the UK in relation to the
holding of shares in treasury and with
the conditions of the waiver in connection
with the purchase of own shares and
any treasury shares it may hold.
Authority to purchase own shares
The directors also require authority from
shareholders in relation to the purchase
of the Company’s own shares. Prudential
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. This authority
has not been used since it was last granted
at the Annual General Meeting in 2013.
This existing authority is due to expire
at the end of this year’s Annual General
Meeting and a special resolution to renew
the authority will be put to shareholders
at the Annual General Meeting on
15 May 2014.
Model code for securities
transactions by directors
Prudential confirms 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 have complied with this
code of conduct throughout the period.
US corporate governance and
regulations
As a result of the listing of its securities
on the New York Stock Exchange, the
Company is required to comply with the
relevant provisions of the Sarbanes-Oxley
Act 2002 (the ‘Act’) as they apply to foreign
private issuers and has adopted procedures
to ensure this is the case.
In particular, in relation to the provisions
of Section 302 of that Act, which covers
disclosure controls and procedures, a
Disclosure Committee has been established
reporting to the Group Chief Executive,
chaired by the Chief Financial Officer and
comprising members of senior management.
The objectives of this Committee are to:
— Assist the Group Chief Executive and
the Chief Financial Officer in designing,
implementing and periodically
evaluating the Company’s disclosure
controls and procedures;
— Monitor compliance with the Company’s
disclosure controls and procedures;
— Review and provide advice to the Group
Chief Executive and the Chief Financial
Officer with regard to the scope and
content of all public disclosures made
by the Company which are of material
significance to the market or investors; and
— Review and consider and, where
applicable, follow up on matters raised
by other components of the disclosure
process. These may include, to the
extent they are relevant to the
disclosure process, any matters to be
raised with the Audit Committee, the
internal auditors or the external auditor
on the Company’s internal controls.
In discharging these objectives, the
Committee helps to support the
certifications by the Group Chief Executive
and the Chief Financial Officer of the
effectiveness of disclosure procedures and
controls required by Section 302 of the Act.
The provisions of Section 404 of the Act
require the Company’s management to
report on the effectiveness of internal
controls over financial reporting in its Annual
Report on Form 20-F, which is filed with the
US Securities and Exchange Commission.
To comply with this requirement and report
on the effectiveness of internal control, the
Group has documented and tested its
internal controls over financial reporting in
the format required by the Act. The annual
assessment and related report from the
external auditor will be included in the
Group’s Annual Report on Form 20-F.
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.
Prudential plc Annual Report 2013 of compensation for loss of office or
employment that occurs as a result of a
change of control. Terms applying on a
termination of their office are set out in the
directors’ remuneration report. In the US,
senior executives participate on a
discretionary basis in a plan which entitles
them to compensation, in the event that
their employment is terminated or adversely
affected as a result of a change of control.
Customers
The five largest customers of the Group
constituted in aggregate less than
30 per cent of its total sales for each of 2012
and 2013.
For the year ended 31 December 2013,
none of the directors, 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 issued share capital) had any interest
in the Group’s major customers.
86
Additional disclosures
The following additional disclosures
are made in compliance with the
Companies Act 2006, the Disclosure
and Transparency Rules issued by
the FCA and the UK and HK Codes.
Financial reporting
The directors have a duty to report to
shareholders on the performance and
financial position of the Group and are
responsible for preparing the financial
statements on pages 127 to 289 and the
supplementary information on pages 296 to
330. It is the responsibility of the auditor to
form independent opinions, based on its
audit of the financial statements and its audit
of the EEV basis supplementary information,
and to report its opinions to the Company’s
shareholders and to the Company. Its
opinions are given on pages 291 and 332.
Company law requires the directors
to prepare financial statements for each
financial year which give a true and fair
view of the state of affairs of the Company
and of the Group. The criteria applied in
the preparation of the financial statements
are set out in the statement of directors’
responsibilities on pages 290 and 331.
Company law also requires the Board to
approve the strategic report. In addition, the
UK Code requires the directors’ statement
to state that they consider the annual report
and financial statements, taken as a whole is
fair, balanced and understandable and
provides the information necessary for
shareholders to assess the Company’s
performance, business model and strategy.
The directors are further required to
confirm that the strategic report includes
a fair review of the development and
performance of the business, with a
description of the principal risks and
uncertainties. Such confirmation is
included in the statement of directors’
responsibilities on pages 290 and 331.
The strategic report provides, on pages
46 to 53, a description of the Group’s risk
and capital management, which includes
a description of the Group’s liquidity
position. These risks are also discussed in
the audited sections of the Group Chief
Risk Officer’s report on the risks facing
our business and our capital strength.
The directors who held office at the
date of approval of this directors’ report
confirm that, so far as they are each aware,
there is no relevant audit information of
which the Company’s auditor is unaware
and that each director has taken all the
steps that he or she ought to have taken as
a director to make himself or herself aware
of any relevant audit information and to
establish that the Company’s auditor is
aware of that information. This confirmation
is given and should be interpreted in
accordance with the provisions of Section
418 of the Companies Act 2006.
Going concern
In accordance with the requirements of the
guidance issued by the Financial Reporting
Council in October 2009 ‘Going Concern
and Liquidity Risk: Guidance for directors of
UK companies 2009’, after making sufficient
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 strategic report on pages 34 to
45. The risks facing the Group’s capital and
liquidity positions and their sensitivities are
referred to in the strategic report on pages
46 to 53. Specifically, the Group’s
borrowings are detailed in Note C6 on pages
235 to 236, the market risk and liquidity
analysis associated with the Group’s assets
and liabilities can be found in Note C3.5(a)
on pages 206 to 208, policyholder liability
maturity profile by business units in Notes
C4.1(b), C4.1(c) and C4.1(d) on pages 215,
217 and 218 respectively, cash flow details in
the consolidated statement of cash flows and
provisions and contingencies in Note C12.
The directors, therefore, have continued to
adopt the going concern basis of accounting
in preparing the financial statements for the
year ended 31 December 2013.
Post-balance sheet events
Significant events affecting the Group which
have taken place after the end of the financial
year are detailed in Note D4 on page 272.
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.
Significant contracts
At no time during the year did any director
hold a material interest in any contract of
significance with the Company or any
subsidiary undertaking.
Compensation for loss of office
None of the terms of employment of the
directors includes provisions for payment
Prudential plc Annual Report 2013 Governance Index to principal directors’ report disclosures
Information required to be disclosed in the directors’ report may be found in the following sections:
Information
Business review
Disclosure of information to auditor
Directors in office during the year
Dividend recommended for the year
Section in Annual Report
Strategic report
Additional disclosures
Board of directors
Strategic report
Details of qualifying third party indemnity provisions
Corporate governance report
Corporate responsibility governance
Political donations and expenditure
Greenhouse gas emissions
Financial instruments –
risk management objectives and policies
Corporate responsibility review
Corporate responsibility review
Corporate responsibility review
Strategic report
Post-balance sheet events
Note D4 of the Notes on the Group financial statements
Future developments of the business of the Company
Group Chief Executive’s report
Employment policies and employee involvement
Corporate responsibility review
Structure of share capital, including restrictions
on the transfer of securities, voting rights and
significant shareholders
Corporate governance report
Rules governing appointments of directors
Corporate governance report
Rules governing changes to the Articles of Association
Corporate governance report
Powers of directors
Corporate governance report
Significant agreements impacted by a change of control Additional disclosures
Agreements for compensation for loss of office
or employment on takeover
Additional disclosures
87
Page number(s)
13
86
73
45
69
61
59
60
46
272
12
56-57
83
71
84
73
86
86
In addition, the risk factors set out on pages 362 to 366 and the additional unaudited financial information set out on pages 335 to 361, are
incorporated by reference into this directors’ report.
Signed on behalf of the Board of directors
Alan F Porter
Group Company Secretary
11 March 2014
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Prudential plc Annual Report 2013
88
Prudential plc Annual Report 2013
89
Remuneration report
90
Annual statement from the Chairman
of the Remuneration Committee
92 Our executive remuneration at a glance
94
107
120
Directors’ remuneration policy
Annual report on remuneration
Supplementary information
This report has been prepared to comply with
Schedule 8 of the Large and Medium-sized
Companies and Groups (Accounts and Reports)
(Amendment) Regulations 2013, as well as the
Companies Act 2006 and other related regulations.
Remuneration report Prudential plc Annual Report 2013Section 44
90
Annual statement from the Chairman
of the Remuneration Committee
Lord Turnbull
Chairman of the
Remuneration Committee
Dear fellow shareholder,
I am pleased to present the
Remuneration Committee’s report on
directors’ remuneration for the year
to 31 December 2013.
Firstly, I am delighted to welcome Philip
Remnant and Anthony Nightingale, who
joined the Committee in 2013. Keki
Dadiseth and Michael Garrett stepped
down from the Committee in 2013
following eight and nine years’ service
respectively, and I would like to thank
them for their contribution.
I trust that you will find this a clear and
comprehensive report that illustrates the
strong alignment between Prudential’s
performance and our executive directors’
remuneration. To comply with new
legislation regarding disclosure of
executive directors’ remuneration we have
changed the format of this year’s report
and, in addition, the Remuneration
Committee has taken into account best
practice guidelines issued by shareholder
representatives.
While we have endeavoured to keep the
report as concise as possible, Prudential
is a large and complex organisation. Each
of our major business units has a market
capitalisation which would independently
make them a constituent of the FTSE 100,
and the pay and remuneration
arrangements for the respective business
unit CEOs reflect the differing market
practices in the geographies and industries
in which they operate. As Prudential is
unusual in having all of these executives on
the Board, and as it is required to comply
with Hong Kong as well as UK reporting
requirements, our report is understandably
longer than many others.
To assist shareholders with the
understanding of our remuneration practices
we have set out an ‘at a glance’ summary
page, overleaf. This is followed by:
— Our directors’ remuneration policy on
pages 94 to 106 which describes how
we will pay directors in the future;
— Our annual report on remuneration on
pages 107 to 119 which sets out
remuneration delivered in respect of
performance in 2013 and operation in
2014; and
— Supplementary information on pages
120 to 123.
Achievement in 2013 under our key
performance measures
IFRS operating profit
CAGR
+20%
£2,954m
£2,520m
£1,823m
£2,017m
£1,446m
2009
2010
2011
2012
2013
EEV new business profit
CAGR
+15%
£2,843m
£2,452m
£2,028m £2,151m
£1,619m
2009
2010
2011
2012
2013
Business unit remittances
CAGR
+18%
£1,105m
£1,341m
£1,200m
£935m
£688m
2009
2010
2011
2012
2013
Total shareholder return
4
3
4
£
1
0
2
£
0
9
2
£
7
4
1
£
5
8
1
£
7
1
1
£
9
9
1
£
8
9
1
£
6
2
1
£
9
0
1
£
0
0
1
£
0
0
1
£
1 Jan 09 1 Jan 10 1 Jan 11
1 Jan 12 1 Jan 13 1 Jan 14
Prudential plc – value of £100 invested
on 1 January 2009
International insurers – value of £100
invested on 1 January 2009
Prudential plc Annual Report 2013 Remuneration reportRemuneration report 91
As you will see, we operate a remuneration
architecture which provides a clear link
between pay and the achievement of the
Group’s key strategic priorities and delivery
of shareholder value. This consists of base
salary and benefits; an annual bonus, of
which a significant proportion is deferred in
Prudential shares for three years; and a
long-term incentive plan, all underpinned
by significant shareholding guidelines.
Rewarding 2013 performance
During 2013, the Group delivered further
increases in new business profitability, IFRS
profitability and cash generation, due to
strong performances across all of our
business units. This was accomplished in
an environment of continued global
macroeconomic uncertainty, while
operating within the Group’s risk appetite,
risk framework and maintaining
appropriate levels of capital.
Across all of our key performance
metrics the Group’s 2013 results exceed
those achieved in 2012. The Remuneration
Committee sets stretching performance
ranges for all of its incentive plans and the
bonuses awarded to executive directors
reflect these excellent achievements
during 2013, which have generated
substantial value for our shareholders.
changes to our remuneration architecture
for 2014, or any significant changes to the
metrics used.
In particular, in determining the 2014
remuneration packages the Committee
was mindful of the following:
— Maintaining our restraint on base salary
increases: The 2014 salary increases for
executive directors are in line with
salary increase budgets for other
employees across our business units;
— Determining annual bonus metrics that
remain based on challenging
performance requirements closely
aligned to the strategy of the Group and
business units. 40 per cent of 2014
bonuses will also be deferred into
shares for three years before release
in 2018. Deferred shares are subject to
malus provisions which mean that part
or all of these amounts can be withheld
in specific circumstances;
— Continuing to ensure that long-term
incentive awards only vest subject to
achievement of stretching performance
measures linked to the three year
business plan, as well as being
dependent on delivery of shareholder
returns that exceeds our peers;
Strong share price growth and a step
— Ensuring long-term alignment between
change in our dividend policy means
that £100 invested in Prudential on
1 January 2009 increased to £434 by
31 December 2013. This outstanding track
record means that Prudential’s shareholder
return is, once more, significantly ahead
of our peers in the international insurance
sector over the three year performance
period of our long-term incentives. As a
result the awards made in 2011 under the
Group Performance Share Plan will be
released in full in 2014 .
Further details of how the
Remuneration Committee rewarded this
exceptional 2013 performance are set out
in the annual report on remuneration on
pages 107 to 119.
Aligning 2014 pay to performance
In 2013, shareholders approved a new
remuneration architecture that further
improved the alignment of the Group’s
reward strategy with the business strategy.
As set out in the directors’ remuneration
policy, we are not intending to make any
the interests of shareholders and
executives by requiring executives to
maintain a significant shareholding on
an ongoing basis; and
— Retaining the current maximum
opportunities under the annual bonus
and long-term incentive awards, other
than an increase (from 225 per cent
to 250 per cent of salary) to the
Chief Financial Officer’s long-term
incentive award.
The Chief Financial Officer’s total
remuneration opportunity for 2014 has
increased by 10 per cent. This reflects the
increasing complexity and responsibilities
of the role, together with the incumbent’s
considerable performance and
contribution to the Group. In making this
adjustment, the Remuneration Committee
was mindful of ensuring that the majority
of this be provided through long-term
incentive awards, so that the full value
is only realised over the long term and
subject to the achievement of stretching
performance conditions. I am grateful for
the support that our major shareholders
gave for this when I discussed it with them
prior to implementation.
Further details of how the
Remuneration Committee has aligned
2014 packages with performance are set
out in the annual report on remuneration
on pages 107 to 119.
Shareholder support
Prudential maintains open and transparent
communication with our shareholders of
which this report forms part. During
Autumn 2013, I personally met with
shareholders and their representatives,
who together own more than half of our
share capital, to discuss our remuneration
policy and its implementation in 2014.
The Remuneration Committee is
extremely grateful for this feedback and
support received from shareholders on
Prudential’s remuneration architecture and
directors’ remuneration policy, which
builds on the significant vote in favour of
the 2012 directors’ remuneration report.
In conclusion
I trust that you find this a clear and
comprehensive report that demonstrates
the link between pay and performance
at Prudential.
At the AGM in May 2014:
— Prudential’s directors’ remuneration
policy for future years will be subject
to a binding shareholder vote; and
— The annual report on remuneration
will be subject to an advisory vote.
I look forward to your continued support.
Lord Turnbull
Chairman of the Remuneration
Committee
11 March 2014
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Prudential plc Annual Report 2013
92
Our executive remuneration
at a glance
Our remuneration strategy and principles
Our remuneration strategy remains unchanged from that approved by shareholders in last year’s directors’ remuneration report:
To attract and retain the high calibre executives required to lead and develop the Group
Reward must be:
B Valued by executives; and
B 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:
B Determined by delivery of the Group’s annual and longer-term business objectives;
B Aligned with shareholder value creation; and
B Consistent with the Group’s risk appetite so that the delivery of the business plan can be sustained.
Our remuneration architecture
At our 2013 AGM, shareholders supported the implementation of a revised remuneration architecture as illustrated below.
No structural changes are being proposed in 2014:
Key elements1
Salary
Cash
bonus
Deferred
bonus
Financial and
personal objectives
set with reference
to business plans
approved by
the Board
Stretching IFRS
profit ranges set with
reference to business
plans approved by
the Board.
TSR vesting
schedule relative to
insurance peers
Prudential
Long Term
Incentive Plan
(‘PLTIP’)
Key features of our policy
How we implemented the policy
2014 2015 2016 2017 2018
Broadly aligned with pay review
budgets for other employees.
Salary increases are in line with
budgets for all employees:
B Salary increases of 3% in 2013.
B Salary increases of 3% in 20142.
The maximum opportunity is up to
200% of salary.
A significant proportion, currently
40%, of bonus is deferred into shares
for three years.
Deferred award is subject to
malus provisions.
The Group Chief Executive has a
maximum AIP opportunity of 200%
of salary, with the maximum for
the CFO of 175%. For other executives
the maximum is 160%.
2013 bonuses were paid based on
performance measures related to
profit, cash flow and capital adequacy,
as well as personal objectives.
Maximum award under the Plan is
550% of salary.
Aligned with our long-term business
strategy and delivery of shareholder
value, vesting is currently subject to:
B Relative TSR; and
B Group IFRS Profit; or
B Business unit IFRS profit.
Measured over the three financial
years from year of award.
Awards in 2013 and 2014 are below
plan limits:
B Group Chief Executive:
400% of salary
B CEO JNL: 460% of salary
B Other PLTIP awards were
250% of salary, or less.
For business unit CEOs awards
vest based on TSR and business
unit IFRS profit. For other
executives awards are subject
to TSR and Group IFRS profit.
The Committee keeps the
performance conditions under
review to ensure that future awards
remain aligned with strategy.
Share
ownership
guidelines
We have significant share ownership guidelines for all executives3 as follows:
B 350% of salary for the Group Chief Executive; and
B
200% of salary for other executive directors.
Key
Fixed pay
Short-term variable pay
Long-term variable pay
Share ownership guidelines
CEO, JNL also shares in the JNL bonus pool; and CEO, M&G retains separate arrangements.
Notes
1
2 The Chief Financial Officer received an increase of 5%.
3 Progress against the share ownership guidelines is detailed in the ‘Statement of directors’
shareholdings’ section of the annual report on remuneration.
Prudential plc Annual Report 2013 Remuneration reportRemuneration report 93
What 2013 performance means for executive directors’ pay
At Prudential, the remuneration packages are designed to ensure a strong alignment between pay and performance. As you can see from
the charts on page 90, sustained growth across all of our key performance metrics has delivered substantial value to our shareholders. This has
been reflected in both the annual bonuses paid and the release of long-term incentive awards, as set out in the annual report on remuneration.
In particular, the long-term incentives awarded to executive directors in 2011 had stretching performance conditions attached to
vesting and were denominated in shares. The significant value generated for shareholders through share price growth and dividends
paid over the last three years is, therefore, reflected in the value of the LTIP releases, together with the achievement of performance
conditions, as illustrated in the chart below.
Value of LTIP releases
£000
8,000
6,000
4,000
2,000
0
1,118
On
grant
(2011)
2,114
1,256
1,343
1,674
2,114
1,118
1,295
2,425
2,745
3,704
On
vesting
(2014)
On
grant
(2013)
On
vesting
(2014)
On
grant
(2011)
On
vesting
(2014)
On
grant
(2011)
On
vesting
(2014)
On
grant
(2011)
On
vesting
(2014)
On
grant
(2011)
On
vesting
(2014)
On
grant
(2010/11)
On
vesting
(2014)
7,549
5,189
4,596
John Foley
Jackie Hunt
Michael McLintock Nic Nicandrou
Barry Stowe
Tidjane Thiam
Mike Wells
Legacy below board plans (awarded 2010)
Dividends
Share price growth
Award size
The value of these performance related elements of remuneration are added to the fixed packages provided to executive directors in the
table below to calculate the 2013 ‘single figure’ of total remuneration:
Executive director
Role
Group Investment Director
CEO, UK
John Foley
Jackie Hunt1
Michael McLintock CEO, M&G
Nic Nicandrou
Barry Stowe
Tidjane Thiam
Mike Wells
Chief Financial Officer
CEO, PCA
Group Chief Executive
CEO, JNL
Fixed pay
Performance related
2013
salary
628
199
371
649
679
1,030
691
Pension &
benefits
275
274
185
254
796
381
78
2013
bonus
1,004
935
2,225
1,124
1,037
2,056
3,415
LTIP
release
2013
‘Single Figure’
2012
‘Single Figure’
2,114
1,343
3,704
2,114
2,425
5,189
7,549
4,021
3,552
6,485
4,141
4,937
8,656
11,733
1,895
n/a
5,517
4,489
5,482
9,533
7,273
Note
1
Jackie Hunt received a payment of £801,000 in respect of awards forfeited when leaving Standard Life, included in the above ‘Single Figure’.
Aligning 2014 pay to performance
In 2014, the Remuneration Committee granted salary increases to all executive directors in line with the budget for the wider work force.
As stated above, no changes have been made to the remuneration architecture approved by shareholders at the 2013 AGM.
Remuneration packages remain strongly aligned with performance over both the short and the long term.
The resultant remuneration packages for 2014 are set out in detail in the annual report on remuneration and summarised in the
table below:
Executive director
Role
Group Investment Director
CEO, UK
John Foley
Jackie Hunt
Michael McLintock CEO, M&G1
Nic Nicandrou
Barry Stowe
Tidjane Thiam
Mike Wells
Chief Financial Officer
CEO, PCA
Group Chief Executive
CEO, JNL2
2014 salary
increase
3%
3%
3%
5%
3%
3%
3%
2014 salary
£648,000
£644,000
£382,000
£682,000
HK$ 8,490,000
£1,061,000
US$ 1,114,000
Maximum AIP (% salary)
Maximum
bonus
Bonus
deferred
LTI award
(% salary)
160%
160%
600%
175%
160%
200%
160%
40%
40%
40%
40%
40%
40%
40%
250%
225%
450%
250%
225%
400%
460%
Notes
1 The bonus opportunity for the CEO, M&G remains at the lower of 0.75 per cent of M&G’s IFRS profit or six times salary. As with 2013, he will receive awards under
the Prudential LTIP and the M&G Executive LTIP, which are both included in the above LTI award.
2 The CEO, JNL will also continue to have a 10 per cent share of the Jackson Senior Management Bonus Pool. 40 per cent of this is deferred in shares.
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Prudential plc Annual Report 2013
94
Remuneration report
Directors’ remuneration policy
This remuneration policy will apply following the AGM on 15 May 2014 (subject to shareholder approval).
Total remuneration for our executive directors is made up of a number of elements. The purpose of each element is set out below:
Fixed pay
Component
Base salary
Benefits
Purpose
Paying salaries at a competitive level enables the Company to
recruit and retain key executives.
The benefits provided to executives are items and allowances that
assist them in carrying out their duties efficiently.
Expatriate and relocation benefits allow Prudential to attract high
calibre executives in the international talent market and deploy
them appropriately within the Group.
Provision for an income in retirement
Pension benefits provide executives with opportunities to save
for an income in retirement.
Variable pay
Annual cash bonus
Annual deferred bonus
Payments under the Annual Incentive Plan (AIP) incentivise the
delivery of stretching financial and personal objectives which are
drawn from the annual business plan.
The Company mandates that a proportion of each executive
director’s annual bonus is not paid in cash and must be deferred.
The deferred bonus is subject to malus provisions designed to
ensure that performance is sustained. Deferral into shares aligns
the interests of our executive directors with our shareholders and
helps to ensure a focus on the longer-term sustainable success of
the Company.
Prudential Long Term Incentive Plan (‘PLTIP’) The Prudential Long Term Incentive Plan is designed to incentivise
M&G Executive LTIP
Legacy long-term
incentives
Group Performance Share Plan (‘GPSP’)
Business Unit Performance Plan (‘BUPP’)
the delivery of:
— Longer- term business plans; sustainable long-term returns
for shareholders; and adherence to the Group’s risk appetite.
Awards are made in Prudential shares, aligning the experience
of executives and shareholders.
The M&G Executive LTIP is designed to incentivise the
delivery of:
— Longer-term sustainable growth; and adherence to the
Group’s and M&G’s risk appetite.
The GPSP was designed to incentivise the achievement
of sustainable long-term returns for shareholders.
Awards were made in Prudential shares, aligning the absolute
shareholder experience of executives and shareholders.
The BUPP was designed to incentivise the delivery of
business unit performance for executives who have regional
responsibilities. These directors received awards under both
the GPSP and the BUPP to ensure a dual focus on business unit
and Group performance.
Awards were made in Prudential shares aligning the absolute
shareholder experience of executives and shareholders.
Prudential plc Annual Report 2013 Remuneration report 95
Fixed pay policy for executive directors
Component
Base salary
Benefits
Provision for
an income in
retirement
Operation
Opportunity
Annual salary increases for executive
directors will normally be in line with the
increases for other employees across our
business units. However, there is no
prescribed maximum annual increase.
The maximum paid will be the cost to the
company of providing these benefits. The
cost of these benefits may vary from year
to year but the Committee is mindful of
achieving the best value from providers.
Executive directors are entitled to receive
pension contributions or a cash supplement
(or combination of the two) up to a total
of 25 per cent of base salary or, retain
membership of a defined benefit scheme.
In addition, the Chief Executive, PCA
receives statutory contributions into the
Mandatory Provident Fund.
Prudential’s policy is to offer all executive directors base salaries
which are competitive within their local market.
The Committee reviews salaries annually with changes effective
from 1 January. In determining base salaries for each executive,
the Committee considers factors such as:
— Salary increases for all employees;
— The performance and experience of the executive;
— Group or business unit financial performance; and
— Internal relativities.
Additionally, economic factors such as inflation are considered.
Having taken a view on the appropriate levels of increase based
on these criteria, market data is reviewed with the intention that
any resultant salary remains within a competitive range.
As the Company has executive directors based in multiple
geographies, and within insurance and asset management
businesses, the Remuneration Committee reviews data from
a number of different markets which it believes to be the most
relevant benchmarks. The benchmarks used are disclosed
in the annual report on remuneration.
Salaries are typically paid in the local currency of the country where
the executive is based. This means that the reported salary in the
‘single figure’ table may fluctuate due to currency movements. The
Committee may also determine that the salary of an executive is set
in an alternative currency (for example US dollars).
Prudential’s policy is for the Committee to have the discretion
to offer executive directors benefits which reflect their
individual circumstances and are competitive within their local
market, including:
— Health and wellness benefits;
— Protection and security benefits;
— Transport benefits;
— Family and education benefits;
— All employee share plans and savings plans; and
— Relocation and expatriate benefits.
No benefits are pensionable.
Prudential’s policy is to offer all executive directors a pension
provision which is competitive within their local market.
The pension provision for executive directors depends on the
arrangements in place for other employees in their business unit
when they joined the Group.
Those executives who joined the Group before June 2003 were
entitled to join the defined benefit plans available at that time.
At the end of 2013, no executive director was an active member
of a Group defined benefit scheme.
Executives who are not an active member of a defined benefit
scheme have the option to:
— Receive payments into a defined contribution scheme; or
— Take a cash supplement in lieu of contributions.
Jackson’s Defined Contribution Retirement Plan has a guaranteed
element (6 per cent of pensionable salary) and additional
contributions (up to a further 6 per cent of pensionable salary)
based on the profitability of JNL.
Remuneration reportDirectors’ remuneration policy Prudential plc Annual Report 2013 96
Annual bonus policy for executive directors
Annual bonus
Operation
Determining
annual bonus
payments
Unusual
circumstances
Opportunity
Performance
measures
Currently all executive directors participate in the Annual Incentive Plan (AIP).
The AIP awards for all executive directors are subject to the achievement of financial and personal objectives.
Business unit chief executives either have measures of their business unit’s financial performance in the AIP or
they may participate in a business unit specific bonus plan. For example, the President and CEO, JNL currently
participates in the Jackson Senior Management Bonus Pool, as well as in the AIP.
No bonus is payable under the AIP for performance at or below the threshold level, increasing to 100 per cent
for achieving or exceeding the maximum level.
The Committee determines the annual incentive payment for each executive director with reference to the
performance achieved against performance ranges.
The Jackson Senior Management Bonus Pool is calculated based on JNL’s financial performance and distributed
to Jackson’s leadership team.
In assessing performance, the Committee will take into account the personal performance of the director and
the Group and/or business units’ adherence to the risk appetite and framework, as well as other relevant factors.
To assist them in their assessment the Committee considers a report from the Group Chief Risk Officer on
adherence to the Group’s risk appetite and framework.
See page 104 for details of the Committee’s powers in respect of AIP participants joining or leaving the Group.
The Chief Executive, M&G has a bonus opportunity of 0.75 per cent of M&G’s IFRS profit, capped at six times salary.
For other executive directors the maximum AIP opportunity is up to 200 per cent of salary. Annual awards are
disclosed in the relevant annual report on remuneration.
In addition to the AIP, the President & CEO, JNL receives a 10 per cent share of the Jackson Senior Management
Bonus Pool.
The Committee has the discretion to determine the specific performance conditions attached to each AIP cycle
and to set annual targets for these measures with reference to the business plans approved by the Board. The
financial measures used for the AIP will typically include profit, cash and capital adequacy. For the measures used
in 2013 and 2014, please refer to our annual report on remuneration.
Jackson’s profitability and other key financial measures determine the value of the Jackson Senior Management
Bonus Pool.
The current weighting of the performance measures are:
Financial
Personal
Group Investment Director 1
Chief Executive, UK & Europe
Chief Executive, M&G
Chief Financial Officer
Chief Executive, PCA
Group Chief Executive
President & CEO, JNL2
50%
80%
80%
80%
80%
80%
80%
50%
20%
20%
20%
20%
20%
20%
Notes
1 The Group Investment Director is responsible for oversight of Prudential’s investment activities, with particular emphasis on
ensuring alignment to the Group’s risk appetite. The weighting of his bonus objectives reflect this role.
2 The President & CEO, JNL also participates in the Jackson Senior Management Bonus Pool. The whole of the pool is determined by
financial performance.
The Committee retains the discretion to adjust and/or set different performance measures if events
occur (such as a change in strategy, a material acquisition and/or divestment of a Group business or a change
in prevailing market conditions) which cause the Committee to determine that the measures are no longer
appropriate and that amendment is required so that they achieve their original purpose.
Prudential plc Annual Report 2013 Remuneration reportDirectors’ remuneration policy continued 97
Annual bonus policy for executive directors continued
Deferred bonus shares
Operation
All executive directors are required to defer a percentage of their total annual bonus into Prudential shares.
Currently all directors defer 40 per cent of bonus for three years.
Determining the
release of the
award
Unusual
circumstances
(including change
of control)
When awards are released they are increased to reflect the number of shares which could have been purchased
with the dividends paid on the released shares, during the deferral period.
The Committee has the authority to apply a malus adjustment to all, or a portion of, an outstanding deferred
award. This power could be invoked in specific circumstances, for example, if a business decision taken during
the performance period led to a material breach of a law or regulation, or if there is a material adverse restatement
of the accounts for that period.
In the event of a corporate transaction (eg takeover, merger, winding up, rights issue etc), the Remuneration
Committee will determine whether awards will:
— Vest in part or in full; and/or
— Continue in accordance with the rules of the Plan; and/or
— Lapse and, in exchange, the Participant will be granted an award under any other share or cash incentive plan
which the Remuneration Committee considers to be broadly equivalent to the award.
See page 104 for details of the Committee’s powers in respect of AIP participants joining or leaving the Group.
Opportunity
The maximum vesting under this arrangement is 100 per cent of the original deferral, plus accrued dividend
shares.
Performance
measures
The level of the initial deferred bonus awards are determined by the value of the bonus in respect of performance
in the previous year as described in the table above. The release of awards is not subject to any further
performance conditions.
Remuneration reportDirectors’ remuneration policy Prudential plc Annual Report 2013 98
Long-term incentive policy for executive directors
Prudential Long Term Incentive Plan (‘PLTIP’)
Operation
Granting awards
Prudential’s policy is that executive directors receive long-term incentive awards with full vesting only achieved
if the Company meets stretching performance targets.
The Rules of the PLTIP were approved by shareholders in 2013. The Committee will operate this Plan in line with
these Rules.
The PLTIP is a conditional share plan: the shares which are awarded will ordinarily be released to directors after
three years to the extent that performance conditions have been met. If performance conditions are not achieved
in full, the unvested portion of any award lapses and performance cannot be retested.
The levels of award made under the PLTIP in 2014 (as a percentage of salary) are:
Group Investment Director
CEO, UK
CEO, M&G
Chief Financial Officer
CEO, PCA
Group Chief Executive
CEO, JNL
250%
225%
150%
250%
225%
400%
460%
Determining
the release of
the award
Unusual
circumstances
(including change
of control)
Opportunity
The PLTIP has a three-year performance period (although the Committee has the discretion to apply shorter or
longer performance periods when the PLTIP is used for buy-out awards on recruitment).
The Committee has the authority to apply a malus adjustment to all, or a portion of, an outstanding PLTIP award.
This power could be invoked, for example, if a business decision taken during the performance period led to a
material breach of a law or regulation, or if there is a material adverse restatement of the accounts for that period.
The Committee also has the discretion to postpone the vesting date of the award.
When awards are released they are increased to reflect the number of shares which could have been purchased
with the dividends paid on the released shares, between the awards being granted and released. However, the
Committee has the discretion to determine that the number of dividend shares should be reduced or forfeited.
In the case of a corporate transaction (eg takeover, merger, winding up, rights issue etc) the Committee may
determine that awards will be exchanged for replacement awards (either in cash or shares) of equal value or be
released. Where awards are released the Remuneration Committee will have regard to the performance of the
Company, the time elapsed between the date of grant and the relevant event and any other matter which the
Remuneration Committee considers relevant or appropriate.
The Committee may make amendments to the Rules of the Plan which are minor and to benefit the administration
of the Plan, which take account of any changes in legislation, and/or which obtain or maintain favourable tax,
exchange control or regulatory treatment. No amendments may be made to the advantage of participants without
prior shareholder approval.
See page 104 for details of the Committee’s powers in respect of PLTIP participants joining or leaving the Group.
The value of shares awarded under the PLTIP (in any given financial year) may not exceed 550 per cent of the
executive’s annual basic salary.
Awards made in a particular year are usually significantly below this limit. The levels of award in 2014 are shown
above. The Committee do not envisage increasing these over the life of the policy and would consult with major
shareholders before doing so. In addition, these would be disclosed in the relevant annual report on remuneration
and be subject to an advisory vote at the AGM.
The maximum vesting under the PLTIP is 100 per cent of the original share award plus accrued dividend shares.
Prudential plc Annual Report 2013 Remuneration reportDirectors’ remuneration policy continued 99
Long-term incentive policy for executive directors continued
Performance
measures
Relative TSR
IFRS profit
The performance conditions attached to PLTIP awards are:
— Relative TSR (50 per cent of award); and
— Group IFRS profit (50 per cent of award); or
— Business unit IFRS profit (50 per cent of award).
The performance conditions attached to each award is dependent on the role of the executive and will be
disclosed in the relevant annual report on remuneration.
The awards made under the PLTIP to the Chief Executive, M&G are subject only to the TSR performance
condition as the IFRS profit of M&G is a performance condition under the M&G Executive LTIP.
Relative TSR is measured over three years. 25 per cent of this portion of each award will vest for achieving the
threshold level of median increasing to full vesting for meeting the stretch level of upper quartile.
TSR is measured against a peer group of international insurers (currently 18) which are similar to Prudential in size,
geographic footprint and products. The peer group for each award is disclosed in the relevant annual report on
remuneration.
Three year cumulative IFRS operating profit is assessed at Group or business unit level.
Threshold 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 this portion of the award will vest for achieving threshold performance
increasing to full vesting for meeting stretch targets. The target for Group IFRS operating profit will be disclosed
when the performance period ends.
Committee
discretions
For any award made under the PLTIP to vest, the Committee must be satisfied that the quality of the Company’s
underlying financial performance justifies the level of reward delivered at the end of the performance period.
For current awards
For future
awards
The Committee may revise the peer group used to measure relative TSR to reflect events such as mergers,
demergers, listings and delistings.
As set out in the Rules of the PLTIP, which were approved by shareholders at the 2013 AGM, the Committee
has the discretion to amend the performance conditions attached to an award if circumstances relevant to the
performance condition have changed, and the Committee is satisfied that the amended measure will be a fairer
measure of performance and no more or less demanding than the original condition. The Committee will consult
with major shareholders before revising performance conditions on outstanding awards under the PLTIP. In
addition, these would be disclosed in the relevant annual report on remuneration and would be subject to an
advisory vote at the AGM.
For new awards, organisations may be included in the peer group if their size, geographic footprint and products
become similar to those of the Company. Organisations which no longer meet such criteria may be excluded from
the peer group.
The Committee retains the ability to adjust and/or set different performance measures (or the weighting of
performance conditions) which apply to future long-term incentive awards if events occur (such as a change in
strategy, a material acquisition and/or divestment of a Group business or a change in prevailing market conditions)
which cause the Committee to determine that the measures are no longer appropriate and that amendment is
required so that they achieve their original purpose. The Committee will consult with major shareholders before
revising performance conditions on future awards under the PLTIP. In addition, these would be disclosed in the
relevant annual report on remuneration and would be subject to an advisory vote at the AGM.
Remuneration reportDirectors’ remuneration policy Prudential plc Annual Report 2013 100
Long-term incentive policy for executive directors continued
M&G Executive LTIP
Operation
Granting awards
Determining the
release of the
award
The Chief Executive, M&G currently receives awards under the M&G Executive LTIP. 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 performance of M&G over the three year performance period.
Awards are settled in cash.
The Committee has the authority to apply a malus adjustment to all, or a portion of, an outstanding M&G
Executive LTIP award. This power could be invoked, for example, if a business decision taken during the
performance period led to a material breach of a law or regulation, or if there is a material adverse restatement
of the accounts for that period.
Unusual
circumstances
(including change
of control)
In the event of a change of control, the Committee may determine that the award will vest immediately or continue
until the original vest date.
See page 104 for details of the Committee’s powers in respect of M&G Executive LTIP participants joining or
leaving the Group.
Opportunity
Performance
measures
The Chief Executive, M&G receives an award with an initial value of 300 per cent of salary under the M&G
Executive LTIP.
The maximum vesting under the M&G Executive LTIP is 100 per cent of the number of phantom shares originally
awarded.
The phantom share price at vesting is currently determined by the increase or decrease in M&G’s profitability
with profit and investment performance adjustments also applied.
Where the investment performance of M&G’s funds is in the top two quartiles during the three-year performance
period, the value of phantom shares vesting will be enhanced. The value of phantom shares may be doubled
if performance is in the top quartile. Investment performance in the bottom quartile will result in awards being
forfeited, irrespective of any profit growth.
If profits in the third year of the performance period are less than the average annual profit generated over the
performance period the award will be reduced, potentially down to zero.
Share ownership guidelines for executive directors
Operation
The share ownership guidelines for the executive directors were increased as part of the review of remuneration
architecture approved by shareholders in 2013. The revised guidelines, effective from 1 January 2013, are:
— 350 per cent of salary for the Group Chief Executive; and
— 200 per cent of salary for other executive directors.
Executives have five years from the implementation of this policy (or the date of their appointment, if later) to build
this level of ownership. Shares earned and deferred under the Annual Incentive Plan are included in calculating
the executive director’s shareholding for these purposes. Unvested share awards under long-term incentive plans
are not included.
Progress against the share ownership guidelines is detailed in the ‘Statement of directors’ shareholdings’ section
of the annual report on remuneration.
Prudential plc Annual Report 2013 Remuneration reportDirectors’ remuneration policy continued 101
Variable pay policy for executive directors (legacy plans)
Group Performance Share Plan (‘GPSP’) and Business Unit Performance Plan (‘BUPP’)
Operation
Prior to the approval of the PLTIP, the Group Performance Share Plan and the Business Unit Performance Plan
were the principal long-term incentive plans operated for executive directors.
All executive directors were eligible to participate in the GPSP. The Chief Executive, UK & Europe, Chief
Executive, PCA and President & CEO, JNL also received awards under the Business Unit Performance Plan.
The GPSP and BUPP are conditional share plans: the shares which were awarded will be released to directors
to the extent that performance conditions have been met, over the three-year performance period.
Determining the
release of the
award
The Committee has the discretion to reduce the proportion of an award that will vest or determine that an award
will be forfeited or to postpone the vesting date of the award to allow the Committee to consider whether any
part of the award should vest.
When awards are released they are increased to reflect the number of shares which could have been purchased
with the dividends paid on the released shares, during the performance period. However, the Committee has
the discretion to determine that the number of dividend shares should be reduced or forfeited.
Unusual
circumstances
(including
change of
control)
Opportunity
Performance
measures
GPSP
Asia BUPP
Jackson BUPP
Committee
discretions
If an award vests early as a result of a corporate transaction (eg takeover, merger, winding up, rights issue etc)
awards may be exchanged for replacement award (either in cash or shares) of equal value or released. Where
the awards are released, the Remuneration Committee will have regard to the performance of the Company,
the time elapsed between the date of grant and the relevant event and any other matter which the Remuneration
Committee considers relevant or appropriate.
See page 104 for details of the Committee’s powers in respect of GPSP and BUPP participants joining or leaving
the Group.
The maximum award which could be made to a participant under the GPSP and BUPP in total in any year was
550 per cent of salary.
The maximum vesting under the GPSP and BUPP is 100 per cent of the original award, plus accrued dividends.
GPSP awards normally vest on the basis of the Group’s Total Shareholder Return (TSR) performance. TSR
is the combination of the share price growth and the dividends paid. Awards made prior to 2013 are subject
to Prudential’s TSR achievement over the performance period compared with the TSR of an index composed
of international insurers.
For threshold performance of meeting the index, 25 per cent of the award vests. This increases on a straight-line
basis to 75 per cent vesting for performance of 110 per cent of the index and full vesting for 120 per cent of the
index. The same performance condition also applies to the UK BUPP.
The peer group for outstanding awards is disclosed in the relevant annual report on remuneration. The Remuneration
Committee may revise this peer group to reflect events such as mergers, demergers and delistings.
Some awards were granted using alternative performance conditions, eg UK IFRS operating profit and TSR
on a ranked basis where the Committee considered it appropriate.
Asia BUPP awards are dependent on the achievement of PCA’s new business profit, IFRS profit and cash
remittance measured over a cumulative three-year 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.
Vesting of awards made under the Jackson BUPP are dependent on Shareholder Capital Value (SCV) growth
over the performance period. At threshold performance of 8 per cent compound annual growth in SCV,
30 per cent of the award vests. This increases on a straight-line basis to 75 per cent vesting for 10 per cent
growth, and full vesting for 12 per cent compound annual growth in SCV.
In addition, for any award made under the GPSP or the BUPP to vest, the Committee must be satisfied that the
quality of the Company’s underlying financial performance justifies the level of reward delivered at the end of
the performance period. If performance measures are not achieved in full, the unvested portion of any award
lapses and performance cannot be retested.
As set out in the rules of the GPSP and BUPP, the Committee has the discretion to amend the performance
conditions attached to an award if circumstances relevant to the performance condition have changed and the
Committee is satisfied that the amended measure will be a fairer measure of performance and no more or less
demanding than the original condition. The Committee may make amendments to the Rules of the Plan which
are minor and to benefit the administration of the Plan, which take account of any changes in legislation, and/or
which obtain or maintain favourable tax, exchange control or regulatory treatment. No amendments may be
made to the advantage of participants without prior shareholder approval.
Remuneration reportDirectors’ remuneration policy Prudential plc Annual Report 2013 102
Notes to the remuneration policy table for executive directors
Determining the performance measures
The Committee selected the performance measures which currently apply to variable pay plans on the following basis:
AIP
The performance measures are selected to incentivise the delivery of the Group’s business plan, specifically to ensure that financial
objectives are delivered while maintaining adequate levels of capital. Executives are also rewarded for the achievement of personal
objectives. These personal objectives include the executive’s contribution to Group strategy as a member of the Board and specific
goals related to their functional and/or business unit role.
PLTIP
Awards made under the PLTIP are currently subject to the achievement of IFRS profit targets and relative TSR. IFRS profit was selected
as a performance measure because it is central to the management of the business and a key driver of shareholder value. Relative TSR
was selected as a performance measure because it focuses on the value delivered to shareholders – aligning the long-term interests of
shareholders with those of executives. There is one exception; awards made under the PLTIP to the CEO, M&G are subject only to the
TSR performance condition. His annual awards under the M&G Executive LTIP (see below) are subject to an IFRS profit target, thereby
ensuring that he has the same combination of performance targets as other executives.
M&G Executive LTIP
The performance measures under the M&G Executive LTIP are currently M&G’s IFRS operating profit and investment performance.
IFRS profit was selected as a performance measure as it is central to the management of the business and a key driver of shareholder
value. Investment performance was selected as a performance measure as it is the principal measure of the relative return which M&G
provides to its investors and is crucial in ensuring the long-term success of M&G.
GPSP
The performance measure under the GPSP is relative TSR. Relative TSR was selected as a performance measure because it focuses
on the value delivered to shareholders – aligning the long-term interests of shareholders with those of executives.
Asia BUPP
The performance measures under the PCA BUPP are PCA IFRS operating profit, PCA new business profit and PCA cash remittances.
These measures were selected as performance measures because they reflected the growth and cash strategy of PCA.
Jackson BUPP
The performance measure under the Jackson BUPP is shareholder capital value growth. This was selected as a performance measure
because it is an estimation of the shareholder value created by the Jackson business over the performance period.
UK BUPP
The performance measure under the UK BUPP is relative TSR. Relative TSR was selected as a performance measures for the UK BUPP
because this aligned the UK business with the Group performance measure in order to reflect the cash generative priorities of the UK
business.
Setting the performance ranges
Where variable pay has performance conditions based on business plan measures (for example the AIP and the IFRS profit element
of the PLTIP) the performance ranges are set by the Remuneration Committee prior to, or at the beginning of, the performance period.
Performance is based on annual and longer-term plans approved by the Board. These reflect the long-term ambitions of the Group and
business units, in the context of anticipated market conditions.
For market-based performance conditions (eg relative TSR and M&G investment performance) the Committee requires that
performance is in the upper quartile, relative to Prudential’s peer group, for awards to vest in full.
Key differences between directors’ remuneration and the remuneration of other employees
Across the Group, remuneration is reviewed regularly with the intention that all employees are paid appropriately in the context of
their local market and given their individual skills, experience and performance. Each business unit’s salary increase budget is set with
reference to local market conditions. The Remuneration Committee considers salary increase budgets in each business unit when
determining the salaries of executive directors.
The principles that apply to executive directors are cascaded to other employees in their business unit. All senior leaders in the
Group participate in annual bonus schemes which have performance conditions which mirror the CEO for their business unit. In addition,
they are eligible to receive awards under the Prudential Long Term Incentive Plan or the M&G Executive LTIP with performance
conditions aligned to those which apply to executive directors.
Legacy payments
Any commitment made before either (i) 27 June 2012 or (ii) an individual becoming a director, will be honoured even where it is not
consistent with the policy prevailing at the time such commitment is fulfilled.
References to ‘shares’
In this report, references to shares include American Depository Receipts (ADRs). Directors may receive awards denominated in ADRs
rather than shares, depending on their location.
Prudential plc Annual Report 2013 Remuneration reportDirectors’ remuneration policy continued 103
Scenarios of total remuneration
The chart below provides an illustration of the future total remuneration for each executive director in respect of remuneration opportunity
for 2014. Three scenarios of potential outcome are provided based on underlying assumptions shown in the notes to the chart.
£000
8,000
6,000
4,000
2,000
0
2,459
41%
21%
100% 38%
928
m
u
m
n
M
i
i
h
t
i
w
e
n
i
l
n
I
s
n
o
i
t
a
t
c
e
p
x
e
3,585
45%
29%
26%
m
u
m
i
x
a
M
5,726
50%
40%
10%
m
u
m
i
x
a
M
3,368
43%
31%
26%
m
u
m
i
x
a
M
3,219
47%
36%
569
100% 18%
m
u
m
n
M
i
i
h
t
i
w
e
n
i
l
n
I
s
n
o
i
t
a
t
c
e
p
x
e
3,843
44%
31%
25%
m
u
m
i
x
a
M
2,607
41%
23%
100% 36%
945
m
u
m
n
M
i
i
h
t
i
w
e
n
i
l
n
I
s
n
o
i
t
a
t
c
e
p
x
e
3,044
32%
18%
1,501
100% 49%
m
u
m
n
M
i
i
h
t
i
w
e
n
i
l
n
I
s
n
o
i
t
a
t
c
e
p
x
e
7,815
54%
27%
19%
m
u
m
i
x
a
M
4,194
38%
27%
36%
m
u
m
i
x
a
M
5,163
51%
1,449
21%
100% 28%
m
u
m
n
M
i
i
h
t
i
w
e
n
i
l
n
I
s
n
o
i
t
a
t
c
e
p
x
e
2,309
39%
22%
100% 38%
889
m
u
m
n
M
i
i
h
t
i
w
e
n
i
l
n
I
s
n
o
i
t
a
t
c
e
p
x
e
7,521
44%
46%
10%
m
u
m
i
x
a
M
5,289
39%
46%
790
100% 15%
h
t
i
m
u
m
n
M
i
i
s
n
o
i
t
a
t
c
e
p
x
e
w
e
n
i
l
n
I
John Foley
Jackie Hunt
Michael McLintock
Nic Nicandrou
Barry Stowe
Tidjane Thiam
Mike Wells
Fixed
Annual bonus
Long-term incentives
Notes
The scenarios in the chart above have been calculated on the following assumptions:
Minimum
In line with expectations
Maximum
Fixed pay
— Base salary at 1 January 2014.
— Pension allowance at 1 January 2014.
— Estimated value of benefits based on amounts paid in 2013.
— Barry Stowe and Mike Wells are paid in HK$ and US$ respectively and have been converted to GBP for the purposes of this chart.
Annual bonus
No bonus paid.
— 50% of maximum AIP.
— 100% of maximum AIP.
Long-term incentives
(excludes share
price growth
and dividends)
No long-term incentive vesting.
— JNL bonus pool at the average
— JNL bonus pool at highest of the
of the last three years.
last three years.
— 62.5% of award under Prudential
LTIP (midway between threshold
and maximum).
— 100% of face value
of M&G Executive LTIP.
— 100% of award under Prudential LTIP.
— 200% of face value
of M&G Executive LTIP.
Service contracts
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 confirm that any variable payment will be at the discretion of the Company.
All of the remuneration obligations placed on the Company by service contracts and letters of engagement are set out elsewhere
in this directors’ remuneration policy.
Statement of consideration of conditions elsewhere in the Group
Across the Group, remuneration is reviewed regularly with the intention that all employees are paid appropriately in the context of their
local market and given their individual skills, experience and performance. Each business unit’s salary increase budget is set with
reference to local market conditions. The Remuneration Committee considers salary increase budgets in each business unit when
determining the salaries of executive directors.
Prudential does not consult with employees when setting the directors’ remuneration policy: Prudential is a global organisation with
employees and agents in multiple business units and geographies. As such, there are practical challenges associated with consulting with
employees directly on this matter. As many employees are also shareholders, they will be able to participate in the binding vote on the
directors’ remuneration policy.
Statement of consideration of shareholder views
The Remuneration Committee and the Company undertake regular consultation with key institutional investors on the remuneration
policy and implementation. This engagement is led by the Remuneration Committee Chairman and is an integral part of the Company’s
investor relations programme. The Committee is grateful to shareholders for the feedback which is provided, and takes this into account
when determining executive remuneration.
Remuneration reportDirectors’ remuneration policy Prudential plc Annual Report 2013
104
Approach to recruitment remuneration
The table below outlines the approach that Prudential will take when recruiting a new executive director. This approach would also apply
to internal promotions.
The approach to recruiting a non-executive director or a non-executive chairman is outlined in the remuneration policy for non-
executive directors and the non-executive Chairman on page 106.
Element
Approach
Base salary, benefits
and pension
The salary, benefits and pension for a new executive director will be set using the approach set out in the table
’Fixed pay policy for Executive Directors’.
Variable
remuneration
The variable remuneration opportunities for a new executive director would be consistent with the limits and
structures outlined in the variable pay policy table.
Awards and
contractual rights
forfeited when
leaving previous
employer
On joining the Board from within the Group the Committee may allow an executive to retain any outstanding
deferred bonus and/or long-term incentive awards and/or other contractual arrangements which they held on their
appointment. These awards (which may have been made under plans not listed in this policy) would remain subject
to the original Rules, performance conditions and vesting schedule applied to them when they were awarded.
If a newly appointed executive director forfeits one or more bonuses (including outstanding deferred bonuses) on
leaving a previous employer, these payments or awards may be replaced in either cash or Prudential shares with an
award of an equivalent value. Replacement awards will be released on the same schedule as the foregone awards.
If a newly appointed executive director forfeits one or more long-term incentive awards on leaving a previous
employer, these may be replaced with Prudential awards with an equivalent value. Replacement awards will
generally be made under the terms of a long-term incentive plan approved by shareholders, and vest on the same
schedule as the foregone awards. Performance conditions will be applied to awards replacing foregone long-term
incentive awards; these will be the same as those applied to the long-term incentive awards made to Prudential
executives in the year in which the forfeited award was made.
Potential variations
The Committee may consider compensating a newly appointed executive for other relevant contractual rights
forfeited when leaving their previous employer.
The use of Listing Rule 9.4.2 to facilitate the recruitment of an executive director is now only relevant in ‘unusual
circumstances’. The Committee does not anticipate using this Rule but reserves the right to do so in an
exceptional circumstance. For example, this rule may be required if, for any reason, like-for-like replacement
awards on recruitment could not be made under existing plans.
This provision would only be used to compensate for remuneration forfeited on leaving a previous employer.
Any arrangement established to replace foregone long-term incentive awards would reflect, as far as possible,
the terms of the original award (including, if applicable, any performance conditions). The value of this would
be capped to be no higher, on recruitment, than the awards which the individual had to surrender to be recruited.
Policy on payment on loss of office
Element
Approach
Notice periods
Principles
The Company’s policy is that executive directors’ service contracts will not require the Company to give an
executive more than 12 months’ notice without prior shareholder approval. A shorter notice period may be
offered where this is in line with market practice in an executive’s location.
The Company is required to give to, and to receive from, each of the current executive directors 12 months’ notice
of termination, unless indicated in this table. An executive director whose contract is terminated would be entitled
to 12 months’ salary and benefits in respect of their notice period. Payments are phased over the notice period,
although a payment in lieu of notice may be made.
Any executive leaving the Group other than by way of their death or disablement would have a duty to mitigate their loss.
Potential variations
If an executive director is dismissed for cause, their contract would be terminated with immediate effect and they
would not receive any payments in relation to their notice period.
Should an executive die while serving as an employee their estate would not be entitled to receive payments
and benefits in respect of their notice period – provisions are made under the Company’s life assurance scheme
to provide for this circumstance (see ‘Benefits’ in the Fixed pay policy for executive directors).
Should an executive director step down from the Board but remain employed by the Group, they would not
receive any payment in lieu of notice in respect of their service as a director.
The contract for Mike Wells is a renewable one-year fixed-term contract, renewable automatically on 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.
The contract for Michael McLintock requires that he gives the Company six months’ notice of termination.
Prudential plc Annual Report 2013 Remuneration reportDirectors’ remuneration policy continued 105
Policy on payment on loss of office continued
Element
Approach
Outstanding
deferred bonus
awards
Principles
The treatment of outstanding deferred bonuses will be decided by the Committee, taking into account the
circumstances of the departure, including the performance of the director.
Deferred bonus awards are normally retained by participants leaving the Company. Awards made in respect
of performance in, or before, 2012 will be released shortly after the end of employment. Awards made in respect
of performance in 2013, and subsequent years, will vest on the original timetable.
Prior to release, awards remain subject to the malus terms originally applied to them.
Potential variations
Any executive director dismissed for cause would forfeit all outstanding deferred bonus awards.
Should an executive die while serving as an employee, outstanding deferred bonus awards will be released as
soon as possible after the date of death.
Should an executive director step down from the Board but remain employed by the Group, they would retain
any outstanding deferred bonus awards. These awards would remain subject to the original Rules, performance
conditions and vesting schedule applied to them when they were awarded.
Outstanding
long-term incentive
awards
Principles
The treatment of outstanding long-term incentives will be decided by the Committee, taking into account the
circumstances of the departure, including the performance of the director.
Executives will normally retain their outstanding long-term incentive awards. These awards will ordinarily be
pro-rated based on time employed, will vest on the original timescale and will remain subject to the original
performance conditions assessed over the entire performance period.
Bonus for final
year of service
Other payments
Potential variations
Any executive director dismissed for cause would forfeit all outstanding long-term incentive awards.
The release of awards may be expedited in the case of the death of a participant.
Awards made under the M&G Executive LTIP will be released immediately should the director leave due to
disablement or death and would be pro-rated based on time employed.
Should an executive director step down from the Board but remain employed by the Group, they would retain
any outstanding long-term incentive awards which they held on their change of role. These awards would remain
subject to the original Rules, performance conditions and vesting schedule.
Principles
The payment of a bonus for the final year of service will be decided by the Committee giving full consideration
to the circumstances of the departure including the performance of the director.
The Committee may award a departing executive a bonus which will usually be pro-rated to reflect the portion
of the final financial year in which they served which had elapsed on the last day of their employment. Any such
bonus would be calculated with reference to individual and financial performance measures in the usual way.
The Committee may determine that a portion of such a bonus must be deferred.
Potential variations
Any executive director dismissed for cause would not be eligible for any outstanding bonus payments.
The Committee may decide to award an executive stepping down from the Board, but remaining with the Group,
a bonus pro-rated to reflect the portion of the financial year which had elapsed on the date of their change of role.
This would be calculated with reference to individual and financial performance measures in the usual way.
The Committee may determine that a portion of such a bonus must be deferred.
Principles
Consistent with other employees in their business unit, executive directors may receive payments to compensate
them for the loss of employment rights on termination. Payments may include:
— A nominal amount for agreeing to non-solicitation and confidentiality clauses;
— Directors’ and Officers’ insurance cover for a specified period following the executive’s termination date;
— Payment for outplacement services; and
— Reimbursement of legal fees.
The Committee reserves the right to make additional exit payments where such payments are made in good faith:
— In discharge of an existing legal obligation (or by way of damages for breach of such an obligation); or
— By way of settlement or compromise of any claim arising in connection with the termination of a director’s
office or employment.
Remuneration reportDirectors’ remuneration policy Prudential plc Annual Report 2013 106
Remuneration policy for non-executive directors and the non-executive Chairman
Fees
Benefits
Share ownership guidelines
Non-executive
directors
Non-executive
Chairman
Non-executive directors are
not eligible to receive benefits,
a pension allowance or to
participate in the Group’s
employee pension schemes.
Travel and expenses for non-
executive directors (including the
Chairman) are incurred in the
normal course of business, for
example in relation to attendance
at Board and committee meetings.
The costs associated with these
are all met by the Company.
In July 2011, a share ownership
guideline for non-executive
directors was introduced. It is
expected that non-executive
directors will 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 has a share
ownership guideline of one
times his annual fee and is
expected to attain this level
of share ownership within
five years of the date of
his appointment.
The Chairman may be offered
benefits including:
— Health and wellness benefits;
protection and security
benefits; transport benefits;
and relocation and expatriate
benefits (where appropriate)
The maximum paid will be the
cost to the Company of providing
these benefits.
The Chairman is not eligible
to receive a pension allowance
or to participate in the Group’s
employee pension schemes.
All non-executive directors receive a basic
fee for their duties as a Board member.
Additional fees are paid for added
responsibilities such as chairmanship and
membership of committees, or acting as
the Senior Independent Director. Fees are
paid to non-executives in cash, subject to
the appropriate deductions.
The basic and additional fees are reviewed
annually by the Board, with any changes
effective from 1 July. In determining the
level of fees the Board considers:
— The time commitment and other
requirements of the role; Group financial
performance; salary increases for all
employees; and benchmark information
from appropriate markets.
If, in a particular year, the number of
meetings is materially greater than usual, the
Company may determine that the provision
of additional fees is fair and reasonable.
Non-executive directors are not eligible
to participate in annual bonus plans or
long-term incentive plans.
The Chairman receives an annual fee for the
performance of their role. This fee is agreed
by the Remuneration Committee and is paid
to the Chairman in cash, subject to the
appropriate deductions. On appointment,
the fee may be fixed for a specified period
of time. Following the fixed period (if
applicable) this fee will be reviewed annually.
Changes in the fee are effective from 1 July.
In determining the level of the fee for the
Chairman the Committee considers:
— The time commitment and other
requirements of the role; the
performance and experience of the
Chairman; internal relativities; Company
financial performance; salary increases
for all employees; and benchmark
information from appropriate markets.
The Chairman is not eligible to participate
in annual bonus plans or long-term
incentive plans.
Recruitment of a new non-executive chairman or non-executive director
The fees for a new non-executive director will be consistent with the current basic fee paid to other non-executive directors (as set out
in the annual report on remuneration for that year) and will be reflective of their additional responsibilities as Chair and/or members of
Board committees.
The fee for a new non-executive Chairman will be set with reference to the time commitment and other requirements of the role, the
experience of the candidate, as well as internal relativities among the other executive and non-executive directors. To provide context
for this decision, data would be sought for suitable market reference point(s).
Notice periods – non-executive directors and non-executive Chairman
Non-executive directors are appointed pursuant to letters of appointment with notice periods of six months without liability for
compensation. A contractual notice period of 12 months by either party applies for the non-executive Chairman. The Chairman would
not be entitled to any payments for loss of office. For information on the terms of appointment for non-executive directors please see
the corporate governance report.
Prudential plc Annual Report 2013 Remuneration reportDirectors’ remuneration policy continued Remuneration report
Annual report on remuneration
107
The operation of the Committee
The members of the Committee during 2013, and the number of Remuneration Committee meetings they attended, are listed below.
All are independent non-executive directors:
Director
Lord Turnbull KCB CVO (Chairman)
Keki Dadiseth (until 1 May 2013)
Michael Garrett (until 31 August 2013)
Kai Nargolwala
Anthony Nightingale CMG SBS JB (from 1 June 2013)
Philip Remnant CBE ACA (from 1 January 2013)
Meetings attended
5/5
0/2
3/3
5/5
3/3
5/5
In 2013, the Committee met five times. Key activities at each meeting are shown in the table below:
Meeting
Key activities
Early March 2013
Approve the 2012 directors’ remuneration report; consider 2012 bonus awards for executive directors; consider
vesting of the long-term incentive awards with a performance period ending on 31 December 2012; and approve
2013 long-term incentive awards, performance measures and Plan documentation.
Mid-March 2013
Confirm 2012 annual bonuses and the vesting of long-term incentive awards with a performance period ending
on 31 December 2012, in light of audited financial results.
June 2013
September 2013
December 2013
Review the remuneration of the Group Leadership Team, senior risk staff and of employees with a remuneration
opportunity over £1 million per annum; consider the cascade of the remuneration architecture to the senior
management team; and review progress towards share ownership guidelines by the Chairman, executive
directors and Group Executive Committee members.
Monitor performance against long-term incentive targets, based on the half year results; review the dilution
levels resulting from the Company’s share plans; consider the latest version of the external measures report;
review total 2014 remuneration of executive directors for consultation with shareholders; and review draft
remuneration policy report for consultation with shareholders.
Review the level of participation in the Company’s all-employee share plans; approve executive directors’ 2014
salaries and incentive opportunities; consider the annual bonus and long-term incentive measures and targets to
be used in 2014; review an initial draft of the 2013 directors’ remuneration report; review the Committee’s terms
of reference; and approve the Committee’s 2014 work plan.
The Chairman and the Group Chief Executive attend meetings by invitation. The Committee also had the benefit of advice from:
Group Chief Risk Officer; Chief Financial Officer; Group Human Resources Director; and Director of Group Reward and Employee
Relations. Individuals are never present when their own remuneration is discussed.
During 2013, Deloitte LLP were the independent advisor to the Committee. Deloitte were appointed by the Committee in 2011
following a competitive tender process. As part of this process, the Committee considered the services that Deloitte provided to
Prudential and its competitors as well as other potential conflicts of interests. Deloitte is a member of the Remuneration Consultants’
Group and voluntarily operate under their code of conduct when providing advice on executive remuneration in the UK. Deloitte
regularly meet with the Chairman of the Committee without management present. The Committee is comfortable that the Deloitte
engagement partner and team, that provide remuneration advice to the Committee, do not have connections with Prudential that may
impair their independence and objectivity. The total fees paid to Deloitte for the provision of independent advice to the Committee in
2013 were £72,000, charged on a time and materials basis. During 2013, Deloitte also gave Prudential management advice on
remuneration, as well as providing guidance on Solvency II, taxation and other financial matters. In addition, management received
external advice and data from a number of providers. This included market data and legal counsel. This is not considered to be material
advice or services.
During the year, the Company has complied with the appropriate provisions of the UK Corporate Governance Code which are in force
regarding directors’ remuneration.
Remuneration reportAnnual report on remuneration Prudential plc Annual Report 2013 108
Remuneration in respect of performance in 2013
Base salary
Executive directors’ salaries were reviewed in 2012, with changes effective from 1 January 2013. When the Committee took these
decisions it considered the salary increases awarded to other employees, the performance and experience of each executive, and the
relative size of each directors’ role, as well as the performance of the Group. Salary increases for the wider workforce vary across our
business units, varying with local market conditions; in 2013 salary budgets increased between 3 per cent and 6 per cent for the wider
workforce.
To provide context for this review, information was also drawn from the following market reference points:
Director
Rob Devey
John Foley
Michael McLintock
Nic Nicandrou
Barry Stowe
Tidjane Thiam
Role
Chief Executive, UK & Europe
Chief Risk Officer
Chief Executive, M&G
Chief Financial Officer
Chief Executive, PCA
Group Chief Executive
Mike Wells
President & CEO, JNL
Benchmark(s) used to assess remuneration
FTSE 40
International Insurance Companies
FTSE 40
McLagan UK Investment Management Survey
FTSE 40
International Insurance Companies
Towers Watson Asian Insurance Survey
FTSE 40
International Insurance Companies
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 below.
Executive1
Rob Devey
John Foley
Michael McLintock
Nic Nicandrou
Barry Stowe
Tidjane Thiam
Mike Wells
2012 salary
2013 salary (+3%)
£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
Note
1
Jackie Hunt was appointed on 5 September 2013. Her salary on joining was £625,000.
Annual bonus
The directors’ remuneration policy section provides further details of the design of Prudential’s annual bonus plans.
2013 annual bonus opportunities
Executive directors’ bonus opportunities, the weighting of performance measures for 2013 and the proportion of annual bonuses
deferred are set out below:
Weighting of measures
Financial measures
Maximum AIP
opportunity
(% of salary)
Deferral
requirement
Group
Business unit
Personal
objectives
160% 40% of total bonus
160% 40% of total bonus
160% 40% of total bonus
600% 40% of total bonus
175% 40% of total bonus
160% 40% of total bonus
200% 40% of total bonus
160% 40% of total bonus
20%
50%
20%
20%
80%
20%
80%
80%
60%
–
60%
60%
–
60%
–
–
20%
50%
20%
20%
20%
20%
20%
20%
Rob Devey1
John Foley
Jackie Hunt
Michael McLintock2
Nic Nicandrou
Barry Stowe
Tidjane Thiam
Mike Wells3
Notes
1 The maximum bonus opportunity shown for Rob Devey was his annual opportunity – this was pro-rated for the portion of 2013 for which he was employed
by the Company (to 31 October). Please see the section on ‘Payment to past directors’ for details.
2 Michael McLintock’s annual bonus opportunity in 2013 was the lower of 0.75 per cent of M&G’s IFRS profit and six times annual salary. M&G’s IFRS profit in 2013
3
was £395 million.
In addition to the AIP, Mike Wells receives a 10 per cent share of the Jackson Senior Management Bonus Pool. This is determined by the financial performance
of Jackson.
Prudential plc Annual Report 2013 Remuneration reportAnnual report on remuneration continued 109
2013 AIP performance measures and achievement
Financial performance
The financial performance measures set for 2013 are shown below. Prior to the start of the year the Committee set stretching
performance ranges for each of these measures. The Committee reviewed the Group’s performance against these ranges at its meeting
in February 2014; in all of our key performance metrics the Group’s 2013 results exceed those achieved in 2012. The Committee also
reviewed a report from the Group Chief Risk Officer which assessed the achievement of these results in the context of adherence to
the Group’s risk appetite and framework.
The performance measures, and the relative achievement compared to the performance range, is illustrated below. The Board believe
that, due to the commercial sensitivity of these targets, disclosing them may damage the competitive position of the Group.
Weighting1
Threshold
0% vesting
Midpoint
50% vesting
Maximum
100% vesting
Above maximum
100% vesting
30%
20%
15%
15%
10%
10%
Measure
IFRS operating profit
IGD surplus
Cash flow
Net free surplus generated
NBP EEV profit
In-force EEV profit
Group
PCA
UKIO
M&G
Notes
1 The weighting of each measure within the Group financial element of the bonus for all executives excluding the Chief Executive, M&G. Weightings for the
business unit bonus element vary based on the strategy of each business.
In addition, investment performance (measured over a one and three-year basis) forms 30 per cent of the Chief Executive, M&G’s annual bonus.
2
Personal performance
As set out in our remuneration policy, a proportion 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 specific
goals related to their functional and/or business unit role. 2013 objectives were set for each executive prior to the start of the financial
year, and performance against these objectives was assessed by the Committee at its meeting in February 2014.
2013 annual incentive plan payments
On the basis of the outstanding performance of the Group and business units, and the Committee’s assessment of each executive’s
personal performance, the Committee determined the following 2013 AIP payments:
Executive
Role
2013 salary
Maximum
2013 AIP
2013 AIP
payment
(as a percentage
of maximum)
2013 AIP
payment
Chief Executive, UK & Europe
Group Investment Director
Chief Executive, UK & Europe
Rob Devey1
John Foley
Jackie Hunt
Michael McLintock2 Chief Executive, M&G
Chief Financial Officer
Nic Nicandrou
Chief Executive, PCA
Barry Stowe
Group Chief Executive
Tidjane Thiam
Mike Wells3
President & CEO, JNL
£618,000
£628,300
£625,000
£370,800
£648,900
HK$8,240,000
£1,030,000
US$1,081,500
160%
160%
160%
600%
175%
160%
200%
160%
77.4%
99.9%
93.4%
100.0%
99.0%
95.4%
99.8%
99.2%
£637,776
£1,004,023
£934,375
£2,224,800
£1,123,895
HK$12,579,184
£2,055,880
US$1,716,773
Notes
1 Rob Devey received a bonus pro-rated for the portion of 2013 he was employed by the Company (to 31 October 2013). Please see the section on ‘Payments to past
directors’ for details.
2 Michael McLintock’s annual bonus opportunity in 2013 was the lower of 0.75 per cent of M&G’s IFRS profit and six times annual salary. M&G’s IFRS profit in 2013
3
was £395 million.
In addition to the AIP Mike Wells also received 10 per cent of the JNL Senior Management Bonus Pool. His total bonus including his AIP and JNL Senior
Management award is US$5,342,373.
2013 Jackson bonus pool
In 2013 the Jackson bonus pool was determined by Jackson’s profitability, capital adequacy, remittances to Group, in-force experience
and credit rating. Across all of these measures, Jackson delivered excellent performance and exceeded prior year performance.
As a result of this performance, the Committee determined that Mike Wells’ share of the bonus pool would be US$3,625,600.
Remuneration reportAnnual report on remuneration Prudential plc Annual Report 2013 110
Long-term incentive plans with performance periods ending on 31 December 2013
Our long-term incentive plans have performance conditions which are based on the Group’s business priorities. When the Committee
decided the proportion of these awards which should be released, actual financial results were reviewed against the performance
targets set. The Committee also reviewed the underlying Company performance to ensure that these vesting levels were appropriate.
The vesting levels are set out below.
The remuneration policy report contains further details of the design of Prudential’s long-term incentive plans. Information
on long-term incentives awarded in 2013 is shown on page 115.
Group Performance Share Plan (GPSP) and UK BUPP awards
In 2011, all executive directors were made awards under the GPSP. The line chart below compares Prudential’s TSR during the
performance period (1 January 2011 to 31 December 2013) with that of the peer group index TSR. As a result of Prudential’s excellent
TSR performance, which was in excess of 140 per cent of the index, these awards will be released in full:
Group Performance Share Plan (GPSP) and UK BUPP awards
220%
200%
180%
160%
140%
120%
100%
80%
219.5
188.0
172.3
156.7
Dec 2010
Dec 2011
Dec 2012
Dec 2013
Prudential TSR performance – vesting level = 100%
Index x 120% – performance level required for awards to vest at 100%
Index x 110% – performance level required for awards to vest at 75%
Index – performance required for awards to vest at 25%
Note
1 Companies in the peer group for the 2011 GPSP and UK BUPP awards are:
Aegon, Allianz, Aviva, Axa, Generali, ING, Legal & General, Manulife, Old Mutual and Standard Life.
Asia BUPP
In 2011, Barry Stowe received an award under the Asia BUPP. This award vests based on the new business profit, IFRS profit and cash
remittances of the Asia business. The chart below illustrates the achievement against performance ranges for the 2011 Asia award:
Measure
Threshold
Mid
Maximum
Overall 2013 vesting
1/3 cumulative new business profit
1/3 cumulative IFRS profit
1/3 cumulative cash remittances
98.09%
M&G Executive Long-Term Incentive Plan
The phantom share price at vesting for the 2011 M&G Executive Long-Term Incentive award is determined by the increase or decrease
in M&G’s profitability over the three-year performance period, with adjustments for the investment performance of its funds. M&G
performance and the resulting phantom share price for Michael McLintock is shown below:
Award
Three-year profit growth of M&G
Three-year investment performance
2013 phantom share price
2011 M&G Executive LTIP
61%
Second quartile
£2.30
Prudential plc Annual Report 2013 Remuneration reportAnnual report on remuneration continued
111
Jackson awards
In 2010, Mike Wells was granted awards under two legacy long-term incentive plans offered to senior staff in Jackson; these awards had
a four-year performance period. In 2011, following his appointment to the Prudential Board, he received awards under the GPSP and
Jackson BUPP. These awards had a three-year performance period. Mike Wells’ 2010 JNL awards (the JNL Long-Term Incentive Plan and
2010 JNL US Performance Share Plan) will be released in 2014, alongside his 2011 GPSP and BUPP awards. The vesting of these awards
are set out below:
Jackson BUPP
Mike Wells’ 2011 Jackson BUPP award vests subject to Shareholder Capital Value (SCV) growth over the performance period.
As a result of excellent SCV growth of 17.7 per cent per annum over the performance period this award will vest in full:
Percentage of award that vests:
30%
75%
100%
Actual performance
Compound annual growth
in SCV over three years:
0%
5%
8%
10%
12%
15%
17.7%
Legacy below Board long-term incentive plans
On 31 December 2013, the performance periods for the 2010 awards under the JNL long-term incentive plans (which began on
1 January 2010) came to an end. Over the four-year period the shareholder value of the US business grew by 14.33 per cent per annum
(on a compound basis) and by 70.848 per cent over the performance period. This resulted in vesting of 121.16 per cent of Mike Wells’
2010 JNL US Performance Share Plan award and of 70.848 per cent of his 2010 cash-settled JNL Long-Term Incentive Plan award.
These were the last awards which Mike Wells received under these plans.
Pension entitlements
Pension provisions in 2013 were:
Executive
Barry Stowe
Mike Wells
John Foley
2013 pension arrangement
Life assurance provision
Pension supplement in lieu of pension of
25 per cent of salary and a HK$30,000
payment to the Hong Kong Mandatory
Provident Fund.
Four times salary.
Matching contributions of 6 per cent of base
salary capped at US$255,000.
Two times salary.
An annual profit sharing contribution
equivalent to 6 per cent of pensionable
salary was made in 2013.
Contributions into the defined contribution
pension scheme and a cash supplement
with a total value of 25 per cent of salary.
Up to four times salary plus a dependants’ pension.
All other UK-based executives
Pension supplement in lieu of pension of
25 per cent of salary.
Up to four times salary plus a dependants’ pension.
Michael McLintock previously participated in a contributory defined benefit scheme which was open at the time he joined the Company.
The scheme provided a target pension of two-thirds of final pensionable earnings on retirement for an employee with 30 years or
more potential service who remains in service to normal retirement date. Mr McLintock is now a deferred member of the scheme.
Mr McLintock’s normal retirement date under the scheme is age 60. Should Mr McLintock claim his deferred pension before this
age it will be subject to an actuarial reduction. There are no additional benefits payable should Mr McLintock retire early.
At the end of 2013 the transfer value of this entitlement was £1,089,263. This equates to an annual pension of £57,378, which
will increase broadly in line with inflation in the period before becoming due for payment on Mr McLintock’s retirement.
Prior to joining the Board, John Foley participated in a defined benefit scheme. There are no entitlements under this scheme
in respect of his service as an executive director.
Remuneration reportAnnual report on remuneration Prudential plc Annual Report 2013 112
Table of 2013 executive director total remuneration ‘The Single Figure’
£000
Rob Devey1
John Foley
Jackie Hunt2
Michael McLintock
Nic Nicandrou
Barry Stowe3
Tidjane Thiam
Mike Wells4
Total
Of which:
2013
taxable
benefits*
2013
pension
benefits†
2013
total bonus
Amount
paid in cash
Amount
deferred into
Prudential
shares
2013
LTIP
releases‡
Other
payments§
Total 2013
remuneration
‘The Single
Figure’¶
77
118
224
92
92
624
123
58
129
157
50
93
162
172
258
20
638
1,004
935
2,225
1,124
1,037
2,056
3,415
1,408
1,041
12,434
383
602
561
1,335
674
622
1,234
2,049
7,460
255
402
374
890
450
415
822
1,366
4,974
1,996
2,114
1,343
3,704
2,114
2,425
5,189
7,549
26,434
129
–
801
–
–
–
–
–
930
3,484
4,021
3,552
6,485
4,141
4,937
8,656
11,733
47,009
2013
salary
515
628
199
371
649
679
1,030
691
4,762
* Benefits include (where provided) the cost of providing the use of a car and driver, medical insurance, security arrangements and relocation/expatriate benefits.
† 2013 pension benefits include cash supplements for pension purposes, and contributions into DC schemes as outlined on page 111.
‡ In line with the regulations, the estimated value of LTIP releases has been calculated based on the average share price over the last three months of 2013. The actual
value of LTIPs, based on the share price on the date awards are released, will be shown in the 2014 report.
§ Other payments comprises of pay in lieu of salary and pension supplement for Rob Devey over the period 1 November 2013 to 31 December 2013 and a cash payment
to Jackie Hunt in respect of shares forfeited when leaving Standard Life, the net value of which was used to purchase Prudential shares. Further information is
outlined on page 118. There were no malus adjustments in 2013.
¶ Each remuneration element is rounded to the nearest £1,000 and totals are the sum of these rounded figures. Total remuneration is calculated using the
methodology prescribed by Schedule 8 of the Companies Act.
Notes
1 Rob Devey left the Company on 31 October 2013.
2
Jackie Hunt joined the Company on 5 September 2013. Her benefits included a one-off relocation payment of £188,679 to cover additional expenses such as stamp
duty and estate agent fees.
3 Barry Stowe’s benefits relate primarily to his expatriate status, including costs of £224,612 for housing, £35,230 for children’s education, £70,452 for home leave
and a £252,142 Executive Director Location Allowance.
4 Mike Wells’ bonus figure excludes a contribution of £9,779 from a profit sharing plan which has been made into a 401(k) retirement plan. This is included under
2013 pension benefits.
Table of 2012 executive director total remuneration ‘The Single Figure’
£000
Rob Devey
John Foley
Michael McLintock1
Nic Nicandrou
Barry Stowe2
Tidjane Thiam
Mike Wells3
Total
Of which:
2012
salary
2012
benefits*
2012
pension
benefits†
Total 2012
bonus
Amount
paid in cash
Amount
deferred into
Prudential
shares
2012
LTIP
releases‡
Other
payments
Total 2012
remuneration
‘The Single
Figure’§
600
610
360
630
651
1,000
663
4,514
114
156
124
99
608
123
55
150
153
311
158
165
250
19
710
976
1,308
1,092
1,022
2,000
2,902
1,279
1,206
10,010
426
586
904
655
613
1,000
2,031
6,215
284
390
404
437
409
1,000
871
3,795
2,510
–
3,414
2,510
3,036
6,160
3,634
21,264
–
–
–
–
–
–
–
–
4,084
1,895
5,517
4,489
5,482
9,533
7,273
38,273
* The value of benefits is the cost to the Company of providing core and additional benefits. The value of some benefits included in the 2012 benefits calculation
(for example life assurance) have not been included in 2013 taxable benefits information as they are not subject to UK tax. The 2012 number has not been restated
from the 2012 report as the differences are not considered significant.
† 2012 pension benefits includes amounts paid as cash supplements, employers contributions into DC schemes and the 2012 increase in transfer value in Michael
McLintock’s DB pension, as set out in the 2012 directors’ remuneration report. In the 2012 report these amounts were shown in two columns: ‘Cash supplements
for pension purposes’ and ‘2012 employers pension contributions.’
‡ The long-term incentive values shown above are higher than those reported in the 2012 Annual Report. This is because there was significant share price growth
between the final three months of 2012 (used to estimate the value of the awards, in line with the regulations) and the price on 15 March 2013 and 2 April 2013, when
long-term awards were released. The estimated share price was £8.67 but the actual price on release was £11.54 (15 March 2013) and £10.83 (2 April 2013). Dividend
equivalent shares were also added to GPSP and BUPP awards on release.
§ Each remuneration element is rounded to the nearest £1,000 and totals are the sum of these rounded figures. Total remuneration is calculated using the
methodology prescribed by Schedule 8 of the Companies Act.
Notes
1
‘The Single Figure’ for Michael McLintock for 2012 includes the increase in transfer value of his defined benefit pension. This is outlined in the 2012 directors’
remuneration report.
2 Barry Stowe’s benefits 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.
3 Mike Wells’ bonus figure excludes a contribution of US$15,000 from a profit sharing plan which has been made into a 401(k) retirement plan. This is included
under employers pension contribution.
Prudential plc Annual Report 2013 Remuneration reportAnnual report on remuneration continued Performance graph and table
The chart below illustrates the TSR performance of Prudential, the FTSE 100 and International Insurers over the past five years.
The information in the table below shows the total remuneration for the Group Chief Executive over the period:
Prudential TSR v FTSE 100 and International Insurers – total return over five years to December 2013
£450
£400
£350
£300
£250
£200
£150
£100
113
£434
£201
£187
Prudential
FTSE 100
International Insurers
Dec 2008
Dec 2009
Dec 2010
Dec 2011
Dec 2012
Dec 2013
£000
2009
2009
2010
2011
2012
2013
Group Chief Executive
Salary, pension and benefits
Annual bonus payment
(As % of maximum)
Long-term incentive vesting
(As % of maximum)
Other payments
Group Chief Executive Single Figure
of total remuneration
Mark Tucker Tidjane Thiam Tidjane Thiam Tidjane Thiam Tidjane Thiam Tidjane Thiam
1,411
2,056
(99.8%)
5,189
(100%)
–
1,013
841
(92%)
1,575
(100%)
308
1,189
1,570
(97%)
2,534
(100%)
–
1,241
1,570
(97%)
2,528
(100%)
–
1,373
2,000
(100%)
6,160
(100%)
–
286
354
(90%)
–
–
–
3,737
640
5,293
5,339
9,533
8,656
Note
1 Mark Tucker left the Company on 30 September 2009. Tidjane Thiam became Group Chief Executive on 1 October 2009. The figures shown for Tidjane Thiam’s
remuneration in 2009 relate only to his service as Group Chief Executive.
Percentage change in remuneration
The table below sets out how the change in remuneration for the Group Chief Executive between 2012 and 2013 compares to a wider
employee comparator group:
Group Chief Executive
All UK employees
Salary
3%
4.8%
Benefits
0%
5.3%
Bonus
2.8%
20.3%
The employee comparator group used for the purpose of this analysis is all UK employees. This includes employees in the UK Insurance
Operations business, M&G and Group Head Office, and reflects the average change in pay for employees employed in both 2012 and
2013. The salary increase includes uplifts made through the annual salary review, as well as any additional changes in the year, for
example promotions or role changes.
The UK work force has been chosen as the most appropriate comparator group as it reflects the economic environment for the
location in which the Group Chief Executive is employed.
Relative importance of spend on pay
The table below sets out the amounts paid in respect of 2012 and 2013 on all employee pay and dividends:
All employee pay (£m)1
Dividends (£m)
2012
1,141
747
2013
1,562
859
Percentage
change
36.9%
15.0%
Note
1 All employee pay as taken from note B3.1 to the financial statements. The figure for 2012 includes an adjustment in respect of pension actuarial gains.
Underlying employee pay excluding social security and pension costs increased by 13.6 per cent. Further information is set out in the financial statements.
Remuneration reportAnnual report on remuneration Prudential plc Annual Report 2013 114
Non-executive remuneration in 2013
Chairman’s fees
The annual fee paid to the Chairman, Paul Manduca, remained unchanged at £600,000.
Non-executive director fees
An increase of just under 3 per cent was made to the basic non-executive fee with effect from 1 July 2013. Increases were made to the
additional fees paid to chairmen of the Remuneration Committee and Risk Committee, and a fee for membership of the Nomination
Committee of £10,000 per annum was introduced. These changes reflect the increased time commitment involved in these roles.
The revised fees are shown below:
Annual Fees
Basic fee
Additional fees:
Audit Committee Chairman
Audit Committee member
Remuneration Committee Chairman
Remuneration Committee member
Risk Committee Chairman
Risk Committee member
Nomination Committee member
Senior Independent Director
From
1 July 2012
£
From
1 July 2013
£
87,500
70,000
25,000
50,000
25,000
60,000
25,000
–
50,000
90,000
70,000
25,000
60,000
25,000
65,000
25,000
10,000
50,000
Note
1
If, in a particular year, the number of meetings is materially greater than usual, the Company may determine that the provision of additional fees is fair and
reasonable.
The resulting fees paid to non-executives are:
£000s
Chairman
Paul Manduca1
Non-executive directors
Keki Dadiseth2
Howard Davies
Michael Garrett3
Ann Godbehere
Alistair Johnston
Kai Nargolwala
Anthony Nightingale4
Philip Remnant4
Alice Schroeder4
Lord Turnbull
Total
2013
fees
600
40
181
75
189
114
139
67
194
64
174
2012
fees
393
120
171
111
181
111
136
n/a
n/a
n/a
161
2013
taxable
benefits*
Total 2013
remuneration:
‘The Single
Figure’†
Total 2012
remuneration:
‘The Single
Figure’
2012
benefits
129
71
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
729
40
181
75
189
114
139
67
194
64
174
464
120
171
111
181
111
136
n/a
n/a
n/a
161
1,837
1,384
129
71
1,966
1,455
* Benefits include the cost of providing the use of a car and driver, medical insurance and security arrangements. The value of some benefits included in the 2012
benefits calculation (for example life assurance) have not been included in 2013 taxable benefits information as they are not subject to UK tax. The 2012 number
has not been restated from the 2012 report as the differences are not considered significant.
† Each remuneration element is rounded to the nearest £1,000 and totals are the sum of these rounded figures. Total remuneration is calculated using the
methodology prescribed by Schedule 8 of the Companies Act. The Chairman and non-executive directors are not entitled to participate in annual bonus plans
or long-term incentive plans.
Notes
1
Paul Manduca was appointed as Chairman on 2 July 2012. The figures for 2012 above include the fees he received as the Senior Independent Director prior
to his appointment as Chairman.
2 Keki Dadiseth retired from the Board on 1 May 2013. In 2013, he was paid an allowance of £2,999 in respect of his accommodation expenses in London while
on Company business during the period he served as a non-executive director. In 2012 this totalled £8,997. This is included in the fees shown above.
3 Michael Garrett retired from the Board on 31 August 2013.
4 Anthony Nightingale, Philip Remnant and Alice Schroeder did not serve as non-executive directors during 2012.
Prudential plc Annual Report 2013 Remuneration reportAnnual report on remuneration continued 115
Long-term incentives awarded in 2013
2013 share-based long-term incentive awards
The table below shows the awards made to executive directors in 2013 under share-based long-term incentive plans and the
performance conditions attached to these awards:
Executive
Role
Group Investment Director
Chief Executive, UK & Europe
John Foley
Jackie Hunt1
Michael McLintock2 Chief Executive, M&G
Chief Financial Officer
Nic Nicandrou
Chief Executive, PCA
Barry Stowe
Group Chief Executive
Tidjane Thiam
President & CEO, JNL
Mike Wells
Face value
of award
(% of
salary)
250%
225%
150%
225%
225%
400%
460%
Face value
of award*
£s
1,570,745
1,406,282
556,196
1,460,023
1,563,811
4,119,988
3,257,930
Percentage
of award
released for
achieving
threshold
targets†
25%
25%
25%
25%
25%
25%
25%
End of
performance
period
31 Dec 15
31 Dec 15
31 Dec 15
31 Dec 15
31 Dec 15
31 Dec 15
31 Dec 15
Weighting of performance conditions
IFRS Profit
Group
TSR Group Asia
US
UK
50%
50% 50%
50%
100%
50% 50%
50%
50% 50%
50%
50%
50%
* Awards for executive directors are calculated based on the average share price over the three dealing days prior to the awards being granted (22 May 2013).
† The percentage of award released for achieving maximum targets is 100 per cent.
Notes
1
Jackie Hunt’s award was granted on 7 October 2013. The number of shares awarded was calculated using the same share price as used for the other executive
directors. Jackie Hunt was also made awards to replace long-term incentives forfeited when she left Standard Life. These are outlined under ‘Recruitment
arrangements’.
2 The awards made under the PLTIP to the Chief Executive, M&G are subject only to the TSR performance condition. The IFRS profit of M&G is a performance
condition under the M&G Executive LTIP.
3 Rob Devey also received a long-term incentive award in 2013. Please see the section on ‘Payments to past directors’ for details of the award and the performance
conditions attached to it.
Group TSR performance will be measured on a ranked basis. 25 per cent of the award will vest for TSR at the median of the peer group
increasing to full vesting for performance at the upper quartile. The peer group for 2013 awards is:
Aegon
Allianz
Legal & General
Old Mutual
Swiss Re
Aflac
Aviva
Manulife
Prudential Financial
Zurich Insurance Group
AIA
AXA
MetLife
Standard Life
AIG
Generali
Munich Re
Sun Life Financial
Performance ranges for IFRS operating profit measured on a cumulative basis over three years are set at the start of the performance
period. Due to commercial sensitivities these are not published in advance but will be disclosed for Group, when awards vest.
2013 cash long-term incentive awards
In addition to his PLTIP award, Michael McLintock receives an annual award under the M&G Executive LTIP. In 2013 he received the
following award:
Executive
Role
Face value
of award
(% of
salary)
Face value
of award
£s
Percentage
of award
released for
achieving
threshold
targets
End of
performance
period
Michael McLintock
Chief Executive, M&G
300%
1,112,400
See note
31 Dec 15
Note
1 The value of the award on vesting will be based on the profitability and investment performance of M&G over the performance period, as described in the
Directors’ remuneration policy.
Remuneration reportAnnual report on remuneration Prudential plc Annual Report 2013 116
Statement of directors’ shareholdings
The shareholding requirements and share ownership guidelines are outlined below:
Group Chief Executive
Other executive directors
Chairman
Non-executive directors
Articles of Association
Share ownership guideline
Number of
shares
Period to
meet the
requirement1
Where
applicable,
requirement
met?
Number of
shares as
a percentage
of salary/fee
2,500
2,500
2,500
2,500
1 year
1 year
1 year
1 year
Yes
Yes
Yes
Yes
350%
200%
100%
100%
Period to
meet the
guideline2
5 years
5 years
5 years
3 years
Where
applicable,
requirement
met?
Yes
Yes
On course
Yes
Notes
1 Holding requirement of the Articles of Association (2,500 ordinary shares) must be obtained within one year of appointment to the Board.
2 The increased guidelines for executive directors were introduced with effect from 1 January 2013. Executive directors have five years from this date (or date of
joining if later) to reach the enhanced guideline. The guideline for non-executive directors was introduced on 1 July 2011. Non-executive directors have three
years from this date (or date of joining if later) to reach the guideline.
The interests of directors in ordinary shares of the Company are set out below. ‘Beneficial interest’ includes shares acquired under the
Share Incentive Plan (detailed in the table on page 123), deferred annual incentive awards and interests in shares awarded on appointment
(detailed in the ‘other share awards’ table on page 121). It is only these shares that count towards the share ownership guidelines.
1 Jan 2013
31 Dec 2013
11 Mar 2014
Total
beneficial
interest
(number of
shares)
Total
beneficial
interest
(number of
shares)
Beneficial
interest as
a percentage
of salary/
basic fee*
Number of
shares
subject to
performance
conditions†
Total
interest in
shares
Total
beneficial
interest
(number of
shares)
2,500
42,500
95%
–
42,500
42,500
323,235
–
682,733
350,858
511,231
923,839
591,808
275,443
3,192
15,914
5,000
16,000
–
–
–
16,624
32,196
39,233
240,047
36,360
453,820
302,885
401,140
892,684
405,844
n/a
8,316
15,914
10,000
50,000
15,000
4,709
2,000
16,624
n/a
n/a
512%
78%
1,640%
625%
792%
1,161%
787%
n/a
124%
237%
149%
744%
223%
70%
30%
248%
n/a
n/a
483,765
320,430
142,283
460,412
499,090
1,243,213
1,208,278
n/a
723,812
356,790
596,103
763,297
900,230
2,135,897
1,614,122
n/a
–
–
–
–
–
–
–
–
–
–
8,316
15,914
10,000
50,000
15,000
4,709
2,000
16,624
n/a
n/a
240,047
36,395
453,820
302,921
401,140
892,684
405,844
n/a
8,316
15,914
10,000
50,000
15,000
4,709
2,000
16,624
n/a
n/a
Chairman
Paul Manduca
Executive directors
John Foley
Jackie Hunt1
Michael McLintock
Nic Nicandrou
Barry Stowe2
Tidjane Thiam
Mike Wells3
Rob Devey4
Non-executive directors
Howard Davies
Ann Godbehere
Alistair Johnston
Kaikhushru Nargolwala
Anthony Nightingale5
Philip Remnant6
Alice Schroeder7
Lord Turnbull
Keki Dadiseth8
Michael Garrett9
* Based on the closing share price on 31 December 2013 (£13.40).
† Further information on share awards subject to performance conditions are detailed in the ‘share-based long-term incentive awards’ section of the
Supplementary information.
Notes
1
2 For the 1 January 2013 figure part of Barry Stowe’s beneficial interest in shares is made up of 207,963 ADRs (representing 415,926 ordinary shares) and 95,305
Jackie Hunt was appointed to the Board on 5 September 2013.
ordinary shares (8,513.73 of these ADRs are held within an investment account which secures premium financing for a life assurance policy). For the
31 December 2013 figure the beneficial interest in shares is made up of 200,570 ADRs (representing 401,140 ordinary shares).
3 For the 1 January 2013 figure Mike Wells’ beneficial interest in shares is made up of 295,904 ADRs (representing 591,808 ordinary shares). For the 31 December 2013
figure his beneficial interest in shares is made up of 202,922 ADRs (representing 405,844 ordinary shares). In the table above, the figure for shares subject to
performance conditions includes 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.
4 Rob Devey left the Board on 5 September 2013.
5 Anthony Nightingale was appointed to the Board on 1 June 2013.
6 Philip Remnant was appointed to the Board on 1 January 2013.
7 Alice Schroeder was appointed to the Board on 10 June 2013. For the 31 December 2013 figure her beneficial interest in shares is made up of 1,000 ADRs
(representing 2,000 ordinary shares).
8 Keki Dadiseth retired from the Board on 1 May 2013.
9 Michael Garrett retired from the Board on 31 August 2013.
Prudential plc Annual Report 2013 Remuneration reportAnnual report on remuneration continued
117
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 participated in any other option scheme.
Exercise period
Number of options
Market
price
at 31
December
2013
Date of
grant
Exercise
price
Beginning
End
of period Granted Exercised Cancelled Forfeited Lapsed
Beginning
End of
period
25 Apr 08
John Foley
20 Sep 13
John Foley
Tidjane Thiam 16 Sep 11
Tidjane Thiam 20 Sep 13
16 Sep 11
Nic Nicandrou
551
901
466
901
466
1,340
1 Jun 13 29 Nov 13
1,340 1 Dec 16 31 May 17
1,340 1 Dec 14 29 May 15
1,340 1 Dec 16 31 May 17
1,340 1 Dec 16 31 May 17
2,953
–
965
–
3,268
–
998
–
499
–
2,953
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
998
–
965
–
–
499
– 3,268
Notes
1 A gain of £16,418.68 was made by directors in 2013 on the exercise of SAYE options.
2 No price was paid for the award of any option.
3 The highest and lowest closing share prices during 2013 were 1,340 pence and 901.5 pence respectively.
4 All exercise prices are shown to the nearest pence.
Directors’ terms of employment
Executive directors’ service contracts
The remuneration policy report contains further details of the terms included in executive director service contracts. Details of the
service contracts of each executive director are outlined below:
Executive director
Rob Devey1
John Foley
Jackie Hunt
Michael McLintock
Nic Nicandrou
Barry Stowe
Tidjane Thiam
Mike Wells2
Date of contract
1 July 2009
8 December 2010
25 April 2013
21 November 2001
26 April 2009
18 October 2006
20 September 2007
15 October 2010
Notice period
to the Company
Notice period
from the Company
12 months
12 months
12 months
6 months
12 months
12 months
12 months
12 months
12 months
12 months
12 months
12 months
12 months
12 months
12 months
12 months
Notes
1 Rob Devey left the Company on 31 October 2013.
2 The contract for Mike Wells is a renewable one-year fixed-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.
Chairman’s letter of appointment
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. A contractual notice period of 12 months by either party applies.
Non-executive directors’ letters of appointment
The remuneration policy report contains further details on non-executive directors’ letters of appointment. Details of their individual
appointments are outlined below:
Non-executive director
Keki Dadiseth1
Howard Davies
Michael Garrett2
Ann Godbehere
Alistair Johnston
Kaikhushru Nargolwala
Anthony Nightingale3
Philip Remnant
Alice Schroeder3
Lord Turnbull
Appointment by the Board
Initial election by
shareholders at AGM
Notice period
Expiration of current
term of appointment
1 April 2005
15 October 2010
1 September 2004
2 August 2007
1 January 2012
1 January 2012
1 June 2013
1 January 2013
10 June 2013
18 May 2006
AGM 2005
AGM 2011
AGM 2005
AGM 2008
AGM 2012
AGM 2012
AGM 2014
AGM 2013
AGM 2014
AGM 2006
6 months
6 months
6 months
6 months
6 months
6 months
6 months
6 months
6 months
6 months
n/a
AGM 2014
n/a
AGM 2014
AGM 2015
AGM 2015
AGM 2014
AGM 2016
AGM 2014
AGM 2015
Notes
1 Keki Dadiseth retired from the Board on 1 May 2013.
2 Michael Garrett retired from the Board on 31 August 2013.
3 For Anthony Nightingale and Alice Schroeder the table assumes initial election by shareholders at the 2014 AGM.
Remuneration reportAnnual report on remuneration Prudential plc Annual Report 2013 118
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 2013, Michael McLintock
received £65,000 as a trustee and non-executive director of another organisation. Jackie Hunt received £45,000 as a non-executive
director for another organisation. Other directors served on the boards of educational, development, charitable and cultural organisations
without receiving a fee for such services.
Recruitment arrangements
Jackie Hunt
On 26 April 2013, it was announced that Jackie Hunt would join Prudential as Chief Executive for UK & Europe. The Remuneration
Committee determined that long-term awards forfeited by Ms Hunt as a consequence of joining Prudential would be replaced on a
like-for-like basis, and are subject to Prudential performance criteria.
Ms Hunt was compensated for the loss of her outstanding Standard Life long-term incentive awards with equivalent awards under
the Prudential Long Term Incentive Plan as outlined below:
Standard Life award being replaced
2011 Group LTIP
2012 Group LTIP
Face value
of award*
£s
Performance
condition
attached
to award†
Percentage
of award
released for
achieving
threshold
targets‡
End of
performance
period
1,185,536
Relative TSR
25% 31 Dec 2013
1,060,994
Relative TSR
25% 31 Dec 2014
* The face value of awards was calculated using Standard Life’s three days average share price on the date Jackie Hunt joined the Company (September 2013) of £3.389.
† The performance conditions attached to the awards are the same TSR conditions as other GPSP and UK BUPP awards made in the relevant year.
‡ The percentage of award released for achieving maximum targets is 100 per cent.
Ms Hunt was not compensated for forfeiting her 2013 Standard Life Group LTIP. Instead, a 2013 long-term incentive award was granted
to her. Full details of this award are set out in the ‘Long-term incentives awarded in 2013’ section of this report.
Ms Hunt forfeited Standard Life deferred bonus awards with a value of £801,210. The Company arranged for these to be replaced
with Prudential shares on a like-for-like basis. A cash payment was made to Ms Hunt in respect of these awards, the net value of which
was used to purchase 36,337 shares which will be held in a nominee arrangement on her behalf and released to her in March 2014
and March 2015 (in line with the release dates of the original Standard Life awards).
In order for Ms Hunt to take up the position with Prudential she was required to relocate. To facilitate this, the Committee approved
the reimbursement of reasonable removal charges for the transport of household items and of legal fees for the sale and purchase
of properties. A one-off payment of £188,679 was made to cover additional expenses, such as stamp duty and estate agent fees.
Payments to past directors
Rob Devey
On 26 April 2013 it was announced that Rob Devey would leave Prudential at the end of October 2013. In line with his contractual
entitlements, Mr Devey will receive a payment in lieu of salary and pension allowance for the period 1 November 2013 to 25 April 2014.
This is paid in instalments and is subject to mitigation. The total amount paid will be £378,000. Medical and life assurance cover will be
provided until 25 April 2014. The amounts paid in 2013 are included in the table of 2013 total remuneration on page 112.
In 2013 Rob Devey was granted an award under the Prudential Long Term Incentive Plan as follows. At vesting, the award will be
pro-rated for time employed. It remains subject to the original vesting schedule and to potential future reduction depending on the
achievement of performance conditions:
Executive
Rob Devey
Face value
of award
(% of
salary)
Face value
of award*
£s
Percentage
of award
released for
achieving
threshold
targets†
End of
performance
period
225%
1,390,497
25%
31 Dec 15
* The Award is calculated based on the average share price over the three dealing days prior to the award being granted (22 May 2013).
† The percentage of award released for achieving maximum targets is 100 per cent (which will then be pro-rated for time employed). 50 per cent of the award will vest
subject to relative TSR and 50 per cent subject to the achievement of UK IFRS profit targets. Further details of the performance conditions are outlined in the
‘Long-term incentives awarded in 2013’ section.
Prudential plc Annual Report 2013 Remuneration reportAnnual report on remuneration continued 119
The Remuneration Committee used their discretion to determine that outstanding variable awards of pay would be treated in the
following ways:
— A 2013 bonus pro-rated for the amount of time Mr Devey was employed by Prudential during the 2013 financial year (to 31 October 2013).
A 2013 bonus of £637,776 was awarded;
— 60 per cent of this award was paid in cash and 40 per cent was deferred into Prudential shares and will be released in 2016;
— Outstanding long-term incentive awards were prorated based on the time Mr Devey was employed by Prudential as a proportion
of the relevant performance periods. Awards will continue to be subject to the original performance conditions and released on the
original timescales.
As set out in the section on ‘Remuneration in respect of performance in 2013’, the performance conditions attached to Rob Devey’s 2011
GPSP and UK BUPP awards were met in full and 100 per cent of the proportion of these awards that were outstanding (34 months
out of 36) will be released in 2014.
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 full details of the remuneration arrangements that would apply to Clark Manning after his resignation.
These arrangements were implemented as intended by the Committee.
The performance conditions attached to the 2010 GPSP and BUPP awards were met in full and awards to Clark Manning were
released during 2013 on a pro-rata basis, as disclosed in last year’s report. There are no further outstanding awards.
Other directors
A number of former directors receive retiree medical benefits for themselves and their partner (where applicable). This is consistent
with other senior members of staff employed at the same time. A de minimis threshold of £10,000 has been set by the Committee;
any payments, or benefits provided to a past director under this amount will not be reported.
Statement of voting at general meeting
At the 2013 Annual General Meeting, shareholders were asked to vote on the 2012 directors’ remuneration report, the adoption of
the Prudential Long Term Incentive Plan and the adoption of the rules of the Prudential 2013 Savings-Related Share Option Scheme
(‘Prudential SAYE’). Each of these resolutions received a significant vote in favour by shareholders; the Committee is grateful for this
support and endorsement by our shareholders. The votes received were:
Resolution
Votes
for
% of votes
cast
Votes
against
% of votes
cast
Total votes
cast
Votes
withheld
The Directors’ remuneration report
Prudential SAYE
Prudential Long Term Incentive Plan
1,680,696,983
1,870,467,975
1,649,705,967
88.40%
96.63%
87.11%
220,534,791
65,332,272
244,056,797
11.60%
3.37%
12.89%
1,901,231,774
1,935,800,247
1,893,762,764
36,594,496
2,036,940
44,065,902
Statement of implementation in 2014
Executive directors’ salaries were reviewed in 2013 with changes effective from 1 January 2014. When the Committee took these
decisions, it considered the salary increases awarded to other employees in 2013 and the expected increases in 2014. The Committee
also took account of the performance and experience of each executive, and the relative size of each directors’ role, as well as the
performance of the Group. The external markets used to provide context to Committee were those used for 2013 salaries, with
for the Chief Executive, M&G, an additional benchmark of Asset Management within International Insurance Companies.
— The 2014 salary increase for the Chief Financial Officer was 5 per cent, all other executive directors received a 3 per cent increase.
These uplifts are in line with 2014 salary increase budgets for other employees across our business units (3 per cent to 6 per cent).
2014 salaries are set out in the ‘Our executive remuneration at a glance’ section.
— No changes will be made to executive directors’ maximum opportunities under the annual bonus and long-term incentive awards other
than for the Chief Financial Officer. The Chief Financial Officer’s 2014 long-term incentive award increased to 250 per cent of salary.
— The Chief Financial Officer’s total remuneration opportunity for 2014 has increased by 10 per cent. This reflects the increasing
complexity and responsibilities of the role, together with the incumbent’s considerable performance and contribution to the Group.
In making this adjustment the Remuneration Committee were mindful of ensuring that the majority of this be provided through
long-term incentive awards, so that the full value is only realised over the long term and subject to the achievement of stretching
performance conditions. Major shareholders were consulted on this change prior to implementation.
— The performance measures attached to 2014 bonuses and long-term incentive awards remain unchanged from those set out in the
’Remuneration in respect of 2013’ section of this report.
Remuneration reportAnnual report on remuneration Prudential plc Annual Report 2013 120
Remuneration report
Supplementary information
Directors’ outstanding long-term incentive awards
Share-based long-term incentive awards
Plan
name
Year of
award
Conditional
share awards
outstanding
at 1 Jan 2013
Conditional
awards in
2013
Market
price
at date of
award
John Foley
Jackie Hunt
Michael
McLintock
GPSP
GPSP
PLTIP
PLTIP
PLTIP
GPSP
GPSP
GPSP
GPSP
PLTIP
Nic Nicandrou GPSP
GPSP
GPSP
PLTIP
Barry Stowe 1 GPSP
BUPP
GPSP
BUPP
GPSP
BUPP
PLTIP
Tidjane Thiam GPSP
GPSP
GPSP
PLTIP
2011
2012
2013
2013
2013
2013
2010
2011
2012
2013
2010
2011
2012
2013
2010
2010
2011
2011
2012
2012
2013
2010
2011
2012
2013
Mike Wells 1, 3
JNL PSP 2009
JNL PSP 2010
2011
GPSP
2011
BUPP
2012
GPSP
2012
BUPP
2013
PLTIP
(Number of
shares)
(Number of
shares)
152,484
199,433
131,848
351,917
131,848
106,805
95,585
118,040
320,430
46,687
46,687
66,238
48,517
47,079
161,834
208,179
152,484
185,374
122,554
546,037
122,554
129,076
129,076
88,270
88,270
95,642
95,642
131,266
625,976
131,266
510,986
374,279
523,103
345,831
1,408,368
345,831
218,100
141,000
197,648
197,648
199,256
199,256
273,470
1,152,908
273,470
(pence)
733.5
678
1,203
1,176
1,176
1,176
568.5
733.5
678
1,203
568.5
733.5
678
1,203
568.5
568.5
733.5
733.5
678
678
1,203
568.5
733.5
678
1,203
455.5
568.5
733.5
733.5
678
678
1,203
Rights
exercised
in 2013
Rights
lapsed
in 2013
Conditional
share awards
outstanding at
31 December 2013
Date of
end of
performance
period
Dividend
equivalents on
vested shares
(Number of
shares
released)2
(Number of
shares)
152,484
199,433
131,848
483,765
106,805
95,585
118,040
320,430
–
48,517
47,079
46,687
142,283
–
152,484
185,374
122,554
460,412
–
–
88,270
88,270
95,642
95,642
131,266
499,090
–
374,279
523,103
345,831
31 Dec 13
31 Dec 14
31 Dec 15
31 Dec 13
31 Dec 14
31 Dec 15
31 Dec 12
31 Dec 13
31 Dec 14
31 Dec 15
31 Dec 12
31 Dec 13
31 Dec 14
31 Dec 15
31 Dec 12
31 Dec 12
31 Dec 13
31 Dec 13
31 Dec 14
31 Dec 14
31 Dec 15
31 Dec 12
31 Dec 13
31 Dec 14
31 Dec 15
31 Dec 12
31 Dec 13
31 Dec 13
31 Dec 13
31 Dec 14
31 Dec 14
31 Dec 15
7,490
66,238
7,490
66,238
23,548 208,179
23,548 208,179
14,522 129,076
13,824 122,880
6,196
28,346 251,956
6,196
57,806 510,986
57,806 510,986
1,243,213
218,100
–
141,000
197,648
197,648
199,256
199,256
273,470
218,100
1,208,278
Notes
1 The awards for Barry Stowe and Mike Wells were made in ADRs. The figures in the table are represented in terms of ordinary shares (1 ADR = 2 shares).
2
3 The table above reflects the maximum number of shares (150 per cent of the original number awarded) which may be released to Mike Wells under the
In 2010 a scrip dividend equivalent and in 2011, 2012 and 2013 a DRIP dividend equivalent were accumulated on these awards.
JNL Performance Share Plan. This maximum number of shares may be released if stretch performance targets are achieved.
Prudential plc Annual Report 2013 Remuneration report
121
Business-specific 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 2013
Mike Wells
JNL LTIP
JNL LTIP
Total cash payments made in 2013
Year of initial
award
Face value of
conditional
share awards
outstanding at
1 January 2013
£000
Conditionally
awarded
in 2013
£000
Payments
made
in 2013
£000
Face value of
conditional
share awards
outstanding at
31 December
2013
£000
Date of end of
performance
period
2010
2011
2012
2013
2009
2010
987
1,318
953
894
906
1,112
2,616
2,616
1,118
1,118
–
1,318
953
1,112
31 Dec 12
31 Dec 13
31 Dec 14
31 Dec 15
–
906
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 profit growth and investment performance over the
performance period. For the 2010 award of 987,179 units, the unit price at the end of the performance period was £2.65, which resulted in a payment of £2,616,024 to
Michael McLintock during 2013. For the 2011 award of 1,318,148 units, the unit price at the end of the performance period was £2.30. This will result in payment of
£3,031,740 to Michael McLintock in 2014.
See page 111 for a description of the JNL LTIP. Performance over the period from 2009 to 2012 resulted in a payment of £1,117,509 to Mike Wells during 2013.
Performance over the period from 2010 to 2013 will result in a payment of £633,946 being paid to Mike Wells in 2014. 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 2013 and 31 December 2013 was US$2,800,000 and US$1,400,000 respectively.
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 payouts. The number of shares is calculated using the average share price over the three business days
commencing on the day of the announcement of the Group’s annual financial results for the relevant year. For the awards from the 2012
annual incentives, made in 2013, the average share price was 1,124.17 pence.
Year of
grant
Conditional
share awards
outstanding at
1 January 2013
(Number
of shares)
Con-
ditionally
awarded in
2013
(Number
of shares)
Dividends
accumu–
lated in 2013
(Number
of shares)2
Shares
released
in 2013
(Number
of shares)
Conditional
share awards
outstanding at
31 December
2013
(Number
of shares)
Date of
end of
restricted
period
Date of
release
Market
price at
date of
award
Market
price at
date of
vesting
or release
(pence)
(pence)
John Foley
Deferred 2011 annual
incentive award
Deferred 2012 annual
incentive award
Michael McLintock
Deferred 2009 annual
incentive award
Deferred 2010 annual
incentive award
Deferred 2011 annual
incentive award
Deferred 2012 annual
incentive award
2012
2013
2010
2011
2012
2013
34,727
34,727
46,057
46,057
77,493
80,753
37,284
195,530
35,905
35,905
1,189
896
2,085
2,085
962
926
47,246 31 Dec 14
35,623 31 Dec 15
82,869
750
1,055
77,493
– 31 Dec 12 02 Apr 13
552.5
1,083
82,838 31 Dec 13
38,246 31 Dec 14
36,831 31 Dec 15
721.5
750
1,055
3,973
77,493
157,915
Remuneration reportSupplementary information Prudential plc Annual Report 2013
122
Nic Nicandrou
Deferred 2009 annual
incentive award
Deferred 2010 annual
incentive award
Deferred 2011 annual
incentive award
Deferred 2012 annual
incentive award
Barry Stowe 1
Deferred 2009 annual
incentive award
Deferred 2010 annual
incentive award
Deferred 2011 annual
incentive award
Deferred 2012 annual
incentive award
Tidjane Thiam
Deferred 2009 annual
incentive award
Deferred 2010 annual
incentive award
Deferred 2011 annual
incentive award
Deferred 2012 annual
incentive award
Mike Wells 1
2009 after tax deferral
program award 3
Deferred 2010 Group
deferred bonus
plan award
Deferred 2011 annual
incentive award
Deferred 2012 annual
incentive award
Year of
grant
Conditional
share awards
outstanding at
1 January 2013
(Number
of shares)
Con-
ditionally
awarded in
2013
(Number
of shares)
Dividends
accumu–
lated in 2013
(Number
of shares)2
Shares
released
in 2013
(Number
of shares)
Conditional
share awards
outstanding at
31 December
2013
(Number
of shares)
Date of
end of
restricted
period
Date of
release
Market
price at
date of
award
Market
price at
date of
vesting
or release
(pence)
(pence)
2010
2011
2012
2013
2010
2011
2012
2013
27,276
49,862
45,060
122,198
38,836
38,836
40,474
58,314
52,446
151,234
37,726
37,726
2010
65,482
2011
229,515
2012
104,719
2013
399,716
88,954
88,954
27,276
– 31 Dec 12 02 Apr 13
552.5
1,083
51,149 31 Dec 13
46,223 31 Dec 14
39,839 31 Dec 15
721.5
750
1,055
27,276
137,211
40,474
– 31 Dec 12 02 Apr 13
552.5
1,083
59,836 31 Dec 13
53,814 31 Dec 14
38,710 31 Dec 15
721.5
750
1,055
1,287
1,163
1,003
3,453
1,522
1,368
984
3,874
40,474
152,360
65,482
– 31 Dec 12 02 Apr 13
552.5
1,083
5,929
2,705
2,297
235,444 31 Dec 13
107,424 31 Dec 14
91,251 31 Dec 15
721.5
750
1,055
10,931
65,482
434,119
2010
32,250
32,250
– 15 Mar 13 15 Mar 13
520
1,154
2011
2012
2013
94,080
96,336
222,666
80,364
80,364
2,456
2,514
2,096
7,066
96,536 31 Dec 13
98,850 31 Dec 14
82,460 31 Dec 15
721.5
750
1,055
32,250
277,846
Notes
1
2
3
The Deferred Share Awards for Barry Stowe and Mike Wells were made in ADRs. The figures in the table are represented in terms of ordinary shares
(1 ADR = 2 shares).
In 2010 a scrip dividend equivalent and in 2011, 2012 and 2013 a DRIP dividend equivalent were accumulated on these awards.
This award attracts dividends in the form of cash rather than shares.
Prudential plc Annual Report 2013 Remuneration reportSupplementary information continued
123
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. No directors or other employees are provided with loans to enable them to buy shares.
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.
In 2013, participants could elect to enter into savings contracts of up to £250 per month for a period of three or five years. At the end
of this term, participants may exercise their options within six months and purchase shares. If an option is not exercised within six months,
participants are entitled to a refund of their cash savings plus interest, if applicable under the rules. Shares are issued to satisfy those
options which are exercised. No options may be granted under the schemes if the grant would cause the number of shares which have
been issued, or which remain issuable pursuant to options granted in the preceding 10 years under the scheme and any other option
schemes operated by the Company, or which have been issued under any other share incentive scheme of the Company, to exceed
10 per cent of the Company’s ordinary share capital at the proposed date of grant.
Details of executive directors’ rights under the SAYE scheme are set out in the ‘Statement of directors’ shareholdings’.
Share Incentive Plan (SIP)
UK-based executive directors are also eligible to participate in the Company’s HMRC approved Share Incentive Plan (SIP). In 2013, all UK
based employees were able to purchase Prudential plc shares up to a value of £125 per month from their gross salary (partnership shares)
through the SIP. 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. If the employee withdraws from the plan,
or leaves the Group, matching shares may be forfeited.
The table below provides information about shares purchased under the SIP together with Matching Shares (awarded on a 1:4 basis)
and dividend shares.
Nic Nicandrou
Jackie Hunt
Year of
initial grant
SIP awards
held in trust
at 1 Jan 2013
(Number of
shares)
Partnership
shares
accumulated
in 2013
(Number of
shares)
Matching
shares
accumulated
in 2013
(Number of
shares)
Dividend
shares
accumulated
in 2013
(Number of
shares)
SIP awards
held in trust
at 31 Dec 2013
(Number of
shares)
2010
2013
869
–
136
19
34
4
25
–
1,064
23
Dilution
Releases from the Prudential Long Term Incentive Plan, GPSP and BUPP are satisfied using new issue shares, rather than by purchasing
shares in the open market. Shares relating to options granted under all-employee share plans are also satisfied by new issue shares.
The combined dilution from all outstanding shares and options at 31 December 2013 was 0.2 per cent of the total share capital at the
time. Deferred shares will continue to be satisfied by the purchase of shares in the open market.
Five highest paid individuals
Of the five individuals with the highest emoluments in 2013, three were directors whose emoluments are disclosed in this report.
The aggregate of the emoluments of the other two individuals
for 2013 were as follows:
Base salaries, allowances and benefits in kind
Pension contributions
Performance-related pay
Total
Signed on behalf of the Board of directors
2013
£000
335
70
24,601
25,006
Their emoluments were within the following bands:
£7,500,001 – £7,600,000
£17,400,001 – £17,500,000
Number of five
highest paid
employees
2013
1
1
Lord Turnbull
Chairman of the Remuneration Committee
11 March 2014
Paul Manduca
Chairman
11 March 2014
Remuneration reportSupplementary information Prudential plc Annual Report 2013 124
Prudential plc Annual Report 2013 Financial statements 125
Section 5
Financial statements
126
281
282
290
291
Index to Group IFRS financial statements
Balance sheet of the parent company
Notes on the parent company financial statements
Statement of directors’ responsibilities in respect
of the annual report and the financial statements
Independent auditor’s report to the members
of Prudential plc only
5
Financial statements Prudential plc Annual Report 2013 126
Index to Group IFRS financial statements
Primary statements
127
128
129
130
131
133
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated statement of changes in equity: 2013
2012
Consolidated statement of financial position
Consolidated statement of cash flows
Notes to Primary statements
A1
A2
A3
Section A: Background and accounting policies
134
135
Background and basis of preparation
Adoption of new and amended accounting standards in 2013
Accounting policies
A3.1
Accounting policies and use of estimates
and judgements
New accounting pronouncements not yet effective
A3.2
136
148
Section B: Earnings performance
B1
B2
B3
B4
B5
B6
B7
149
150
152
155
157
158
159
160
161
163
163
164
165
169
170
B1.3
Analysis of performance by segment
B1.1
B1.2
Segment results – profit before tax
Short-term fluctuations in investment returns
on shareholder-backed business
Determining operating segments and performance
measure of operating segments
Segmental income statement
Revenue
Staff and employment costs
Share-based payments
Key management remuneration
Fees payable to the auditor
B1.4
B1.5
Profit before tax – asset management operations
Acquisition costs and other expenditure
B3.1
B3.2
B3.3
B3.4
Effect of changes and other accounting features on insurance
assets and liabilities
Tax charge
Earnings per share
Dividends
Section C: Balance sheet notes
C1
C2
C3
C4
171
176
178
179
181
183
184
188
195
204
206
208
209
211
212
215
217
218
Analysis of Group position by segment and business type
C1.1
Group statement of financial position –
analysis by segment
Group statement of financial position –
analysis by business type
C1.2
Asia insurance operations
Group assets and liabilities – Classification
Group assets and liabilities – Measurement
Analysis of segment position by business type
C2.1
C2.2 US insurance operations
C2.3 UK insurance operations
C2.4 Asset management operations
Assets and liabilities – Classification and Measurement
C3.1
C3.2
C3.3 Debt securities
Loans portfolio
C3.4
Financial instruments – additional information
C3.5
C3.5(a) Market risk
C3.5(b) Derivatives and hedging
C3.5(c) Derecognition, collateral and offsetting
C3.5(d) Impairment of financial assets
Policyholder liabilities and unallocated surplus
of with-profits funds
C4.1 Movement and duration of liabilities
C4.1(a) Group overview
C4.1(b) Asia insurance operations
C4.1(c) US insurance operations
C4.1(d) UK insurance operations
Products and determining contract liabilities
C4.2
C4.2(a) Asia
C4.2(b) US
C4.2(c) UK
Intangible assets
C5.1
C5.1(a) Goodwill attributable to shareholders
C5.1(b) Deferred acquisition costs and other intangible assets
Intangible assets attributable to shareholders
attributable to shareholders
Intangible assets attributable to with-profits funds
C5.2
Borrowings
C6.1
Core structural borrowings
of shareholder-financed operations
US insurance operations
UK insurance operations
Asset management and other operations
C6.2 Other borrowings
C6.3 Maturity analysis
Risks and sensitivity analysis
C7.1
Group overview
C7.2 Asia insurance operations
C7.3
C7.4
C7.5
Tax assets and liabilities
C8.1
C8.2
Defined benefit pension schemes
Share capital, share premium and own shares
Capital position statement
C11.1
C11.2
Deferred tax
Current tax asset and liability
Life assurance business
Asset management operations –
regulatory and other surplus
C5
C6
C7
C8
C9
C10
C11
C12
C13
C14
Provisions
Property, plant and equipment
Investment properties
220
221
224
230
231
234
235
236
236
237
239
241
246
248
249
250
250
257
259
264
265
266
267
Section D: Other notes
268
270
270
272
272
D1
D2
D3
D4
D5
278
279
279
280
D6
D7
D8
D9
Business acquisitions and disposals
Domestication of the Hong Kong branch business
Contingencies and related obligations
Post balance sheet events
Additional information on the effect of adoption
of new and amended accounting standards
Subsidiary undertakings
Investments in joint ventures and associates
Related party transactions
Commitments
Prudential plc Annual Report 2013 Financial statements
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
Benefits and claims
Outward reinsurers’ share of benefit and claims
Movement in unallocated surplus of with-profits funds
Benefits and claims and movement in unallocated surplus of with-profits funds, net of
reinsurance
Acquisition costs and other expenditure
Finance costs: interest on core structural borrowings of shareholder-financed operations
Remeasurement of carrying value of Japan life business classified as held for sale
Total charges, net of reinsurance
Share of profits from joint ventures and associates, net of related tax
Profit before tax (being tax attributable to shareholders’ and policyholders’ returns)†
Less tax charge attributable to policyholders’ returns
Profit before tax attributable to shareholders
Total tax charge attributable to policyholders and shareholders
Adjustment to remove tax charge attributable to policyholders’ returns
Tax charge attributable to shareholders’ returns
Profit for the year attributable to equity holders of the Company
Earnings per share (in pence)
Based on profit attributable to the equity holders of the Company:
Basic
Diluted
127
Note
2013 £m
2012* £m
B1.5
B1.5
B1.5
B1.4
B3
D1
B1.4
A2,D5
B1.1
B5
B5
B6
30,502
(658)
29,844
20,347
2,184
52,375
(42,227)
622
(1,549)
(43,154)
(6,861)
(305)
(120)
(50,440)
147
2,082
(447)
1,635
(736)
447
(289)
1,346
29,113
(491)
28,622
23,931
1,885
54,438
(44,116)
259
(1,287)
(45,144)
(6,032)
(280)
–
(51,456)
135
3,117
(370)
2,747
(954)
370
(584)
2,163
2013
2012*
52.8p
52.7p
85.1p
85.0p
* The Group has adopted new accounting standards on consolidated financial statements and joint arrangements, and amendments to the employee benefits
accounting standard, from 1 January 2013 as described in note A2. Accordingly, the 2012 comparative results and related notes have been adjusted retrospectively
from those previously published.
† This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders.
This is principally because the corporate taxes of the Group include those on the income of consolidated with-profits and unit-linked funds that, through adjustments
to benefits, are borne by policyholders. These amounts are required to be included in the tax charge of the Company under IAS 12. Consequently, the profit before all
taxes measure (which is determined after deducting the cost of policyholder benefits and movements in the liability for unallocated surplus of the PAC with-profits
fund after adjusting for taxes borne by policyholders) is not representative of pre-tax profits attributable to shareholders.
Financial statementsPrimary statements Prudential plc Annual Report 2013 128
Consolidated statement of comprehensive income
Year ended 31 December
Profit for the year
Note
2013 £m
2012* £m
1,346
2,163
Other comprehensive (loss) income:
Items that may be reclassified subsequently to profit or loss
Exchange movements on foreign operations and net investment hedges:
Exchange movements arising during the year
Related tax
Net unrealised valuation movements on securities of US insurance operations classified as
available-for-sale:
Net unrealised holding (losses) gains arising during the year
Net gains included in the income statement on disposal and impairment
Total
Related change in amortisation of deferred acquisition costs
Related tax
Total
Items that will not be reclassified to profit or loss
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes:
Gross
Related tax
A1
C3.3
C5.1(b)
(255)
–
(255)
(2,025)
(64)
(2,089)
498
557
(1,034)
(1,289)
(62)
14
(48)
(214)
(2)
(216)
930
(68)
862
(270)
(205)
387
171
45
(11)
34
Other comprehensive (loss) income for the year, net of related tax
Total comprehensive income for the year
(1,337)
205
9
2,368
* The Group has adopted new accounting standards on consolidated financial statements and joint arrangements, and amendments to the employee benefits
accounting standard, from 1 January 2013, as described in note A2. Accordingly, the 2012 comparative results and related notes have been adjusted retrospectively
from those previously published.
Prudential plc Annual Report 2013 Financial statements Primary statements Consolidated statement of changes in equity
129
2013 £m
Share
capital
note C10
Share
premium
note C10
Note
Retained
earnings
Translation
reserve
Available-
for-sale
securities
reserves
Share-
holders’
equity
Non-
controlling
interests
Total
equity
–
1,346
–
–
1,346
–
1,346
Year ended 31 December
Reserves
Profit for the year
Other comprehensive loss:
Exchange movements on foreign
operations and net investment
hedges, net of related tax
Net unrealised valuation movements,
net of related change in
amortisation of deferred
acquisition costs and related tax
Shareholders’ share of actuarial
and other gains and losses on
defined benefit pension schemes,
net of tax
Total other comprehensive loss
Total comprehensive income for the year
Dividends
Reserve movements in respect of
share-based payments
Change in non-controlling interests
Share capital and share premium
New share capital subscribed
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
At end of year
–
–
–
–
–
–
–
–
–
–
–
–
B7
C10
–
(255)
–
(255)
–
(255)
–
–
(1,034)
(1,034)
–
(1,034)
–
–
–
–
–
–
–
–
6
–
–
(781)
98
–
–
(10)
(31)
574
6,851
7,425
(48)
(48)
–
–
(48)
(255)
(1,034)
(1,337)
1,298
(255)
(1,034)
9
(781)
98
–
6
–
–
–
–
–
–
–
–
–
–
–
–
(10)
–
(10)
–
128
128
6
1,889
1,895
(31)
(255)
66
(189)
(1,034)
1,425
(709)
10,359
391
9,650
–
(4)
5
1
(31)
(713)
10,364
9,651
–
–
–
–
–
(4)
–
(48)
(1,337)
9
(781)
98
(4)
6
Financial statementsPrimary statements Prudential plc Annual Report 2013
130
Consolidated statement of changes in equity continued
Year ended 31 December
Reserves
Profit for the year
Other comprehensive income (loss):
Exchange movements on foreign
operations and net investment
hedges, net of related tax
Net unrealised valuation movements,
net of related change in
amortisation of deferred
acquisition costs and related tax
Shareholders’ share of actuarial
and other gains and losses on
defined benefit pension schemes,
net of tax
Total other comprehensive income (loss)
Total comprehensive income for the year
Dividends
Reserve movements in respect of
share-based payments
Change in non-controlling interests
arising principally from purchase and
sale of property partnerships of the
PAC with-profits fund and other
consolidated investment funds
B7
Share capital and share premium
New share capital subscribed
C10
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
At end of year
2012* £m
Share
capital
note C10
Share
premium
note C10
Note
Retained
earnings
Translation
reserve
Available-
for-sale
securities
reserves
Share-
holders’
equity
Non-
controlling
interests
Total
equity
–
2,163
–
–
2,163
–
2,163
–
–
–
–
–
–
–
–
–
1
–
–
–
–
–
–
–
–
–
–
16
–
–
–
–
34
34
2,197
(655)
42
–
–
(13)
36
1,607
5,244
6,851
(216)
–
(216)
–
(216)
–
387
387
–
387
–
(216)
(216)
–
387
387
–
–
–
–
–
–
–
–
–
–
–
–
(216)
282
66
387
1,038
1,425
34
205
2,368
(655)
42
–
–
–
–
–
34
205
2,368
(655)
42
–
(38)
(38)
17
(13)
36
1,795
8,564
10,359
–
–
–
(38)
43
17
(13)
36
1,757
8,607
5
10,364
1
127
128
16
1,873
1,889
* The Group has adopted new accounting standards on consolidated financial statements and joint arrangements, and amendments to the employee benefits
accounting standard, from 1 January 2013, as described in note A2. Accordingly, the 2012 comparative results and related notes have been adjusted retrospectively
from those previously published.
Prudential plc Annual Report 2013 Financial statements Primary statements
131
Consolidated statement of financial position
Assets
31 December
Note
2013 £m
2012* £m
2011*‡ £m
Intangible assets attributable to shareholders:
Goodwill
Deferred acquisition costs and other intangible assets
Total
Intangible assets attributable to with-profits funds:
Goodwill 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
Investment in joint ventures and associates accounted for using
the equity method
Financial investments†:
Loans
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments
Deposits
Total
Assets held for sale§
Cash and cash equivalents
Total assets
C5.1(a)
C5.1(b)
C5.2(a)
C5.2(b)
C13
C4.1(a)iv
C8.1
C8.2
C1.1
C1.1
C14
D7
C3.4
C3.3
1,461
5,295
6,756
177
72
249
1,469
4,177
5,646
178
78
256
1,465
4,143
5,608
178
89
267
7,005
5,902
5,875
920
6,838
2,412
244
2,609
1,746
754
6,854
2,306
248
2,771
1,325
14,769
14,258
737
1,643
2,261
541
2,694
966
8,842
11,477
10,554
10,470
809
635
516
12,566
120,222
132,905
6,265
12,213
296,457
12,743
98,626
138,907
7,547
12,248
281,260
10,381
85,963
123,647
7,240
10,340
248,557
D1(c)
916
6,785
98
6,126
3
6,741
C1,C3.1
325,932
307,644
270,018
* The Group has adopted new accounting standards on consolidated financial statements and joint arrangements, and amendments to the employee benefits
accounting standard, from 1 January 2013, as described in note A2. Accordingly, the 2012 and 2011 comparative balance sheets and the 2012 related notes have been
adjusted retrospectively from those previously published.
† Included within financial investments are £3,791 million (2012: £3,015 million) of lent securities.
‡ The 2011 balance sheet has been presented to comply with the IAS 1 requirement that applies on adoption of new accounting standards.
§ The Group agreed in July 2013 to sell, subject to regulatory approval, its closed book life assurance business in Japan. As at 31 December 2013, the business was
classified as held for sale.
Financial statementsPrimary statements Prudential plc Annual Report 2013
132
Consolidated statement of financial position
Equity and liabilities
31 December
Equity
Shareholders’ equity
Non-controlling interests
Total equity
Liabilities
Policyholder liabilities and unallocated surplus of with-profits funds:
Insurance contract liabilities
Investment contract liabilities with discretionary participation features
Investment contract liabilities without discretionary participation features
Unallocated surplus of with-profits funds
Total
Core structural borrowings of shareholder-financed operations:
Subordinated debt
Other
Total
Other borrowings:
Operational borrowings attributable to shareholder-financed operations
Borrowings attributable to with-profits 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
Liabilities held for sale†
Total liabilities
Total equity and liabilities
Note
2013 £m
2012* £m
2011*‡ £m
9,650
1
9,651
10,359
5
10,364
8,564
43
8,607
218,185
35,592
20,176
12,061
286,014
205,484
33,812
18,378
10,589
268,263
177,611
29,745
16,967
9,215
233,538
3,662
974
4,636
2,152
895
2,074
5,278
3,778
395
824
3,307
635
1,689
3,736
2,577
977
3,554
2,245
968
2,381
5,145
3,964
443
751
2,701
591
2,832
3,442
2,652
959
3,611
3,329
925
3,114
4,124
3,926
928
654
2,473
518
3,046
1,225
21,716
22,250
20,008
868
316,281
325,932
–
–
297,280
307,644
261,411
270,018
C4.1(a)
C6.1
C6.2
C6.2
C8.1
C8.2
C12
C3.5(b)
D1(c)
C1,C3.1
* The Group has adopted new accounting standards on consolidated financial statements and joint arrangements, and amendments to the employee benefits
accounting standard, from 1 January 2013 as described in note A2. Accordingly, the 2012 and 2011 comparative balance sheets and the 2012 related notes have been
adjusted retrospectively from those previously published.
† The Group agreed in July 2013 to sell, subject to regulatory approval, its closed book life assurance business in Japan. As at 31 December 2013, the business was
classified as held for sale.
‡ As a result of the adoption of the new accounting standards described above, the 2011 balance sheet has been presented in accordance with IAS 1.
The consolidated financial statements on pages 127 to 280 were approved by the Board of directors on 11 March 2014. They were signed
on its behalf:
Paul Manduca
Chairman
Tidjane Thiam
Group Chief Executive
Nic Nicandrou
Chief Financial Officer
Prudential plc Annual Report 2013 Financial statements Primary statements
Consolidated statement of cash flows
Year ended 31 December
Note
2013 £m
2012* £m
133
Cash flows from operating activities
Profit before tax (being tax attributable to shareholders’ and policyholders’ returns)note (i)
Non-cash movements in operating assets and liabilities reflected in profit before tax:
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 itemsnote (ii)
Operating cash items:
Interest receipts
Dividend receipts
Tax paid
Net cash flows from operating activities
Cash flows from investing activities
Purchases of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Acquisition of subsidiaries and distribution rights, net of cash balancenote (iii)
Change to Group’s holdings, net of cash balancenote (iii)
Net cash flows from investing activities
Cash flows from financing activities
Structural borrowings of the Group:
Shareholder-financed operations:note (iv)
Issue of subordinated debt, net of costs
Bank loan
Interest paid
With-profits operations:note (v)
Interest paid
Equity capital:
Issues of ordinary share capital
Dividends paid
Net cash flows from financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of exchange rate changes on cash and cash equivalents
Cash and cash equivalents at end of year
B5
C13
D1
C6.1
C6.2
2,082
3,117
(23,487)
(1,146)
21,951
1,907
(8,345)
81
(26,993)
(774)
26,362
(511)
(7,772)
188
6,961
1,738
(418)
1,324
(221)
42
(405)
–
(584)
1,124
–
(291)
(9)
6
(781)
49
789
6,126
(130)
6,785
6,483
1,530
(925)
705
(139)
14
(224)
23
(326)
–
25
(270)
(9)
17
(655)
(892)
(513)
6,741
(102)
6,126
* The Group has adopted new accounting standards on consolidated financial statements and joint arrangements, and amendments to the employee benefits
accounting standard, from 1 January 2013, as described in note A2. Accordingly, the 2012 comparative results and related notes have been adjusted retrospectively
from those previously published.
Notes
(i)
(ii) Other non-cash items consist of the adjustment of non-cash items to profit before tax together with other net items, net purchases of treasury shares and other
This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders.
net movements in equity.
(iii) The acquisition of Thanachart Life and the related distribution agreements in 2013 resulted in a net cash outflow of £396 million. The acquisition of REALIC in
2012, resulted in a net cash outflow of £224 million and a further cash payment of £9 million in 2013. See note D1 for further details.
The net cash inflow of £23 million for change in Group’s holdings in 2012 was in respect of the dilution of M&G’s holdings in PPM South Africa resulting in a
(iv)
(v)
reclassification from a subsidiary to an associate.
Structural borrowings of shareholder-financed operations exclude borrowings to support short-term fixed income securities programmes, non-recourse
borrowings of investment subsidiaries of shareholder-financed operations and other borrowings of shareholder-financed operations. Cash flows in respect of
these borrowings are included within cash flows from operating activities.
Interest paid on structural borrowings of with-profits operations relate solely to the £100 million 8.5 per cent undated subordinated guaranteed bonds, which
contribute to the solvency base of the Scottish Amicable Insurance Fund (SAIF), a ring-fenced sub-fund of the PAC with-profits fund. Cash flows in respect of
other borrowings of with-profits funds, which principally relate to consolidated investment funds, are included within cash flows from operating activities.
Financial statementsPrimary statements Prudential plc Annual Report 2013
134
A: Background and accounting policies
A1: Background and basis of preparation
Background
Prudential plc (the Company) together with its subsidiaries (collectively, the Group or Prudential) is an international financial services
group with its principal operations in Asia, the US and the UK. Prudential offers a wide range of retail financial products and services
and asset management services throughout these territories. The retail financial products and services principally include life insurance,
pensions and annuities as well as collective investment schemes.
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-profits (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 for health cover.
In the US, the Group’s principal subsidiary is Jackson National Life Insurance Company (Jackson). The principal products of Jackson
are fixed annuities (interest-sensitive, fixed index and immediate annuities), variable annuities, 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-profits, including deposit administration, other conventional and unitised with-profits
policies and non-participating pension annuities in the course of payment and unit-linked products.
Basis of preparation
These statements have been prepared in accordance with 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 EC1606/2032). EU-endorsed IFRS may differ from IFRS
issued by the IASB if, at any point in time, new or amended IFRS have not been endorsed by the EU. At 31 December 2013, there were no
unendorsed standards effective for the two years ended 31 December 2013 affecting the consolidated financial information of the Group
and there were no differences between IFRS endorsed by the EU and IFRS issued by the IASB in terms of their application to the Group.
Except for the adoption of the new and amended accounting standards for Group IFRS reporting as described in note A2 below, the
accounting policies applied by the Group in determining the IFRS basis results in this report are the same as those previously applied in
the Group’s consolidated financial statements for the year ended 31 December 2012.
The exchanges rates applied for balances and transactions in currency other than the presentational currency of the Group, pounds
sterling (GBP) were:
Local currency: £
Hong Kong
Indonesia
Malaysia
Singapore
India
Vietnam
US
Closing
rate at
31 Dec 2013
Average
for
2013
Closing
rate at
31 Dec 2012
Average
for
2012
12.84
20,156.57
5.43
2.09
102.45
34,938.60
1.66
12.14
16,376.89
4.93
1.96
91.75
32,904.71
1.56
12.60
15,665.76
4.97
1.99
89.06
33,875.42
1.63
12.29
14,842.01
4.89
1.98
84.70
33,083.59
1.58
As a result, the exchange movement arising during 2013 recognised in other comprehensive income is:
Asia operations
US operations
Unallocated to a segment (central funds)*
2013 £m
2012 £m
(319)
(37)
101
(255)
(87)
(187)
60
(214)
* The exchange rate movement unallocated to a segment mainly reflects the translation of currency borrowings which have been designated as a net investment
hedge against the currency risk of the investment in Jackson.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statements 135
A2: Adoption of new and amended accounting standards in 2013
The following accounting standards and amendments issued and endorsed for use in the EU have been adopted for 2013:
Accounting standard
Key requirements
Impact on results
IFRS 11, ’Joint arrangements’,
IFRS 12, ’Disclosures of interest
in other entities’ and IAS 28,
’Investments in associates and
joint ventures’
The standards are effective for annual periods
beginning on or after 1 January 2014 for IFRS
as endorsed by the EU and have been early
adopted by the Group from 1 January 2013
with adjustments to comparative results.
IFRS 11 requires a joint venture to be recognised
as an investment and be accounted for using
the equity method in accordance with IAS 28.
IFRS 12 requires certain disclosures in respect
of the Group’s interest in the joint ventures.
IFRS 10, ’Consolidated
financial statements’, IFRS 12,
’Disclosures of interest in other
entities’, and IAS 27, ‘Separate
financial statements’
The standards are effective for annual periods
beginning on or after 1 January 2014 for IFRS
as endorsed by the EU and have been early
adopted by the Group. Comparative results
are retrospectively adjusted.
IFRS 13, ‘Fair value
measurement’
Amendments to IAS 19,
‘Employee benefits’
The standard changes the definition of control
such that an investor has control over an
investee when it is exposed, or has rights, to
variable returns from its involvement with the
investee and has ability to influence those
returns through power over the investee.
The principal category of vehicles affected
is the Group’s interest in investment funds.
IFRS 13 creates a uniform framework to explain
how to measure fair value and aims to enhance
fair value disclosures.
The standard is effective for annual periods
beginning on or after 1 January 2013, with
no adjustment to comparative results.
These amendments are effective from
1 January 2013 and key revisions relevant to
the Group are:
(i) Presentation of actuarial gains and losses
in ‘other comprehensive income’;
(ii) The replacement of the expected return
on plan assets with an amount based on
the liability discount rate in the
determination of pension costs; and
(iii) Enhanced disclosures, specifically on risks
arising from defined benefit plans.
The Group has early adopted the standards
from 1 January 2013 and has applied the
requirements for the relevant interests in
accordance with the transition provisions of
IFRS 11. The Group has recognised its
investment in joint ventures as the aggregate
of the carrying amounts of the assets and
liabilities that were previously proportionately
consolidated by the Group. This determines the
deemed cost of the Group’s investments in joint
ventures for applying equity accounting.
The Group’s investments in joint ventures
affected by these standards are as described
in note D7 and there is no change to the
classification of these investments as joint
ventures.
The Group has assessed whether the
investment holdings as at 1 January 2013 that
need to be consolidated under IAS 27 for SIC12
differ under IFRS 10. Where consolidation has
led to the additional funds being consolidated,
the principal effect has been to ‘gross up’ the
consolidated statement of financial position for:
(i) the difference between the net value of the
newly consolidated assets and liabilities
(including those attributable to external
parties) and the previous carrying value
for the Group’s interest; and
(ii) the equal and opposite liability or non-
controlling interest for the external parties’
interests in the funds.
The Group has adopted the standard for
1 January 2013 and there is no material impact
on the fair value measurement of the Group’s
assets and liabilities.
Following this adoption, the Group presents
actuarial gains and losses in ‘other comprehensive
income’ instead of the ‘income statement’.
The revision to the assumption relating to
expected returns altered the pension costs by
an insignificant amount, with a corresponding
equal and opposite effect on the actuarial gains
and losses included in other comprehensive
income.
Amendments to IAS 1,
‘Presentation of financial
statements’
These amendments, effective from 1 January
2013, require items in other comprehensive
income to be presented separately based on
whether or not they may be recycled to profit
or loss in the future.
The Group has adopted these amendments
from 1 January 2013 and amended the
presentation of the statement of other
comprehensive income.
Financial statementsA: Background and accounting policies Prudential plc Annual Report 2013 136
A2: Adoption of new and amended accounting standards in 2013 continued
Accounting standard
Key requirements
Impact on results
Amendment to IFRS 7,
‘Financial Instruments:
Disclosures’
Amendment to IAS 36,
‘Recoverable Amount
Disclosures for Non-financial
Assets’
The amendment requires additional disclosures
for recognised financial instruments that have
been offset in accordance with IAS 32 or are
subject to enforceable master netting
agreements or similar arrangements.
The Group has early adopted the amendment
for 2013. The amendment effective in 2014
clarifies that the recoverable amount for a cash
generating unit to which significant goodwill
has been allocated is only required to be
disclosed when an impairment loss has been
recognised or reversed.
This is disclosure only requirement with the
relevant disclosures provided in note C3.5(c).
There is no consequential impact on the
Group’s disclosures.
Additional information on the quantitative effect of the adoption of the new and amended accounting standards on the Group’s primary
financial statements and supplementary analysis of profit is provided in note D5. For some of these changes additional disclosure
requirements apply. These are reflected in the financial statements.
A3: Accounting policies
A3.1 Accounting policies and use of estimates and judgements
The consolidated financial statements have been prepared in accordance with IFRS and IFRS Interpretations Committee (IFRIC)
interpretations issued and effective for the year ended 31 December 2013.
This note provides detailed accounting policies adopted by the Group to prepare the consolidated financial statements. With the
exception of the consequential impact of the adoption of IFRS 13 on fair value measurement, which is not required to be applied
retrospectively before 1 January 2013 (as explained in note A2), these accounting policies are applied consistently for all years presented
and normally are not subject to changes unless new accounting standards, interpretations or amendments are introduced by the IASB.
a Critical accounting policies, accounting estimates and judgements
Prudential believes that its critical accounting policies are limited to those references in the table below:
Critical accounting policies
Classification of insurance and investment contracts
Measurement of policyholder liabilities and unallocated surplus of with-profits fund
Measurement and presentation of derivatives and debt securities of US insurance operations
Presentation of results before tax
Segmental analysis of results and earnings distributable to shareholders
Accounting
policy reference
A3.1(c)
A3.1(d)
A3.1(j)(v)
A3.1(k)
A3.1(m)
The preparation of these financial statements requires Prudential to make estimates and judgements about future conditions. Prudential
evaluates its estimates, including those related to long-term business provisioning and the fair value of assets. The table below sets out
items that require the Group to make estimates and judgements in applying the relevant accounting policy:
Critical accounting estimates and assumptions
Classification of insurance and investment contracts
Measurement of policyholder liabilities
Measurement of deferred acquisition costs
Determination of fair value of financial investments
Determining impairment relating to financial assets
Accounting
policy reference
A3.1(c)
A3.1(d)
A3.1(f)
A3.1(j)(ii)
A3.1(j)(iii)
b Basis of consolidation
The Group consolidates those investees it is deemed to control. The Group has control over an investee if all three of the following are met:
(1) it has power over an investee; (2) it is exposed to, or has rights, to variable returns from its involvement with the investee; (3) it has
ability to use its power over the investee to affect its own returns.
i Subsidiaries
Subsidiaries are those investees in which the Group controls. The vast majority of Group’s subsidiaries are corporate entities where the
Group holds the majority of voting rights and are consolidated. The consolidation of other vehicles held by the Group is discussed below:
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsA: Background and accounting policies continued 137
The Group’s insurance operations invests in a number of limited partnerships, either directly or through unit trusts, through a mix of
capital and loans. These limited partnerships are managed by general partners, in which the Group hold equity. Such interest in general
partners and limited partnerships provide the Group with voting and similar rights to participate in the governance framework of the
relevant activities in which limited partnerships are engaged in. Accounting for the limited partnerships as subsidiaries, joint ventures,
associates or other financial investments depends on the terms of each partnership agreement and the shareholdings in the general
partners. In the context of direct investment in limited partnerships, the following circumstances may indicate a relationship in which,
in substance, the Group controls and consequently consolidates a limited partnership:
— The Group has existing rights that give it the current ability to direct the relevant activities of the limited partnership, ie activities that
significantly affect the generation of economic returns from the limited partnership’s operation;
— The Group has the power to obtain the significant benefits of the activities of the limited partnerships. Generally, it is presumed that
the Group has significant benefits if its participation in the limited partnership is greater than 20 per cent; and
— The Group’s current ability to join together with other partners to direct the activities of the partnership.
The Group performs a re-assessment of consolidation whenever there is a change in the substance of the relationship between the
Group and a limited partnership. Where the Group is deemed to control a limited partnership, it is treated as a subsidiary and its results,
assets and liabilities are consolidated. Where the Group holds a minority share in a limited partnership, with no control over their
associated general partners, the investments are carried at fair value through profit and loss within financial investments in the
consolidated statement of financial position.
The Group does not have a material percentage of non-controlling interests in its subsidiaries.
ii Joint ventures and associates
Joint ventures are joint arrangements arising from a contractual agreement whereby the Group and other investors have joint control
of the net assets of the arrangement. In a number of these arrangements, the Group’s share of the underlying net assets may be less than
50 per cent but the terms of the relevant agreement make it clear that control is jointly exercised between the Group and the third party.
Associates are entities over which the Group has significant influence, but it does not control. Generally it is presumed that the Group
has significant influence if it holds between 20 per cent and 50 per cent voting rights of the entity.
The Group adopted IFRS 11 for investments in joint ventures from 1 January 2013 and accordingly are accounted for using the equity
method of accounting. In line with the transition provision requirements, the Group has recognised its investment in joint ventures at
1 January 2012, as the aggregate of the carrying amounts of the assets and liabilities that were previously proportionately consolidated
by the Group. This determines the deemed cost of the Group’s investment in joint ventures for applying equity accounting. The effect
of adoption of IFRS 11 is disclosed in note A2. Investments in associates are initially recognised at cost and adjusted thereafter for the
change in Group’s share of net assets of the associates. The Group’s share of profit or loss of its joint ventures and associates is recognised
in the income statement and its share of movements in other comprehensive income is recognised in other comprehensive income.
iii Structured entities
Structured entities are those which have been designed so that voting or similar rights are not the dominant factor in deciding who
controls the entity such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means
of contractual arrangements. In addition to the entities discussed above in A3.1b(i) and A3.1b(ii), the Group as part of its business
strategy invests in structured entities such as Open-Ended Investment Companies (OEICs), Unit Trusts (UTs), variable interest entities,
investment vehicles within separate accounts offered through variable annuities, collateral debt obligations, mortgage-backed securities,
and similar asset-backed securities.
Open-ended investment companies and unit trusts
The Group invests in open-ended investment companies and unit trusts, which invest mainly in equities, bonds, cash and cash
equivalents, and properties. The Group’s percentage ownership in these entities can fluctuate on a daily basis according to the
participation of the Group’s and other investors in them. For these entities, the following circumstances may indicate, in substance,
the Group has power over an entity:
— The entity is managed by the Group’s asset manager and the Group holds a significant investment in the entity; and
— Where the entity is managed by asset managers outside the Group, Prudential has existing rights that give it the ability to direct
the current activities of the entity. In assessing the Group’s ability to direct an entity, the Group considers its ability relative to other
investors. The Group has limited number of open-ended investment companies and unit trusts where it considers it has such ability.
For the entity managed by asset managers outside the Group with no current ability to direct its activities, the Group is deemed to have
no power over such an entity.
For those entities managed by the Group’s asset managers, it is generally presumed that the Group is exposed to, or has rights, to
variable returns from an entity and has ability to use its power to affect its own returns where Group’s holding is greater than 50 per cent
and is deemed to have no significant influence over an entity for participation less than 20 per cent. For holdings between 20 per cent
and 50 per cent, the Group performs an assessment of power and associated control over an entity on a case by case basis. For these
entities, the following circumstances may indicate that the Group controls an entity:
— The Group has power over the relevant activities of the entity; and
— The exposure, or rights, to variable returns (including administrative and performance fee earned by the Group’s asset manager)
from the entity is higher than the Group’s interest.
Where the Group is deemed to control these entities they are treated as a subsidiary and are consolidated, with the interests of investors
other than the Group being classified as liabilities and appear as net asset value attributable to unit holders of consolidated unit trusts
and similar funds.
Financial statementsA: Background and accounting policies Prudential plc Annual Report 2013 138
A3: Accounting policies continued
Where the Group does not control these entities (as it is deemed to be acting as an agent) and they do not meet the definition of associates,
they are carried at fair value through profit and loss within financial investments in the consolidated statement of financial position.
Where the Group’s asset manager set up the open-ended investment companies and unit trusts as part of asset management
operations, the Group’s interest is limited to the administration fees charged to manage the assets of such entities. With no participation
in these entities, the Group does not retain risks associated with open-ended investment companies and unit trusts and is deemed to be
acting as an agent.
The Group generates returns and retains the ownership risks in investment vehicles commensurate to its participation and does not
have any further exposure to the residual risks of the open-ended investment companies and unit trusts.
Jackson’s separate account assets
Jackson offers variable contracts that invest contract holder’s premiums, at the contract holders’ direction, in investment vehicles
(‘Separate Accounts’) that invest in equity, fixed income, bonds and money market mutual funds. The contract holder retains the
underlying returns and the ownership risks related to the separate accounts and its underlying investments. The shareholder’s economic
interest in separate accounts is limited to the administrative fees charged. The separate accounts are set up as separate regulated entities
governed by a Board of Companies or trustees for which the majority of the members are independent of Jackson or any affiliated entity.
The independent members represent contract holders’ interest and are responsible for any decision making that impacts contract
holders’ interest and governs the operational activities of the entities advisors, including asset managers managing the investment
vehicles. Accordingly the Group has no control over these vehicles. These investments are carried at fair value through profit and loss
within financial investments in the consolidated statement of financial position.
Other structured entities
The Group holds investments in mortgage-backed securities, collateral debt obligations and similar asset-backed securities that are
actively traded in a liquid market. The Group is not the sponsor of the vehicles in which it holds investments and has no administrative
rights over the vehicle’s activities. The Group generates returns and retains the ownership risks commensurate to its holding and its
exposure to the investments. Accordingly the Group does not have power over the relevant activities of such vehicles and all are carried
at fair value through profit and loss within financial investments in the consolidated statement of financial position.
The table below provides aggregate carrying amounts of the investments in unconsolidated structured entities reported in the
Group’s statement of financial position:
Statement of financial position line items
Equity securities and portfolio holdings in unit trusts
Debt securities
Total
2013 £m
OEICs/UTs
Separate
account
assets
Other
structured
entities
78,856
–
78,856
65,681
–
65,681
–
13,190
13,190
The Group generates returns and retains the ownership risks in these investments commensurate to its participation and does not have
any further exposure to the residual risks or losses of the investments or the vehicles in which it holds investments.
As at 31 December 2013, the Group does not have an agreement, contractual or otherwise, or intention to provide financial support
to structured entities that could expose the Group to a loss.
c Classification of insurance and investment contracts
IFRS 4 requires contracts written by insurers to be classified as either ‘insurance contracts’ or ‘investment contracts’ depending on the
level of insurance risk transferred. Insurance risk is a pre-existing risk, other than financial risk, transferred from the contract holder to the
contract issuer. If significant insurance risk is transferred to the Group then it is classified as an insurance contract. Contracts that transfer
financial risk to the Group but not significant insurance risk are termed investment contracts. Furthermore, some contracts, both
insurance and investment, contain discretionary participating features representing the contractual right to receive additional benefits
as a supplement to guaranteed benefits:
a That are likely to be a significant portion of the total contract benefits;
b Whose amount or timing is contractually at the discretion of the insurer; and
c That are contractually based on asset or fund performance, as discussed in IFRS 4.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsA: Background and accounting policies continued 139
Business units
Asia
US
UK
Insurance contracts and investment contracts
with discretionary participation features
Investment contracts without discretionary
participation features
— With-profits contracts
— Non-participating term contracts
— Whole life contracts
— Unit-linked policies
— Accident and health policies
— Variable annuity contracts
— Fixed annuity contracts
— Life insurance contracts
— Minor amounts for a number of small
categories of business
— Guaranteed investment contracts (GICs)
— Minor amounts of ‘annuity certain’ contracts
— With-profits contracts
— Bulk and individual annuity business
— Non-participating term contracts
— Certain unit-linked savings and similar
contracts
d Measurement of policyholder liabilities and unallocated surplus of with-profits funds
The measurement basis of policyholder liabilities is dependent upon the classification of the contracts under IFRS 4 described in note
A3.1(c) above.
IFRS 4 permits the continued usage of previously applied GAAP for insurance contracts and investment contracts with discretionary
participating features. Accordingly, except for UK regulated with-profits funds as discussed below, the modified statutory basis (MSB)
of reporting as set in the Statement of Recommended Practice (SORP) issued by Association of British Insurers (ABI) has been adopted
by the Group on first time application of IFRS in 2005.
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.
For with-profits funds, as the shareholders’ participation in the cost of bonuses arises only on distribution, the Group has elected
to account for the unallocated surplus of UK regulated with-profits funds as a liability with no allocation to equity.
The policy of measuring contract liabilities at business unit level is noted below. Additional details are discussed in note C4.2.
i Insurance contracts
Asia insurance operations
The policyholder liabilities for businesses in Asia are determined in accordance with methods prescribed by local GAAP adjusted to
comply, where necessary, with the MSB. Refinements to the local reserving methodology are generally treated as change in estimates,
dependent on the nature of the change.
For the operations in India, Japan, Taiwan and, until 2012, Vietnam, the local GAAP is not appropriate as a starting point in the context
of the MSB, and, instead, the 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 benefit provisions for non-participating linked
business are determined using the net level premium method, with an allowance for surrenders, maintenance and claim expenses.
Rates of interest used in establishing the policyholder benefit provisions vary by operation depending on the circumstances attaching
to each block of business. Where appropriate, liabilities for participating business for these operations include provisions for the
policyholders’ interest in investment gains and other surpluses that have yet to be declared as bonuses.
Whilst the basis of valuation of liabilities in these businesses is in accordance with the requirements of the ABI SORP, it may differ from
that determined on MSB for UK operations with the same features.
US insurance operations
In accordance with the MSB, the policyholder liabilities for Jackson’s conventional protection-type policies are determined under
US GAAP principles with locked in assumptions for mortality, interest, policy lapses and expenses along with provisions for adverse
deviations. For non-conventional protection-type policies, the policyholder liabilities includes the policyholder account balance.
Acquisition costs are accounted for as explained in section (f) below.
As permitted by IFRS 4, Jackson uses shadow accounting to make adjustments to the liabilities or related deferred acquisition costs
which are recognised directly in other comprehensive income. Jackson accounts for the majority of its investment portfolio on an
available-for-sale basis whereby unrealised gains and losses are recognised in other comprehensive income. 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 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 deferred acquisition costs adjustments
reflect the change in deferred acquisition costs that would have arisen if the assets held in the statement of financial position had been
sold, crystallising unrealised gains or losses, and the proceeds reinvested at the yields currently available in the market.
Financial statementsA: Background and accounting policies Prudential plc Annual Report 2013 140
A3: Accounting policies continued
UK insurance operations
The UK regulated with-profits funds are accounted for by the voluntary application of the UK accounting standard FRS 27, ‘Life Assurance’
that requires liabilities to be calculated as the realistic basis liabilities. The realistic basis liabilities are measured by reference to the PRA’s
Peak 2 basis of reporting. This Peak 2 basis requires the value of liabilities to be calculated as:
— A with-profits benefits reserve, plus
— Future policy related liabilities, plus
— The realistic current liabilities of the fund.
The with-profits benefits reserve is primarily based on the retrospective calculation of accumulated asset shares but is adjusted to reflect
future policyholder benefits and other outgoings. Asset shares broadly reflect the policyholders’ share of the with-profits fund assets
attributable to their policies.
The future policy related liabilities 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 Peak 2 basis realistic liabilities for with-profits business included in the PRA regulatory returns include the element for the
shareholders’ share of the future cost of bonuses consistent with the contract asset shares. For accounting purposes under FRS 27, this
latter item is not shown as part of contract liabilities. This is because, consistent with the current basis of financial reporting, shareholder
transfers are recognised only on declaration. Instead the shareholders’ share of future costs of bonuses is included within the liabilities
for unallocated surplus.
Other UK insurance contracts that contain significant insurance risk include unit-linked, annuity and other non-profit business. For
the purposes of local regulations, segregated accounts are established for linked business for which policyholder benefits are wholly
or partly determined by reference to specific investments or to an investment-related index. The interest rates used in establishing
policyholder benefit provisions for pension annuities in the course of payment are adjusted each year. Mortality rates used in establishing
policyholder benefits are based on published mortality tables adjusted to reflect actual experience.
ii Investment contracts with discretionary participation features
For investment contracts with discretionary participation features, the accounting basis is consistent with the accounting for similar
with-profits insurance contracts. Other investment contracts are accounted for on a basis that reflects the hybrid nature of the
arrangements whereby part is accounted for as a financial instrument under IAS 39 and the investment management service component
is accounted for under IAS 18.
For those investment contracts in the US with fixed and guaranteed terms, the Group uses the amortised cost model to measure
the liability.
Those investment contracts without fixed and guaranteed terms are designated at fair value through profit and loss because the
resulting liabilities are managed and their performance is evaluated on a fair value basis. Where the contract includes a surrender option,
its carrying value is subject to a minimum carrying value equal to its surrender value.
iii Investment contracts without discretionary participation features
The measurement of investment contracts without discretionary participation features is carried out in accordance with IAS 39 to reflect
the deposit nature of the arrangement, with premiums and claims reflected as deposits and withdrawals and taken directly to the
statement of financial position as movements in the financial liability balance.
Under IFRS, investment contracts (excluding those with discretionary participation features) accounted for as financial liabilities in
accordance with IAS 39 which also offer investment management services, require the application of IAS 18 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.
iv Unallocated surplus of with-profits funds
Unallocated surplus represents the excess of assets over policyholder liabilities for the Group’s with-profits funds that have yet to be
appropriated between policyholders and shareholders. As allowed under IFRS 4, the Group has opted to continue to record unallocated
surplus of with-profits funds wholly as a liability with no allocation to equity. The annual excess (shortfall) of income over expenditure
of the with-profits funds, after declaration and attribution of the cost of bonuses to policyholders and shareholders, is transferred to
(from) the unallocated surplus each year through a charge (credit) to the income statement. The balance retained in the unallocated
surplus represents cumulative income arising on the with-profits business that has not been allocated to policyholders or shareholders.
The balance of the unallocated surplus is determined after full provision for deferred tax on unrealised appreciation on investments.
e 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.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsA: Background and accounting policies continued 141
f Deferred acquisition costs for insurance contracts
Except for acquisition costs of with-profits contracts of the UK regulated with-profits funds, which are accounted for under the realistic
PRA 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 specifically identified and capitalised as part of deferred acquisition costs. In general, this
deferral is presentationally shown by an explicit carrying value for 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 is 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.
The deferral and amortisation of acquisition costs is of most relevance to the Group’s results for Asia and US insurance operations.
The deferred acquisition costs for US and some Asia operations is determined with reference to US GAAP principles.
Asia insurance 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 US insurance operations paragraph below 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.
US insurance operations
Under IFRS 4, the Group applies grandfathered US GAAP for measuring the insurance assets and liabilities of US insurance operations.
The Group adopted FAS ASU 2010-26 on ‘Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts’ from
1 January 2012 and capitalises only those incremental costs directly relating to successfully acquiring a contract.
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 profits depend on mortality
assumptions, assumed unit costs and terminations other than deaths (including the related charges), all of which are based on a
combination of Jackson’s actual industry experience and future expectations. A detailed analysis of actual mortality, lapse and expenses
experience is performed using internally developed experience studies.
For US variable annuity business a key assumption is the investment return from the separate accounts, which is determined using
a mean reversion methodology. Under the mean reversion methodology, projected returns over the next five years are flexed (subject
to capping) so that, combined with the actual rates of return for the current and the previous two years is maintained. The projected rates
of return are capped at no more than 15 per cent for each of the next five years. These returns affect the level of future expected profits
through their effects on the fee income with consequential impact on the amortisation of deferred acquisition costs. The level of
acquisition costs carried in the statement of financial position is also sensitive to unrealised valuation movements on debt securities held
to back the liabilities and solvency capital. Further details are discussed in note C5.1(b).
UK insurance operations
For UK regulated with-profits 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.
g Liability adequacy test
The Group performs adequacy testing on its insurance liabilities to ensure that the carrying amounts (net of related deferred acquisition
costs) and, where relevant, present value of acquired in-force business is sufficient to cover current estimates of future cash flows.
Any deficiency is immediately charged to the income statement.
h Earned premiums, policy fees and claims paid
Premium and annuity considerations for conventional with-profits policies and other protection type insurance policies are recognised
as revenue when due. Premiums and annuity considerations for linked policies, unitised with-profits and other investment type policies
are recognised as revenue when received or, in the case of unitised or unit-linked policies, when units are issued. These amounts exclude
premium taxes and similar duties where Prudential collects and settles taxes borne by the customer.
Policy fees charged on linked and unitised with-profits policies for mortality, asset management and policy administration are
recognised as revenue when related services are provided.
Claims paid include maturities, annuities, surrenders and deaths. Maturity claims are recorded as charges on the policy maturity date.
Annuity claims are recorded when each annuity instalment becomes due for payment. Surrenders are charged to the income statement
when paid and death claims are recorded when notified.
Financial statementsA: Background and accounting policies Prudential plc Annual Report 2013 142
A3: Accounting policies continued
i Investment return
Investment return included in the income statement principally comprises interest income, dividends, investment appreciation/depreciation
(realised and unrealised gains and losses) on investments designated as fair value through profit and loss, and realised gains and
losses (including impairment losses) on Jackson’s debt securities designated as available-for-sale. Movements in unrealised
appreciation/depreciation of Jackson’s debt securities designated as available-for-sale are recorded in other comprehensive income.
Interest income is recognised as it accrues, taking into account the effective yield on investments. Dividends on equity securities are
recognised on the ex-dividend date and rental income is recognised on an accrual basis.
j Financial investments other than instruments classified as long-term business contracts
i Investment classification
The Group holds financial investments in accordance with IAS 39 whereby, subject to specific criteria, financial instruments are required
to be accounted for under one of the following categories:
— Financial assets and liabilities at fair value through profit and loss – this comprises assets and liabilities designated by management as
fair value through profit and loss on inception and derivatives that are held for trading. These investments are measured at fair value
with all changes thereon being recognised in investment 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. These 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 financial
instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset;
— Available-for-sale 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
— Loans and receivables – except for those designated as at fair value through profit and loss or available-for-sale, these instruments
comprise non-quoted investments that have fixed or determinable payments. These instruments 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 instruments are carried at amortised cost using the effective interest method.
The Group uses the trade date method to account for regular purchases and sales of financial assets.
ii Use of fair value
The Group uses current bid prices to value its investments with quoted prices. Actively traded investments without quoted prices are
valued using prices provided by third parties. If there is no active established market for an investment, the Group applies an appropriate
valuation technique such as a discounted cash flow technique.
Determining the fair value of financial investments when the markets are not active
The Group holds certain financial investments for which the markets are not active. These can include financial investments which are
not quoted on active markets and financial investments for which markets are no longer active as a result of market conditions eg market
illiquidity. When the markets are not active, there is generally no or limited observable market data to account for financial investments
at fair value. The determination of whether an active market exists for a financial investment requires management’s judgement.
If the market for a financial investment of the Group is not active, the fair value is determined by using valuation techniques. The
Group establishes fair value for these financial investments by using quotations from independent third parties, such as brokers or pricing
services or by using internally developed pricing models. Priority is given to publicly available prices from independent sources when
available, but overall the source of pricing and/or the valuation technique is chosen with the objective of arriving at a fair value
measurement which reflects the price at which an orderly transaction would take place between market participants on the
measurement date. The valuation techniques include the use of recent arm’s length transactions, reference to other instruments that
are substantially the same, discounted cash flow analysis, option adjusted spread models and, if applicable, enterprise valuation and
may include a number of assumptions relating to variables such as credit risk and interest rates. Changes in assumptions relating to these
variables could positively or negatively impact the reported fair value of these financial investments.
The financial investments measured at fair value are classified into the following three level hierarchy on the basis of the lowest level
of inputs that is significant to the fair value measurement of the financial investment concerned:
Level 1: Quoted prices (unadjusted) in active markets for identical assets and liabilities.
Level 2: Inputs other than quoted prices included within level 1 that are observable either directly or indirectly (ie derived from prices).
Level 3: Significant inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsA: Background and accounting policies continued 143
iii Determining impairments’ relation to financial assets
Available-for-sale securities
The majority of Jackson’s debt securities portfolio is accounted for on an available-for-sale basis. The consideration of evidence of
impairment requires management’s judgement. In making this determination the factors considered include, for example:
Determining factors
Consideration of evidence of impairment
Whether the decline of the
financial investment’s fair value
is substantial
The impact of the duration of
the security on the calculation
of the revised estimated
cash flows
The duration and extent to
which the amortised cost
exceeds fair value
A substantial decline in fair value might be indicative of a credit loss event that would lead to a
measurable decrease in the estimated future cash flows.
The duration of a security to maturity helps to inform whether assessments of estimated future
cash flows that are higher than market value are reasonable.
This factor provides an indication of how the contractual cash flows and effective interest rate of
a financial asset compares with the implicit market estimate of cash flows and the risk attaching to
a ‘fair value’ measurement. The length of time for which that level of difference has been in place
may also provide further evidence as to whether the market assessment implies an impairment loss
has arisen.
The financial condition and
prospects of the issuer
These factors and other observable conditions may indicate that an investment is impaired.
If a loss event that will have a detrimental effect on cash flows is identified, an impairment loss is recognised in the income statement.
The loss recognised is determined as the difference between the book cost and the fair value of the relevant impaired securities. This loss
comprises the effect of the expected loss of contractual cash flows and any additional market-price-driven temporary reductions in values.
For Jackson’s residential mortgage-backed and other asset-backed securities, all of which are classified as available-for-sale, the
model used to analyse cash flows begins with the current delinquency experience of the underlying collateral pool for the structure, by
applying assumptions about how much of the currently delinquent loans will eventually default, and multiplying this by an assumed loss
severity. Additional factors are applied to anticipate ageing effects. After applying a cash flow simulation an indication is obtained as
to whether or not the security has suffered, or is anticipated to suffer, contractual principal or interest payment 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-specific
developments and future cash flows. These assessments are based on the best available information at the time. Factors such as market
liquidity, the widening of bid/ask spreads and a change in cash flow assumptions can contribute to future price volatility. If actual
experience differs negatively from the assumptions and other considerations used in the consolidated financial statements, unrealised
losses currently in equity may be recognised in the income statement in future periods. Additional details on the impairments of the
available-for-sale securities of Jackson are described in notes C3.5(d).
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 profit
and loss basis, and as described below, financial assets classified as loans and receivables under IAS 39 are carried at amortised cost
using the effective interest rate method. The loans and receivables include loans collateralised by mortgages, deposits and loans to
policyholders. In estimating future cash flows, the Group looks at the expected cash flows of the assets and applies historical loss
experience of assets with similar credit risks that has been adjusted for conditions in the historical loss experience which no longer exist
or for conditions that are expected to arise. The estimated future cash flows are discounted using the financial asset’s original or variable
effective interest rate and exclude credit losses that have not yet been incurred.
The risks inherent in reviewing the impairment of any investment include: the risk that market results may differ from expectations,
facts and circumstances may change in the future and differ from estimates and assumptions, or the Group may later decide to sell the
asset as a result of changed circumstances.
Certain mortgage loans of the UK insurance operations and, consequent upon the purchase of REALIC in 2012 by Jackson, policy
loans held to back funds withheld under reinsurance arrangements have been designated at fair value through profit and loss as these
loan portfolios are managed and evaluated on a fair value basis.
Assets carried at cost or amortised cost are subject to impairment testing where appropriate under IFRS requirements.
Reversal of impairment loss
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).
Financial statementsA: Background and accounting policies Prudential plc Annual Report 2013 144
A3: Accounting policies continued
iv Derivatives and hedge accounting
Derivative financial instruments are used to reduce or manage investment, interest rate and currency exposures, to facilitate efficient
portfolio management and for investment purposes.
The Group may designate certain derivatives as hedges.
For hedges of net investments in foreign operations, the effective portion of any change in fair value of derivatives or other financial
instruments designated as net investment hedges 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 flow hedging treatment under IAS 39. The exceptions, where hedge
accounting has been applied in 2013 and 2012, are summarised in note C3.5(b).
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-profits funds and
annuity business, and Jackson.
For UK with-profits funds the derivative programme derivatives are used for the purposes of efficient 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
financial assets including derivatives held.
For Jackson an extensive derivative programme is maintained. Value movements on the derivatives held can be very significant in
their effect on shareholder results. Further details on this aspect of the Group’s financial reporting are described in note B1.2.
v Measurement and presentation of derivatives and debt securities of US insurance operations
The policies for these items are significant factors in contributing to the volatility of the income statement result and shareholders’ equity.
Under IAS 39, derivatives are required to be carried at fair value. Unless net investment hedge accounting is applied, value movements
on derivatives are recognised in the income statement.
For derivative instruments of Jackson that are entered into to mitigate economic exposures, the Group has considered whether it is
appropriate to undertake the necessary operational changes to qualify for hedge accounting so as to achieve matching of value movements
in hedging instruments and hedged items in the performance statements. In reaching the decision, a number of factors were particularly
relevant. These were:
— IAS 39 hedging criteria have been designed primarily in the context of hedging and hedging instruments that are assessable as
financial instruments that are either stand-alone or separable from host contracts, rather than, for example, duration characteristics
of insurance contracts;
— The high hurdle levels under IAS 39 of ensuring hedge effectiveness at the level of individual hedge transactions;
— The difficulties in applying the macro hedge provisions under IAS 39 (which are more suited to banking arrangements) to Jackson’s
derivative book;
— The complexity of asset and liability matching of US life insurers such as those with Jackson’s product range; and finally
— Whether it is possible or desirable, without an unacceptable level of costs and constraint on commercial activity, to achieve the
accounting hedge effectiveness required under IAS 39.
Taking account of these considerations the Group has decided that, except for 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 reflected within it. This volatility is reflected in the level of short-term fluctuations in investment
returns, as shown in notes B1.1 and B1.2.
Under IAS 39, unless carried at amortised cost (subject to impairment provisions where appropriate) under the held-to-maturity
category, debt securities are also carried at fair value. The Group has chosen not to classify any financial assets as held-to-maturity.
Debt securities of Jackson are designated as available-for-sale with value movements, unless impaired, being recorded as movements
within other comprehensive income. Impairments are recorded in the income statement.
vi 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 financial instruments and insurance contracts to create hybrid instruments. Embedded derivatives
meeting the definition of an insurance contract are accounted for under IFRS 4. Where economic characteristics and risks of the
embedded derivatives are not closely related to the economic characteristics and risks of the host instrument, and where the hybrid
instrument is not measured at fair value with the changes in fair value recognised in the income statement, the embedded derivative
is bifurcated and carried at fair value as a derivative in accordance with IAS 39. For Jackson’s ‘not for life’ Guaranteed Minimum
Withdrawal Benefit and Fixed Index Annuity reserves the determination of fair value requires assumptions regarding future mix
of Separate Account assets, equity volatility levels, and policyholder behaviour.
In addition, the Group applies the option under IFRS 4 to not separate and fair value surrender options embedded in host contracts
and with-profits investment contracts whose strike price is either a fixed amount or a fixed amount plus interest. Further details on the
valuation basis for embedded derivatives attaching to Jackson’s life assurance contracts are provided in note C4.2.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsA: Background and accounting policies continued 145
vii Securities lending including repurchase agreements
The Group is party to various securities lending agreements under which securities are loaned to third parties on a short-term basis. The
loaned securities are not derecognised; rather, they continue to be recognised within the appropriate investment classification. The Group’s
policy is that collateral in excess of 100 per cent of the fair value of securities loaned is required from all securities’ borrowers and typically
consists of cash, debt securities, equity securities or letters of credit.
In cases where the Group takes possession of the collateral under its securities lending programme, the collateral, and corresponding
obligation to return such collateral, are recognised in the consolidated statement of financial position.
viii Derecognition of financial assets and liabilities
The Group’s policy is to derecognise financial assets when it is deemed that substantially all the risks and rewards of ownership have
been transferred.
The Group derecognises financial liabilities only when the obligation specified in the contract is discharged, cancelled or has expired.
ix Financial liabilities designated at fair value through profit and loss
Consistent with the Group’s risk management and investment strategy and the nature of the products concerned, the Group has
designated under IAS 39 classification certain financial liabilities at fair value through profit and loss as these instruments are managed
and their performance evaluated on a fair value basis. These instruments include liabilities related to consolidated collateralised debt
obligations and net assets attributable to unit holders of consolidated unit trusts and similar funds.
k Presentation of results before tax
The total tax charge for the Group reflects tax that in addition to relating to shareholders’ profits is also attributable to policyholders and
unallocated surplus of with-profits funds and unit-linked policies. This is explained in more detail in note B5. Reported profit before the
total tax charge is not representative of pre-tax profits attributable to shareholders. Accordingly, in order to provide a measure of pre-tax
profits attributable to shareholders the Group has chosen to adopt an income statement presentation of the tax charge and pre-tax
results that distinguishes between policyholder and shareholder components.
l 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 identified by the Group reflect the Group’s organisational structure, which is by both geography (Asia, US
and UK) and by product line (insurance operations and asset management).
The products of the insurance operations contain both significant and insignificant levels 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.
Further information on the Group’s operating segments is provided in note B1.3.
m Segmental analysis of results and earnings attributable to shareholders
The Group uses operating profit based on longer-term investment returns as the segmental measure of its results. The basis of calculation
is disclosed in note B1.3.
For shareholder-backed business, with the exception of debt securities held by Jackson and assets classified as loans and receivables
at amortised cost, all financial investments and investment property are designated as assets at fair value through profit and loss. The
short-term fluctuations affect the result for the year and the Group provides additional analysis of results before and after short-term
fluctuations in investment returns, together with other items that are of a short-term, volatile or one-off nature. Short-term fluctuations
in investment returns on such assets held by with-profits funds do not affect directly reported shareholder results. This is because
(i) the unallocated surplus of with-profits funds is accounted for as a liability and (ii) excess or deficits of income and expenditure of
the funds over the required surplus for distribution are transferred to or from unallocated surplus.
n 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.
o Investment properties
Investments in leasehold and freehold properties not for occupation by the Group, including properties under development for future
use as investment properties, are carried at fair value, with changes in fair value included in the income statement. Properties are valued
annually either by the Group’s qualified surveyors or by taking into consideration the advice of professional external valuers using the
Royal Institution of Chartered Surveyors valuation standards. Each property is externally valued at least once every three years.
Leases of investment property where the Group has substantially all the risks and rewards of ownership are classified as finance leases
(leasehold property). Finance leases are capitalised at the lease’s inception at the lower of the fair value of the leased property and the
present value of the minimum lease payments.
Financial statementsA: Background and accounting policies Prudential plc Annual Report 2013 146
A3: Accounting policies continued
p Pension schemes
For the Group’s defined benefit schemes, if the present value of the defined benefit obligation exceeds the fair value of the scheme
assets, then a liability is recorded in the Group’s statement of financial position. By contrast, if the fair value of the assets exceeds the
present value of the defined benefit obligation then the surplus will only be recognised if the nature of the arrangements under the trust
deed, and funding arrangements between the Trustee and the Company, support the availability of refunds or recoverability through
agreed reductions in future contributions. In addition, if there is a constructive obligation for the Company to pay deficit funding, this
is also recognised such that the financial position recorded for the scheme reflects the higher of any underlying IAS 19 deficit and the
obligation for deficit funding.
The Group utilises the projected unit credit method to calculate the defined benefit obligation. This method sees each period of
service as giving rise to an additional unit of benefit entitlement and measures each unit separately to build up the final obligation.
Estimated future cash flows are then discounted at a high-quality corporate bond rate, adjusted to allow for the difference in duration
between the bond index and the pension liabilities where appropriate, to determine its present value. These calculations are performed
by independent actuaries.
The plan assets of the Group’s pension schemes exclude several insurance contracts that have been issued by the Group. These
assets are excluded from plan assets in determining the pension obligation recognised in the consolidated statement of financial position.
The aggregate of the actuarially determined service costs of the currently employed personnel and the net interest on the net defined
benefit liability (asset) at the start of the period is charged to the income statement. Actuarial and other gains and losses as a result of
changes in assumptions or experience variances are recognised as other comprehensive income.
Contributions to the Group’s defined contribution schemes are expensed when due.
q Share-based payments and related movements in own shares
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.
r Tax
Current tax expense is charged or credited based upon amounts estimated to be payable or recoverable as a result of taxable amounts
for the current year. To the extent that losses of an individual UK company are not offset in any one year, they can be carried back for one
year or carried forward indefinitely to be offset against profits arising from the same company.
Deferred taxes are provided under the liability method for all relevant temporary differences. 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 profits will
be available against which these losses can be utilised.
The tax charge for long-term business includes tax expense attributable to both policyholders and shareholders. In the UK, life
insurance companies are taxed on both their shareholders’ profits and on their policyholders’ insurance and investment returns on
certain insurance and investment products. Tax on shareholders’ profits 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 profits.
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.
s 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.
Income and expenses of entities sold during the period are included in the income statement up to the date of disposal. The gain or
loss on disposal is calculated as the difference between sale proceeds net of selling costs, less the net assets of the entity at the date of
disposal adjusted for foreign exchange movements attaching to the sold entity that are required to be recycled to the income statement
under IAS 21.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsA: Background and accounting policies continued 147
t Goodwill
Goodwill arising on acquisitions of subsidiaries and businesses is capitalised and carried on the Group statement of financial position as
an intangible asset at initial value less any accumulated impairment losses. Goodwill impairment testing is conducted annually and when
there is an indication of impairment. For the purposes of impairment testing, goodwill is allocated to cash generating units.
u Intangible assets
Intangible assets acquired on the purchase of a subsidiary or portfolio of contracts are fair valued at acquisition. Deferred acquisition
costs are accounted for as described in policy notes (d) and (f) above. Other intangible assets, such as distribution rights and software,
are valued initially at the price paid to acquire them and are subsequently carried at cost less amortisation and any accumulated
impairment losses. Distribution rights relate to fees paid under bancassurance partnership arrangements for bank distribution of
products for the term of the contract. Amounts for distribution rights are amortised on a basis to reflect the pattern in which the future
economic benefits are expected to be consumed by reference to new business levels. The same principles apply to determining the
amortisation method for other intangible assets unless the pattern cannot be determined reliably, in which case a straight line method
is applied.
v 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.
w 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.
x Share capital
Where there is no obligation to transfer assets, shares are classified as equity. The difference between the proceeds received on issue
of the shares, net of share issue costs, and the nominal value of the shares issued, is credited to share premium. Where the Company
purchases shares for the purposes of employee incentive plans, the consideration paid, net of issue costs, is deducted from retained
earnings. Upon issue or sale any consideration received is credited to retained earnings net of related costs.
y Foreign exchange
The Group’s consolidated financial statements are presented in pounds sterling, the Group’s presentation currency. Accordingly, the
results and financial position of foreign subsidiaries must be translated into the presentation currency of the Group from their functional
currencies, 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.
z 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.
Financial statementsA: Background and accounting policies Prudential plc Annual Report 2013 148
A3.2 New accounting pronouncements not yet effective
The following standards, interpretations and amendments have been issued but are not yet effective in 2013, including those which have
not yet been adopted in the EU. This is not intended to be a complete list as only those standards, interpretations and amendments that
could have an impact upon the Group’s financial statements are discussed.
Offsetting Financial Assets and Financial Liabilities – Amendments to IAS 32
This amendment, effective on or after 1 January 2014, clarifies the offsetting criteria of financial assets and liabilities. In particular the
amendment clarifies that in order to meet criteria to offset a financial asset and a financial liability, a right to set-off must be currently
available rather than being contingent on a future event. Further, the right to set-off must be exercisable by any of the counterparties,
both in the normal course of business and in the event of default, insolvency and bankruptcy. The Group is assessing the impact of this
amendment but it is not expected to have a significant effect on the Group’s financial statements.
Annual improvements to IFRS – 2010-2012 Cycle and 2011-2013 Cycle
These improvements include minor changes to ten IFRS standards, and are effective for annual periods beginning on or after 1 July 2014. The
Group is assessing the impact of these amendments but they are not expected to have a significant effect on the Group’s financial statements.
IFRIC 21, ‘Levies’
IFRIC 21, ‘Levies’, issued in May 2013, is effective for annual periods beginning on or after 1 January 2014. It has not yet been endorsed
for use in the EU. This interpretation clarifies that an entity recognises a liability for a levy imposed by a government (that is not income
tax) when the activity that triggers payment, as identified by the relevant legislation, occurs. The Group is assessing the impact of this
interpretation but it is not expected to have a material effect on the Group’s financial statements.
IFRS 9, ‘Financial instruments: Classification and measurement’
This standard when effective will automatically replace IAS 39, ’Financial Instruments – Recognition and measurement’. Under the
current version of IFRS 9 the classification and hence measurement of financial assets would be on two bases, either amortised cost or
fair value through profit or loss, rather than the existing four bases of classification. 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 section of the comprehensive income statement, rather than within profit or loss for liabilities measured
at fair value. Notwithstanding these prospective requirements, under the current version of IFRS 9, on 28 November 2012, the IASB
released an exposure draft proposing amendments. The proposed changes would introduce a fair value through other comprehensive
income category which would include certain financial assets that contain contractual cash flows 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 flows and for sale. The
Group is assessing the impact of this standard and will consider the remaining phases of IFRS 9 when finalised by the IASB. IFRS 9 has not
yet been endorsed for use in the EU and there is currently no mandatory effective date pending the finalisation of its remaining phases.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsA: Background and accounting policies continued B: Earnings performance
B1: Analysis of performance by segment
B1.1 Segment results – profit before tax
Asia operations
Insurance operations
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)
Broker-dealer and asset management
Total US operations
UK operations
UK insurance operations:
Long-term business
General insurance commissionnote (i)
Total UK insurance operations
M&G (including Prudential Capital)
Total UK operations
Total segment profit
Other income and expenditure
Investment return and other income
Interest payable on core structural borrowings
Corporate expenditurenote (ii)
Total
Solvency II implementation costs
Restructuring costsnote (iii)
Operating profit based on longer-term investment returns
Short-term fluctuations in investment returns on shareholder-backed business
Amortisation of acquisition accounting adjustments
Gain on dilution of Group holdingsnote (iv)
(Loss) profit attaching to held for sale Japan life businessnote (v)
Costs of domestication of Hong Kong branch
Profit before tax attributable to shareholders
Basic earnings per share (in pence)
Based on operating profit based on longer-term investment returns
Based on profit for the year
149
Note
2013 £m
2012* £m
B4(a)
B4(b)
B4(c)
B1.2
D1
D1
D1
D2
B6
1,003
–
1,003
(2)
1,001
74
1,075
1,243
59
1,302
706
29
735
441
1,176
3,553
10
(305)
(263)
(558)
(29)
(12)
2,954
(1,110)
(72)
–
(102)
(35)
1,635
2013
90.9p
52.8p
862
51
913
(7)
906
69
975
964
39
1,003
703
33
736
371
1,107
3,085
13
(280)
(231)
(498)
(48)
(19)
2,520
187
(19)
42
17
–
2,747
2012*
76.9p
85.1p
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
Notes
(i)
The Group’s UK insurance operations transferred its general insurance business to Churchill in 2002. General insurance commission represents the
commission receivable net of expenses for Prudential-branded general insurance products as part of this arrangement.
Corporate expenditure as shown above is for Group Head Office and Asia Regional Head Office.
(ii)
(iii) Restructuring costs are incurred in the UK and represent one-off expenses incurred in securing expense savings.
(iv) During 2012, M&G reduced its holdings in PPM South Africa resulting in a reclassification from a subsidiary to an associate giving rise to a gain on dilution of
(v)
£42 million.
To facilitate comparisons of operating profit based on longer-term investment returns that reflect the Group’s retained operations, the results attributable to the
held for sale Japan life business are included separately within the supplementary analysis of profit above.
Financial statementsB: Earnings performance Prudential plc Annual Report 2013
150
B1: Analysis of performance by segment continued
B1.2 Short-term fluctuations in investment returns on shareholder-backed business
Insurance operations:
Asianote (ii)
USnote (iii)
UKnote (iv)
Other operations:
– Economic hedge value movementnote (v)
– Othernote (vi)
Total
2013 £m
2012* £m
(204)
(625)
(254)
–
(27)
(1,110)
54
(90)
136
(32)
119
187
* The 2012 comparative results have been adjusted retrospectively from those previously published for the application of the new and amended accounting standards
described in note A2. In addition, to facilitate comparisons of results that reflect the Group’s retained operations, the short-term fluctuations in investment returns
attributable to the held for sale Japan life business are included separately within the supplementary analysis of profit.
Notes
(i)
General overview of defaults
The Group did not experience any defaults on its shareholder-backed debt securities portfolio in 2013 or 2012.
(ii) Asia insurance operations
In Asia, the negative short-term fluctuations of £(204) million (2012: positive £54 million) primarily reflect net unrealised movements on bond holdings
following a rise in bond yields during the year.
(iii) US insurance operations
The short-term fluctuations in investment returns for US insurance operations comprise the following items:
2013 £m
2012 £m
Short-term fluctuations relating to debt securities
Charges in the year:
Losses on sales of impaired and deteriorating bonds
Bond write downs
Recoveries/reversals
Total charges in the yearnote (a)
Less: Risk margin charge included in operating profit based on longer-term investment returnsnote (b)
Interest-related realised gains:
Arising in the year
Less: Amortisation of gains and losses arising in current and prior years to operating profit based on longer-term
investment returns
Related amortisation of deferred acquisition costs
Total short-term fluctuations related to debt securities
Derivatives (other than equity-related): market value movements (net of related amortisation of deferred
acquisition costs)note (c)
Net equity hedge results (principally guarantees and derivatives, net of related amortisation of deferred
acquisition costsnote (d)
Equity-type investments: actual less longer-term return (net of related amortisation of deferred acquisition costs)
Other items (net of related amortisation of deferred acquisition costs)
Total
(5)
(8)
10
(3)
85
82
64
(89)
(25)
(15)
42
(531)
(255)
89
30
(625)
(23)
(37)
13
(47)
79
32
94
(91)
3
(3)
32
135
(302)
23
22
(90)
The short-term fluctuations in investment returns shown in the table above are stated net of a credit for the related amortisation of deferred acquisition costs of
£228 million (2012: credit of £76 million). See note C5.1(b).
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
2013 £m
2012 £m
1
(1)
–
–
(1)
(2)
(3)
(4)
(1)
(3)
(8)
(14)
(25)
(47)
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsB: Earnings performance continued
(b)
The risk margin reserve charge for longer-term credit-related losses included in operating profit based on longer-term investment returns of Jackson
for 2013 is based on an average annual risk margin reserve of 25 basis points (2012: 26 basis points) on average book values of US$54.4 billion
(2012: US$47.6 billion) as shown below:
Moody’s rating category (or equivalent under
NAIC ratings of mortgage-backed securities)
A3 or higher
Baa1, 2 or 3
Ba1, 2 or 3
B1, 2 or 3
Below B3
Total
Related change to amortisation of deferred
acquisition costs (see below)
Risk margin reserve charge to operating profit for
longer-term credit related losses
Average
book
value
US$m
27,557
24,430
1,521
530
317
54,355
2013
2012
RMR
Annual
expected loss
%
US$m
0.11
0.25
1.18
2.80
2.32
0.25
(32)
(62)
(18)
(15)
(7)
(134)
25
(109)
Average
book
value
US$m
23,129
21,892
1,604
597
342
47,564
£m
(20)
(40)
(11)
(9)
(5)
(85)
16
(69)
RMR
Annual
expected loss
%
US$m
0.11
0.26
1.12
2.82
2.44
0.26
(26)
(56)
(18)
(17)
(8)
(125)
21
(104)
151
£m
(16)
(36)
(11)
(11)
(5)
(79)
13
(66)
Consistent with the basis of measurement of insurance assets and liabilities for Jackson’s IFRS results, the charges and credits to operating profits based on
longer-term investment returns are partially offset by related amortisation of deferred acquisition costs.
Derivatives (other than equity-related): negative fluctuation of £(531) million (2012: positive fluctuation of £135 million) net of related amortisation of deferred
acquisition costs.
(c)
These losses and gains are in respect of interest rate swaps and swaptions and for the Guaranteed Minimum Income Benefit (GMIB) reinsurance. The
swaps and swaptions are undertaken to manage interest rate exposures and durations within the general account and the variable annuity and fixed index
annuity guarantees (as described in note (d) below). The GMIB reinsurance is in place so as to insulate Jackson from the GMIB exposure.
The amounts principally reflect the fair value movement on these instruments, net of related amortisation of deferred acquisition costs.
Under the Group’s IFRS reporting of Jackson’s derivatives (other than equity-related) programme significant accounting mismatches arise. This is
because:
– The derivatives are required to be fair valued with the value movements booked in the income statement;
– As noted above, part of the derivative value movements arises in respect of interest rate exposures within Jackson’s guarantee liabilities for variable
annuity and fixed index annuity business which are only partially fair valued under IFRS (see below); and
– The GMIB liability is valued under the US GAAP insurance measurement basis applied for IFRS in a way that substantially does not recognise the effect of
market movements. However, notwithstanding that the liability is reinsured, as the reinsurance asset is net settled it is deemed a derivative under IAS 39
which requires fair valuation.
In 2013, the negative fluctuation of £(531) million reflects principally the adverse mark-to-market impact of the 1.3 per cent increase in swap rates on the
valuation of the interest rate swaps, swaptions, and the GMIB reinsurance asset.
(d) Net equity hedge result: negative fluctuation of £(255) million (2012: negative fluctuation £(302) million).
These amounts are in respect of the equity-based derivatives and associated guarantee liabilities of Jackson’s variable and fixed index annuity
business. The equity based derivatives are undertaken to manage the equity risk exposure of the guarantee liabilities. The economic exposure of these
guarantee liabilities also includes the effects of changes in interest rates which are managed through the swaps and swaptions programmes described in
note (c) above.
The amounts reflect the net effect of:
– Fair value movements on free-standing equity derivatives;
– The accounting value movements on the variable annuity and fixed index annuity guarantee liabilities;
– Fee assessments and claim payments in respect of guarantee liabilities; and
– Related DAC amortisation.
Under the Group’s IFRS reporting of Jackson’s equity-based derivatives and associated guarantee liabilities significant accounting mismatches arise. This is
because:
– The free-standing derivatives and Guaranteed Minimum Withdrawal Benefit (GMWB) ‘not for life’ embedded derivative liabilities are required to be fair
valued. These fair value movements include the effects of changes to levels of equity markets, implied volatility and interest rates. The interest rate
exposure is managed through the derivative programme explained above in note (c);
– The Guaranteed Minimum Death Benefit (GMDB) and GMWB ‘for life’ guarantees are valued under the US GAAP insurance measurement basis applied for
IFRS in a way that substantially does not recognise the effect of equity market and interest rate changes.
In 2013, the negative fluctuation of £(255) million reflects the net effect of mark-to-market reductions on the free-standing derivatives being offset by
reductions in the carrying amounts of those guarantees that are fair valued embedded derivatives. Both aspects reflect increased equity markets ( the S&P
500 increased by 30 per cent) with the value movement on the embedded derivatives also being affected by decreases in average implied volatility levels
and the 1.3 per cent increase in Treasury bond interest rates.
(iv) UK insurance operations
The negative short-term fluctuations in investment returns for UK insurance operations of £(254) million (2012: positive £136 million) reflect mainly net
investment movements arising in the period on fixed income assets backing the capital of the annuity business following the rise in bond yields during the
year. In addition, the amount for 2013 includes the effect of a partial hedge of future shareholder transfers expected to emerge from the UK’s with-profits
sub-fund taken out during the year. This hedge reduces the risk arising from equity market declines.
Economic hedge value movement
This item represents the cost on short-dated hedge contracts taken out in first 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.
(v)
(vi) Other
Short-term fluctuations in investment returns of other operations, were negative £(27) million (2012: positive £119 million) representing principally unrealised
value movements on investments and foreign exchange items.
Financial statementsB: Earnings performance Prudential plc Annual Report 2013
152
B1: Analysis of performance by segment continued
B1.3 Determining operating segments and performance measure of operating segments
Operating segments
The Group’s operating segments, determined in accordance with IFRS 8, ‘Operating Segments’, are as follows:
Insurance operations
— Asia
— US (Jackson)
— UK
Asset management operations
— M&G (including Prudential Capital)
— Eastspring Investments
— US broker-dealer and asset management (including Curian)
The Group’s operating segments are also its reportable segments for the purposes of internal management reporting with the exception
of Prudential Capital (PruCap) which has been incorporated into the M&G operating segment for the purposes of segment reporting.
Performance measure
The performance measure of operating segments utilised by the Company is IFRS operating profit attributable to shareholders based on
longer-term investment returns, as described below. This measurement basis distinguishes operating profit based on long-term
investment returns from other constituents of the total profit as follows:
— Short-term fluctuations in investment returns;
— Amortisation of acquisition accounting adjustments arising on the purchase of business. This comprises principally the charge for the
adjustments arising on the purchase of REALIC in 2012;
— For 2012, gain on dilution of the Group’s holdings in PPM South Africa;
— (Loss) profit attaching to the held for sale Japan life business. See note D1 for further details; and
— For 2013, the costs associated with the domestication of the Hong Kong branch.
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 Office and the Asia Regional Head
Office.
Except in the case of assets backing the UK annuity, unit-linked and US variable annuity separate account liabilities, operating profit
based on longer-term investment returns for shareholder-financed 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 profit based on longer-term investment returns is as follows:
— UK annuity business liabilities: For this business, policyholder liabilities are determined by reference to current interest rates. The
value movements of the assets covering liabilities are closely correlated with the related change in liabilities. Accordingly, asset value
movements are recorded within the ‘operating results based on longer-term investment returns’. Policyholder liabilities include a
margin for credit risk. Variations between actual and best estimate expected impairments are recorded as a component of short-term
fluctuations in investment returns; and
— Unit-linked and US variable annuity business separate account liabilities: For such business, the policyholder unit liabilities are directly
reflective of the asset value movements. Accordingly, the operating results based on longer-term investment returns reflect the
current period value movements in unit liabilities and the backing assets.
In the case of other shareholder-financed business, the measurement of operating profit based on longer-term investment returns
reflects the particular features of long-term insurance business where assets and liabilities are held for the long-term and for which the
accounting basis for insurance liabilities under current IFRS is not generally conducive to demonstrating trends in underlying
performance of life businesses exclusive of the effects of short-term fluctuations in market conditions. In determining the profit on this
basis, the following key elements are applied to the results of the Group’s shareholder-financed operations.
(a) Debt, equity-type securities and loans
Longer-term investment returns comprise actual income receivable for the period (interest/dividend income) and for both debt and
equity-type securities longer-term capital returns.
In principle, for debt securities and loans, the longer-term capital returns comprise two elements:
— Risk margin reserve 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 risk margin reserve charge to the
operating result is reflected in short-term fluctuations in investment returns; and
— 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.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsB: Earnings performance continued 153
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 significant 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 risk
margin reserve 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 risk margin reserve charge. Further details of the risk margin reserve charge, as well as the
amortisation of interest-related realised gains and losses, for Jackson are shown in note B1.2.
For debt securities backing non-linked shareholder-financed 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 risk margin reserve charge.
At 31 December 2013, the level of unamortised interest-related realised gains and losses related to previously sold bonds for the
Group was a net gain of £461 million (2012: net gain of £495 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-financed
operations other than the UK annuity business, unit-linked and US variable annuity are of significance for the US and Asia insurance
operations. Different rates apply to different categories of equity-type securities.
As at 31 December 2013, the equity-type securities for US insurance non-separate account operations amounted to £1,118 million
(2012: £1,004 million). For these operations, the longer-term rates of return for income and capital applied in 2013 and 2012, which
reflect the combination of risk free rates and appropriate risk premiums, 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
5.7% to 6.8%
7.7% to 9.0%
5.5% to 6.2%
7.5% to 8.2%
2013
2012
For Asia insurance operations, excluding assets of the Japan life held for sale business, investments in equity securities held for
non-linked shareholder-financed operations amounted to £571 million as at 31 December 2013 (2012: £474 million). The rates of return
applied in the years 2013 and 2012 ranged from 3.42 per cent to 13.75 per cent with the rates applied varying by territory.
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 inflation. These rates are broadly
stable from period to period but may be different between countries reflecting, for example, differing expectations of inflation in each
territory. The assumptions are for returns expected to apply in equilibrium conditions. The assumed rates of return do not reflect any
cyclical variability in economic performance and are not set by reference to prevailing asset valuations.
The longer-term investment returns for the Asia insurance joint ventures accounted for on the equity method are determined on a
similar basis as the other Asia insurance operations described above.
(b) US variable and fixed index annuity business
The following value movements for Jackson’s variable and fixed index annuity business are excluded from operating profit based on
longer-term investment returns:
— Fair value movements for equity-based derivatives;
— Fair value movements for embedded derivatives for Guaranteed Minimum Withdrawal Benefit ‘not for life’ and fixed index annuity
business, and Guaranteed Minimum Income Benefit reinsurance (see note);
— Movements in accounts carrying value of Guaranteed Minimum Death Benefit and Guaranteed Minimum Withdrawal Benefit ‘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;
— Fee assessments and claim payments, in respect of guarantee liabilities; and
— Related amortisation of deferred acquisition costs for each of the above items.
Note: US operations – Embedded derivatives for variable annuity guarantee features
The Guaranteed Minimum Income Benefit liability, which is fully reinsured, subject to a deductible and annual claim limits, is accounted
for in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification ( 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, ‘Financial Instruments: Recognition and
Measurement’, and the asset is therefore recognised at fair value. As the Guaranteed Minimum Income Benefit is economically reinsured
the mark to market element of the reinsurance asset is included as a component of short-term fluctuations in investment returns.
Financial statementsB: Earnings performance Prudential plc Annual Report 2013 154
B1: Analysis of performance by segment continued
(c) 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 profit).
The principal example of non-equity based derivatives (for example interest rate swaps and swaptions) whose value movements are
excluded from operating profit arises in Jackson. Non-equity based derivatives are primarily held by Jackson as part of a broadly-based
hedging programme for features of Jackson’s bond portfolio (for which value movements are booked in the statement of comprehensive
income rather than the income statement), product liabilities (for which US GAAP accounting as ‘grandfathered’ under IFRS 4 does not
fully reflect the economic features being hedged), and the interest rate exposure attaching to equity-based embedded derivatives.
(d) Other liabilities to policyholders and embedded derivatives for product guarantees
Under IFRS, the degree to which the carrying values of liabilities to policyholders are sensitive to current market conditions varies
between territories depending upon the nature of the ‘grandfathered’ measurement basis. In general, in those instances where the
liabilities are particularly sensitive to routine changes in market conditions, the accounting basis is such that the impact of market
movements on the assets and liabilities is broadly equivalent in the income statement, and operating profit based on longer-term
investments returns is not distorted. In these circumstances, there is no need for the movement in the liability to be bifurcated between
the elements that relate to longer-term market conditions and short-term effects.
However, some types of business movements in liabilities do require bifurcation to ensure that at the net level (ie after allocated
investment return and change for policyholder benefits) the operating result reflects longer-term market returns.
Examples where such bifurcation is necessary are:
Asia – Hong Kong
For certain non-participating business, the economic features are more akin to asset management products with policyholder liabilities
reflecting asset shares over the contract term. For these products, the charge for policyholder benefits in the operating results should
reflect the asset share feature rather than volatile movements that would otherwise be reflected if the local regulatory basis (also applied
for IFRS basis) 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.
UK shareholder-backed annuity business
The operating result based on longer-term investment returns reflects the impact of value movements on policyholder liabilities for
annuity business in PRIL and the PAC non-profit sub-fund after adjustments to allocate the following elements of the movement to the
category of ‘short-term fluctuations in investment returns’:
— The impact on credit risk provisioning of actual upgrades and downgrades during the period;
— Credit experience compared to assumptions; and
— Short-term value movements on assets backing the capital of the business.
Credit experience reflects 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 fluctuations 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.
(e) Fund management and other non-insurance businesses
For these businesses, the particular features applicable for life assurance noted above do not apply. For these businesses it is
inappropriate to include returns in the operating result on the basis described above. Instead, it is appropriate to generally include
realised gains and losses (including impairments) in the operating result with unrealised gains and losses being included in short-term
fluctuations. For this purpose impairments are calculated as the credit loss determined by comparing the projected cash flows discounted
at the original effective interest rate to the carrying value. In some instances it may also be appropriate to amortise realised gains and
losses on derivatives and other financial instruments to operating results over a time period that reflects the underlying economic
substance of the arrangements.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsB: Earnings performance continued 155
B1.4 Segmental income statement
Insurance operations
Asset management
Year ended 31 December 2013 £m
Gross premiums earned
Outward reinsurance premiums
Earned premiums, net of reinsurance
Investment returnnote (ii)
Other income
Asia
US
UK
M&G
9,061
(190)
15,661
(278)
8,871
895
48
15,383
10,003
(2)
5,780
(190)
5,590
9,372
226
–
–
–
143
1,165
Total revenue, net of reinsurance
9,814
25,384
15,188
1,308
Benefits and claims
Outward reinsurers’ share of benefits
and claims
Movement in unallocated surplus of
with-profits fundsnote (iii)
Benefits and claims and movements in
unallocated surplus of with-profits
funds, net of reinsurance
Acquisition costs and other operating
(6,825) (24,206) (11,196)
150
500
(28)
(255)
–
(1,294)
(6,930) (23,706) (12,518)
–
–
–
–
US
–
–
–
11
855
866
–
–
–
–
Eastspring
Invest-
ments
Total
segment
Unallo-
cated
corporate
Group
total
– 30,502
(658)
–
– 30,502
(658)
–
– 29,844
(1) 20,423
2,537
245
– 29,844
(76) 20,347
2,184
(353)
244
52,804
(429) 52,375
– (42,227)
– (42,227)
–
–
622
(1,549)
–
–
622
(1,549)
– (43,154)
– (43,154)
expenditureB3
(2,015)
(1,112)
(1,950)
(840)
(807)
(193)
(6,917)
56
(6,861)
Finance costs: interest on core structural
borrowings of shareholder-financed
operations
Remeasurement of carrying value of
Japan life business classified as held
for sale
–
(13)
(120)
–
–
–
(17)
–
–
–
–
–
(30)
(275)
(305)
(120)
–
(120)
Total charges, net of reinsurance
(9,065) (24,831) (14,468)
(857)
(807)
(193) (50,221)
(219) (50,440)
29
–
83
12
–
23
147
–
147
Share of profit from joint ventures and
associates, net of related tax
Profit (loss) before tax (being tax
attributable to shareholders’ and
policyholders’ returns)note (i)
Tax charge attributable to policyholders’
778
553
803
463
returns
(90)
–
(357)
–
Profit (loss) before tax attributable to
shareholders
688
553
446
463
59
–
59
74
2,730
(648)
2,082
–
(447)
–
(447)
74
2,283
(648)
1,635
This is represented in the segmental analysis of profit from continuing operations before tax attributable to shareholders in note B1.1
as follows:
Insurance operations
Asset management
Year ended 31 December 2013 £m
Operating profit based on longer-term
investment returns
1,001
1,243
735
441
Asia
US
UK
M&G
Short-term fluctuations in investment
returns on shareholder-backed
business
Amortisation of acquisition accounting
adjustments
Loss attaching to held for sale Japan life
business
Costs of domestication of Hong Kong
branch
Profit (loss) before tax attributable to
shareholders
(204)
(625)
(254)
22
(7)
(65)
(102)
–
–
–
–
–
(35)
–
–
–
Eastspring
Invest-
ments
Total
segment
Unallo-
cated
corporate
Group
total
74
3,553
(599)
2,954
–
–
–
–
(1,061)
(49)
(1,110)
(72)
(102)
(35)
–
–
–
(72)
(102)
(35)
US
59
–
–
–
–
688
553
446
463
59
74
2,283
(648)
1,635
Financial statementsB: Earnings performance Prudential plc Annual Report 2013 156
B1: Analysis of performance by segment continued
Insurance operations
Asset management
Year ended 31 December 2012* £m
Gross premiums earned
Outward reinsurance premiums
Earned premiums, net of reinsurance
Investment returnnote (ii)
Other income
Asia
US
UK
M&G
7,433
(163)
7,270
2,965
68
14,660
(193)
14,467
6,193
(2)
7,020
(135)
6,885
14,533
213
–
–
–
242
972
Total revenue, net of reinsurance
10,303
20,658
21,631
1,214
Benefits and claims
Outward reinsurers’ share of benefits
and claims
Movement in unallocated surplus of
with-profits fundsnote (iii)
Benefits and claims and movements in
unallocated surplus of with-profits
funds, net of reinsurance
Acquisition costs and other operating
(7,160)
(18,703)
(18,253)
108
(518)
(8)
–
159
(769)
(7,570)
(18,711)
(18,863)
–
–
–
–
US
–
–
–
6
725
731
–
–
–
–
Eastspring
Invest-
ments
Total
segment
Unallo-
cated
corporate
–
–
29,113
(491)
–
6
223
229
28,622
23,945
2,199
54,766
Group
total
29,113
(491)
28,622
23,931
1,885
–
–
–
(14)
(314)
(328)
54,438
–
(44,116)
–
(44,116)
–
–
259
(1,287)
–
–
259
(1,287)
–
(45,144)
–
(45,144)
expenditureB3
(1,763)
(1,079)
(1,630)
(696)
(692)
(175)
(6,035)
3
(6,032)
Finance costs: interest on core structural
borrowings of shareholder-financed
operations
–
(13)
–
Total charges, net of reinsurance
(9,333)
(19,803)
(20,493)
(16)
(712)
–
–
(29)
(251)
(280)
(692)
(175)
(51,208)
(248)
(51,456)
83
–
28
9
–
15
135
–
135
Share of profit from joint ventures and
associates, net of related tax
Profit (loss) before tax (being tax
attributable to shareholders’ and
policyholders’ returns)note (i)
Tax charge attributable to policyholders’
1,053
855
1,166
511
returns
(76)
–
(294)
–
Profit (loss) before tax attributable to
shareholders
977
855
872
511
39
–
39
69
3,693
(576)
3,117
–
(370)
–
(370)
69
3,323
(576)
2,747
This is represented in the segmental analysis of profit from continuing operations before tax attributable to shareholders in note B1.1
as follows:
Operating profit based on longer-term
investment returns
Short-term fluctuations in investment
returns on shareholder-backed
business
Gain on dilution of Group’s holdings
Amortisation of acquisition accounting
adjustments
Profit attaching to held for sale Japan life
business
Profit (loss) before tax attributable to
shareholders
Insurance operations
Asset management
Year ended 31 December 2012* £m
Asia
US
UK
M&G
906
964
736
371
54
–
–
17
(90)
–
(19)
–
136
–
–
–
98
42
–
–
US
39
–
–
–
–
Eastspring
Invest-
ments
Total
segment
Unallo-
cated
corporate
Group
total
69
3,085
(565)
2,520
–
–
–
–
198
42
(19)
17
(11)
–
–
–
187
42
(19)
17
977
855
872
511
39
69
3,323
(576)
2,747
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsB: Earnings performance continued 157
Notes
(i)
(ii)
This measure is the formal profit (loss) before tax measure under IFRS but is not the result attributable to shareholders.
Investment return principally comprises:
– Interest and dividends;
– Realised and unrealised gains and losses on securities and derivatives classified as fair value through profit and loss under IAS 39; and
– Realised gains and losses, including impairment losses, on securities classified as available-for-sale under IAS 39.
(iii) The movement in unallocated surplus of with-profits funds for Asia above includes movement relating to the Hong Kong branch of PAC. For the purpose of the
presentation of unallocated surplus of with-profits funds within the statement of financial position, the Hong Kong branch balance is shown within the
unallocated surplus of the PAC with-profits sub-fund.
B1.5 Revenue
Long-term business premiums
Insurance contract premiums
Investment contracts with discretionary participation feature premiums
Inwards reinsurance premiums
Less: reinsurance premiums ceded
Earned premiums, net of reinsurancenote (iv)
Investment return
Realised and unrealised gains and losses on securities at fair value through profit and loss
Realised and unrealised losses and gains on derivatives at fair value through profit and loss
Realised gains on available-for-sale securities, previously recognised in other comprehensive income
Realised gains (losses) on loans
Interestnotes (i),(ii)
Dividends
Other investment return
Investment return
Fee income from investment contract business and asset managementnotes (iii),(iv)
Total revenue
2013 £m
2012* £m
28,339
1,877
286
(658)
29,844
12,879
(1,724)
64
11
6,771
1,740
606
20,347
2,184
52,375
26,650
2,243
220
(491)
28,622
15,270
75
68
(51)
6,586
1,424
559
23,931
1,885
54,438
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
Notes
(i)
The segmental analysis of interest income is as follows:
2013 (£m)
2012* (£m)
Insurance operations
Asset management operations
Asia
562
336
US
1,981
1,778
UK
M&G
4,178
4,374
112
105
Eastspring
Investments
Unallocated
corporate
US
1
1
1
1
(64)
(9)
Total
6,771
6,586
Interest income includes £5 million (2012: £13 million) accrued in respect of impaired securities.
(ii)
(iii) Fee income includes £44 million (2012: £35 million) relating to financial instruments that are not held at fair value through profit and loss. These fees primarily
related to prepayment fees, late fees and syndication fees.
(iv) The following table provides additional segmental analysis of revenue from external customers:
Revenue from external customers:
Insurance operations
Asset management
Unallocated corporate
Intra-group revenue eliminated on consolidation
Total revenue from external customers
Revenue from external customers:
Insurance operations
Asset management
Unallocated corporate
Intra-group revenue eliminated on consolidation
Total revenue from external customers
2013 £m
Asia
US
UK
Intra-group
Total
8,919
245
–
(98)
9,066
15,381
855
–
(86)
16,150
5,816
1,165
26
(195)
6,812
2012* £m
–
(379)
–
379
–
30,116
1,886
26
–
32,028
Asia
US
UK
Intra-group
Total
7,339
222
–
(84)
7,477
14,465
725
–
(77)
15,113
7,098
972
19
(172)
7,917
–
(333)
–
333
–
28,902
1,586
19
–
30,507
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting
standards described in note A2.
Financial statementsB: Earnings performance Prudential plc Annual Report 2013
158
B1: Analysis of performance by segment continued
Revenue from external customers comprises:
Earned premiums, net of reinsurance
Fee income from investment contract business and asset management (presented as ‘Other income’)
Total revenue from external customers
2013 £m
2012* £m
29,844
2,184
32,028
28,622
1,885
30,507
The asset management operations, M&G, Eastspring Investments and US asset management provide services to the Group insurance
operations for which fees are charged at appropriate arm’s length prices. Intra-group fees included within asset management revenue
were earned by the following asset management segment:
Intra-group revenue generated by:
M&G
US broker-dealer and asset management (including Curian)
Eastspring Investments
Total intra-group fees included within asset management segment
2013 £m
2012 £m
195
98
86
379
172
77
84
333
Revenue from external customers of Asia, US and UK insurance operations shown above are net of outwards reinsurance premiums of
£190 million, £278 million, and £190 million respectively (2012: £163 million, £193 million and £135 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 £2,243 million (2012: Hong Kong £1,745 million).
Due to the nature of the business of the Group, there is no reliance on any major customers.
B2: Profit before tax – asset management operations
The profit included in the income statement in respect of asset management operations for the year is as follows:
Revenue (excluding revenue of consolidated investment funds
and NPH broker-dealer fees)
NPH broker-dealer feesnote (i)
Gross revenue
Charges (excluding charges of consolidated investment funds
and NPH broker-dealer fees)
NPH broker-dealer feesnote (i)
Gross charges
Share of profit from joint ventures and associates, net of
related tax
Profit before tax
Comprising:
Operating profit based on longer-term investment returnsnote (ii)
Short-term fluctuations in investment returnsnote (iii)
Gain on dilution of Group’s holdings
Profit before tax
2013 £m
US
Eastspring
Investments
2012* £m
Total
Total
362
504
866
(303)
(504)
(807)
–
59
59
–
–
59
244
–
244
(193)
–
(193)
23
74
74
–
–
74
1,914
504
2,418
(1,353)
(504)
(1,857)
35
596
574
22
–
596
1,739
435
2,174
(1,144)
(435)
(1,579)
24
619
479
98
42
619
M&G
1,308
–
1,308
(857)
–
(857)
12
463
441
22
–
463
* The 2012 comparative results have been adjusted retrospectively from those previously published for the application of the new and amended accounting standards
described in note A2. One of the new accounting standards adopted was IFRS 11 which requires joint ventures to be equity accounted. Accordingly, share of profit
from joint ventures and associates is disclosed as a separate line.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsB: Earnings performance continued
159
Notes
(i)
The segment revenue of the Group’s asset management operations is required to include:
NPH broker-dealer fees represent commissions received that are then paid on to the writing brokers on sales of investment products. To reflect their
commercial nature, the amounts are also wholly reflected as charges within the income statement. After allowing for these charges, there is no effect on profit
from this item. The presentation in the table above shows the amounts attributable to this item so that the underlying revenue and charges can be seen.
(ii) M&G operating profit based on longer-term investment returns:
Asset management fee income
Other income
Staff costs
Other costs
Underlying profit before performance-related fees
Share of associate results
Performance-related fees
Operating profit from asset management operations
Operating profit from Prudential Capital
Total M&G operating profit based on longer-term investment returns
2013 £m
2012 £m
859
4
(339)
(166)
358
12
25
395
46
441
728
6
(289)
(147)
298
13
9
320
51
371
The difference between the fees and other income shown above in respect of asset management operations, and the revenue figure for M&G shown (excluding
consolidated investment funds) in the main table primarily relates to the total revenue of Prudential Capital (including short-term fluctuations) of £144 million
(2012: £218 million) and commissions which have been netted off in arriving at the fee income of £859 million (2012: £728 million) in the table above. The
difference in the presentation of commission is aligned with how management reviews the business.
(iii) Short-term fluctuations in investment returns for M&G are primarily in respect of unrealised fair value movements on Prudential Capital’s bond portfolio.
B3: Acquisition costs and other expenditure
Acquisition costs incurred for insurance policies
Acquisition costs deferred less amortisation of acquisition costs
Administration costs and other expenditure
Movements in amounts attributable to external unit holders of consolidated investment funds
Total acquisition costs and other expenditure
2013 £m
2012* £m
(2,553)
566
(4,303)
(571)
(6,861)
(2,557)
595
(3,863)
(207)
(6,032)
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
Included in total acquisition costs and other expenditure are:
(a) Total depreciation and amortisation expense of £(510) million (2012: £(727) million) relates primarily to amortisation of deferred
acquisition costs of insurance contracts and asset management contracts. The segmental analysis of total depreciation and
amortisation expense is analysed below.
(b) The charge for non-deferred acquisition costs and the amortisation of those costs that are deferred, was £(1,987) million
(2012: (1,962) million). These amounts comprise £(1,953) million and £(34) million for insurance and investment contracts
respectively (2012: £(1,742) million and £(220) million, respectively).
(c) Interest expense, excluding interest on core structural borrowings of shareholder-financed operations, which amounted to
£(120) million (2012: £(140) million) and is included as part of investment management expenses. The segmental interest expense is
analysed below.
(d) Finance costs of £(305) million (2012: £(280) million) comprising £(275) million (2012: £(251) million) of interest on core debt of the
parent company, £(13) million (2012: £(13) million) on US insurance operations’ surplus notes and £(17) million (2012: £(16) million) on
PruCap’s bank loan.
(e) Movements in amounts attributable to external unit holders are in respect of those OEICs and unit trusts which are required to be
consolidated and comprises a charge of £(583) million (2012: £(261) million) for UK insurance operations and a credit of £12 million
(2012: £54 million) for Asia insurance operations.
Financial statementsB: Earnings performance Prudential plc Annual Report 2013
160
B3: Acquisition costs and other expenditure continued
(f) Segmental analysis of depreciation and amortisation expense, and interest expense:
Insurance operations:
Asia
US
UK
Asset management operations:
M&G
US
Eastspring Investments
Total segment
Unallocated corporate
Total
Depreciation and
amortisation expense
Interest expense
2013 £m
2012* £m
2013 £m
2012 £m
(221)
(198)
(68)
(7)
(1)
(3)
(498)
(12)
(510)
(329)
(302)
(65)
(6)
(1)
(3)
(706)
(21)
(727)
–
(11)
(70)
(27)
–
–
(108)
(12)
(120)
(7)
(28)
(62)
(18)
–
–
(115)
(25)
(140)
(g) There were no fee expenses relating to financial liabilities held at amortised cost included in acquisition costs in 2013 and 2012.
B3.1 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
Pension costs†
Total
2013
2012*
12,239
4,414
5,533
22,186
11,284
4,000
5,035
20,319
2013 £m
2012* £m
1,272
94
196
1,562
1,119
82
(60)
1,141
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
† The charge (credit) incorporates the effect of actuarial gains and losses.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsB: Earnings performance continued 161
B3.2 Share-based payments
a Description of the plans
The Group operates a number of share award and share option plans that provides Prudential plc shares to participants upon vesting.
The plans which are in operation include Prudential Long Term Incentive Plan (PLTIP), Group Performance Share Plan (GPSP), Business
Unit Performance Plan (BUPP), Jackson Long-Term Incentive Plan (Jackson LTIP), Annual Incentive Plan (AIP), savings-related share
option schemes, share purchase plans and deferred bonus plans. Some of these plans are participated in by executive directors, the
details of which are described in the Directors’ Remuneration Report. In addition, the following information is provided.
Share scheme
Description
Jackson Long-Term Incentive
Plan
Eligible Jackson employees were previously granted share awards under a long-term incentive plan
which rewarded the achievement of shareholder value targets. These awards were in the form of
a contingent right to receive shares or a conditional allocation of shares. These share awards have
vesting periods of four years and are at nil cost to the employee. Award holders do not have any right
to dividends or voting rights attaching to the shares. The shares are held in the employee share trust in
the form of American Depository Receipts which are tradable on the New York Stock Exchange. The
final awards under this arrangement were made in 2012.
Prudential Corporation Asia
Long-Term Incentive Plan
(PCA LTIP)
The PCA LTIP provides eligible employees with conditional awards. Awards are discretionary and on
a year-by-year basis determined by Prudential’s full year financial results and the employee’s
contribution to the business. Awards vest after three years subject to the employee being in
employment. Vesting of awards may also be subject to performance conditions. All awards are made
in Prudential shares, or ADRs, except for countries where share awards are not feasible due to
securities and/or tax reasons, where awards will be replaced by the cash value of the shares that
would otherwise have been transferred.
Savings-related share option
schemes
Employees and eligible agents in a number of geographies are eligible for plans similar to the HMRC
approved Save As You Earn (SAYE) share option scheme in the UK. Eligible employees participate in
the International savings-related share option scheme while eligible agents based in Hong Kong and
Malaysia can participate in the non-employee savings-related share option scheme.
Share purchase plans
Deferred bonus plans
Eligible employees outside the UK are invited to participate in arrangements similar to the Company’s
HMRC approved UK SIP, which allows the purchase of Prudential plc shares. For instance, staff based
in Ireland are eligible for the Share Participation Plan, approved by the Irish Revenue.
The Company operates a number of deferred bonus schemes including the Group Deferred Bonus
Plan, the Prudential Corporation Asia Deferred Bonus Plan (PCA DBP), the Prudential Capital
Deferred Bonus Plan (PruCap DBP) and other arrangements. There are no performance conditions
attached to deferred share awards made under these arrangements.
Financial statementsB: Earnings performance Prudential plc Annual Report 2013 162
B3: Acquisition costs and other expenditure continued
b Outstanding options and awards
The following table shows movement in outstanding options and awards under the Group’s share-based compensation plans at
31 December 2013 and 2012:
Options outstanding under SAYE schemes
Awards outstanding under
incentive plans including
conditional options
2013
2012
2013
2012
Number
of options
millions
Weighted
average
exercise
price
£
Number
of options
millions
Weighted
average
exercise
price
£
Number
of awards
millions
Number
of awards
millions
9.4
2.5
(1.2)
(0.2)
(0.1)
(0.2)
10.2
0.5
4.54
9.01
4.57
5.14
6.16
3.92
5.60
4.50
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
23.7
11.9
(7.8)
(0.6)
–
(0.1)
27.1
26.7
8.8
(9.4)
(1.4)
–
(1.0)
23.7
Beginning of year:
Granted
Exercised
Forfeited
Cancelled
Lapsed/expired
End of year
Options immediately exercisable, end of year
The weighted average share price of Prudential plc for the year ended 31 December 2013 was £11.14 compared to £7.69 for the
year ended 31 December 2012.
The following table provides a summary of the range of exercise prices for Prudential plc options outstanding at 31 December.
Range of exercise prices
Between £2 and £3
Between £4 and £5
Between £5 and £6
Between £6 and £7
Between £9 and £10
Number
outstanding
millions
2013
2.6
2.9
–
2.3
2.4
2012
2.8
4.1
0.1
2.4
–
10.2
9.4
Outstanding
Weighted
average remaining
contractual life
years
Exercisable
Weighted average
exercise prices
£
Number
exercisable
millions
Weighted average
exercise prices
£
2013
1.0
1.7
0.8
2.6
3.9
2.3
2012
2013
2.0
2.3
0.6
3.6
–
2.6
2.88
4.63
5.53
6.29
9.01
5.60
2012
2.88
4.61
5.60
6.29
–
2013
2012
2013
2012
–
0.5
–
–
–
0.1
0.1
–
–
–
0.2
2.88
4.59
5.51
–
–
4.50
2.88
4.24
5.67
–
–
3.88
4.54
0.5
The years shown above for weighted average remaining contractual life include the time period from end of vesting period to expiration
of contract.
c Fair value of options and awards
The fair value amounts estimated on the date of grant relating to all options (including conditional nil cost options) and awards, 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 (£)
Weighted average fair value (£)
Prudential
LTIP/GPSP
(TSR)
–
23.64
0.73
–
–
11.80
7.38
2013
SAYE
options
2.73
24.27
1.06
3.46
9.01
11.85
3.00
Other
awards
–
–
–
–
–
–
11.06
GPSP
–
33.03
0.31
–
–
6.78
3.91
2012
SAYE
options
Other
awards
3.63
34.33
0.39
3.24
6.29
8.26
2.28
–
–
–
–
–
–
6.72
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsB: Earnings performance continued 163
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 Prudential LTIP (TSR),
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 all options and awards, the expected volatility is based on the market implied volatilities for Prudential shares as quoted on
Bloomberg. The Prudential specific at-the-money implied volatilities are adjusted to allow for the different terms 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 five-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 Prudential LTIP
(TSR) and GPSP (TSR) volatility and correlation between Prudential and a basket of 18 competitor companies is required. For grants in
2013, an average index volatility and correlation of 26 per cent and 60 per cent respectively, were used. 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 financial statements related to share-based compensation is as follows:
Share-based compensation expense
Amount accounted for as equity-settled
Carrying value at 31 December of liabilities arising from share-based payment transactions
Intrinsic value of above liabilities for which rights had vested at 31 December
2013 £m
2012 £m
83
63
23
17
58
42
24
16
B3.3 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 is analysed in the following table:
Salaries and short-term benefits
Post-employment benefits
Share-based payments
2013 £m
2012 £m
16.5
1.0
14.3
31.8
13.8
1.2
11.8
26.8
Post-employment benefits comprise the change in the transfer value of the accrued benefit relating to directors’ defined benefit pension
schemes in the year and the total contributions made to directors’ other pension arrangements.
The share-based payments charge comprises £9.3 million (2012: £8.0 million), which is determined in accordance with IFRS 2,
‘Share-Based Payments’ (see note B3.2) and £5.0 million (2012: £3.8 million) of deferred share awards.
Total key management remuneration includes total directors’ remuneration of £48.9 million (2012: £40.1 million) less LTIP releases of
£26.4 million (2012: £21.3 million) as shown in the directors’ remuneration table and related footnotes in the directors’ remuneration
report. Further information on directors’ remuneration is given in the directors’ remuneration report.
B3.4 Fees payable to the 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 finance transactions
All other services
Total
In addition, there were fees incurred of £0.1 million (2012: £0.1 million) for the audit of pension schemes.
2013 £m
2012 £m
2.0
6.8
2.8
0.8
1.1
0.5
1.2
2.0
6.5
3.2
0.5
0.5
0.4
1.2
15.2
14.3
Financial statementsB: Earnings performance Prudential plc Annual Report 2013 164
B4: Effect of changes and other accounting features on insurance assets and liabilities
In addition to the effect of the new accounting pronouncements for 2013 as disclosed in note A2, the following features are of particular
relevance to the determination of the 2013 results:
a Asia insurance operations
In 2013, the IFRS operating profit based on longer-term investment returns for Asia insurance operations included a net £44 million credit
(2012: £48 million) representing a small number of non-recurring items.
In 2012, the basis of determining the valuation rate of interest was 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 benefit is included within the short-term fluctuations in
investment returns in the Group’s supplementary analysis of profit. The 2012 operating profit also included the £51 million gain on sale of
stake in China Life of Taiwan.
b US insurance operations
Amortisation of deferred acquisition costs
Jackson applies a mean reversion technique for amortisation of deferred acquisition costs on variable annuity business which dampens
the effects of short-term market movements on expected gross profits against which deferred acquisition costs are amortised. To the
extent that the mean reversion methodology does not fully dampen the effects of market returns, there is a charge or credit for
accelerated or decelerated amortisation. For 2013, reflecting the positive market returns in the year, there was a credit for decelerated
amortisation of £82 million (2012: £56 million) to the operating profit based on longer-term investment returns. See note C5.1(b) for
further details.
Other
In 2013, Jackson revised its projected long-term separate account return from 8.4 per cent to 7.4 per cent net of external fund
management fees. The effect of this change together with other assumption changes and recalibration of modelling of accounting values
of guarantees gave rise to a net benefit of £6 million to profit before tax.
c UK insurance operations
Annuity business: allowance for credit risk
For IFRS reporting, the results for UK shareholder-backed annuity business are particularly sensitive to the allowances made for credit
risk. The allowance is reflected in the deduction from the valuation rate of interest for discounting projected future annuity payments to
policyholders that would have otherwise applied. Credit risk allowance comprises (i) an amount for long-term best estimate defaults, and
(ii) additional provisions for credit risk premium, downgrade resilience and short-term defaults.
Prudential Retirement Income Limited (PRIL) is the principal company which writes the UK’s shareholder backed business.
The weighted components of the bond spread over swap rates for shareholder-backed fixed and linked annuity business for PRIL,
based on the asset mix at the these dates are shown below.
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 2013
31 December 2012
Pillar 1
regulatory
basis
(bps)
133
15
47
62
71
Adjustment
from
regulatory
to IFRS
basis
(bps)
–
–
(19)
(19)
19
Pillar 1
regulatory
basis
(bps)
161
15
50
65
96
IFRS
(bps)
133
15
28
43
90
Adjustment
from
regulatory
to IFRS
basis
(bps)
–
–
(23)
(23)
23
IFRS
(bps)
161
15
27
42
119
Notes
(i)
(ii)
Bond spread over swap rates reflects market observed data.
Long-term expected defaults are derived by applying Moody’s data from 1970 to 2009 and the definition 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.
The prudent Pillar 1 regulatory basis reflects the overriding objective of maintaining sufficient provisions and capital to ensure payments to policyholders
can be made. The approach for IFRS aims to establish liabilities that are closer to ‘best estimate’.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsB: Earnings performance continued Movement in the credit risk allowance
The movement during 2013 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 2012
Credit rating changes
Asset trading
New business and other
Total allowance for credit risk at 31 December 2013
Pillar 1
Regulatory
basis
(bps)
Total
65
2
(3)
(2)
62
165
IFRS
(bps)
Total
42
1
(2)
2
43
The methodology applied is to retain favourable credit experience in short-term allowances for credit risk on the IFRS basis but such
surplus experience is not retained in the Pillar 1 credit provisions.
Overall the movement has led to the credit allowance for Pillar 1 purposes to be 47 per cent (2012: 40 per cent) of the bond spread
over swap rates. For IFRS purposes it represents 32 per cent (2012: 26 per cent) of the bond spread over swap rates.
The reserves for credit risk allowance at 31 December 2013 for the UK shareholder annuity fund were as follows:
PRIL
PAC non-profit sub-fund
Total – 31 December 2013
Total – 31 December 2012
Pillar 1
Regulatory
basis
£bn
Total
1.7
0.2
1.9
2.1
IFRS
£bn
Total
1.2
0.1
1.3
1.3
Mortality and other assumption changes
For the shareholder-backed business, the net effect of assumption changes was a credit of £20 million (2012: a charge of £17 million).
This comprises the aggregate effect of changes to mortality assumptions offsetting releases of margins and altered expenses and other
assumptions, where appropriate, in the two periods.
B5: Tax charge
a Total tax charge by nature of expense
The total tax charge in the income statement is as follows:
Tax charge
UK tax
Overseas tax
Total tax charge
2013 £m
2012* £m
Current
tax
Deferred
tax
(178)
(221)
(399)
(122)
(215)
(337)
Total
(300)
(436)
(736)
Total
(421)
(533)
(954)
Financial statementsB: Earnings performance Prudential plc Annual Report 2013 166
B5: Tax charge continued
The total tax charge comprises:
Current tax expense:
Corporation tax
Adjustments in respect of prior years
Total current tax
Deferred tax arising from:
Origination and reversal of temporary differences
Impact of changes in local statutory tax rates
Expense in respect of a previously unrecognised tax loss, tax credit or temporary difference from
a prior period
Total deferred tax charge
Total tax charge
2013 £m
2012* £m
(414)
15
(399)
(392)
55
–
(337)
(736)
(942)
144
(798)
(182)
30
(4)
(156)
(954)
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
The current tax charge of £399 million includes £18 million (2012: £17 million) in respect of the tax charge for the Hong Kong operation.
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 profits, depending on the nature of the business written.
Until the end of 2012 for the Group’s UK life insurance companies, shareholders’ profits 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’ profits
are calculated using accounting profit or loss as a starting point.
The total tax charge comprises tax attributable to policyholders and unallocated surplus of with-profits funds, unit-linked policies and
shareholders as shown below.
Tax charge
Tax charge to policyholders’ returns
Tax charge attributable to shareholders
Total tax charge
2013 £m
2012* £m
Current
tax
Deferred
tax
(207)
(192)
(399)
(240)
(97)
(337)
Total
(447)
(289)
(736)
Total
(370)
(584)
(954)
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
The principal reason for the increase in the tax charge attributable to policyholders’ returns is an increase in deferred tax on net
unrealised gains on investments in UK insurance operations. The credit of £69 million on unrealised gains and losses on investments
shown in the table below reflects a credit on unrealised losses on investments in US insurance operations which exceeds the charge on
UK insurance operations.
The total deferred tax charge arises as follows:
Unrealised gains and losses on investments
Balances relating to investment and insurance contracts
Short-term timing differences
Capital allowances
Unused tax losses
Deferred tax charge
2013 £m
2012* £m
69
(44)
(314)
(7)
(41)
(337)
(89)
467
(206)
–
(328)
(156)
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
In 2013, a deferred tax credit of £598 million (2012: charge of £198 million) has been taken through other comprehensive income.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsB: Earnings performance continued
167
b Reconciliation of effective tax rate
For the purposes of explaining the relationship between tax expense and accounting profit, it is appropriate to consider the sources of
profit and tax by reference to those that are attributable to shareholders and policyholders. A reconciliation of tax charge on profit
attributable to shareholders is provided below.
Overview of reconciliation of effective tax rate
Profit before tax
Taxation charge:
Expected tax rate
Expected tax charge
Variance from expected tax charge
Actual tax charge
Average effective tax rate
2013 £m
2012* £m
Attributable to
shareholders
Attributable to
policyholders†
1,635
447
26%
(429)
140
(289)
18%
100%
(447)
–
(447)
100%
Total
2,082
42%
(876)
140
(736)
35%
Attributable to
shareholders
Attributable to
policyholders†
2,747
27%
(750)
166
(584)
21%
370
100%
(370)
–
(370)
100%
Total
3,117
36%
(1,120)
166
(954)
31%
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
† For the column entitled ‘Attributable to policyholders’, the profit (loss) before tax represents income, before tax attributable to policyholders and unallocated surplus
of with-profits funds and unit-linked policies. This income has been determined after deduction of charges for policyholder benefits 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.
Reconciliation of tax charge on profit attributable to shareholders
2013 £m (except for tax rates)
Asia
insurance
operations*
US
insurance
operations
UK
insurance
operations
Other
operations
Operating profit (loss) based on longer-term investment returns
Non-operating loss
Profit (loss) before tax attributable to shareholders
Expected tax rate:†
Tax charge (credit) 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
Impact of changes in local statutory tax rates
Deferred tax adjustments
Effect of results of joint ventures and associates
Irrecoverable withholding taxes
Other
Total actual tax charge (credit)
Analysed into:
Tax charge (credit) on operating profit (loss) based on
longer-term investment returns
Tax credit on non-operating loss
Actual tax rate:
Operating profit based on longer-term investment returns
Total profit
1,001
(313)
688
21%
144
(3)
5
(45)
61
(9)
(4)
(10)
–
9
148
173
(25)
17%
22%
1,243
(690)
553
35%
194
–
–
(88)
–
–
–
–
–
(5)
101
343
(242)
28%
18%
735
(289)
446
23%
103
4
–
–
–
(51)
–
–
–
16
72
132
(60)
18%
16%
(25)
(27)
(52)
23%
(12)
(7)
(12)
(10)
5
5
(8)
(8)
20
(5)
(32)
(10)
(22)
40%
62%
Total*
2,954
(1,319)
1,635
26%
429
(6)
(7)
(143)
66
(55)
(12)
(18)
20
15
289
638
(349)
22%
18%
* The expected and actual tax rates as shown includes the impact of the held for sale Japan life business. The tax rates for Asia insurance and Group, excluding the
impact of the held for sale Japan life business are as follows:
Expected tax rate on total profit
Actual tax rate:
Operating profit based on longer-term investment returns
Total profit
Asia insurance
Total Group
23%
17%
19%
27%
22%
17%
† The expected tax rates shown in the table above (rounded to the nearest whole percentage) reflect the corporation tax rates generally applied to taxable profits of the
relevant country jurisdictions. For Asia operations the expected tax rates reflect the corporation tax rates weighted by reference to the source of profits of operations
contributing to the aggregate business result. The expected tax rate for other operations reflects the mix of business between UK and overseas non-insurance
operations, which are taxed at a variety of rates. The rates will fluctuate from year to year dependent on the mix of profits.
Financial statementsB: Earnings performance Prudential plc Annual Report 2013
168
B5: Tax charge continued
Operating profit (loss) based on longer-term investment returns
Non-operating profit (loss)
Profit 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
Impact of changes in local statutory tax rates
Deferred tax adjustments
Effect of results of joint ventures and associates
Irrecoverable withholding taxes
Other
Total actual tax charge
Analysed into:
Tax charge on operating profit (loss) based on longer-term
investment returns
Tax charge (credit) on non-operating profit (loss)
Actual tax rate:
Operating profit (loss) based on longer-term
investment returns
Total profit
2012* £m (except for tax rates)
Asia
insurance
operations
US
insurance
operations
UK
insurance
operations
Other
operations
906
71
977
23%
225
(14)
–
(68)
29
–
(5)
(24)
–
3
146
133
13
15%
15%
964
(109)
855
35%
300
10
(3)
(68)
–
–
–
–
–
(5)
234
272
(38)
28%
27%
736
136
872
24.5%
214
(86)
129
43
24.5%
11
(26)
–
–
–
(39)
8
–
–
7
164
126
38
17%
19%
(10)
32
(2)
3
9
–
(5)
14
(12)
40
36
4
(42)%
93%
Total
2,520
227
2,747
27%
750
(40)
29
(138)
32
(30)
3
(29)
14
(7)
584
567
17
23%
21%
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
† The expected tax rates shown in the table above reflect the corporation tax rates generally applied to taxable profits of the relevant country jurisdictions. For Asia
operations the expected tax rates reflect the corporation tax rates weighted by reference to the source of profits of operations contributing to the aggregate business
result. The expected tax rate for Other operations reflects the mix of business between UK and overseas non-insurance operations, which are taxed at a variety of
rates. The rates will fluctuate from year to year dependent on the mix of profits.
c Taxes paid
In 2013 Prudential remitted £1.8 billion (2012: £2.2 billion) of tax to revenue authorities, this includes £418 million (2012: £925 million) of
corporation tax, £236 million of other taxes and £1,143 million collected on behalf of employees, customers and third parties.
The geographical split of taxes remitted by Prudential is as follows:
Asia
US
UK
Other
Total tax paid
2013 £m
2012 £m
Corporation
taxes*
Other
taxes†
Taxes
collected‡
148
(58)
327
1
418
48
35
152
1
236
123
315
702
3
1,143
Total
319
292
1,181
5
1,797
Corporation
taxes*
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
* In certain countries such as the UK, the corporation tax payments for the Group’s life insurance businesses are based on taxable profits 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/value added tax/goods and services taxes, employee and annuitant payroll taxes.
The 2013 corporation tax payments are lower than 2012 reflecting (i) refunds received in 2013 of overpaid tax in relation to prior period
tax returns in Asia and US, (ii) US tax payments being reduced due to impact of tax relief on movements in derivatives held to manage
Jackson’s exposure to financial markets, and (iii) reductions in UK equity and bond investment gains.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsB: Earnings performance continued
169
Before
tax
note B1.1
£m
Tax
note B5
£m
Note
2013
Net of tax
Basic
earnings
per share
Diluted
earnings
per share
£m
pence
pence
2,954
(638)
2,316
90.9p
90.7p
B1.2
(1,110)
318
(792)
(31.1)p
(31.0)p
(72)
(102)
(35)
1,635
24
–
7
(48)
(102)
(28)
(289)
1,346
(1.9)p
(4.0)p
(1.1)p
52.8p
(1.9)p
(4.0)p
(1.1)p
52.7p
Before
tax
note B1.1
£m
Tax
note B5
£m
2012*
Net of tax
Basic
earnings
per share
Diluted
earnings
per share
£m
pence
pence
2,520
(567)
1,953
76.9p
76.8p
187
42
(19)
17
2,747
(24)
–
7
–
163
42
(12)
17
(584)
2,163
6.4p
1.7p
(0.5)p
0.6p
85.1p
6.4p
1.7p
(0.5)p
0.6p
85.0p
B6: Earnings per share
Based on operating profit based on longer-term
investment returns
Short-term fluctuations in investment returns on
shareholder-backed business
Amortisation of acquisition accounting
adjustments
Loss attaching to held for sale Japan life business
Costs of domestication of Hong Kong branch
D1
D2
Based on profit for the year
Based on operating profit based on longer-term
investment returns
Short-term fluctuations in investment returns on
shareholder-backed business
Gain on dilution of holdings in PPMSA
Amortisation of acquisition accounting
adjustments arising on the purchase of
REALIC
Note
B1.2
Profit attaching to held for sale Japan life business
D1
Based on profit for the year
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
The tables above exclude actuarial and other gains and losses on defined benefit pension schemes which, following the changes to
IAS 19 described in note A2, are now reported in Other Comprehensive Income. Furthermore, in order to facilitate comparisons of
operating profit based on longer-term investment returns that reflect the Group’s retained operations, the results attributable to the held
for sale Japan life business are included separately within the supplementary analysis of profit.
Earnings per share are calculated based on earnings attributable to ordinary shareholders, after related tax and non-controlling
interests.
The weighted average number of shares for calculating earnings per share:
Weighted average number of 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 price
Diluted earnings per share
2013
millions
2012
millions
2,548
10
(6)
2,552
2,541
9
(6)
2,544
Financial statementsB: Earnings performance Prudential plc Annual Report 2013 170
B7: Dividends
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
2013
Pence
per share
9.73p
23.84p
33.57p
9.73p
20.79p
30.52p
2012
Pence
per share
8.40p
20.79p
29.19p
8.40p
17.24p
25.64p
£m
249
610
859
249
532
781
£m
215
532
747
215
440
655
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 final dividend for the year ended 31 December 2012 of 20.79 pence per ordinary share was paid to eligible
shareholders on 23 May 2013 and the 2013 interim dividend of 9.73 pence per ordinary share was paid to eligible shareholders on
26 September 2013.
The 2013 final dividend of 23.84 pence per ordinary share will be paid on 22 May 2014 in sterling to shareholders on the principal
register and the Irish branch register at 6.00pm BST on 28 March 2014 (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 2 June 2014. The final dividend will be paid on or about
29 May 2014 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 11 March 2014. The
exchange rate at which the dividend payable to the SG Shareholders will be translated into SG$, will be determined by CDP.
Shareholders on the principal register and Irish branch register will be able to participate in a Dividend Reinvestment Plan.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsB: Earnings performance continued 171
C: Balance sheet notes
C1: Analysis of Group position by segment and business type
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 financial position by operating segment and type of business.
C1.1 Group statement of financial position – analysis by segment
a Position as at 31 December 2013
2013 £m
Insurance operations
Note
Asia
C2.1
US
C2.2
UK
C2.3
Total
insurance
operations
Asset
manage-
ment
operations
C2.4
Unallo-
cated to a
segment
(central
opera-
tions)
Intra-
group
elimina-
tions
31 Dec
Group
total
C5.1(a)
231
–
–
231
1,230
C5.1(b)
1,026
1,257
4,140
4,140
90
90
5,256
5,487
20
1,250
C5.2(a)
C5.2(b)
–
66
66
–
–
–
1,323
55
4,140
2,042
C8
177
6
183
273
142
177
72
249
–
–
–
5,736
2,239
1,250
119
–
19
19
–
–
–
19
54
–
–
–
–
–
–
–
–
1,461
5,295
6,756
177
72
249
7,005
2,412
1,073
6,710
5,808
13,591
1,356
4,500
(7,090) 12,357
D7
C3.4
C3.3
1
28
11,448
11,477
–
268
–
449
717
92
922
6,375
4,173
11,470
1,096
14,383
18,554
41
896
66,008
30,292
1,557
39,745 120,136
82,014 130,860
6,201
12,148
4,603
– 11,252
35,065 104,260 153,684 293,009
D1
916
1,522
–
604
–
2,586
916
4,712
65
2,045
61
65
3,424
–
1,562
–
–
–
21
–
3
–
24
–
511
–
11,477
–
–
809
12,566
– 120,222
– 132,905
6,265
–
12,213
–
– 296,457
–
–
916
6,785
By operating segment
Assets note (i)
Intangible assets attributable to
shareholders:
Goodwill
Deferred acquisition costs and other
intangible assets
Total
Intangible assets attributable to with-
profits funds:
Goodwill in respect of acquired
subsidiaries for venture fund and
other investment purposes
Deferred acquisition costs and other
intangible assets
Total
Total
Deferred tax assets
Other non-investment and non-cash
assets note (ii)
Investments of long-term business and
other operations:
Investment properties
Investments in joint ventures and
associates accounted for using the
equity method
Financial investments:
Loans
Equity securities and portfolio
holdings in unit trusts
Debt securities
Other investments
Deposits
Total investments
Assets held for sale
Cash and cash equivalents note (iii)
Total assets
C3.1
39,954 117,756 162,493 320,203
7,711
5,108
(7,090) 325,932
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013
172
C1: Analysis of Group position by segment and business type continued
By operating segment
Equity and liabilities
Equity
Shareholders’ equity
Non-controlling interests
Total equity
Liabilities
Policyholder liabilities and unallocated
surplus of with-profits funds:
Insurance contract liabilities
Investment contract liabilities with
discretionary participation features
Investment contract liabilities without
discretionary participation features
Unallocated surplus of with-profits
funds
Total policyholder liabilities and
unallocated surplus of with-profits
funds
Core structural borrowings of
shareholder-financed operations:
Subordinated debt
Other
Total
Operational borrowings attributable to
shareholder-financed operations
Borrowings attributable to with-profits
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 liabilitiesnote (iv)
Total
Liabilities held for sale
Total liabilities
C6.1
C6.2
C6.2
C8.1
C8.2
C12
C3.5(b)
D1(c)
Insurance operations
Note
Asia
US
UK
2013 £m
Total
insurance
operations
Asset
manage-
ment
operations
Unallo-
cated to a
segment
(central
opera-
tions)
Intra-
group
elimina-
tions
31 Dec
Group
total
2,795
1
2,796
3,446
–
2,998
–
3,446
2,998
9,239
1
9,240
1,991
–
(1,580)
–
1,991
(1,580)
–
–
–
9,650
1
9,651
31,540 104,971
81,674 218,185
240
– 35,352
35,592
130
2,440
17,606
20,176
77
– 11,984
12,061
C4
31,987 107,411 146,616 286,014
–
–
–
–
–
–
150
150
–
–
–
142
74
–
895
–
150
150
216
895
–
794
1,280
2,074
1,038
594
45
106
1,797
85
58
580
4,303
868
26
1,948
–
–
666
11
515
2,647
4,214
1,213
181
383
3,240
166
804
429
5,278
3,755
226
489
5,703
262
1,377
3,656
–
14
8
302
4,684
298
112
24
6,607
11,910
22,820
5,442
–
–
868
–
37,158 114,310 159,495 310,963
–
–
–
–
–
–
275
275
3
–
–
–
–
–
–
–
3,662
549
4,211
1,933
–
–
–
9
161
33
10
75
200
56
544
–
– 218,185
–
–
–
35,592
20,176
12,061
– 286,014
–
–
–
–
–
3,662
974
4,636
2,152
895
–
2,074
–
–
–
–
(7,090)
–
–
–
5,278
3,778
395
824
3,307
635
1,689
3,736
(7,090) 21,716
–
868
Total equity and liabilities
C3.1
39,954 117,756 162,493 320,203
5,720
7,711
6,688
(7,090) 316,281
5,108
(7,090) 325,932
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued
173
b Position as at 31 December 2012
By operating segment
Assets note (i)
Intangible assets attributable to
2012* £m
Insurance operations
Note
Asia
C2.1
US
C2.2
UK
C2.3
Total
insurance
operations
Asset
manage-
ment
operations
C2.4
Unallo-
cated to a
segment
(central
opera-
tions)
Intra-
group
elimina-
tions
31 Dec
Group
total
shareholders:
Goodwill
Deferred acquisition costs and other
intangible assets
C5.1(a)
C5.2(b)
239
819
1,058
–
–
239
1,230
3,222
3,222
105
105
4,146
4,385
13
1,243
Total
Intangible assets attributable to with-
profits funds:
Goodwill in respect of acquired
subsidiaries for venture fund and
other investment purposes
Deferred acquisition costs and other
intangible assets
Total
Total
Deferred tax assets
Other non-investment and non-cash
assets note (ii)
Investments of long-term business and
other operations:
Investment properties
Investments in joint ventures and
associates accounted for using the
equity method
Financial investments:
Loans
Equity securities and portfolio
holdings in unit trusts
Debt securities
Other investments
Deposits
Total investments
Assets held for sale
Cash and cash equivalentsnote (iii)
–
18
18
–
–
–
18
52
–
–
–
–
–
–
–
–
1,469
4,177
5,646
178
78
256
5,902
2,306
C5.1(a)
C5.2(b)
–
72
72
–
–
–
1,130
76
3,222
1,889
C8
178
6
184
289
183
178
78
256
–
–
–
4,641
2,148
1,243
106
1,023
6,792
5,448
13,263
1,036
3,766
(6,113)
11,952
2
24
10,528
10,554
–
D7
284
–
259
543
92
C3.4
1,006
6,235
4,303
11,544
1,199
C3.3
12,730
20,067
927
851
49,551
32,993
2,296
211
36,281
98,562
84,008 137,068
7,479
4,256
12,193
11,131
35,867
91,310 150,766 277,943
–
1,545
–
513
98
2,668
98
4,726
64
1,839
41
55
3,290
–
918
–
–
–
–
–
27
–
27
–
482
–
10,554
–
–
635
12,743
–
98,626
– 138,907
7,547
–
12,248
–
– 281,260
–
–
98
6,126
Total assets
C3.1
39,641 103,726 159,452 302,819
6,593
4,345
(6,113) 307,644
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013
174
C1: Analysis of Group position by segment and business type continued
By operating segment
Equity and liabilities
Equity
Shareholders’ equity
Non-controlling interests
Total equity
Liabilities
Policyholder liabilities and unallocated
surplus of with-profits funds:
Insurance contract liabilities
Investment contract liabilities with
discretionary participation features
Investment contract liabilities without
discretionary participation features
Unallocated surplus of with-profits
funds (reflecting application of
‘realistic’ basis provisions for UK
regulated with-profits funds)
Total policyholder liabilities and
unallocated surplus of with-profits
funds
Core structural borrowings of
shareholder-financed operations:
Subordinated debt
Other
Total
Operational borrowings attributable to
shareholder-financed operations
Borrowings attributable to with-profits
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 liabilitiesnote (iv)
Total
Total liabilities
Total equity and liabilities
2012* £m
Insurance operations
Note
Asia
C2.1
US
C2.2
UK
C2.3
Total
insurance
operations
Asset
manage-
ment
operations
C2.4
Unallo-
cated to a
segment
(central
opera-
tions)
Intra-
group
elimina-
tions
31 Dec
Group
total
2,529
4
2,533
4,343
–
4,343
3,033
1
3,034
9,905
5
9,910
1,937
–
(1,483)
–
1,937
(1,483)
–
–
–
10,359
5
10,364
31,026
90,192
84,266 205,484
348
–
33,464
33,812
127
2,069
16,182
18,378
63
–
10,526
10,589
C4
31,564
92,261 144,438 268,263
C6.1
C6.2
C6.2
C8.1
C8.2
C12
C3.5(b)
–
–
–
7
–
–
153
153
26
–
–
–
–
127
968
–
153
153
160
968
–
920
1,461
2,381
1,765
582
46
100
1,544
61
837
602
5,537
25
2,168
–
–
611
20
645
2,554
3,355
1,185
237
362
2,747
291
1,010
237
5,145
3,935
283
462
4,902
372
2,492
3,393
6,943
10,885
23,365
37,108
99,383 156,418 292,909
39,641 103,726 159,452 302,819
–
–
–
–
–
–
275
275
1
–
–
–
13
9
261
3,767
144
150
36
4,380
4,656
6,593
–
–
–
–
–
2,577
549
3,126
2,084
–
–
–
16
151
28
145
75
190
13
618
5,828
4,345
– 205,484
–
–
33,812
18,378
–
10,589
– 268,263
–
–
–
–
–
2,577
977
3,554
2,245
968
–
2,381
–
–
–
–
(6,113)
–
–
–
5,145
3,964
443
751
2,701
591
2,832
3,442
(6,113)
22,250
(6,113) 297,280
(6,113) 307,644
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued
175
Notes
(i)
The non-current assets of the Group comprise goodwill, intangible assets other than DAC and present value of acquired in-force business and property, plant
and equipment included within ‘other non-investment and non-cash assets’. Items defined as financial instruments or related to insurance contracts are
excluded. The Group’s total non-current assets at 31 December comprise:
UK including insurance operations, M&G and central operations
US
Asia†
Total
2013 £m
2012* £m
2,090
157
827
3,074
1,927
152
629
2,708
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting
standards described in note A2.
† No individual country in Asia held non-current assets at the end of the year which exceeded 10 per cent of the Group total.
(ii)
Included within other non-investment and non-cash assets are accrued investment income of £2,609 million (2012: £2,771 million) and other debtors of
£1,746 million (2012: £1,325 million).
Accrued investment income
Interest receivable
Other
Total
Other debtors comprises:
Amounts due from
Policyholders
Intermediaries
Reinsurers
Other
Total
Total accrued investment income and other debtors
2013 £m
2012* £m
1,951
658
2,609
303
26
16
1,401
1,746
4,355
1,986
785
2,771
257
27
21
1,020
1,325
4,096
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting
standards described in note A2.
Of the other £4,355 million (2012: £4,096 million) of accrued investment income and other debtors, £350 million (2012: £523 million) is expected to be settled
after one year or more.
(iii) 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. The component breakdown is as follows:
Cash
Cash equivalents
Total cash and cash equivalents
2013 £m
2012* £m
5,605
1,180
6,785
4,696
1,430
6,126
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting
standards described in note A2.
Of the total cash and cash equivalents £511 million (31 December 2012: £482 million) are held centrally and considered to be available for general use by the
Group. The remaining funds are considered not to be available for general use by the Group, and include funds held for the benefit of policyholders.
(iv) Other liabilities comprise:
Creditors arising from direct insurance and reinsurance operations
Interest payable
Other items†
Total
2013 £m
2012* £m
1,159
56
2,521
3,736
1,095
62
2,285
3,442
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting
standards described in note A2.
† Of the £2,521 million (2012: £2,285 million) other items as at 31 December 2013, £2,051 million (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 D1.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013
176
C1: Analysis of Group position by segment and business type continued
C1.2 Group statement of financial position – analysis by business type
2013 £m
2012* £m
Policyholder
Shareholder-backed business
Unit-
linked
and
variable
annuity
Non-
linked
business
Asset
manage-
ment
operations
Unallo-
cated
to a
segment
(central
operations)
Intra-
group
elimina-
tions
31 Dec
Group
total
31 Dec
Group
total
Note
Participating
funds
Assets
Intangible assets attributable to
shareholders:
Goodwill
Deferred acquisition costs and other
intangible assets
C5.1
C5.1
Total
Intangible assets attributable to
with-profits funds:
In respect of acquired subsidiaries
for venture fund and other
investment purposes
Deferred acquisition costs and other
intangible assets
Total
Total
Deferred tax assets
Other non-investment and non-cash
C8
assets
Investments of long-term business and
–
–
–
177
72
249
249
83
–
–
–
–
–
–
–
1
231
1,230
5,256
5,487
20
1,250
–
–
–
–
–
–
5,487
2,155
1,250
119
–
19
19
–
–
–
19
54
–
–
–
–
–
–
–
–
1,461
1,469
5,295
6,756
4,177
5,646
177
72
249
178
78
256
7,005
2,412
5,902
2,306
3,331
599
9,661
1,356
4,500
(7,090) 12,357
11,952
other operations:
Investment properties
Investments in joint ventures and
associates accounted for using the
equity method
Financial investments:
Loans
Equity securities and portfolio
holdings in unit trusts
Debt securities
Other investments
Deposits
Total investments
Assets held for sale
Cash and cash equivalents
Total assets
9,260
645
1,572
–
383
C3.4
3,346
–
–
334
92
8,124
1,096
C3.3
D1
28,365
57,791
4,309
9,486
90,872
9,622
36
1,024
899
63,447
1,856
1,638
112,940 102,199
77,870
–
1,952
328
982
588
1,778
118,555 104,109
97,539
65
2,045
61
65
3,424
–
1,562
7,711
–
–
–
21
–
3
–
24
–
511
– 11,477
10,554
–
809
635
– 12,566
12,743
– 120,222
98,626
– 132,905 138,907
7,547
–
6,265
12,248
– 12,213
– 296,457 281,260
–
–
916
98
6,785
6,126
5,108
(7,090) 325,932 307,644
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued
177
2013 £m
2012* £m
Policyholder
Shareholder-backed business
Unit-
linked
and
variable
annuity
Non-
linked
business
Asset
manage-
ment
operations
Unallo-
cated
to a
segment
(central
operations)
Intra-
group
elimina-
tions
31 Dec
Group
total
31 Dec
Group
total
Note
Participating
funds
–
–
–
–
–
–
9,239
1
9,240
1,991
–
(1,580)
–
1,991
(1,580)
–
–
–
9,650
1
10,359
5
9,651
10,364
96,991 101,251
75,711
12,061
–
–
C4
109,052 101,251
75,711
–
–
–
–
–
–
– 273,953 257,674
– 12,061
10,589
– 286,014 268,263
C6.1
C6.2
C6.2
C8
D1
–
–
–
–
–
–
–
–
–
150
150
216
–
275
275
3,662
549
4,211
3
1,933
–
–
–
–
3,662
974
4,636
2,577
977
3,554
2,152
2,245
895
1,192
7,416
–
–
44
2,486
328
–
2,519
9,163
540
118,555 104,109
88,299
118,555 104,109
97,539
–
14
5,428
–
5,720
7,711
–
9
535
–
–
–
895
3,778
(7,090) 17,938
868
–
968
3,964
18,286
–
6,688
(7,090) 316,281 297,280
5,108
(7,090) 325,932 307,644
Equity and liabilities
Equity
Shareholders’ equity
Non-controlling interests
Total equity
Liabilities
Policyholder liabilities and unallocated
surplus of with-profits funds:
Contract liabilities (including amounts
in respect of contracts classified as
investment contracts under IFRS 4)
Unallocated surplus of with-profits
funds
Total policyholder liabilities and
unallocated surplus of with-profits
funds
Core structural borrowings of
shareholder-financed operations:
Subordinated debt
Other
Total
Operational borrowings attributable to
shareholder-financed operations
Borrowings attributable to with-profits
operations
Deferred tax liabilities
Other non-insurance liabilities
Liabilities held for sale
Total liabilities
Total equity and liabilities
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013
178
C2: Analysis of segment position by business type
To show the statement of financial position by reference to the differing degrees of policyholder and shareholder economic interest of
the different types of business, the analysis below is structured to show separately assets and liabilities of each segment by business type.
C2.1 Asia insurance operations
Assets
Intangible assets attributable to shareholders:
Goodwill
Deferred acquisition costs and other intangible assets
Total
Intangible assets attributable to with-profits funds:
Deferred acquisition costs and other intangible assets
Deferred tax assets
Other non-investment and non-cash assets
Investments of long-term business and other operations:
Investment properties
Investments in joint ventures and associates accounted
for using the equity method
Financial investments:
Loans C3.4
Equity securities and portfolio holdings in unit trusts
Debt securities C3.3
Other investments
Deposits
Total investments
Assets held for sale
Cash and cash equivalents
Total assets
Equity and liabilities
Equity
Shareholders’ equity
Non-controlling interests
Total equity
Liabilities
Policyholder liabilities and unallocated surplus of with-profits
funds:
Contract liabilities (including amounts in respect of contracts
classified as investment contracts under IFRS 4)
Unallocated surplus of with-profits funds note (ii)
Total C4.1(b)
Operational borrowings attributable to shareholder-financed
operations
Deferred tax liabilities
Other non-insurance liabilities
Liabilities held for sale
Total liabilities
Total equity and liabilities
2013 £m
2012* £m
With-profits
business
note (i)
Unit-linked
assets and
liabilities
Other
business
31 Dec
Total
31 Dec
Total
–
–
–
66
–
320
–
–
522
4,538
9,736
8
304
–
–
–
–
1
131
–
–
–
9,274
2,451
21
260
15,108
12,006
–
392
328
332
231
1,026
1,257
–
54
622
1
268
400
571
6,367
12
332
7,951
588
798
231
1,026
1,257
66
55
1,073
1
268
922
14,383
18,554
41
896
35,065
916
1,522
239
819
1,058
72
76
1,023
2
284
1,006
12,730
20,067
927
851
35,867
–
1,545
15,886
12,798
11,270
39,954
39,641
–
–
–
–
–
–
2,795
1
2,796
2,795
1
2,796
2,529
4
2,533
13,138
77
13,215
–
403
2,268
–
15,886
15,886
11,918
–
11,918
–
44
508
328
6,854
–
6,854
–
147
933
540
12,798
12,798
8,474
11,270
31,910
77
31,987
–
594
3,709
868
37,158
39,954
31,501
63
31,564
7
582
4,955
–
37,108
39,641
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
Notes
(i)
(ii)
The statement of financial position for with-profits business comprises the with-profits assets and liabilities of the Hong Kong, Malaysia and Singapore
with-profits operations. Assets and liabilities of other participating business are included in the column for ‘Other business’.
For the purposes of the presentation of unallocated surplus of with-profits within the statement of financial position, the Hong Kong branch balance is reported
within the unallocated surplus of the PAC with-profits sub-fund of the UK insurance operations.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued
179
2013 £m
2012 £m
Variable
annuity
separate
account
assets and
liabilities
note (i)
Fixed annuity,
GIC and other
business
note (i)
31 Dec
Total
31 Dec
Total
–
–
–
–
–
–
65,681
–
–
–
65,681
–
4,140
4,140
2,042
6,710
28
6,375
327
30,292
1,557
–
38,579
604
4,140
4,140
2,042
6,710
28
6,375
66,008
30,292
1,557
–
104,260
604
3,222
3,222
1,889
6,792
24
6,235
49,551
32,993
2,296
211
91,310
513
65,681
52,075
117,756
103,726
–
–
3,446
3,446
3,446
3,446
4,343
4,343
C2.2 US insurance operations
Assets
Intangible assets attributable to shareholders:
Deferred acquisition costs and other intangibles
Total
Deferred tax assets
Other non-investment and non-cash assets note (iv)
Investments of long-term business and other operations:
Investment properties
Financial investments:
Loans C3.4
Equity securities and portfolio holdings in unit trusts note (iii)
Debt securities C3.3
Other investments note (ii)
Deposits
Total investments
Cash and cash equivalents
Total assets
Equity and liabilities
Equity
Shareholders’ equity note (vi)
Total equity
Liabilities
Policyholder liabilities:
Contract liabilities (including amounts in respect of contracts classified
as investment contracts under IFRS 4) note (v)
Total C4.1 (c)
Core structural borrowings of shareholder-financed operations
Operational borrowings attributable to shareholder-financed operations
Deferred tax liabilities
Other non-insurance liabilities note (v)
Total liabilities
Total equity and liabilities
65,681
65,681
–
–
–
–
65,681
65,681
41,730
41,730
150
142
1,948
4,659
48,629
52,075
107,411
107,411
150
142
1,948
4,659
114,310
117,756
92,261
92,261
153
26
2,168
4,775
99,383
103,726
Notes
(i)
These amounts are for Separate Account assets and liabilities for all variable annuity products comprising those with and without guarantees. Assets and
liabilities attaching to variable annuity business that are not held in the separate account eg in respect of guarantees are shown within other business.
(ii) Other investments comprise:
Derivative assets*
Partnerships in investment pools and other†
2013 £m
2012 £m
766
791
1,557
1,546
750
2,296
* After taking account of the derivative liabilities of £515 million (2012: £645 million), which are also included in Other non-insurance liabilities, the derivative
position for US operations is a net asset of £251 million (2012: £901 million).
† Partnerships in investment pools and other comprise primarily investments in limited partnerships. These include interests in the PPM America Private Equity
Fund and diversified investments in 166 (2012: 167) other partnerships by independent money managers that generally invest in various equities and fixed
income loans and securities.
(iii) Equity securities and portfolio holdings in unit trusts includes investments in mutual funds, the majority of which are equity-based.
(iv)
Included within other non-investment and non-cash assets of £6,710 million (2012: £6,792 million) were balances of £6,065 million (2012: £6,076 million) for
reinsurers’ share of insurance contract liabilities. Of the £6,065 million as at 31 December 2013, £5,410 million related to the reinsurance ceded by the REALIC
business acquired in 2012 (2012: £5,234 million). REALIC holds collateral for certain of these reinsurance arrangements with a corresponding funds withheld
liability. As of 31 December 2013, the funds withheld liability of £2,051 million (2012: £2,021 million) was recorded within other non-insurance liabilities.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013
180
C2: Analysis of segment position by business type continued
(v)
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 agreements totalled £485 million (2012: £825 million) and are included in other non-insurance
liabilities in the statement of financial position above.
(vi) Changes in shareholders’ equity.
Operating profit based on longer-term investment returns B1.1
Short-term fluctuations in investment returns B1.2
Amortisation of acquisition accounting adjustments arising on the purchase of REALIC
Profit before shareholder tax
Tax B5
Profit for the year
Profit for the year (as above)
Items recognised in other comprehensive income:
Exchange movements
Unrealised valuation movements on securities classified as available-for-sale:
Unrealised holding (losses) gains arising during the year
Deduct net gains included in the income statement
Total unrealised valuation movements
Related change in amortisation of deferred acquisition costsC5.1(b)
Related tax
Total other comprehensive (loss) income
Total comprehensive (loss) income for the year
Dividends, interest payments to central companies and other movements
Net (decrease) increase in equity
Shareholders’ equity at beginning of year
Shareholders’ equity at end of year
2013 £m
2012 £m
1,243
(625)
(65)
553
(101)
452
964
(90)
(19)
855
(234)
621
2013 £m
2012 £m
452
(32)
(2,025)
(64)
(2,089)
498
557
(1,066)
(614)
(283)
(897)
4,343
3,446
621
(181)
930
(68)
862
(270)
(205)
206
827
(245)
582
3,761
4,343
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued
181
C2.3 UK insurance operations
Of the total investments of £154 billion in UK insurance operations, £98 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-profits funds:
In respect of acquired subsidiaries for venture fund and
other investment purposes
Deferred acquisition costs
Total
Total
Deferred tax assets
Other non-investment and non-cash assets
Investments of long-term business and other operations:
Investment properties
Investments in joint ventures and associates accounted
for using the equity method
Financial investments:
Loans C3.4
Equity securities and portfolio holdings in unit trusts
Debt securitiesC3.3
Other investmentsnote (iv)
Deposits
Total investments
Assets held for sale
Cash and cash equivalents
Total assets
2013 £m
2012* £m
Other funds and subsidiaries
Scottish
Amicable
Insurance
Fund
note (iii)
PAC with-
profits
sub-fund
notes (i),(ii)
Unit-
linked
assets
and
liabilities
Annuity
and other
long-term
business
Total
31 Dec
Total
31 Dec
Total
–
–
–
–
–
–
–
–
177
6
183
183
–
–
–
–
–
–
1
267
82
2,744
–
468
90
90
–
–
–
90
90
–
–
–
90
59
2,329
90
59
2,797
90
90
177
6
183
273
105
105
178
6
184
289
142
5,808
183
5,448
456
8,804
645
1,543
2,188
11,448
10,528
–
383
–
66
66
449
259
96
2,060
3,340
315
694
2,728
21,767
44,715
3,986
8,488
–
15,917
7,171
15
764
1,349
1
26,788
287
1,306
1,349
15,918
33,959
302
2,070
4,173
39,745
82,014
4,603
11,252
4,303
36,281
84,008
4,256
11,131
6,961
90,871
24,512
31,340
55,852 153,684 150,766
–
196
–
1,364
–
650
–
376
–
1,026
–
2,586
98
2,668
7,425
95,244
25,630
34,194
59,824 162,493 159,452
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013
182
C2: Analysis of segment position by business type continued
2013 £m
2012* £m
Other funds and subsidiaries
Scottish
Amicable
Insurance
Fund
note (iii)
PAC with-
profits
sub-fund
notes (i),(ii)
Unit-
linked
assets
and
liabilities
Annuity
and other
long-term
business
Total
31 Dec
Total
31 Dec
Total
–
–
–
–
–
–
–
–
–
2,998
–
2,998
–
2,998
–
2,998
2,998
2,998
3,033
1
3,034
Equity and liabilities
Equity
Shareholders’ equity
Non-controlling interests
Total equity
Liabilities
Policyholder liabilities and unallocated surplus of
with-profits funds:
Contract liabilities (including amounts in respect of
contracts classified as investment contracts under IFRS 4)
7,112
76,741
23,652
27,127
50,779 134,632 133,912
Unallocated surplus of with-profits funds (reflecting
application of ‘realistic’ basis provisions for UK regulated
with-profits funds)C4.1(d)
Total
Operational borrowings attributable to shareholder-financed
operations
Borrowings attributable to with-profits funds
Deferred tax liabilities
Other non-insurance liabilities
Total liabilities
Total equity and liabilities
– 11,984
–
–
– 11,984
10,526
7,112
88,725
23,652
27,127
50,779 146,616 144,438
–
12
53
248
–
883
736
4,900
–
–
–
1,978
74
–
424
3,571
74
–
424
5,549
74
895
1,213
10,697
127
968
1,185
9,700
7,425
95,244
25,630
31,196
56,826 159,495 156,418
7,425
95,244
25,630
34,194
59,824 162,493 159,452
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
Notes
(i)
(ii)
The PAC with-profits sub-fund (WPSF) mainly contains with-profits business but it also contains some non-profit business (unit-linked, term assurances and
annuities). Included in the PAC with-profits fund is £12.2 billion (2012: £13.3 billion) of non-profits annuities liabilities. The WPSF’s profits are apportioned
90 per cent to its policyholders and 10 per cent to shareholders as surplus for distribution is determined via the annual actuarial valuation. For the purposes
of this table and subsequent explanation, references to the WPSF also include, for convenience, the amounts attaching to the Defined Charges Participating
Sub-fund which comprises 3.6 per cent of the total assets of the WPSF and includes the with-profits annuity business transferred to Prudential from the
Equitable Life Assurance Society on 1 December 2007 (with assets of approximately £1.7 billion). Profits to shareholders on this with-profits annuity business
emerge on a ‘charges less expenses’ basis and policyholders are entitled to 100 per cent of the investment earnings.
The Hong Kong branch balance is reported within the unallocated surplus of the PAC with-profits sub-fund and excludes policyholder liabilities of the Hong Kong
branch of PAC.
(iii) The fund is solely for the benefit of policyholders of SAIF. Shareholders have no interest in the profits of this fund although they are entitled to asset management
fees on this business. SAIF is a separate sub-fund within the PAC long-term business fund.
(iv) Other investments comprise:
Derivative assets†
Partnerships in investment pools and other‡
2013 £m
2012* £m
1,472
3,131
4,603
1,349
2,907
4,256
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting
standards described in note A2.
† After including derivative liabilities of £804 million (2012: £1,010 million), which are also included in the statement of financial position, the overall derivative
position was a net asset of £668 million (2012: £339 million).
‡ Partnerships in investment pools and other comprise mainly investments held by the PAC with-profits fund. These investments are primarily investments
in limited partnerships and, additionally, investments in property funds.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued
183
C2.4 Asset management operations
Assets
Intangible assets:
Goodwill
Deferred acquisition costs and other intangible assets
Total
Other non-investment and non-cash assets
Investments in joint ventures and associates accounted for
using the equity method
Financial investments:
Loans C3.4
Equity securities and portfolio holdings in unit trusts
Debt securities C3.3
Other investments
Deposits
Total investments
Cash and cash equivalents
Total assets
Equity and liabilities
Equity
Shareholders’ equity
Total equity
Liabilities
Core structural borrowing of shareholder-financed operations
Intra-group debt represented by operational borrowings at
Group level note (ii)
Other non-insurance liabilities note (iii)
Total liabilities
Total equity and liabilities
2013 £m
Eastspring
Investments
US
31 Dec
Total
2012* £m
31 Dec
Total
16
2
18
198
–
–
–
–
14
32
46
56
318
134
134
–
–
184
184
318
61
1
62
67
58
–
11
–
–
33
102
101
332
255
255
–
–
77
77
332
1,230
20
1,250
1,475
92
1,096
65
2,045
61
65
3,424
1,562
7,711
1,991
1,991
275
1,933
3,512
5,720
7,711
1,230
13
1,243
1,142
92
1,199
64
1,839
41
55
3,290
918
6,593
1,937
1,937
275
2,084
2,297
4,656
6,593
M&G
note (i)
1,153
17
1,170
1,210
34
1,096
54
2,045
47
–
3,276
1,405
7,061
1,602
1,602
275
1,933
3,251
5,459
7,061
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
Notes
(i)
(ii)
The M&G statement of financial position includes the assets and liabilities in respect of Prudential Capital.
Intra-group debt represented by operational borrowings at Group level.
Operational borrowings for M&G are in respect of Prudential Capital’s short-term fixed income security programme and comprise:
Commercial paper
Medium Term Notes
Total intra-group debt represented by operational borrowings at Group level
(iii) Other non-insurance liabilities consist primarily of intra-group balances, derivative liabilities and other creditors.
2013 £m
2012 £m
1,634
299
1,933
1,535
549
2,084
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013
184
C3: Assets and liabilities – Classification and Measurement
C3.1 Group assets and liabilities – Classification
The classification of the Group’s assets and liabilities, and its corresponding accounting carrying values reflect the requirements of IFRS.
For financial investments the basis of valuation reflects the Group’s application of IAS 39 ’Financial Instruments: Recognition and Measurement’
as described further below. Where assets and liabilities have been valued at fair value or measured on a different basis but fair value is
disclosed, the Group has followed the principles under IFRS 13 ‘Fair Value Measurement’. The basis applied is summarised below:
2013 £m
Cost/
Amortised
cost/ IFRS 4
basis value
note (i)
Total
carrying
value
Fair
value,
where
applicable
At fair value
Through
profit
and loss
Available-
for-sale
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,461
5,295
6,756
1,461
5,295
6,756
177
72
249
177
72
249
7,005
7,005
920
6,838
2,412
244
2,609
1,746
920
6,838
2,412
244
2,609
1,746
14,769
14,769
2,609
1,746
11,477
–
2,137
120,222
102,700
6,265
–
242,801
916
–
–
–
–
–
30,205
–
–
30,205
–
809
10,429
–
–
–
12,213
11,477
809
12,566
120,222
132,905
6,265
12,213
11,477
12,995
120,222
132,905
6,265
12,213
23,451
296,457
–
–
–
6,785
916
6,785
916
6,785
243,717
30,205
52,010
325,932
Intangible assets attributable to shareholders:
Goodwill
Deferred acquisition costs and other intangible assets
Total
Intangible assets attributable to with-profits funds:
In respect of acquired subsidiaries for venture fund and
other investment purposes
Deferred acquisition costs and other intangible assets
Total
Total 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 operationsnote (ii):
Investment properties
Investments accounted for using the equity method
Loansnote (iv)
Equity securities and portfolio holdings in unit trusts
Debt securitiesnote (v)
Other investmentsnote (vi)
Deposits
Total investments
Assets held for sale
Cash and cash equivalents
Total assets
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued
185
2013 £m
Cost/
Amortised
cost/ IFRS 4
basis value
note (i)
Total
carrying
value
Fair
value,
where
applicable
At fair value
Through
profit
and loss
Available-
for-sale
Liabilities
Policyholder liabilities and unallocated surplus of with-profits
funds:
Insurance contract liabilities
Investment contract liabilities with discretionary
participation featuresnote (iii)
Investment contract liabilities without discretionary
participation features
Unallocated surplus of with-profits funds
Total
Core structural borrowings of shareholder-financed operations:
Other borrowings:
Operational borrowings attributable to
shareholder-financed operations
Borrowings attributable to with-profits 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
Liabilities held for sale
Total liabilities
–
–
17,736
–
17,736
–
–
18
–
5,278
–
–
–
263
–
1,689
2,051
9,281
868
27,903
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
218,185
218,185
35,592
35,592
2,440
12,061
20,176
12,061
268,278
286,014
20,177
4,636
4,636
5,066
2,152
877
2,152
895
2,152
909
2,074
2,074
2,085
–
3,778
395
824
3,044
635
–
1,685
5,278
3,778
395
824
3,307
635
1,689
3,736
5,278
3,307
1,689
3,736
12,435
21,716
–
868
868
288,378
316,281
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013
186
C3: Assets and liabilities – Classification and Measurement continued
2012* £m
Cost/
Amortised
cost/ IFRS 4
basis value
note (i)
Total
carrying
value
Fair
value,
where
applicable
At fair value
Through
profit
and loss
Available-
for-sale
Intangible assets attributable to shareholders:
Goodwill
Deferred acquisition costs and other intangible assets
Total
Intangible assets attributable to with-profits funds:
In respect of acquired subsidiaries for venture fund and
other investment purposes
Deferred acquisition costs and other intangible assets
Total
Total 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 operationsnote (ii):
Investment properties
Investments accounted for using the equity method
Loansnote (iv)
Equity securities and portfolio holdings in unit trusts
Debt securitiesnote (v)
Other investmentsnote (vi)
Deposits
Total investments
Assets held for sale
Cash and cash equivalents
Total assets
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
10,554
–
2,068
98,626
106,082
7,547
–
224,877
98
–
–
–
–
–
32,825
–
–
32,825
–
–
1,469
4,177
5,646
178
78
256
1,469
4,177
5,646
178
78
256
5,902
5,902
754
6,854
2,306
248
2,771
1,325
754
6,854
2,306
248
2,771
1,325
14,258
14,258
–
635
10,675
–
–
–
12,248
23,558
–
6,126
10,554
635
12,743
98,626
138,907
7,547
12,248
281,260
98
6,126
224,975
32,825
49,844
307,644
2,771
1,325
10,554
13,255
98,626
138,907
7,547
12,248
98
6,126
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued
187
2012* £m
Cost/
Amortised
cost/ IFRS 4
basis value
note (i)
Total
carrying
value
Fair
value,
where
applicable
At fair value
Through
profit
and loss
Available-
for-sale
Liabilities
Policyholder liabilities and unallocated surplus of with-profits
funds:
Insurance contract liabilities
Investment contract liabilities with discretionary
participation featuresnote (iii)
Investment contract liabilities without discretionary
participation features
Unallocated surplus of with-profits funds
Total
Core structural borrowings of shareholder-financed operations:
Other borrowings:
Operational borrowings attributable to
shareholder-financed operations
Borrowings attributable to with-profits 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
–
–
16,309
–
16,309
–
–
40
–
5,145
–
–
–
259
–
2,832
2,021
10,257
26,606
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
205,484
205,484
33,812
33,812
2,069
10,589
18,378
10,589
251,954
268,263
18,419
3,554
3,554
4,133
2,245
928
2,245
968
2,245
977
2,381
2,381
2,400
–
3,964
443
751
2,442
591
–
1,421
5,145
3,964
443
751
2,701
591
2,832
3,442
5,145
2,701
2,832
3,442
11,993
22,250
270,674
297,280
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
Notes
(i)
Assets carried at cost or amortised cost are subject to impairment testing where appropriate under IFRS requirements. This category also includes assets which
are valued by reference to specific IFRS standards such as reinsurers’ share of insurance contract liabilities, deferred tax assets and investments accounted for
under the equity method.
(ii) Realised gains and losses on the Group’s investments for 2013 recognised in the income statement amounted to a net gain of £2.5 billion (2012: £6.8 billion).
(iii) The carrying value of investment contracts with discretionary participation features is on IFRS 4 basis. It is impractical to determine the fair value of these
contracts due to the lack of a reliable basis to measure participation features.
(iv) Loans and receivables are reported net of allowance for loan losses of £62 million (2012: £83 million).
(v) As at 31 December 2013 £495 million (2012: £525 million) of convertible bonds were included in debt securities and £1,078 million (2012: £673 million) were
included in borrowings.
(vi) See note C3.5(b) for details of the derivative assets included. The balance also contains the PAC with-profits fund’s participation in various investment funds
and limited liability property partnerships.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013
188
C3: Assets and liabilities – Classification and Measurement continued
C3.2 Group assets and liabilities – Measurement
The section provides detail of the designation and valuation of the Group’s financial assets and liabilities shown under the following
categories:
a Determination of fair value
The fair values of the assets and liabilities of the Group have been determined on the following bases.
The fair values of the financial instruments for which fair valuation is required under IFRS are determined by the use of current market
bid prices for exchange-quoted investments, or by using quotations from independent third-parties, such as brokers and pricing services
or by using appropriate valuation techniques.
The estimated fair value of derivative financial instruments reflects the estimated amount the Group would receive or pay in an arm’s
length transaction. This amount is determined using quoted prices if exchange listed, quotations from independent third parties or
valued internally using standard market practices.
The loans and receivables have been shown net of provisions for impairment. The fair value of loans has been estimated from
discounted cash flows expected to be received. The rate of discount used was the market rate of interest where applicable.
The fair value of investment properties is based on market values as assessed by professionally qualified external valuers or by
the Group’s qualified surveyors.
The fair value of the subordinated and senior debt issued by the parent company is determined using the quoted prices from
independent third parties.
The fair value of financial liabilities (other than derivative financial instruments) is determined using discounted cash flows of the
amounts expected to be paid.
b Fair value measurement hierarchy of Group assets and liabilities
Assets and liabilities carried at fair value on the statement of financial position
The table below shows the assets and liabilities carried at fair value analysed by level of the IFRS 13 ‘Fair Value Measurement’ defined fair
value hierarchy. This hierarchy is based on the inputs to the fair value measurement and reflects the lowest level input that is significant to
that measurement.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued 189
Financial instruments at fair value
Analysis of financial investments, net of derivative liabilities by
business type
With-profits
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total financial investments, net of derivative liabilities
Percentage of total
Unit-linked and variable annuity separate account
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total financial investments, net of derivative liabilities
Percentage of total
Non-linked shareholder-backed
Loans
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total financial investments, net of derivative liabilities
Percentage of total
Group total analysis, including other financial 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 financial investments, net of derivative liabilities
Investment contracts liabilities without discretionary participation features
held at fair value
Borrowings attributable to the with-profits funds held at fair value
Net asset value attributable to unit holders of consolidated unit trusts and
similar funds
Other financial liabilities held at fair value
Total financial instruments at fair value
Percentage of total
31 Dec 2013 £m
Level 1
Level 2
Level 3
Total
Quoted
prices
(unadjusted)
in active
markets
Valuation
based on
significant
observable
market inputs
Valuation
based on
significant
unobservable
market inputs
25,087
14,547
169
(32)
39,771
44%
90,645
3,573
6
(1)
94,223
94%
–
841
13,428
–
–
14,269
21%
2,709
42,759
1,191
(517)
46,142
52%
191
6,048
30
(3)
6,266
6%
250
100
51,880
1,111
(935)
52,406
75%
–
116,573
31,548
175
(33)
250
3,000
100,687
2,332
(1,455)
148,263
104,814
569
485
2,949
–
4,003
4%
36
1
–
–
37
0%
1,887
44
184
809
(201)
2,723
4%
1,887
649
670
3,758
(201)
6,763
28,365
57,791
4,309
(549)
89,916
100%
90,872
9,622
36
(4)
100,526
100%
2,137
985
65,492
1,920
(1,136)
69,398
100%
2,137
120,222
132,905
6,265
(1,689)
259,840
–
–
(17,736)
(18)
–
–
(17,736)
(18)
(3,703)
–
144,560
61%
(248)
(263)
86,549
37%
(1,327)
(2,051)
3,385
2%
(5,278)
(2,314)
234,494
100%
In addition to the financial instruments shown above, the assets and liabilities held for sale on the consolidated statement of financial
position at 31 December 2013 in respect of Japan life business included a net financial instruments balance of £934 million, primarily
for equity securities and debt securities. Of this amount, £905 million has been classified as level 1 and £29 million as level 2.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013 190
C3: Assets and liabilities – Classification and Measurement continued
Analysis of financial investments, net of derivative liabilities by
business type
With-profits
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total financial investments, net of derivative liabilities
Percentage of total
Unit-linked and variable annuity separate account
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total financial investments, net of derivative liabilities
Percentage of total
Non-linked shareholder-backed
Loans
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total financial investments, net of derivative liabilities
Percentage of total
Group total analysis, including other financial 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 financial investments, net of derivative liabilities
Investment contracts liabilities without discretionary participation features
held at fair value
Borrowings attributable to the with-profits fund held at fair value
Net asset value attributable to unit holders of consolidated unit trusts and
similar funds
Other financial liabilities held at fair value
Total financial instruments at fair value
Percentage of total
31 Dec 2012* £m
Level 1
Level 2
Level 3
Total
Quoted
prices
(unadjusted)
in active
markets
Valuation
based on
significant
observable
market inputs
Valuation
based on
significant
unobservable
market inputs
22,057
16,056
108
(61)
38,160
42%
72,488
3,660
26
–
76,174
93%
–
827
13,357
24
(16)
14,192
20%
2,496
45,550
1,743
(1,075)
48,714
54%
183
5,409
10
(1)
5,601
7%
226
7
54,146
2,301
(1,484)
55,196
76%
–
95,372
33,073
158
(77)
226
2,686
105,105
4,054
(2,560)
128,526
109,511
–
–
(16,309)
(40)
(3,653)
–
124,873
57%
(268)
(259)
92,635
42%
480
542
2,574
–
3,596
4%
39
2
–
–
41
0%
1,842
49
185
761
(195)
2,642
4%
1,842
568
729
3,335
(195)
6,279
–
–
(1,224)
(2,021)
3,034
1%
25,033
62,148
4,425
(1,136)
90,470
100%
72,710
9,071
36
(1)
81,816
100%
2,068
883
67,688
3,086
(1,695)
72,030
100%
2,068
98,626
138,907
7,547
(2,832)
244,316
(16,309)
(40)
(5,145)
(2,280)
220,542
100%
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued
191
Investment properties at fair value
Group total
Investment properties
31 Dec 2013 £m
Level 1
Level 2
Level 3
Total
Quoted
prices
(unadjusted)
in active
markets
Valuation
based on
significant
observable
market inputs
Valuation
based on
significant
unobservable
market inputs
–
–
11,477
11,477
Assets and liabilities at amortised cost for which fair value is disclosed
The table below shows the assets and liabilities carried at amortised cost on the statement of financial position but for which fair value is
disclosed in the financial statements. The assets and liabilities that are carried at amortised cost but where the carrying value approximates
the fair value, are excluded from the analysis below.
Assets
Loans
Liabilities
Investment contract liabilities without discretionary participation features
Core structural borrowings of shareholder-financed operations
Operational borrowings attributable to shareholder-financed operations
Borrowings attributable to the with-profits funds
Obligations under funding, securities lending and sale and repurchase
agreements
31 Dec 2013 £m
Level 1
Level 2
Level 3
Total
Quoted
prices
(unadjusted)
in active
markets
Valuation
based on
significant
observable
market inputs
Valuation
based on
significant
unobservable
market inputs
–
–
–
–
–
–
3,778
7,080
10,858
–
(4,878)
(2,010)
(798)
(2,441)
(188)
(142)
(93)
(2,441)
(5,066)
(2,152)
(891)
(1,589)
(496)
(2,085)
The fair value of the assets and liabilities in the table above, with the exception of the subordinated and senior debt issued by the parent
company, has been estimated from the discounted cash flows expected to be received or paid. Where appropriate, the observable
market interest rate has been used and the assets and liabilities are classified within level 2. Otherwise, they are included as level 3 assets
or liabilities.
The fair value included for the subordinated and senior debt issued by the parent company is determined using the quoted prices
from independent third parties.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013 192
C3: Assets and liabilities – Classification and Measurement continued
c Valuation approach for level 2 fair valued assets and liabilities
A significant 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, stale price reviews and variance analysis on prices achieved on subsequent trades.
Pricing services, where available, are used to obtain the third-party broker quotes. Where pricing services providers are used, a single
valuation is obtained and applied.
When prices are not available from pricing services, quotes are sourced directly from brokers. Prudential seeks to obtain a number
of quotes from different brokers so as to obtain the most comprehensive information available on their executability. Where quotes are
sourced directly from brokers, the price used in the valuation is normally selected from one of the quotes based on a number of factors,
including the timeliness and regularity of the quotes and the accuracy of the quotes considering the spreads provided. The selected
quote is the one which best represents an executable quote for the security at the measurement date.
Generally, no adjustment is made to the prices obtained from independent third parties. Adjustment is made in only limited circumstances,
where it is determined that the third-party valuations obtained do not reflect fair value (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 reflects the price at which an orderly transaction would take place between market participants on the measurement date. The
techniques used require a number of assumptions relating to variables such as credit risk and interest rates. Examples of such variables
include an average credit spread based on the corporate bond universe and the relevant duration of the asset being valued. Prudential
determines the input assumptions based on the best available information at the measurement dates. Securities valued in such manner
are classified as level 3 where these significant inputs are not based on observable market data.
Of the total level 2 debt securities of £100,687 million at 31 December 2013 (2012: £105,105 million), £8,556 million are valued
internally (2012: £8,248 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 specified liquidity premium. The majority of the parameters used in this valuation
technique are readily observable in the market and, therefore, are not subject to interpretation.
d Fair value measurements for level 3 fair valued assets and liabilities
Reconciliation of movements in level 3 assets and liabilities measured at fair value
The following table reconciles the value of level 3 fair valued assets and liabilities at 1 January 2013 to that presented at 31 December 2013.
Total investment return recorded in the income statement represents interest and dividend income, realised gains and losses,
unrealised gains and losses on the assets classified at fair value through profit 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.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued
193
Financial instruments at fair value
£m
Total
gains/
losses
recorded
in other
compre-
hensive
income
Total
gains/
losses in
income
statement
At
1 Jan
Acqui-
sition
of
REALIC
in 2012 Purchases
Sales
Settled
Issued
Reclassi-
fication
of Japan
life
as held
for sale
Transfers
into
level 3
Transfers
out of
level 3
At
31 Dec
1,842
4
(37)
–
–
–
(66)
144
–
–
–
1,887
568
729
50
60
3,335
(195)
426
(6)
(3)
(4)
(1)
–
6,279
534
(45)
(1,224)
(2,021)
(57)
3
(1)
41
3,034
480
(5)
–
–
–
–
–
–
–
–
26
16
80
–
(73)
(146)
(215)
–
–
(1)
–
–
–
–
81
–
–
(28)
–
–
84
92
52
–
(3)
(48)
649
670
–
–
3,758
(201)
122
(434)
(67)
225
(28)
228
(51) 6,763
–
–
2
–
94
144
(141)
(218)
–
–
–
–
– (1,327)
– (2,051)
122
(432)
171
(134)
(28)
228
(51) 3,385
–
(46)
(42)
1,858
–
–
(12)
84
375
859
49
65
3,277
(218)
250
13
44
(3)
(61)
–
–
–
–
–
255
260
482
–
(98)
(228)
–
(73)
(613)
–
–
–
–
–
–
–
4,293
331
(62)
1,858
997
(939)
(85)
84
(911)
–
(20)
41
(47)
46
–
(2,075)
(153)
–
–
–
–
73
(93)
(106)
3,382
352
(63)
(217)
844
(939)
(12)
(115)
–
–
–
–
–
–
–
–
–
–
6
18
–
–
–
1,842
(63)
(169)
568
729
–
10
3,335
(195)
24
(222)
6,279
–
–
–
–
(1,224)
(2,021)
24
(222)
3,034
10,554
441
(15)
– 1,110
(613)
–
–
–
–
– 11,477
2013
Loans
Equity securities and
portfolio holdings
in unit trusts
Debt securities
Other investments
(including derivative
assets)
Derivative liabilities
Total financial
investments, net of
derivative liabilities
Net asset value
attributable to
unit holders of
consolidated unit
trusts and similar
funds
Other financial liabilities
Total financial
instruments at
fair value
2012
Loans
Equity securities and
portfolio holdings
in unit trusts
Debt securities
Other investments
(including derivative
assets)
Derivative liabilities
Total financial
investments, net of
derivative liabilities
Net asset value
attributable to
unit holders of
consolidated unit
trusts and similar
funds
Other financial liabilities
Total financial
instruments at
fair value
Other assets
at fair value
2013
Investment properties
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013 194
C3: Assets and liabilities – Classification and Measurement continued
Of the total net gains and losses in the income statement of £480 million (2012: £419 million), £415 million (2012: £126 million) relates
to net unrealised gains relating to financial instruments still held at the end of the period, 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
Other financial liabilities
Total
2013 £m
2012 £m
46
30
397
(8)
(57)
7
415
27
51
48
–
–
126
Valuation approach for level 3 fair valued assets and liabilities
Financial instruments at fair value
Investments valued using valuation techniques include financial investments which by their nature do not have an externally quoted
price based on regular trades, and financial investments for which markets are no longer active as a result of market conditions 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 flow analysis, option adjusted spread models and, if applicable, enterprise valuation. These
techniques may include a number of assumptions relating to variables such as credit risk and interest rates. Changes in assumptions
relating to these variables could positively or negatively impact the reported fair value of these instruments. When determining the
inputs into the valuation techniques used priority is given to publicly available prices from independent sources when available, but
overall the source of pricing is chosen with the objective of arriving at a fair value measurement which reflects the price at which an
orderly transaction would take place between market participants on the measurement date.
The fair value estimates are made at a specific point in time, based upon available market information and judgments about the
financial instruments, including estimates of the timing and amount of expected future cash flows and the credit standing of counterparties.
Such estimates do not reflect any premium or discount that could result from offering for sale at one time the Group’s entire holdings of a
particular financial instrument, nor do they consider the tax impact of the realisation of unrealised gains or losses from selling the financial
instrument being fair valued. In some cases the disclosed value cannot be realised in immediate settlement of the financial instrument.
In accordance with the Group’s risk management framework, the estimated fair value of derivative financial instruments valued
internally using standard market practices are subject to assessment against external counterparties’ valuations.
At 31 December 2013 the Group held £3,385 million (2012: £3,034 million), 2 per cent of the total fair valued financial assets net of
fair valued financial liabilities (2012: 1 per cent), within level 3.
Included within these amounts were loans of £1,887 million at 31 December 2013 (2012: £1,842 million), measured at the loan
outstanding balance, attached to REALIC acquired in 2012 and held to back the liabilities for funds withheld under reinsurance
arrangements. The funds withheld liability of £2,051 million at 31 December 2013 (2012: £2,021 million) was also classified within level 3,
accounted for on a fair value basis being equivalent to the carrying value of the underlying assets.
Excluding the loans and funds withheld liability under REALIC’s reinsurance arrangements as described above, which amounted to
a net liability of £(164) million (2012: £(179) million), the level 3 fair valued financial assets net of financial liabilities were £3,549 million
(2012: £3,213 million). Of this amount, a net liability of £(304) million (2012: net liability of £(213) million) were internally valued,
representing 0.1 per cent of the total fair valued financial assets net of financial liabilities (2012: 0.1 per cent). Internal valuations are
inherently more subjective than external valuations. Included within these internally valued net liabilities were:
(a) Debt securities of £118 million (2012: £75 million), which were either valued on a discounted cash flow method with an internally
developed discount rate or on external prices adjusted to reflect the specific known conditions relating to these securities
(eg distressed securities or securities which were being restructured).
(b) Private equity and venture investments of £878 million (2012: £904 million) which were valued internally based on management
information available for these investments. These investments were principally held by consolidated investment funds which are
managed on behalf of third parties.
(c) Liabilities of £(1,301) million (2012: £(1,199) million) for the net asset value attributable to external unit holders respect of the
consolidated investment funds, which are non-recourse to the Group. These liabilities are valued by reference to the underlying assets.
(d) Other sundry individual financial investments of £1 million (2012: £7 million).
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued
195
Of the internally valued net liability referred to above of £(304) million (2012: net liability of £(213) million):
(e) A net liability of £(380) million (2012: net liability of £(240) million) was held by the Group’s participating funds and therefore
shareholders’ profit and equity are not impacted by movements in the valuation of these financial instruments.
(f) A net asset of £nil (2012: £3 million) was held by the Group’s unit-linked funds for which the investment return is wholly attributable
to policyholders.
(g) A net asset of £76 million (2012: £24 million) was held to support non-linked shareholder-backed business. If the value of all the level 3
instruments held to support non-linked shareholder-backed business valued internally was varied downwards by 10 per cent, the
change in valuation would be £8 million (2012: £2 million), which would reduce shareholders’ equity by this amount before tax. Of this
amount, a decrease of £6 million (2012: an increase of £1 million) would pass through the income statement substantially as part of
short-term fluctuations in investment returns outside of operating profit and a £2 million decrease (2012: a £3 million decrease) would
be included as part of other comprehensive income, being unrealised movements on assets classified as available-for-sale.
Other assets at fair value – Investment properties
The investment properties of the Group are principally held by the UK insurance operations which are externally valued by professionally
qualified external valuers using the Royal Institution of Chartered Surveyors (RICS) valuation standards. An ‘income capitalisation’
technique is predominantly applied for these properties. This technique calculates the value through the yield and rental value depending
on factors such as the lease length, building quality, covenant and location. The variables used are compared to recent transactions with
similar features to those of the Group’s investment properties. As the comparisons are not with properties which are virtually identical
to Group’s investment properties, adjustments are made by the valuers where appropriate to the variables used. Changes in assumptions
relating to these variables could positively or negatively impact the reported fair value of the properties.
e Transfers into and transfers out of levels
The Group’s policy is to recognise transfers into and transfers out of levels as of the end of each half year reporting period except for
material transfers which are recognised as of the date of the event or change in circumstances that caused the transfer.
During 2013, the transfers between levels within the Group’s portfolio were primarily transfers from level 1 to 2 of £471 million and
transfers from level 2 to level 1 of £260 million. These transfers which relate to equity securities and debt securities arose to reflect the
change in the observability of the inputs used in valuing these securities.
In addition, the transfers into and out of level 3 in 2013 were £228 million and £(51) million, respectively. These transfers were between
levels 3 and 2 and primarily for equity securities and debt securities.
f Valuation processes applied by the Group
The Group’s valuation policies, procedures and analyses for instruments categorised as level 3 are overseen by Business Unit committees
as part of the Group’s wider financial reporting governance processes. The procedures undertaken include approval of valuation
methodologies, verification processes, and resolution of significant or complex valuation issues. In undertaking these activities the Group
makes use of the extensive expertise of its asset management functions.
C3.3 Debt securities
This note provides analysis of the Group’s debt securities, including asset-backed securities and sovereign debt securities, by segment.
Debt securities are carried at fair value. The amounts included in the statement of financial position are analysed as follows, with
further information relating to the credit quality of the Group’s debt securities at 31 December 2013 provided in the notes below.
Insurance operations:
Asianote (a)
USnote (b)
UKnote (c)
Asset management operations
Total
2013 £m
2012* £m
18,554
30,292
82,014
2,045
20,067
32,993
84,008
1,839
132,905
138,907
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
In the tables below, with the exception of some mortgage-backed securities, 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.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013 196
C3: Assets and liabilities – Classification and Measurement continued
a Asia insurance operations
2013 £m
2012* £m
With-profits
business
Unit-linked
assets
Other
business
S&P – AAA
S&P – AA+ to AA-
S&P – A+ to A-
S&P – BBB+ to BBB-
S&P – Other
Moody’s – Aaa
Moody’s – Aa1 to Aa3
Moody’s – A1 to A3
Moody’s – Baa1 to Baa3
Moody’s – Other
Fitch
Other
Total debt securities
489
2,584
1,710
1,349
351
6,483
1,076
128
104
238
30
1,576
415
1,262
9,736
13
432
257
516
238
1,456
218
31
22
207
13
491
131
373
222
1,717
929
852
844
4,564
434
17
51
127
33
662
182
959
Total
724
4,733
2,896
2,717
1,433
12,503
1,728
176
177
572
76
2,729
728
2,594
Total
785
5,523
3,272
1,906
3,132
14,618
1,389
271
147
375
112
2,294
533
2,622
2,451
6,367
18,554
20,067
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
In addition to the debt securities shown above, the assets held for sale on the consolidated statement of financial position at
31 December 2013 in respect of Japan life business included a debt securities balance of £387 million. Of this amount, £356 million
were rated as AA+ to AA- and £29 million were rated A+ to A-.
The following table analyses debt securities of ’Other business’ which are not externally rated by S&P, Moody’s or Fitch.
Government bonds
Corporate bonds rated as investment grade by local external ratings agencies
Structured deposits issued by banks which are rated, but specific deposits are not
Other
2013 £m
2012* £m
387
491
1
80
959
58
428
–
123
609
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
b US insurance operations
i Overview
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 (RMBS)
Commercial mortgage-backed securities (CMBS)
Other debt securities
Total US debt securities†
2013 £m
2012 £m
3,330
18,875
3,395
25,600
1,760
2,339
593
30,292
4,126
19,699
3,542
27,367
2,400
2,639
587
32,993
* A 1990 SEC rule that facilitates the resale of privately placed securities under Rule 144A that are without SEC registration to qualified institutional investors.
The rule was designed to develop a more liquid and efficient institutional resale market for unregistered securities.
† Debt securities for US operations included in the statement of financial position comprise:
Available-for-sale
Securities held at fair value through profit and loss to back liabilities for funds withheld under reinsurance arrangement
2013 £m
2012 £m
30,205
87
30,292
32,825
168
32,993
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued
197
ii Valuation basis, presentation of gains and losses and securities in an unrealised loss position
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 13 requires classification of the fair values applied by the Group into a three level hierarchy. At 31 December 2013,
0.1 per cent of Jackson’s debt securities were classified as level 3 (31 December 2012: 0.1 per cent) comprising of fair values where there
are significant inputs which are not based on observable market data.
Except for certain assets covering liabilities that are measured at fair value, the debt securities of the US insurance operations are
classified as ‘available-for-sale’. Unless impaired, fair value movements are recognised in other comprehensive income. Realised gains
and losses, including impairments, recorded in the income statement are as shown in note B1.2 of this report.
Movements in unrealised gains and losses
There was a movement in the statement of financial position value for debt securities classified as available-for-sale from a net unrealised
gain of £2,807 million to a net unrealised gain of £781 million as analysed in the table below. This decrease reflects the effects of rising
long-term interest rates.
Assets fair valued at below book value
Book value*
Unrealised (loss) gain
Fair value (as included in statement of financial position)
Assets fair valued at or above book value
Book value*
Unrealised gain (loss)
Fair value (as included in statement of financial position)
Total
Book value*
Net unrealised gain (loss)
Fair value (as included in statement of financial position)
* Book value represents cost/amortised cost of the debt securities.
† Translated at the average rate of US$1.5646: £1.00.
2013 £m
2012 £m
Changes in
unrealised
appreciation†
Foreign
exchange
translation
Reflected as part of
movement in Other
comprehensive income
(714)
43
(1,375)
20
(2,089)
63
10,825
(849)
9,976
18,599
1,630
20,229
29,424
781
30,205
4,551
(178)
4,373
25,467
2,985
28,452
30,018
2,807
32,825
Debt securities classified as available-for-sale in an unrealised loss position
(a) Fair value of securities as a percentage of book value
The following table shows the fair value of the debt securities in a gross unrealised loss position for various percentages of book value:
Between 90% and 100%
Between 80% and 90%
Below 80%
Total
(b) Unrealised losses by maturity of security
1 year to 5 years
5 years to 10 years
More than 10 years
Mortgage-backed and other debt securities
Total
2013 £m
2012 £m
Fair value
Unrealised
loss
Fair value
Unrealised
loss
7,624
1,780
572
9,976
(310)
(331)
(208)
(849)
4,214
85
74
4,373
(112)
(13)
(53)
(178)
2013 £m
2012 £m
(5)
(224)
(558)
(62)
(849)
(1)
(9)
(91)
(77)
(178)
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013 198
C3: Assets and liabilities – Classification and Measurement continued
(c) Age analysis of unrealised losses for the periods indicated
The following table shows the age analysis of all the unrealised losses in the portfolio by reference to the length of time the securities have
been in an unrealised loss position:
Less than 6 months
6 months to 1 year
1 year to 2 years
2 years to 3 years
More than 3 years
Total
Non-
investment
grade
2013 £m
Investment
grade
(2)
(12)
(2)
(1)
(13)
(30)
(52)
(329)
(423)
–
(15)
(819)
Non-
investment
grade
2012 £m
Investment
grade
(5)
(1)
(2)
(1)
(31)
(40)
(101)
(1)
–
–
(36)
(138)
Total
(54)
(341)
(425)
(1)
(28)
(849)
Total
(106)
(2)
(2)
(1)
(67)
(178)
(d) Securities whose fair values were below 80 per cent of the book value
£208 million of the £849 million of gross unrealised losses as shown in the table (a) above at 31 December 2013 (31 December 2012:
£53 million of the £178 million of gross unrealised losses) related to securities whose fair values were below 80 per cent of the book value.
The analysis of the £208 million (31 December 2012: £53 million), by category of debt securities and by age analysis indicating the length
of time for which their fair value was below 80 per cent of the book value, is as follows:
Category analysis
Residential mortgage-backed securities:
Prime (including agency)
Sub-prime
Commercial mortgage-backed securities
Other asset-backed securities
Total structured securities
Government bonds
Corporates
Total
2013 £m
2012 £m
Fair value
Unrealised
loss
Fair value
Unrealised
loss
–
4
4
16
9
29
521
22
572
–
(1)
(1)
(6)
(6)
(13)
(188)
(7)
(208)
5
18
23
10
41
74
–
–
74
(2)
(8)
(10)
(23)
(20)
(53)
–
–
(53)
The following table shows the age analysis as at 31 December 2013, of the securities whose fair values were below 80 per cent of the
book value:
Age analysis
Less than 3 months
3 months to 6 months
More than 6 months
2013 £m
2012 £m
Fair value
Unrealised
loss
Fair value
Unrealised
loss
93
418
61
572
(24)
(159)
(25)
(208)
7
–
67
74
(2)
–
(51)
(53)
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued 199
iii Ratings
The following table summarises the securities detailed above by rating using S&P, Moody’s, Fitch and implicit ratings of mortgage-backed
securities based on National Association of Insurance Commissioners (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
2013 £m
2012 £m
132
5,252
7,728
9,762
941
23,815
65
13
65
70
10
223
2,774
179
87
3,040
159
3,055
187
6,343
7,728
10,230
1,173
25,661
55
18
21
56
13
163
2,934
207
321
3,462
184
3,523
30,292
32,993
* The Securities Valuation Office of the NAIC classifies 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 classifications:
NAIC 1
NAIC 2
NAIC 3-6
2013 £m
2012 £m
1,165
1,836
54
3,055
1,453
2,022
48
3,523
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).
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013 200
C3: Assets and liabilities – Classification and Measurement continued
c UK insurance operations
2013 £m
Other funds and subsidiaries
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
Scottish
Amicable
Insurance
Fund
PAC
with-profits
fund
Unit-linked
assets
367
502
825
819
214
2,727
93
105
49
41
10
298
18
297
4,403
5,421
10,896
9,972
2,578
33,270
1,544
2,525
847
702
125
5,743
349
5,353
785
1,202
1,720
1,679
97
5,483
229
1,107
55
93
–
1,484
60
144
Other
annuity and
long-term
business
2013
Total
£m
2012*
Total
£m
PRIL
2,944
3,161
6,599
4,017
292
338
404
851
638
74
17,013
2,305
395
2,179
994
331
4
3,903
166
2,433
72
504
132
47
1
756
18
194
8,837
10,690
20,891
17,125
3,255
60,798
2,333
6,420
2,077
1,214
140
9,200
9,688
23,000
17,720
3,043
62,651
8,446
1,420
927
1,385
307
12,184
12,485
611
8,421
527
8,345
Total debt securities
3,340
44,715
7,171
23,515
3,273
82,014
84,008
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
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 £8,421 million total debt securities
held at 31 December 2013 (2012: £8,345 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
2013 £m
2012* £m
3,691
3,456
1,274
8,421
3,173
3,810
1,362
8,345
The majority of unrated debt security investments were held in SAIF and the PAC with-profits fund and relate to convertible debt and
other investments which are not covered by ratings analysts nor have an internal rating attributed to them. For the £2,627 million for
PRIL and other annuity and long-term business investments for non-linked shareholder-backed business which are not externally rated,
£605 million were internally rated AA+ to AA-, £948 million A+ to A-, £868 million BBB+ to BBB-, £65 million BB+ to BB- and £141 million
were internally rated B+ and below or unrated.
d Asset management operations
The debt securities are all held by M&G (Prudential Capital).
M&G
AAA to A- by Standard & Poor’s or Aaa to A3 rated by Moody’s
Other
Total M&G (including Prudential Capital)
2013 £m
2012 £m
1,690
355
2,045
1,529
310
1,839
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued
201
e Asset-backed securities
The Group’s 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 2013
is as follows:
Shareholder-backed operations (excluding assets held in unit-linked funds):
Asia insurance operationsnote (i)
US insurance operationsnote (ii)
UK insurance operations (2013: 36% AAA, 23% AA)note (iii)
Other operations note (iv)
With-profits operations:
Asia insurance operationsnote (i)
UK insurance operations (2013: 60% AAA, 12% AA)note (iii)
Total
2013 £m
2012 £m
139
4,692
1,727
667
7,225
200
5,765
5,965
144
5,626
1,408
566
7,744
241
5,850
6,091
13,190
13,835
Notes
(i)
Asia insurance operations
The Asia insurance operations’ exposure to asset-backed securities is primarily held by the with-profits operations. Of the £200 million, 53 per cent
(2012: 63 per cent) are investment graded.
(ii) US insurance operations
US insurance operations’ exposure to asset-backed securities at 31 December 2013 comprises:
RMBS
Sub-prime (2013: 10% AAA, 10% AA)
Alt-A (2013: 1% AA, 7% BBB)
Prime including agency (2013: 75% AA, 2% A)
CMBS (2013: 43% AAA, 22% AA)
CDO funds (2013: 25% AA, 19% A), including £nil exposure to sub-prime
Other ABS (2013: 25% AAA, 20% AA), including £69 million exposure to sub-prime
Total
(iii) UK insurance operations
2013 £m
2012 £m
255
270
1,235
2,339
46
547
4,692
261
323
1,816
2,639
44
543
5,626
The majority of holdings of the shareholder-backed business relates to the UK market and primarily relates to investments held by PRIL. Of the holdings of
the with-profits operations, £1,490 million (2012: £1,697 million) relates to exposure to the US markets and with the remaining exposure being primarily to the
UK market.
(iv) Asset management operations
Asset management operations’ exposure to asset-backed securities is held by Prudential Capital with no sub-prime exposure. Of the £667 million, 85 per cent
(2012: 77 per cent) are graded AAA.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013
202
C3: Assets and liabilities – Classification and Measurement continued
f Group sovereign debt and bank debt exposure
The Group exposures held by the shareholder-backed business and with-profits funds in sovereign debts and bank debt securities at
31 December 2013:
Exposure to sovereign debts
Italy
Spain
France
Germany
Other Europe (principally Belgium and Isle of Man)
Total Continental Europe
United Kingdom
Total Europe
United States†
Other, predominantly Asia
Total
2013 £m
2012* £m
Shareholder-
backed
business
With-profits
funds
Shareholder-
backed
business
With-profits
funds
53
1
19
413
45
531
3,516
4,047
3,045
3,084
10,176
53
14
–
389
45
501
2,432
2,933
4,026
1,508
8,467
51
1
18
444
50
564
3,432
3,996
3,725
3,069
10,790
59
31
–
469
41
600
2,306
2,906
3,547
1,401
7,854
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new accounting standards described in A2
and their consequential impact.
† The exposure to the United States sovereign debt comprises holdings of Jackson, the UK and Asia insurance operations.
The table above excludes assets held to cover linked liabilities and those of the consolidated unit trusts and similar funds. In addition, the
table above excludes the proportionate share of sovereign debt holdings of the Group’s joint venture operations. As discussed in note A2
following the adoption of IFRS 11 these operations are accounted for using single line equity method in the balance sheet.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued 203
Exposure to bank debt securities
Senior debt
Subordinated debt
Bank debt securities £m
Shareholder-backed business
Covered
Senior
Portugal
Ireland
Italy
Spain
Austria
France
Germany
Netherlands
Total Continental Europe
United Kingdom
Total Europe
United States
Other, predominantly Asia
Total
With-profits funds
Portugal
Ireland
Italy
Spain
France
Germany
Netherlands
Total Continental Europe
United Kingdom
Total Europe
United States
Other, predominantly Asia
Total
–
–
–
100
–
23
–
–
123
409
532
–
21
553
–
10
15
136
12
–
–
173
598
771
–
108
879
45
17
30
12
–
64
3
14
185
175
360
1,688
281
2,329
6
–
67
13
168
24
208
486
442
928
1,942
638
3,508
Total
senior
debt
45
17
30
112
–
87
3
14
308
584
892
1,688
302
2,882
6
10
82
149
180
24
208
659
1,040
1,699
1,942
746
4,387
Tier 2
Tier 1
Total
subordinated
debt
31 Dec
2013
Total
31 Dec
2012
Total
–
–
–
23
12
71
63
57
226
673
899
456
300
1,655
–
–
–
–
57
–
7
64
635
699
129
174
1,002
–
–
–
–
–
17
–
81
98
112
210
19
96
325
–
–
–
–
–
–
–
–
20
20
143
182
345
–
–
–
23
12
88
63
138
324
785
1,109
475
396
1,980
–
–
–
–
57
–
7
64
655
719
272
356
1,347
45
17
30
135
12
175
66
152
632
1,369
2,001
2,163
698
4,862
6
10
82
149
237
24
215
723
1,695
2,418
2,214
1,102
5,734
37
16
39
168
11
195
22
182
670
1,466
2,136
2,243
741
5,120
6
6
75
186
157
–
138
568
1,904
2,472
2,083
655
5,210
The table above excludes assets held to cover linked liabilities and those of the consolidated unit trusts and similar funds. In addition,
the table above excludes the proportionate share of sovereign debt holdings of the Group’s joint venture operations. As discussed in
note A2 following the adoption of IFRS 11 these operations are accounted for using a single line equity method in the balance sheet.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013 204
C3: Assets and liabilities – Classification and Measurement continued
C3.4 Loans portfolio
Loans are accounted for at amortised cost net of impairment except for:
— Certain mortgage loans which have been designated at fair value through profit and loss of the UK insurance operations as this loan
portfolio is managed and evaluated on a fair value basis; and
— Certain policy loans of the US insurance operations which are held to back liabilities for funds withheld under reinsurance arrangement
and are also accounted on a fair value basis.
The amounts included in the statement of financial position are analysed as follows:
Insurance operations:
Asianote (a)
USnote (b)
UKnote (c)
Asset management operations
M&Gnote (d)
Total
2013 £m
2012* £m
922
6,375
4,173
1,096
12,566
1,006
6,235
4,303
1,199
12,743
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
a Asia insurance operations
The loans of the Group’s Asia insurance operations comprise:
Mortgage loans†
Policy loans†
Other loans‡
Total Asia insurance operations loans
2013 £m
2012* £m
57
611
254
922
43
602
361
1,006
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
† 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.
b US insurance operations
The loans of the Group’s US insurance operations comprise:
Mortgage loans*
Policy loans†
Total US insurance operations loans
Loans backing
liabilities for
funds withheld
–
1,887
1,887
2013 £m
Other loans
3,671
817
4,488
Loans backing
liabilities for
funds withheld
–
1,842
1,842
Total
3,671
2,704
6,375
2012 £m
Other loans
3,543
850
4,393
Total
3,543
2,692
6,235
* All of the mortgage loans are commercial mortgage loans which are collateralised by properties. The property types are industrial, multi-family residential, suburban
office, retail and hotel. The breakdown by property type is as follows:
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued Industrial
Multi-family residential
Office
Retail
Hotels
Other
205
2013 %
2012 %
28
30
13
19
9
1
100
29
25
17
19
10
–
100
† The policy loans are fully secured by individual life insurance policies or annuity policies. The purchase of REALIC in the second half of 2012 included policy loans
which are accounted for at fair value through profit and loss to back liabilities for funds withheld under reinsurance. The policy loans are valued at £1,887 million at
31 December 2013 (2012: £1,842 million). All other policy loans are accounted for at amortised cost, less any impairment.
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 £6.5 million (2012: £6.3 million). The portfolio has a current
estimated average loan to value of 61 per cent (2012: 65 per cent).
At 31 December 2013, Jackson had mortgage loans with a carrying value of £47 million (2012: £78 million) where the contractual terms of the agreements had
been restructured.
c UK insurance operations
The loans of the Group’s UK insurance operations comprise:
SAIF and PAC WPSF:
Mortgage loans†
Policy loans
Other loans‡
Total SAIF and PAC WPSF loans
Shareholder-backed operations:
Mortgage loans†
Other loans
Total loans of shareholder-backed operations
Total UK insurance operations loans
2013 £m
2012* £m
1,183
12
1,629
2,824
1,345
4
1,349
4,173
1,311
16
1,712
3,039
1,259
5
1,264
4,303
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
† The mortgage loans are collateralised by properties. By carrying value, 84 per cent of the £1,345 million held for shareholder-backed business relates to lifetime
(equity release) mortgage business which has an average loan to property value of 30 per cent.
‡ Other loans held by the PAC with-profits fund are all commercial loans and comprise mainly syndicated loans.
d Asset management operations
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:
AAA
AA+ to AA-
BBB+ to BBB-
BB+ to BB-
B+ to B-
Other
Total M&G (including Prudential Capital) loans
2013 £m
2012 £m
108
28
516
174
250
20
–
–
836
339
24
–
1,096
1,199
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013
206
C3: Assets and liabilities – Classification and Measurement continued
C3.5 Financial instruments – additional information
a Market risk
i Liquidity analysis
Contractual maturities of financial liabilities
The following table sets out the contractual maturities for applicable classes of financial liabilities, excluding derivative liabilities and
investment contracts that are separately presented. The financial liabilities are included in the column relating to the contractual
maturities at the undiscounted cash flows (including contractual interest payments) due to be paid assuming conditions are consistent
with those of year end.
Total
carrying
value
1 year
or less
After 1
year to
5 years
After 5
years to
10 years
2013 £m
After 10
years to
15 years
After 15
years to
20 years
Over
20 years
No stated
maturity
Total
Financial liabilities
Core structural borrowings
of shareholder-financed
operationsC6.1
Operational borrowings
attributable to
shareholder-financed
operationsC6.2
Borrowings attributable to
with-profits fundsC6.2
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-financed
operationsC6.1
Operational borrowings
attributable to
shareholder-financed
operationsC6.2
Borrowings attributable to
with-profits fundsC6.2
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
4,636
166
928
1,100
823
1,196
2,542
1,721
8,476
2,152
1,790
895
118
2,074
3,736
2,074
1,526
5,278
3,307
5,278
3,049
375
406
–
44
–
24
–
211
–
58
–
39
22,078
14,001
1,777
1,408
–
48
–
–
–
79
950
2012* £m
–
12
–
–
–
74
–
70
–
2,165
189
1,054
–
–
–
2,108
2,074
3,736
–
386
–
–
5,278
3,651
1,282
2,998
4,018
26,434
Total
carrying
value
1 year
or less
After 1
year to
5 years
After 5
years to
10 years
After 10
years to
15 years
After 15
years to
20 years
Over
20 years
No stated
maturity
Total
3,554
140
791
603
958
1,038
691
1,753
5,974
2,245
1,708
968
115
558
542
2,381
3,442
2,381
934
5,145
2,701
5,145
2,435
–
45
–
23
20,436
12,858
1,959
–
199
–
5
–
36
843
–
71
–
–
–
73
–
12
–
–
–
73
–
2,266
129
1,141
–
–
–
2,458
2,381
3,442
–
70
–
406
–
–
5,145
3,043
1,102
1,120
1,170
4,340
23,392
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.:
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued 207
Maturity analysis of derivatives
The following table shows the gross and net derivative positions together with a maturity profile of the net derivative position:
2013
2012*
Carrying value of net derivatives £m
Maturity profile of net derivative position £m
Derivative
assets
Derivative
liabilities
Net
derivative
position
2,329
3,862
(1,689)
(2,832)
640
1,030
1 year
or less
697
1,022
After 1
year to
3 years
After 3
years to
5 years
(12)
(22)
(9)
(14)
After 5
years
18
(50)
Total
694
936
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
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). The Group has no cash flow hedges and in
general, contractual maturities are not considered essential for an understanding of the timing of the cash flows for these instruments.
The only exception is certain identified interest rate swaps which are fully expected to be held until maturity solely for the purposes of
matching cash flows on separately held assets and liabilities. For these instruments the undiscounted cash flows (including contractual
interest amounts) due to be paid under the swap contract assuming conditions are consistent with those at year end are included in the
column relating to the contractual maturity of the derivative.
The table below shows the maturity profile for investment contracts on an undiscounted basis to the nearest £ billion. This maturity
profile has been based on the cash flow projections of expected benefit payments as part of the determination of the value of in-force
business when preparing EEV basis results.
2013
2012
£bn
1 year
or less
5
4
After 1
year to
5 years
After 5
years to
10 years
After 10
years to
15 years
After 15
years to
20 years
Over
20 years
18
16
17
15
13
11
10
8
9
10
Total
undis-
counted
value
72
64
Total
carrying
value
56
52
Most investment contracts have options to surrender early, often subject to surrender or other penalties. Therefore, most contracts can
be said to have a contractual maturity of less than one year, but in reality the additional charges and term of the contracts means these are
unlikely to be exercised in practice and the more useful information is to present information on expected payment.
The maturity profile above excludes certain corporate unit-linked business with gross policyholder liabilities of £13 billion (2012: £12 billion)
which have no stated maturity but which are repayable on demand.
This table has been prepared on an undiscounted basis and accordingly the amounts shown for life assurance investment contracts
differ from those disclosed on the statement of financial position. Durations of long-term business contracts, covering insurance and
investment contracts, on a discounted basis are included in section C4.
The vast majority of the Group’s financial assets are held to back the Group’s policyholder liabilities. Although asset/liability matching
is an important component of managing policyholder liabilities (both those classified as insurance and those classified as investments),
this profile is mainly relevant for managing market risk rather than liquidity risk. Within each business unit this asset/liability matching is
performed on a portfolio-by-portfolio basis.
In terms of liquidity risk a large proportion of the policyholder liabilities contain discretionary surrender values or surrender charges,
meaning that many of the Group’s liabilities are expected to be held for the long term. Much of the Group’s investment portfolios are 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 appropriate to evaluate the nature
and extent of the Group’s liquidity risk.
ii Market and other financial risks
The Group’s maximum exposure to credit risk of financial instruments before any allowance for collateral or allocation of losses to
policyholders is represented by the carrying value of financial instruments on the balance sheet that have exposures to credit risk
comprising 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 (b) below for derivative assets. The collateral in place in relation to derivatives is
described in note (c) below. Notes C3.4, 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, £14 million (2012: £25 million) are past their due date but have not been impaired. Of the
total past due but not impaired, £9 million is less than one year past their due date (2012: £18 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 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 £59 million
(2012: £86 million).
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013 208
C3: Assets and liabilities – Classification and Measurement continued
In addition, during the year the Group took possession of £nil (2012: £16 million) of other collateral held as security, which mainly consists
of assets that could be readily converted into cash.
Further details of collateral and pledges are provided in note (c) below.
iii Foreign exchange risk
As at 31 December 2013, the Group held 20 per cent (2012: 19 per cent) and 7 per cent (2012: 7 per cent) of its financial assets and
financial liabilities respectively, in currencies, mainly US dollar and Euro, other than the functional currency of the relevant business unit.
Of these financial assets, 58 per cent (2012: 56 per cent) are held by the PAC with-profits fund, allowing the fund to obtain exposure
to foreign equity markets.
Of these financial liabilities, 28 per cent (2012: 28 per cent) are held by the PAC with-profits fund, mainly relating to foreign currency
borrowings.
The exchange risks inherent in these exposures are mitigated through the use of derivatives, mainly forward currency contracts
(note (b) below).
The amount of exchange loss recognised in the income statement in 2013, except for those arising on financial instruments measured
at fair value through profit and loss, is £284 million (2012: £213 million loss). This constitutes £1 million gain (2012: £1 million loss) on
Medium Term Notes liabilities and £285 million of net loss (2012: £212 million net loss), mainly arising on investments of the PAC with-profits
fund. The gains/losses on Medium Term Notes liabilities are fully offset by value movements on cross-currency swaps, which are
measured at fair value through profit and loss.
b Derivatives and hedging
Derivatives
The Group enters into a variety of exchange traded and over-the-counter derivative financial instruments, including futures, options,
forward currency contracts and swaps such as interest rate swaps, cross-currency swaps, swaptions and credit default swaps.
All over-the-counter derivative transactions, 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 2013 were as follows:
Derivative assets
Derivative liabilities
Derivative assets
Derivative liabilities
2013 £m
Asia
insurance
operations
US
insurance
operations
UK
insurance
operations
Asset
management
Unallocated
to a segment
41
(58)
(17)
766
(515)
251
1,472
(804)
668
47
(112)
(65)
3
(200)
(197)
2012* £m
Asia
insurance
operations
US
insurance
operations
UK
insurance
operations
Asset
management
Unallocated
to a segment
927
(837)
90
1,546
(645)
901
1,349
(1,010)
339
38
(150)
(112)
2
(190)
(188)
Group
total
2,329
(1,689)
640
Group
total
3,862
(2,832)
1,030
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
The above derivative assets are included in ‘other investments’ in the statement of financial position and are used for efficient portfolio
management to obtain cost effective and efficient management of 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. The Group also uses interest
rate derivatives to reduce exposure to interest rate volatility. In particular:
— UK with-profits funds use derivatives for efficient portfolio management or reduction in investment risks. For UK annuity business
derivatives are used to assist with asset and liability cash flow matching;
— 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 businesses have purchased some swaptions to manage the default risk on certain
underlying assets and hence reduce the amount of regulatory capital held to support the assets; and
— Some products, especially in the US, have guarantee features linked to equity indexes. A mismatch between guaranteed product
liabilities and the performance of the underlying assets, exposes the Group to equity index risk. In order to mitigate this risk, the
relevant business units purchase swaptions, equity options and futures to better match asset performance with liabilities under
equity-indexed products.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued 209
Hedging
The Group has formally assessed and documented the effectiveness of the following hedges under IAS 39.
Fair value hedges
The Group had previously designated as a fair value hedge certain fixed to floating rate swaps which hedge the fair value exposure
to interest rate movements of certain of the Group’s operational borrowings. All of these hedges were terminated by January 2013.
The fair value of the derivatives designated as fair value hedges above at 31 December 2012 was an asset of less than £1 million.
Movements in the fair value of the hedging instruments of a net gain of £0.3 million (2012: net loss of £3 million) and the hedged items
of a net loss of £0.3 million (2012: net gain of £3 million) are recorded in the income statement in respect of these fair value hedges.
Net investment hedges
The Group has designated perpetual subordinated capital securities totalling US$3.55 billion (2012: 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
£2,133 million as at 31 December 2013 (2012: £1,746 million). The foreign exchange gain of £46 million (2012: loss of £81 million) on
translation of the borrowings to pounds sterling at the statement of financial position date is recognised in the translation reserve in
shareholders’ equity. This net investment hedge was 100 per cent effective.
The Group has no cash flow hedges in place.
c Derecognition, collateral and offsetting
Securities lending and reverse repurchase agreements
The Group has entered into securities lending (including repurchase agreements) whereby blocks of securities are loaned to third
parties, primarily major brokerage firms. The amounts above the fair value of the loaned securities required to be received as collateral
by the agreements depend on the quality of the collateral, calculated on a daily basis. The loaned securities are not removed from the
Group’s consolidated statement of financial position, rather they are retained within the appropriate investment classification. Collateral
typically consists of cash, debt securities, equity securities and letters of credit.
At 31 December 2013, the Group had lent £3,791 million (2012: £3,015 million) of securities of which £2,910 million (2012: £2,047 million)
was lent by the PAC with-profits fund and held collateral under such agreements of £3,930 million (2012: £3,137 million) of which
£3,012 million (2012: £2,138 million) was held by the PAC with-profits fund.
At 31 December 2013, the Group had entered into reverse repurchase transactions under which it purchased securities and had
taken on the obligation to resell the securities. The fair value of the collateral held in respect of these transactions was £9,931 million
(2012: £8,454 million).
In addition, at 31 December 2013, the Group had entered into repurchase transactions for which the fair value of the collateral
pledged was cash of £17 million and securities of £524 million (2012: securities pledged of £100 million).
Collateral and pledges under derivative transactions
At 31 December 2013, the Group had pledged £780 million (2012: £754 million) for liabilities and held collateral of £1,432 million
(2012: £1,964 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 agreements.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013 210
C3: Assets and liabilities – Classification and Measurement continued
Offsetting assets and liabilities
The Group’s derivative instruments, repurchase agreements and securities lending agreements are subject to master netting arrangements
and collateral arrangements. A master netting arrangement with a counterparty creates a right of offset for amounts due to and due from
that same counterparty that is enforceable in the event of a default or bankruptcy. The Group recognises amounts subject to master
netting arrangements on a gross basis within the consolidated balance sheets.
The following tables present the gross and net information about the Group’s financial instruments subject to master netting arrangements:
Financial assets:
Derivative assets
Reverse repurchase agreements
Financial liabilities:
Derivative liabilities
Securities lending
Repurchase agreements
Total financial liabilities
Financial assets:
Derivative assets
Reverse repurchase agreements
Financial liabilities:
Derivative liabilities
Securities lending
Repurchase agreements
Total financial liabilities
Gross amount
presented in the
consolidated
financial
position
note (i)
2,136
9,931
12,067
(1,479)
(1,242)
(541)
(3,262)
Gross amount
presented in the
consolidated
financial
position
note (i)
31 Dec 2013 £m
Gross amounts not offset in the
consolidated statement of financial position
Financial
instruments
note (ii)
Cash
collateral
Securities
collateral
note (iii)
Net
amount
(832)
–
(832)
832
–
–
832
(555)
–
(555)
(631)
(9,931)
(10,562)
222
1,242
17
1,481
333
–
524
857
118
–
118
(92)
–
–
(92)
31 Dec 2012 £m
Gross amounts not offset in the
consolidated statement of financial position
Financial
instruments
note (ii)
Cash
collateral
Securities
collateral
note (iii)
Net
amount
3,683
8,454
12,137
(2,552)
(2,017)
(100)
(4,669)
(1,868)
–
(1,868)
1,868
–
–
1,868
(536)
–
(536)
205
2,017
–
2,222
(989)
(8,454)
(9,443)
70
–
100
170
290
–
290
(409)
–
–
(409)
Notes
(i)
(ii) Represents the amount that could be offset under master netting or similar arrangements where Group does not satisfy the full criteria to offset on the
The Group has not offset any of the amounts presented in the consolidated statement of financial position.
consolidated statement of financial position.
(iii) Excludes initial margin amounts for exchange-traded derivatives.
In the tables above, the amounts of assets or liabilities presented in the consolidated statement of financial position are offset first by
financial instruments that have the right of offset under master netting or similar arrangements with any remaining amount reduced
by the amount of cash and securities collateral. The actual amount of collateral may be greater than amounts presented in the tables.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued 211
d Impairment of financial assets
In accordance with the Group’s accounting policy set out in note A3(j), 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 2013, net impairment reversals of £17 million (2012: losses of £(50) million) were recognised
for available-for-sale securities and loans and receivables analysed as shown in the attached table.
Available-for-sale debt securities held by Jackson
Loans and receivables*
Net credit (charge) for impairment net of reversals
* Relates to loans held by the UK with-profits fund and mortgage loans held by Jackson:
Impairment recognised on available-for-sale securities amounted to £(8) million (2012: £(37) million) arising from:
Residential mortgage-backed securities
Public fixed income
Other
2013 £m
2012 £m
(8)
25
17
(37)
(13)
(50)
2013 £m
2012 £m
(3)
–
(5)
(8)
(8)
(2)
(27)
(37)
The impairment recorded on the residential mortgage-backed securities was primarily due to reduced cash flow expectations on such
securities that are collateralised by diversified pools of primarily below investment grade securities. Of the impaired losses of £8 million
(2012: £37 million), the top five individual corporate issuers made up 57 per cent (2012: 74 per cent), reflecting a deteriorating business
outlook of the companies concerned. The impairment losses have been recorded in ‘investment return’ in the income statement.
Jackson’s portfolio of debt securities is managed proactively with credit analysts closely monitoring and reporting on the credit quality
of its holdings. Jackson continues to review its investments on a case-by-case basis to determine whether any decline in fair value
represents an impairment. In addition, investments in structured securities are subject to a rigorous review of their future estimated cash
flows including expected and stress case scenarios to identify potential shortfalls in contractual payments (both interest and principal).
Impairment charges are recorded on structured securities when the Company forecasts a contractual payment shortfall. Situations
where such a shortfall would not lead to a recognition of a loss are rare. However, some structured securities do not have a single
determined set of future cash flows and instead, there can be a reasonable range of estimates that could potentially emerge. With this
variability, there could be instances where the projected cash flow shortfall under management’s base case set of assumptions is so
minor that relatively small and justifiable changes to the base case assumptions would eliminate the need for an impairment loss to be
recognised. The impairment loss reflects the difference between the fair value and book value.
In 2013, the Group realised gross losses on sales of available-for-sale securities of £22 million (2012: £44 million) with 72 per cent
(2012: 64 per cent) of these losses related to the disposal of fixed maturity securities of the top 10 individual issuers, which were disposed
of as part of risk reduction programmes intended to limit future credit loss exposure. Of the £22 million (2012: £ 44 million), £5 million
(2012: £23 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 A3(j). A key indicator of whether such impairment may arise in future, and the potential
amounts at risk, is the profile of gross unrealised losses for fixed maturity securities accounted for on an available-for-sale basis by
reference to the time periods by which the securities have been held continuously in an unrealised loss position and by reference to the
maturity date of the securities concerned.
For 2013, the amount of gross unrealised losses for fixed maturity securities classified as available-for-sale under IFRS in an unrealised
loss position was £849 million (2012: £178 million). Notes B1.2 and C3.3 provide further details on the impairment charges and unrealised
losses of Jackson’s available-for-sale securities.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013
212
C4: Policyholder liabilities and unallocated surplus of with-profits funds
The note provides information of policyholder liabilities and unallocated surplus of with-profit funds held on the Group’s statement
of financial position:
C4.1 Movement and duration of liabilities
C4.1(a) Group overview
i Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds
At 1 January 2012
Comprising:
Policyholder liabilities on the consolidated statement of financial position*
Unallocated surplus of with-profits funds on the consolidated statement
of financial position
Group’s share of policyholder liabilities of joint ventures§
Net flows:
Premiums
Surrenders
Maturities/Deaths
Net flows
Shareholders’ transfers post tax
Investment-related items and other movements
Foreign exchange translation differences
Acquisition of REALICnote D1
As at 31 December 2012/1 January 2013
Comprising:
Insurance operations £m
Asia
note C4.1(b)
US
note C4.1(c)
UK
note C4.1(d)
Total
30,912
69,189
136,189
236,290
28,110
69,189
127,024
224,323
50
2,752
5,620
(2,541)
(658)
2,421
(31)
2,178
(816)
–
–
–
14,907
(4,356)
(954)
9,597
–
4,241
(3,678)
12,912
9,165
–
8,340
(4,785)
(8,009)
(4,454)
(205)
13,006
(98)
–
9,215
2,752
28,867
(11,682)
(9,621)
7,564
(236)
19,425
(4,592)
12,912
34,664
92,261
144,438
271,363
Policyholder liabilities on the consolidated statement of financial position*
Unallocated surplus of with-profits funds on the consolidated statement
31,501
92,261
133,912
257,674
of financial position
Group’s share of policyholder liabilities of joint ventures§
Reclassification of Japan life business as held for sale†
Net flows:
Premiums
Surrenders
Maturities/Deaths
Net flows
Shareholders’ transfers post tax
Investment-related items and other movements
Foreign exchange translation differences
Acquisition of Thanachart Lifenote D1
At 31 December 2013
Comprising:
Policyholder liabilities on the consolidated statement of financial position*
Unallocated surplus of with-profits funds on the consolidated statement
of financial position
Group’s share of policyholder liabilities of joint ventures§
Average policyholder liability balances‡
2013
2012
63
3,100
(1,026)
6,555
(2,730)
(997)
2,828
(38)
462
(2,231)
487
–
–
–
15,951
(5,087)
(1,229)
9,635
–
8,219
(2,704)
–
10,526
–
–
7,378
(4,582)
(8,121)
(5,325)
(192)
7,812
(117)
–
10,589
3,100
(1,026)
29,884
(12,399)
(10,347)
7,138
(230)
16,493
(5,052)
487
35,146
107,411
146,616
289,173
31,910
107,411
134,632
273,953
77
3,159
34,423
32,732
–
–
11,984
–
12,061
3,159
99,836
77,497
134,272
268,531
130,468
240,697
* The 2012 comparative results in the consolidated statement of financial position have been adjusted retrospectively from those previously published for the
application of the new accounting standards described in note A2.
† The reclassification of Japan life business as held for sale reflects the value of policyholder liabilities held at 1 January 2013 following its reclassification during 2013 as
held for sale. No other amounts are shown within the 2013 analysis above in respect of Japan. The comparatives include the Japan life business. If Japan life business
had been excluded from the 2012 amount, the average policyholder liability balance for 2012 would have been £31,616 million for Asia.
‡ Averages have been based on opening and closing balances and adjusted for acquisitions and disposals in the year and exclude unallocated surplus of with-profits
funds and adjusted for corporate transactions in the year.
§ The Group’s investment in joint ventures are accounted for on the equity method in the Group’s balance sheet. The Group’s share of the policyholder liabilities as
shown above relate to the joint venture life business in China, India and of the Takaful business in Malaysia.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued
213
The items above represent the amount attributable to changes in policyholder liabilities and unallocated surplus of with-profits funds
as a result of each of the components listed. The policyholder liabilities shown include investment contracts without discretionary
participation features (as defined 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.
ii Analysis of movements in policyholder liabilities for shareholder-backed business
Shareholder-backed business
At 1 January
Net flows:
Premiums
Surrenders
Maturities/Deaths
Net flowsnote (a)
Investment-related items and other movements
Acquisition of subsidiaries
Foreign exchange translation differences
At 31 December
Comprising:
2012* £m
Asia
US
UK
Total
18,269
69,189
46,048
133,506
4,141
(1,933)
(226)
1,982
1,539
–
(577)
21,213
14,907
(4,356)
(954)
9,597
4,241
12,912
(3,678)
92,261
3,801
(2,585)
(2,345)
(1,129)
4,586
–
–
22,849
(8,874)
(3,525)
10,450
10,366
12,912
(4,255)
49,505
162,979
Policyholder liabilities on the consolidated statement of financial position
Group’s share of policyholder liabilities relating to joint ventures
18,113
3,100
92,261
–
49,505
–
159,879
3,100
Shareholder-backed business
Asia
US
UK
Total
2013 £m
At 1 January
Reclassification of Japan life business as held for salenote (b)
Premiums
Surrenders
Maturities/Deaths
Net flowsnote (a)
Investment-related items and other movements
Acquisition of subsidiaries
Foreign exchange translation differences
At 31 December
Comprising:
21,213
(1,026)
4,728
(2,016)
(363)
2,349
622
487
(1,714)
92,261
–
15,951
(5,087)
(1,229)
9,635
8,219
–
(2,704)
49,505
–
3,628
(2,320)
(2,346)
(1,038)
2,312
–
–
162,979
(1,026)
24,307
(9,423)
(3,938)
10,946
11,153
487
(4,418)
21,931
107,411
50,779
180,121
Policyholder liabilities on the consolidated statement of financial position
Group’s share of policyholder liabilities relating to joint ventures
18,772
3,159
107,411
–
50,779
–
176,962
3,159
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
Notes
(a)
(b)
Including net flows of the Group’s insurance joint ventures.
The reclassification of Japan life business as held for sale reflects the value of policyholder liabilities held at 1 January 2013 following its reclassification during
2013 as held for sale. No other amounts are shown within the 2013 analysis above in respect of Japan.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013 214
C4: Policyholder liabilities and unallocated surplus of with-profits funds continued
iii Movement in insurance contract liabilities and unallocated surplus of with-profits funds
Further analysis of the movement in the year of the Group’s insurance contract liabilities, gross and reinsurance share, and unallocated
surplus of with-profits funds is provided below:
At 1 January 2012
Income and expense included in the income statement and other comprehensive income
Acquisition of REALIC
Other movements in the year
Foreign exchange translation differences
At 31 December 2012/1 January 2013
Reclassification of Japan life business as held for sale
Income and expense included in the income statement and other comprehensive income
Acquisition of Thanachart Life
Other movements in the year
Foreign exchange translation differences
At 31 December 2013
Insurance contract liabilities*
Gross
£m
180,363
16,561
12,912
–
(4,352)
205,484
(1,026)
18,133
487
–
(4,893)
218,185
Reinsurers’
share
£m
1,486
–
4,810
(58)
(162)
6,076
–
–
–
56
(114)
6,018
Unallocated
surplus of
with profits
funds
£m
9,215
1,381
–
–
(7)
10,589
–
1,507
–
–
(35)
12,061
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
iv Reinsurers’ share of insurance contract liabilities
Insurance contract liabilities
Claims outstanding
2013 £m
US
5,406
659
6,065
Asia
381
141
522
UK
231
20
251
Total
6,018
820
6,838
2012* £m
Total
6,076
778
6,854
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
The Group cedes certain business to other insurance companies. Although the ceding of insurance does not relieve the Group from
its liability to its policyholders, the Group participates in such agreements for the purpose of managing its loss exposure. The Group
evaluates the financial condition of its reinsurers and monitors concentration of credit risk from similar geographic regions, activities
or economic characteristics of the reinsurers to minimise its exposure from reinsurer insolvencies. Of the reinsurers’ share of insurance
contract liabilities balance of £6,838 million at 31 December 2013 (2012: £6,854 million), 96 per cent (2012: 97 per cent) were ceded by
the Group’s UK and US operations, of which 93 per cent (2012: 92 per cent) of the balance were from reinsurers with Standard & Poor’s
rating A- and above.
The reinsurance asset for Jackson as shown in the table above primarily relates to certain fully collateralised former REALIC business
retained by Swiss Re through 100 per cent reinsurance agreements. Jackson acquired the REALIC business in 2012 (see note D1(b)).
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. Net commissions
received on ceded business and claims incurred ceded to external reinsurers totalled £37 million and £278 million respectively during 2013
(2012: £24 million and £123 million respectively). There were no deferred gains or losses on reinsurance contracts in either 2013 or 2012.
The Group’s Asia and UK businesses do not cede significant amounts of business outside the Group. During 2013, the Group’s UK
insurance business wrote a longevity swap on certain aspects of the UK’s annuity back-book liabilities. This resulted in a one-off benefit
of £27 million to IFRS profit before tax. The gains and losses recognised in profit and loss for the other reinsurance contracts written in
the year were immaterial.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued 215
C4.1(b) Asia insurance operations
i Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds
A reconciliation of the total policyholder liabilities and unallocated surplus of with-profits funds of Asia insurance operations from the
beginning of the year to the end of the year is as follows:
At 1 January 2012
Comprising:
Policyholder liabilities on the consolidated statement of financial position*
Unallocated surplus of with-profits funds on the consolidated statement
of financial position
Group’s share of policyholder liabilities relating to joint ventures‡
Premiums:
New business
In-force
Surrendersnote (c)
Maturities/Deaths
Net flowsnote (b)
Shareholders’ transfers post tax
Investment-related items and other movements
Foreign exchange translation differencesnote (a)
At 31 December 2012 / 1 January 2013
Comprising:
Policyholder liabilities on the consolidated statement of financial position*
Unallocated surplus of with-profits funds on the consolidated statement
of financial position
Group’s share of policyholder liabilities relating to joint ventures‡
Reclassification of Japan life business as held for sale§
Premiums:
New business
In-force
Surrendersnote (c)
Maturities/Deaths
Net flowsnote (b)
Shareholders’ transfers post tax
Investment-related items and other movementsnote (d)
Acquisition of Thanachart life
Foreign exchange translation differencesnote (a)
At 31 December 2013
Comprising:
Policyholder liabilities on the consolidated statement of financial position*
Unallocated surplus of with-profits funds on the consolidated statement
of financial position
Group’s share of policyholder liabilities relating to joint ventures‡
Average policyholder liability balances†
2013
2012
With-profits
business
£m
Unit-linked
liabilities
£m
Other
business
£m
Total
£m
12,643
12,015
6,254
30,912
12,593
10,101
5,416
28,110
50
–
216
1,263
1,479
(608)
(432)
439
(31)
639
(239)
–
1,914
1,336
1,292
2,628
(1,675)
(30)
923
–
1,451
(361)
–
838
636
877
1,513
(258)
(196)
1,059
–
88
(216)
50
2,752
2,188
3,432
5,620
(2,541)
(658)
2,421
(31)
2,178
(816)
13,451
14,028
7,185
34,664
13,388
11,969
6,144
31,501
63
–
–
242
1,585
1,827
(714)
(634)
479
(38)
(160)
–
(517)
–
2,059
(366)
1,519
1,301
2,820
(1,799)
(46)
975
–
369
–
(1,241)
13,215
13,765
–
1,041
(660)
902
1,006
1,908
(217)
(317)
1,374
–
253
487
(473)
8,166
63
3,100
(1,026)
2,663
3,892
6,555
(2,730)
(997)
2,828
(38)
462
487
(2,231)
35,146
13,138
11,918
6,854
31,910
77
–
13,263
12,990
–
1,847
13,714
13,022
–
1,312
7,446
6,720
77
3,159
34,423
32,732
* The 2012 comparative results in the consolidated statement of financial position have been adjusted retrospectively from those previously published for the
application of the new accounting standards described in note A2.
† Averages have been based on opening and closing balances and adjusted for acquisitions and disposals in the year and exclude unallocated surplus of with-profits funds.
‡ The Group’s investment in joint ventures are accounted for on an equity method and the Group’s share of the policyholder liabilities as shown above relate to the joint
venture life business in China, India and of the Takaful business in Malaysia.
§ The reclassification of Japan life business as held for sale reflects the value of policyholder liabilities held at 1 January 2013 following its reclassification during 2013
as held for sale. No other amounts are shown within the 2013 analysis above in respect of Japan. The 2012 comparatives include the Japan life business. If Japan life
business had been excluded from the 2012 amount, the average policyholder liability balance for 2012 would have been £31,616 million in total allocated £12,990 million,
£12,648 million and £5,978 million for its with-profits business, unit-linked business and other business respectively.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013
216
C4: Policyholder liabilities and unallocated surplus of with-profits funds continued
Notes
(a) Movements in the year have been translated at the average exchange rates for the year ended 31 December 2013. The closing balance has been translated at
the closing spot rates as at 31 December 2013. Differences upon retranslation are included in foreign exchange translation differences.
(b) Net flows have increased by £407 million to £2,828 million in 2013 compared with £2,421 million in 2012 reflecting increased flows from new business and
(c)
(d)
growth in the in-force books.
The rate of surrenders for shareholder-backed business (expressed as a percentage of opening liabilities after the removal of Japan) was 10.0 per cent in 2013,
lower than the 10.6 per cent recorded in 2012. Maturities/deaths have increased from £658 million in 2012 to £997 million in 2013, primarily as a result of an
increased number of endowment products within Hong Kong, Singapore and Thailand reaching their maturity point.
Investment-related items and other movements for 2013 principally represents unrealised losses on bonds, following the rise in bond yields within the
with-profits funds and positive investment gains from the Asia equity market in the unit-linked and other business.
ii Duration of liabilities
The table below shows the carrying value of policyholder liabilities. The table below also shows the maturity profile of the cash flows
on a discounted basis for 2013 and 2012, taking account of expected future premiums and investment returns:
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
2013 £m
2012* £m
31,910
31,501
%
23
20
16
12
9
20
%
22
19
16
13
10
20
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
iii Summary policyholder liabilities (net of reinsurance) and unallocated surplus
At 31 December 2013, the summary policyholder liabilities and unallocated surplus for Asia operations of £32.0 billion
(2012: £31.6 billion), net of reinsurance of £251 million (2012: £170 million), excluding joint ventures, comprised the following:
Hong Kong
Indonesia
Korea
Malaysia
Singapore
Taiwan
Other countries
Total Asia operations
2013 £m
2012* £m
8,655
1,824
2,450
3,434
10,886
2,236
2,251
31,736
8,610
2,110
2,131
3,226
10,731
1,931
2,655
31,394
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued 217
C4.1(c) US insurance operations
i Analysis of movements 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 2012
Premiums
Surrenders
Maturities/Deaths
Net flowsnote (b)
Transfers from general to separate account
Investment-related items and other movements
Foreign exchange translation differencesnote (a)
Acquisition of REALICnote (d)
At 31 December 2012/1 January 2013
Premiums
Surrenders
Maturities/Deaths
Net flowsnote (b)
Transfers from general to separate account
Investment-related items and other movementsnote (c)
Foreign exchange translation differencesnote (a)
At 31 December 2013
Average policyholder liability balances*
2013
2012
Variable
annuity
separate
account
liabilities
£m
37,833
10,361
(2,149)
(404)
7,808
1,577
4,014
(1,998)
64
49,298
11,377
(2,906)
(485)
7,986
1,603
8,725
(1,931)
Fixed annuity,
GIC and other
business
£m
31,356
4,546
(2,207)
(550)
1,789
(1,577)
227
(1,680)
12,848
42,963
4,574
(2,181)
(744)
1,649
(1,603)
(506)
(773)
Total
£m
69,189
14,907
(4,356)
(954)
9,597
–
4,241
(3,678)
12,912
92,261
15,951
(5,087)
(1,229)
9,635
–
8,219
(2,704)
65,681
41,730
107,411
57,489
43,549
42,347
33,948
99,836
77,497
* Averages have been based on opening and closing balances, and adjusted for acquisitions and disposals in the year.
Notes
(a) Movements in the year have been translated at an average rate of US$1.56/£1.00 (2012: US$1.58/£1.00). The closing balances have been translated at closing rate
of US$1.66/£1.00 (2012: US$1.63/£1.00). Differences upon retranslation are included in foreign exchange translation differences.
(b) Net flows for the year were £9,635 million compared with £9,597 million in 2012. Gross inflows increased by 7 per cent primarily reflecting increased variable
(c)
annuity new business volume.
Positive investment-related items and other movements in variable annuity separate account liabilities of £8,725 million for 2013 primarily reflects the increase
in the US equity market during the year. Fixed annuity, GIC and other business investment and other movements primarily reflects the reduction in guarantee
reserves (reflecting the impact of higher equity values and higher interest rates on these reserves), which has more than offset the increase in general account
reserves which arise from interest credited to policyholder accounts in the year.
(d) The amounts shown for the acquisition of REALIC represents the liabilities, before reduction for reinsurance ceded, acquired at the date of acquisition.
ii Duration of liabilities
The table below shows the carrying value of policyholder liabilities. The table below also shows the maturity profile of the cash flows
on a discounted basis for 2013 and 2012:
2013 £m
2012 £m
Fixed
annuity and
other business
(including
GICs and
similar
contracts)
41,730
49
27
11
6
4
3
Variable
annuity
65,681
2013 %
48
31
13
5
2
1
Fixed
annuity and
other business
(including
GICs and
similar
contracts)
Total
107,411
42,963
Variable
annuity
49,298
2012 %
Total
92,261
48
30
12
5
3
2
45
27
12
7
5
4
46
31
13
6
2
2
46
29
13
6
3
3
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
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013 218
C4: Policyholder liabilities and unallocated surplus of with-profits funds continued
C4.1(d) UK insurance operations
i Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds
A reconciliation of the total policyholder liabilities and unallocated surplus of with-profits funds of UK insurance operations from the
beginning of the year to the end of the year is as follows:
At 1 January 2012
Comprising:
Policyholder liabilities
Unallocated surplus of with-profits funds
Premiums
Surrenders
Maturities/Deaths
Net flows note (a)
Shareholders’ transfers post tax
Switches
Investment-related items and other movements note (b)
Foreign exchange translation differences
At 31 December 2012/1 January 2013
Comprising:
Policyholder liabilities
Unallocated surplus of with-profits funds
Premiums
Surrenders
Maturities/Deaths
Net flows note (a)
Shareholders’ transfers post tax
Switches
Investment-related items and other movements note (b)
Foreign exchange translation differences
At 31 December 2013
Comprising:
Policyholder liabilities
Unallocated surplus of with-profits funds
Average policyholder liability balances*
2013
2012
Shareholder-backed funds
and subsidiaries
SAIF and PAC
with-profits
sub-fund
£m
Unit-linked
liabilities
£m
Annuity
and other
long-term
business
£m
Total
£m
90,141
21,281
24,767
136,189
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
3,750
(2,262)
(5,775)
(4,287)
(192)
(195)
5,695
(117)
22,197
–
2,150
(2,263)
(644)
(757)
–
195
2,017
–
27,308
–
1,478
(57)
(1,702)
(281)
–
–
100
–
133,912
10,526
7,378
(4,582)
(8,121)
(5,325)
(192)
–
7,812
(117)
95,837
23,652
27,127
146,616
83,853
11,984
84,130
82,691
23,652
–
27,127
–
134,632
11,984
22,924
21,739
27,218
26,038
134,272
130,468
* Averages have been based on opening and closing balances and exclude unallocated surplus of with-profits funds.
Notes
(a) Net outflows increased from £4,454 million in 2012 to £5,325 million in 2013, driven primarily by lower sales of with-profits bonds in the year as a result from the
implementation of the recommendations of the Retail Distribution Review and lower bulk annuity sales in 2013 compared to 2012. This increase is partly offset
by a decrease in the outflow of the unit-linked business. The levels of inflows/outflows for unit-linked business is driven by corporate pension schemes with
transfers in or out from only one or two schemes influencing the level of flows in the year. Excluding these transactions, the net flow in the unit-linked business
for 2013 is broadly consistent to 2012.
Investment-related items and other movements of £7,812 million reflects the strong growth in the UK equity markets in 2013, partly offset by the impact on
liabilities of rising long-term bond yields.
(b)
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued 219
ii Duration of liabilities
With the exception of most unitised with-profits bonds and other whole of life contracts the majority of the contracts of the UK insurance
operations have a contract term. In effect, the maturity term of the other contracts reflects the earlier of death, maturity, or lapsation.
In addition, as described in note A3.1, with-profits contract liabilities 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’ notes below show the maturity profile of the cash
flows for insurance contracts, as defined by IFRS, ie those containing significant insurance risk, and investment contracts, which do not.
With-profits business
2013 £m
Annuity business
(Insurance contracts)
Other
Insurance
contracts
Investment
contracts
Total
Non-profit
annuities
within
WPSF
(including
PAL)
PRIL
Total
Insurance
contracts
Investment
contracts
Total
TOTAL
Policyholders’ liabilities
36,248
35,375
71,623
12,230
19,973
32,203
13,223
17,583
30,806 134,632
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
42
24
14
9
5
6
40
25
17
11
5
2
41
25
16
10
5
3
33
25
18
11
6
7
2013 %
28
23
18
13
8
10
30
24
18
12
8
8
39
25
16
9
5
6
40
22
16
10
6
6
39
23
16
10
6
6
38
24
16
11
6
5
With-profits business
2012 £m
Annuity business
(Insurance contracts)
Other
Insurance
contracts
Investment
contracts
Total
Non-profit
annuities
within
WPSF
(including
PAL)
PRIL
Total
Insurance
contracts
Investment
contracts
Total
TOTAL
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
Notes
(i)
The cash flow projections of expected benefit payments used in the maturity profile table above are from value of in-force business and exclude the value of
future new business, including future vesting of internal pension contracts.
Benefit payments do not reflect the pattern of bonuses and shareholder transfers in respect of the with-profits 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-profits 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.
(v)
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013 220
C4: Policyholder liabilities and unallocated surplus of with-profits funds continued
C4.2 Products and determining contract liabilities
a Asia
Features of products and guarantees
The life insurance products offered by the Group’s Asia operations include a range of with-profits 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 profit 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 benefits are guaranteed, or determined by a set
of defined market-related parameters. Unit-linked products combine savings with protection, the cash value of the policy depends on
the value of the underlying unitised funds. Health and Protection (H&P) policies provide mortality or morbidity benefits and include
health, disability, critical illness and accident coverage. H&P products are commonly offered as supplements to main life policies but
can be sold separately.
Product guarantees in Asia can be broadly classified into four main categories, namely premium rate, cash value or interest rate
guarantees, policy renewability, and convertibility options.
Subject to local market circumstances and regulatory requirements, the guarantee features described in note C4.2(c) 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
benefits. Unit-linked products have the lowest level of guarantee.
The risks on death coverage through premium rate guarantees are low due to the diversified nature of the business as well as rigorous
product pricing.
Cash value and interest rate guarantees are of three types:
— Maturity values
Maturity values are guaranteed for non-participating products and on the guaranteed portion of participating products. Declared
annual bonuses are also guaranteed once vested. Future bonus rates and cash dividends are not guaranteed on participating products.
— Surrender values
Surrender values are guaranteed for non-participating products and on the guaranteed portion of participating products. The surrender
value of declared reversionary bonuses are also guaranteed once vested. Market value adjustments and surrender penalties are used
for certain products and where the law permits such adjustments in cash values.
— Interest rate guarantees
It is common in Asia for regulations or market-driven demand and competition to provide some form of capital value protection and
minimum crediting interest rate guarantees. This would be reflected within the guaranteed maturity and surrender values.
The guarantees are borne by shareholders for non-participating and investment-linked (non-investment guarantees only) products.
Participating product guarantees are predominantly supported by the segregated life funds and their estates.
Whole of life contracts with floor levels of policyholder benefits that accrue at rates set at inception and do not vary subsequently
with market conditions are written in the Korean life operations though this is not to a significant 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 2013
of £547 million and £1,905 million respectively (2012: £505 million and £1,628 million respectively).
Determining contract liabilities
For the with-profits business, the total value of the with-profits funds is driven by the underlying asset valuation with movements
reflected principally in the accounting value of policyholder liabilities and unallocated surplus. Similarly, for the unit-linked business,
the attaching liabilities reflect the unit value obligation driven by the value of the investments of the unit fund.
For the shareholder-backed non-linked business, the future policyholder benefit provisions for Asia businesses in the Group’s IFRS
accounts, are determined in accordance with methods prescribed by local GAAP adjusted to comply, where necessary, with the modified
statutory basis or where local GAAP is not well established and in which the business written is primarily non-participating and linked
business, US GAAP principles are used as the most appropriate reporting basis.
For the countries which apply local GAAP adjusted to comply, where necessary, with modified statutory basis, the approach to
determining the contract liabilities is driven by the local solvency basis. A gross premium valuation method is used in those countries
where a Risk-Based Capital framework is adopted for local solvency. Under the gross premium valuation method, all cash flows are
valued explicitly using best estimate assumptions.
A Risk-Based Capital framework applying the gross premium valuation method is adopted by Singapore, Malaysia, Thailand and from
2013, Indonesia. In applying this approach, an overlay constraint to the method is applied such that no negative reserves are derived at an
individual policyholder level.
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 was aligned substantially to that used by the
countries applying the gross premium valuation method.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued
221
For India, Japan, Taiwan, and until 2012, Vietnam, US GAAP is applied for measuring insurance assets and liabilities. For these countries,
the future policyholder benefit provisions for non-linked business are determined using the net level premium method, with an allowance
for surrenders, maintenance and claims expenses. Rates of interest used in establishing the policyholder benefit provisions vary by
operation depending on the circumstances attaching to each block of business.
The other Asia operations principally adopt a net premium valuation method to determine the future policyholder benefit provisions.
The effect of changes in assumptions used to measure insurance assets and liabilities for Asia insurance operations is as disclosed
in note B4(a).
b US
Features of products and guarantees
Jackson provides long-term savings and retirement products to retail and institutional customers throughout the US. Jackson offers fixed
annuities (fixed interest rate annuities, fixed index annuities and immediate annuities), variable annuities, life insurance and institutional
products. Jackson discontinued offering life insurance products in August 2012.
i Fixed annuities
Fixed interest rate annuities
At 31 December 2013, fixed interest rate annuities accounted for 10 per cent (2012: 13 per cent) of policy and contract liabilities of Jackson.
Fixed interest rate 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 flexible payout options.
The policyholder of fixed interest rate annuity pays Jackson a premium, which is credited to the policyholder’s account. Periodically,
interest is credited to the policyholder’s account and in some cases administrative charges are deducted from the policyholder’s account.
Jackson makes benefit payments at a future date as specified in the policy based on the value of the policyholder’s account at that date.
The policy provides that at Jackson’s discretion it may reset the interest rate, subject to a guaranteed minimum. At 31 December 2013,
Jackson had fixed interest rate annuities totalling £11.2 billion (US$18.5 billion) (2012: £11.7 billion (US$19.0 billion)) in account value with
minimum guaranteed rates ranging from 1.0 per cent to 5.5 per cent and a 3.05 per cent average guaranteed rate (2012: 1.0 per cent to
5.5 per cent and a 3.09 per cent average guaranteed rate).
Approximately 50 per cent (2012: 50 per cent) of the fixed interest rate annuities Jackson wrote in 2013 provide for a market value
adjustment (‘MVA’) 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. While the MVA feature minimises the surrender risk associated with certain fixed
annuities, Jackson still bears a portion of the surrender risk on policies without this feature, and the investment risk on all fixed interest
rate annuities. In certain cases, additional provisions are held to reflect the existence of guarantees offered in the past that are no longer
supported by earnings on the existing asset portfolio.
Fixed index annuities
Fixed index annuities accounted for 7 per cent (2012: 8 per cent) of Jackson’s policy and contract liabilities at 31 December 2013. Fixed
index annuities vary in structure, but generally are deferred annuities that enable policyholders to obtain a portion of an equity-linked
return (based on participation rates and caps) but provide a guaranteed minimum return. These guaranteed minimum rates are generally
set at 1.0 per cent to 3.0 per cent. Jackson had fixed index annuities allocated to indexed funds totalling £6.1 billion (US$10.2 billion) (2012:
£5.6 billion (US$9.2 billion)) in account value with minimum guaranteed rates on index accounts ranging from 1.0 per cent to 3.0 per cent
and a 1.85 per cent average guaranteed rate (2012: 1.0 per cent to 3.0 per cent and a 1.82 per cent average guarantee rate). Jackson also
offers fixed interest accounts on some fixed index annuity products. Fixed interest accounts of fixed index annuities totalled £1.5 billion
(US$2.5 billion) (2012: £1.5 billion (US$2.3 billion)) in account value with minimum guaranteed rates ranging from 1.0 per cent to
3.0 per cent and a 2.56 per cent average guaranteed rate (2012: 1.0 per cent to 3.0 per cent and a 2.53 per cent average guaranteed rate).
Jackson hedges the equity return risk on fixed index products using futures and options linked to the relevant index as well as through
offsetting equity exposure in the variable annuities product. The cost of these hedges is taken into account in setting the index participation
rates or caps. Jackson bears the investment risk and a portion of surrender risk on these products.
Immediate annuities
At 31 December 2013, immediate annuities accounted for 1 per cent (2012: 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 fixed period of years
and/or the life of the policyholder. If the term is for the life of the policyholder, then Jackson’s primary risk are mortality and reinvestment
risks. 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 2013, variable annuities accounted for 65 per cent (2012: 60 per cent) of Jackson’s policy and contract liabilities.
Variable annuities are deferred annuities that have the same tax advantages and payout options as interest-sensitive and fixed index
annuities. They are also used for asset accumulation in retirement planning and to provide income in retirement.
The primary differences between variable annuities and interest-sensitive or fixed index annuities are investment risk and return. If a
policyholder chooses a variable annuity, the rate of return depends upon the performance of the selected fund portfolio. Policyholders
may allocate their investment to either the fixed account or a selection of variable accounts. Investment risk on the variable account is
borne by the policyholder, while investment risk on the fixed is borne by Jackson through guaranteed minimum fixed rates of return.
At 31 December 2013, 6 per cent (2012: 8 per cent) of variable annuity funds were in fixed accounts. Jackson had accounts in variable
annuities totalling £4.2 billion (US$7.0 billion) (2012: £4.3 billion (US$7.0 billion)) in account value with minimum guaranteed rates
ranging from 1.0 per cent to 3.0 per cent and a 1.85 per cent average guaranteed rate (2012: 1.0 per cent to 3.0 per cent and a
1.89 per cent average guaranteed rate).
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013 222
C4: Policyholder liabilities and unallocated surplus of with-profits funds continued
Jackson issues variable annuity contracts where it contractually guarantees to the contractholder either a) return of no less than total
deposits made to the contract adjusted for any partial withdrawals, b) total deposits made to the contract adjusted for any partial
withdrawals plus a minimum return, or c) the highest contract value on a specified anniversary date adjusted for any withdrawals
following the contract anniversary. These guarantees include benefits that are payable in the event of death (guaranteed minimum death
benefit (GMDB)), annuitisation (guaranteed minimum income benefit (GMIB)), or at specified dates during the accumulation period
(guaranteed minimum withdrawal benefit (GMWB) and guaranteed minimum accumulation benefit (GMAB)). Jackson hedges these
risks using equity options and futures contracts as described in note C7.3. The GMAB and GMIB are no longer offered, with the existing
GMIB coverage being substantially reinsured.
Jackson launched Elite Access in March 2012. Elite Access is a variable annuity which has no guaranteed benefits and provides tax
efficient access to alternative investments. Single premium sales in 2013 were £2,585 million (2012: £849 million).
iii Aggregate distribution of account values
The table below shows the distribution of account values for fixed annuities (fixed interest rate and fixed index) and the fixed account
portion of variable annuities within the range of minimum guaranteed interest rates as described in notes i to ii above as at 31 December
2013 and 2012:
Minimum guaranteed interest rate
1.0%
> 1.0% to 2.0%
> 2.0% to 3.0%
> 3.0% to 4.0%
> 4.0% to 5.0%
> 5.0%
Total
Account value
2013 £m
2012 £m
3,012
8,349
8,867
1,163
1,460
197
2,534
8,374
9,174
1,236
1,518
209
23,048
23,045
iv Life insurance
Life insurance products accounted for 14 per cent (2012: 15 per cent) of Jackson’s policy and contract liabilities at 31 December 2013.
Jackson discontinued new sales of life insurance products effective 1 August 2012 but increased its life insurance products book when
it acquired REALIC in September 2012. Life products include term life and interest-sensitive life (universal life and variable universal life).
Term life provides protection for a defined period and a benefit that is payable to a designated beneficiary 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 benefit protection with the ability for the policyholder account to be invested in
separate account funds. For certain fixed universal life plans, additional provisions are held to reflect the existence of guarantees offered
in the past that are no longer supported by earnings on the existing asset portfolio.
At 31 December 2013, Jackson had interest sensitive life business in force with total account value of £5.7 billion (US$9.5 billion)
(2012: £6.0 billion (US$9.7 billion)), with minimum guaranteed interest rates ranging from 2.5 per cent to 6.0 per cent with a 4.65 per cent
average guaranteed rate (2012: 2.5 per cent to 6.0 per cent with a 4.67 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 2013 and 2012:
Minimum guaranteed interest rate
< 2.0%
> 2.0% to 3.0%
> 3.0% to 4.0%
> 4.0% to 5.0%
> 5.0%
Total
Account value
2013 £m
2012 £m
–
182
2,182
1,908
1,456
5,728
–
183
2,141
2,097
1,550
5,971
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued 223
v Institutional products
Jackson’s institutional products consist of guaranteed investment contracts (‘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 2013, institutional products accounted for 3 per cent of policy and contract liabilities (2012: 3 per cent). Under a
traditional GIC, the policyholder makes a lump sum deposit. The interest rate paid is fixed and established when the contract is issued.
If deposited funds are withdrawn earlier than the specified term of the contract, an adjustment is made that approximates a market value
adjustment.
Under a funding agreement, the policyholder either makes a lump sum deposit or makes specified periodic deposits. Jackson agrees
to pay a rate of interest, which may be fixed but is usually a floating short-term interest rate linked to an external index. The average term
of the funding agreements is one to two years. In 2013 and 2012, there were no funding agreements terminable by the policyholder with
less than 90 days’ notice.
Determining contract liabilities
Under the modified statutory basis of reporting applied under IFRS 4 for insurance contracts, providing the requirements of the
Companies Act, UK GAAP standards and the ABI SORP are met, it is permissible to reflect the previously applied UK GAAP basis.
Accordingly, and consistent with the basis explained in note A3.1, in the case of Jackson the carrying values of insurance assets and
liabilities are consolidated into the Group accounts based on US GAAP. An overview of the deferral and amortisation of acquisition costs
for Jackson is provided in note C5.1(b).
Under US GAAP, investment contracts (as defined for US GAAP purposes) are accounted for by applying in the first instance a
retrospective deposit method to determine the liability for policyholder benefits. This is then augmented by potentially three additional
amounts. These amounts are for:
— Any amounts that have been assessed to compensate the insurer for services to be performed over future periods (ie deferred income);
— Any amounts previously assessed against policyholders that are refundable on termination of the contract; and
— Any probable future loss on the contract (ie premium deficiency).
Capitalised acquisition costs and deferred income for these contracts are amortised over the life of the book of contracts. The present
value of the estimated gross profits is generally computed using the rate of interest that accrues to policyholder balances (sometimes
referred to as the contract rate). Estimated gross profits include estimates of the following elements, each of which will be determined
based on the best estimate of amounts of the following individual elements over the life of the book of contracts without provision for
adverse deviation for:
— Amounts expected to be assessed for mortality less benefit claims in excess of related policyholder balances;
— Amounts expected to be assessed for contract administration less costs incurred for contract administration;
— Amounts expected to be earned from the investment of policyholder balances less interest credited to policyholder balances;
— Amounts expected to be assessed against policyholder balances upon termination of contracts (sometimes referred to as surrender
charges); and
— Other expected assessments and credits.
Variable annuity contracts written by Jackson may, as described above, provide for Guaranteed Minimum Death Benefit, Guaranteed
Minimum Income Benefit, Guaranteed Minimum Withdrawal Benefit and Guaranteed Minimum Death Benefit features. In general
terms, liabilities for these benefits are accounted for under US GAAP by using estimates of future benefits and fees under best estimate
persistency assumptions.
In accordance with US GAAP, the ‘grandfathered’ basis for IFRS, which specifies how certain guarantee features should be accounted
for, the Guaranteed Minimum Death Benefit and the ‘for life’ portion of Guaranteed Minimum Withdrawal Benefit liabilities are
determined each period end by estimating the expected value of benefits in excess of the projected account balance and recognising
the excess ratably over the life of the contract based on total expected assessments. At 31 December 2013, these liabilities were valued
using a series of deterministic investment performance scenarios, a mean investment return of 7.4 per cent (2012: 8.4 per cent) net of
external fund management fees, and assumptions for lapse, mortality and expense that are the same as those used in amortising the
capitalised acquisition costs.
The direct Guaranteed Minimum Income Benefit liability is determined by estimating the expected value of the annuitisation benefits
in excess of the projected account balance at the date of annuitisation and recognising the excess ratably over the accumulation period
based on total expected assessments.
Guaranteed Minimum Income Benefit benefits are essentially fully reinsured, subject to a modest deductible and annual claim limits.
As this reinsurance benefit is net settled, it is considered to be a derivative under IAS 39, and is therefore recognised at fair value with
the change in fair value included as a component of short-term fluctuations. The direct GMIB liability is not considered a derivative
instrument under IAS 39 and, as such, an accounting differences arises from this one-sided mark to market.
The assumptions used for calculating the direct Guaranteed Minimum Income Benefit liability at 31 December 2013 and 2012 are
consistent with those used for calculating the Guaranteed Minimum Death Benefit and ‘for life’ Guaranteed Minimum Withdrawal
Benefit liabilities. Guaranteed Minimum Withdrawal Benefit ‘not for life’ features are considered to be embedded derivatives under
IAS 39. Therefore, provisions for these benefits are recognised at fair value. The change in these guaranteed benefit reserves, along with
claim payments and associated fees included in reserves are included along with the hedge results in short-term fluctuations, resulting
in removal of the market impact from the operating profit based on longer-term investment returns.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013 224
C4: Policyholder liabilities and unallocated surplus of with-profits funds continued
Jackson regularly evaluates estimates used and adjusts the additional Guaranteed Minimum Death Benefit, Guaranteed Minimum
Income Benefit and Guaranteed Minimum Withdrawal Benefit ‘for life’ liability balances, with a related charge or credit to benefit
expense if actual experience or other evidence suggests that earlier assumptions should be revised.
For Guaranteed Minimum Withdrawal Benefit and Guaranteed Minimum Income Benefit reinsurance embedded derivatives that are
fair valued under IAS 39, Jackson bases its volatility assumptions on implied market volatility for periods ranging from 5 to 10 years where
sufficient market liquidity is assumed to exist, followed by grading to long-term historical volatility levels beyond that point, and explicitly
incorporates Jackson’s own credit risk in determining discount rates.
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 policyholder behaviour are also incorporated into the model through the use of explicitly
conservative assumptions. On a periodic basis, Jackson validates the resulting fair values based on comparisons to other models and
market movements.
With the exception of the Guaranteed Minimum Death Benefit, Guaranteed Minimum Income Benefit, Guaranteed Minimum
Withdrawal Benefit and Guaranteed Minimum Accumulation Benefit features of variable annuity contracts, the financial guarantee
features of Jackson’s contracts are in most circumstances not explicitly valued, but the impact of any interest guarantees would be
reflected as they are earned in the current account value (ie the US GAAP liability).
For traditional life insurance contracts, provisions for future policy benefits are determined under US GAAP using the net level
premium method and assumptions as of the issue date as to mortality, interest, policy lapses and expenses plus provisions for adverse
deviation.
Institutional products are accounted for as investment contracts under IFRS with the liability classified as being in respect of financial
instruments rather than insurance contracts, as defined by IFRS 4. In practice there is no material difference between the IFRS and
US GAAP basis of recognition and measurement for these contracts.
Certain institutional products representing obligations issued in currencies other than US dollars have been hedged for changes in
exchange rates using cross-currency swaps. The fair value of derivatives embedded in funding agreements, as well as foreign currency
transaction gains and losses, are included in the carrying value of the trust instruments supported by funding agreements recorded in
other non-insurance liabilities.
The effect of non-recurrent changes of assumptions used to measure insurance assets and liabilities of Jackson is shown in note B4(b).
c UK
Features of products and guarantees
Prudential’s long-term products in the UK consist of life insurance, pension products and pension annuities.
These products are written primarily in:
— One of three separate sub-funds of the PAC long-term fund, namely the with-profits sub-fund (WPSF), SAIF, and the non-profit sub-fund;
— Prudential Annuities Limited (PAL), which is owned by the PAC with-profits sub-fund;
— Prudential Retirement Income Limited (PRIL), a shareholder-owned subsidiary; or
— Other shareholder-backed subsidiaries writing mainly non-profit unit-linked business.
i With-profits products and PAC with-profits sub-fund
The WPSF mainly contains with-profits business but it also contains some non-profit business (unit-linked, term assurances and
annuities). The WPSF’s profits are apportioned 90 per cent to its policyholders and 10 per cent to shareholders as surplus for distribution
is determined via the annual actuarial valuation.
The WPSF held a provision of £36 million at 31 December 2013 (2012: £47 million) to honour guarantees on a small amount of
guaranteed annuity products. SAIF’s exposure to guaranteed annuities is described below.
With-profits products provide returns to policyholders through bonuses that are ‘smoothed’. There are two types of bonuses: ‘annual’
and ‘final’. Annual bonuses are declared once a year, and once credited, are guaranteed in accordance with the terms of the particular
product. Unlike annual bonuses, final bonuses are guaranteed only until the next bonus declaration.
The main factors that influence the determination of bonus rates are the return on the investments of the with-profits fund, inflation,
taxation, the expenses of the fund chargeable to policyholders and the degree to which investment returns are smoothed. The overall
rate of return earned on investments and the expectation of future investment returns are the most important influences on bonus rates.
A high proportion of the assets backing the with-profits business are invested in equities and real estate. If the financial strength of
the with-profits business is affected, then a higher proportion of fixed interest or similar assets might be held by the fund.
Further details on the determination of the two types of the bonuses, ‘regular’ and ‘final’ are provided below:
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued 225
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, PAC retains the
discretion whether or not to declare a regular bonus each year, and there is no limit on the amount by which regular bonus rates can change.
Final bonus rates
A final bonus which is normally declared yearly, may be added when a claim is paid or when units of a unitised product are realised.
The rates of final bonus usually vary by type of policy and by reference to the period, usually a year, in which the policy commences or
each premium is paid. These rates are determined by reference to the asset shares for the sample policies but subject to the smoothing
approach as explained below.
In general, the same final bonus scale applies to maturity, death and surrender claims except that:
— The total surrender value may be impacted by the application of a Market Value Reduction for accumulating with-profits policies and
by the surrender bases for conventional with-profits business; and
— For the SAIF and Scottish Amicable, the final bonus rates applicable on surrender may be adjusted to reflect expected future bonus rates.
Application of significant judgement
The application of the above method for determining bonuses requires the PAC Board to apply significant judgement in many respects,
including in particular the following:
— Determining what constitutes fair treatment of customers: Prudential is required by UK law and regulation to consider the fair
treatment of its customers in setting bonus levels. The concept of determining what constitutes fair treatment, while established by
statute, is not defined;
— Smoothing of investment returns: This is an important feature of with-profits products. Determining when particular circumstances,
such as a significant rise or fall in market values, warrant variations in the standard bonus smoothing limits that apply in normal
circumstances requires the PAC Board to exercise significant judgement; and
— Determining at what level to set bonuses to ensure that they are competitive: The overall return to policyholders is an important
competitive measure for attracting new business.
Key assumptions
As noted above, the overall rate of return on investments and the expectation of future investment returns are the most important
influences in bonus rates, subject to the smoothing described below. Prudential determines the assumptions to apply in respect of these
factors, including the effects of reasonably likely changes in key assumptions, in the context of the overarching discretionary and
smoothing framework that applies to its with-profits business as described above. As such, it is not possible to specifically quantify the
effects of each of these assumptions, or of reasonably likely changes in these assumptions.
Prudential’s approach, in applying significant judgement and discretion in relation to determining bonus rates, is consistent
conceptually with the approach adopted by other firms that manage a with-profits business. It is also consistent with the requirements
of UK law, which require all UK firms that carry out a with-profits business to define, and make publicly available, the Principles and
Practices of Financial Management (PPFM) that are applied in the management of their with-profits funds.
Accordingly, Prudential’s PPFM contains an explanation of how it determines regular and final bonus rates within the discretionary
framework that applies to all with-profits policies, subject to the general legislative requirements applicable. The purpose of Prudential’s
PPFM is therefore to:
— Explain the nature and extent of the discretion available;
— Show how competing or conflicting interests or expectations of different groups and generations of policyholders, and policyholders
and shareholders are managed so that all policyholders and shareholders are treated fairly; and
— Provide a knowledgeable observer (eg a financial adviser) with an understanding of the material risks and rewards from starting and
continuing to invest in a with-profits policy with Prudential.
Furthermore, in accordance with industry-wide regulatory requirements, the PAC Board has appointed:
— An Actuarial Function Holder who provides the PAC Board with all actuarial advice;
— A With-Profits Actuary whose specific duty is to advise the PAC Board on the reasonableness and proportionality of the manner in which
its discretion has been exercised in applying the PPFM and the manner in which any conflicting interests have been addressed; and
— A With-Profits Committee of independent individuals, which assesses the degree of compliance with the PPFM and the manner in
which conflicting rights have been addressed.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013 226
C4: Policyholder liabilities and unallocated surplus of with-profits funds continued
Smoothing of investment return
In determining bonus rates for the UK with-profits policies, smoothing is applied to the allocation of the overall earnings of the UK
with-profits fund of which the investment return is a significant element. The smoothing approach differs between accumulating and
conventional with-profits policies to reflect the different contract features. In normal circumstances, Prudential does not expect most
payout values on policies of the same duration to change by more than 10 per cent up or down from one year to the next, although some
larger changes may occur to balance payout values between different policies. Greater flexibility may be required in certain circumstances,
for example following a significant rise or fall in market values, and in such situations the PAC Board may decide to vary the standard
bonus smoothing limits in order to protect the overall interests of policyholders.
The degree of smoothing is illustrated numerically by comparing in the following table the relatively ‘smoothed’ level of policyholder
bonuses declared as part of the surplus for distribution, with the more volatile movement in investment return and other items of income
and expenditure of the UK component of the PAC with-profits fund for each year presented.
Net income of the fund:
Investment return
Claims incurred
Movement in policyholder liabilities
Add back policyholder bonuses for the year (as shown below)
Claims incurred and movement in policyholder liabilities
(including charge for provision for asset shares and excluding policyholder bonuses)
Earned premiums, net of reinsurance
Other income
Acquisition costs and other expenditure
Share of profits from investment joint ventures
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
2013 £m
2012* £m
5,757
(6,681)
(197)
1,749
(5,129)
3,801
52
(1,025)
88
(308)
3,236
(1,294)
1,942
1,749
193
1,942
8,390
(6,857)
(3,989)
1,865
(8,981)
4,558
39
(907)
27
(286)
2,840
(769)
2,071
1,865
206
2,071
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
ii Annuity business
Prudential’s conventional annuities include level, fixed-increase and inflation-linked annuities, the link being to the Retail Price Index
(RPI) in the majority of cases. They are mainly written within the subsidiaries PAL, PRIL, the PAC non-profit sub-fund and the PAC
with-profits sub-fund, but there are some annuity liabilities in Prudential Pensions Limited and SAIF.
Prudential’s fixed-increase annuities incorporate automatic increases in annuity payments by fixed amounts over the policyholder’s
life. The RPI annuities that Prudential offers provide for a regular annuity payment to which an additional amount is added periodically
based on the increase in the UK RPI.
Prudential’s with-profits annuities, which are written in the WPSF, combine the income features of annuity products with the
investment smoothing features of with-profits products and enable policyholders to obtain exposure to investment return on the WPSF’s
equity shares, property and other investment categories over time. Policyholders select a ‘required smoothed return’ bonus from the
specific range Prudential offers for the particular product. The amount of the annuity payment each year depends upon the relationship
between the required smoothed return bonus rate selected by the policyholder when the product is purchased and the smoothed return
bonus rates Prudential subsequently declares each year during the term of the product. If the total bonus rates fall below the anticipated
rate, then the annuity income falls.
iii SAIF
SAIF is a ring-fenced sub-fund of the PAC long-term fund formed following the acquisition of the mutually owned Scottish Amicable Life
Assurance Society in 1997. No new business may be written in SAIF, although regular premiums are still being paid on policies in force at
the time of the acquisition and incremental premiums are permitted on these policies.
The fund is solely for the benefit of policyholders of SAIF. Shareholders have no interest in the profits of this fund although they are
entitled to asset management fees on this business.
The process for determining policyholder bonuses of SAIF with-profits policies, which constitute the vast majority of obligations of the
funds, is similar to that for the with-profits policies of the WPSF. However, in addition, the surplus assets in SAIF are allocated to policies
in an orderly and equitable distribution over time as enhancements to policyholder benefits ie in excess of those based on asset share.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued 227
Provision is made for the risks attaching to some SAIF unitised with-profits policies that have (Market Value Reduction) MVR-free
dates and for those SAIF products which have a guaranteed minimum benefit 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 £328 million was held in SAIF at
31 December 2013 (2012: £371 million) to honour the guarantees. As SAIF is a separate sub-fund solely for the benefit of policyholders
of SAIF, this provision has no impact on the financial position of the Group’s shareholders’ equity.
iv Unit-linked (non-annuity) and other non-profit business
Prudential UK insurance operations also have an extensive book of unit-linked policies of varying types and provide a range of other
non-profit business such as credit life and protection contracts. These contracts do not contain significant financial guarantees.
There are no guaranteed maturity values or guaranteed annuity options on unit-linked policies except for minor amounts for certain
policies linked to cash units within SAIF.
Determining contract liabilities
i Overview
The calculation of the contract liabilities involves the setting of assumptions for future experience. This is done following detailed review
of the relevant experience including in particular mortality, expenses, tax, economic assumptions and, where applicable, persistency.
For with-profits business written in the WPSF or SAIF, a market consistent valuation is performed (as described in section (ii) below).
Additional assumptions required are for persistency and the management actions under which the fund is managed. Assumptions used
for a market-consistent valuation typically do not contain margins, whereas those used for the valuation of other classes of business do.
Mortality assumptions are set based on the results of the most recent experience analysis looking at the experience over recent years
of the relevant business. For non-profit business, a margin for adverse deviation is added. Different assumptions are applied for different
product groups. For annuitant mortality, assumptions for current mortality rates are based on recent experience investigations and
expected future improvements in mortality. The expected future improvements are based on recent experience and projections of the
business and industry experience generally.
Maintenance and, for some classes of business, termination expense assumptions are expressed as per policy amounts. They are set
based on the expenses incurred during the year, including an allowance for ongoing investment expenditure and allocated between
entities and product groups in accordance with the operation’s internal cost allocation model. For non-profit business a margin for
adverse deviation is added to this amount. Expense inflation assumptions are set consistent with the economic basis and based on the
difference between yields on nominal gilts and index-linked gilts.
The actual renewal expenses incurred on behalf of SAIF by other Group companies are recharged in full to SAIF.
The assumptions for asset management expenses are based on the charges specified in agreements with the Group’s asset
management operations, plus a margin for adverse deviation for non-profit business.
Tax assumptions are set equal to current rates of taxation.
For non-profit business excluding unit-linked business, the valuation interest rates used to discount the liabilities are based on the
yields as at the valuation date on the assets backing the technical provisions. For fixed interest securities the gross redemption yield is
used except for the PAL (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 fixed
interest securities and property to reflect credit risk. To calculate the non-unit reserves for linked business, assumptions have been set for
the gross unit growth rate and the rate of inflation of maintenance expenses, as well as for the valuation interest rate as described above.
ii WPSF and SAIF
The policyholder liabilities reported for the WPSF are primarily for two broad types of business. These are accumulating and conventional
with-profits contracts. The policyholder liabilities of the WPSF are accounted for under FRS 27.
The provisions have been determined on a basis consistent with the detailed methodology included in regulations contained in the
PRA’s rules for the determination of reserves on the PRA’s ‘realistic’ Peak 2 basis. In aggregate, the regime has the effect of placing a value
on the liabilities of UK with-profits contracts, which reflects the amounts expected to be paid based on the current value of investments
held by the with-profits funds and current circumstances. These contracts are a combination of insurance and investment contracts with
discretionary participation features, as defined by IFRS 4.
The PRA’s Peak 2 calculation under the realistic regime requirement is explained further in note A3.1(d) under the UK regulated
with-profits section.
The contract liabilities for with-profits business also require assumptions for persistency. These are set based on the results of recent
experience analysis.
The process of determining policyholder liabilities of SAIF is similar to that for the with-profits policies of the WPSF.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013 228
C4: Policyholder liabilities and unallocated surplus of with-profits funds 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. Further details on credit risk allowance are provided in note B4(c).
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.
Since 2009, new mortality projection models have been released annually by the Continuous Mortality Investigation (CMI).
The CMI 2011 model was used to produce the 2012 results, with calibration to reflect an appropriate view of future mortality
improvements. The CMI 2012 model was used to produce the 2013 results, again with calibration to reflect an appropriate view
of future mortality improvements.
The tables and range of percentages used are set out in the following tables:
2013
In payment
Non-profit annuities within the WPSF
(including PAL)
Males
Females
Males
PRIL
Females
93% – 99% PCMA00
with future
improvements in line
with Prudential’s own
calibration of the
CMI 2012 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 2012 mortality
model, with a long-term
improvement rate
of 1.50%.
91% – 96% PCMA00
with future
improvements in line
with Prudential’s own
calibration of the
CMI 2012 mortality
model, with a long-term
improvement rate
of 2.25%.
84% – 98% PCFA00
with future
improvements in line
with Prudential’s own
calibration of the
CMI 2012 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
2012
In payment
Non-profit annuities within the WPSF
(including PAL)
Males
Females
Males
PRIL
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-profit annuities within the WPSF
(including PAL)
Males
Females
Males
PRIL
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%.
84% – 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
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued
229
iv Unit-linked (non-annuity) and other non-profit business
The majority of other long-term business written in the UK insurance operations is unit-linked business or other business with similar
features. For these contracts the attaching liability reflects the unit value obligation and provision for expenses and mortality risk.
The latter component is determined by applying mortality assumptions on a basis that is appropriate for the policyholder profile.
For unit-linked business, the assets covering unit liabilities are exposed to market risk, but the residual risk when considering the
unit-linked liabilities and assets together is limited to the effect on fund-based charges.
For those contracts where the level of insurance risk is insignificant, the assets and liabilities arising under the contracts are
distinguished between those that relate to the financial instrument liability and acquisition costs and deferred income that relate to the
component of the contract that relates to investment management. Acquisition costs and deferred income are recognised consistent
with the level of service provision in line with the requirements of IAS 18.
v Effect 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 of credit risk in 2013 and 2012. However, changes in the
portfolio have given rise to altered levels of credit risk allowance as set out in note B4(c).
Other operating assumption changes
The effect of other operating assumption changes for the shareholder-backed business is set out in note B4 (c).
For the with-profits sub-fund, the aggregate effect of assumption changes in 2013 was a net credit to unallocated surplus of
£200 million (2012: net charge of £90 million), relating to changes in mortality assumptions, offsetting releases of margins, and altered
expense, persistency and economic assumptions, where appropriate in the two periods.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013 230
C5: Intangible assets
C5.1 Intangible assets attributable to shareholders
a Goodwill attributable to shareholders
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
2013 £m
2012 £m
1,589
–
(8)
1,581
(120)
1,461
1,153
308
1,461
1,585
2
2
1,589
(120)
1,469
1,153
316
1,469
Other goodwill represents amounts allocated to entities in Asia and the US operations in respect of acquisitions made prior to 2012.
As discussed in note D1 there was no goodwill attached to the purchase of REALIC or Thanachart Life. Other goodwill amounts by
acquired operations are not individually material.
The aggregate goodwill impairment of £120 million at 31 December 2013 and 2012 relates to the goodwill held in relation to the Japan
life business which was impaired in 2005. The Group signed an agreement to sell the Japan life business in July 2013. The completion of
the transaction is dependent on regulatory approval.
Impairment testing
Goodwill does not generate cash flows independently of other groups of assets and thus is assigned to cash-generating units for the
purposes of impairment testing. These cash-generating units 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 cash-generating units carrying amount, including any goodwill, with its recoverable amount.
With the exception of M&G, the goodwill attributable to shareholders 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 15. Any excess of IFRS over EEV carrying value is then compared with
EEV basis value of current and projected future new business to determine whether there is any indication that the goodwill in the IFRS
statement of financial position may be impaired. The assumptions underpinning the Group’s EEV basis of reporting are included in the
EEV basis supplementary information in this Annual Report.
M&G
The recoverable amount for the M&G cash-generating units has been determined by calculating its value in use. This has been
calculated by aggregating the present value of future cash flows expected to be derived from the M&G operating segment (based upon
management projections).
The discounted cash flow valuation has been based on a three-year plan prepared by M&G, and approved by management, and
cash flow projections for later years.
The value in use is particularly sensitive to a number of key assumptions as follows:
i
ii
iii
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 financial
projections for the plan.
The assumed growth rate on forecast cash flows beyond the terminal year of the plan. A growth rate of 2.5 per cent (2012: 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.
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 (2012: 12 per cent) has been applied to post-tax
cash flows. The pre-tax risk discount rate was 18 per cent (2012: 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.
iv That asset management contracts continue on similar terms.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued 231
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.
b Deferred acquisition costs and other intangible assets attributable to shareholders
The deferred acquisition costs and other intangible assets attributable to shareholders comprise:
Deferred acquisition costs related to insurance contracts as classified under IFRS 4
Deferred acquisition costs related to investment management contracts, including life assurance contracts
classified as financial instruments and investment management contracts under IFRS 4
Present value of acquired in-force policies for insurance contracts as classified under IFRS 4 (PVIF)
Distribution rights and other intangibles
2013 £m
2012* £m
4,684
96
4,780
67
448
515
3,776
100
3,876
64
237
301
Total of deferred acquisition costs and other intangible assets
5,295
4,177
* The 2012 comparative results have been retrospectively adjusted from those previously published for the application of IFRS 11 described in note A2 whereby equity
presentation rather than proportionate consolidation for joint venture operations applies.
Balance at 1 January
As previously reported
Effect of adoption of IFRS 11 note A2
After effect of change
Reclassification of Japan life as held for sale note D5
Additions
Acquisition of subsidiaries
Amortisation to the income statement:
Operating profit
Non-operating profit
Disposals
Exchange differences and other movements
Amortisation of DAC related to net unrealised valuation
movements on Jackson’s available-for-sale securities
recognised within other comprehensive income
Balance at 31 December
2013 £m
2012* £m
Deferred acquisition costs
Asia
US
UK
Asset
manage-
ment
PVIF and
other
intan-
gibles†
Total
Total
654
(90)
564
(28)
202
–
(167)
–
(167)
–
(18)
3,199
–
3,199
–
716
–
(403)
228
(175)
–
(117)
–
498
553
4,121
103
–
103
–
3
–
(17)
–
(17)
–
–
–
89
10
–
10
–
12
–
(5)
–
(5)
–
–
–
17
301
–
301
–
297
21
(51)
–
(51)
(1)
(52)
4,267
(90)
4,177
(28)
1,230
21
(643)
228
(415)
(1)
(187)
4,234
(90)
4,144
–
1,059
5
(682)
76
(606)
–
(155)
–
498
(270)
515
5,295
4,177
* The 2012 comparative results have been retrospectively adjusted from those previously published for the application of IFRS 11 described in note A2 whereby equity
presentation rather than proportionate consolidation for joint venture operations applies.
† PVIF and other intangibles includes software rights of £56 million (2012: £60 million) with additions of £26 million, amortisation of £27 million, disposals and other
movements of £1 million and exchange losses of £2 million. The additions of £297 million for PVIF and other intangibles in 2013 include the amount advanced to
secure the exclusive 15-year bancassurance partnership agreement entered into with Thanachart Bank in Thailand. Further, the addition of £21 million for acquisition
of subsidiaries is for the acquisition of Thanachart Life. The amount of £5 million for 2012 was for the acquisition of REALIC. See note D1 for further details.
US insurance operations
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
2013 £m
2012 £m
3,716
868
(463)
4,121
3,330
821
(952)
3,199
* Consequent upon the negative unrealised valuation movement in 2013 of £2,089 million (2012: positive unrealised valuation movement of £862 million), there is a
credit of £498 million (2012: a debit of £270 million) for altered ‘shadow’ DAC amortisation booked within other comprehensive income. These adjustments reflect
movement from period to period, in the changes to the pattern of reported gross profits that would have happened if the assets reflected in the statement of financial
position had been sold, crystallising the unrealised gains and losses, and the proceeds reinvested at the yields currently available in the market. At 31 December 2013,
the cumulative shadow DAC balance as shown in the table above was negative £463 million (2012: negative £952 million).
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013 232
C5: Intangible assets continued
Overview of the deferral and amortisation of acquisition costs for 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 profits. For annuity and interest-sensitive life
business, acquisition costs are deferred and amortised in line with a combination of historical and future expected gross profits on the
relevant contracts. For fixed and index annuity and interest-sensitive life business, the key assumption is the long-term spread between
the earned rate on investments and the rate credited to policyholders, which is based on an annual spread analysis. Expected gross
profits also depend on mortality assumptions, assumed unit costs and terminations other than deaths (including the related charges),
all of which are based on a combination of actual experience of Jackson, industry experience and future expectations. A detailed analysis
of actual mortality, lapse and expense experience is performed using internally developed experience studies.
As with fixed and index annuity and interest-sensitive life business, acquisition costs for Jackson’s variable annuity products are
amortised in line with the emergence of profits. The measurement of the amortisation in part reflects current period fees (including those
for guaranteed minimum death, income, or withdrawal benefits) earned on assets covering liabilities to policyholders, and the historical
and expected level of future gross profits which depends on the assumed level of future fees, as well as components related to mortality,
lapse, and expense.
Mean reversion technique
For variable annuity products, under US GAAP (as ‘grandfathered’ under IFRS 4) the projected gross profits, against which acquisition
costs are amortised, reflect an assumed long-term level of returns on separate account investments which, as referenced in note A2, for
Jackson, is 7.4 per cent (2012: 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 five years is adjusted from
period to period so that in combination with the actual rates of return for the preceding two years and the current period, the 7.4 per cent
(2012: 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 7.4 per cent (2012: 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 floor feature whereby the projected returns in each of the next five 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.
Sensitivity of amortisation charge
The amortisation charge to the income statement is reflected in both operating profit and short-term fluctuations in investment returns.
The amortisation charge to the operating profit in a reporting period comprises:
i
a core amount that reflects a relatively stable proportion of underlying premiums or profit; and
ii
an element of acceleration or deceleration arising from market movements differing from expectations.
In periods where the cap and floor 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 floor is relevant, the mean reversion technique provides no further dampening and
additional volatility may result.
In 2013, the DAC amortisation charge for operating profit was determined after including a credit for decelerated amortisation of
£82 million (2012: £56 million). The 2013 amount primarily reflects the separate account performance of 20 per cent, which is higher
than the assumed level for the year.
As noted above, 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 significant movement in equity markets
in 2014 (outside the range of negative 37 per cent to positive 27 per cent) for the mean reversion assumption to move outside the corridor.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued 233
Deferred acquisition costs related to insurance and investment contracts attributable to shareholders
Additional movement analysis of deferred acquisition costs and other intangibles attributable to shareholders
The movement in deferred acquisition costs relating to insurance and investment 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 classified as available-for-sale
DAC at 31 December
2013 £m
2012* £m
Insurance
contracts
Investment
management
note
Insurance
contracts
Investment
management
note
3,776
920
(372)
(138)
498
4,684
100
14
(18)
–
–
96
3,716
1,013
(535)
(148)
(270)
3,776
105
12
(17)
–
–
100
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
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
Present value of acquired in-force (PVIF) and other intangibles attributable to shareholders
2013 £m
2012 £m
224
(128)
96
210
(110)
100
At 1 January
Cost
Accumulated amortisation
Additions (including amounts arising on acquisition
of subsidiaries)
Amortisation charge
Disposals
Exchange differences and other movements
At 31 December
Comprising:
Cost
Accumulated amortisation
2013 £m
Other intangibles
note (ii)
Distri-
bution
rights
Software
Total
230
(53)
177
271
(17)
–
(39)
392
458
(66)
392
184
(124)
60
26
(27)
(1)
(2)
56
203
(147)
56
631
(330)
301
318
(51)
(1)
(52)
515
882
(367)
515
PVIF
note (i)
217
(153)
64
21
(7)
(0)
(11)
67
221
(154)
67
2012* £m
Other intangibles
note (ii)
Distri-
bution
rights
Software
Total
235
(36)
199
–
(17)
–
(5)
177
230
(53)
177
153
(96)
57
32
(28)
–
(1)
60
184
(124)
60
600
(280)
320
37
(50)
–
(6)
301
631
(330)
301
PVIF
note (i)
212
(148)
64
5
(5)
–
–
64
217
(153)
64
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
Notes
(i)
All of the PVIF balances relate to insurance contracts and are accounted for under UK GAAP as permitted by IFRS 4. The PVIF attaching to 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 profits emerge.
(ii) Other intangibles comprise distribution and software 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 fixed period of time. The distribution rights amounts are amortised over
the term of the distribution contracts. Software is amortised over its useful economic life, which generally represents the licence period of the software
acquired. Amortisation is charged to the ‘acquisition costs and other expenditure’ line in the income statement.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013 234
C5: Intangible assets continued
C5.2 Intangible assets attributable to with-profits funds
a Goodwill in respect of acquired investment subsidiaries for venture fund and other investment purposes
At 1 January
Exchange differences
At 31 December
2013 £m
2012 £m
178
(1)
177
178
–
178
All the goodwill relates to the UK insurance operations segment.
The venture fund investments consolidated by the Group relates to investments of the PAC with-profits fund which are managed
by M&G for which the goodwill is shown in the table above. Goodwill is tested for impairment of these investments by comparing the
investment’s carrying value including goodwill with its recoverable amount (fair value less costs to sell). The fair value is determined by
using a discounted cash flow valuation based on cash flow 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 which were
from 10 to 14 per cent. The discount rates were derived by reference to risk-free rates and an equity premium risk. In 2013 and 2012,
none of the goodwill was impaired.
b Deferred acquisition costs and other intangible assets
Other intangible assets in the Group consolidated statement of financial position attributable to with-profits funds consist of:
Deferred acquisition costs related to insurance contracts attributable to the PAC with-profits fund note
Distribution rights attributable to with-profits funds of the Asia insurance operations
Computer software attributable to with-profits funds of the Asia insurance operations
2013 £m
2012 £m
6
60
6
72
6
70
2
78
Note
The above costs relate to non-participating business written by the PAC with-profits sub-fund. As the with-profit contracts are accounted for under the UK regulatory
‘realistic basis’, no deferred acquisition costs are established for this type of business.
Distribution rights attributable to with-profits 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 fixed 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
At 31 December
Comprising:
Gross amount
Accumulated amortisation
2013 £m
2012 £m
92
(22)
70
(9)
(1)
60
91
(31)
60
96
(13)
83
(9)
(4)
70
92
(22)
70
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued C6: Borrowings
C6.1 Core structural borrowings of shareholder-financed operations
Holding company operations:
US$1,000m 6.5% Perpetual Subordinated Capital Securities
US$250m 6.75% Perpetual Subordinated Capital Securities note (vi)
US$300m 6.5% Perpetual Subordinated Capital Securities note (vi)
US$750m 11.75% Perpetual Subordinated Capital Securities
US$700m 5.25% Perpetual Subordinate Capital Securities note (iv), (vi)
US$550m 7.75% Perpetual Subordinated Capital Securities note (vi)
235
2013 £m
2012 £m
604
151
181
451
417
329
615
154
185
458
–
334
Perpetual subordinated capital securities (Innovative Tier 1) note (i), (iv)
2,133
1,746
¤20m Medium Term Subordinated Notes 2023 note (vii)
£435m 6.125% Subordinated Notes 2031
£400m 11.375% Subordinated Notes 2039
£700m 5.7% Subordinated Notes 2063 note (v)
Subordinated notes (Lower Tier 2) note (i),(v)
Subordinated debt total
Senior debt: note (ii)
£300m 6.875% Bonds 2023
£250m 5.875% Bonds 2029
Holding company total
Prudential Capital bank loan note (iii)
Jackson US$250m 8.15% Surplus Notes 2027 (Lower Tier 2) note (i), (viii)
Total (per consolidated statement of financial position)
17
429
388
695
1,529
3,662
300
249
4,211
275
150
4,636
16
429
386
–
831
2,577
300
249
3,126
275
153
3,554
Notes
(i)
These debt classifications are consistent with the treatment of capital for regulatory purposes, as defined in the Prudential Regulation Authority handbook.
Tier 1 subordinated debt is entirely US$ denominated. The Group has designated all US$3.55 billion (2012: 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.
(ii)
(iii) The Prudential Capital bank loan of £275 million has been made in two tranches: a £160 million loan maturing on 20 December 2017, currently drawn at a cost of
(iv)
(v)
12 month £LIBOR plus 0.4 per cent and a £115 million loan also maturing on 20 December 2017 and currently drawn at a cost of 12 month £LIBOR plus 0.59 per cent.
In January 2013, the Company issued core structural borrowings of US$700 million 5.25 per cent Tier 1 Perpetual Subordinated Capital Securities primarily to
retail investors in Asia. The proceeds, net of costs, were US$689 million.
In December 2013, the Company issued core structural borrowings of £700 million Lower Tier 2 Subordinated notes primarily to UK institutional investors.
The proceeds, net of costs, were £695 million.
(vi) These borrowings can be converted, in whole or in part, at the Company’s option and subject to certain conditions, on any interest payment date, into one
or more series of Prudential preference shares.
(vii) 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.
(viii) The Jackson’s borrowings are unsecured and subordinated to all present and future indebtedness, policy claims and other creditor claims of Jackson.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013 236
C6: Borrowings continued
C6.2 Other borrowings
a Operational borrowings attributable to shareholder-financed operations
Commercial paper
Medium Term Notes 2013 note (ii)
Medium Term Notes 2015
Borrowings in respect of short-term fixed income securities programmes
Non-recourse borrowings of US operations
Bank loans and overdrafts
Obligations under finance leases
Other borrowings note (iii)
Other borrowings
Total note (i)
2013 £m
2012 £m
1,634
–
299
1,933
18
3
–
198
201
1,535
250
299
2,084
20
1
1
139
141
2,152
2,245
Notes
(i)
(ii)
In addition to the debt listed above, £200 million Floating Rate Notes were issued by Prudential plc in October 2013 which will mature in April 2014. These Notes
have been wholly subscribed by a Group subsidiary and accordingly have been eliminated on consolidation in the Group financial statements. These notes
were originally issued in October 2008 and have been reissued upon their maturity.
In January 2013 the Company repaid on maturity, £250 million Medium Term Notes included within borrowings in respect of short-term fixed income
securities in the table above.
(iii) Other borrowings mainly include amounts whose repayment to the lender is contingent upon future surplus emerging from certain contracts specified under
the arrangement. If insufficient 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.
In addition, other borrowings include senior debt issued through the Federal Home Loan Bank of Indianapolis (FHLB), secured by collateral posted with the
FHLB by Jackson.
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.
b Borrowings attributable to with-profits operations
Non-recourse borrowings of consolidated investment funds
£100m 8.5% undated subordinated guaranteed bonds of Scottish Amicable Finance plc†
Other borrowings (predominantly obligations under finance leases)
Total
2013 £m
2012* £m
691
100
104
895
759
100
109
968
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
† The interests of the holders of the bonds issued by Scottish Amicable Finance plc, a subsidiary of the Scottish Amicable Insurance Fund, are subordinate to the
entitlements of the policyholders of that fund.
C6.3 Maturity analysis
The following table sets out the contractual maturity analysis of the Group’s borrowings on the statement of financial position:
Less than 1 year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
Over 5 years
Total
Shareholder-financed operations
With-profits operations
Core structural borrowings
Operational borrowings
Borrowings
2013 £m
2012 £m
2013 £m
2012 £m
2013 £m
2012* £m
–
–
–
275
–
4,361
4,636
115
160
–
–
–
3,279
3,554
1,835
309
8
–
–
–
2,152
1,920
6
309
9
1
–
2,245
35
126
49
53
59
573
895
288
35
124
28
61
432
968
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued 237
C7: Risk and sensitivity analysis
C7.1 Group overview
The Group’s risk framework and the management of the risk including those attached to the Group’s financial statements including
financial assets, financial liabilities and insurance liabilities, together with the inter-relationship with the management of capital have been
included in the audited sections of ‘Group chief risk officer’s report on the risks facing our business and our capital strength’ within the
Strategic Report.
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 profitability 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 benefits of diversification
of risks (as described further below). Business units are also required to disclose to the Group risk function all material risks, along with
information on their severity and likelihood, and mitigating actions taken or planned. Credit risk remains one of the largest risk exposures.
This reflects the relative size of exposure in Jackson and the UK shareholder annuities business. The Group manages concentration of
credit risks by setting limits on the maximum exposure to each counterparty based on their credit ratings.
The financial and insurance assets and liabilities attaching to the Group’s life assurance business are, to varying degrees, subject to
market and insurance risk and other changes of experience assumptions that may have a material effect on IFRS basis profit or loss and
shareholders’ equity.
Market risk is the risk that the fair value or future cash flows of a financial instrument or, in the case of liabilities of insurance contracts,
their carrying value will fluctuate because of changes in market prices. Market risk comprises three types of risk, namely:
— Foreign exchange risk: due to changes in foreign exchange rates;
— Interest rate risk: due to changes in market interest rates; and
— Other price risk: due to fluctuations in market prices (other than those arising from interest rate risk or foreign exchange 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:
— The Group’s with-profits and unit-linked funds absorb most market risk attaching to the funds’ investments. Except for second order
effects, for example on asset management fees and shareholders’ share of cost of bonuses for with-profits business, shareholder
results are not directly affected by market value movements on the assets of these funds;
— The Group’s shareholder results are most sensitive to market risks for assets of the shareholder-backed business; and
— 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 significant items for which the IFRS shareholders’ profit 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.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013
238
C7: Risk and sensitivity analysis continued
Type of business
Market and credit risk
Insurance and lapse risk
Investments/derivatives
Liabilities/unallocated surplus
Other exposure
Asia insurance operations (see also section C7.2)
All business
Currency risk
With-profits business
Net neutral direct exposure (indirect exposure only)
Unit-linked business
Net neutral direct exposure (indirect exposure only)
Investment performance
subject to smoothing
through declared bonuses
Investment performance
through asset
management fees
Mortality and
morbidity risk
Persistency risk
Persistency risk
Non-participating
business
Asset/liability mismatch risk
Credit risk
Interest rates for those
operations where the basis
of insurance liabilities is
sensitive to current market
movements
Interest rate and price risk
US insurance operations (see also section C7.3)
All business
Currency risk
Variable annuity business Net effect of market risk arising from incidence of
guarantee features and variability of asset management
fees offset by derivative hedging programme
Fixed index annuity
business
Fixed index annuities,
Fixed annuities and
GIC business
Incidence of equity
participation features
Derivative hedge
programme to the extent
not fully hedged against
liability and fund
performance
Credit risk
Interest rate risk
Profit 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 fixed income securities
classified as available-for-
sale under IAS 39
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
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued 239
Type of business
Market and credit risk
Insurance and lapse risk
UK insurance operations (see also section C7.4)
Investments/derivatives
Liabilities/unallocated surplus
Other exposure
With-profits business
(including Prudential
Annuities Limited)
Net neutral direct exposure (indirect exposure only)
SAIF sub-fund
Net neutral direct exposure (indirect exposure only)
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
Investment performance
subject to smoothing
through declared bonuses
Persistency risk to
future shareholder
transfers
Asset management fees
earned by M&G
Investment performance
through asset
management fees
Persistency risk
Mortality experience
and assumptions for
longevity
Detailed analyses of sensitivity of IFRS basis profit or loss and shareholders’ equity to key market and other risks by business unit are
provided in notes C7.2, C7.3, C7.4 and C7.5. The sensitivity analyses provided show the effect on profit or loss and shareholders’ equity
to changes in the relevant risk variables, all of which are reasonably possible at the relevant balance sheet date.
Impact of diversification on risk exposure
The Group enjoys significant diversification benefits achieved through the geographical spread of the Group’s operations and, within
those operations through a broad mix of products types. This arises because not all risk scenarios are likely to happen at the same time
and across all geographic regions. Relevant correlation factors include:
Correlation across geographic regions:
— Financial risk factors; and
— Non-financial risk factors.
Correlation across risk factors:
— Longevity risk;
— Expenses;
— Persistency; and
— Other risks.
The effect of Group diversification across the Group’s life businesses is to significantly reduce the aggregate standalone volatility risk
to IFRS operating profit based on longer-term investment returns. The effect is almost wholly explained by the correlations across risk
types, in particular longevity risk.
C7.2 Asia insurance operations
Exposure and sensitivity of IFRS basis profit and shareholders’ equity to market and other risks
The Asia operations sell with-profits and unit-linked policies and, although the with-profits business generally has a lower terminal bonus
element than in the UK, the investment portfolio still contains a proportion of equities. Non-participating business is largely backed by
debt securities or deposits. The Group’s exposure to market risk arising from its Asia operations is therefore at modest levels. This reflects
the fact that the Asia operations have a balanced portfolio of with-profits, unit-linked and other types of business.
In Asia, adverse persistency experience can impact the IFRS profitability of certain types of 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 financial impact of lapses is often mitigated through the specific features of the products, eg surrender
charges, or through the availability of premium holiday or partial withdrawal policy features.
In summary, for Asia operations, the operating profit based on longer-term investment returns is mainly affected by the impact of
market levels on unit-linked persistency, and other insurance risks. At the total IFRS profit level the Asia result is affected by short-term
value movements on the asset portfolio for non-linked shareholder-backed business.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013 240
C7: Risk and sensitivity analysis continued
i Sensitivity to risks other than foreign exchange risk
With-profits business
Similar principles to those explained for UK with-profits business in C7.4 apply to profit emergence for the Asia with-profits business.
Correspondingly, the profit emergence reflects bonus declaration and is relatively insensitive to period by period fluctuations in
insurance risk or interest rate movements.
Unit-linked business
As for the UK insurance operations, for unit-linked business, the main factor affecting the profit and shareholders’ equity of the Asia
operations is investment performance through asset management fees. The sensitivity of profits and shareholders’ equity to changes
in insurance risk interest rate risk and credit risk are not material.
Other business
Interest rate risk
Excluding its with-profit 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 2013, 10-year government bond rates vary from territory to territory and range
from 1.7 per cent to 9.0 per cent (2012: 0.6 per cent to 9.5 per cent).
For the sensitivity analysis as shown in the table below, the reasonably possible interest rate movement used is one per cent for all
territories but subject to a floor of zero where the bond rates are currently below 1 per cent.
The estimated sensitivity to the decrease and increase in interest rates at 31 December 2013 and 2012 is as follows:
Pre-tax profit
Related deferred tax (where applicable)
Net effect on profit and shareholders’ equity
2013 £m
2012* £m
Decrease
of 1%
Increase
of 1%
Decrease
of 1%
Increase
of 1%
311
(34)
277
(215)
40
(175)
205
(45)
160
(259)
43
(216)
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
The pre-tax impacts, if they arose, would mostly be recorded within the category short-term fluctuations in investments returns in the
Group’s segmental analysis of profit before tax.
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 reflects 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.
Equity price risk
The non-linked shareholder business has limited exposure to equity and property investment (£571 million at 31 December 2013).
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 reflected in the short-term fluctuation component of the Group’s segmental analysis of profit before tax,
at 31 December 2013 and 2012 would be as follows:
Pre-tax profit
Related deferred tax (where applicable)
Net effect on profit and shareholders’ equity
2013 £m
2012* £m
Decrease
of 20%
Decrease
of 10%
Decrease
of 20%
Decrease
of 10%
(114)
24
(90)
(57)
12
(45)
(129)
26
(103)
(65)
13
(52)
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued 241
A 10 or 20 per cent increase in their value would have an approximately equal and opposite effect on profit and shareholders’ equity
to the sensitivities shown above. The market risk sensitivities shown above reflect the impact of temporary market movements and,
therefore, the primary effect of such movements would, in the Group’s segmental analysis of profits, be included within the short-term
fluctuations in investment returns.
In the equity risk sensitivity analysis 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 profit would be decreased by approximately £38 million (2012: £30 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 to foreign exchange risk
Consistent with the Group’s accounting policies, the profits of the Asia insurance operations are translated at average exchange rates and
shareholders’ equity at the closing rate for the reporting period. For 2013, the rates for the most significant operations are given in note A1.
A 10 per cent increase or decrease in these rates would have reduced or increased profit before tax attributable to shareholders, profit
for the year and shareholders’ equity, excluding goodwill, attributable to Asia operations respectively as follows:
Profit before tax attributable to shareholders note
Profit for the year
Shareholders’ equity, excluding goodwill, attributable to Asia operations
A 10% increase in local
currency to £ exchange rates
A 10% decrease in local
currency to £ exchange rates
2013 £m
2012 £m
2013 £m
2012 £m
(63)
(49)
(246)
(90)
(75)
(243)
77
60
300
110
92
297
Note
Sensitivity on profit (loss) before tax ie aggregate of the operating profit based on longer-term investment returns and short-term fluctuations in investment returns.
C7.3 US insurance operations
Exposure and sensitivity of IFRS basis profit and shareholders’ equity to market and other risks
At the level of operating profit based on longer-term investment returns, Jackson’s 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.
Jackson’s main exposures are to market risk through its exposure to interest rate risk and equity risk. Approximately 94 per cent
(2012: 94 per cent) of its general account investments support fixed interest rate and fixed index annuities, life business and surplus and
6 per cent (2012: 6 per cent) support institutional business. All of these types of business contain considerable interest rate guarantee
features and, consequently, require that the assets that support them are primarily fixed income or fixed maturity.
Jackson is exposed primarily to the following risks:
Risks
Equity risk
Risk of loss
— Related to the incidence of benefits related to guarantees issued in connection with its VA
contracts; and
— Related to meeting contractual accumulation requirements in FIA contracts.
Interest rate risk
— Related to meeting guaranteed rates of accumulation on fixed annuity products following a sharp
and sustained fall in interest rates;
— Related to the guarantee features attaching to the company’s products and to policyholder
withdrawals following a sharp and sustained increase in interest rates; and
— The risk of mismatch between the expected duration of certain annuity liabilities and repayment
risk and extension risk inherent in mortgage-backed securities.
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 profit (ie including short-term fluctuations 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 fixed income securities. Movements in unrealised appreciation on these securities are included as
movement in shareholders’ equity (ie outside the income statement).
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013 242
C7: Risk and sensitivity analysis continued
Jackson enters into financial derivative transactions, including those noted below to reduce and manage business risks. These transactions
manage the risk of a change in the value, yield, price, cash flows or quantity of, or a degree of exposure with respect to assets, liabilities
or future cash flows, which Jackson has acquired or incurred.
Jackson uses free-standing derivative instruments for hedging purposes. Additionally, certain liabilities, primarily trust instruments
supported by funding agreements, fixed index annuities, certain GMWB variable annuity features and reinsured GMIB variable annuity
features contain embedded derivatives as defined by IAS 39, ‘Financial Instruments: Recognition and Measurement’. Jackson does not
account for such derivatives as either fair value or cash flow hedges as might be permitted if the specific hedge documentation requirements
of IAS 39 were followed. Financial derivatives, including derivatives embedded in certain host liabilities that have been separated for
accounting and financial reporting purposes are carried at fair value.
Value movements on the derivatives are reported within the income statement. In preparing Jackson’s segment profit as shown
in note B1.1, value movements on Jackson’s derivative contracts are included within short-term fluctuations in investment returns and
excluded from operating results based on longer-term investment returns.
The principal types of derivatives used by Jackson and their purpose are as follows:
Derivative
Purpose
Interest rate swaps
Put-swaption contracts
Equity index futures contracts
and equity index options
Total return swaps
Cross-currency swaps
Credit default swaps
These generally involve the exchange of fixed and floating payments over the period for which Jackson
holds the instrument without an exchange of the underlying principal amount. These agreements are
used for hedging purposes.
These contracts provide the purchaser with the right, but not the obligation, to require the writer to
pay the present value of a long-duration interest rate swap at future exercise dates. Jackson purchases
and writes put-swaptions with maturities up to 10 years. Put-swaptions hedge against significant
movements in interest rates.
These derivatives (including various call, put options and put spreads) are used to hedge Jackson’s
obligations associated with its issuance of fixed index immediate and deferred annuities and certain
VA guarantees. Some of these annuities and guarantees contain embedded options which are fair
valued for financial reporting purposes.
Total return swaps in which Jackson receives equity returns or returns based on reference pools of
assets in exchange for short-term floating rate payments based on notional amounts, are held for both
hedging and investment purposes.
Cross-currency swaps, which embody spot and forward currency swaps and additionally, in some
cases, interest rate swaps and equity index swaps, are entered into for the purpose of hedging
Jackson’s foreign currency denominated funding agreements supporting trust instrument obligations.
These 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 profit 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.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued 243
i Sensitivity to equity risk
At 31 December 2013 and 2012, Jackson had variable annuity contracts with guarantees, for which the net amount at risk (‘NAR’)
is defined as the amount of guaranteed benefit in excess of current account value, as follows:
31 December 2013
Return of net deposits plus a minimum return
GMDB
GMWB – Premium only
GMWB*
GMAB – Premium only
Highest specified anniversary account value minus withdrawals
post-anniversary
GMDB
GMWB – Highest anniversary only
GMWB*
Combination net deposits plus minimum return, highest
specified anniversary account value minus withdrawals
post-anniversary
GMDB
GMIB‡
GMWB*
31 December 2012
Return of net deposits plus a minimum return
GMDB
GMWB – Premium only
GMWB*
GMAB – Premium only
Highest specified anniversary account value minus withdrawals
post-anniversary
GMDB
GMWB – Highest anniversary only
GMWB*
Combination net deposits plus minimum return, highest
specified anniversary account value minus withdrawals
post-anniversary
GMDB
GMIB‡
GMWB*
Minimum
return
0-6%
0%
0-5%
0%
Account
value
£m
52,985
2,260
5,632
57
5,522
2,039
717
0-6%
0-6%
0-8%
3,522
1,642
40,906
Minimum
return
0-6%
0%
0-5%†
0%
Account
value
£m
40,964
2,213
3,359
53
4,554
1,880
697
0-6%
0-6%
0-8%†
2,705
1,588
31,167
Weighted
average
attained age
Period
until
expected
annuitisation
64.7 years
64.6 years
66.9 years
2.4 years
Weighted
average
attained age
Period
until
expected
annuitisation
64.4 years
64.0 years
66.4 years
3.3 years
Net
amount
at risk
£m
1,248
36
46
–
134
93
62
217
317
1,059
Net
amount
at risk
£m
1,839
91
88
–
324
245
137
348
469
1,918
* Amounts shown for Guaranteed Minimum Withdrawal Benefit 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 benefit payment
remaining after the amount of the ‘not for life’ guaranteed benefits 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.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013 244
C7: Risk and sensitivity analysis continued
Account balances of contracts with guarantees were invested in variable separate accounts as follows:
Mutual fund type:
Equity
Bond
Balanced
Money market
Total
2013 £m
2012 £m
40,529
10,043
10,797
703
62,072
28,706
10,433
8,379
729
48,247
As noted above, Jackson is exposed to equity risk through the options embedded in the fixed index liabilities and Guaranteed Minimum
Death Benefit and Guaranteed Minimum Withdrawal Benefit guarantees included in certain variable annuity benefits as illustrated
above. This risk is managed using an equity hedging programme to minimise the risk of a significant economic impact as a result of
increases or decreases in equity market levels while taking advantage of naturally offsetting exposures in Jackson’s operations. Jackson
purchases external futures and options that hedge the risks inherent in these products, while also considering the impact of rising and
falling separate account fees.
As a result of this hedging programme, if the equity markets were to increase further in the future, the net effect of 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
financial reporting of 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.
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 financial derivatives, including that relating to the reinsurance of Guaranteed Minimum Income Benefit
guarantees.
At 31 December 2013, the estimated sensitivity of Jackson’s profit, 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.
Pre-tax profit, net of related changes in
amortisation of DAC
Related deferred tax effects
Net sensitivity of profit after tax and shareholders’
2013 £m
2012 £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%
485
(170)
165
(58)
77
(27)
213
(74)
295
(103)
139
(49)
(105)
37
(256)
89
equity
315
107
50
139
192
90
(68)
(167)
Note
The table above has been prepared to exclude the impact of the instantaneous equity movements on the separate account fees. In addition, the sensitivity
movements shown include those relating to the fixed index annuity and the reinsurance of GMIB guarantees.
The above table provides sensitivity movements as at a point in time while the actual impact on financial results would vary contingent
upon the volume of new product sales and lapses, changes to the derivative portfolio, correlation of market returns and various other
factors including volatility, interest rates and elapsed time.
The directional movements in the sensitivities reflect the hedging programme in place at 31 December 2013.
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.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued 245
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 fixed annuity liabilities of Jackson products is not generally sensitive to interest rate risk. This position derives
from the nature of the products and the US GAAP basis of measurement. 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 the income statement. 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 floor of zero) and increase in interest rates at
31 December 2013 and 2012 is as follows:
Profit and loss:
Pre-tax profit effect (net of related changes in
amortisation of DAC)
Related effect on charge for deferred tax
Net profit effect
Other comprehensive income:
Direct effect on carrying value of debt securities
(net of related changes in amortisation
of DAC)
Related effect on movement in deferred tax
Net effect
Total net effect on shareholders’ equity
2013 £m
2012 £m
Decrease
of 2%
Decrease
of 1%
Increase
of 1%
Increase
of 2%
Decrease
of 2%
Decrease
of 1%
Increase
of 1%
Increase
of 2%
(128)
45
(83)
(66)
23
(43)
(52)
18
(34)
(161)
56
(105)
(187)
65
(122)
–
–
–
(54)
19
(35)
(186)
65
(121)
2,624
(918)
1,706
1,623
1,477
(517)
(1,477)
517
(2,624)
918
960
917
(960)
(1,706)
(994)
(1,811)
2,541
(889)
1,652
1,530
1,427
(499)
(1,427)
499
(2,541)
889
928
928
(928)
(1,652)
(963)
(1,773)
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.
iii Sensitivity to foreign exchange risk
Consistent with the Group’s accounting policies, the profits of the Group’s US operations are translated at average exchange rates and
shareholders’ equity at the closing rate for the reporting period. For 2013, the rates were US$1.56 (2012: US$1.58) and US$1.66 (2012: US$1.63)
to £1.00 sterling, respectively. A 10 per cent increase or decrease in these rates would reduce or increase profit before tax attributable
to shareholders, profit for the year and shareholders’ equity attributable to US insurance operations respectively as follows:
Profit before tax attributable to shareholders note
Profit for the year
Shareholders’ equity attributable to US insurance operations
A 10% increase in
US$:£ exchange rates
A 10% decrease in
US$:£ exchange rates
2013 £m
2012 £m
2013 £m
2012 £m
(50)
(41)
(313)
(78)
(56)
(395)
61
50
383
95
69
483
Note
Sensitivity on profit before tax ie aggregate of the operating profit based on longer-term investment returns and short-term fluctuations in investment returns.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013
246
C7: Risk and sensitivity analysis continued
iv Other sensitivities
Total profit of Jackson 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 profit 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 fluctuations in investment returns. In this way the most
significant direct effect of market changes that have taken place to the Jackson result are separately identified. The principal determinants
of variations in operating profit based on longer-term returns are:
— Growth in the size of assets under management covering the liabilities for the contracts in force;
— Variations in fees and other income, offset by variations in market value adjustment payments and, where necessary, strengthening
of liabilities;
— Spread returns for the difference between investment returns and rates credited to policyholders; and
— Amortisation of deferred acquisition costs.
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 profits on the relevant contracts. For interest-sensitive
business, the key assumption is the expected long-term spread between the earned rate and the rate credited to policyholders, which
is based on an annual spread analysis. In addition, expected gross profits depend on mortality assumptions, assumed unit costs and
terminations other than deaths (including the related charges) all of which are based on a combination of actual experience of Jackson,
industry experience and future expectations. A detailed analysis of actual experience is measured by internally developed expense,
mortality and persistency studies.
Except to the extent of mortality experience, which primarily affects profits through variations in claim payments and GMDB
reserves, the profits of Jackson are relatively insensitive to changes in insurance risk.
Jackson is sensitive to lapse risk. However, Jackson uses 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 2013 was
7.4 per cent (2012: 8.4 per cent). The impact of using this return is reflected in two principal ways, namely:
— Through the projected expected gross profits 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 C5.1(b) above; and
— The required level of provision for guaranteed minimum death benefit claims.
C7.4 UK insurance operations
Exposure and sensitivity of IFRS basis profit and shareholders’ equity to market and other risks
The IFRS basis results of the UK insurance operations are most sensitive to asset/liability matching, mortality and default rate experience
and longevity assumptions and the difference between the return on corporate bond and risk-free rate for shareholder-backed annuity
business of PRIL and the PAC non-profit sub-fund. Further details are described below.
The IFRS operating profit based on longer-term investment returns for UK insurance operations is sensitive to changes in longevity
assumptions affecting the carrying value of liabilities to policyholders for UK shareholder-backed annuity business. At the total IFRS
profit level, the result is particularly sensitive to temporary value movements on assets backing the capital of the shareholder-backed
annuity business.
With-profits business
SAIF
Shareholders have no interest in the profits of the ring-fenced fund of SAIF but are entitled to the asset management fees paid on the
assets of the fund.
With-profits sub-fund business
The shareholder results of the UK with-profits 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-profits funds are subject to market risk. Changes in their carrying value, net of related changes
to asset-share liabilities of with-profit contracts, affect the level of unallocated surplus of the fund. Therefore, the level of unallocated
surplus is particularly sensitive to the level of investment returns on the portion of the assets that represents surplus. However, as
unallocated surplus is accounted for as a liability under IFRS, movements in its value do not affect shareholders’ profit and equity.
The shareholder results of the UK with-profits fund correspond to the shareholders’ share of the cost of bonuses declared on the
with-profits business 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 profitability from with-profits 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.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued 247
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 reflect the market rates of return attaching to the covering assets.
Except to the extent of any asset/liability duration mismatch which is reviewed regularly, and exposure to credit risk, the sensitivity of
the Group’s results to market risk for movements in the carrying value of 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, profits from shareholder-backed annuity business are most sensitive to:
— The extent to which the duration of the assets held closely matches the expected duration of the liabilities under the contracts;
— Actual versus expected default rates on assets held;
— The difference between long-term rates of return on corporate bonds and risk-free rates;
— The variance between actual and expected mortality experience;
— The extent to which changes to the assumed rate of improvements in mortality give rise to changes in the measurement of liabilities; and
— Changes in renewal expense levels.
A decrease in assumed mortality rates of 1 per cent would decrease gross profits by approximately £71 million (2012: £74 million). A decrease
in credit default assumptions of five basis points would increase gross profits by £151 million (2012: £157 million). A decrease in renewal
expenses (excluding asset management expenses) of 5 per cent would increase gross profits by £27 million (2012: £25 million). The effect
on profits would be approximately symmetrical for changes in assumptions that are directionally opposite to those explained above.
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. The liabilities of the other business are also broadly insensitive to market risk. Profits from unit-linked and similar
contracts primarily arise from the excess of charges to policyholders for management of assets under the Company’s stewardship, over
expenses incurred. The former is most sensitive to the net accretion of funds under management as a function of new business and lapse
and timing of death. The accounting impact of the latter is dependent upon the amortisation of acquisition costs in line with the emergence
of margins (for insurance contracts) and amortisation in line with service provision (for the investment management component of
investment contracts). By virtue of the design features of most of the contracts which provide low levels of mortality cover, the profits
are relatively insensitive to changes in mortality experience.
i Sensitivity 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 annuity business, not generally exposed to interest rate risk. At 31 December 2013 annuity liabilities accounted for 98 per cent
(2012: 98 per cent) of UK shareholder-backed business liabilities. For 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-profit sub-fund) is very
substantially ameliorated by virtue of the close matching of assets with appropriate duration. The level of matching from period to period
can vary depending on management actions and economic factors so it is possible for a degree of mis-matching profits or losses to arise.
The close matching by the Group of assets of appropriate duration to annuity liabilities is based on maintaining economic and regulatory
capital. The measurement of liabilities under capital reporting requirements and IFRS is not the same with contingency reserves and
some other margins for prudence within the assumptions required under the 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 annuities business) to a movement in interest
rates is as follows.
2013 £m
2012 £m
A decrease
of 2%
A decrease
of 1%
An increase
of 1%
An increase
of 2%
A decrease
of 2%
A decrease
of 1%
An increase
of 1%
An increase
of 2%
Carrying value of debt securities and
derivatives
Policyholder liabilities
Related deferred tax effects
Net sensitivity of profit after tax and
shareholders’ equity
8,602
(7,525)
(215)
3,843
(3,366)
(95)
(3,170)
2,762
82
(5,827)
5,054
155
9,006
(7,878)
(259)
3,993
(3,513)
(110)
(3,265)
2,867
91
(5,983)
5,235
172
862
382
(326)
(618)
869
370
(307)
(576)
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013 248
C7: Risk and sensitivity analysis continued
In addition the shareholder-backed portfolio of UK non-linked insurance operations covering liabilities and shareholders’ equity includes
equity securities and investment properties. Excluding any second order effects on the measurement of the liabilities for future cash
flows to the policyholder, a fall in their value would have given rise to the following effects on pre-tax profit, profit after tax and
shareholders’ equity.
Pre-tax profit
Related deferred tax effects
Net sensitivity of profit after tax and shareholders’ equity
2013 £m
2012 £m
A decrease
of 20%
A decrease
of 10%
A decrease
of 20%
A decrease
of 10%
(309)
72
(237)
(154)
36
(118)
(316)
73
(243)
(158)
36
(122)
A 10 or 20 per cent increase in their value would have an approximately equal and opposite effect on profit and shareholders’ equity
to the sensitivities shown above. The market risk sensitivities shown above reflect the impact of temporary market movements, and,
therefore the primary effect of such movements would, in the Group’s segmental analysis of profits, be included within the short-term
fluctuations in investment returns.
In the equity risk sensitivity analysis 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.
C7.5 Asset management and other operations
a Asset management
i Sensitivities to foreign exchange risk
Consistent with the Group’s accounting policies, the profits 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 significant operations are shown in note A1.
A 10 per cent increase in the relevant exchange rates would have reduced reported profit before tax attributable to shareholders and
shareholders’ equity, excluding goodwill attributable to Eastspring Investments and US asset management operations, by £21 million
(2012: £10 million) and £44 million (2012: £29 million) respectively.
ii Sensitivities to other financial risks for asset management operations
The principal sensitivities to other financial risk of asset management operations are credit risk on the bridging loan portfolio 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
2013 by asset management operations were £2,045 million (2012: £1,839 million), the majority of which are held by the Prudential
Capital operation. Debt securities held by M&G and Prudential Capital are in general variable rate bonds and so market value is limited
in sensitivity to interest rate movements and consequently any change in interest rates would not have a material impact on profit
or shareholders’ equity. The Group’s asset management operations do not hold significant investments in property or equities.
b Other operations
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 inflation 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 £75 million.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued 249
C8: Tax assets and liabilities
C8.1 Deferred tax
The statement of financial position contains the following deferred tax assets and liabilities in relation to:
Unrealised losses or gains on investments
Balances relating to investment and insurance contracts
Short-term timing differences
Capital allowances
Unused deferred tax losses
Total
Deferred tax assets
Deferred tax liabilities
2013 £m
2012* £m
2013 £m
2012* £m
315
8
2,050
10
29
2,412
100
1
2,092
15
98
2,306
(1,450)
(451)
(1,861)
(16)
–
(3,778)
(1,812)
(428)
(1,715)
(9)
–
(3,964)
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
The deferred tax asset at 31 December 2013 and 2012 arises in the following parts of the Group:
UK insurance operations:
SAIF
PAC with-profits fund (including PAL)
Other
US insurance operations
Asia insurance operations
Other operations
Total
2013 £m
2012* £m
1
82
59
2,042
55
173
2,412
1
113
69
1,889
76
158
2,306
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
Deferred tax assets are recognised to the extent that they are regarded as recoverable, that is to the extent that, on the basis of all
available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal
of the underlying temporary differences can be deducted.
The taxation regimes applicable across the Group often apply separate rules to trading and capital profits and losses. The distinction
between temporary differences that arise from items of either a trading or capital nature may affect the recognition of deferred tax
assets. Accordingly, for the 2013 results and financial position at 31 December 2013 the possible tax benefit of approximately £127 million
(2012: £158 million), which may arise from capital losses valued at approximately £0.6 billion (2012: £0.8 billion), is sufficiently uncertain
that it has not been recognised. In addition, a potential deferred tax asset of £61 million (2012: £122 million), which may arise from trading
tax losses and other potential temporary differences totalling £0.4 billion (2012: £0.5 billion) is sufficiently uncertain that it has not been
recognised. Of these, losses of £54 million will expire within the next seven years. Of the remaining losses £0.5 million will expire within
20 years and the rest have no expiry date.
The table that follows provides a breakdown of the recognised deferred tax assets set out in the table 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 profits
is not significantly impacted by any current proposed changes to future accounting standards.
Asia
Jackson
UK long-term business
Other
Total
Short-term timing differences
Unused tax losses
Expected
period of
recoverability
2013 £m
Expected
period of
recoverability
2013 £m
24
1 to 3 years
1,733 With run-off
of in-force
book
135 1 to 10 years
158 1 to 10 years
2,050
20
–
3 to 5 years
–
1 to 3 years
1 to 3 years
2
7
29
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.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013
250
C8: Tax assets and liabilities continued
The reduction in the UK corporation tax rate to 21 per cent from 1 April 2014 and a further reduction to 20 per cent from 1 April 2015 was
substantively enacted on 2 July 2013 which has had the effect of reducing the UK with-profits and shareholder-backed business element
of the deferred tax balances as at 31 December 2013 by £51 million. As the 2013 Finance Act has been enacted at the balance sheet date,
the effects of these changes are reflected in the financial statements for the year ended 31 December 2013.
C8.2 Current tax asset and liability
Of the £244 million (2012: £248 million) current tax recoverable, the majority is expected to be recovered in one year or less.
The current tax liability decreased to £395 million (2012: £443 million) reflecting the settlement of prior year balances in the UK and
Asia following the agreement with taxation authorities.
C9: Defined benefit pension schemes
a Summary and background information
The Group asset/liability in respect of defined benefit pension schemes is as follows:
Underlying economic surplusnote (c)
Less: unrecognised surplusnote (c)
Economic surplus (deficit) (including investment in Prudential insurance
policies)note (c)
Attributable to:
PAC with-profits fund
Shareholder-backed operations
Consolidation adjustment against policyholder liabilities for investment in
Prudential insurance policies
IAS 19 pension asset (liability) on the Group statement of financial position*
2013 £m
Other
schemes
(80)
–
(80)
(58)
(22)
(114)
(194)
PSPS
726
(602)
124
87
37
–
124
2012 £m
Total
1,138
(1,010)
128
78
50
(169)
(41)
Total
646
(602)
44
29
15
(114)
(70)
* At 31 December 2013, the PSPS pension asset of £124 million (2012: £164 million) and the other schemes’ pension liabilities of £194 million (2012: £205 million) are
included within ‘Other debtors’ and ‘Provisions’ respectively on the consolidated statement of financial position.
The Group’s businesses operate a number of pension schemes. The specific features of these plans vary in accordance with the
regulations of the country in which the employees are located, although they are, in general, funded by the Group and based either on a
cash balance formula or on years of service and salary earned in the last year or years of employment. The largest defined benefit scheme
is the principal UK scheme, namely the Prudential Staff Pension Scheme (PSPS). PSPS accounts for 84 per cent (2012: 86 per cent) of the
underlying scheme liabilities of the Group’s defined benefit schemes.
The Group also operates two smaller UK defined benefit schemes in respect of Scottish Amicable and M&G. In addition, there are
two small defined benefit schemes in Taiwan which have negligible deficits.
Triennial actuarial valuations
Defined benefit schemes in the UK are generally required to be subject to full actuarial valuations 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, finalised in 2012 by CG Singer, Fellow of the Institute and
Faculty of Actuaries, of Towers Watson Limited. This valuation 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. Based on this valuation, future contributions into the
scheme were reduced to the minimum level of contributions required under the scheme rules effective from July 2012. Excluding expenses,
the contributions are now payable at approximately £6 million per annum for ongoing service of active members of the scheme. No deficit
or other funding is required. Deficit funding for PSPS, where applicable, as applied prior to 2012, is apportioned in the ratio of 70/30
between the PAC with-profits 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.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued
The market value of PSPS scheme assets as at the 5 April 2011 valuation was £5,255 million. The actuarial assumptions used
in determining benefit obligations and the net periodic benefit costs for the purposes of the 2011 valuation were as follows.
Rate of increase in salaries
Rate of inflation:
Retail Prices Index (RPI)
Consumer Prices Index (CPI)
Rate of increase of pensions in payment for inflation:
Guaranteed (maximum 5%)
Guaranteed (maximum 2.5%)
Discretionary
Expected returns on plan assets
Mortality assumptions:
The tables used for PSPS pensions in payment at 5 April 2011 were:
251
Nil
3.7
3.0
3.0
2.5
Nil
4.2
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:
— 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
— 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 Staff Pension Scheme (SASPS) was as at 31 March 2011, finalised in 2012
by Jonathan Seed, Fellow of the Institute and Faculty of Actuaries, of Xafinity Consulting. This valuation demonstrated the scheme to
be 85 per cent funded. Based on this valuation, it was agreed with the Trustees that the existing level of deficit funding of £13.1 million
per annum continues to be paid into the scheme until 31 December 2018, to eliminate the actuarial deficit. The deficit funding will be
reviewed every three years at subsequent valuations.
The last completed actuarial valuation of the M&G Group Pension Scheme (M&GGPS) was as at 31 December 2011, finalised in 2012
by Paul Belok, Fellow of the Institute and Faculty of Actuaries, of Aon Hewitt Limited. This valuation demonstrated the scheme to be
83 per cent funded. Based on this valuation, deficit funding amounts designed to eliminate the actuarial deficit over a three year period
are being made from January 2013 of £18.6 million per annum for the first two years and £9.3 million in the third year.
Summary economic and IAS 19 financial positions
Under the IAS 19 ‘Employee Benefits’ valuation basis, the Group applies IFRIC 14, ‘IAS 19 – The Limit on a Defined Benefit Asset,
Minimum Funding Requirements and their Interaction’. Under IFRIC 14, 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 financial position recorded, reflects
the higher of any underlying IAS 19 deficit and any obligation for committed deficit funding where applicable. For PSPS, the Group does
not have an unconditional right of refund to any surplus of the scheme.
The underlying IAS 19 surplus for PSPS at 31 December 2013 was £726 million (31 December 2012: £1,174 million) of which reflecting
the arrangements under the scheme rules, only a portion of the surplus, being £124 million (2012: £164 million) is recognised as recoverable.
The £124 million (2012: £164 million) represents the present value of the economic benefit to the Company from the difference between
future ongoing contributions to the scheme and estimated accrued cost of service. Of this amount, £87 million has been allocated to the
PAC with-profits fund and £37 million was allocated to the shareholders’ fund (2012: £115 million and £49 million, respectively).
The IAS 19 deficit of the SASPS at 31 December 2013 was a deficit of £115 million (2012: deficit of £74 million) and has been allocated
approximately 50 per cent to the PAC with-profits fund and 50 per cent to the shareholders’ fund.
The IAS 19 surplus of the M&GGPS on an economic basis at 31 December 2013 was a surplus of £36 million (2012: surplus of £38 million)
and is wholly attributable to shareholders. The underlying position on an economic basis reflects 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 2013, the M&GGPS has invested £114 million in Prudential insurance policies (2012: £169 million). After excluding
these investments that are offset against liabilities to policyholders, the IAS 19 basis position of the M&GGPS is a deficit of £78 million
(2012: deficit of £131 million).
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013
252
C9: Defined benefit pension schemes continued
Risks to which the defined benefit schemes expose the Group
Responsibility of making good of any deficit that may arise in the schemes lies with the employers of the schemes, which are subsidiaries of
the Group. Accordingly, the pension schemes expose the Group to a number of risks and the most significant of which are detailed below:
— Interest rate and investment risk – this risk arises because the schemes are not invested wholly in assets that most closely match the
expected future cash flows. Therefore, falling equity markets and bond yields may lead to higher deficits in the schemes. Details of
the investment portfolio of the schemes are provided in note 3;
— Inflation risk – the majority of the benefit obligations of all three schemes are linked to inflation, and higher inflation will lead to higher
liabilities; and
— Mortality risk – increases in life expectancy of the members would mean that benefits are paid for longer and will result in an increase
in the scheme’s liabilities.
Corporate governance
The Group’s UK pension schemes are regulated by ‘The Pension Regulator’ in accordance with the Pension Act 1995. Trustees have
been appointed for each pension scheme and they have the ultimate responsibility to ensure that the scheme is managed in accordance
with the Trust Deed & Rules. The Trustees are required by the Pension Regulator to be well conversant with the Trust Deed & Rules and
to act in accordance with these Rules.
The Rules of the Group’s largest pension arrangement, the defined benefit section of PSPS, a final salary scheme, specify that, in
exercising its investment powers, the Trustee’s objective is to achieve the best overall investment return consistent with the security of
the assets of the scheme. In doing this, consideration is given to the nature and duration of the scheme’s liabilities. The Trustee sets the
benchmark for the asset mix, following analysis of the liabilities by the Scheme’s Actuary and, having taken advice from the Investment
Managers, then selects benchmark indices for each asset type in order to measure investment performance against a benchmark return.
The Trustee reviews strategy, the asset mix benchmark and the Investment Managers’ objectives every three years, to coincide with
the Actuarial Valuation, or earlier if the Scheme Actuary recommends. Interim reviews are conducted annually based on changing
economic circumstances and financial market levels.
The Trustee sets the general investment policy and specifies any restrictions on types of investment and the degrees of divergence
permitted from the benchmark, but delegates the responsibility for selection and realisation of specific investments to the Investment
Managers. In carrying out this responsibility, the Investment Managers are required by the Pensions Act 1995 to have regard to the need
for diversification and suitability of investments. Subject to a number of restrictions contained within the relevant asset management
agreements, the Investment Managers are authorised to invest in any class of investment asset. However, the Investment Managers will
not invest in any new class of investment asset without prior consultation with the Trustee.
The Trustee consults the Principal Employer, the Prudential Assurance Company, on the investment principles, but the ultimate
responsibility for the investment of the assets of the scheme lies with the Trustee.
The investment policies and strategies for the other two UK defined benefit schemes (the SASPS and M&GGPS, which are both
final salary schemes), follow similar principles, but have different target allocations reflecting the particular requirements of the schemes.
All of the three UK schemes are closed to new entrants.
The majority of the scheme liabilities are linked to inflation. The assets that would most closely match the liabilities are a combination
of index-linked government bonds or investment grade derivatives to match these inflation-linked liabilities and fixed interest gilts to
match the fixed liabilities of the schemes. These ‘matching assets’ generally are expected to generate lower future returns than asset
classes such as equities. The risk that must be traded off against investing in higher expected returns assets is increased volatility of the
schemes’ return and higher risk of default.
The Trustee of each of the schemes manages the investment strategy of the scheme to achieve an acceptable balance between
investing in the assets that most closely match the expected benefit payments and assets that are expected to achieve a greater return
in the hope of reducing the contributions required or providing additional benefits to members. When determining the investment
strategy, the Trustee considers the risk that falls in asset values may not be matched by similar falls in the value of the schemes’ liabilities.
It also consults the Principal Employer, in order to understand the Principal Employer’s appetite for bearing this risk and considers the
Employer’s ability to make good any shortfall that may arise.
The PSPS scheme has entered into a derivatives based strategy to match the duration and inflation profile of its liabilities. This
involved a reallocation from other investments to other assets with an interest and inflation swap overlay. In broad terms, the scheme
is committed to making a series of payments related to LIBOR on a nominal amount and in return, the scheme receives a series of fixed
and inflation-linked payments which match a proportion of its liabilities. As at 31 December 2013, the nominal value of the interest and
inflation-linked swaps amounted to £0.8 billion (2012: £0.9 billion) and £2.7 billion (2012: £2.0 billion) respectively.
The SASPS and M&GGPS use very limited or no derivatives to hedge their risks. The risks arising from these schemes are managed
through well diversified investments with a portion of the scheme assets invested in inflation-indexed bonds to provide a partial hedge
against inflation. The M&G pension scheme also invests in leveraged gilts as part of its asset liability management.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued 253
b Assumptions
The actuarial assumptions used in determining benefit obligations and the net periodic benefit costs for the years ended 31 December
were as follows:
Discount rate*
Rate of increase in salaries
Rate of inflation†:
Retail prices index (RPI)
Consumer prices index (CPI)
Rate of increase of pensions in payment for inflation:
PSPS:
Guaranteed (maximum 5%)
Guaranteed (maximum 2.5%)
Discretionary
Other schemes
2013 %
2012 %
4.4
3.3
3.3
2.3
2.5
2.5
2.5
3.3
4.4
2.7
2.7
2.0
2.5
2.5
2.5
2.7
* The discount rate has been determined by reference to an ‘AA’ corporate bond index, adjusted where applicable, to allow for the difference in duration between the
index and the pension liabilities.
† The rate of inflation reflects the long-term assumption for the UK RPI or CPI depending on the tranche of the schemes.
The calculations are based on current actuarially calculated mortality estimates with a specific allowance made for future improvements
in mortality. The specific allowance made is in line with a custom calibration and has been updated in 2013 to reflect the 2011 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 2013 were:
Male: 112.0 per cent PNMA00 with improvements in line with a custom calibration of the CMI’s 2011 mortality model, with a long-term
mortality improvement rate of 1.75 per cent per annum; and
Female: 108.5 per cent PNFA00 with improvements in line with a custom calibration of the CMI’s 2011 mortality model, with a long-term
mortality improvement rate of 1.25 per cent per annum.
The tables used for PSPS immediate annuities in payment at 31 December 2012 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
2013 years
2012 years
Male
27.9
31.5
Female
29.5
32.8
Male
28.0
30.6
Female
29.1
31.2
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, Xafinity Consulting
for SASPS and Aon Hewitt Limited for the M&GGPS, the most recent full valuations have been updated to 31 December 2013, applying
the principles prescribed by IAS 19.
c Estimated pension scheme surpluses and deficits
This section illustrates the financial position of the Group’s defined benefit pension schemes on an economic basis and the IAS 19 basis.
The underlying pension position on an economic basis reflects the assets (including investments in Prudential policies that are offset
against liabilities to policyholders on the Group consolidation) and the liabilities of the schemes. The IAS 19 basis excludes the investments
in Prudential policies. At 31 December 2013, the investments in Prudential insurance policies comprise £143 million (2012: £123 million)
for PSPS and £114 million (2012: £169 million) for the M&GGPS. In principle, on consolidation, the investments are eliminated against
policyholder liabilities of UK insurance operations so that the formal IAS 19 position for the schemes in isolation excludes these items.
This treatment applies to the M&GGPS investments. However, as a substantial portion of the Company’s interest in the underlying
surplus of PSPS is not recognised, the adjustment is not necessary for the PSPS investments.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013 254
C9: Defined benefit pension schemes continued
Movements on the pension scheme deficit determined on the economic basis are as follows, with the effect of the application of IFRIC 14
being shown separately:
2013 £m
(Charge) credit to income
statement or other
comprehensive income
Surplus (deficit)
in schemes at
1 January 2013
Operating
results (based
on longer-term
investment
returns)
Actuarial and
other gains and
losses
Contributions
paid
Surplus (deficit)
in schemes at
31 Dec 2013
All schemes
Underlying position (without the effect of IFRIC 14)
Surplus
Less: amount attributable to PAC with-profits fund
Shareholders’ share:
Gross of tax surplus (deficit)
Related tax
Net of shareholders’ tax
Application of IFRIC 14 for the derecognition of PSPS surplus
Derecognition of surplus
Less: amount attributable to PAC with-profits fund
Shareholders’ share:
Gross of tax surplus (deficit)
Related tax
Net of shareholders’ tax
With the effect of IFRIC 14
Surplus (deficit)
Less: amount attributable to PAC with-profits fund
Shareholders’ share:
Gross of tax surplus (deficit)
Related tax
Net of shareholders’ tax
1,138
(787)
351
(81)
270
(1,010)
709
(301)
69
(232)
128
(78)
50
(12)
38
15
(21)
(6)
1
(5)
(39)
32
(7)
2
(5)
(24)
11
(13)
3
(10)
(563)
366
(197)
50
(147)
447
(313)
134
(36)
98
(116)
53
(63)
14
(49)
56
(15)
41
(8)
33
–
–
–
–
–
56
(15)
41
(8)
33
646
(457)
189
(38)
151
(602)
428
(174)
35
(139)
44
(29)
15
(3)
12
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 plans’ net assets at 31 December comprise the following investments and liabilities:
Equities:
UK
Overseas
Bonds*:
Government
Corporate
Asset-backed securities
Derivatives
Properties
Other assets
Total value of assets
2013
Other
schemes
£m
76
317
311
107
17
6
44
24
902
Total
£m
209
329
4,599
822
62
97
115
711
6,944
PSPS
£m
133
12
4,288
715
45
91
71
687
6,042
2012†
PSPS
£m
Other
schemes
£m
123
–
4,754
454
39
165
167
698
6,400
63
249
274
141
3
11
40
16
797
Total
£m
186
249
5,028
595
42
176
207
714
7,197
%
3
5
66
12
1
1
2
10
100
%
3
3
70
8
1
2
3
10
100
* 97 per cent of the bonds are investment graded (2012: 98 per cent).
† The 2012 comparatives have been reclassified to align to the current year’s asset categorisation.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued
255
The movements in the IAS 19 pension schemes’ surplus and deficit between scheme assets and liabilities as consolidated in the financial
statements were:
Attributable to policyholders and shareholders
2013 £m
Effect of
IFRIC 14 for
derecognition
of PSPS surplus
Economic basis
net surplus
(deficit)
Other
adjustments
including for
investments in
Prudential
insurance
policies(iii)
IAS 19 basis
net deficit(i)
Present value
of benefit
obligations(i),(ii)
(6,059)
(27)
(267)
254
(2)
Net surplus
(deficit)
(without the
effect of
IFRIC 14)
1,138
(27)
46
(4)
–
56
–
(1,010)
(39)
128
(27)
7
(4)
–
56
–
(197)
(563)
447
(116)
Net deficit, beginning of year
Current service cost
Net interest on net defined benefit
liability (asset)
Administration expenses paid out
of plan assets
Benefit payments
Employers’ contributionsnote (iv)
Employees’ contributions
Actuarial and other gains and
lossesnote (v)
Transfer out of investment in
Prudential insurance policies
Plan assets(i)
7,197
313
(4)
(254)
56
2
(366)
Net surplus (deficit), end of year
6,944
(6,298)
–
646
(602)
2012 £m
–
44
Effect of
IFRIC 14 for
derecognition
of PSPS surplus
Economic basis
net surplus
(deficit)
(1,607)
(70)
Present value
of benefit
obligations(i),(ii)
(5,620)
(29)
(106)
(264)
239
(2)
Net surplus
(deficit)
(without the
effect of
IFRIC 14)
1,544
(29)
(106)
69
(3)
–
71
–
(277)
(408)
667
–
1,138
(1,010)
Net deficit, beginning of year
Current service cost
Past service costnote (vi)
Net interest on net defined benefit
liability (asset)
Administration expenses paid out
of plan assets
Benefit payments
Employers’ contributionsnote (iv)
Employees’ contributions
Actuarial and other gains and
lossesnote (v)
Transfer out of investment in
Prudential insurance policies
and other adjustments
Plan assets(i)
7,164
333
(3)
(239)
71
2
(131)
Net surplus (deficit), end of year
7,197
(6,059)
(169)
(8)
1
62
(114)
(41)
(27)
(1)
(4)
–
56
–
(115)
62
(70)
Other
adjustments
including for
investments in
Prudential
insurance
policies(iii)
(165)
(8)
IAS 19 basis
net deficit(i)
(228)
(29)
(106)
(9)
(3)
–
71
–
(20)
239
24
(169)
24
(41)
(63)
(29)
(106)
(1)
(3)
–
71
–
259
–
128
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013
256
C9: Defined benefit pension schemes continued
Notes
(i)
The IAS 19 basis pensions deficit can be summarised as follows:
2013 £m
2012 £m
Quoted prices
in an active
market
Other
Total
Quoted prices
in an active
market
Other
Total
Plan assets (IAS 19 basis before effect of IFRIC 14):
Equities:
UK
Overseas
Government
Corporate
Asset-backed securities
Derivatives
Properties
Other assets
Fair value of plan assets, end of year*
Present value of benefit obligation
Effect of the application of IFRIC 14 for pension
schemes:
Derecognition of PSPS’ surplus
Consolidation adjustment in respect of investment of
PSPS in Prudential policies
Deficit recognised in the statement of financial
position
24
305
4,564
781
62
97
–
527
6,360
2
14
–
12
–
–
115
184
327
26
319
4,564
793
62
97
115
711
6,687
(6,298)
389
(602)
143
(70)
21
232
4,965
521
42
176
–
494
6,451
2
17
–
8
–
–
207
220
454
23
249
4,965
529
42
176
207
714
6,905
(6,059)
846
(1,010)
123
(41)
* The IAS 19 basis plan assets at 31 December 2013 of £6,687 million (2012: £6,905 million) is different from the economic basis plan assets of £6,944 million
(2012: £7,197 million) as shown above due to the exclusion of investment in Prudential insurance policies, which are eliminated on consolidation of £257 million
(2012: £292 million) comprising £143 million for PSPS (2012: £123 million) and £114 million for the M&GGPS scheme (2012: £169 million).
None of the scheme assets included shares in Prudential plc or property occupied by the Prudential Group.
(ii) Maturity profile of the benefit obligations
The weighted average duration of the benefit obligations of the schemes is 18.2 years (2012: 18.1 years)
The following table provides an expected maturity analysis of the benefit obligations as at 31 December 2013:
1 year or less
After 1 year
to 5 years
After 5 years
to 10 years
After 10 years
to 15 years
After 15 years
to 20 years
Over 20 years
2013 £m
All schemes
223
972
1,459
1,672
1,747
10,198
Total
16,271
The expected maturity analysis of the benefit obligations as at 31 December 2012 is similar to those of 2013 above.
(iii) The adjustments for investments in Prudential insurance policies are consolidation adjustments for intragroup assets and liabilities with no impact to
operating results.
(iv) Total employer contributions expected to be paid into the Group defined benefit schemes for the year ending 31 December 2014 amounts to £56 million
(2013: £56 million).
The actuarial and other gains and losses attributable to policyholders and shareholders as shown in the table above are analysed as follows:
(v)
Actuarial and other gains and losses
Return on the scheme assets less amount included in interest income
(Losses) gains on changes in demographic assumptions
Losses on changes in financial assumptions
Experience losses on scheme liabilities
Effect of derecognition of PSPS surplus
Consolidation adjustment for investments in Prudential insurance policies and other adjustments
2013 £m
2012 £m
(366)
(22)
(174)
(1)
(563)
447
1
(115)
(131)
14
(287)
(4)
(408)
667
(20)
239
(vi) During the first 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
on the underlying surplus.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued
257
d Sensitivity of the pension scheme liabilities to key variables
The total underlying Group pension scheme liabilities of £6,298 million (2012: £6,059 million) comprise £5,316 million (2012: £5,226 million)
for PSPS and £982 million (2012: £833 million) for the other schemes. The table below shows the sensitivity of the underlying PSPS and
the other scheme liabilities at 31 December 2013 and 2012 to changes in discount rate, inflation rates and mortality rates. The sensitivity
information below is based on the core scheme liabilities and assumptions at the balance sheet date. The sensitivity is calculated based
on a change in one assumption, with all other assumptions being held constant. As such, interdependencies between the assumptions
are excluded.
The sensitivity of the underlying pension scheme liabilities to changes in discount, inflation and mortality rates as shown above
does not directly equate to the impact on the profit or loss attributable to shareholders or shareholders’ equity, due to the effect of
the application of IFRIC 14 on PSPS and the allocation of a share of the interest in financial position of the PSPS and Scottish Amicable
schemes to the PAC with-profits fund as described above.
The sensitivity to the changes in the key variables as shown in the table above has no significant impact on the pension costs included
in the Group’s operating results. This is due to the pension costs charged in each of the periods presented, being derived largely from
market conditions at the beginning of the period. After applying IFRIC 14 and to the extent attributable to shareholders, any residual
impact from the changes to these variables is reflected as actuarial gains and losses on defined benefit pension schemes within the
supplementary analysis of profits.
Assumption applied
Discount rate
2013
4.4%
2012
Sensitivity change
in assumption
Impact of sensitivity on scheme liabilities
on IAS 19 basis
2013
2012
4.4% Decrease by 0.2%
Increase in scheme liabilities by:
Discount rate
4.4%
4.4% Increase by 0.2%
Rate of inflation
RPI: 3.3% RPI: 2.7% RPI: Decrease by 0.2%
CPI: 2.3% CPI: 2.0% CPI: Decrease by 0.2% with
Mortality rate
consequent reduction in
salary increases
Increase life expectancy by
1 year
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
3.3%
5.1%
3.1%
4.7%
0.7%
4.6%
2.7%
2.7%
3.3%
4.9%
3.1%
4.6%
0.6%
4.3%
2.6%
2.4%
C10: Share capital, share premium and own shares
2013
2012
Number of
ordinary shares
Share capital
£m
Share premium
£m
Number of
ordinary shares
Share capital
£m
Share premium
£m
Issued shares of 5p each fully paid:
At 1 January
Shares issued under
share-based schemes
At 31 December
2,557,242,352
3,139,384
2,560,381,736
128
–
128
1,889 2,548,039,330
6
9,203,022
1,895 2,557,242,352
127
1
128
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 2013, there were options outstanding under Save As You Earn schemes to subscribe for shares as follows:
31 December 2013
31 December 2012
Number of
shares to
subscribe for
10,233,986
9,396,810
Share price range
from
288p
288p
to
901p
629p
Exercisable
by year
2019
2018
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013
258
C10: Share capital, share premium and own shares
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. The cost of own shares of £141 million as at 31 December 2013
(2012: £97 million) is deducted from retained earnings. The Company has established trusts to facilitate the delivery of shares under
employee incentive plans. At 31 December 2013, 7.1 million (2012: 8.0 million) Prudential plc shares with a market value of £94.5 million
(2012: £69 million) were held in such trusts all of which are for employee incentive plans.
The Company purchased the following number of shares in respect of employee incentive plans.
2013
2012
* The maximum number of shares held in 2013 was 8.0 million which was in January 2013.
The shares purchased each month are as follows:
Number of
shares
purchased
(in millions)*
4.4
5.9
Cost
£m
53.8
47.9
2013 Share Price
2012 Share Price
Number of
shares
11,864
10,900
11,342
894,567
54,781
15,950
11,385
924,499
10,960
103,999
12,108
2,362,435
4,424,790
Low
£
9.15
9.25
10.15
10.30
11.56
10.89
11.20
11.48
11.38
11.54
12.52
12.63
High
£
Cost
£
Number of
shares
9.15
108,496
9.25
100,868
10.15
115,121
10.86
9,692,613
11.72
643,608
11.11
176,139
135,132
11.20
11.94 10,955,609
124,725
11.38
1,201,870
11.69
151,773
12.65
12.93 30,377,986
15,573
12,678
522,002
368,901
939,541
482,377
15,047
28,488
712,649
12,549
492,993
2,277,012
53,783,940
5,879,810
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
£
6.40
7.33
8.03
7.67
7.26
6.84
7.26
8.12
8.25
8.39
9.15
9.27
Cost
£
99,589
92,930
3,946,335
2,712,460
6,407,556
3,208,338
109,166
228,176
5,829,154
105,329
4,502,129
20,706,597
47,947,759
January
February
March*
April
May
June
July
August
September
October
November
December
Total
* The 2012 comparative has been adjusted from previously published numbers.
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 2013 was 7.1 million (2012: 4.5 million)
and the cost of acquiring these shares of £60 million (2012: £27 million) is included in the cost of own shares. The market value of these
shares as at 31 December 2013 was £95 million (2012: £39 million). During 2013, these funds made net additions of 2,629,816 Prudential
shares (2012: net disposals of 4,143,340) for a net increase of £33.1 million to book cost (2012: net decrease of £25.1 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 2013 or 2012.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued
259
C11: Capital position statement
This statement sets out the estimated capital position of the Group’s subsidiaries, by life assurance and asset management operations
by reference to the local regulations as at 31 December 2013.
C11.1 Life assurance business
a Summary statement
The Group’s estimated capital position for its life assurance subsidiaries with reconciliations to shareholders’ equity is shown below.
In addition the statement provide an analysis of available capital for Group’s life assurance operations, determined by reference to the
local regulations, to meet risks and regulatory requirements.
2013 £m
Other UK
life
assurance
sub-
sidiaries
and funds
note (ii)
Total PAC
with-
profits
fund
SAIF
WPSF
note (i)
2012 £m
Asia life
assurance
sub-
sidiaries
Jackson
Total life
assurance
operations
note (b)
Total life
assurance
operations
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
912
–
912
2,064
2,976
3,446
–
3,446
–
2,564
231
2,795
–
3,446
2,795
6,922
231
7,153
2,064
9,217
7,553
239
7,792
2,087
9,879
– 11,984
(3,112)
–
11,984
(3,112)
–
–
–
–
77
–
12,061
(3,112)
10,589
(2,469)
–
–
–
–
–
–
–
–
(5)
–
(5)
–
(89)
–
(4,121)
151
(784)
–
(4,999)
151
(4,201)
153
–
–
(55)
(55)
–
–
(195)
(617)
(195)
(617)
8,000
8,000
–
(179)
(268)
2,610
–
–
817
–
–
2,610
696
(55)
(107)
–
(286)
(195)
(265)
(215)
(435)
(543)
(993)
6,196
4,011
8,000
8,000
2,708
2,903
1,802
15,413
13,890
6,428
28,735
35,163
374
34,978
35,352
6,802
63,713
70,515
–
–
–
–
–
–
6,293
41,456
43,266
101
35,453
33,559
6,394
76,909
76,825
–
–
310
–
32
12,973
–
32
13,283
–
6,127
27,069
–
65,681
39,290
6,744
11,918
6,724
6,744
83,758
86,366
6,597
67,382
88,492
–
23
23
17,583
2,440
130
20,176
18,378
Group shareholders’ equity
Held outside long-term funds:
Net assets
Goodwill
Total
Held in long-term fundsnote (iii)
Total Group shareholders’ equity
Adjustments to regulatory basis
Unallocated surplus of with-profits fundsnote (v)
Shareholders’ share of realistic liabilities
Deferred acquisition costs of non-participating
business and goodwill not recognised for
regulatory reporting
Jackson surplus notesnote (iv)
Investment and policyholder liabilities valuation
differences between IFRS and regulatory basis
for Jacksonnote (vii)
Pension liability difference between IAS 19 and
regulatory basisnote (vii)
Valuation difference on PAL between IFRS basis and
regulatory basis
Other adjustmentsnote (v)
Total adjustments
Total available capital resources of life assurance
businesses on local regulatory bases
Policyholder liabilities
UK regulated with-profits funds:
Insurance contracts
Investment contracts with discretionary
participation features
Total
Other liabilities:
Insurance contracts:
With-profits liabilities of non-UK regulated
funds
Unit-linked, including variable annuitynote (viii)
Other life assurance businessnote (viii)
Investment contracts without discretionary
participation features note (vi)
Total
310
13,028
13,338
50,779 107,411
25,516 197,044 180,849
Total policyholder liabilities shown in the
consolidated statement of financial position
7,112
76,741
83,853
50,779 107,411
31,910 273,953 257,674
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013
260
C11: Capital position statement continued
Notes
(i) WPSF unallocated surplus includes amounts related to the Hong Kong branch. Policyholder liabilities are included in the Asia life assurance subsidiaries.
(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
Excluding PAC shareholders’ equity that is included in ‘parent company and shareholders’ equity of other subsidiaries and funds’.
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-profits
funds, deferred tax, admissibility and other items measured differently on the regulatory basis. For Jackson the principal reconciling item is deferred tax
related to the differences between IFRS and regulatory basis as shown in the table above and other methodology differences.
(vi) Principally includes unit-linked and similar contracts in the UK and GIC liabilities of Jackson.
(vii) The investment and policyholder liabilities valuation difference between IFRS and regulatory bases for Jackson is mainly due to not all investments being
carried at fair value under the regulatory basis and also due to the valuation difference on annuity reserves.
(viii) The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting
standards described in note A2.
b Reconciliation to the Group total shareholders’ equity
The table below reconciles shareholders’ equity held in life assurance operations (as shown in the table in note (a)) to the Group total
shareholders’ equity as at 31 December 2013:
2013 £m
Total life
assurance
operations
M &G
(including
Prudential
Capital)
Parent
company and
shareholders’
equity of other
subsidiaries
and funds
note (i)
6,922
231
7,153
2,064
9,217
449
1,153
1,602
–
1,602
(1,246)
77
(1,169)
–
(1,169)
Group
total
6,125
1,461
7,586
2,064
9,650
Group shareholders’ equity
Held outside long-term funds:
Net assets
Goodwill
Total
Held in long-term funds
Total Group shareholders’ equity
Note
(i)
Including PAC shareholders’ equity.
c Movement in total available capital
Total available capital for the Group’s life assurance operations has changed as follows:
Other UK life
assurance
subsidiaries
and funds
note (iii)
2,370
122
–
–
216
2,708
WPSF
note (i)
7,000
200
(100)
600
300
8,000
£m
Jackson
note (ii)
2,899
–
–
–
4
2,903
Asia life
assurance
subsidiaries
note (iv)
1,621
34
–
(23)
170
1,802
Group
total
13,890
356
(100)
577
690
15,413
Available capital at 31 December 2012
Changes in assumptions
Changes in management policy
Changes in regulatory requirements
New business and other factorsnote (v)
Available capital at 31 December 2013
Notes
(i) With-profits sub-fund
(ii)
The increase in 2013 of £1 billion reflects primarily the positive impact of investment returns earned on the opening available capital and rising yields.
Jackson
The increase of £4 million in 2013 reflects an underlying increase of £57 million (applying the 2013 year end exchange rate of US$1.66:£1.00) and £53 million
of exchange translation loss.
(iii) Other UK life assurance subsidiaries and funds
The effect from the changes in assumptions of valuation interest rates on insurance liabilities is broadly matched by the corresponding effect on assets leaving
no significant impact on the available capital.
(iv) Asia life assurance subsidiaries
The increase of £181 million in 2013 reflects an underlying increase of £325 million (applying the relevant 2013 year end exchange rates) and £143 million of
exchange translation loss.
(v) New business and other factors comprise the effect of changes in new business, valuation interest rate, investment return, foreign exchange and other factors.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued
261
d Basis of preparation, capital requirements and management
Each of the Group’s long-term business operations is capitalised to a sufficiently strong level for its individual circumstances.
Details by the Group’s major operations are shown below.
i Asia insurance operations
The available capital shown above of £1,802 million (2012: £1,621 million) represents the excess of local regulatory basis assets over
liabilities before deduction of required capital of £699 million (2012: £661 million).
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. The Hong Kong business branch
of PAC was transferred to separate subsidiaries established in Hong Kong on 1 January 2014 (see note D2). For the other material Asian
operations, the details of the basis of determining regulatory capital and regulatory capital requirements are as follows:
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.
In 2013, the local regulatory basis in Indonesia was replaced with the Indonesian authority’s risk-based capital framework. In accordance
with the framework, policy reserves for traditional business are determined on a gross premium reserve basis using prudent best estimate
assumptions. For linked business, the value of the units are maintained with a non-unit reserve which is calculated in accordance with
standard actuarial methodology.
Korea
Policy reserves for traditional business are determined on net premium reserve basis using standard mortality and prescribed standard
interest rates.
For linked business, the value of the units are held together with the non-unit reserves and calculated in accordance with the local
regulator’s standard actuarial methodology.
A risk-based capital framework is applied in Korea. For local solvency, the regulatory minimum is 100 per cent of the risk-based
capital. Further, in accordance with the local risk-based capital framework, insurers are expected to maintain a level of free surplus in
excess of the capital requirements. The general target level for the solvency margin is greater than 150 per cent of the risk-based capital
as required by the regulators.
Malaysia
A risk-based capital framework applies in Malaysia.
For participating business, a gross premium reserve on the guaranteed and non-guaranteed benefits determined using best estimate
assumptions is held. The amount held is subject to a minimum of a gross premium reserve on the guaranteed benefits, determined using
best estimate assumptions along with provisions of risk margin for adverse deviations 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 a deficit (if any) and the 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 reflect its own risk profile and this is expected to be higher than the Supervisory Target
Capital Level.
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 specified assumptions, but without allowance for future bonus, that include prescribed provisions
for adverse deviations (PADs).
For non-participating business, gross premium reserves are held. For linked business the value of units is held together with a non-unit
reserve calculated in accordance with standard actuarial methodology.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013 262
C11: Capital position statement continued
Thailand
A new risk-based capital framework was adopted from 1 January 2012 to replace the previous framework that used a net premium approach.
For non-participating business, the gross premium reserves are determined using best estimate assumptions along with provisions of
risk margin for adverse deviations discounted at the risk-free rate.
The risk free rate is derived from the greater of the current yield curve of Thai government bonds or a weighted-average yield curve
of the prior seven quarters Thai government bonds, as prescribed by the local regulator.
Vietnam
For traditional business, mathematical reserves are calculated using a modified net premium approach, set using assumptions agreed
with the regulator.
For linked business, the value of units is held together with the non-unit reserves calculated in accordance with the local regulator’s
standard actuarial methodology.
The capital requirement is determined as 4 per cent of reserves plus a specified percentage of 0.1 per cent of sums at risk for policies
with original term less than or equal to five years or 0.3 per cent of sums at risk for policies with original term of more than five years.
An additional capital requirement of Vietnamese Dong 200 billion is also required for companies transacting unit-linked business.
ii US insurance operations
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 £2,903 million (2012: £2,899 million) reflects US regulatory basis assets less liabilities
as adjusted for asset valuation reserves. The asset valuation reserve, which is reflected as available capital, 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 ratably in the future.
Jackson’s risk-based capital ratio is significantly in excess of regulatory requirements. At 31 December 2013, 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 increase statutory surplus by £0.8 million at 31 December 2013.
Michigan insurance law specifically allows value of business acquired as an admitted asset as long as certain criteria are met.
US NAIC standards limit the admitted amount of goodwill/value of business acquired generally to 10 per cent of capital and surplus.
At 31 December 2013, Jackson reported £257 million of statutory basis value of business acquired as a result of the REALIC acquisition,
which is fully admissible under Michigan insurance law.
iii UK insurance operations
In the UK, the insurers, regulated by PRA, must hold capital resources equal at least to the Minimum Capital Requirement (MCR).
In addition the rules require insurers to perform Individual Capital Assessments. Under these rules insurers must assess for themselves
the amount of capital needed to back their business. If the PRA views the results of this assessment as insufficient, it may draw up its
own Individual Capital Guidance for a firm, which can be superimposed as a requirement.
PAC with-profits sub-fund and Scottish Amicable Insurance Fund
Under PRA rules, insurers with with-profits liabilities of more than £500 million must hold capital equal to the higher of the MCR and
the Enhanced Capital Requirement (ECR). The ECR is intended to provide a more risk responsive and ‘realistic’ measure of a with-profit
insurer’s capital requirements, whereas the MCR is broadly speaking equivalent to the previous required minimum margin under the
Interim Prudential Sourcebook and satisfies the minimum EU Standards.
Determination of the ECR involves the comparison of two separate measurements of the firm’s resources requirement, which the
PRA 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’.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued 263
Available capital of the with-profits sub-fund and Scottish Amicable Insurance Fund of £8.0 billion (2012: £7.0 billion) represents the
excess of assets over liabilities on the PRA 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 which is
estimated to be £0.9 billion at 31 December 2013 (2012: £1.5 billion).
The PRA’s basis of setting the risk capital margin is to target a level broadly equivalent to a Standard & Poor’s credit rating of BBB and
to judge this by ensuring there are sufficient assets to absorb a one in 200 year event. The risk capital margin calculation achieves this by
setting rules for the determination of margins to cover defined stress changes in asset values and yields for market risk, credit risk and
termination risk for with-profits policies.
PAC has discretion in its management actions in the case of adverse investment conditions. Management actions encompass, but are
not confined to, investment allocation decisions, levels of reversionary bonuses, crediting rates and total claim values.
Other UK life assurance subsidiaries and funds
The available capital of £2,708 million (2012: £2,370 million) reflects the excess of regulatory basis assets over liabilities of the subsidiaries
and funds, before deduction of the capital resources requirement of £1,364 million (2012: £1,376 million).
The capital resources requirement for these companies broadly reflects a formula which, for active funds, equates to a percentage of
regulatory reserves plus a percentage of death strains. Death strains represent the payments made to policyholders upon death in excess
of amounts explicitly allocated to fund the provisions for policyholder’s claims and maturities.
iv Group capital requirements
In addition to the requirements at individual company level, PRA 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 2013, together with market risk sensitivity
disclosure provided to key management, is provided in the Strategic Report section of the Group’s 2013 Annual Report.
e Transferability of available capital
For PAC and all other UK long-term insurers, long-term business assets and liabilities must, by law, be maintained in funds separate from
those for the assets and liabilities attributable to non-life insurance business or to shareholders. Only the ‘established surplus’, the excess
of assets over liabilities in the long-term fund determined through a formal valuation, may be transferred so as to be available for other
purposes. Distributions from the with-profits sub-fund to shareholders reflect the shareholders’ one-ninth share of the cost of declared
policyholders’ bonuses.
Accordingly, the excess of assets over liabilities of the PAC long-term fund is retained within that company. The retention of the capital
enables it to support with-profits and other business of the fund by, for example, providing the benefits associated with smoothing and
guarantees. It also provides investment flexibility for the fund’s assets by meeting the regulatory capital requirements that demonstrate
solvency and by absorbing the costs of significant events or fundamental changes in its long-term business without affecting the bonus
and investment policies.
For other UK long-term business subsidiaries, the amounts retained within the companies are at levels which provide an appropriate
level of capital strength in excess of the regulatory minimum.
For Jackson, capital retention is maintained at a level consistent with an appropriate rating by Standard & Poor’s. Currently Jackson
is rated AA. Jackson can pay dividends on its capital stock only out of earned surplus unless prior regulatory approval is obtained.
Furthermore, dividends which exceed the greater of statutory net gain from operations for the prior year or 10 per cent of Jackson’s prior
year-end statutory surplus require prior regulatory approval.
For Asian subsidiaries, the amounts retained within the companies are at levels that provide an appropriate level of capital strength in
excess of the local regulatory minimum. For ring-fenced with-profits funds, the excess of assets over liabilities is retained with distribution
tied to the shareholders’ share of bonuses through declaration of actuarially determined surplus. The Singapore and Malaysian
businesses may, in general, remit dividends to the UK, provided the statutory insurance fund meets the capital adequacy standard
required under local statutory regulations.
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.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013 264
C11: Capital position statement continued
f Sensitivity of liabilities and total capital to changed market conditions and capital management policies
Prudential manages its assets, liabilities and capital locally, in accordance with local regulatory requirements and reflecting the different
types of liabilities Prudential has in each business. As a result of the diversity of products offered by Prudential and the different regulatory
requirements in which it operates, Prudential employs differing methods of asset/liability and capital management, depending on the
business concerned.
Stochastic modelling of assets and liabilities is undertaken in the UK, Jackson and Asia to assess the economic capital requirements.
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
flow analysis to create a portfolio of debt securities whose value changes in line with the value of liabilities when interest rates change.
This type of analysis helps protect profits from changing interest rates. This type of analysis is used in the UK for annuity business and by
Jackson for its interest-sensitive and fixed index annuities and institutional products.
For businesses that are most sensitive to equity price changes, Prudential uses stochastic modelling and scenario testing to look at
the future returns on its investments under different scenarios which best reflect the large diversity in returns that equities can produce.
This allows Prudential to devise an investment and with-profits policyholder bonus strategy that, based on the model assumptions,
allows it to optimise returns to its policyholders and shareholders over time while maintaining appropriate financial strength. Prudential
uses this methodology extensively in connection with its UK with-profits business.
g Intra-group arrangements in respect of the Scottish Amicable Insurance Fund
Should the assets of the Scottish Amicable Insurance Fund be inadequate to meet the guaranteed benefit obligations of the policyholders
of the Scottish Amicable Insurance Fund, the PAC long-term fund would be liable to cover any such deficiency in the first instance.
C11.2 Asset management operations – Regulatory and other surplus
Certain asset management subsidiaries of the Group are subject to regulatory requirements. The movement in the year of the surplus
regulatory capital position of those subsidiaries, 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 to the parent company
Exchange movement
End of year
Asset management operations
2013 £m
2012 £m
M&G including
Prudential
Capital
US
Eastspring
Investments
Total
Total
255
349
(3)
–
(292)
–
309
124
18
–
–
(6)
(2)
134
134
57
(1)
8
(67)
(2)
129
513
424
(4)
8
(365)
(4)
572
412
416
3
9
(318)
(9)
513
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued
C12: Provisions
Provision in respect of defined benefit pension schemes:C9
Other provisions (see below)
Total provisions
Analysis of other provisions:
265
2013 £m
2012* £m
194
441
635
205
386
591
At 1 January
Charged to income statement:
Additional provisions
Unused amounts released
Used during the year
Exchange differences
Total at 31 December
2013 £m
2012* £m
Legal
provisions
note (i)
Restruc-
turing
provisions
note (ii)
Other
Provisions
note (iii)
20
17
(2)
(21)
–
14
27
2
(13)
(3)
–
13
339
183
(10)
(86)
(12)
414
Legal
provisions
note (i)
Restruc-
turing
provisions
note (ii)
Other
Provisions
note (iii)
14
10
(1)
(2)
(1)
20
23
14
(4)
(6)
–
27
252
207
(7)
(109)
(4)
339
Total
386
202
(25)
(110)
(12)
441
Total
289
231
(12)
(117)
(5)
386
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
Notes
(i)
Total legal provisions at 31 December 2013 of £14 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 £14 million legal
provision as at 31 December 2013, £11 million has been established to cover this potential litigation and is expected to be utilised over the next five 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 benefits provisions of £332 million, provisions for onerous contracts of £41 million and regulatory and other provisions of
£41 million. Staff benefits are generally expected to be paid out within the next three years.
The provision balance is expected to be paid out within the next five years.
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013
266
C13: 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
251
(39)
212
212
(1)
(12)
96
1
11
307
357
(50)
307
Group
occupied
property
2013 £m
Tangible
assets
Total
1,221
(467)
754
754
(3)
(87)
221
78
(43)
920
970
(428)
542
542
(2)
(75)
125
77
(54)
613
1,060
(447)
613
1,417
(497)
920
Group
occupied
property
2012* £m
Tangible
assets
258
(29)
229
229
(9)
(10)
4
–
(2)
212
251
(39)
212
884
(376)
508
508
(8)
(80)
135
(1)
(12)
542
970
(428)
542
Total
1,142
(405)
737
737
(17)
(90)
139
(1)
(14)
754
1,221
(467)
754
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
Capital expenditure: property, plant and equipment by segment
The capital expenditure of £125 million (2012: £135 million) arose as follows: £68 million in UK, £16 million in US and £23 million in Asia
in insurance operations with the remaining balance of £18 million arising from asset management operations and unallocated corporate
expenditure (2012: £80 million in UK, £24 million in US, £17 million in Asia in insurance operations and £10 million in other operations).
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsC: Balance sheet notes continued
267
C14: Investment properties
Investment properties principally relate to the PAC with-profits fund and are carried at fair value. A reconciliation of the carrying amount
of investment properties at the beginning and end of the year is set out below:
At 1 January
Additions:
Resulting from acquisitions
Resulting from expenditure capitalised
Disposals
Net gain (loss) from fair value adjustments
Net foreign exchange differences
Transfers from (to) held for sale assets
At 31 December
2013 £m
2012* £m
10,554
10,470
1,050
42
(613)
441
(15)
18
1,025
118
(695)
(215)
(52)
(97)
11,477
10,554
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
The 2013 income statement includes rental income from investment properties of £606 million (2012: £544 million) and direct operating
expenses including repairs and maintenance arising from these properties of £46 million (2012: £49 million).
Investment properties of £4,426 million (2012: £3,845 million) are held under finance leases. A reconciliation between the total of
future minimum lease payments at the statement of financial position date, and their present value is shown below. This table also shows
the minimum future rentals to be received on non-cancellable operating leases of the Group’s freehold investment properties in the
following periods:
Less than 1 year
1 to 5 years
Over 5 years
Total
2013 £m
2012* £m
Future
minimum
payments
Future
finance
charges
PV of future
minimum
payments
Future
minimum
payments
Future
finance
charges
PV of future
minimum
payments
5
19
824
848
–
(3)
(752)
(755)
5
16
72
93
5
22
959
986
–
(4)
(873)
(877)
5
18
86
109
Contingent rent is that portion of the lease payments that is not fixed in amount but is based on the future value of a factor that changes
other than with the passage of time. There was no contingent rent recognised as income or expense in 2013 and 2012.
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
2013 £m
2012 £m
351
1,204
3,294
4,849
451
1,541
3,785
5,777
The total minimum future rentals to be received on non-cancellable sub-leases for the Group’s investment properties held under finance
leases at 31 December 2013 are £2,315 million (2012: £2,439 million).
Financial statementsC: Balance sheet notes Prudential plc Annual Report 2013
268
D: Other notes
D1: Business acquisitions and disposals
a Acquisition of Thanachart Life Assurance Company Limited and bancassurance partnership agreement with
Thanachart Bank
On 3 May 2013, the agreement Prudential plc, through its subsidiary Prudential Life Assurance (Thailand) Public Company Limited
(Prudential Thailand), entered into in November 2012 to establish an exclusive 15-year partnership with Thanachart Bank Public
Company Limited (Thanachart Bank) to develop jointly their bancassurance business in Thailand was launched. At the same time,
Prudential Thailand completed the acquisition of 100 per cent of the voting interest in Thanachart Life Assurance Company Limited
(Thanachart Life), a wholly-owned life insurance subsidiary of Thanachart Bank. 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.
The consideration for the transaction is THB 18.981 billion (£412 million), of which THB 17.500 billion (£380 million) was settled in
cash on completion in May 2013 with a further payment of THB 0.946 billion (£20 million), for adjustments to reflect the net asset value
as at completion date, paid in July 2013. In addition a deferred payment of THB 0.535 billion (£12 million) is payable 12 months after
completion. Included in the total consideration of THB 18.981 billion (£412 million) was the cost of the distribution rights associated
with the exclusive 15-year bancassurance partnership agreement with Thanachart Bank.
The purchase consideration paid was equivalent to the fair value of the acquired assets and liabilities assumed. No goodwill has
been recognised.
In addition to the purchase consideration, the Group incurred £4 million of acquisition related costs, of which £3 million was
recognised as an expense in the consolidated income statement in the second half of 2012 and the remaining £1 million recognised
in 2013.
Assets acquired and liabilities assumed at the date of acquisition
The fair value of the acquired assets and liabilities are shown in the table below:
Assets
Acquired value of in-force business
Investments (principally debt securities)
Cash and cash equivalents
Other assets (including distribution rights)
Total assets
Liabilities
Insurance contract liabilities
Other non-insurance liabilities
Total liabilities
Net assets acquired and liabilities assumed
Purchase consideration (including £12 million of deferred consideration)
Fair value
recognised at
acquisition
date
£m
21
642
4
293
960
487
61
548
412
412
Insurance contract liabilities were valued consistent with Prudential’s existing IFRS valuation basis for the Thailand Life business,
determined in accordance with methods prescribed by local GAAP adjusted to comply, where necessary, with UK GAAP. In accordance
with IFRS 3 ‘Business Combinations’, an acquired value of in-force business has been recognised.
Included within the identifiable assets as shown above are loans and other debtors acquired with fair values of £6 million. These values
represent the gross contractual amounts all of which are expected to be collected.
The consolidated statement of cashflows contains a £396 million net cash outflow in respect of the acquisition of Thanachart Life and
the cost of the distribution rights representing cash consideration paid of £400 million less cash and cash equivalents acquired of £4 million.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statements Impact of the acquisition on the results of the Group
Revenue
Operating profit based on longer-term investment returns
Short-term fluctuations in investment returns
Amortisation of acquisition accounting adjustmentsnote (ii)
Profit before tax
269
Actual £m Proforma £m
Post-
acquisition
period from
3 May to
31 Dec 2013
Estimated
full year
2013
note (i)
113
197
30
(7)
(3)
20
40
(7)
(4)
29
Notes
(i)
(ii)
The proforma shows the estimation of the Thanachart Life business’ contribution to the Group’s consolidated revenue and profit before tax for the period if
the acquisition had occurred on 1 January 2013. 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 as if the acquisition had occurred on 1 January 2013. These amounts have been determined using actual results for
the four month period to 2 May 2013 and the post-acquisition results from 3 May to 31 December 2013.
The amortisation of acquisition accounting adjustments represents the amortisation of the acquired value of in-force business.
b Acquisition of Reassure America Life Insurance Company in 2012
On 4 September 2012, the Group through its indirect wholly-owned subsidiary, Jackson completed the acquisition of 100 per cent issued
share capital of SRLC America Holding Corp. and its primary operating subsidiary, Reassure America Life Insurance Company (REALIC).
REALIC is 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 and does not write new business. At 31 December 2012, the purchase
consideration was subject to final agreement under the terms of the transaction with Swiss Re. No goodwill was recognised under IFRS
on the date of the completion of the acquisition as the purchase consideration paid was equivalent to the fair value of the identifiable
assets and liabilities assumed.
In the course of 2013, following the conclusion of an independent arbitration process over outstanding matters, the purchase
consideration for REALIC was revised to £381 million in line with the re-measured value of the individual acquired assets and liabilities.
This compares to the provisional estimates of £370 million for consideration and net assets reported in the 2012 consolidated IFRS
financial statements.
The consolidated statement of cash flows in 2012 contained a £224 million net cash outflow in respect of this acquisition representing
cash consideration of £371 million less cash and cash equivalents acquired of £147 million. In 2013 an additional cash outflow of £9 million
was recorded reflecting the revised consideration.
c Agreement to sell Japan life business
On 16 July 2013, the Group reached an agreement to sell the Group’s closed book life insurance business in Japan, PCA Life Insurance
Company Limited to SBI Holdings Inc. for US$85 million (£51 million at 31 December 2013 closing exchange rate). Completion of the
transaction is dependent on regulatory approval.
The Japan life business has been classified as held for sale in these consolidated financial statements in accordance with IFRS 5,
‘Non-current assets held for sale and discontinued operations’. Consistent with its classification as held for sale, the IFRS carrying value
of the Japan life business has been set to £48 million at 31 December 2013, representing the proceeds, net of related expenses. This has
resulted in a charge as for ‘Remeasurement of Japan life business classified as held for sale’ of £(120) million in the income statement.
In order to facilitate comparisons of the Group’s retained businesses, the supplementary analysis of profit of the Group as shown in
note B1.1 has been adjusted to show separately the results for the Japan life business. Accordingly, the comparative results for 2012 have
been retrospectively adjusted. For 2013 the result for the year, including short-term fluctuations in investment returns, together with the
adjustment to the carrying value have given rise to an aggregate loss of £(102) million (2012: £17 million profit). This comprises:
Remeasurement of carrying value on classification as held for sale
Amounts that would otherwise be classified within:
Operating profit based on longer-term investment returns
Short-term fluctuations in investment returns
(Loss) profit attaching to held for sale Japan life business
Related tax charge
2013 £m
2012 £m
(120)
3
15
(102)
–
–
(2)
19
17
–
Financial statementsD: Other notes Prudential plc Annual Report 2013 270
D1: Business acquisitions and disposals continued
The assets and liabilities of the Japan life business classified as held for sale on the statement of financial position as at 31 December 2013
are as follows:
Assets
Investments
Other assets
Adjustment for remeasurement of the carrying value to fair value less costs to sell
Assets held for sale
Liabilities
Policyholder liabilities
Other liabilities
Liabilities held for sale
Net assets
2013 £m
956
80
1,036
(120)
916
814
54
868
48
d PAC with-profits funds acquisitions
In December 2013, the PAC with-profits fund, via its venture fund holdings and as part of its investment portfolio, acquired a 100 per cent
interest of Falbygdens Energi AB, a Swedish utility company. The main business operations comprise the production and distribution of
district heating and the distribution of electricity primarily within the municipality of Falköping. The company also operates a broadband
business in the municipality.
The consideration paid of £71 million was equivalent to the fair value of acquired assets and liabilities assumed. No goodwill has
been recognised.
As these transactions are within the with-profits fund, they have no impact on shareholders’ profit or equity for the year ended
31 December 2013. The impact on the Group’s consolidated revenue, including investment returns, is not material. Had the acquisitions
been effected at 1 January 2013, the revenue and profit of the Group for the year ended 31 December 2013 would not have been
materially different.
D2: Domestication of the Hong Kong branch business
On 1 January 2014, following consultation with policyholders of PAC and regulators and court approval, the Hong Kong branch of PAC
was transferred to separate subsidiaries established in Hong Kong. On an IFRS basis, approximately £12.6 billion of assets, £12.3 billion
of liabilities (including policyholder liabilities of £10.2 billion and £1.7 billion of unallocated surplus) and £0.3 billion of shareholders’ funds
(for the excess assets of the transferred non-participating business) have been transferred.
The costs of enabling the domestication in 2013 were £35 million. Within the Group’s supplementary analysis of profit, these costs
have been presented as a separate category of items excluded from operating profit based on longer-term investment returns as shown
in note B1.1.
D3: Contingencies and related obligations
In addition to the legal proceedings relating to Jackson mentioned under the legal provisions section in note C12, 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 financial condition, results of
operations, or cash flows.
Pension mis-selling review
The pensions review by the UK insurance regulator of past sales of personal pension policies required all UK life insurance companies
to review their cases of potential mis-selling and record a provision for the estimated costs. The Group met the requirement of the UK
insurance regulator to issue offers to all cases by 30 June 2002.
At 31 December 2013 the pension mis-selling provision was £286 million (31 December 2012: £306 million). The pension mis-selling
provision is included within the liabilities in respect of investment contracts with discretionary participation features under IFRS 4 and
is stochastically determined on a discounted basis. The average discount rate implied in the movement in the year is 3.4 per cent
(2012: 2.3 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.
The costs associated with the pension mis-selling review have been met from the inherited estate (see below) and, accordingly 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.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsD: Other notes continued 271
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. This review was completed on
30 June 2002 with the assurance continuing to apply to any policy in force at 31 December 2003, both for premiums paid before
1 January 2004, and for subsequent regular premiums (including future fixed, retail price index or salary related increases and
Department of Work and Pensions rebate business). The assurance has not applied to new business since 1 January 2004.
Guaranteed annuities
PAC used to sell guaranteed annuity products in the UK and at 31 December 2013 held a provision of £36 million (2012: £47 million)
within the main with-profits fund within policyholder liabilities to honour guarantees on these products. The Group’s main exposure
to guaranteed annuities in the UK is through SAIF and at 31 December 2013 a provision of £328 million (2012: £371 million) was held
in SAIF to honour the guarantees. As SAIF is a separate sub-fund of the PAC long-term business fund, attributable to the policyholders,
the movement in this provision has no impact on shareholders.
Other matters
Inherited estate of the PAC long-term fund
The assets of the with-profits sub-fund (WPSF) within the long-term insurance fund of 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.
This estate enables PAC to support with-profits business by providing the benefits associated with smoothing and guarantees, by
providing investment flexibility for the fund’s assets, by meeting the regulatory capital requirements that demonstrate solvency and
by absorbing the costs of certain significant events or fundamental changes in its long-term business without affecting the bonus and
investment policies. The size of the inherited estate fluctuates from year to year depending on the investment return and the extent of
its utilisation.
Support for long-term business funds by shareholders’ funds
As a proprietary insurance company, PAC is liable to meet its obligations to policyholders even if the assets of the long-term funds are
insufficient to do so. The assets, represented by the unallocated surplus of with-profits funds, in excess of amounts expected to be paid
for future terminal bonuses and related shareholder transfers (‘the excess assets’) in the long-term funds could be materially depleted
over time by, for example, a significant or sustained equity market downturn, costs of significant fundamental strategic change or a
material increase in the pension mis-selling provision. In the unlikely circumstance that the depletion of the excess assets within the
long-term fund was such that the Group’s ability to satisfy policyholders’ reasonable expectations was adversely affected, it might
become necessary to restrict the annual distribution to shareholders or to contribute shareholders’ funds to the long-term funds to
provide financial support.
In 1997, the business of Scottish Amicable Life Assurance Society (SALAS), a mutual society, was transferred to PAC with the creation
of, a separate sub-fund, Scottish Amicable Insurance Fund (SAIF) within PAC’s long-term business fund containing all the with-profits
business and all other pension business that was transferred. No new business has been or will be written in the sub-fund and it is
managed to ensure that all the invested assets are distributed to SAIF policyholders over the lifetime of SAIF policies. With the exception
of certain amounts in respect of the unitised with-profits life business, all future earnings arising in SAIF are retained for SAIF policyholders.
Any excess (deficiency) of revenue over expense within SAIF during a period is attributable to the policyholders of the fund.
Shareholders have no interest in the profits of SAIF but are entitled to the asset management fees paid on this business.
SAIF with-profits policies contain minimum levels of guaranteed benefit 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
benefit obligations of the policyholders of SAIF, the PAC long-term fund would be liable to cover any such deficiency in the first instance.
Unclaimed Property Provision
Jackson has received regulatory enquiries on a developing industry-wide matter regarding 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 firms to perform specific unclaimed property audits or targeted market
conduct examinations covering claims settlement practices and procedures for escheating unclaimed property. One such firm has
contracted with the treasury departments of 27 states to perform an examination of Jackson’s practices for handling unclaimed property.
Any regulatory audits, related examination activity and internal reviews may result in additional payments to beneficiaries, escheatment
of funds (ie, reversion of funds to the state) deemed abandoned under state laws, administrative penalties and changes in Jackson’s
procedures for the identification of unreported claims and handling of escheatable property. At 31 December 2013, Jackson has accrued
£12 million to cover any such liability.
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 and are financed by payments assessed on solvent insurance companies based on location, volume and types of business.
The Group estimated its reserve for future guarantee fund assessments for Jackson, included within other liabilities to be £13 million
at 31 December 2013 (2012: £31 million). Similar assessments for the UK businesses were not significant. The directors believe that
the reserve is adequate for all anticipated payments for known insolvencies.
Financial statementsD: Other notes Prudential plc Annual Report 2013 272
D3: Contingencies and related obligations continued
At 31 December 2013, Jackson has unfunded commitments of £298 million (2012: £325 million) related to its investments in limited
partnerships and of £132 million (2012: £86 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.
The Group has provided other guarantees and commitments to third parties entered into in the normal course of business but the
Company does not consider that the amounts involved are significant.
Intra-group capital support arrangements
Prudential and PAC have put in place intra-group arrangements to formalise circumstances in which capital support would be made
available by Prudential (including in the scenarios referred to in pension mis-selling review above). While Prudential considers it unlikely
that such support will be required, the arrangements are intended to provide additional comfort to PAC and its policyholders.
In addition, Prudential has put in place intra-group arrangements to formalise undertakings by Prudential to the regulators of the
Hong Kong subsidiaries, which from 1 January 2014, contain the domesticated branch business from PAC as noted in note D2 regarding
their solvency levels. In addition, the scheme of transfer of the Hong Kong branch includes short-term support arrangements between
Prudential and PAC to underpin similar arrangements between PAC and the newly domesticated business. It is considered unlikely that
support will need to be provided under these arrangements.
D4: Post balance sheet events
Final dividend
The 2013 final dividend approved by the Board of Directors after 31 December 2013 is as described in note B7.
D5: Additional information on the effect of adoption of new and amended accounting standards
The new and amended accounting standards adopted by the Group in 2013 are explained in note A2. The tables below show the
quantitative effect of the adoption of these new and amended standards on the Group primary financial statements and supplementary
analysis of profit.
(a) The aggregate effect of the adoption of the standards on the income statement, earnings per share, statement of comprehensive
income, statement of changes in equity, statement of financial position and cash flow statement is shown in the tables below:
Consolidated income statement
Total revenue, net of reinsurance
Benefits and claims and movement in unallocated surplus
of with-profits funds, net of reinsurance
Acquisition costs and other expenditure
Remeasurement of carrying value of Japan life business
classified as held for sale
Share of profit from joint ventures and associates, net of
related tax*
Profit before tax (being tax attributable to shareholders’ and
policyholders’ returns)
Less tax charge attributable to policyholders’ returns
Profit 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
Profit for the year attributable to equity holders of
the Company
Earnings per share (in pence)
Based on profit attributable to the equity holders of the Company:
Basic
Diluted
Under previous
accounting
requirements
2013 £m
Effect of IFRS changes
IFRS 10
IFRS 11
IAS 19R
After
IFRS
changes
53,499
116
(1,240)
–
52,375
(43,948)
(7,409)
–
(116)
(120)
–
2,022
(437)
1,585
(724)
437
(287)
1,298
50.9p
50.8p
–
–
–
–
–
–
–
–
–
–
–
837
244
–
147
(12)
–
(12)
12
–
12
–
(43)
115
(43,154)
(7,166)
–
–
72
(10)
62
(24)
10
(14)
(120)
147
2,082
(447)
1,635
(736)
447
(289)
48
1,346
–
–
1.9p
1.9p
52.8p
52.7p
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsD: Other notes continued Total revenue, net of reinsurance
Benefits and claims and movement in unallocated surplus
of with-profits funds, net of reinsurance
Acquisition costs and other expenditure
Share of profit from joint ventures and associates, net
of related tax*
Profit before tax (being tax attributable to shareholders’
and policyholders’ returns)
Less tax charge attributable to policyholders’ returns
Profit 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
Profit for the year attributable to equity holders
of the Company
Earnings per share (in pence)
Based on profit attributable to the equity holders of the Company:
Basic
Diluted
As reported
under previous
accounting
requirements
55,476
(45,953)
(6,335)
–
3,188
(378)
2,810
(991)
378
(613)
2,197
86.5p
86.4p
2012 £m
Effect of IFRS changes
IFRS 10
IFRS 11
IAS 19R
–
94
(145)
–
(51)
6
(45)
17
(6)
11
(34)
52
–
(52)
–
–
–
–
–
–
–
–
–
–
(1,090)
715
220
135
(20)
2
(18)
20
(2)
18
–
–
–
* The effect of change from IFRS 11 in the table above includes the reclassification of the Group’s share of profit from its investments in associates into the line for share
of profit from joint ventures and associates, net of related tax. These investments were already on the equity method accounting prior to 2013 but their results were
previously included within the Investment return included with total revenue.
Consolidated statement of comprehensive income and statement of changes in equity
Under previous
accounting
requirements
2013 £m
Effect of IFRS changes
IFRS 10
IFRS 11
IAS 19R
Profit for the year
Exchange movements on foreign operations and net investment
hedges, net of related tax
Net unrealised valuation on securities of US insurance
operations classified as available-for-sale net of amortisation
of deferred acquisition costs and related tax
Shareholders’ share of actuarial and other gains and losses
on defined benefit pension schemes, net of related tax
Total comprehensive income for the year
Net increase in shareholders’ equity
At beginning of year
At end of year
1,298
(255)
(1,034)
–
9
(709)
10,359
9,650
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
273
After
IFRS
changes
54,438
(45,144)
(6,312)
135
3,117
(370)
2,747
(954)
370
(584)
2,163
(1.4)p
(1.4)p
85.1p
85.0p
After
IFRS
changes
1,346
(255)
48
–
–
(1,034)
(48)
–
–
–
–
(48)
9
(709)
10,359
9,650
Financial statementsD: Other notes Prudential plc Annual Report 2013
274
D5: Additional information on the effect of adoption of new and amended accounting standards continued
As reported
under previous
accounting
requirements
2012 £m
Effect of IFRS changes
IFRS 10
IFRS 11
IAS 19R
Profit for the year
Exchange movements on foreign operations and net investment
hedges, net of related tax
Net unrealised valuation on securities of US insurance
operations classified as available-for-sale net of amortisation
of deferred acquisition costs and related tax
Shareholders’ share of actuarial and other gains and losses
on defined benefit pension schemes, net of related tax
Total comprehensive income for the year
Net increase in shareholders’ equity
At beginning of year
At end of year
Consolidated statement of financial position
2,197
(216)
387
–
2,368
1,795
8,564
10,359
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(34)
–
–
34
–
–
–
–
Under previous
accounting
requirements
31 Dec 2013 £m
Effect of IFRS changes
IFRS 10
IFRS 11
IAS 19R
Assets
Intangible assets attributable to shareholders
Intangible assets attributable to with-profits funds
Reinsurers’ share of insurance contract liabilities
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 other assets
Total assets
Liabilities
Policyholder liabilities and unallocated surplus of with-profits
funds
Net asset value attributable to unit holders of consolidated
unit trusts and similar funds
Total other liabilities
Total liabilities
Equity
Shareholders’ equity
Non-controlling interests
Total equity
Total equity and liabilities
6,837
249
6,846
8,038
12,015
100
11,755
120,974
134,278
6,291
12,563
8,128
328,074
289,173
4,167
25,083
318,423
9,650
1
9,651
–
–
–
21
–
–
830
547
139
(1)
(3)
(125)
1,408
(81)
–
(8)
(128)
(538)
709
(19)
(1,299)
(1,512)
(25)
(347)
(302)
(3,550)
–
(3,159)
1,111
297
1,408
–
(391)
(3,550)
–
–
–
–
–
–
328,074
1,408
(3,550)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
After
IFRS
changes
2,163
(216)
387
34
2,368
1,795
8,564
10,359
After
IFRS
changes
6,756
249
6,838
7,931
11,477
809
12,566
120,222
132,905
6,265
12,213
7,701
325,932
286,014
5,278
24,989
316,281
9,650
1
9,651
325,932
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsD: Other notes continued
As reported
under previous
accounting
requirements
31 Dec 2012 £m
Effect of IFRS changes
IFRS 10
IFRS 11
IAS 19R
Assets
Intangible assets attributable to shareholders
Intangible assets attributable to with-profits funds
Reinsurers’ share of insurance contract liabilities
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 other assets
Total assets
Liabilities
Policyholder liabilities and unallocated surplus of with-profits
funds
Net asset value attributable to unit holders of consolidated
unit trusts and similar funds
Total other liabilities
Total liabilities
Equity
Shareholders’ equity
Non-controlling interests
Total equity
Total equity and liabilities
5,736
256
6,859
7,492
10,880
113
11,821
99,958
140,103
7,900
12,653
6,482
310,253
271,363
4,345
24,181
299,889
10,359
5
10,364
310,253
–
–
–
25
–
–
930
172
146
(323)
(3)
(121)
826
(90)
–
(5)
(113)
(326)
522
(8)
(1,504)
(1,342)
(30)
(402)
(137)
(3,435)
–
(3,100)
800
26
826
–
–
–
–
(335)
(3,435)
–
–
–
826
(3,435)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
275
After
IFRS
changes
5,646
256
6,854
7,404
10,554
635
12,743
98,626
138,907
7,547
12,248
6,224
307,644
268,263
5,145
23,872
297,280
10,359
5
10,364
307,644
Financial statementsD: Other notes Prudential plc Annual Report 2013
276
D5: Additional information on the effect of adoption of new and amended accounting standards continued
Assets
Intangible assets attributable to shareholders
Intangible assets attributable to with-profits funds
Reinsurers’ share of insurance contract liabilities
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 other assets
Total assets
Liabilities
Policyholder liabilities and unallocated surplus of with-profits
funds
Net asset value attributable to unit holders of consolidated
unit trusts and similar funds
Total other liabilities
Total liabilities
Equity
Shareholders’ equity
Non-controlling interests
Total equity
Total equity and liabilities
Consolidated statement of cash flows
As reported
under previous
accounting
requirements
31 Dec 2011 £m
Effect of IFRS changes
IFRS 10
IFRS 11
IAS 19R
5,699
267
1,647
7,267
10,757
70
9,714
87,349
124,498
7,509
10,708
7,260
272,745
236,290
3,840
24,008
264,138
8,564
43
8,607
–
–
–
23
–
–
675
(50)
199
(241)
(30)
(305)
271
(91)
–
(4)
(91)
(287)
446
(8)
(1,336)
(1,050)
(28)
(338)
(211)
(2,998)
–
(2,752)
284
(13)
271
–
–
–
–
(246)
(2,998)
–
–
–
272,745
271
(2,998)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Cash flows from operating activities
Profit before tax (being tax attributable to shareholders’
and policyholders’ returns)
Non-cash movements in operating assets and liabilities
reflected in profit before tax and other items
Net cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
Net 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
Under previous
accounting
requirements
2013 £m
Effect of IFRS changes
IFRS 10
IFRS 11
IAS 19R
2,022
(272)
1,750
(584)
49
1,215
6,126
(130)
7,211
–
(124)
(124)
–
–
(124)
–
–
(124)
(12)
(290)
(302)
–
–
(302)
–
–
(302)
72
(72)
–
–
–
–
–
–
–
After
IFRS
changes
5,608
267
1,643
7,199
10,470
516
10,381
85,963
123,647
7,240
10,340
6,744
270,018
233,538
4,124
23,749
261,411
8,564
43
8,607
270,018
After
IFRS
changes
2,082
(758)
1,324
(584)
49
789
6,126
(130)
6,785
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsD: Other notes continued
As reported
under previous
accounting
requirements
2012 £m
Effect of IFRS changes
IFRS 10
IFRS 11
IAS 19R
Cash flows from operating activities
Profit before tax (being tax attributable to shareholders’
and policyholders’ returns)
Non-cash movements in operating assets and liabilities
reflected in profit before tax and other items
Net cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of exchange rate changes on cash and cash equivalents
Cash and cash equivalents at end of year
3,188
(2,742)
446
(326)
(892)
(772)
7,257
(101)
6,384
–
190
190
–
–
190
(310)
–
(120)
(20)
89
69
–
–
69
(206)
(1)
(138)
(51)
51
–
–
–
–
–
–
–
277
After
IFRS
changes
3,117
(2,412)
705
(326)
(892)
(513)
6,741
(102)
6,126
(b) The effect of the adoption of the new and amended accounting standards in 2013 on the Group’s supplementary analysis of profit
is shown in the table below.
Segment disclosure – profit before tax
Under previous
accounting
requirements
2013 £m
Effect of IFRS changes
IFRS 11
IAS 19R
Operating profit based on longer-term investment returns
Asia operations:
Asia insurance operations:
Before reclassification of held for sale Japan life business
Reclassification of Japan life business
Eastspring Investments
Other operations
Total
Short-term fluctuations in investment returns:
Before reclassification of held for sale Japan life business
Reclassification of Japan life business
Shareholders’ share of actuarial and other gains and losses on defined
benefit pension schemes
Amortisation of acquisition accounting adjustments
Loss attaching to held for sale Japan life business:
Reclassification from operating profit based on longer-term
investment returns
Reclassification from short-term fluctuations in investment returns
Remeasurement of carrying value of Japan life business classified
as held for sale
Costs of domestication of Hong Kong branch
Profit before tax attributable to shareholders
Basic EPS based on operating profit based on longer-term investment returns
after tax and non-controlling interests
Basic EPS based on total profit after tax and non-controlling interests
1,009
(3)
1,006
82
1,879
2,967
(1,095)
(15)
(1,110)
(63)
(72)
3
15
(120)
(102)
(35)
1,585
90.9p
50.9p
After
IFRS
changes
1,004
(3)
1,001
74
1,879
2,954
(1,095)
(15)
(1,110)
–
(72)
3
15
(120)
(102)
(35)
(5)
–
(5)
(8)
–
(13)
1
–
1
–
–
–
–
–
–
–
–
–
–
–
–
–
(1)
–
(1)
63
–
–
–
–
–
–
(12)
62
1,635
–
–
–
1.9p
90.9p
52.8p
Financial statementsD: Other notes Prudential plc Annual Report 2013
278
D5: Additional information on the effect of adoption of new and amended accounting standards continued
Operating profit based on longer-term investment returns
Asia operations:
Asia insurance operations:
Before reclassification of held for sale Japan life business
Reclassification of Japan life business
Eastspring Investments
Other operations
Total
Short-term fluctuations in investment returns:
Before reclassification of held for sale Japan life business
Reclassification of Japan life business
Shareholders’ share of actuarial and other gains and losses on defined
benefit pension schemes
Amortisation of acquisition accounting adjustments
Gain on dilution of Group holdings
Profit attaching to held for sale Japan life business:
Reclassification from operating profit based on longer-term
investment returns
Reclassification from short-term fluctuations in investment returns
Profit before tax attributable to shareholders
Basic EPS based on operating profit based on longer-term investment returns
after tax and non-controlling interests
Basic EPS based on total profit after tax and non-controlling interests
2012 £m
As reported
under previous
accounting
requirements
Effect of IFRS changes
IFRS 11
IAS 19R
After
IFRS
changes
913
2
915
75
1,545
2,535
204
(19)
185
50
(19)
42
(2)
19
17
2,810
76.9p
86.5p
(9)
–
(9)
(6)
–
(15)
(3)
–
(3)
–
–
–
–
–
–
–
–
–
–
–
–
5
–
5
(50)
–
–
–
–
–
904
2
906
69
1,545
2,520
206
(19)
187
–
(19)
42
(2)
19
17
(18)
(45)
2,747
–
–
–
(1.4)p
76.9p
85.1p
D6: Subsidiary undertakings
a Principal subsidiaries
The principal subsidiary undertakings of the Group at 31 December 2013 are disclosed in note 5 ‘Investments of the Company’ of the
parent Company financial statements.
Details of all Prudential subsidiaries, joint ventures and associates will be annexed to the next Annual Returns of Prudential plc filed
with the UK Registrar of Companies.
b Dividend restrictions and minimum capital requirements
Certain Group subsidiaries and joint ventures are subject to restrictions on the amount of funds they may transfer in the form of cash
dividends or otherwise to the parent company.
Under UK company law, dividends can only be paid if a UK company has distributable reserves sufficient to cover dividend.
Further, UK insurance companies are required to maintain solvency margins in accordance with the Prudential Regulation Authority
rules. The Group UK asset management company, M&G is also required to consider its capital requirements before making any
distribution to the parent company.
Jackson is subject to state laws that limit the dividends payable to its parent company based on statutory capital and surplus and
prior year earnings. Dividends in excess of these limitations require prior regulatory approval.
The Group’s subsidiaries and joint ventures 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 sufficient distributable reserves.
The Group capital position statement for life assurance businesses is set out in note C11.1, showing the available capital reflecting
the excess of regulatory basis over liabilities for each fund or group of companies determined by reference to the local regulation of the
subsidiaries. In addition, disclosure is also provided in note C11.1 of the local capital requirement of each of the funds, or group of companies.
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsD: Other notes continued
279
D7: Investments in joint ventures and associates
Joint ventures represent arrangements where the parties who control the arrangement through contractual or other agreement have the
rights to the net assets of the arrangements. The Group has shareholder-backed joint venture insurance and asset management business
in China with CITIC Group, and in India with ICICI Bank. In addition, there is an asset management joint venture in Hong Kong with BOCI
and a Takaful general and life insurance joint venture in Malaysia.
The Group has various joint ventures relating to property investments held by the PAC with-profits fund. The results of these joint ventures
are reflected in the movement in the unallocated surplus of the PAC with-profits funds and therefore do not affect shareholders’ results.
As a consequence of adoption of IFRS 11 ‘Joint Arrangements’ from 1 January 2013, the Group’s joint ventures are accounted for using
the equity method. For these operations the net of tax results are reflected in the Group’s profit before tax.
The investments in these joint ventures have the same accounting year end as the Group, except for joint ventures in India. Although
these entities have reporting periods ending 31 March, 12 months of financial information up to 31 December is recorded. Accordingly,
the information covers the same period as that of the Group.
The Group has two associates; PruHealth and PPM South Africa that are also accounted for under the equity method. In addition, the
Group has 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-profits funds where the Group has significant influence. As allowed under
IAS 28, these investments are accounted for as investments in associates and are carried at fair value through profit and loss. The aggregate
fair value of associates carried at fair value through profit and loss where there are published price quotations is approximately £0.5 billion
at 31 December 2013 (2012: £0.8 billion).
The Group’s share of the profits, net of related tax, and carrying amount of interest in joint ventures and associates, which are equity
accounted as shown in the consolidated income statement comprises the following:
Shareholder-backed business
PAC with-profits fund (prior to offsetting effect in movement in
unallocated surplus)
Total
Joint ventures
Associates
2013 £m
2012 £m
2013 £m
2012 £m
52
88
140
98
27
125
7
–
7
10
–
10
There is no other comprehensive income in the joint ventures and associates. There have been no unrecognised share of losses of a joint
venture or associate that the Group has stopped recognising in the total income.
The joint ventures have no significant contingent liabilities or capital commitments to which the Group is exposed nor does the Group
have any significant contingent liabilities or capital commitments in relation to its interest in the joint ventures.
D8: 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
which are regarded as related parties for the purposes of IAS 24. The balances are included in the Group’s statement of financial position
sheet at fair value or amortised cost in accordance with their IAS 39 classifications. The transactions are included in the income statement
and include amounts paid on issue of shares or units, amounts received on cancellation of shares or units and paid in respect of the periodic
charge and administration fee.
Further, following the adoption of IFRS 11 in 2013 as described in note A2, the Group’s investments in joint ventures are now accounted
for on an equity method basis. Previously, the assets and liabilities of these joint ventures were proportionally consolidated by the Group
with any of their intra-group transactions eliminated on consolidation. There are no material transactions between these joint ventures
and other Group companies.
Executive officers and directors of the Company may from time to time purchase insurance, asset management or annuity products
marketed by Group companies in the ordinary course of business on substantially the same terms as those prevailing at the time for
comparable transactions with other persons.
In 2013 and 2012, other transactions with directors were not deemed to be significant both by virtue of their size and in the context of
the directors’ financial positions. 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 B3.3.
Financial statementsD: Other notes Prudential plc Annual Report 2013 280
D9: Commitments
Operating leases and capital commitments
The Group leases various offices to conduct its business. Leases in which a significant portion of the risks and rewards of ownership are
retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the
lessor) are charged to the income statement on a straight-line basis over the period of the lease.
Future minimum lease payments for non-cancellable operating leases fall due during the following periods:
Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
Future minimum sub-lease rentals received for non-cancellable operating leases for land and buildings
Minimum lease rental payments included in consolidated income statement
2013 £m
2012* £m
110
308
333
20
92
68
196
116
18
73
* The 2012 comparative results have been adjusted retrospectively from those previously published for the application of the new accounting standards described
in note A2.
In addition, 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 2013 were £92 million (2012: £5 million).
Prudential plc Annual Report 2013 Financial statements Notes to Primary statementsD: Other notes continued Balance sheet of the parent company
31 December
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
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
Total assets less current liabilities
Liabilities: amounts falling due after more than one year
Subordinated liabilities
Debenture loans
Other borrowings
Amounts owed to subsidiary undertakings
Total net assets (excluding pension)
Pension asset (net of related deferred tax)
Total net assets (including pension)
Capital and reserves
Share capital
Share premium
Profit and loss account
Shareholders’ funds
281
Note
2013 £m
2012 £m
5
5
6
8
7
7
8
7
7
7
9
10
10
11
11
18,216
1,497
19,713
11,929
1,164
13,093
3,706
9
3
3
224
3,945
(1,634)
(200)
(199)
(2,462)
(60)
(4)
(40)
(4,599)
(654)
3,208
47
3
3
193
3,454
(1,535)
(450)
(190)
(1,705)
(103)
(19)
(46)
(4,048)
(594)
19,059
12,499
(3,662)
(549)
(299)
(7,227)
(11,737)
7,322
30
7,352
128
1,895
5,329
7,352
(2,577)
(549)
(299)
(2,576)
(6,001)
6,498
38
6,536
128
1,889
4,519
6,536
The financial statements of the parent company on pages 281 to 289 were approved by the Board of directors on 11 March 2014 and
signed on its behalf.
Paul Manduca
Chairman
Tidjane Thiam
Group Chief Executive
Nic Nicandrou
Chief Financial Officer
Financial statementsParent company Prudential plc Annual Report 2013
282
Notes on the parent company financial statements
1 Nature of operations
Prudential plc (the ‘Company’) is a parent holding company. The Company together with its subsidiaries (collectively, the ‘Group’) is
an international financial services group with its principal operations in 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 financing of each of its subsidiaries.
2 Basis of preparation
The financial statements of the Company, which comprise the balance sheet and related notes, are prepared in accordance with Part 15
of the Companies Act 2006. The Company has taken advantage of the exemption under Section 408 of the Companies Act 2006 from
presenting its own profit and loss account.
The financial statements are prepared in accordance with applicable accounting standards under UK Generally Accepted Accounting
Practice (UK GAAP), including Financial Reporting Standards (FRS) and Statements of Standard Accounting Practice (SSAP).
The Company has not prepared a cash flow statement on the basis that its cash flow is included within the cash flow statement in
the consolidated financial statements. The Company has also taken advantage of the exemption within FRS 29, ‘Financial Instruments:
Disclosures’, from the requirements of this standard on the basis that the Company’s results are included in the publicly available
consolidated financial statements of the Group that include disclosures that comply with IFRS 7, ‘Financial Instruments: Disclosures’,
which is equivalent to FRS 29.
3 Significant accounting policies
Shares in subsidiary undertakings
Shares in subsidiary undertakings are shown at the lower of cost and estimated realisable value.
Loans to subsidiary undertakings
Loans to subsidiary undertakings are shown at cost, less provisions.
Derivatives
Derivative financial instruments are held to manage certain macro-economic exposures. Derivative financial instruments are carried
at fair value with changes in fair value included in the profit and loss account.
Borrowings
Borrowings are initially recognised at fair value, net of transaction costs, and subsequently accounted for on an amortised cost basis using
the effective interest method. Under the effective interest method, the difference between the redemption value of the borrowing and
the initial proceeds, net of transaction costs, is amortised through the profit and loss account to the date of maturity, or, for hybrid debt,
over the expected life of the instrument.
Dividends
Interim dividends are recorded in the period in which they are paid. Final dividends are recorded in the period in which they are approved
by shareholders.
Share premium
The difference between the proceeds received on issue of shares and the nominal value of the shares issued is credited to the share
premium account.
Foreign currency translation
Foreign currency borrowings that have been used to finance or provide a hedge against Group equity investments in overseas
subsidiaries are translated at year end exchange rates. The impact of these currency translations is recorded within the profit and loss
account for the year.
Other assets and liabilities denominated in foreign currencies are also converted at year end exchange rates with the related foreign
currency exchange gains or losses reflected in the profit and loss account for the year.
Prudential plc Annual Report 2013 Financial statements Notes on the parent company financial statements
283
Tax
Current tax expense is charged or credited to operations based upon amounts estimated to be payable or recoverable as a result of
taxable operations for the current year. To the extent that losses of an individual UK company are not offset in any one year, they can
be carried back for one year or carried forward indefinitely to be offset against profits arising from the same company.
Deferred tax assets and liabilities are recognised in accordance with the provisions of FRS 19, ’Deferred tax’. The Company has
chosen not to apply the option available of recognising such assets and liabilities on a discounted basis to reflect the time value of money.
Except as set out in FRS 19, deferred tax is recognised in respect of all timing differences that have originated but not reversed by the
balance sheet date. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered.
The Group’s UK subsidiaries each file separate tax returns. In accordance with UK tax legislation, where one domestic UK company is
a 75 per cent owned subsidiary of another UK company or both are 75 per cent owned subsidiaries of a common parent, the companies
are considered to be within the same UK tax group. For companies within the same tax group, trading profits and losses arising in the
same accounting period may be offset for the purposes of determining current and deferred taxes.
Pensions
The Company assumes a portion of the pension surplus or deficit of the Group’s main pension scheme, the Prudential Staff Pension Scheme
(‘PSPS’) and applied the requirements of FRS 17 ‘Retirement Benefits’ (as amended in December 2006) to its interest in the PSPS surplus
or deficit. Further details are disclosed in note 9.
A pension surplus or deficit is recorded as the difference between the present value of the scheme liabilities and the fair value of the
scheme assets. The Company’s share of pension surplus is recognised to the extent that the Company is able to recover a surplus either
through reduced contributions in the future or through refunds from the scheme.
The assets and liabilities of the defined benefit pension schemes of the Prudential Group are subject to a full triennial actuarial valuation
using the projected unit method. Estimated future cash flows are then discounted at a high quality corporate bond rate, adjusted to
allow for the difference in duration between the bond index and the pension liabilities where appropriate, to determine its present value.
These calculations are performed by independent actuaries.
The aggregate of the actuarially determined service costs of the currently employed personnel and the unwind of the discount on
liabilities at the start of the period, gains and losses on settlements and curtailments, less the expected investment return on the scheme
assets at the start of the period, is recognised in the profit and loss account. To the extent that part or all of the Company’s interest in the
pension surplus is not recognised as an asset, the unrecognised surplus is initially applied to extinguish any past service costs, losses on
settlements or curtailments that would otherwise be included in the profit and loss account. Next, the expected investment return on the
scheme’s assets is restricted so that it does not exceed the total of the current service cost, interest cost and any increase in the recoverable
surplus. Any further adjustment for the unrecognised surplus is treated as an actuarial gain or loss.
Actuarial gains and losses as a result of the changes in assumptions, the difference between actual and expected investment return
on scheme assets and experience variances are recorded in the statement of total recognised gains and losses. Actuarial gains and losses
also include adjustment for unrecognised pension surplus as described above.
Share-based payments
The Group offers share award and option plans for certain key employees and a Save As You Earn (‘SAYE’) plan for all UK and certain
overseas employees. The 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 financial 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.
Financial statementsParent company Prudential plc Annual Report 2013 284
4 Reconciliation from UK GAAP to IFRS
The Company financial statements are prepared in accordance with UK GAAP and the consolidated financial statements are prepared
in accordance with IFRS as issued by the IASB and endorsed by the EU. The tables below provide a reconciliation between UK GAAP
and IFRS.
Profit after tax
Profit (loss) for the financial year of the Company in accordance with UK GAAP
IFRS adjustment*
Profit (loss) for the financial 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†
Profit after tax of the Group attributable to shareholders in accordance with IFRS
Net equity
Shareholders’ equity of the Company in accordance with UK GAAP and IFRS
Share in the IFRS net equity of the Group†
Shareholders’ equity of the Group in accordance with IFRS
2013 £m
2012 £m
1,579
16
1,595
(249)
1,346
(216)
71
(145)
2,308
2,163
2013 £m
2012 £m
7,352
2,298
9,650
6,536
3,823
10,359
* ‘IFRS adjustment’ in the above table represents the difference 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 profit (loss) for the financial year of the Company in accordance with UK GAAP and IFRS includes dividends declared in the year
from subsidiary undertakings of £2,332 million and £501 million for the years ended 31 December 2013 and 2012, 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.
The Group has adopted new accounting standards on consolidated financial statements and joint arrangements, and amendments
to the employee benefits accounting standard, from 1 January 2013 as described in note A2 of the Group financial statements.
Accordingly, the 2012 figures for profit after tax of the Group have been adjusted retrospectively from those previously published.
Prudential plc Annual Report 2013 Financial statements Notes on the parent company financial statementsNotes on the parent company financial statements continued 5 Investments of the Company
At 1 January
Net investment in subsidiary undertakings
Net loan advance
Other movements
Foreign exchange movement
At 31 December
285
2013 £m
Shares in
subsidiary
undertakings
Loans to
subsidiary
undertakings
11,929
6,281
–
6
–
18,216
1,164
–
340
–
(7)
1,497
In 2013, as part of a process of simplifying the Group’s corporate structure, the Company reorganised some of its interests in intermediate
holding companies, resulting in a net increase of £6,281 million in the cost of shares in subsidiary undertakings.
In February 2014, the Company dissolved part of the structure, resulting in a reduction of £12,791 million in the cost of shares
in subsidiary undertakings, and at the same time, an increase of £6,326 million in the value of loans to subsidiary undertakings.
Other movements relate to share-based payments and reflect the value of payments settled by the Company for employees
of its subsidiary undertakings in the year.
The principal subsidiary undertakings of the Company at 31 December 2013 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*
PT Prudential Life Assurance*
* Owned by a subsidiary undertaking of the Company.
Main activity
Country of incorporation
Insurance
Insurance
Insurance
Asset management
Insurance
Insurance
Insurance
England and Wales
England and Wales
Scotland
England and Wales
US
Singapore
Indonesia
The Company has 100 per cent of the voting rights of the subsidiaries except the Indonesian subsidiary, where the Company has
94.6 per cent of the voting rights attaching to the aggregate of the shares across the types of capital in issue.
Each subsidiary operates mainly in its country of incorporation, except for PRIL, which operates mainly in England and Wales.
6 Deferred tax asset
Short-term timing differences
Unused deferred tax losses
Total
2013 £m
2012 £m
2
7
9
3
44
47
Deferred tax assets are recognised to the extent that they are regarded as recoverable, that is to the extent that, on the basis of all
available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal
of the underlying temporary differences can be deducted.
For each category of deferred tax asset recognised, its recoverability against forecast taxable profits is not significantly impacted
by expected changes to accounting standards.
The reductions in the UK corporation tax rate to 21 per cent from 1 April 2014 and 20 per cent from 1 April 2015 were substantively
enacted on 2 July 2013. Accordingly, the effects of these changes are reflected in the financial statements for the year ended
31 December 2013. The changes have not had a material impact on the Company’s net deferred tax balances as at 31 December 2013.
Financial statementsParent company Prudential plc Annual Report 2013
286
7 Borrowings
Core structural borrowingsnote (i)
Other borrowings:
Commercial papernote (ii)
Floating Rate Notes 2014note (iii)
Medium-Term Notes 2013note (ii)
Medium-Term Notes 2015note (ii)
Total borrowings
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
Core structural borrowings
Other borrowings
Total
2013 £m
2012 £m
2013 £m
2012 £m
2013 £m
2012 £m
4,211
3,126
–
–
4,211
1,634
200
–
299
2,133
1,834
299
–
2,133
1,535
200
250
299
2,284
1,985
299
–
2,284
1,634
200
–
299
6,344
1,834
299
4,211
6,344
–
–
–
–
–
–
–
–
4,211
3,126
–
–
4,211
4,211
3,662
549
4,211
–
–
3,126
3,126
2,577
549
3,126
3,126
1,535
200
250
299
5,410
1,985
299
3,126
5,410
Notes
(i)
(ii)
(iii) The Company issued £200 million Floating Rate Notes in 2013 which mature in April 2014. These Notes have been wholly subscribed to by a Group subsidiary
Further details on the core structural borrowings of the Company are provided in note C6.1 of the Group financial statements.
These borrowings support a short-term fixed income securities programme.
and accordingly have been eliminated on consolidation in the Group financial statements. The 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.
8 Derivative financial instruments
Cross-currency swap
Inflation-linked swap
Total
2013 £m
2012 £m
Fair value
assets
Fair value
liabilities
Fair value
assets
Fair value
liabilities
3
–
3
–
199
199
3
–
3
–
190
190
Derivative financial instruments are held to manage certain macro-economic exposures. The change in fair value of the derivative
financial instruments of the Company was a loss before tax of £9 million (2012: gain before tax of £17 million).
The derivative financial instruments are valued internally using standard market practices. In accordance with the Company’s risk
management framework, all internally generated valuations are subject to independent assessment against external counterparties’ valuations.
Prudential plc Annual Report 2013 Financial statements Notes on the parent company financial statementsNotes on the parent company financial statements continued
287
9 Pension scheme financial position
The majority of UK Prudential staff are members of the Group’s pension schemes. The largest scheme is the Prudential Staff Pension
Scheme (the ‘Scheme’) which is primarily a closed defined benefit scheme.
At 31 December 2005, the allocation of surpluses and deficits attaching to the Scheme between the Company and the unallocated
surplus of The Prudential Assurance Company Limited (‘PAC’) with-profits fund was apportioned in the ratio 30/70 following detailed
consideration of the sourcing of previous contributions. This ratio was applied to the base deficit position at 1 January 2006 and for the
purpose of determining the allocation of the movements in that position up to 31 December 2013. 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 C9, together with the key assumptions adopted,
including mortality assumptions.
Using external actuarial advice provided by the professionally qualified actuaries, Towers Watson, for the valuation of the Scheme,
the most recent full valuations have been updated to 31 December 2013 applying the principles prescribed by FRS 17. The long-term
expected rates of return are set out below:
Equities
Bonds
Properties
Other assets
Weighted average long-term expected rate of return
The assets and liabilities of the Scheme were:
Prospectively
for 2014 %
2013 %
2012 %
7.6
3.8
6.4
2.0
3.7
6.7
2.8
5.5
2.0
2.9
6.8
3.0
5.55
2.0
3.1
31 Dec 2013
31 Dec 2012
31 Dec 2011
31 Dec 2010
31 Dec 2009
£m
%
£m
%
£m
%
£m
%
£m
%
145
5,048
71
778
2.4
83.5
1.2
12.9
123
5,247
167
863
1.9
82.0
2.6
13.5
6,042
100.0
6,400
100.0
210
5,547
297
378
6,432
3.3
86.2
4.6
5.9
100.0
548
3,864
199
740
5,351
10.3
72.2
3.7
13.8
100.0
830
3,406
272
441
4,949
16.8
68.8
5.5
8.9
100.0
(5,316)
(5,226)
(4,844)
(4,866)
(4,436)
726
1,174
49
recognised by the Company
37
Amounts reflected in the
balance sheet of the
Company, net of deferred
tax
30
38
1,588
52
39
485
56
41
513
52
37
The surplus in the Scheme recognised in the balance sheet of the Company represents the amount which is recoverable through reduced
future contributions and is net of the apportionment to the PAC with-profits fund.
Equities
Bonds
Properties
Other assets
Total value of assets
Present value of Scheme
liabilities
Underlying surplus in the
Scheme
Surplus in the Scheme
Financial statementsParent company Prudential plc Annual Report 2013 288
9 Pension scheme financial position continued
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
Benefit payments
Present value of Scheme liabilities, at 31 December
* The past service cost in 2012 of £106 million resulted from an exceptional discretionary increase to pensions in payment of the Scheme.
Fair value of Scheme assets, at 1 January
Expected return on Scheme assets
Employee contributions
Employer contributions*
Actuarial losses
Benefit payments
Fair value of Scheme assets, at 31 December
2013 £m
2012 £m
5,226
17
3
225
1
78
(234)
5,316
4,844
21
106
227
1
252
(225)
5,226
2013 £m
2012 £m
6,400
182
1
11
(318)
(234)
6,042
6,432
201
1
36
(45)
(225)
6,400
* The contributions include deficit funding, ongoing service contributions and expenses.
Pension charge and actuarial (losses) gains of the Scheme and attributable to the Company
The pension charge of the Scheme and the charge recognised in the Company’s profit and loss account are as follows:
Pension charge:
Operating charge:
Current service cost
Past service cost
Finance (expense) income:
Interest on Scheme liabilities
Expected return on Scheme assets
Total pension charge of the Scheme
2013 £m
2012 £m
(17)
(3)
(225)
182
(43)
(63)
(21)
(106)
(227)
201
(26)
(153)
Pension charge attributable to the Company
(25)
(53)
The pension charge attributable to the Company is net of the apportionment to the PAC with-profits fund and is related to the surplus
recognised on the balance sheet of the Company. No adjustment was made to the pension charge in 2013 or 2012 relating to the
unrecognised portion of the Scheme’s surplus.
Actuarial (losses) gains:
2013 £m
2012 £m
2011 £m
2010 £m
2009 £m
Actual less expected return on Scheme assets (5% (2012: 1%)
(2011: 15%) (2010: 5%) (2009: 2%) of assets)
Experience (losses) gains on Scheme liabilities (0% (2012: 0%)
(2011: 6%) (2010: 0%) (2009: 1%) of liabilities)
Changes in assumptions underlying the present value of
Scheme liabilities
Total actuarial (losses) gains (7% (2012: 6%) (2011: 17%)
(2010: 2%) (2009: 5%) of the present value of
Scheme liabilities)
Actuarial gains (losses) attributable to the Company before tax
(318)
(2)
(76)
(396)
8
(45)
(19)
973
295
275
1
85
59
(233)
(426)
(370)
(374)
(297)
35
842
(16)
(94)
(14)
(230)
(3)
Prudential plc Annual Report 2013 Financial statements Notes on the parent company financial statementsNotes on the parent company financial statements continued
289
The total actual return on Scheme assets was a loss of £136 million (2012: gain of £156 million).
The experience gains on Scheme liabilities in 2011 of £295 million related mainly to improvements in data consequent upon the 2011
triennial valuation of the Scheme.
The actuarial gains (losses) attributable to the Company are net of the apportionment to the PAC with-profits fund and are related
to the surplus recognised in the balance sheet of the Company. In 2013, the actuarial losses attributable to the Company included
an amount credited of £127 million (2012: £124 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 £8 million (2012: £35 million) attributable to the Company are recorded in the statement of total
recognised gains and losses. Cumulative actuarial gains as at 31 December 2013 amount to £101 million (2012: £93 million).
Total employer contributions expected to be paid into the Scheme for the year ending 31 December 2014 amount to £11 million,
reflecting the annual accrual cost and expenses.
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 2013
is set out in note C10 of the Group financial statements.
11 Profit of the Company and reconciliation of the movement in shareholders’ funds
The profit after tax of the Company for the year was £1,579 million (2012: loss of £216 million). After dividends of £781 million
(2012: £655 million), actuarial gains net of tax in respect of the pension scheme of £6 million (2012: £27 million) and share-based payment
credits of £6 million (2012: £6 million), retained profit at 31 December 2013 amounted to £5,329 million (2012: £4,519 million). Retained
profit includes £2,683 million relating to gains made by intermediate holding companies following the transfer at fair value of certain
subsidiaries to other parts of the Group as part of internal restructuring exercises. Because the gains relate to intra-group transactions,
the amount of £2,683 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 sufficient 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 2013, the UK GAAP retained earnings of the holding company from which distributable reserves may be derived
were £5,329 million.
A reconciliation of the movement in shareholders’ funds of the Company is given below:
Profit (loss) for the yearnote 4
Dividends
Actuarial gains recognised in respect of the pension scheme, net of related taxnote 9
Share-based paymentsnote 5
New share capital subscribed
Net increase (decrease) in shareholders’ funds
Shareholders’ funds at beginning of year
Shareholders’ funds at end of yearnote 4
12 Other information
2013 £m
2012 £m
1,579
(781)
798
6
6
6
816
6,536
7,352
(216)
(655)
(871)
27
6
17
(821)
7,357
6,536
a
Information on directors’ remuneration is given in the directors’ remuneration report section of this Annual Report and note B3.3
of the Group financial statements.
Information on transactions of the directors with the Group is given in note D8 of the Group financial statements.
b
c The Company employs no staff.
d
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts were £0.1 million (2012: £0.1 million) and
for other services were £0.1 million (2012: £0.6 million).
In certain instances, the Company has guaranteed that its subsidiaries will meet their obligations when they fall due for payment.
e
13 Post balance sheet events
In February 2014, the Company dissolved part of the Group’s corporate structure, resulting in a gain on dissolution of £595 million and
a reduction of £12,791 million in the cost of shares in subsidiary undertakings. At the same time, there were increases of £6,326 million
in loans to subsidiary undertakings and £127 million in current assets, and a reduction of £6,933 million in amounts owed to subsidiary
undertakings, of which £819 million related to amounts falling due within one year and £6,114 million to amounts falling due after more
than one year.
Subject to shareholders’ approval, in May 2014 the Company will pay a final dividend for the year ended 31 December 2013.
Further details are provided in note B7 of the Group financial statements.
Financial statementsParent company Prudential plc Annual Report 2013
290
Statement of directors’ responsibilities in respect
of the annual report and the financial statements
The directors are responsible for
preparing the Annual Report and the
Group and parent company financial
statements in accordance with
applicable law and regulations.
Company law requires the directors
to prepare Group and parent company
financial statements for each financial year.
Under that law the directors are required
to prepare the Group financial statements
in accordance with International Financial
Reporting Standards (IFRS) as adopted by
the European Union (EU) and applicable
law and have elected to prepare the
parent company financial statements in
accordance with UK Accounting Standards
and applicable law (UK Generally Accepted
Accounting Practice).
Under company law the directors must
not approve the financial statements unless
they are satisfied that they give a true and
fair view of the state of affairs of the Group
and parent company and of their profit or
loss for that period. In preparing each of
the Group and parent company financial
statements, the directors are required to:
— Select suitable accounting policies and
then apply them consistently;
— Make judgements and estimates that
are reasonable and prudent;
— For the Group financial statements,
state whether they have been prepared
in accordance with IFRS as adopted by
the EU;
— For the parent company financial
statements, state whether applicable
UK Accounting Standards have been
followed, subject to any material
departures disclosed and explained
in the parent company financial
statements; and
— Prepare the financial statements on
the going concern basis unless it is
inappropriate to presume that the
Group and the parent company will
continue in business.
The directors are responsible for keeping
adequate accounting records that are
sufficient to show and explain the parent
company’s transactions and disclose
with reasonable accuracy at any time the
financial position of the parent company
and enable them to ensure that its financial
statements comply with the Companies
Act 2006. They have general responsibility
for taking such steps as are reasonably
open to them to safeguard the assets of the
Group and to prevent and detect fraud and
other irregularities.
Under applicable law and regulations,
the directors are also responsible for
preparing a strategic report, directors’
report, directors’ remuneration report and
corporate governance statement that
comply with that law and those regulations.
The directors are responsible for the
maintenance and integrity of the corporate
and financial information included on the
Company’s website. Legislation in the UK
governing the preparation and
dissemination of financial statements may
differ from legislation in other jurisdictions.
The directors of Prudential plc, whose
names and positions are set out on pages
64 to 68 confirm that to the best of
their knowledge:
— The financial statements, prepared in
accordance with the applicable set of
accounting standards, give a true and
fair view of the assets, liabilities, financial
position and profit or loss of the Company
and the undertakings included in the
consolidation taken as a whole; and
— The strategic 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.
— The Annual Report and financial
statements, taken as a whole, is fair,
balanced and understandable and
provides the information necessary
for shareholders to assess the
Company’s performance, business
model and strategy.
Prudential plc Annual Report 2013 Financial statements Statement of directors’ responsibilities/Independent auditor’s report 291
Independent auditor’s report to the members of Prudential plc only
Opinions and conclusions arising
from our audit
1. Our opinion on the financial
statements is unmodified
We have audited the financial statements
of Prudential plc for the year ended
31 December 2013 set out on pages 127 to
280 of the Group financial statements and
pages 281 to 289 of the parent company
statements. In our opinion:
— The financial statements give a true
and fair view of the state of the Group’s
and of the parent company’s affairs
as at 31 December 2013 and of the
Group’s profit for the year then ended;
— The Group financial statements have
been properly prepared in accordance
with International Financial Reporting
Standards as adopted by the European
Union;
— The parent company financial
statements have been properly prepared
in accordance with UK Accounting
Standards; and
— The financial statements have been
prepared in accordance with the
requirements of the Companies Act
2006 and, as regards the Group
financial statements, Article 4 of the
IAS Regulation.
2. Our assessment of risks of material
misstatement
In arriving at our audit opinion above on the
financial statements the risks of material
misstatement that had the greatest effect
on our audit were as follows:
Investments (£296,457 million)
Refer to page 74 (Audit Committee report),
pages 142 to 145 (accounting policy) and
pages 188 to 211 (financial disclosures)
The risk – The Group’s investment
portfolio represents 91 per cent of the
Group’s total assets. Quoted prices from
liquid market sources can be obtained for
the substantial majority of the portfolio.
The areas that involved significant audit
effort and judgement in 2013 were the
valuation of illiquid positions within the
financial investment portfolio representing
6 per cent of total investments. These
included unlisted equity, unlisted debt
securities, derivatives and loans such as
commercial mortgage loans and bridge
loans. For these positions a reliable
third-party price was not readily available
and therefore involved the application of
expert judgement in the valuations adopted.
Our response – We used own valuation
specialists and pricing services to assist us
in performing our audit procedures in this
area, which included:
— Assessing whether the valuation
process is appropriately designed and
captures relevant valuation inputs;
— Testing associated controls in respect
of the valuation process;
— Performing our own independent price
checks using external quotes where
available for illiquid positions;
— Assessing pricing model methodologies
and assumptions against industry
practice and valuation guidelines; and
— Evaluating the testing performed by the
group in order to identify any impairment
in relation to loans by reviewing loan
files to check performance of the loans.
We obtained an understanding of
existing and prospective investee
company cash flows to understand
whether loans can be serviced or
refinancing may be required and
considered the impact on impairment
testing performed.
Our work included consideration of events
which occurred subsequent to the year end
up until the date of this audit report.
We also assessed whether the Group’s
disclosures in relation to the valuation
of investments are compliant with the
relevant accounting requirements, in
particular the sensitivity of the valuations
adopted to alternative outcomes.
Policyholder Liabilities
(£273,953 million)
Refer to page 74 (Audit Committee report),
pages 138 to 140 (accounting policy) and
pages 212 to 229 (financial disclosures)
The risk: The Group has significant
insurance liabilities representing
87 per cent of the Group’s total liabilities.
This is an area that involves significant
judgement over uncertain future
outcomes, mainly the ultimate total
settlement value of long-term policyholder
liabilities. Economic assumptions, such as
investment return and associated discount
rates, and operating assumptions such as
mortality and persistency are the key
inputs used to estimate these long-term
liabilities. The valuation of the guarantees
in the US variable annuity business is a
complex exercise as it involves exercising
significant judgement over the relationship
between the investment return attaching
to these products and the guarantees
contractually provided to policyholders
and the likely policyholder behaviour in
response to changes in investment
performance. The valuation of the
insurance liabilities in relation to the UK
annuity business requires the exercise
of significant judgement in the setting
of mortality and credit risk assumptions.
Our response: We used our own
actuarial specialists to assist us in
performing our audit procedures in this
area, which included among others:
(a) Consideration of the appropriateness
of the economic assumptions used in
the valuation of the US variable annuity
guarantees in relation to investment
mix and projected investment returns
by reference to company specific and
industry data, of future growth rates
by reference to market trends, market
volatility and associated discount rates
used in the stochastic models used by
the Group. Our work on the persistency
assumptions primarily considered
their appropriateness by reference
to company and industry data on
policyholder behaviour.
(b) Consideration of the appropriateness of
the mortality and credit risk assumptions
used in the valuation of the UK annuity
liabilities by reference to company and
industry data on historical mortality
experience and expectations of future
mortality. Our work on the credit risk
assumptions primarily considered the
appropriateness of management’s
methodology and assumptions by
reference to industry practice and our
expectation derived from market
experience.
Other key audit procedures included
assessing the Group’s methodology for
calculating the insurance liabilities and their
analysis of the movements in insurance
liabilities during the year, including
consideration that the movements are in
line with the assumptions adopted by the
group, our understanding of developments
in the business and our expectation
derived from market experience. We
considered the validity of management’s
liability adequacy testing which is a key
test performed to check that the liabilities
are adequate in the context of expected
experience. Our work on the liability
adequacy test includes assessing the
reasonableness of the projected cash flows
and challenging the assumptions adopted
in the context of company and industry
experience data and specific product
features.
We considered whether the Group’s
disclosures in relation to the assumptions
used in the calculation of insurance
liabilities are compliant with the relevant
accounting requirements, in particular
the sensitivities of these assumptions
to alternative scenarios and inputs.
Financial statementsStatement of directors’ responsibilitiesIndependent auditor’s report Prudential plc Annual Report 2013 292
Prudential plc Annual Report 2013 Financial statements Independent auditor’s report
Deferred Acquisition Costs (‘DAC’)
(£4,786 million)
Refer to page 74 (Audit Committee report),
page 141 (accounting policy) and pages
231 to 234 (financial disclosures)
The risk – DAC represents 1 per cent
of the total assets and involves judgement
in the identification of, and the extent to
which, certain acquisition costs can be
deferred, and assessment of recoverability
of the asset. The DAC associated with the
US business, which represents 86 per cent
of total DAC, involves the greatest
judgement in terms of measurement and
recoverability. The amortisation of the
DAC asset is related to the achieved and
projected future profit profile.
Our response – We used our own
actuarial specialists to assist us in
performing our audit procedures in this
area, which included:
(i) evaluating the appropriateness of the
deferral policy adopted by management
by comparing it against the requirements
of relevant accounting standards;
(ii) evaluating whether costs are deferred
in accordance with management’s
deferral policy; and
(iii) assessing the calculations performed by
the Group including the appropriateness
of the assumptions used in determining
the profit profile and the extent of the
associated adjustment necessary to
the DAC asset. Our work in this area
included assessing the reasonableness
of assumptions such as the projected
investment return by comparing against
the Group’s investment portfolio mix
and market return data.
We also considered the adequacy of the
Group’s disclosures about the degree of
estimation involved in the valuation of DAC.
3. Our application of materiality and
an overview of the scope of our audit
The materiality for the Group financial
statements as a whole was set at
£307 million. This was determined with
reference to a benchmark of IFRS
shareholders’ equity (of which it represents
3 per cent) which we consider to be one of
the principal considerations for members
of the company as it represents the
residual interest that can be ascribed to
shareholders after policyholder assets
and corresponding liabilities have been
accounted for.
We agreed with the Group audit
committee to report to it all corrected and
uncorrected misstatements we identified
through our audit with an individual value
in excess of £15 million in addition to other
audit misstatements below that threshold
that we believe warranted reporting on
qualitative grounds.
Audits for Group reporting purposes
were performed at the following key
components by component auditors in all
locations except for the UK Group Head
Office operations which were covered by
the Group team in the UK:
— Insurance operations in the UK, US,
Hong Kong, Indonesia, Singapore,
Malaysia, Korea, Vietnam, India
and Taiwan;
— Fund management operations in the UK
(M&G and Prudential Capital); and
— UK Group Head Office operations.
These audits covered 91 per cent of total
Group revenue; 95 per cent of Group
profit before taxation; 95 per cent of total
Group assets and 90 per cent of Group
shareholders’ equity.
The audits undertaken for Group
reporting purposes at the key reporting
components of the Group were all
performed to component materiality levels
set by the Group audit team. These
component materiality levels were set as
£110 million for key reporting components
in Asia and £140 million for all other key
reporting components listed above to
evaluate the impact of misstatements in
aggregate on the Group financial
statements.
Detailed audit instructions were sent to
all the auditors in these locations. These
instructions covered the significant audit
areas that should be covered by these
audits (which included the relevant risks of
material misstatement detailed above), and
set out the information required to be
reported back to the Group audit team.
The Group team held planning and risk
assessment meetings with components in
scope for Group reporting and participated
in the separate individual local planning
and risk assessment meetings.
The Senior Statutory Auditor, in
conjunction with other senior staff in the
Group team, also regularly attended
component audit committee meetings
(at a regional level for Asia) to understand
at first hand the key risks and audit issues
at a component level which may affect
the Group financial statements.
4. Our opinion on other matters
prescribed by the Companies Act
2006 is unmodified
In our opinion:
— The part of the directors’ remuneration
report to be audited has been properly
prepared in accordance with the
Companies Act 2006; and
— The information given in the strategic
report and the directors’ report for the
financial year for which the financial
statements are prepared is consistent
with the financial statements.
Independent auditor’s report to the members of Prudential plc only continued 5. We have nothing to report in
respect of the matters on which we
are required to report by exception
Under ISAs (UK and Ireland) we are
required to report to you if, based on the
knowledge we acquired during our audit,
we have identified other information in the
annual report that contains a material
inconsistency with either that knowledge
or the financial statements, a material
misstatement of fact, or that is otherwise
misleading.
In particular, we are required to report
to you if:
— We have identified material
inconsistencies between the knowledge
we acquired during our audit and the
directors’ statement that they consider
that the annual report and financial
statements taken as a whole is fair,
balanced and understandable and
provides the information necessary
for shareholders to assess the Group’s
performance, business model and
strategy; or
— The audit committee report does
not appropriately address matters
communicated by us to the audit
committee.
Under the Companies Act 2006 we are
required to report to you if, in our opinion:
— Adequate accounting records have not
been kept by the parent company, or
returns adequate for our audit have not
been received from branches not visited
by us; or
— The parent company financial
statements and the part of the directors’
remuneration report to be audited are
not in agreement with the accounting
records and returns; or
— Certain disclosures of directors’
remuneration specified by law are not
made; or
— We have not received all the information
and explanations we require for our audit.
Under the Listing Rules we are required
to review:
— The directors’ statement, set out on
page 86, in relation to going concern;
and
— The part of the corporate governance
statement on page 83 relating to the
company’s compliance with the nine
provisions of the 2010 UK Corporate
Governance Code specified for our
review; and
— Certain elements of the report to
shareholders by the Board on directors’
remuneration.
We have nothing to report in respect of
the above responsibilities.
Scope of report and responsibilities
As explained more fully in the directors’
responsibilities statement set out on page
290, the directors are responsible for the
preparation of the financial statements and
for being satisfied that they give a true and
fair view. A description of the scope of an
audit of financial statements is provided on
the Financial Reporting Council’s website
at www.frc.org.uk/auditscopeukprivate.
This report is made solely to the Company’s
members as a body and is subject to
important explanations and disclaimers
regarding our responsibilities, published
on our website at www.kpmg.com/uk/
auditscopeukco2013 which are
incorporated into this report as if set out
in full and should be read to provide
an understanding of the purpose of this
report, the work we have undertaken and
the basis of our opinions.
Rees Aronson
(Senior Statutory Auditor)
for and on behalf of KPMG Audit Plc,
Statutory Auditor
Chartered Accountants
London
11 March 2014
293
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Prudential plc Annual Report 2013
294
Prudential plc Annual Report 2013
295
Section 6
European Embedded Value (EEV)
basis results
296
Pre-tax operating profit based on longer-term
investment returns
Summarised consolidated income statement
297
298 Movement in shareholders’ equity
299
Summary statement of financial position
Notes on the EEV basis results
300
300
301
303
303
305
306
307
309
310
310
311
313
13
314
316
323
327
328
14
15
16
17
18
8
9
10
11
12
1 Basis of preparation
2
3
4
5
6
7
Analysis of pre-tax new business contribution
Pre-tax operating profit from business in force
Business acquisitions and disposals
Short-term fluctuations in investment returns
Effect of changes in economic assumptions
Net core structural borrowings of
shareholder-financed operations
Analysis of movement in free surplus
Reconciliation of movement in shareholders’ equity
Tax attributable to shareholders’ profit
Earnings per share
Reconciliation of post-tax movements in net worth
and value of in-force for long-term business
Expected transfer of value of in-force business
to free surplus
Sensitivity of results to alternative assumptions
Methodology and accounting presentation
Assumptions
New business premiums and contributions
Additional information on the effect of the
agreement to sell Japan life business and adoption of
new and amended IFRS accounting standards
331
332
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
Description of EEV basis reporting
In broad terms, IFRS profits for long-term business reflect
the aggregate of results on a traditional accounting basis.
By contrast, embedded value is a way of reporting the value
of the life insurance business.
The European Embedded Value principles were published by
the CFO Forum of major European insurers in October 2005.
The principles provide consistent definitions, a framework
for setting actuarial assumptions and an approach to the
underlying methodology and disclosures.
Results prepared under the EEV principles capture the
discounted value of future profits expected to arise from the
current book of long-term business. The results are prepared
by projecting cash flows, by product, using best estimate
assumptions for all relevant factors. Furthermore, in
determining these expected profits full allowance is made
for the risks attached to their emergence and the associated
cost of capital, and takes into account recent experience in
assessing likely future persistency, mortality and expenses.
Further details are explained in note 15.
6
Financial statementsEuropean Embedded Value (EEV) basis results Prudential plc Annual Report 2013 296
European Embedded Value (EEV) basis results
Pre-tax operating profit based on longer-term investment returns
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 (including Prudential Capital)
Total
Other income and expenditure
Investment return and other income
Interest payable on core structural borrowings
Corporate expenditure
Unwind of expected asset management margin note (i)
Total
Solvency II implementation costs
Restructuring costs
Pre-tax operating profit based on longer-term investment returns*
Analysed as profits (losses) from:
New business
Business in force*
Long-term business*
Asset management*
Other results
Total*
Note
2013 £m
2012 £m
note (ii)
2
3
2
3
2
3
2
3
1,460
927
2,387
74
(2)
2,459
1,086
1,135
2,221
59
2,280
297
736
1,033
29
1,062
441
1,503
10
(305)
(263)
(61)
(619)
(31)
(12)
1,266
692
1,958
69
(7)
2,020
873
737
1,610
39
1,649
313
553
866
33
899
371
1,270
13
(280)
(231)
(56)
(554)
(50)
(22)
5,580
4,313
2,843
2,798
5,641
574
(635)
5,580
2,452
1,982
4,434
479
(600)
4,313
* The Group has adopted the new accounting standard on ‘Joint arrangements’ (IFRS 11) from 1 January 2013. This has resulted in a reallocation of £(8) million in 2013
(2012: £(6) million) from the tax charge on operating profit based on longer-term investment returns to the pre-tax result for Eastspring investments, with no effect on
the net of tax EEV basis results. In addition, the Group agreed in July 2013 to sell, dependent on regulatory approval, its closed book life insurance business in Japan.
Accordingly, the presentation of the 2012 comparative EEV basis results and related notes have been adjusted from those previously published for the retrospective
application of this standard and for the reclassification of the result attributable to the held for sale Japan life business, as described in note 18. This approach has been
adopted consistently throughout this supplementary information.
Notes
(i)
(ii)
The value of profits or losses from asset management and service companies that support the Group’s covered insurance businesses (as defined in note 15(a))
are included in the profits for new business and the in-force value of the Group’s long-term business. The results of the Group’s asset management operations
include the profits from the management of internal and external funds. For EEV basis reporting, Group shareholders’ other income is adjusted to deduct the
unwind of the expected profit margin for the year arising from the management of the assets of the covered business 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 profit accordingly
includes the variance between actual and expected profit in respect of management of the covered business assets.
The comparative results have been prepared using previously reported average exchange rates for the year.
Prudential plc Annual Report 2013 Financial statements European Embedded Value (EEV) basis results Summarised consolidated income statement
Pre-tax operating profit based on longer-term investment returns
Asia operations*
US operations
UK operations:
UK insurance operations
M&G (including Prudential Capital)
Other income and expenditure
Solvency II implementation costs
Restructuring costs
Pre-tax operating profit based on longer-term investment returns*
(Loss) profit attaching to held for sale Japan life business*
Short-term fluctuations in investment returns*
Effect of changes in economic assumptions*
Mark to market value movements on core borrowings
Costs of domestication of Hong Kong branch
Gain on acquisition of REALIC†
Gain on dilution of Group’s holdings†
Total non-operating profit*
Profit before tax attributable to shareholders (including actual investment returns)*
Tax attributable to shareholders’ profit*
Profit for the year attributable to equity holders of the Company*
297
Note
2013 £m
2012 £m
2,459
2,280
1,062
441
1,503
(619)
(31)
(12)
5,580
(35)
(819)
821
152
(35)
–
–
84
5,664
(1,306)
4,358
2,020
1,649
899
371
1,270
(554)
(50)
(22)
4,313
21
510
(2)
(380)
–
453
42
644
4,957
(1,188)
3,769
4
5
6
12
4
9
10
* The 2012 comparative results have been adjusted retrospectively from those previously published for the adoption of IFRS 11 and revised ‘Employee benefits’
(IAS 19) and for the reclassification of the result attributable to the held for sale Japan life business – see note 18.
† During 2012, the Group completed the acquisition of REALIC generating a gain of £453 million and M&G reduced its holding in PPM South Africa resulting in
a reclassification from a subsidiary to an associate and a gain on dilution of £42 million.
Earnings per share (in pence)
Based on post-tax operating profit including longer-term investment returns of £4,204 million
(2012*: £3,174 million)
Based on post-tax profit of £4,358 million (2012*: £3,769 million)
Note
2013
2012*
11
11
165.0p
171.0p
124.9p
148.3p
* The 2012 comparative results have been adjusted retrospectively from those previously published for the adoption of IFRS 11 and revised IAS 19 – see note 18.
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
2013
2012
9.73p
23.84p
33.57p
9.73p
20.79p
30.52p
8.40p
20.79p
29.19p
8.40p
17.24p
25.64p
Financial statementsEuropean Embedded Value (EEV) basis results Prudential plc Annual Report 2013 298
Movement in shareholders’ equity
Profit for the year attributable to equity shareholders*
Items taken directly to equity:
Exchange movements on foreign operations and net investment hedges:
Exchange movements arising during the year
Related tax
Dividends
New share capital subscribed
Post-tax shareholders’ share of actuarial and other gains and losses on defined benefit
pension schemes*
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
Net increase in shareholders’ equity
Shareholders’ equity at beginning of year
Shareholders’ equity at end of year
* The 2012 comparative results have been adjusted retrospectively from those previously published for the adoption of revised IAS 19 – see note 18.
Note
2013 £m
2012 £m
4,358
3,769
(1,077)
–
(781)
6
(53)
98
(10)
(31)
(149)
52
2,413
22,443
24,856
9
9
9
(467)
(2)
(655)
17
44
42
(13)
36
53
(18)
2,806
19,637
22,443
Total
9,669
300
9,969
6,140
16
6,156
6,797
392
1,153
1,545
8,342
31 Dec 2013 £m
Asset
management
and other
operations
194
61
255
118
16
134
22
449
1,153
1,602
1,624
Long-term
business
operations
10,305
231
10,536
6,966
–
6,966
7,342
–
–
–
7,342
31 Dec 2012 £m
Asset
management
and other
operations
Long-term
business
operations
9,462
239
9,701
6,032
–
6,032
6,772
–
–
–
6,772
207
61
268
108
16
124
25
392
1,153
1,545
1,570
Total
10,499
292
10,791
7,084
16
7,100
7,364
449
1,153
1,602
8,966
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 note 7
Other net assets
–
–
–
(2,373)
372
(2,001)
(2,373)
372
(2,001)
–
–
–
(2,282)
258
(2,024)
(2,282)
258
(2,024)
Shareholders’ equity at end of year
24,844
12
24,856
22,505
(62)
22,443
Representing:
Net assets (liabilities)
Acquired goodwill
24,613
231
24,844
(1,218)
1,230
12
23,395
1,461
24,856
22,266
239
22,505
(1,292)
1,230
(62)
20,974
1,469
22,443
Prudential plc Annual Report 2013 Financial statements European Embedded Value (EEV) basis resultsEuropean Embedded Value (EEV) basis results continued
299
Net asset value per share
Based on EEV basis shareholders’ equity of £24,856 million (2012: £22,443 million) (in pence)
Number of issued shares at year end (millions)
Return on embedded value*
31 Dec 2013
31 Dec 2012
971p
2,560
19%
878p
2,557
16%
* Return on embedded value is based on EEV post-tax operating profit, as shown in note 11, as a percentage of opening EEV basis shareholders’ equity.
Summary statement of financial position
Total assets less liabilities, before deduction for insurance funds*
Less insurance funds†
Policyholder liabilities (net of reinsurers’ share) and unallocated surplus of with-profits funds*
Less shareholders’ accrued interest in the long-term business
Total net assets
Share capital
Share premium
IFRS basis shareholders’ reserves
Total IFRS basis shareholders’ equity
Additional EEV basis retained profit
Total EEV basis shareholders’ equity (excluding non-controlling interests)
Note
31 Dec 2013
£m
31 Dec 2012
£m
288,826
271,768
(279,176)
15,206
(261,409)
12,084
(263,970)
(249,325)
9
24,856
22,443
128
1,895
7,627
9,650
15,206
24,856
128
1,889
8,342
10,359
12,084
22,443
9
9
9
* The 2012 comparative results have been adjusted retrospectively from those previously published for the adoption of IFRS 11 – see note 18.
† Including liabilities in respect of insurance products classified as investment contracts under IFRS 4. For 2013 the policyholder liabilities of the held for sale
Japan life business are included in total assets less liabilities, before deduction for insurance funds.
The supplementary information on pages 296 to 330 was approved by the Board of directors on 11 March 2014.
Paul Manduca
Chairman
Tidjane Thiam
Group Chief Executive
Nic Nicandrou
Chief Financial Officer
Financial statementsEuropean Embedded Value (EEV) basis results Prudential plc Annual Report 2013 300
Notes on the EEV basis results
1 Basis of preparation
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 presentational change for the results of the held for sale Japan life business and the consequential effects of the changes in
accounting policies for IFRS reporting in respect of employee benefits (IAS 19) and joint venture operations (IFRS 11), as described
in note 18, the 2012 results have been derived from the EEV basis results supplement to the Company’s statutory accounts for 2012.
A detailed description of the EEV methodology and accounting presentation is provided in note 15.
2 Analysis of pre-tax new business contribution
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
Annual
premium and
contribution
equivalents
(APE)
note 17
£m
Present value
of new
business
premiums
(PVNBP)
note 17
£m
2,125
1,573
725
4,423
11,375
15,723
5,978
33,076
2013
Pre-tax
new business
contribution
Pre-tax
new business margin
APE
PVNBP
%
69
69
41
64
%
12.8
6.9
5.0
8.6
£m
1,460
1,086
297
2,843
2012
Annual
premium and
contribution
equivalents
(APE)
note 17
£m
Present value
of new
business
premiums
(PVNBP)
note 17
£m
1,897
1,462
836
4,195
10,544
14,600
7,311
32,455
Pre-tax
new business
contribution
Pre-tax
new business margin
APE
PVNBP
£m
1,266
873
313
2,452
%
67
60
37
58
%
12.0
6.0
4.3
7.6
Pre-tax
new business contribution
2013 £m
2012 £m
37
354
18
480
33
37
501
26
210
19
476
26
48
461
1,460
1,266
Prudential plc Annual Report 2013 Financial statements Notes on the EEV basis results
3 Pre-tax operating profit from business in force
(i) Group summary
2013 £m
2012 £m
Asia
operations
note (ii)
US
operations
note (iii)
UK
insurance
operations
note (iv)
Total
Asia
operations*
note (ii)
US
operations
note (iii)
UK
insurance
operations
note (iv)
Unwind of discount and other expected returns
Effect of changes in operating assumptions
Experience variances and other items
Total
846
17
64
927
608
116
411
1,135
547
122
67
736
2,001
255
542
2,798
595
22
75
692
412
35
290
737
482
87
(16)
553
301
Total*
1,489
144
349
1,982
* The 2012 comparative results have been adjusted retrospectively from those previously published for the reclassification of the result attributable to the held for sale
Japan life business – see note 18.
(ii) Asia operations
Unwind of discount and other expected returns note (a)
Effect of changes in operating assumptions:
Mortality and morbidity note (b)
Persistency and withdrawals note (c)
Expense note (d)
Other
Experience variance and other items:
Mortality and morbidity note (e)
Persistency and withdrawals note (f)
Expense note (g)
Other
Total Asia operations
2013 £m
2012* £m
846
35
(30)
(7)
19
17
42
44
(26)
4
64
927
595
79
(24)
(45)
12
22
57
52
(30)
(4)
75
692
* The 2012 comparative results have been adjusted retrospectively from those previously published for the reclassification of the result attributable to the held for sale
Japan life business – see note 18.
Notes
(a)
(b)
(c)
(d)
(e)
(f)
(g)
The increase in unwind of discount and other expected returns of £251 million from £595 million in 2012 to £846 million in 2013 reflects a £140 million effect of
higher risk discount rates, driven by the increase in long-term interest rates, together with an effect of £111 million arising from the growth in the opening in-force
value (adjusted for assumption changes) on which the discount rates are applied, partially offset by a £(21) million reduction due to unfavourable exchange rate
movements, particularly in Indonesia, and a £21 million increase in the return on net worth.
In 2013 the credit of £35 million for mortality and morbidity assumption changes mainly reflects a beneficial effect arising from the renegotiation of a
reinsurance agreement in Indonesia. The 2012 credit of £79 million primarily reflected mortality improvements in Hong Kong and Singapore and revised
assumptions for critical illness business in Singapore.
The charge for persistency and withdrawals assumption changes reflects a number of offsetting items including for 2013, the effect of strengthening lapse and
premium holiday assumptions in Korea.
In 2012 the charge of £(45) million for expense assumption changes principally arose in Malaysia and reflected changes to the pension entitlements of agents.
The favourable effect of mortality and morbidity experience in 2013 of £42 million (2012: £57 million) reflects continued better than expected experience,
principally arising in Hong Kong, Indonesia and Singapore.
The persistency and withdrawals experience variance in 2013 of £44 million (2012: £52 million) principally reflects favourable experience in Hong Kong and
Indonesia.
The negative expense experience variance of £(26) million in 2013 (2012: £(30) million) principally reflects 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.
Prudential plc Annual Report 2013Financial statementsEuropean Embedded Value (EEV) basis resultsNotes on the EEV basis results 302
3 Pre-tax operating profit from business in force continued
(iii) US operations
Unwind of discount and other expected returns note (a)
Effect of changes in operating assumptions:
Persistency note (b)
Variable annuity fees note (c)
Other
Experience variances and other items:
Spread experience variance note (d)
Amortisation of interest-related realised gains and losses note (e)
Other note (f)
Total US operations note (g)
2013 £m
2012 £m
608
72
50
(6)
116
274
89
48
411
1,135
412
45
(19)
9
35
205
91
(6)
290
737
Notes
(a) The increase in unwind of discount and other expected returns of £196 million from £412 million for 2012 to £608 million in 2013 includes a £125 million effect of
the increase in opening value of in-force business (after assumption changes), together with the positive effect of higher risk discount rates of £65 million and a
£6 million increase in the return on net worth.
The effect of changes in persistency assumptions of £72 million in 2013 (2012: £45 million) primarily relates to a reduction in lapse rates following the end of the
surrender charge period, principally for variable annuity business.
(b)
(c) The effect of the change of assumption for variable annuity fees represents the capitalised value of the change in the projected policyholder advisory fees,
which vary according to the size and the mix of variable annuity funds.
(d) The spread assumption for Jackson is determined on a longer-term basis, net of provision for defaults (see note 16(ii)(b)). The spread experience variance in 2013
of £274 million (2012: £205 million) includes the positive effect of transactions undertaken to more closely match the overall asset and liability duration.
The amortisation of interest-related gains and losses reflects 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 reflect the long-term returns included in operating profits.
The credit of £48 million for other changes in experience variances and other items mainly reflects the positive persistency experience variance of £62 million
(2012: £21 million) across all products.
The result includes a full year contribution from the REALIC book of business of £61 million (2012: four months of £19 million).
(e)
(f)
(g)
(iv) UK insurance operations
Unwind of discount and other expected returns note (a)
Effect of change in UK corporate tax rate note (b)
Other items note (c)
Total UK insurance operations
2013 £m
2012 £m
547
122
67
736
482
87
(16)
553
Notes
(a)
(b)
The increase in unwind of discount and other expected returns of £65 million from £482 million in 2012 to £547 million for 2013 reflects a £34 million effect of
higher discount rates, driven by the increase in gilt yields, a £24 million increase in the return on net worth and an effect of £7 million arising from the growth in
the opening value of in-force.
For 2013, the beneficial effect of the change in UK corporate tax rates of £122 million (2012: £87 million) reflects the combined effect of the reductions in
corporate rates from 23 per cent to 21 per cent from April 2014 and 21 per cent to 20 per cent from April 2015 (2012: from 25 per cent to 23 per cent) which were
both enacted in July 2013. Consistent with the Group’s approach of grossing up the movement in the post-tax value of in-force business for shareholder tax, the
£122 million (2012: £87 million) benefit is presented gross.
(c) Other items of £67 million for 2013 includes the positive effects of rebalancing the investment portfolio backing annuity business. In 2012 the negative effect of
£(16) million included a charge of £(52) million for the strengthening of mortality assumptions, net of reserve releases and the effects of portfolio rebalancing
for annuity business.
Prudential plc Annual Report 2013 Financial statements Notes on the EEV basis resultsNotes on the EEV basis results continued 303
4 Business acquisitions and disposals
a Acquisition of Thanachart Life Assurance Company Limited and bancassurance partnership agreement with
Thanachart Bank
On 3 May 2013, the agreement Prudential plc, through its subsidiary Prudential Life Assurance (Thailand) Public Company Limited
(Prudential Thailand), entered into in November 2012 to establish an exclusive 15-year partnership with Thanachart Bank Public
Company limited (Thanachart Bank) to develop jointly their bancassurance business in Thailand was launched. At the same time
Prudential Thailand completed the acquisition of 100 per cent of the voting interest in Thanachart Life Assurance Company Limited
(Thanachart Life), a wholly-owned life insurance subsidiary of Thanachart Bank.
The consideration for the transaction is THB 18.981 billion (£412 million), of which THB 17.500 billion (£380 million) was settled in
cash on completion in May 2013 with a further payment of THB 0.946 billion (£20 million), for adjustments to reflect the net asset value
as at completion date, paid in July 2013. In addition a deferred payment of THB 0.535 billion (£12 million) is payable 12 months after
completion. The acquired assets are comprised of:
Acquired assets:
Net worth (including acquisition of distribution rights)
Value of in force acquired
Transaction consideration
£m
386
26
412
The purchase consideration paid was equivalent to the fair value of the acquired assets and liabilities assumed. No goodwill has been
recognised.
b Acquisition of Reassure America Life Insurance Company in 2012
On 4 September 2012, the Group through its indirect wholly-owned subsidiary, Jackson completed the acquisition of 100 per cent issued
share capital of SRLC America Holding Corp. and its primary operating subsidiary, Reassure America Life Insurance Company (REALIC).
REALIC is 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 and does not write new business.
The gain of £453 million reflects the fair value of the acquired business as 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 was used.
c Agreement to sell Japan life business
On 16 July 2013, the Group reached an agreement to sell, subject to regulatory approval, the life insurance business in Japan, PCA
Life Insurance Company Limited, which was closed to new business in 2010, to SBI Holdings Inc. for US$85 million (£51 million at
31 December 2013 closing exchange rate) with related expenses of £3 million. Consistent with the ‘held for sale’ classification of the
business for IFRS reporting, the EEV carrying value has been set to £48 million at 31 December 2013. For 2013 the result for the year,
together with the adjustment to the carrying value have given rise to an aggregate loss of £(35) million which has been included in
non-operating profit. Consistent with this treatment, the presentation of the comparative results has been adjusted retrospectively
from those previously published.
5 Short-term fluctuations in investment returns
Short-term fluctuations in investment returns, net of the related change in the time value of cost of options and guarantees, arise as follows:
(i) Group Summary
Insurance operations:
Asia* note (ii)
US note (iii)
UK note (iv)
Other operations:
Other* note (v)
Economic hedge value movement note (vi)
Total*
2013 £m
2012 £m
(405)
(422)
35
(792)
(27)
–
(819)
362
(254)
315
423
119
(32)
510
* The 2012 comparative results have been adjusted retrospectively from those previously published for the adoption of revised IAS 19 and for the reclassification of the
results attributable to the held for sale Japan life business – see note 18.
Prudential plc Annual Report 2013Financial statementsEuropean Embedded Value (EEV) basis resultsNotes on the EEV basis results 304
5 Short-term fluctuations in investment returns continued
(ii) Asia operations
For 2013, the negative short-term fluctuations in investment returns of £(405) million principally arise in Hong Kong of £(223) million and
in Singapore of £(96) million, due to unrealised value reductions on bonds, arising from the increase in long-term interest rates, and in
Indonesia of £(52) million for a decrease in future expected fee income for unit-linked business, driven by falls in equity markets.
For 2012, the positive short-term fluctuations in investment returns of £362 million in Asia operations were driven by unrealised gains
on bonds and higher equity markets which principally arose 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.
(iii) US operations
The short-term fluctuations in investment returns for US operations comprise the following items:
Investment return related experience on fixed income securities note (a)
Investment return related impact due to changed expectation of profits on in-force variable annuity
business in future periods based on current period separate account return, net of related
hedging activity note (b)
Other items including actual less long-term return on equity based investments note (c)
Total US operations
2013 £m
2012 £m
21
(99)
(580)
137
(422)
(183)
28
(254)
Notes
(a)
(b)
The credit (charge) relating to fixed income securities comprises the following elements: (1) the excess of actual realised gains (losses) over the amortisation
of interest related realised gains and losses recorded in the profit and loss account; (2) credit loss experience (versus the longer-term assumption); and (3) the
impact of de-risking activities within the portfolio.
This item reflects the net impact of variances in projected future fees and future benefit costs arising from the effect of market fluctuations on the growth in
separate account asset values in the current reporting period and related hedging activity arising from realised and unrealised gains and losses on equity
related hedges and interest rate options.
(c) Other items of £137 million in 2013 primarily reflects a beneficial impact of the excess of actual over assumed return from investments in limited partnerships.
(iv) UK insurance operations
The short-term fluctuations in investment returns for UK insurance operations arise from the following types of business:
Shareholder-backed annuity note (a)
With-profits, unit-linked and other note (b)
Total UK insurance operations
2013 £m
2012 £m
(72)
107
35
(3)
318
315
Notes
(a)
(b)
Short-term fluctuations in investment returns for shareholder-backed annuity business comprise: (1) gains/losses on surplus assets compared to the expected
long-term rate of return reflecting reductions/increases in corporate bond and gilt yields; (2) the difference between actual and expected default experience;
and (3) the effect of mismatching for assets and liabilities of different durations and other short-term fluctuations in investment returns.
The short-term fluctuations in investment returns for with-profits, unit-linked and other business primarily arise from the excess of actual over expected
returns for with-profits business. The total return on the fund (including unallocated surplus) in 2013 was 8 per cent compared to an assumed rate of return of
6 per cent (2012: 10 per cent total return compared to assumed rate of 5 per cent). In addition, the amount for 2013 includes the effect of a partial hedge of future
shareholder transfers expected to emerge from the UK’s with-profits sub-fund taken out during the year. This hedge reduces the risks arising from equity
market declines.
(v) Other items
Short-term fluctuations in investment returns of other operations were negative £(27) million (2012: positive £119 million) representing
principally unrealised value movements on investments and foreign exchange items.
(vi) Economic hedge value movements
This item represents the cost of short-dated hedge contracts taken out in the first 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.
Prudential plc Annual Report 2013 Financial statements Notes on the EEV basis resultsNotes on the EEV basis results continued 305
6 Effect of changes in economic assumptions
The effects of changes in economic assumptions for in-force business, net of the related change in the time value of cost of options and
guarantees, included within profit before tax (including actual investment returns) arise as follows:
(i) Group summary
Asia operations* note (ii)
US operations note (iii)
UK insurance operations note (iv)
Total*
2013 £m
2012 £m
283
372
166
821
(135)
85
48
(2)
* The 2012 comparative results have been adjusted retrospectively from those previously published for the reclassification of the result attributable to the held for sale
Japan life business – see note 18.
(ii) Asia operations
The effect of changes in economic assumptions for Asia operations in 2013 of £283 million primarily reflects the overall impact of the
increase in long-term interest rates in the year, principally arising in Hong Kong of £361 million, Singapore of £107 million and Taiwan
of £99 million mainly due to the increase in fund earned rates for participating business. There are partial offsets arising in Indonesia of
£(237) million and in Malaysia of £(77) million, mainly reflecting the negative impact of calculating health and protection future profits at
a higher discount rate.
The charge of £(135) million in 2012 for the effect of changes in economic assumptions principally arose in Hong Kong of
£(320) million, primarily reflecting the effect on projected cash flows 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 were partial offsets totalling £232 million, principally arising in Malaysia and Indonesia, mainly reflecting the positive impact
of calculating projected health and protection profits at a lower rate, driven by the decrease in risk discount rates.
(iii) US operations
The effect of changes in economic assumptions for US operations reflects the following:
Effect of changes in 10-year treasury rates and beta:
Fixed annuity and other general account business note (a)
Variable annuity business note (b)
Decrease in additional allowance for credit risk note (c)
Total US operations note (d)
2013 £m
2012 £m
(375)
587
160
372
20
(83)
148
85
Notes
(a)
For fixed annuity and other general account business the charge of £(375) million in 2013 principally arises from the effect of a higher discount rate on the
opening value of the in-force book, driven by the 130 basis points increase in the risk-free rate. The projected cash flows for this business principally reflect
projected spread, with secondary effects on the cash flows also resulting from changes to assumed future yields and resulting policyholder behaviour. The
credit of £20 million in 2012 reflected a 10 basis point decrease in the risk-free rate, partially offset by the effect for the acquired REALIC book (reflecting a
20 basis point increase in the risk-free rate from the 4 September acquisition date to 31 December 2012).
(b) For variable annuity business, the credit of £587 million principally reflects an increase in projected fee income and a decrease in projected benefit costs, arising
from the increase in the rate of assumed future return on the underlying separate account assets, driven by the 130 basis points increase in the risk-free rate.
There is a partial offset arising from the increase in the discount rate applied to those cash flows. The charge of £(83) million in 2012 reflected a decrease in the
risk-free rate of 10 basis points.
For 2013 the £160 million (2012: £148 million) effect of the decrease in the additional allowance for credit risk within the risk discount rate reflected the reduction
in credit spreads and represented a 50 basis points decrease for spread business and a 10 basis points decrease for variable annuity business, representing the
proportion of business invested in the general account (as described in note 15(b)(iii)).
(c)
(d) The total effect of changes in economic assumptions for US operations of a credit of £372 million for 2013 includes a pre-tax charge of £(20) million for the effect
of the change in required capital from 235 per cent to 250 per cent of risk-based capital (see note 15(b)(ii)).
Prudential plc Annual Report 2013Financial statementsEuropean Embedded Value (EEV) basis resultsNotes on the EEV basis results 306
6 Effect of changes in economic assumptions continued
(iv) UK insurance operations
The effect of changes in economic assumptions of a credit of £166 million for UK insurance operations for 2013 comprises the following:
Effect of changes in expected long-term rates of return, risk discount rates and other changes:
Shareholder-backed annuity business note (a)
With-profits and other business note (b)
Tax regime note (c)
Total UK insurance operations
2013 £m
2012 £m
(70)
236
–
166
140
(46)
(46)
48
Notes
(a)
(b)
(c)
For shareholder-backed annuity business the overall effect of changes in expected long-term rates of return and risk discount rates reflect the combined effects
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 16(iii)).
For with-profits and other business the total credit in 2013 of £236 million (2012: charge of £(46) million) includes the net effect of the changes in fund earned
rates and risk discount rate (as shown in note 16(iii)), driven by the 120 basis points increase (2012: a reduction of 20 basis points) in the 15-year government
bond rate.
In 2012, the effect of the change in tax regime of £(46) million reflected the change in pattern of taxable profits for shareholder-backed annuity business arising
from the acceleration of tax payments due to the altered timing of relief on regulatory basis provisions.
7 Net core structural borrowings of shareholder-financed operations
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-financed operations
31 Dec 2013 £m
Mark to
market
value
adjustment
–
392
392
–
38
430
IFRS
basis
(2,230)
4,211
1,981
275
150
2,406
EEV
basis at
market
value
(2,230)
4,603
2,373
275
188
IFRS
basis
(1,380)
3,126
1,746
275
153
2,836
2,174
31 Dec 2012 £m
Mark to
market
value
adjustment
–
536
536
–
43
579
EEV
basis at
market
value
(1,380)
3,662
2,282
275
196
2,753
* Including central finance subsidiaries.
† In January 2013, the Company issued US$700 million (£423 million at 31 December 2013 closing exchange rate) perpetual subordinated capital securities. In addition
the Company issued £700 million subordinated notes in December 2013.
Prudential plc Annual Report 2013 Financial statements Notes on the EEV basis resultsNotes on the EEV basis results continued 307
8 Analysis of movement in free surplus
Free surplus is the excess of the regulatory basis net assets for EEV reporting purposes (net worth) over the capital required to support
the covered business. Where appropriate, adjustments are made to the net worth so that backing assets are included at fair value rather
than cost so as to comply with the EEV Principles.
Long-term business and asset management operations note (i)
Underlying movement:
Investment in new business notes (ii), (viii)
Business in force:
Expected in-force cash flows (including expected return on net assets)
Effects of changes in operating assumptions, operating experience
variances and other operating items
Effect of acquisition of REALIC
Increase in EEV assumed level of required capital note 12
(Loss) profit attaching to held for sale Japan life business
Other non-operating items note (iv)
Net cash flows to parent company note (v)
Bancassurance agreement and purchase of Thanachart Life notes 4 ,12
Exchange movements, timing differences and other items note (vi)
Net movement in free surplus
Balance at 1 January 2013 note (viii)
Balance at 31 December 2013 note (viii)
Representing:
Asia operations
US operations
UK operations
Balance at 1 January 2013/1 January 2012 representing:
Asia operations
US operations
UK operations
2013 £m
2012* £m
Asset
management
and UK general
insurance
commission
note (iii)
Long-term
business
note 12
Free surplus
of long-term
business, asset
management
and UK
general
insurance
commission
Free surplus
of long-term
business, asset
management
and UK
general
insurance
commission
(637)
2,150
478
1,991
–
(58)
(40)
(739)
1,154
(1,069)
365
(187)
263
2,957
3,220
1,185
956
1,079
3,220
974
1,211
772
2,957
–
471
–
471
–
–
–
17
488
(272)
–
(165)
51
732
783
194
118
471
783
207
108
417
732
(637)
(618)
2,621
2,405
478
2,462
–
(58)
(40)
(722)
1,642
(1,341)
365
(352)
314
3,689
4,003
1,379
1,074
1,550
4,003
1,181
1,319
1,189
3,689
293
2,080
(169)
–
31
(62)
1,880
(1,200)
–
(412)
268
3,421
3,689
1,181
1,319
1,189
3,689
1,278
1,333
810
3,421
* The 2012 comparative results have been adjusted retrospectively from those previously published for the adoption of the revised IAS 19 and for the reclassification
of the result attributable to the Japan life business – see note 18.
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 figures are shown post-tax.
Free surplus invested in new business represents amounts set aside for required capital and acquisition costs.
shareholders’ equity.
(iv) Changes in non-operating items principally represent short-term fluctuations in investment returns and the effect of changes in economic assumptions for
long-term business operations.
(v) Net cash flows to parent company for long-term business operations reflect the flows as included in the holding company cash flow at transaction rates.
Prudential plc Annual Report 2013Financial statementsEuropean Embedded Value (EEV) basis resultsNotes on the EEV basis results
308
8 Analysis of movement in free surplus continued
(vi)
Exchange movements, timing differences and other items represent:
Exchange movements note 12
Mark to market value movements on Jackson assets backing surplus and required capital note 9
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes note 9
Other note (vii)
2013 £m
Asset
management
and UK
general
insurance
commission
(28)
–
(18)
(119)
(165)
Long-term
business
(164)
(97)
(22)
96
(187)
Total
(192)
(97)
(40)
(23)
(352)
(vii) Other primarily reflects the effect of intra-group loans, contingent loan funding, as shown in note 12(i), timing differences and other non-cash items.
(viii) The free surplus balance at 31 December 2013 includes £392 million (2012: £177 million) representing unamortised amounts advanced to bancassurance
partners for securing exclusive distribution rights. The annual amortisation charge is recorded within ‘investment in new business’ each year at a rate that
is determined by reference to the actual sales levels achieved.
Prudential plc Annual Report 2013 Financial statements Notes on the EEV basis resultsNotes on the EEV basis results continued 309
2013 £m
2012* £m
Long-term business operations
Asia
operations
note (i)
US
operations
UK
insurance
operations
Total
long-term
business
operations
Other
operations
note (i)
Group
total
Group
total
1,460
927
2,387
–
(2)
1,086
1,135
2,221
–
(1)
297
736
1,033
–
(16)
2,385
(157)
2,220
(46)
2,228
2,174
1,017
166
1,183
2,843
2,798
5,641
–
(19)
5,622
(37)
5,585
(494)
69
(695)
12
(198)
(34)
(1,387)
47
–
–
–
574
(616)
(42)
121
79
11
23
2,843
2,798
5,641
574
(635)
5,580
84
5,664
2,452
1,982
4,434
479
(600)
4,313
644
4,957
(1,376)
70
(1,139)
(49)
1,803
1,491
951
4,245
113
4,358
3,769
(974)
(433)
40
–
–
–
412
(5)
–
–
(175)
(300)
–
–
–
(339)
–
–
(1,149)
(1,072)
40
–
72
1,072
(40)
(781)
(1,077)
–
–
(781)
(469)
–
–
(655)
–
–
–
15
–
–
(22)
–
–
(20)
–
–
(22)
–
412
(10)
–
–
–
(97)
–
(97)
843
9,462
10,305
934
6,032
6,966
570
6,772
2,347
22,266
7,342
24,613
(31)
98
(412)
10
(41)
6
–
66
177
243
(53)
98
–
–
(41)
6
(97)
44
42
–
–
23
17
35
2,413
22,443
2,806
19,637
24,856
22,443
2,564
7,741
10,305
3,446
3,520
6,966
2,976
4,366
8,986
15,627
9,650
664
(421) 15,206
10,359
12,084
7,342
24,613
243
24,856
22,443
9 Reconciliation of movement in shareholders’ equity
Pre-tax operating profit (based on longer-term investment
returns)
Long-term business:
New business note 2
Business in force note 3
Asset management
Other results
Pre-tax operating profit based on longer-term investment
returns
Total non-operating profit
Profit before tax (including actual investment returns)
Tax (charge) credit attributable to shareholders’ profit note 10:
Tax on operating profit
Tax on non-operating profit
Profit for the year
Other movements (post-tax)
Exchange movements on foreign operations and net
investment hedges
Intra-group dividends (including statutory transfers) note (ii)
Investment in operations note (iii)
External dividends
Shareholders’ share of actuarial and other gains and losses on
defined benefit pension schemes note (v)
Reserve movements in respect of share-based payments
Bancassurance agreement and purchase of
Thanachart Life notes (vi) and 4
Other transfers
Treasury shares movements
New share capital subscribed
Mark to market value movements on Jackson assets backing
surplus and required capital
Net increase in shareholders’ equity
Shareholders’ equity at 1 January 2013 note (i)
Shareholders’ equity at 31 December 2013 note (i)
Representing:
Statutory IFRS basis shareholders’ equity
Additional retained profit (loss) on an EEV basis note (iv)
EEV basis shareholders’ equity
Balance at 1 January 2013/1 January 2012
Representing:
Statutory IFRS basis shareholders’ equity
Additional retained profit (loss) on an EEV basis note (iv)
EEV basis shareholders’ equity
2,290
7,172
9,462
4,343
1,689
6,032
3,008
3,764
9,641
12,625
10,359
718
(541) 12,084
8,564
11,073
6,772
22,266
177
22,443
19,637
* The 2012 comparative results have been adjusted retrospectively from those previously published for the adoption of IFRS 11 and revised IAS 19 and for the
reclassification of the result attributable to the held for sale Japan life business – see note 18.
Notes
(i)
(ii)
(iii)
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. The amounts included in note 8 for these items are as per the holding company cash flow at transaction rates. The difference primarily relates to
intra-group loans, timing differences arising on statutory transfers, and other non-cash items.
Investment in operations reflects increases in share capital.
Prudential plc Annual Report 2013Financial statementsEuropean Embedded Value (EEV) basis resultsNotes on the EEV basis results 310
9 Reconciliation of movement in shareholders’ equity continued
(iv) The additional retained loss on an EEV basis for Other operations primarily represents the mark to market value adjustment for holding company net
borrowings of a charge of £(392) million (2012: charge of £(536) million), as shown in note 7.
The (charge) credit for the shareholders’ share of actuarial and other gains and losses on defined benefit schemes comprises:
(v)
IFRS basis
Additional shareholders’ interest note 15(c)(vi)
EEV basis total
2013 £m
2012* £m
(48)
(5)
(53)
34
10
44
* The 2012 comparative results have been adjusted retrospectively from those previously published for the adoption of revised IAS 19 – see note 18.
(vi) The £412 million transfer from Other operations to Asia operations represents the funding of Asia operations to purchase the bancassurance agreement and
Thanachart Life (as shown in note 4).
10 Tax attributable to shareholders’ profit
The tax charge comprises:
Tax charge on operating profit based on longer-term investment returns:
Long-term business:*
Asia operations
US operations
UK insurance operations
Other operations†
Total tax charge on operating profit based on longer-term investment returns†
Tax (credit) charge on non-operating profit†
Tax charge on profit attributable to shareholders (including tax on actual investment returns)†
2013 £m
2012 £m
494
695
198
1,387
(11)
1,376
(70)
1,306
420
513
168
1,101
38
1,139
49
1,188
* The tax charge on operating profit for long-term business includes tax on Solvency II and restructuring costs.
† The 2012 comparative results have been adjusted retrospectively from those previously published for the adoption of IFRS 11 and revised IAS 19 – see note 18.
11 Earnings per share (EPS)
Pre-tax profit
Tax
Post-tax profit
EPS (pence)
Average number of shares (millions)
2013 £m
2012* £m
Operating
Total
Operating
5,580
(1,376)
4,204
165.0p
2,548
5,664
(1,306)
4,358
171.0p
2,548
4,313
(1,139)
3,174
124.9p
2,541
Total
4,957
(1,188)
3,769
148.3p
2,541
* The 2012 comparative results have been adjusted retrospectively from those previously published for the adoption of IFRS 11, revised IAS 19 and for the
reclassification of the result attributable to the held for sale Japan life business – see note 18.
Prudential plc Annual Report 2013 Financial statements Notes on the EEV basis resultsNotes on the EEV basis results continued 311
12 Reconciliation of post-tax movements in net worth and value of in-force for long-term business
Group
Shareholders’ equity at 1 January 2013
New business contribution notes (ii), (iii)
Existing business – transfer to net worth
Expected return on existing business
Changes in operating assumptions and experience variances*
Increase in EEV assumed level of required capital note (vi)
Loss attaching to held for sale Japan life business
Other non-operating items
Post-tax profit from long-term business
Exchange movements on foreign operations and net investment hedges
Bancassurance agreement and purchase of Thanachart Life notes 4 and (v)
Intra-group dividends (including statutory transfers) and investment in operations note (i)
Other movements
2013 £m
Free
surplus
note 8
Required
capital
Total net
worth
Total
long-term
business
operations
Value of
in-force
business
note (iv)
2,957
(637)
2,017
133
478
(58)
(40)
(739)
1,154
(164)
365
(963)
(129)
3,898
461
(347)
90
(7)
58
–
(103)
152
(117)
21
–
–
6,855
(176)
1,670
223
471
–
(40)
(842)
1,306
(281)
386
(963)
(129)
15,411
2,258
(1,670)
1,277
182
(13)
5
900
2,939
(868)
26
(69)
–
22,266
2,082
–
1,500
653
(13)
(35)
58
4,245
(1,149)
412
(1,032)
(129)
Shareholders’ equity at 31 December 2013 note(viii)
3,220
3,954
7,174
17,439
24,613
Representing:
Asia operations
Shareholders’ equity at 1 January 2013
New business contribution note (iii)
Existing business – transfer to net worth
Expected return on existing business
Changes in operating assumptions and experience variances*
Loss attaching to held for sale Japan life business note 4
Other non-operating items
Post-tax profit from long-term business
Exchange movements on foreign operations and net investment hedges
Bancassurance agreement and purchase of Thanachart Life notes 4 and (v)
Intra-group dividends (including statutory transfers) and investment in operations
Other movements
974
(310)
713
74
32
(40)
(70)
399
(155)
365
(393)
(5)
970
107
29
(1)
(9)
–
(56)
70
(84)
21
–
–
1,944
(203)
742
73
23
(40)
(126)
469
(239)
386
(393)
(5)
7,518
1,342
(742)
595
61
5
73
1,334
(735)
26
–
–
9,462
1,139
–
668
84
(35)
(53)
1,803
(974)
412
(393)
(5)
Shareholders’ equity at 31 December 2013 note (viii)
1,185
977
2,162
8,143
10,305
US operations
Shareholders’ equity at 1 January 2013
New business contribution note (iii)
Existing business – transfer to net worth
Expected return on existing business
Changes in operating assumptions and experience variances*
Increase in EEV assumed level of required capital note (vi)
Other non-operating items
Post-tax profit from long-term business
Exchange movements on foreign operations and net investment hedges
Intra-group dividends (including statutory transfers)
Other movements
Shareholders’ equity at 31 December 2013
UK insurance operations
Shareholders’ equity at 1 January 2013
New business contribution note (iii)
Existing business – transfer to net worth
Expected return on existing business
Changes in operating assumptions and experience variances*
Other non-operating items
Post-tax profit from long-term business
Intra-group dividends (including statutory transfers) note (i)
Other movements
Shareholders’ equity at 31 December 2013 note (viii)
1,211
(298)
796
41
292
(58)
(637)
136
(9)
(300)
(82)
1,600
288
(296)
53
21
58
(84)
40
(33)
–
–
2,811
(10)
500
94
313
–
(721)
176
(42)
(300)
(82)
3,221
716
(500)
301
111
(13)
700
1,315
(133)
–
–
6,032
706
–
395
424
(13)
(21)
1,491
(175)
(300)
(82)
956
1,607
2,563
4,403
6,966
772
(29)
508
18
154
(32)
619
(270)
(42)
1,328
66
(80)
38
(19)
37
42
–
–
2,100
37
428
56
135
5
661
(270)
(42)
4,672
200
(428)
381
10
127
290
(69)
–
6,772
237
–
437
145
132
951
(339)
(42)
1,079
1,370
2,449
4,893
7,342
* Changes in operating assumptions and experience variances as reported above include development, Solvency II and restructuring costs.
Prudential plc Annual Report 2013Financial statementsEuropean Embedded Value (EEV) basis resultsNotes on the EEV basis results 312
12 Reconciliation of post-tax movements in net worth and value of in-force for long-term business continued
Notes
(i)
(ii)
The amounts shown in respect of free surplus and the value of in-force business for UK insurance operations for intra-group dividends (including statutory
transfers) include contingent loan funding. Contingent loan funding represents amounts whose repayment to the lender is contingent upon future surpluses
emerging from certain contracts specified under the arrangement. If insufficient 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 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
(iii) Free surplus invested in new business is as follows:
2013 £m
2012 £m
(637)
461
(176)
2,258
2,082
(618)
454
(164)
1,955
1,791
2013 £m
2012 £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
Pre-tax new business contribution note 2
Tax
Post-tax new business contribution
Free surplus invested in new business
Post-tax new business contribution per
£1 million free surplus invested
1,460
(321)
1,139
(310)
1,086
(380)
706
(298)
297
(60)
237
(29)
2,843
(761)
2,082
(637)
1,266
(284)
982
(292)
873
(305)
568
(281)
3.7
2.4
8.2
3.3
3.4
2.0
313
(72)
241
(45)
5.4
2,452
(661)
1,791
(618)
2.9
(iv) The value of in-force business includes the value of future margins from current in-force business less the cost of holding required capital and represents:
2013 £m
2012 £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
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 note (vii)
Net value of in-force business
8,540
(347)
(50)
8,143
4,769
(220)
(146)
4,403
5,135
(242)
–
4,893
18,444
(809)
(196)
17,439
7,903
(352)
(33)
7,518
3,992
(121)
(650)
3,221
4,916
(244)
–
4,672
16,811
(717)
(683)
15,411
(v)
The free surplus increase of £365 million in respect of the transaction with Thanachart Bank includes the purchase cost of the partnership agreement to enable
future new sales through the bancasurrance channel. As new business is written, the carrying value of this purchase cost is amortised against the new
business contribution line of this reconciliation.
(vi) The increase in required capital in US operations of £58 million reflects the effect of the change from 235 per cent to 250 per cent of risk-based capital.
(vii) The decrease in the cost of time value of guarantees for US operations from £(650) million at 2012 to £(146) million at 2013 primarily relates to variable annuity
business, mainly arising from the increase in the expected long-term separate account rate of return of 1.3 per cent driven by the increase in the US 10-year
treasury bond rate and strong equity performance, partly offset by the impact from new business written in the year.
(viii) Effects of domestication of Hong Kong branch in 2014
The analysis of shareholders’ equity at 31 December 2013 does not incorporate the impact of the domestication of the Hong Kong branch which took effect on
1 January 2014. In order to align the corporate structure of the branch business in Hong Kong more closely with Prudential’s other Asia operations, the Board of
PAC initiated a proposal to transfer the branch business to two Hong Kong-incorporated companies – Prudential Hong Kong Limited and Prudential General
Insurance Hong Kong Limited – with one providing life insurance and the other providing general insurance.
Following consultation with policyholders of PAC and court approval, the assets and liabilities of the Hong Kong branch business of PAC transferred to
separate subsidiaries on 1 January 2014. As a consequence of this restructuring, adjustments in respect of required capital, and the cost of that capital, will be
necessary. This arises from the transfer of capital that was previously held within the UK business in respect of the Hong Kong branch operations and
additional capital requirements that arise from the newly established subsidiaries. These will be reflected in the movements in net worth and value of in-force
business reported in 2014 as adjustments to opening balances as follows:
£m
Adjustment to shareholders’ equity at 1 January 2014
Free surplus
Required
capital
Total
net worth
Asia operations
UK insurance operations
Net impact on Group total
(104)
69
(35)
104
(69)
35
–
–
–
Value of
in-force
business
Total
long-term
business
operations
(40)
29
(11)
(40)
29
(11)
The adjustments for UK insurance operations reflect the transfer of required capital, and attaching cost of capital, for amounts previously set aside whilst the
Hong Kong business was a branch of Prudential Assurance Company, to the Asia operations segment. The adjustments for Asia operations reflect this transfer
and the effects of additional capital requirements of the Hong Kong regulator under the arrangements for the newly domesticated business. The net effect
reflects the higher required capital levels attributable to the stand-alone Hong Kong shareholder-backed long-term insurance business.
Prudential plc Annual Report 2013 Financial statements Notes on the EEV basis resultsNotes on the EEV basis results continued
313
13 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 2013 and 2012 totals in the tables below for the
emergence of free surplus as follows:
Required capital note 12
Value of in-force (VIF) note 12
Add back: deduction for cost of time value of guarantees note 12
Expected cash flow from sale of Japan life business
Other items note
Total
2013 £m
2012 £m
3,954
17,439
196
(25)
(1,157)
20,407
3,898
15,411
683
–
(1,401)
18,591
Note
‘Other items’ represent amounts incorporated into VIF where there is no definitive 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 final bonus rates so as to exhaust
the estate over the lifetime of the in-force with-profits business. This is an assumption to give an appropriate valuation. To be conservative, this item is excluded from
the expected free surplus generation profile below.
Cash flows are projected on a deterministic basis and are discounted at the appropriate risk discount rate. The modelled cash flows
use the same methodology underpinning the Group’s embedded value reporting and so are subject to the same assumptions
and sensitivities.
The table below shows how the VIF generated by the in-force business and the associated required capital is modelled as emerging
into free surplus over future years.
Asia operations*
US operations
UK insurance operations
Total
Expected period of conversion of future post-tax distributable earnings and required capital flows to
free surplus
2013 £m
2013 total as
shown above
9,021
6,234
5,152
20,407
100%
1-5 years
6 -10 years
11-15 years
16 -20 years
21-40 years
40+ years
3,168
3,326
1,915
8,409
41%
1,883
1,845
1,326
5,054
25%
1,275
653
870
2,798
14%
855
271
536
1,662
8%
1,465
139
487
2,091
10%
375
–
18
393
2%
* Following its reclassification as held for sale, the Asia cash flows exclude any cash flows in respect of Japan.
Asia operations
US operations
UK insurance operations
Total
Expected period of conversion of future post tax distributable earnings and required capital flows to
free surplus
2012 £m
2012 total as
shown above
8,410
5,439
4,742
18,591
100%
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%
1,181
698
756
2,635
14%
840
301
456
1,597
9%
1,297
110
445
1,852
10%
232
–
10
242
1%
Prudential plc Annual Report 2013Financial statementsEuropean Embedded Value (EEV) basis resultsNotes on the EEV basis results 314
14 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 2013 (31 December 2012) and the pre-tax new business
contribution after the effect of required capital for 2013 and 2012 to:
— 1 per cent increase in the discount rates;
— 1 per cent increase and decrease in interest rates, including all consequential changes (assumed investment returns for all asset
classes, market values of fixed interest assets, risk discount rates);
— 1 per cent rise in equity and property yields;
— 10 per cent fall in market value of equity and property assets (embedded value only);
— The statutory minimum capital level (by contrast to EEV basis required capital), (for embedded value only);
— 5 basis point increase in UK long-term expected defaults; and
— 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
2013 £m
2012 £m
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
Asia
operations
US
operations
Pre-tax new business contribution note 2
1,460
1,086
297
2,843
1,266
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
(187)
23
(61)
56
–
–
(52)
72
(107)
96
–
–
(36)
(1)
–
13
(8)
16
(275)
94
(168)
165
(8)
16
(163)
33
(106)
48
–
–
873
(40)
104
(161)
97
–
–
UK
insurance
operations
Total
long-term
business
operations
313
2,452
(38)
6
(11)
13
(10)
20
(241)
143
(278)
158
(10)
20
Embedded value of long-term business operations
2013 £m
2012 £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’ equity note 9
10,305
6,966
7,342
24,613
9,462
6,032
6,772
22,266
Discount rates – 1% increase
Interest rates – 1% increase
Interest rates – 1% decrease
Equity/property yields – 1% rise
Equity/property market values – 10% increase
Statutory minimum capital
Long-term expected defaults – 5 bps increase
Liquidity premium – 10 bps increase
(992)
(297)
200
370
(183)
109
–
–
(266)
(65)
(12)
250
(90)
153
–
–
(529)
(380)
443
210
(238)
4
(114)
228
(1,787)
(742)
631
830
(511)
266
(114)
228
(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
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 profit
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 fluctuations in investment returns. In addition to the sensitivity effects shown above, the
other components of the profit 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.
Prudential plc Annual Report 2013 Financial statements Notes on the EEV basis resultsNotes on the EEV basis results continued
315
(b) Sensitivity analysis – non-economic assumptions
The tables below show the sensitivity of the embedded value as at 31 December 2013 and 31 December 2012 and the pre-tax new
business contribution after the effect of required capital for 2013 and 2012 to:
— 10 per cent proportionate decrease in maintenance expenses (a 10 per cent sensitivity on a base assumption of £10 per annum would
represent an expense assumption of £9 per annum);
— 10 per cent proportionate decrease in lapse rates (a 10 per cent sensitivity on a base assumption of 5 per cent would represent a lapse
rate of 4.5 per cent per annum); and
— 5 per cent proportionate decrease in base mortality and morbidity rates (ie increased longevity).
New business contribution
2013 £m
2012 £m
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
Asia
operations
US
operations
Pre-tax new business contribution note 2
1,460
1,086
297
2,843
1,266
Maintenance expenses – 10% decrease
Lapse rates – 10% decrease
Mortality and morbidity – 5% decrease
Change representing effect on:
Life business
UK annuities
29
109
75
75
–
12
41
6
6
–
4
8
(8)
3
(11)
45
158
73
84
(11)
32
95
76
76
–
873
13
26
5
5
–
UK
insurance
operations
Total
long-term
business
operations
313
2,452
4
7
(11)
3
(14)
49
128
70
84
(14)
Embedded value of long-term business operations
2013 £m
2012 £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’ equity note 9
10,305
6,966
7,342
24,613
9,462
6,032
6,772
22,266
Maintenance expenses – 10% decrease
Lapse rates – 10% decrease
Mortality and morbidity – 5% decrease
Change representing effect on:
Life business
UK annuities
126
352
377
377
–
59
294
154
154
–
58
79
(254)
20
(274)
243
725
277
551
(274)
137
333
387
387
–
50
225
178
178
–
56
66
(273)
13
(286)
243
624
292
578
(286)
Prudential plc Annual Report 2013Financial statementsEuropean Embedded Value (EEV) basis resultsNotes on the EEV basis results
316
15 Methodology and accounting presentation
(a) Covered business
The EEV results for the Group are prepared for ‘covered business’, as defined by the EEV Principles. Covered business represents the
Group’s long-term insurance business for which the value of new and in-force contracts is attributable to shareholders. The results for
covered business, including the Group’s investments in joint venture insurance operations, are presented on a pre-tax basis, with tax
reported separately. 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 definition of long-term business operations is consistent with previous practice and comprises those contracts falling under the
definition for regulatory purposes together with, for US operations, contracts that are in substance the same as guaranteed investment
contracts (GICs) but do not fall within the technical definition.
Covered business comprises the Group’s long-term business operations, with two exceptions:
— The closed Scottish Amicable Insurance Fund (SAIF) which is excluded from covered business. SAIF is a ring-fenced sub-fund of the
Prudential Assurance Company (PAC) long-term fund, established by a Court approved Scheme of Arrangement in October 1997.
SAIF is closed to new business and the assets and liabilities of the fund are wholly attributable to the policyholders of the fund.
— The presentational treatment of the Group’s principal defined benefit pension scheme, the Prudential Staff Pension Scheme (PSPS).
The partial recognition of the surplus for PSPS is recognised in ‘Other’ operations, as described in note 15(c)(vi).
A small amount of UK group pensions business is also not modelled for EEV reporting purposes.
(b) Methodology
(i) Embedded value
Overview
The embedded value is the present value of the shareholders’ interest in the earnings distributable from assets allocated to covered
business after sufficient allowance has been made for the aggregate risks in that business. The shareholders’ interest in the Group’s
long-term business comprises:
— Present value of future shareholder cash flows from in-force covered business (value of in-force business), less deductions for:
– the cost of locked-in required capital;
– the time value of cost of options and guarantees;
— Locked-in required capital; and
— Shareholders’ net worth in excess of required capital (free surplus).
The value of future new business is excluded from the embedded value.
Notwithstanding the basis of presentation of results (as explained in note 15(c)(iv)) no smoothing of market or account balance
values, unrealised gains or investment return is applied in determining the embedded value or profit before tax. Separately, the analysis
of profit is delineated between operating profit based on longer-term investment returns and other constituent items (as explained in
note 15(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 flows. The present value of
the future cash flows is then calculated using a discount rate which reflects both the time value of money and the non-diversifiable risks
associated with the cash flows that are not otherwise allowed for.
Best estimate assumptions
Best estimate assumptions are used for the cash flow projections, where best estimate is defined as the mean of the distribution of future
possible outcomes. The assumptions are reviewed actively and changes are made when evidence exists that material changes in future
experience are reasonably certain.
Assumptions required in the calculation of the value of options and guarantees, for example relating to volatilities and correlations, or
dynamic algorithms linking liabilities to assets, have been set equal to the best estimates and, wherever material and practical, reflect any
dynamic relationships between the assumptions and the stochastic variables.
Demographic assumptions
Persistency, mortality and morbidity assumptions are based on an analysis of recent experience but also reflect expected future
experience. Where relevant, when calculating the time value of financial options and guarantees, policyholder withdrawal rates vary
in line with the emerging investment conditions according to management’s expectations.
Expense assumptions
Expense levels, including those of service companies that support the Group’s long-term business operations, are based on internal
expense analysis investigations and are appropriately allocated to acquisition of new business and renewal of in-force business.
Exceptional expenses are identified and reported separately. 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 where these are expected to be short-lived.
Prudential plc Annual Report 2013 Financial statements Notes on the EEV basis resultsNotes on the EEV basis results continued 317
For Asia operations, the expenses comprise costs borne directly and recharged costs from the Asia regional head office, that are
attributable to covered business. The assumed future expenses for these operations also include projections of these future recharges.
Development expenses are charged as incurred.
Corporate expenditure comprises:
— Expenditure for Group head office, to the extent not allocated to the PAC with-profits funds, together with Solvency II implementation
and restructuring costs, which are charged to the EEV basis results as incurred; and
— Expenditure of the Asia regional head office that is not allocated to the covered business or asset management operations which is
charged as incurred. These costs are primarily for corporate related activities and are included within corporate expenditure.
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 profit that emerges over the lifetime of an individual contract as calculated using the embedded value basis is the same as
that calculated under the IFRS basis. Since the embedded value basis reflects discounted future cash flows, under this methodology the
profit emergence is advanced, thus more closely aligning the timing of the recognition of profits with the efforts and risks of current
management actions, particularly with regard to business sold during the year.
New business
In determining the EEV basis value of new business, premiums are included in projected cash flows on the same basis of distinguishing
annual and single premium business as set out for statutory basis reporting.
New business premiums reflect those premiums attaching to covered business, including premiums for contracts classified as
investment products for IFRS basis reporting. New business premiums for regular premium products are shown on an annualised basis.
Internal vesting business is classified as new business where the contracts include an open market option.
The contribution from new business represents profits 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 reflecting point of sale market conditions. This is consistent with how the
business is priced as crediting rates are linked to yields on specific assets and the yield is 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 profitability 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). These
margins are calculated as the percentage of the value of new business profit to APE and PVNBP. APE is calculated as the aggregate of
regular new business amounts and one-tenth of single new business amounts. PVNBP 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.
Valuation movements on investments
With the exception of debt securities held by Jackson, investment gains and losses during the year (to the extent that changes in capital
values do not directly match changes in liabilities) are included directly in the profit for the year and shareholders’ equity as they arise.
The results for any covered business conceptually reflect the aggregate of the IFRS results and the movements on the additional
shareholders’ interest recognised on the EEV basis. Thus the start point for the calculation of the EEV results for Jackson, as for other
businesses, reflects the market value movements recognised on the IFRS basis.
However, in determining the movements on the additional shareholders’ interest, the basis for calculating the Jackson EEV result
acknowledges that, for debt securities backing liabilities, the aggregate EEV results reflect the fact that the value of in-force business
instead incorporates the discounted value of future spread earnings. This value is not affected generally by short-term market
movements on securities that 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 classified as available-for-sale, movements in unrealised appreciation on
these securities are accounted for in equity rather than in the income statement, as shown in the movement in shareholders’ equity.
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 (post- tax) on the capital.
The annual result is affected by the movement in this cost from year-to-year which comprises a charge against new business profit
and generally a release in respect of the reduction in capital requirements for business in force as this runs off.
Where required capital is held within a with-profits long-term fund, the value placed on surplus assets in the fund is already
discounted to reflect its release over time and no further adjustment is necessary in respect of required capital.
Prudential plc Annual Report 2013Financial statementsEuropean Embedded Value (EEV) basis resultsNotes on the EEV basis results 318
15 Methodology and accounting presentation continued
Financial options and guarantees
Nature of financial 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 floor levels of policyholder benefits that accrue at rates set at inception and do not vary subsequently with market conditions.
US operations (Jackson)
The principal financial options and guarantees in Jackson are associated with the fixed annuity and variable annuity (VA) lines of business.
Fixed annuities provide that, at Jackson’s discretion, it may reset the interest rate credited to policyholders’ accounts, subject to a
guaranteed minimum. The guaranteed minimum return varies from 1.0 per cent to 5.5 per cent for 2013 and 2012, depending on the
particular product, jurisdiction where issued, and date of issue. For 2013 and 2012, 86 per cent of the account values on fixed annuities
are for policies with guarantees of 3 per cent or less. The average guarantee rate is 2.8 per cent for 2013 and 2012.
Fixed annuities also present a risk that policyholders will exercise their option to surrender their contracts in periods of rapidly rising
interest rates, possibly requiring Jackson to liquidate assets at an inopportune time.
Jackson issues VA contracts where it contractually guarantees to the contract holder either: a) return of no less than total deposits
made to the contract adjusted for any partial withdrawals; b) total deposits made to the contract adjusted for any partial withdrawals plus
a minimum return; or c) the highest contract value on a specified anniversary date adjusted for any withdrawals following the specified
contract anniversary. These guarantees include benefits that are payable at specified dates during the accumulation period (Guaranteed
Minimum Withdrawal Benefit (GMWB)), as death benefits (Guaranteed Minimum Death Benefits (GMDB)) or as income benefits
(Guaranteed Minimum Income Benefits (GMIB)). 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 fixed index annuities that enable policyholders to obtain a portion of an equity-linked return while providing a
guaranteed minimum return. The guaranteed minimum returns would be of a similar nature to those described above for fixed annuities.
UK insurance operations
For covered business the only significant financial options and guarantees in the UK insurance operations arise in the with-profits fund.
With-profits products provide returns to policyholders through bonuses that are smoothed. There are two types of bonuses – annual
and final. Annual bonuses are declared once a year and, once credited, are guaranteed in accordance with the terms of the particular
product. Unlike annual bonuses, final bonuses are guaranteed only until the next bonus declaration. The with-profits fund also held a
provision on the Pillar I Peak 2 basis of £36 million at 31 December 2013 (31 December 2012: £47 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-profits 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-profits fund held a reserve of £36 million at 31 December 2013 (31 December 2012: £52 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 £328 million was held in SAIF at 31 December 2013 (31 December 2012: £371 million) to honour the guarantees.
As described in note 15(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 financial options and guarantees comprises two parts. One is given by a deterministic valuation on best estimate assumptions
(the intrinsic value). The other part arises from the variability of economic outcomes in the future (the time value).
Where appropriate, a full stochastic valuation has been undertaken to determine the time value of the financial options and guarantees.
The economic assumptions used for the stochastic calculations are consistent with those used for the deterministic calculations.
Assumptions specific to the stochastic calculations reflect local market conditions and are based on a combination of actual market data,
historic market data and an assessment of long-term economic conditions. Common principles have been adopted across the Group for
the stochastic asset models, for example, separate modelling of individual asset classes but with an allowance for correlation between
the various asset classes. Details of the key characteristics of each model are given in notes 16(iv),(v) and (vi).
In deriving the time value of financial options and guarantees, management actions in response to emerging investment and fund
solvency conditions have been modelled. Management actions encompass, but are not confined to investment allocation decisions,
levels of reversionary and terminal bonuses and credited rates. Bonus rates are projected from current levels and varied in accordance
with assumed management actions applying in the emerging investment and fund solvency conditions.
In all instances, the modelled actions are in accordance with approved local practice and therefore reflect the options actually
available to management. For the PAC with-profits fund, the actions assumed are consistent with those set out in the Principles and
Practices of Financial Management which explains how regular and final bonus rates within the discretionary framework are determined,
subject to the general legislative requirements applicable.
Prudential plc Annual Report 2013 Financial statements Notes on the EEV basis resultsNotes on the EEV basis results continued 319
(ii) Level of required capital
In adopting the EEV Principles, Prudential has based required capital on its internal targets subject to it being at least the local statutory
minimum requirements. For with-profits business written in a segregated life fund, as is the case in Asia and the UK, the capital
available in the fund is sufficient to meet the required capital requirements. For shareholder-backed business the following capital
requirements apply:
— Asia operations: the level of required capital has been set to an amount at least equal to the higher of local statutory requirements and
the internal target;
— US operations: the level of required capital has been set at 250 per cent (2012: 235 per cent) of the risk-based capital required by the
National Association of Insurance Commissioners (NAIC) at the Company Action Level (CAL); and
— UK insurance operations: the capital requirements are set to an amount at least equal to 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 flows are set by reference to risk-free rates
plus a risk margin. The risk margin should reflect any non-diversifiable risk associated with the emergence of distributable earnings that
is not allowed for elsewhere in the valuation. Prudential has selected a granular approach to better reflect differences in market risk
inherent in each product group. The risk discount rate so derived does not reflect an overall Group market beta but instead reflects the
expected volatility associated with the cash flows for each product category in the embedded value model.
Since financial options and guarantees are explicitly valued under the EEV methodology, discount rates under EEV are set excluding
the effect of these product features.
The risk margin represents the aggregate of the allowance for market risk, additional allowance for credit risk where appropriate,
and allowance for non-diversifiable non-market risk. No allowance is required for non-market risks where these are assumed to be
fully diversifiable.
Market risk allowance
The allowance for market risk represents the beta multiplied by an equity risk premium. Except for UK shareholder-backed annuity
business (as explained below) such an approach has been used for all of the Group’s businesses.
The beta of a portfolio or product measures its relative market risk. The risk discount rates reflect the market risk inherent in each
product group and hence the volatility of product cash flows. These are determined by considering how the profits from each product
are affected by changes in expected returns on various asset classes. By converting this into a relative rate of return it is possible to derive
a product specific beta.
Product level betas reflect 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:
— Expected long-term defaults;
— Credit risk premium (to reflect the volatility in downgrade and default levels); and
— Short-term downgrades and defaults.
These allowances are initially reflected in determining best estimate returns and through the market risk allowance described above.
However, for those businesses which are largely backed by holdings of debt securities these allowances in the projected returns and
market risk allowances may not be sufficient and an additional allowance may be appropriate.
The practical application of the allowance for credit risk varies depending upon the type of business as described below.
Asia operations
For Asia operations, the allowance for credit risk incorporated in the projected rates of return and the market risk allowance are sufficient.
Accordingly no additional allowance for credit risk is required.
The projected rates of return for holdings of corporate bonds comprise the risk-free rate plus an assessment of long-term spread over
the risk-free rate.
Prudential plc Annual Report 2013Financial statementsEuropean Embedded Value (EEV) basis resultsNotes on the EEV basis results 320
15 Methodology and accounting presentation continued
US operations (Jackson)
For Jackson business, the allowance for long-term defaults is reflected 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 as
shown in note 16(ii). In determining this allowance a number of factors have been considered. These factors, in particular, include:
— How much of the credit spread on debt securities represents an increased credit risk not reflected in the RMR long-term default
assumptions, and how much is liquidity premium (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
— Policyholder benefits for Jackson fixed annuity business are not fixed. 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.
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 additional allowance for variable annuity business has been set at one-fifth of the non-variable
annuity business to reflect the proportion of the allocated holdings of general account debt securities.
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 flows.
In the annuity MCEV calculations as the assets are generally held to maturity to match long duration liabilities, the future cash flows
are discounted using the swap yield curve plus an allowance for liquidity premium based on Prudential’s assessment of the expected
return on the assets backing the annuity liabilities after allowing for:
— Expected long-term defaults derived as a percentage of historical default experience based on Moody’s data for the period 1970 to
2009 and the definition of the credit rating assigned to each asset held is the second highest credit rating published by Moody’s,
Standard & Poor’s and Fitch;
— A credit risk premium, which is derived as the excess over the expected long-term defaults, of the 95th percentile of historical
cumulative defaults based on Moody’s data for the period 1970 to 2009, and subject to a minimum margin over expected long-term
defaults of 50 per cent;
— An allowance for a 1 notch downgrade of the asset portfolio subject to credit risk; and
— An allowance for short-term downgrades and defaults.
For the purposes of presentation in the EEV results, the results on this basis are reconfigured. Under this approach the projected earned
rate of return on the debt securities held is determined after allowing for expected long-term defaults and, where necessary, an
additional allowance for an element of short-term downgrades and defaults to bring the allowance in the earned rate up to best estimate
levels. The allowances for credit risk premium, 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 16(iii)(b).
(2) With-profits fund non-profit annuity business
For UK non-profit 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 flows to the with-profits fund, which are in turn discounted at
the risk discount rate applicable to all of the projected cash flows of the fund.
(3) With-profits fund holdings of debt securities
The UK with-profits fund holds debt securities as part of its investment portfolio backing policyholder liabilities and unallocated surplus.
The assumed earned rate for with-profit holdings of corporate bonds is defined as the risk-free rate plus an assessment of the long-term
spread over gilts, net of expected long-term defaults. This approach is similar to that applied for equities and properties for which the
projected earned rate is defined as the risk-free rate plus a long-term risk premium.
Prudential plc Annual Report 2013 Financial statements Notes on the EEV basis resultsNotes on the EEV basis results continued 321
Allowance for non-diversifiable non-market risks
The majority of non-market and non-credit risks are considered to be diversifiable. Finance theory cannot be used to determine the
appropriate component of beta for non-diversifiable non-market risks since there is no observable risk premium associated with it that
is akin to the equity risk premium. Recognising this, a pragmatic approach has been applied.
A base level allowance of 50 basis points is applied to cover the non-diversifiable non-market risks associated with the Group’s
businesses. For the Group’s US business and UK business 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 reflect 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-profits business and the treatment of the estate
The proportion of surplus allocated to shareholders from the PAC with-profits fund has been based on the present level of 10 per cent.
The value attributed to the shareholders’ interest in the estate is derived by increasing final bonus rates (and related shareholder
transfers) so as to exhaust the estate over the lifetime of the in-force with-profits business. In any scenarios where the total assets of the
life fund are insufficient to meet policyholder claims in full, the excess cost is fully attributed to shareholders. Similar principles apply,
where appropriate, for other with-profits funds of the Group’s Asia operations.
(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 profits and losses have been translated at average exchange rates for the year. Foreign currency assets and liabilities
have been translated at year end rates of exchange. The principal exchange rates are shown in note A1 of the IFRS statements.
(c) Accounting presentation
(i) Analysis of profit before tax
To the extent applicable, the presentation of the EEV profit for the year is consistent with the basis that the Group applies for analysis of
IFRS basis profits before shareholder taxes between operating and non-operating results. Operating results reflect the underlying results
including longer-term investment returns (which are determined as described in note 15(c)(ii) below) and incorporate the following:
— New business contribution, as defined in note 15(b)(i);
— Unwind of discount on the value of in-force business and other expected returns, as described in note 15(c)(iv) below;
— The impact of routine changes of estimates relating to non-economic assumptions, as described in note 15(c)(iii) below; and
— Non-economic experience variances, as described in note 15(c)(v) below.
Non-operating results comprise the recurrent items of short-term fluctuations in investment returns, the mark to market value
movements on core borrowings and the effect of changes in economic assumptions.
In addition, the 2013 operating profit excludes the loss attaching to the held for sale Japan life business and the costs associated with
the domestication of the Hong Kong branch. The 2012 operating profit excluded the gain arising on the acquisition of REALIC, the profit
attaching to the Japan life business and the dilution of the Group’s holding in PPM South Africa. The amounts for these items are included
in total EEV profit attributable to shareholders. The Company believes that operating profit, as adjusted for these items, better reflects
underlying performance. Profit before tax and basic earnings per share include these items, together with actual investment returns.
Post-tax results
The Group intends to alter its basis of presentation of EEV results for 2014 and subsequent reporting periods to a post-tax basis, in line
with the approach adopted by a number of international insurance groups. An analysis of the Group’s profit and loss account and key
accompanying notes on a pre-tax and post-tax basis for the most recent reporting periods are shown in the additional unaudited financial
information section in note III(c).
(ii) Operating profit
For the investment element of the assets covering the net worth of long-term insurance business, investment returns are recognised in
operating results at the expected long-term rate of return. These expected returns are calculated by reference to the asset mix of the
portfolio. For the purpose of calculating the longer-term investment return to be included in the operating result of the PAC with-profits
fund of UK operations, where assets backing the liabilities and unallocated surplus are subject to market volatility, asset values at the
beginning of the reporting period are adjusted to remove the effects of short-term market movements as explained in note 15(c)(iv) below.
For the purpose of determining the long-term returns for debt securities of US operations for fixed annuity and other general account
business, a risk margin charge is included which reflects the expected long-term rate of default based on the credit quality of the
portfolio. For Jackson, interest-related realised gains and losses are amortised to the operating results over the maturity period of the sold
bonds and for equity-related investments, a long-term rate of return is assumed, which reflects the aggregation of end of year risk-free
rates and equity risk premium. For US variable annuity separate account business, operating profit includes the unwind of discount on
the opening value of in-force adjusted to reflect end of year projected rates of return with the excess or deficit of the actual return
recognised within non-operating profit, together with the related hedging activity.
Prudential plc Annual Report 2013Financial statementsEuropean Embedded Value (EEV) basis resultsNotes on the EEV basis results 322
15 Methodology and accounting presentation continued
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) Effect of changes in operating assumptions
Operating profit 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 at the beginning of the period (adjusted for the effect of current period economic and operating
assumption changes); and
— Required capital and surplus assets.
In applying this general approach, the unwind of discount included in operating profit for the with-profits business of UK insurance
operations is determined by reference to the opening value of in-force, as adjusted for the effects of short-term investment volatility
due to market movements (ie smoothed). In the summary statement of financial position and for total profit reporting, asset values and
investment returns are not smoothed. At 31 December 2013 the shareholders’ interest in the smoothed surplus assets used for this
purpose only were £136 million lower (31 December 2012: £121 million lower) than the surplus assets carried in the statement of
financial position.
(v) Operating experience variances
Operating profits 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.
(vi) Pension costs
Profit before tax
Movements on the shareholders’ share of surpluses (to the extent not restricted by IFRIC 14) and deficits of the Group’s defined benefit
pension schemes adjusted for contributions paid in the year are recorded within Other Comprehensive Income. Consistent with the
basis of distribution of bonuses and the treatment of the estate described in notes 15(b)(i) and (iv), the shareholders’ share incorporates
10 per cent of the proportion of the financial position attributable to the PAC with-profits fund. The financial position is determined by
applying the requirements of IAS 19 as booked for IFRS reporting.
(vii) Effect of changes in economic assumptions
Movements in the value of in-force business at the beginning of the period caused by changes in economic assumptions, net of the
related change in the time value of cost of option and guarantees, are recorded in non-operating results.
(viii) Taxation
The profit for the year for covered business is in most cases calculated initially at the post-tax level. For 2013 and 2012 the post-tax profit
for covered business is then grossed up for presentation purposes at the rates of tax applicable to the countries and periods concerned.
The overall tax rate includes the impact of tax effects determined on a local regulatory basis. Tax payments and receipts included in the
projected cash flows to determine the value of in-force business are calculated using rates that have been substantively enacted by the
end of the reporting period. Current taxation and other legislation have been assumed to continue unaltered except where changes have
been announced and substantively enacted in the year. Additional detail of pre and post-tax EEV basis results are shown in the additional
financial information.
(ix) Inter-company arrangements
The EEV results for covered business incorporate annuities established in the PAC non-profit sub-fund from vesting pension polices in
SAIF (which is not covered business). The EEV results also incorporate the effect of the reinsurance arrangement of non-profit immediate
pension annuity liabilities of SAIF to PRIL. In addition, the free surplus and value of in-force business are calculated after taking account of
the impact of contingent loan arrangements between Group companies (movements in the contingent loan liability are reflected via the
projected cash flows in the value of in-force and the related funding is reflected in free surplus).
Prudential plc Annual Report 2013 Financial statements Notes on the EEV basis resultsNotes on the EEV basis results continued 323
16 Assumptions
Deterministic assumptions
The tables below summarise the principal financial assumptions:
Assumed investment returns reflect the expected future returns on the assets held and allocated to the covered business at the
valuation date.
(i) Asia operations notes (b), (d)
China
Hong Kong notes (b), (c)
India
Indonesia
Korea
Malaysia note (c)
Philippines
Singapore note (c)
Taiwan
Thailand
Vietnam
Total weighted risk discount rate note (a)
Risk discount rate %
New business
31 Dec
In force
31 Dec
2013
11.2
4.9
14.0
12.5
7.4
6.5
10.5
4.6
4.3
10.7
15.7
8.1
2012
10.1
3.8
13.2
9.4
7.4
5.8
11.1
3.6
3.3
10.3
17.2
6.8
2013
11.2
4.8
14.0
12.5
7.6
6.5
10.5
5.3
4.1
10.7
15.7
7.2
2012
10.1
3.5
13.2
9.4
7.2
5.8
11.1
4.3
3.4
10.3
17.2
6.1
Expected
long-term inflation %
10-year government
bond yield %
31 Dec
31 Dec
2013
2012
2013
2.5
2.3
4.0
5.0
3.0
2.5
4.0
2.0
1.0
3.0
5.5
2.5
2.3
4.0
5.0
3.0
2.5
4.0
2.0
1.0
3.0
5.5
4.7
3.1
9.0
8.6
3.6
4.2
3.8
2.6
1.7
3.9
9.0
2012
3.6
1.8
8.2
5.3
3.2
3.5
4.4
1.3
1.2
3.5
10.5
Notes
(a)
(b)
(c)
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 pre-tax EEV basis new business result and the closing value of in-force business. The changes in the risk discount rates for individual Asia territories
reflect the movements in government bond yields, together with the effects 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 mean equity return assumptions for the most significant equity holdings in the Asia operations were:
Hong Kong
Malaysia
Singapore
31 Dec 2013 %
31 Dec 2012 %
7.1
10.1
8.6
5.8
9.5
7.4
(d)
Equity risk premiums in Asia (excluding those for the held for sale Japan life business) range from 3.5 per cent to 8.7 per cent for 2013 (2012: 3.5 per cent to
8.8 per cent).
Prudential plc Annual Report 2013Financial statementsEuropean Embedded Value (EEV) basis resultsNotes on the EEV basis results 324
16 Assumptions continued
(ii) US operations
Assumed new business spread margins: note (a)
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
Allowance for long-term defaults included in projected spread note (b)
Risk discount rate:
Variable annuity:
Risk discount rate
Additional allowance for credit risk included in risk discount rate note (b)
Non-variable annuity:
Risk discount rate
Additional allowance for credit risk included in risk discount rate note (b)
Weighted average total: note (c)
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
Expected long-term rate of inflation
Equity risk premium
Assumed tax rate for value of in-force business
* Including the proportion of variable annuity business invested in the general account.
31 Dec 2013 %
31 Dec 2012 %
1.2
1.75
1.45
2.00
0.75
0.25
7.6
0.2
4.8
1.0
7.4
6.9
3.1
7.1
2.6
4.0
35.0
1.4
1.1
1.75
1.35
1.25
0.28
6.5
0.3
4.0
1.5
6.3
5.6
1.8
5.8
2.5
4.0
35.0
Notes
(a)
(b)
The assumed new business spread margins represent the difference between the earned rate on investments, after allowance for long-term defaults, and the
policy holder crediting rate. The spread margins shown above are the rates at inception. For fixed annuity business (including the proportion of variable
annuity business invested in the general account) and fixed index annuity business, the assumed spread margin grades up linearly by 25 basis points to a
long-term assumption over five years.
The allowance for long-term defaults included in projected spread is shown as at the valuation date applied in the cash flow projections of the value of the
in-force business. The risk discount rates include an additional allowance for credit risk premium and short-term downgrades and defaults. See note 15(b)(iii) for
further details.
(c) The weighted average risk discount rates reflect the mix of business between variable annuity and non-variable annuity business. The increase in the weighted
average risk discount rates from 2012 to 2013 primarily reflects the increase in the US 10-year Treasury bond rate of 130 basis points, partly offset by the effect of
the decrease in additional allowance for credit risk.
Prudential plc Annual Report 2013 Financial statements Notes on the EEV basis resultsNotes on the EEV basis results continued
(iii) UK insurance operations
Shareholder-backed annuity business: note (b)
Risk discount rate:
New business
In force note (a)
Pre-tax expected long-term nominal rate of return for shareholder-backed annuity business:
New business
In force note (a)
Other business:
Risk discount rate:
New business
In force
Pre-tax expected long-term nominal rates of investment return:
UK equities
Overseas equities
Property
15-year gilt rate
Corporate bonds
Post-tax expected long-term nominal rate of return for the PAC with-profits fund:
Pension business (where no tax applies)
Life business
Expected long-term rate of inflation
Equity risk premium
Assumed tax rate for value of in-force business note 3(iv)(b)
325
31 Dec 2013 %
31 Dec 2012 %
6.8
8.3
4.2
4.3
6.1
6.8
6.9
8.0
4.2
3.9
5.2
5.6
7.5
7.1 to 9.2
6.2
3.5
5.1
6.3
5.8 to 9.6
5.1
2.3
3.9
6.2
5.4
3.4
4.0
20.0
5.0
4.4
2.9
4.0
23.0
Notes
(a)
(b)
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 reflect the effect of changes in asset yields.
Credit spread treatment
For Prudential Retirement Income Limited, which has approximately 90 per cent of UK shareholder-backed annuity business the credit assumptions used in
the underlying MCEV calculation (see note 15(b)(iii)) and the residual liquidity premium element of the bond spread over swap rates is as follows:
Bond spread over swap rates
Total credit risk allowance
Liquidity premium
New business* (bps)
In-force business (bps)
31 Dec 2013
31 Dec 2012
31 Dec 2013
31 Dec 2012
127
36
91
150
35
115
133
62
71
161
65
96
* The new business liquidity premium is based on the weighted average of the point of sale liquidity premia.
The overall allowance for credit risk is prudent by comparison with historic rates of default and would be sufficient to withstand a wide
range of extreme credit events over the expected lifetime of the annuity business.
Prudential plc Annual Report 2013Financial statementsEuropean Embedded Value (EEV) basis resultsNotes on the EEV basis results
326
16 Assumptions continued
Stochastic assumptions
The economic assumptions used for the stochastic calculations are consistent with those used for the deterministic calculations
described above. Assumptions specific to the stochastic calculations, such as the volatilities of asset returns, reflect local market
conditions and are based on a combination of actual market data, historic market data and an assessment of longer-term economic
conditions. Common principles have been adopted across the Group for the stochastic asset models, for example, separate modelling
of individual asset classes but with allowance for correlation between the various asset classes.
Details are given below of the key characteristics and calibrations of each model.
(iv) Asia operations
— 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 significant investment asset;
— The stochastic cost of guarantees is primarily only of significance for the Hong Kong, Korea, Malaysia, Singapore and Taiwan
operations; and
— 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 in both years, and the volatility of government bond yields ranges from 0.9 per cent to
2.3 per cent in both years.
(v) US operations (Jackson)
— Interest rates are projected using a log-normal generator calibrated to historical US Treasury yield curves;
— Corporate bond returns are based on Treasury securities plus a spread that has been calibrated to current market conditions and
varies by credit quality; and
— Variable annuity equity returns and bond interest rates have been stochastically generated using a log-normal model with parameters
determined by reference to historical data. The volatility of equity fund returns ranges from 19 per cent to 32 per cent for both 2013
and 2012, 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 for both years.
(vi) UK insurance operations
— Interest rates are projected using a two-factor model calibrated to the initial market yield curve;
— The risk premium on equity assets is assumed to follow a log-normal distribution;
— The corporate bond return is calculated as the return on a zero-coupon bond plus a spread. The spread process is a mean reverting
stochastic process; and
— Property returns are modelled in a similar fashion to corporate bonds, namely as the return on a 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
%
20
18
15
Prudential plc Annual Report 2013 Financial statements Notes on the EEV basis resultsNotes on the EEV basis results continued 327
17 New business premiums and contributions note (i)
Group insurance operations
Asia
US
UK
Group total
Asia insurance operations
Cambodia
Hong Kong
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
SE Asia operations including Hong Kong
China note (ii)
Korea
Taiwan
India note (iii)
Total Asia operations
US insurance operations
Variable annuities
Elite Access (variable annuity)
Fixed annuities
Fixed index annuities
Life
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)
note 15(b)(i)
Present value of new
business premiums
(PVNBP)
note 15(b)(i)
2013 £m 2012 £m 2013 £m 2012 £m 2013 £m 2012 £m 2013 £m 2012 £m
2,136
15,712
5,128
1,568
14,504
6,286
1,911
2
212
1,740
12
207
2,125
1,573
725
1,897
1,462
836
11,375
15,723
5,978
10,544
14,600
7,311
22,976
22,358
2,125
1,959
4,423
4,195
33,076
32,455
–
326
303
114
193
571
66
2
–
157
359
98
172
399
12
1
1
455
445
197
34
304
61
54
–
380
410
208
28
261
36
44
1
487
477
208
53
361
68
54
–
396
446
218
45
301
37
45
1,575
114
311
102
34
1,198
37
94
172
67
1,551
71
82
107
100
1,367
53
86
138
96
1,709
83
113
117
103
1,488
56
95
156
102
3
2,795
1,943
1,352
299
2,588
289
204
9,473
409
641
491
361
–
2,316
2,097
1,388
254
2,314
140
159
8,668
277
438
723
438
2,136
1,568
1,911
1,740
2,125
1,897
11,375
10,544
10,795
2,585
555
907
1
869
11,596
849
581
1,094
6
378
15,712
14,504
284
488
1,305
2,077
120
1,754
901
276
297
653
1,456
2,406
303
2,275
894
408
–
–
–
–
2
–
2
–
–
–
–
161
–
51
–
212
–
–
–
–
12
–
12
–
–
–
–
159
–
48
–
207
1,079
259
55
91
2
87
1,160
85
58
109
12
38
10,795
2,585
555
907
12
869
11,596
849
581
1,094
102
378
1,573
1,462 15,723
14,600
28
49
131
208
173
176
140
28
725
30
65
146
241
189
228
137
41
836
284
488
1,305
2,077
686
1,756
1,183
276
297
653
1,456
2,406
1,045
2,277
1,175
408
5,978
7,311
Total UK and Europe insurance operations
5,128
6,286
Group total
22,976
22,358
2,125
1,959
4,423
4,195
33,076
32,455
Notes
(i)
The tables shown above are provided as an indicative volume measure of transactions undertaken in the reporting period that have the potential to generate
profits for shareholders. The amounts shown are not, and not intended to be, reflective of premium income recorded in the IFRS income statement.
(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.
Prudential plc Annual Report 2013Financial statementsEuropean Embedded Value (EEV) basis resultsNotes on the EEV basis results 328
18 Additional information on the effect of the agreement to sell Japan life business and adoption of new and
amended IFRS accounting standards
In July 2013 the Group agreed to sell, dependent on regulatory approval, its life insurance business in Japan which we closed to new
business in 2010. Also, in 2013 the Group has adopted new accounting standards on ‘Joint arrangements’ (IFRS 11) and amendments
to ‘Employee benefits’ (IAS 19), from 1 January 2013. Accordingly, the 2012 comparative EEV basis results have been retrospectively
adjusted from those previously published for the application of the IFRS standards and for the reclassification of the result attributable
to the held for sale Japan life business. The tables below show the results on the previous and revised basis of reporting.
Pre-tax operating profit based on longer-term investment returns
Asia operations
Long-term business:
Before reclassification of held for sale Japan life business
Reclassification of Japan life business
Eastspring investments
Other results
Pre-tax operating profit based on longer-term investment returns
Short-term fluctuations in investment returns:
Before reclassification of held for sale Japan life business
Reclassification of Japan life business
Shareholders’ share of actuarial and other gains and losses on defined
benefit pension schemes
Effect of changes in economic assumptions:
Before reclassification of held for sale Japan life business
Reclassification of Japan life business
Loss attaching to held for sale Japan life business:
Reclassification from pre-tax operating profit based on longer-term
investment returns
Reclassification from short-term fluctuations in investment returns
Reclassification from effect of changes in economic assumptions
Remeasurement of carrying value of Japan life business classified
as held for sale
Mark to market value movements on core borrowings
Costs of domestication of Hong Kong branch
Profit before tax
Tax attributable to shareholders’ profit
Profit for the year attributable to shareholders
Items taken directly to shareholders’ equity
Net increase in shareholders’ equity
Total EPS based on post-tax profit (in pence)
Under previous
basis
note (i)
2013 £m
Effect of change
IFRS 11
note (ii)
IAS 19
note (iii)
Under new
policies
2,394
(7)
2,387
82
3,119
5,588
(790)
(28)
(818)
(69)
818
3
821
7
28
(3)
(67)
(35)
152
(35)
5,604
(1,299)
4,305
(1,892)
2,413
169.0p
–
–
–
(8)
–
(8)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(8)
8
–
–
–
–
–
–
–
–
–
–
(1)
–
(1)
69
–
–
–
–
–
–
–
–
–
–
68
(15)
53
(53)
–
2,394
(7)
2,387
74
3,119
5,580
(791)
(28)
(819)
–
818
3
821
7
28
(3)
(67)
(35)
152
(35)
5,664
(1,306)
4,358
(1,945)
2,413
2.0p
171.0p
Prudential plc Annual Report 2013 Financial statements Notes on the EEV basis resultsNotes on the EEV basis results continued
329
Under previous
basis
note (i)
31 Dec 2013 £m
Effect of change
IFRS 11
note (ii)
IAS 19
Under new
policies
292,791
(814)
291,977
(3,151)
–
(3,151)
3,151
–
3,151
–
–
–
–
–
–
–
–
–
289,640
(814)
288,826
(279,990)
814
(279,176)
15,206
24,856
(283,141)
814
(282,327)
15,206
24,856
As reported
under
previous
basis
note (i)
1,960
(2)
1,958
75
2,286
4,319
538
(33)
505
62
(16)
14
(2)
2
33
(14)
21
115
5,020
(1,207)
3,813
(1,007)
2,806
150.1p
2012 £m
Effect of change
IFRS 11
note (ii)
IAS 19
note (iii)
Under new
policies
–
–
–
(6)
–
(6)
–
–
–
–
–
–
–
–
–
–
–
–
(6)
6
–
–
–
–
–
–
–
–
–
–
5
–
5
(62)
–
–
–
–
–
–
–
–
(57)
13
(44)
44
–
1,960
(2)
1,958
69
2,286
4,313
543
(33)
510
–
(16)
14
(2)
2
33
(14)
21
115
4,957
(1,188)
3,769
(963)
2,806
(1.8)p
148.3p
Summary statement of financial position
Total net assets
Total assets less liabilities, before deduction for insurance funds:
Before reclassification of held for sale Japan life business
Reclassification of Japan life business
Less insurance funds:
Policyholder liabilities (net of reinsurers’ share) and unallocated
surplus of with-profits funds:
Before reclassification of held for sale Japan life business
Reclassification of Japan life business
Less shareholders’ accrued interest in the long-term business
Total net assets
Pre-tax operating profit based on longer-term investment returns
Asia operations
Long-term business:
Before reclassification of held for sale Japan life business
Reclassification of Japan life business
Eastspring investments
Other results
Pre-tax operating profit based on longer-term investment returns
Short-term fluctuations in investment returns:
Before reclassification of held for sale Japan life business
Reclassification of Japan life business
Shareholders’ share of actuarial and other gains and losses on defined
benefit pension schemes
Effect of changes in economic assumptions:
Before reclassification of held for sale Japan life business
Reclassification of Japan life business
Profit attaching to held for sale Japan life business:
Reclassification from pre-tax operating profit based on longer-term
investment returns
Reclassification from short-term fluctuations in investment returns
Reclassification from effect of changes in economic assumptions
Other items
Profit before tax
Tax attributable to shareholders’ profit
Profit for the year attributable to shareholders
Items taken directly to shareholders’ equity
Net increase in shareholders’ equity
Total EPS based on post-tax profit (in pence)
Prudential plc Annual Report 2013Financial statementsEuropean Embedded Value (EEV) basis resultsNotes on the EEV basis results
330
Prudential plc Annual Report 2013 Financial statements Notes on the EEV basis results/Directors’ responsibilities
18 Additional information on the effect of the agreement to sell Japan life business and adoption of new and
amended IFRS accounting standards continued
Summary statement of financial position
Total net assets
Total assets less liabilities, before deduction for insurance funds:
Less insurance funds:
Policyholder liabilities (net of reinsurers’ share) and unallocated
surplus of with-profits funds
Less shareholders’ accrued interest in the long-term business
Total net assets
As reported
under
previous
basis
31 Dec 2012 £m
Effect of change
IFRS 11
note (ii)
274,863
(3,095)
(264,504)
12,084
22,443
3,095
–
–
IAS 19
Under new
policies
–
–
–
–
271,768
(261,409)
12,084
22,443
Notes
(i)
(ii)
Following the agreement in July 2013 to sell the Group’s life insurance business in Japan, the results for the Japan life business have been shown separately in
the Group’s analysis of profit – see note 4.
Consistent with the requirements of IFRS 11, the Group’s EEV pre-tax results now incorporate the post-tax results for asset management joint venture operations.
For life insurance joint venture operations, the EEV results continue to be presented on a pre-tax basis, ie as for the Group’s other insurance businesses.
(iii) Under the amended IAS 19 all actuarial gains and losses and related tax are recognised in the movement in shareholders’ equity rather than in the summarised
consolidated income statement.
Notes on the EEV basis results continued
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.
In preparing the EEV supplementary
information, the directors have:
— Prepared the supplementary
information in accordance with the
EEV Principles;
— Identified and described the business
When compliance with the EEV
covered by the EVM;
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.
— Applied the EVM consistently to the
covered business;
— Determined assumptions on a realistic
basis, having regard to past, current and
expected future experience and to any
relevant external data, and then applied
them consistently;
— Made estimates that are reasonable and
consistent; and
— Described the basis on which business
that is not covered business has been
included in the supplementary
information, including any material
departures from the accounting
framework applicable to the Group’s
financial statements.
331
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a
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Prudential plc Annual Report 2013
332
Prudential plc Annual Report 2013 Financial statements Independent auditor’s report to Prudential plc
Independent auditor’s report to Prudential plc
on the European Embedded Value (EEV) basis supplementary information
The purpose of this report and
restrictions on its use by persons
other than the Company
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.
Rees Aronson
for and on behalf of KPMG Audit Plc,
Chartered Accountants
London
11 March 2014
Opinions and conclusions arising
from our audit
Our opinion on the EEV basis
supplementary information is
unmodified
We have audited the EEV basis
supplementary information of Prudential
plc (the Company) for the year ended
31 December 2013 set out in the EEV basis
results and Notes on the EEV basis results
pages. The EEV basis supplementary
information should be read in conjunction
with the Group financial statements.
In our opinion, the EEV basis
supplementary information of the Company
for the year ended 31 December 2013 has
been properly prepared, in all material
respects, in accordance with 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 in the Notes on the
EEV basis results.
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 331, 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 an audit of financial
statements performed in accordance
with ISAs (UK and Ireland)
A description of the scope of an audit of
financial statements is provided on our
website at www.kpmg.com/uk/
auditscopeother2013. This report is
made subject to important explanations
regarding our responsibilities, as published
on that website, which are incorporated
into this report as if set out in full and
should be read to provide an
understanding of the purpose of this
report, the work we have undertaken
and the basis of our opinions.
333
Section 7
Additional information
Index to the additional unaudited financial information
Risk factors
Glossary
Shareholder information
334
362
367
371
373 How to contact us
7
Additional information Prudential plc Annual Report 2013 334
Index to the additional unaudited financial information
I.
335
II.
338
Selected historical financial information
Selected historical financial information
IFRS profit and loss information
a
Analysis of long-term insurance business pre-tax
IFRS operating profit based on longer-term
investment returns by driver
Asia operations – analysis of IFRS operating profit
by territory
Analysis of asset management operating profit
based on longer-term investment returns
343
344
b
c
III.
345
346
348
Other information
a Holding company cash flow
b Funds under management
c
350
d
Additional information on pre and post-tax EEV
basis results
Reconciliation of expected transfer of value of
in-force (VIF) and required capital business to
free surplus
354
354
359
e Foreign currency source of key metrics
f
g Option schemes
Economic capital position
Prudential plc Annual Report 2013 Additional information Additional unaudited financial information Additional unaudited financial information
335
I: Selected historical financial information
The following table sets forth Prudential’s selected consolidated financial data for the periods indicated. Certain data is derived from
Prudential’s audited consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS) as
issued by the International Accounting Standards Board (IASB) and as adopted by the European Union (EU) and European Embedded
Value (EEV).
This table is only a summary and should be read in conjunction with Prudential’s consolidated financial statements and the related
notes included elsewhere in this document.
Income statement data
IFRS basis results
Gross premium earned
Outward reinsurance premiums
Earned premiums, net of reinsurance
Investment return
Other income
Total revenue, net of reinsurance
Benefits and claims and movement in unallocated surplus
of with-profits funds, net of reinsurance
Acquisition costs and other expenditure
Finance costs: interest on core structural borrowings
of shareholder-financed operations
Remeasurement of carrying value of Japan life business
classified as held for sale
Loss on sale of Taiwan agency business
Total charges, net of reinsurance
Share of profits from joint ventures and associates, net of
related tax
Profit before tax (being tax attributable to shareholders’ and
policyholders’ returns)note (1)
Tax (charge) credit attributable to policyholders’ returns
Profit before tax attributable to shareholders
Tax (charge) credit attributable to shareholders’ returns
Profit from continuing operations after tax
Discontinued operations (net of tax)
Profit for the year
Based on profit 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
Year ended 31 December
2013 £m
2012* £m
2011* £m
2010* £m
2009* £m
30,502
(658)
29,844
20,347
2,184
52,375
29,113
(491)
28,622
23,931
1,885
54,438
24,837
(417)
24,420
9,361
1,711
35,492
23,610
(349)
23,261
21,662
1,539
46,462
19,525
(323)
19,202
26,813
1,143
47,158
(43,154)
(6,861)
(45,144)
(6,032)
(28,706)
(4,717)
(39,687)
(4,692)
(40,474)
(4,463)
(305)
(120)
–
(280)
(286)
(257)
–
–
–
–
–
–
(209)
–
(559)
(50,440)
(51,456)
(33,709)
(44,636)
(45,705)
147
135
76
64
29
2,082
(447)
1,635
(289)
1,346
–
1,346
3,117
(370)
2,747
(584)
2,163
–
2,163
1,859
7
1,866
(415)
1,451
–
1,451
1,890
(607)
1,283
43
1,326
–
1,326
1,482
(829)
653
(15)
638
(14)
624
52.8p
52.7p
85.1p
85.0p
57.1p
57.0p
52.4p
52.3p
24.9p
24.8p
(in pence)
30.52p
25.64p
25.19p
20.17p
19.20p
* The Group has adopted new accounting standards on consolidated financial statements and joint arrangements, and amendments to the employee benefits
accounting standard, from 1 January 2013, as described in note A2. Accordingly, the 2009 to 2012 comparative results and related notes have been adjusted
retrospectively from those previously published.
Additional information Prudential plc Annual Report 2013 336
I: Selected historical financial information continued
Supplementary IFRS income statement data
Operating profit based on longer-term investment returnsnote (2)
Short-term fluctuations in investment returns on
shareholder-backed business
Costs of terminated AIA transaction
Gain on dilution of Group’s holdings
Amortisation of acquisition accounting adjustments
(Loss) profit attaching to held for sale Japan life business
Costs of domestication of Hong Kong branch
Loss on sale and results of Taiwan agency business
Profit from continuing operations before tax attributable to
2013 £m
2,954
(1,110)
–
–
(72)
(102)
(35)
–
Year ended 31 December
2012* £m
2011* £m
2010* £m
2009* £m
2,520
2,017
1,823
1,444
187
–
42
(19)
17
–
–
(157)
–
–
–
6
–
–
(201)
(377)
30
–
8
–
–
(173)
–
–
–
3
–
(621)
shareholdersnote (2)
1,635
2,747
1,866
1,283
653
Operating earnings per share (reflecting operating profit based
on longer-term investment returns after related tax and
non-controlling interests and excluding 2010 exceptional tax
credit) (in pence)
Operating earnings per share (reflecting operating profit based
on longer-term investment returns after related tax and
non-controlling interests and including 2010 exceptional tax
credit) (in pence)
90.9p
76.9p
62.7p
58.8p
43.3p
90.9p
76.9p
62.7p
65.1p
43.3p
* The Group has adopted new accounting standards on consolidated financial statements and joint arrangements, and amendments to the employee benefits
accounting standard, from 1 January 2013, as described in note A2. Accordingly, the 2009 to 2012 comparative results and related notes have been adjusted
retrospectively from those previously published.
Supplementary EEV income statement data
Operating profit based on longer-term investment returnsnote (2)
Short-term fluctuations in investment returns on
shareholder-backed business
Mark to market value movements on core borrowings
Effect of changes in economic assumptions
Costs of terminated AIA transaction
Gain on dilution of Group’s holdings
Costs of domestication of Hong Kong branch
Gain on acquisition on REALIC
(Loss) profit attaching to held for sale Japan life business
Profit on sale and results of Taiwan agency business
Profit from continuing operations before tax attributable to
2013 £m
5,580
(819)
152
821
–
–
(35)
–
(35)
–
Year ended 31 December
2012* £m
2011* £m
2010* £m
2009* £m
4,313
3,981
3,702
3,093
510
(380)
(2)
–
42
–
453
21
–
(830)
(14)
(141)
–
–
–
–
(19)
–
(52)
(164)
11
(377)
3
–
–
(10)
–
315
(795)
(908)
–
–
–
–
27
91
shareholders
5,664
4,957
2,977
3,113
1,823
Operating earnings per share (reflecting operating profit based
on longer-term investment returns after related tax and
non-controlling interests and excluding 2010 exceptional tax
credit) (in pence)
Operating earnings per share (reflecting operating profit based
on longer-term investment returns after related tax and
non-controlling interests and including 2010 exceptional tax
credit) (in pence)
165.0p
124.9p
116.0p
107.4p
89.1p
165.0p
124.9p
116.0p
113.7p
89.1p
* The Group has adopted new accounting standards on joint arrangements and amendments to employee benefits, from 1 January 2013, as described in note 1.
Accordingly, the 2009 to 2012 comparative EEV results have been adjusted retrospectively from those previously published for the application of the IFRS standards
and for the effect of the Japan life business sale agreement.
Prudential plc Annual Report 2013 Additional information Additional unaudited financial informationAdditional unaudited financial information continued 337
Year ended 31 December
2013 £m
2012 £m
2011 £m
2010 £m
2009 £m
2,125
1,573
725
4,423
2,843
64%
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%
New business data
New business excluding Japannote (3)
Annual premium equivalent (APE) sales:
Asianote (3)
US
UK
Total APE sales
EEV new business profit (NBP)
NBP margin (% APE)
Statement of financial position data
As of and for the year ended 31 December
Total assets
Total policyholder liabilities and unallocated surplus
of with-profits funds
Core structural borrowings of shareholder-financed operations
Total liabilities
Total equity
2013 £m
325,932
286,014
4,636
316,281
9,651
2012* £m
307,644
268,263
3,554
297,280
10,364
2011* £m
2010* £m
2009* £m
270,018
256,330
224,291
233,538
3,611
261,411
8,607
221,895
3,676
248,765
7,565
194,089
3,394
218,418
5,873
* The Group has adopted new accounting standards on consolidated financial statements and joint arrangements, and amendments to the employee benefits
accounting standard, from 1 January 2013, as described in note A2. Accordingly, the 2009 to 2012 comparative results and related notes have been adjusted
retrospectively from those previously published.
Other data
As of and for the year ended 31 December
2013 £bn
2012 £bn
2011 £bn
2010 £bn
2009 £bn
Funds under managementnote (4)
EEV shareholders’ equity, excluding non-controlling interests
Insurance Groups Directive capital surplus (as adjusted)note (5)
443
24.9
5.1
406
22.4
5.1
352
19.6
4.0
340
18.2
4.3
290
15.3
3.4
Notes
1
2
3
4
5
This measure is the formal profit (loss) before tax measure under IFRS, but is not the result attributable to shareholders.
Operating profits are determined on the basis of including longer-term investment returns. EEV and IFRS operating profits are stated after excluding the effect
of short-term fluctuations in investment returns against long-term assumptions, gain on dilution of Group’s holdings, the costs arising from the domestication of
the Hong Kong business, (loss) profit attaching to held for sale Japan life insurance business and, in 2010, costs associated with the terminated AIA transaction.
Separately, on the IFRS basis, operating profit also excludes amortisation of acquisition accounting adjustments. In addition, for EEV basis results, operating
profit excludes the effect of changes in economic assumptions, the market value movement on core borrowings and, in 2012, the gain arising 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 financial position and external funds that are managed by Prudential asset
management operations.
The surpluses shown are before allowing for the final dividends for each year, which are paid in the following year. The 2013 surplus is estimated.
Additional information Prudential plc Annual Report 2013 338
II: IFRS profit and loss information
II(a) Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment
returns by driver
This schedule classifies the Group’s pre-tax operating earnings from long-term insurance operations into the underlying drivers of those
profits, using the following categories:
i
Spread income represents the difference between net investment income (or premium income in the case of the UK annuities new
business) and amounts credited to certain 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 profits driven by net investment performance, being asset management fees that vary with the size of the
underlying policyholder funds net of investment management expenses;
iii With-profits business represents the shareholders’ transfer from the with-profits fund in the year;
iv Insurance margin primarily represents profits 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 year attributable to shareholders. It excludes items
such as restructuring costs and Solvency II costs which are not included in the segment profit for insurance, as well as items that are
more appropriately included in other source of earnings lines (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 year, excluding amounts related to short-term fluctuations, net of costs
deferred in respect of new business.
Analysis of pre-tax IFRS operating profit by source
Spread income
Fee income
With-profits
Insurance margin
Margin on revenues
Expenses:
Acquisition costs
Administration expenses
DAC adjustments
Expected return on shareholder assets
Long-term business operating profit
Asset management operating profit
GI commission
Other income and expenditurenote (i)
Total operating profit based on longer-term
investment returns
2013 £m
Asia
On prior basis
Adjustments
notes (ii), (iii)
Asia
US
UK
Unallocated
Total
125
154
47
681
1,574
(1,015)
(647)
32
58
1,009
82
–
–
(10)
–
–
(2)
(12)
–
13
3
–
(8)
(8)
–
–
115
154
47
679
1,562
(1,015)
(634)
35
58
1,001
74
–
–
730
1,172
–
588
(914)
(670)
313
24
1,243
59
–
–
228
65
251
89
187
(110)
(124)
(14)
134
706
441
29
–
–
–
–
–
–
–
–
–
–
–
–
–
(599)
1,073
1,391
298
1,356
1,749
(2,039)
(1,428)
334
216
2,950
574
29
(599)
1,091
(16)
1,075
1,302
1,176
(599)
2,954
Prudential plc Annual Report 2013 Additional information Additional unaudited financial informationAdditional unaudited financial information continued
339
Spread income
Fee income
With-profits
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 profit
Asset management operating profit
GI commission
Other income and expenditurenote (i)
Total operating profit based on longer-term
investment returns
2012 £m
Asia
As previously
reported
Adjustments
notes (ii), (iii)
Asia
US
UK
Unallocated
Total
106
141
39
594
1,453
(903)
(583)
(28)
43
51
913
75
–
–
988
(13)
–
–
(5)
(14)
–
13
12
–
–
(7)
(6)
–
–
93
141
39
589
1,439
(903)
(570)
(16)
43
51
906
69
–
–
702
875
–
399
–
(972)
(537)
442
55
–
964
39
–
–
266
61
272
39
216
(122)
(128)
(8)
107
–
703
371
33
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(565)
1,061
1,077
311
1,027
1,655
(1,997)
(1,235)
418
205
51
2,573
479
33
(565)
(13)
975
1,003
1,107
(565)
2,520
Notes
(i)
(ii)
Including restructuring and Solvency II implementation costs.
The analysis excludes the results of the held for sale life insurance business of Japan. The results of Japan life business excluded in 2013 were: profit of £3 million
(2012: loss of £2 million).
(iii) The Group has adopted new accounting standards on joint arrangements, as described in note A2. The only impact of the resulting change on the analysis
above is to deduct the associated tax expense from the joint ventures’ operating profit by treating it as an administration expense. This contributed to an
additional expense, as follows:
– Long-term business – 2013: £5 million (2012: £9 million); and
– Asset management business – 2013: £8 million (2012: £6 million).
All other lines continue to include the Group’s share of the relevant part of the joint ventures’ pre-tax operating profit.
Long-term business
Spread income
Fee income
With-profits
Insurance margin
Margin on revenues
Expenses:
Acquisition costsnote (i)
Administration expenses
DAC adjustments
Expected return on shareholder assets
Gain on China Life (Taiwan) shares
Operating profit
2013
Average
liability
notes (iii), (v)
£m
64,312
96,337
97,393
Total
Margin
note (ii)
bps
167
144
31
4,423
169,158
(46)%
(84)
Profit
£m
1,073
1,391
298
1,356
1,749
(2,039)
(1,428)
334
216
–
2,950
1,061
1,077
311
1,027
1,655
(1,997)
(1,235)
418
205
51
2,573
2012
Profit
£m
Average
liability
notes (iii), (iv), (v)
£m
61,432
78,433
95,681
Margin
note (ii)
bps
173
137
33
4,195
142,205
(48)%
(87)
Additional information Prudential plc Annual Report 2013
340
II: IFRS profit and loss information continued
Notes
(i)
The ratio for acquisition costs is calculated as a percentage of APE including with-profits sales. Acquisition costs include only those relating to
shareholder-backed business.
(ii) Margin represents the operating return earned in the year as a proportion of the relevant class of policyholder liabilities excluding unallocated surplus.
(iii) For UK and Asia, opening and closing policyholder liabilities have been used to derive an average balance for the year, as a 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. Average liabilities for spread income are based on the general account liabilities to which spread income attaches. In addition, for REALIC
(acquired in 2012), which are included in the average liability to calculate the administration expense margin, the calculation excludes the liabilities reinsured
to third parties prior to the acquisition by Jackson. Average liabilities are adjusted for business acquisitions and disposals in the year.
(iv) The Group has adopted new accounting standards on joint arrangements, as described in note A2. The only impact of the resulting change on the analysis
above is to deduct the associated tax expense from the joint ventures’ operating profit by treating it as an administration expense. The impact of this change is
explained in note (iii), to the ‘Analysis of pre-tax IFRS operating profit by source’ table earlier in this section. All other lines continue to include the Group’s share
of the relevant part of the joint ventures’ pre-tax operating profit.
The 2013 analysis excludes the results of the held for sale life insurance business of Japan in both the individual profit and average liability amounts shown in
the table above. The comparative results have been presented on a consistent basis.
(v)
Long-term business
Spread income
Fee income
With-profits
Insurance margin
Margin on revenues
Expenses:
Acquisition costsnote (i)
Administration expenses
DAC adjustments
Expected return on shareholder assets
Gain on China Life (Taiwan) shares
Operating profit
Asia
note (iii)
2013
Average
liability
note (iv)
£m
7,446
13,714
13,263
Margin
bps
154
112
35
2,125
21,160
(48)%
(300)
Profit
£m
115
154
47
679
1,562
(1,015)
(634)
35
58
–
1,001
2012
note (ii)
Average
liability
note (iv)
£m
5,978
12,648
12,990
Margin
bps
155
111
30
1,897
18,626
(48)%
(306)
Profit
£m
93
141
39
589
1,439
(903)
(570)
(16)
43
51
906
Notes
(i)
(ii)
The ratio for acquisition costs is calculated as a percentage of APE including with-profits sales. Acquisition costs include only those relating to shareholder-
backed business.
The Group has adopted new accounting standards on joint arrangements, as described in note A2. The only impact of the resulting change on the analysis
above is to deduct the associated tax expense from the joint ventures’ operating profit by treating it as an administration expense. The impact of this change is
explained in note (iii) to the ‘Analysis of pre-tax IFRS operating profit by source’ table earlier in this section. All other lines continue to include the Group’s share
of the relevant part of the joint ventures’ pre-tax operating profit.
(iii) The analysis excludes the 2012 and 2013 results of the life insurance business of Japan in both the individual profit and the average liability amounts shown in
the table above.
(iv) Opening and closing policyholder liabilities, adjusted for corporate transactions, have been used to derive an average balance for the year, as a proxy for
average balances throughout the year.
Analysis of Asia operating profit drivers
— Spread income has increased by £22 million from £93 million in 2012 to £115 million in 2013, an increase of 24 per cent, predominantly
reflecting the growth of the Asian non-linked policyholder liabilities.
— Fee income has increased from £141 million in 2012 to £154 million in 2013, broadly in line with the increase in movement in average
unit-linked liabilities.
— Insurance margin has increased by £90 million from £589 million in 2012 to £679 million in 2013, predominantly reflecting the
continued growth of the in-force book, which contains a relatively high proportion of risk-based products and management action on
claims controls and pricing. Insurance margin includes non-recurring items of £52 million (2012: £48 million), reflecting items that are
not expected to reoccur in the future.
— Margin on revenues has increased by £123 million from £1,439 million in 2012 to £1,562 million in 2013, primarily reflecting the higher
premium income recognised in the year.
— Acquisition costs have increased from £903 million in 2012 to £1,015 million in 2013, in line with the 12 per cent increase in sales,
resulting in a stable acquisition cost ratio. The analysis above uses shareholder acquisition costs as a proportion of total APE. If
with-profits sales were excluded from the denominator the acquisition cost ratio would become 65 per cent (2012: 63 per cent)
reflecting changes to product and country mix.
— Administration expenses have increased from £570 million in 2012 to £634 million in 2013 as the business continues to expand.
The administration expense ratio remains broadly in line with prior periods at 300 basis points (2012: 306 basis points).
Prudential plc Annual Report 2013 Additional information Additional unaudited financial informationAdditional unaudited financial information continued
Long-term business
Spread income
Fee income
Insurance margin
Expenses:
Acquisition costsnote (i)
Administration expenses
DAC adjustments
Expected return on shareholder assets
Operating profit
Profit
£m
730
1,172
588
(914)
(670)
313
24
1,243
US
Margin
Profit
2013
Average
liability
note (ii)
£m
29,648
59,699
bps
246
196
1,573
97,856
(58)%
(68)
£m
702
875
399
(972)
(537)
442
55
964
341
2012
Average
liability
note (ii)
£m
29,416
44,046
Margin
bps
239
199
1,462
75,802
(66)%
(71)
Notes
(i)
(ii)
The ratio for acquisition costs is calculated as a percentage of APE.
The calculation of average liabilities for Jackson is derived from month-end balances throughout the year, as opposed to opening and closing balances only.
Average liabilities for spread income are based on the general account liabilities to which spread income attaches. Average liabilities used to calculate the
administrative expense margin exclude the REALIC liabilities reinsured to third parties prior to the acquisition by Jackson.
Analysis of US operating profit drivers
— Spread income has increased by 4 per cent to £730 million in 2013 from £702 million in 2012. The reported spread margin increased to
246 basis points from 239 basis points in 2012, primarily as a result of lower crediting rates. In addition, spread income benefited from
swap transactions previously entered into to more closely match the overall asset and liability duration. Excluding this effect, the
spread margin would have been 182 basis points (2012: 186 basis points).
— Fee income has increased by 34 per cent to £1,172 million in 2013, compared to £875 million in 2012, primarily due to higher average
separate account balances due to positive net cash flows from variable annuity business and market appreciation. Fee income margin
has remained broadly consistent with the prior year at 196 basis points (2012: 199 basis points), with the decrease primarily
attributable to the change in the mix of business.
— Insurance margin represents operating profits from insurance risks, including variable annuity guarantees and other sundry items.
Positive net flows into variable annuity business with life contingent and other guarantee fees, coupled with a benefit in the year from
re-pricing actions, have increased the insurance margin from £399 million in 2012 to £588 million in 2013. This includes a benefit due
to the inclusion of the full year of operations for REALIC, which contributed £188 million in 2013, compared to £87 million in 2012.
— Acquisition costs, which are commissions and expenses incurred to acquire new business, including those that are not deferrable,
have decreased by £58 million compared to 2012, due largely to the discontinuation of certain policy enhancement options on annuity
business. As a percentage of APE, acquisition costs have decreased to 58 per cent for 2013, compared to 66 per cent in 2012. This
is due to the discontinuation of contract enhancements mentioned above and the continued increase in producers selecting
asset-based commissions which are treated as an administrative expense in this analysis, rather than front end commissions.
— Administration expenses increased to £670 million during 2013 compared to £537 million in 2012, primarily as a result of higher asset-
based commissions paid on the larger 2013 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. Excluding the trail commissions previously mentioned, the resulting administration expense ratio would be lower at 44 basis
points (2012: 48 basis points), reflecting the benefits of operational leverage.
— DAC adjustments decreased to £313 million in 2013 compared to £442 million in 2012, due to lower levels of current year acquisition
costs being deferred and higher DAC amortisation being incurred following higher gross profits. Certain acquisition costs are not
fully deferrable, resulting in new business strain of £198 million for 2013 (2012: £174 million) mainly reflecting the increase in sales
in the period.
Additional information Prudential plc Annual Report 2013
342
II: IFRS profit and loss information continued
Analysis of pre-tax operating profit before and after acquisition costs and DAC adjustments
Long-term business
Other
operating
profits
2013 £m
Acquisition costs
Incurred
Deferred
Total
Other
operating
profits
2012 £m
Acquisition costs
Incurred
Deferred
Total
Total operating profit before acquisition
costs and DAC adjustments
1,844
Less new business strain
Other DAC adjustments – amortisation
of previously deferred acquisition
costs:
Normal
Decelerated
Total
1,844
(914)
Long-term business
Spread income
Fee income
With-profits
Insurance margin
Margin on revenues
Expenses:
Acquisition costsnote (i)
Administration expenses
DAC adjustments
Expected return on shareholders’ assets
Operating profit
Profit
£m
228
65
251
89
187
(110)
(124)
(14)
134
706
(914)
716
1,844
(198)
1,494
(972)
798
1,494
(174)
(485)
82
1,243
1,494
(972)
(412)
56
442
(412)
56
964
(485)
82
313
2013
Average
liability
note (ii)
£m
27,218
22,924
84,130
UK
Margin
Profit
bps
84
28
30
£m
266
61
272
39
216
(122)
(128)
(8)
107
703
725
50,142
(15)%
(25)
2012
Average
liability
note (ii)
£m
26,038
21,739
82,691
Margin
bps
102
28
33
836
47,777
(15)%
(27)
Notes
(i)
The ratio for acquisition costs is calculated as a percentage of APE including with-profits sales. Acquisition costs include only those relating to shareholder-
backed business.
(ii) Opening and closing policyholder liabilities have been used to derive an average balance for the year, as a proxy for average balances throughout the year.
Analysis of UK operating profit drivers
— Spread income has reduced from £266 million in 2012 to £228 million in 2013, principally due to lower annuity sales in the year.
— Fee income has increased in line with the increase in unit-linked liabilities.
— With-profits income has decreased by £21 million from £272 million in 2012 to £251 million in 2013, principally due to a 50 basis point
reduction in annual bonus rates. This has contributed to the reduction in the with-profits margin from 33 basis points in 2012 to 30
basis points in 2013.
— Insurance margin has increased from £39 million in 2012 to £89 million in 2013. This increase arises from our improved profits from our
protection business, the non-recurrence of the 2012 effect of strengthening longevity assumptions on our annuity book and
£27 million positive impact of undertaking a longevity swap on certain aspects of the UK’s annuity back-book liabilities in the first half
of 2013.
— Margin on revenues represents premium charges for expenses and other sundry net income received by the UK. 2013 income was
£187 million, £29 million lower than in 2012, reflecting lower premium volumes in the year.
— Acquisition costs as a percentage of new business sales are in line with 2012 at 15 per cent. Lower commission payments from the
implementation of the recommendations of the Retail Distribution Review have been more than offset by the effect of lower bulk
annuity sales in the year, which traditionally are less capital intensive.
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-profit sales in the year. Acquisition costs as a percentage of shareholder-backed new business sales
were 32 per cent in 2013 (2012: 33 per cent).
— Administration expenses at £124 million are £4 million lower than for 2012 due to lower project spend in the first half of the year.
— Expected return on shareholder assets has increased from £107 million in 2012 to £134 million in 2013, principally due to improved
investment returns in the year and higher surplus assets.
Prudential plc Annual Report 2013 Additional information Additional unaudited financial informationAdditional unaudited financial information continued
343
II(b) Asia operations – analysis of IFRS operating profit by territory
Operating profit based on longer-term investment returns for Asia operations are analysed as follows:
Hong Kong
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
SE Asia operations inc. Hong Kong
China
India
Korea
Taiwan
Other
Non-recurrent itemsnote (ii)
Operating profit before gain on China Life of Taiwan
Gain on sale of stake in China Life of Taiwannote (ii)
Total insurance operationsnote (i)
Development expenses
Total long-term business operating profitnote (iii)
Eastspring Investments
Total Asia operations
2013 £m
AER
2012* £m
AER
vs 2012
CER
vs 2012
101
291
137
18
219
53
54
873
10
51
17
12
(4)
44
1,003
–
1,003
(2)
1,001
74
1,075
88
260
118
15
206
7
25
719
16
50
16
18
(5)
48
862
51
913
(7)
906
69
975
15%
12%
16%
20%
6%
657%
116%
21%
(38)%
2%
6%
(33)%
(20)%
(8)%
16%
(100)%
10%
(71)%
10%
7%
10%
13%
23%
17%
19%
5%
640%
115%
25%
(40)%
10%
2%
(34)%
(20)%
(10)%
20%
(100)%
13%
(71)%
13%
9%
13%
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
Notes
(i)
Analysis of operating profit between new and in-force business
The result for insurance operations comprises amounts in respect of new business and business in force as follows:
New business strain
Business in force
Non-recurrent items:note (ii)
Other non-recurrent items
Gain on sale of stake in China Life (Taiwan)
Total
2013 £m
2012* £m
(15)
974
44
–
1,003
(46)
860
48
51
913
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting
standards described in note A2.
The IFRS new business strain corresponds to approximately 1 per cent of new business APE premiums for 2013 (2012: approximately 2 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 reflects the aggregate of the pre-tax regulatory basis strain to net worth after IFRS adjustments for deferral of acquisition costs and deferred
income where appropriate.
(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 £44 million in 2013 (2012: £48 million) represent a small number of items that are not anticipated to re-occur in subsequent years.
(iii) To facilitate comparisons of operating profit based on longer-term investment returns that reflect the Group’s retained operations, the results attributable to the
held for sale Japan life business are not included within the long-term business operating profit for Asia. The 2012 comparative results have also been adjusted.
The Japan life business contributed a profit of £3 million in 2013 (2012: loss of £(2) million).
Additional information Prudential plc Annual Report 2013
344
II: IFRS profit and loss information continued
II(c) Analysis of asset management operating profit based on longer-term investment returns
2013 £m
M&G
note (ii)
Eastspring
Investments
note (ii)
PruCap
US
Total
Operating income before performance-related fees
Performance-related fees
Operating income(net of commission)note (i)
Operating expensenote (i)
Share of associate’s results
Group’s share of tax on joint ventures’ operating profit
Operating profit based on longer-term investment returns
Average funds under management
Margin based on operating income*
Cost/income ratio†
863
25
888
(505)
12
–
395
215
1
216
(134)
–
(8)
74
£233.8bn
37 bps
59%
£61.9bn
35 bps
62%
121
–
121
(75)
–
–
46
362
–
362
(303)
–
–
59
1,561
26
1,587
(1,017)
12
(8)
574
2012 £m
M&G
note (ii)
Eastspring
Investments
note (ii)
PruCap
US
Total
Operating income before performance-related fees
Performance-related fees
Operating income (net of commission)note (i)
Operating expensenote (i)
Share of associate’s results
Group’s share of tax on joint ventures’ operating profit
Operating profit based on longer-term investment returns
Average funds under management
Margin based on operating income*
Cost/income ratio†
734
9
743
(436)
13
–
320
201
2
203
(128)
–
(6)
69
£205.1bn
36 bps
59%
£55.0bn
37 bps
64%
120
–
120
(69)
–
–
51
296
–
296
(257)
–
–
39
1,351
11
1,362
(890)
13
(6)
479
Notes
(i)
Operating income and expense includes the Group’s share of contribution from joint ventures (but excludes any contribution from associates). In the income
statement, as shown in note B2 of the IFRS financial statements, these amounts are netted and tax deducted and shown as a single amount.
(ii) M&G and Eastspring Investments can be further analysed as follows:
2013
2012
2013
2012
Retail
£m
550
438
Retail
£m
127
118
M&G
Operating income before performance related fees
Margin
of FUM*
bps
Institutional‡
£m
Margin
of FUM*
bps
89
91
313
296
18
19
Eastspring Investments
Operating income before performance related fees
Margin
of FUM*
bps
Institutional‡
£m
Margin
of FUM*
bps
60
64
88
83
22
24
Total
£m
863
734
Total
£m
215
201
Margin
of FUM*
bps
37
36
Margin
of FUM*
bps
35
37
* Margin represents operating income before performance related fees as a proportion of the related funds under management (FUM). Monthly closing internal
and external funds managed by the respective entity have been used to derive the average. Any funds held by the Group’s insurance operations which are
managed by third parties outside of the Prudential Group are excluded from these amounts.
† Cost/income ratio represents cost as a percentage of operating income before performance related fees.
‡ Institutional includes internal funds.
(iii) The 2012 comparative results have been adjusted retrospectively from those previously published for the application of the new accounting standards
described in note A2 following adoption of IFRS 11 for Group’s joint ventures. This amount is excluded from the cost for cost/income ratio purposes.
Prudential plc Annual Report 2013 Additional information Additional unaudited financial informationAdditional unaudited financial information continued III: Other information
III(a) Holding company cash flow
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 (including funding of regional head office costs)
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 outflows
Operating holding company cash flow before dividend*
Dividend paid
Operating holding company cash flow after dividend*
Issue of hybrid debt, net of costs
Acquisition of Thanachart Life
Hedge purchase cost (equity tail risks)
Costs of the domestication of the Hong Kong branch
Other net cash payments
Total holding company cash flow
Cash and short-term investments at beginning of year
Foreign exchange movements
Cash and short-term investments at end of year
* Including central finance subsidiaries.
345
2013 £m
2012 £m
206
216
149
–
149
355
294
454
56
510
(9)
(101)
(110)
400
235
57
1,341
(300)
202
(185)
(32)
(315)
1,026
(781)
245
1,124
(397)
–
(31)
(83)
858
1,380
(8)
2,230
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
Additional information Prudential plc Annual Report 2013
346
III: Other information continued
III(b) Funds under management
a Summary note (i)
Business area:
Asia operations
US operations
UK operations
Prudential Group funds under management
External fundsnote (ii)
Total funds under management
2013 £bn
2012* £bn
38.0
104.3
157.3
299.6
143.3
442.9
38.9
91.4
154.0
284.3
121.4
405.7
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
Notes
(i)
(ii)
Including Group’s share of assets managed by joint ventures.
External funds shown above as at 31 December 2013 of £143.3 billion (2012: £121.4 billion) comprise £148.2 billion (2012: £133.5 billion) of funds managed by M&G
and Eastspring Investments as shown in note (c) below, less £4.9 billion (2012: £12.1 billion) that are classified within Prudential Group’s funds. The £148.2 billion
(2012: £133.5 billion) investment products comprise £143.9 billion (2012: £129.5 billion) as published in the New Business schedules plus Asia Money Market
Funds of £4.3 billion (2012: £4.0 billion).
b Prudential Group funds under management – analysis by business area
Investment properties†
Equity securities
Debt securities
Loans and receivables
Other investments and deposits
Total included in statement of financial position
Internally managed funds held in insurance
join ventures
Asia operations
US operations
UK operations
Total
2013 £bn 2012* £bn
2013 £bn 2012* £bn
2013 £bn 2012* £bn
2013 £bn 2012* £bn
–
14.4
18.6
0.9
0.9
34.8
–
12.7
20.1
1.0
1.8
35.6
–
66.0
30.3
6.4
1.6
104.3
0.1
49.6
33.0
6.2
2.5
91.4
11.7
39.8
84.0
5.3
16.0
10.6
36.3
85.8
5.5
15.5
156.8
153.7
11.7
120.2
132.9
12.6
18.5
295.9
10.7
98.6
138.9
12.7
19.8
280.7
3.2
3.3
–
–
0.5
0.3
3.7
3.6
Total Prudential Group funds under management
38.0
38.9
104.3
91.4
157.3
154.0
299.6
284.3
* The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards
described in note A2.
† As included in the investments section of the consolidated statement of financial position at 31 December 2013, except for £0.3 billion (2012: £0.1 billion) investment
properties which are held for sale or occupied by the Group and, accordingly under IFRS, are included in other statement of financial position captions.
Prudential plc Annual Report 2013 Additional information Additional unaudited financial informationAdditional unaudited financial information continued 347
c Investment products – external funds under management
Eastspring Investmentsnote
M&G
Group total
Eastspring Investmentsnote
M&G
Group total
2013 £m
1 Jan
2013
21,634
111,868
133,502
Market
gross
inflows
74,206
40,832
Redemptions
(72,111)
(31,342)
115,038
(103,453)
2012 £m
1 Jan
2012
19,221
91,948
111,169
Market
gross
inflows
60,498
36,463
96,961
Redemptions
(59,098)
(19,582)
(78,680)
Market
exchange
translation
and other
movements
(1,507)
4,631
3,124
Market
exchange
translation
and other
movements
1,013
3,039
4,052
31 Dec
2013
22,222
125,989
148,211
31 Dec
2012
21,634
111,868
133,502
Note
Including Asia Money Market Funds at 31 December 2013 of £4.3 billion (2012: £4.0 billion).
d M&G and Eastspring Investments – total funds under management
M&G
External funds under management
Internal funds under management
Total funds under management
Eastspring Investments
External funds under managementnote
Internal funds under management
Total funds under management
Note
Including Asia Money Market Funds at 31 December 2013 of £4.3 billion (2012: £4.0 billion).
2013 £bn
2012 £bn
126.0
118.0
244.0
111.9
116.4
228.3
2013 £bn
2012 £bn
22.2
37.7
59.9
21.6
36.5
58.1
Additional information Prudential plc Annual Report 2013 348
III: Other information continued
III(c) Additional information on pre and post-tax EEV basis results
The Group intends to alter its basis of presentation of EEV results for 2014 and subsequent reporting periods to a post-tax basis, in line
with the approach adopted by a number of international insurance groups. The following tables provide an analysis of the Group’s profit
and loss account and key accompanying notes on a pre-tax and post-tax basis for the most recent reporting periods.
Pre and post-tax operating profit based on longer-term investment returns
Asia operations
New businessnotes (ii), (iii)
Business in force*:
Unwind of discount and other expected
returns
Effect of changes in operating assumptions
Experience variances and other items
Long-term business
Eastspring Investments*
Development expenses
Total*
US operations
New businessnote (ii)
Business in force:
Unwind of discount and other expected
returns
Effect of changes in operating assumptions
Experience variances and other items
Long-term business
Broker-deal and asset management
Total
UK operations
New businessnote (ii)
Business in force:
Unwind of discount and other expected
returns
Effect of changes in operating assumptions
Experience variances and other items
Long-term business
General insurance commission
Total UK insurance operations
M&G (including Prudential Capital)
Total
Other income and expenditure
Solvency II and restructuring costs
Operating profit based on longer-term
investment returns
Analysed as profits (losses) from:
New businessnotes (ii), (iii)
Business in force*
Long-term business*
Asset management*
Other results
Total*
Pre-tax
Post-tax
note (i)
Full year
2013
£m
Full year
2012
£m
Half year
2013
£m
Full year
2013
£m
Full year
2012
£m
Half year
2013
£m
1,460
1,266
659
1,139
982
502
846
17
64
927
2,387
74
(2)
2,459
595
22
75
692
1,958
69
(7)
2,020
400
(13)
33
420
1,079
38
(2)
1,115
668
5
80
753
1,892
64
(1)
1,955
465
13
76
554
1,536
58
(5)
1,589
315
(6)
18
327
829
32
(2)
859
1,086
873
479
706
568
311
187
45
164
396
707
21
728
100
204
–
–
204
304
11
315
175
490
608
116
411
1,135
2,221
59
2,280
412
35
290
737
1,610
39
1,649
287
70
180
537
1,016
34
1,050
395
76
349
820
1,526
39
1,565
268
23
238
529
1,097
18
1,115
297
313
130
237
241
547
122
67
736
1,033
29
1,062
441
1,503
(619)
(43)
482
87
(16)
553
866
33
899
371
1,270
(554)
(72)
267
–
7
274
404
15
419
225
644
(304)
(26)
437
98
60
595
832
22
854
346
373
67
10
450
691
25
716
285
1,200
1,001
(482)
(34)
(476)
(55)
(235)
(21)
5,580
4,313
2,479
4,204
3,174
1,821
2,843
2,798
5,641
574
(635)
5,580
2,452
1,982
4,434
479
(600)
4,313
1,268
1,231
2,499
297
(317)
2,479
2,082
2,168
4,250
449
(495)
4,204
1,791
1,533
3,324
361
(511)
3,174
913
927
1,840
228
(247)
1,821
* The 2012 comparative results have been adjusted retrospectively from those previously published for the adoption of IFRS 11 and for the reclassification of the result
attributable to the held for sale Japan life business – see note 18 of the EEV basis results section.
Prudential plc Annual Report 2013 Additional information Additional unaudited financial informationAdditional unaudited financial information continued 349
Summary of consolidated income statement
Operating profit based on longer-term
investment returns*
Short-term fluctuations in investment returns:
Asia operations*
US operations
UK insurance operations
Other operations*
Effect of changes in economic assumptions:
Asia operations
US operations
UK insurance operations
Other non-operating profit
Total non-operating profit
Pre-tax
Post-tax
note (i)
Full year
2013
£m
Full year
2012
£m
Half year
2013
£m
Full year
2013
£m
Full year
2012
£m
Half year
2013
£m
5,580
4,313
2,479
4,204
3,174
1,821
(405)
(422)
35
(27)
(819)
283
372
166
821
82
84
362
(254)
315
87
510
(135)
85
48
(2)
136
644
(282)
(404)
(92)
(30)
(808)
333
62
289
684
156
32
(308)
(280)
28
(4)
(564)
255
242
132
629
89
154
302
(163)
243
83
465
(99)
56
37
(6)
136
595
(223)
(271)
(70)
(23)
(587)
272
40
222
534
156
103
Profit attributable to shareholders
5,664
4,957
2,511
4,358
3,769
1,924
* The 2012 comparative results have been adjusted retrospectively from those previously published for the revised IAS 19 and for the reclassification of the result
attributable to the held for sale Japan life business – see note 18 of the EEV basis results section.
Notes
(i)
The tax rates include the impact of tax effects determined on a local regulatory basis. Tax payments and receipts included in the projected cash flows to
determine the value of in-force business are calculated using rates that have been substantively enacted by the end of the reporting period.
(ii) New business contribution
Full year 2013
Q3 2013
Half year 2013
Q1 2013
Full year 2012
Q3 2012
Half year 2012
Q1 2012
Full year 2011
(iii) New business contribution by Asia territory
Pre-tax new business contribution
Post-tax new business contribution
Asia
operations
£m
US
operations
£m
UK
insurance
operations
£m
1,460
990
659
308
1,266
828
547
260
1,076
1,086
756
479
192
873
683
442
214
815
297
204
130
63
313
227
152
62
260
Asia
operations
£m
US
operations
£m
UK
insurance
operations
£m
1,139
767
502
237
982
627
414
197
811
706
492
311
125
568
444
288
139
530
237
163
100
48
241
173
116
47
195
Total
£m
2,843
1,950
1,268
563
2,452
1,738
1,141
536
2,151
Total
£m
2,082
1,422
913
410
1,791
1,244
818
383
1,536
Full year
2013
£m
Pre-tax
Full year
2012
£m
Half year
2013
£m
Full year
2013
£m
Post-tax
Full year
2012
£m
Half year
2013
£m
Asia operations:
China
Hong Kong
India
Indonesia
Korea
Taiwan
Other
37
354
18
480
33
37
501
26
210
19
476
26
48
461
Total Asia operations
1,460
1,266
17
162
10
228
19
16
207
659
28
283
15
359
25
31
398
1,139
20
162
15
365
20
40
360
982
13
125
8
174
14
13
155
502
Additional information Prudential plc Annual Report 2013 350
III: Other information continued
III(d) 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 flows emerging in the years shown in the tables is considered most meaningful. The modelled
cash flows use the same methodology underpinning the Group’s embedded value reporting and so are subject to the same assumptions
and sensitivities.
In addition to showing the amounts, both discounted and undiscounted, expected to be generated from all in-force business at
31 December 2013, the tables also present the expected future free surplus to be generated from the investment made in new business
during 2013 over the same 40 year period.
Expected transfer of value of in-force (VIF) and required capital business to free surplus
Expected period of emergence
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034 to 2038
2039 to 2043
2044 to 2048
2049 to 2053
Undiscounted expected generation from
all in-force business at 31 December*
Undiscounted expected generation from
2013 long-term new business written*
2013 £m
Asia
801
821
798
735
705
682
672
665
654
650
635
633
637
637
624
596
590
570
561
544
2,586
2,334
2,075
1,808
US
902
817
760
709
700
666
670
623
540
469
386
313
265
228
206
174
162
146
158
85
305
104
–
–
UK
Total
462
471
467
467
479
466
462
455
451
461
449
440
429
423
408
401
389
377
368
363
1,400
1,152
569
336
2,165
2,109
2,025
1,911
1,884
1,814
1,804
1,743
1,645
1,580
1,470
1,386
1,331
1,288
1,238
1,171
1,141
1,093
1,087
992
4,291
3,590
2,644
2,144
Asia
116
140
142
111
107
93
96
99
93
105
89
93
88
89
109
84
85
84
82
90
399
357
313
276
US
260
113
114
40
108
92
85
127
105
88
70
58
50
43
38
29
24
20
17
15
32
(13)
–
–
UK
24
21
21
19
21
20
20
20
20
21
19
18
18
18
18
18
18
18
18
19
82
96
54
37
Total
400
274
277
170
236
205
201
246
218
214
178
169
156
150
165
131
127
122
117
124
513
440
367
313
Total free surplus expected to emerge
in the next 40 years
22,013
9,388
12,145
43,546
3,340
1,515
658
5,513
* The analysis excludes amounts incorporated into VIF at 31 December 2013 where there is no definitive 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 after 2053. Following its classification
as held for sale, the Asia cash flows exclude any cash flows in respect of Japan.
The above amounts can be reconciled to the new business amounts as follows:
New business
Undiscounted expected free surplus generation for years 2014 to 2053
Less: discount effect
Discounted expected free surplus generation for years 2014 to 2053
Discounted expected free surplus generation for years 2053+
Less: free surplus investment in new business
Other items*
Post-tax EEV new business profit
Tax
Pre-tax EEV new business profit
Asia
3,340
(2,098)
1,242
52
(310)
155
1,139
321
1,460
2013 £m
US
1,515
(516)
999
–
(298)
5
706
380
1,086
UK
658
(397)
261
2
(29)
3
237
60
297
Total
5,513
(3,011)
2,502
54
(637)
163
2,082
761
2,843
* Other items represent the impact of the time value of options and guarantees on new business, foreign exchange effects and other non-modelled items. Foreign exchange
effects arise as EEV new business profit amounts are translated at average exchange rates and the expected free surplus generation uses year end closing rates.
Prudential plc Annual Report 2013 Additional information Additional unaudited financial informationAdditional unaudited financial information continued 351
The undiscounted expected free surplus generation from all in-force business at 31 December 2013 shown below can be reconciled to
the amount that was expected to be generated as at 31 December 2012 as follows:
Group
2012 expected free surplus generation for years
2013 to 2052
Less: Amounts expected to be realised in the
2013
£m
2014
£m
2015
£m
2016
£m
2017
£m
2018
£m
Other
£m
Total
£m
1,950
1,816
1,788
1,687
1,671
1,594
24,646
35,152
current year
(1,950)
–
–
–
–
–
–
(1,950)
Add: expected free surplus to be generated in
year 2053*
Foreign exchange differences
New business
Acquisition of Thanachart Life
Operating movements
Non-operating and other movements†
2013 expected free surplus generation for years
2014 to 2053
Asia
2012 expected free surplus generation for years
2013 to 2052
Less: amounts expected to be realised in the
current year
Add: expected free surplus to be generated in
year 2053*
Foreign exchange differences
New business
Acquisition of Thanachart Life
Operating movements
Non-operating and other movements†
2013 expected free surplus generation for years
2014 to 2053
US
2012 expected free surplus generation for years
2013 to 2052
Less: amounts expected to be realised in the
current year
Add: expected free surplus to be generated in
year 2053*
Foreign exchange differences
New business
Operating movements
Non-operating and other movements
2013 expected free surplus generation for years
2014 to 2053
–
–
–
–
–
–
–
(90)
400
17
(45)
67
–
(84)
274
13
1
117
–
(75)
277
11
1
124
–
(72)
170
8
16
118
–
(68)
236
5
26
91
179
(1,204)
4,156
20
179
(1,593)
5,513
74
5,655
6,171
–
2,165
2,109
2,025
1,911
1,884
33,452
43,546
2013
£m
2014
£m
2015
£m
2016
£m
2017
£m
2018
£m
Other
£m
Total
£m
719
761
724
686
654
628
13,069
17,241
(719)
–
–
–
–
–
–
(719)
–
–
–
–
–
–
–
–
(79)
116
17
(21)
7
–
(73)
140
13
(5)
22
–
(65)
142
11
–
24
–
(61)
111
8
3
20
–
(58)
107
5
6
17
135
(1,132)
2,724
20
135
(1,468)
3,340
74
3,337
3,410
801
821
798
735
705
18,153
22,013
2013
£m
2014
£m
2015
£m
2016
£m
2017
£m
2018
£m
Other
£m
Total
£m
785
572
600
557
587
551
3,897
7,549
(785)
–
–
–
–
(11)
260
(6)
87
–
(11)
113
3
112
–
(10)
114
6
93
–
–
(11)
40
18
75
–
–
(785)
–
(10)
108
21
30
–
(72)
880
–
(125)
1,515
795
1,234
902
817
760
709
700
5,500
9,388
–
–
–
–
–
–
* Excluding 2013 new business.
† Includes the removal of Japan life business following its reclassification as held for sale.
Additional information Prudential plc Annual Report 2013 352
III: Other information continued
UK
2012 expected free surplus generation for years
2013 to 2052
Less: amounts expected to be realised in the
current year
Add: expected free surplus to be generated in
year 2053*
New business
Operating movements
Non-operating and other movements†
2013 expected free surplus generation for years
2014 to 2053
2013
£m
2014
£m
2015
£m
2016
£m
2017
£m
2018
£m
Other
£m
Total
£m
446
483
464
444
430
415
7,680
10,362
(446)
–
–
–
–
–
–
–
24
(18)
(27)
–
–
21
3
(17)
–
–
21
(5)
7
–
–
19
(5)
23
–
–
21
(1)
44
–
(446)
44
552
44
658
1,523
1,527
462
471
467
467
479
9,799
12,145
* Excluding 2013 new business.
† The amounts shown above for non-operating and other movements include the effects of a partial hedge of the future shareholder transfers expected to emerge from
the UK’s with-profits sub-fund that was transacted in 2013. This hedge reduces the risk arising from equity market declines for the years 2014-2018. However, in rising
equity markets as assumed in preparing the EEV results, the hedge reduces the projected free surplus benefit of those higher returns. Consistent with this feature, for
2014 the expected free surplus generation compared to that expected at 31 December 2012 is reduced by £(58) million as a result of this hedge.
At 31 December 2013, the total free surplus expected to be generated over the next five years (years 2014 to 2018 inclusive), using the
same assumptions and methodology as underpin our embedded value reporting was £10.1 billion, an increase of £1.5 billion from the
£8.6 billion expected over the same period at the end of 2012.
This increase primarily reflects the new business written in 2013, which is expected to generate £1,357 million of free surplus over the
next five years. Operating, non-operating and other items are expected to increase free surplus generation by £570 million over the next
five years, but this has been offset by adverse foreign exchange movements of £389 million.
At 31 December 2013, the total free surplus expected to be generated on an undiscounted basis in the next forty years is £43.5 billion,
up from the £35 billion expected at end of 2012, reflecting the effect of new business written and the positive market movements in Asia,
following increases in bond yields principally in Hong Kong, Indonesia and Singapore, together with higher projected separate account
fees following increase in US equities values. The foreign exchange translation effect arising across US and Asia operations is a reduction
of £1.6 billion. The overall growth in the undiscounted value of free surplus, reflects both our ability to write new business on attractive
economics and to manage the in-force book for value, as well as the positive gearing of our cash flows to rising long-term yields and
equity markets.
Actual underlying free surplus generated in 2013 from life business in force at the end of 2012 was £2.6 billion inclusive of £0.5 billion
of changes in operating assumptions and experience variances. This compares with the expected 2013 realisation at the end of 2012 of
£2.0 billion. This can be analysed further as follows:
Transfer to free surplus in 2013
Expected return on free assets
Changes in operating assumptions and experience variances
Underlying free surplus generated from in-force life business in 2013
2013 free surplus expected to be generated at 31 December 2012
Asia
£m
713
74
32
819
719
US
£m
796
41
292
1,129
785
UK
£m
508
18
154
680
446
Total
£m
2,017
133
478
2,628
1,950
Prudential plc Annual Report 2013 Additional information Additional unaudited financial informationAdditional unaudited financial information continued The equivalent discounted amounts of the undiscounted totals shown previously are outlined below:
Expected period of emergence
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034 to 2038
2039 to 2043
2044 to 2048
2049 to 2053
Discounted expected generation from all
in-force business at 31 December
Discounted expected generation from
long-term 2013 new business written
2013 £m
Asia
759
717
646
553
493
443
406
375
343
316
291
271
254
238
221
199
185
170
157
144
587
405
281
192
US
866
737
642
562
519
463
436
380
311
255
197
150
121
99
86
69
63
55
57
27
98
41
–
–
UK
431
410
381
354
339
308
285
261
242
230
208
190
172
158
142
130
117
105
96
88
269
151
47
20
Total
2,056
1,864
1,669
1,469
1,351
1,214
1,127
1,016
896
801
696
611
547
495
449
398
365
330
310
259
954
597
328
212
Asia
110
119
111
80
71
57
54
52
44
47
37
36
31
30
35
25
24
22
21
22
85
59
41
29
US
250
101
95
32
79
63
54
76
58
45
33
25
20
16
13
10
8
6
5
4
7
(1)
–
–
UK
22
18
17
15
15
14
13
12
11
11
10
8
8
8
7
6
6
6
5
5
19
15
6
4
353
Total
382
238
223
127
165
134
121
140
113
103
80
69
59
54
55
41
38
34
31
31
111
73
47
33
Total discounted free surplus expected
to emerge in the next 40 years
8,646
6,234
5,134
20,014
1,242
999
261
2,502
The above amounts can be reconciled to the Group’s financial statements as follows:
Discounted expected generation from all in-force business for years 2014 to 2053
Discounted expected generation from all in-force business for years after 2053
Discounted expected generation from all in-force business (excluding Japan) at 31 December 2013
Add: free surplus of life operations held at 31 December 2013
Less: time value of guarantees
Expected cash flow from the sale of Japan life business*
Other non-modelled items†
Total EEV for life operations
Total
£m
20,014
393
20,407
3,220
(196)
25
1,157
24,613
* Upon completion of the sale of the Japan life business £25 million of free surplus will be released. See note 4 of the EEV basis results section for further details.
† These relate to items where there is no definitive 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 2013. In particular, it excludes
the value of the shareholders’ interest in the estate.
Additional information Prudential plc Annual Report 2013
354
III: Other information continued
III(e) Foreign currency source of key metrics
The tables below show the Group’s key free surplus, IFRS and EEV, metrics analysis by contribution by currency group:
Free surplus and IFRS full year 2013 results
US$ linkednote 1
Other Asia currencies
Total Asia
UK sterlingnotes 3, 4
US$note 4
Total
EEV full year 2013 results
US$ linkednote 1
Other Asia currencies
Total Asia
UK sterlingnotes 3, 4
US$note 4
Total
Underlying
free surplus
generated
note 2
%
Pre-tax
operating
profit
notes 2, 3, 4
%
Shareholders’
funds
notes 2, 3, 4
%
14
9
23
42
35
19
17
36
20
44
14
18
32
53
15
100
100
100
Pre-tax
New Business
profits
%
Pre-tax
operating
profit
notes 2, 3, 4
%
Shareholders’
funds
notes 2, 3, 4
%
29
22
51
11
38
100
26
18
44
15
41
100
28
15
43
37
20
100
Notes
1
2
3
4
US$ linked – comprising the Hong Kong and Vietnam operations where the currencies are pegged to the US dollar and the Malaysia and Singapore operations
where the currencies are managed against a basket of currencies including the US dollar.
Includes long-term, asset management business and other businesses.
For operating profit and shareholders’ funds UK sterling includes amounts in respect of central operations as well as UK insurance operations and M&G.
For shareholders’ funds, the US$ grouping includes US$ denominated core structural borrowings. Sterling operating profits include all interest payable as
sterling denominated, reflecting interest rate currency swaps in place.
III(f) Economic capital position
Following provisional agreement on the Omnibus II Directive on 13 November 2013, Solvency II is now expected to come into force on
1 January 2016. Therefore, our economic capital results are based on outputs from our Solvency II internal model. Although the
Solvency II and Omnibus II Directives, together with draft Level 2 ‘Delegated Acts’ provide a viable framework for the calculation of
Solvency II results, there remain material areas of uncertainty and in many areas the methodology and assumptions are subject to review
and approval by the Prudential Regulation Authority, the Group’s lead regulator. We do not expect to submit our Solvency II internal
model to the Prudential Regulation Authority for approval until 2015 and, therefore, the economic capital results shown below should
not be interpreted as outputs from an approved Solvency II internal model.
At 31 December 2013, the Group had an economic capital surplus of £11.3 billion and an economic solvency ratio of 257 per cent
(before taking into account the 2013 final dividend). A summary of the capital position is shown in the table below:
31 December 2013
Available capital
Economic Capital Requirement
Surplus
Economic solvency ratio
Note
Based on the Group’s Solvency II internal model which has not been reviewed or approved by the Prudential Regulation Authority.
£bn
Economic
capital
position
note
18.5
7.2
11.3
257%
Prudential plc Annual Report 2013 Additional information Additional unaudited financial informationAdditional unaudited financial information continued 355
These results are based on outputs from our current Solvency II internal model, assessed against a draft set of rules and with a number of key
working assumptions. Further explanation of the underlying methodology and assumptions are set out in the sections below. By disclosing
economic capital information at this stage, the directors of Prudential plc are seeking to provide an indication of the potential outcome of
Solvency II based on the Group’s current interpretation of the draft rules. An update of the capital position will be reported annually going
forwards and will evolve to reflect changes to the Solvency II rules, ongoing refinements to our internal model calibrations, and feedback
from the Prudential Regulation Authority on Prudential’s approach to implementing this new capital regime. Against this background of
uncertainty, it is possible that the final outcome of Solvency II could result in a fall in the Group solvency ratio, relative to the results shown above.
Methodology
In line with Solvency II, for the Group’s European and Asia life business, and holding companies, the available capital is the value of assets
in excess of liabilities. The key components of available capital are the market value of assets, insurance technical provisions (calculated
as the sum of best estimate liabilities plus a risk margin) and other liabilities. Subordinated debt forms part of available capital, rather than
being treated as a liability, since this debt is subordinated to policyholder claims.
As a general principle, both assets and liabilities are recognised at the value at which they could theoretically be transferred to a third party
in an arms length transaction. On the asset side of the balance sheet, assets are mostly held at IFRS fair value. However, adjustments are
required to IFRS values to eliminate intangible items such as goodwill and deferred acquisition costs and to take account of economic assets
which are excluded from the current IFRS balance sheet such as the present value of future with-profits shareholder transfers.
The best estimate liability is calculated by taking the average of future risk-adjusted best estimate cash flows, taking into account the
time value of money and the relative liquidity of those liabilities. The best estimate liability allows for the value of options and guarantees
embedded in existing contracts as well as the value of future discretionary benefits payable to policyholders. Realistic management
actions and policyholder behaviour are allowed for where relevant. In addition, since capital requirements are only derived to cover risks
over a one year horizon, a risk margin is added to the best estimate liability to cover the cost of ceding liabilities to a third party after one
year, assuming a 6 per cent per annum cost of capital, in line with Solvency II requirements.
The Economic Capital Requirement measures the potential reduction in the value of available capital over a one year time horizon, in
an adverse 1-in-200 probability event, consistently with the Solvency II Directive. This allows for diversification effects between different
risk types and between entities. No restrictions on the economic value of overseas surplus have been allowed for in assessing the capital
position at Group level.
Prudential’s US insurance entities are included in the economic capital position on a local RBC basis under the assumption of US
equivalence and the assumed permitted use of the ’deduction and aggregation’ method. This is in line with our view of the most likely
outcome of Solvency II given the agreement reached in the Omnibus II Directive. The contribution of US insurance entities to the Group
surplus is that in excess of 250 per cent of the US RBC Company Action Level, which is in line with the level at which we measure both the
Group’s IGD surplus and the Group’s reported free surplus amount. In line with the draft Solvency II requirements under the ’deduction
and aggregation’ method, no diversification benefit is allowed for between US insurance entities and other parts of the Group.
The contribution of Japan to the Group surplus has been set equal to the ‘held for sale’ accounting value of £48 million, pending
completion of the sale. The impact of the domestication of the Hong Kong branch, which became effective on 1 January 2014, is not
allowed for in these economic capital results, but is estimated to have a negative impact on the Group solvency ratio of -4 percentage
points, mainly due to a loss of diversification in the risk margin following separation of the Hong Kong business into a subsidiary.
Consistently with evolving Solvency II requirements, the Group calculation also includes all non-insurance entities, including asset
management companies, Prudential Capital and holding companies, as follows:
— Asset managers are included in line with existing sectoral capital rules, and Prudential Capital is included on a Basel basis, which
follows the expected Solvency II treatment;
— Defined benefit pension schemes are included using international accounting standards and, in addition, a capital requirement is
added; and
— Holding companies are measured on a Solvency II basis, as if they were insurance companies, in line with draft Solvency II rules.
In addition to the assumption of US equivalence, and without applying restrictions to the economic value of overseas surplus, other key
elements of Prudential’s methodology relating to areas that are presently unclear in the draft Solvency II rules, and which are likely to
evolve as more detailed requirements are clarified, relate to:
(i) The liability discount rate for UK annuities, which is currently set by applying a ‘liquidity premium’ in addition to the risk-free rate.
This liquidity premium addition reflects the long-term buy-and-hold nature of the assets backing UK annuity liabilities, which are,
therefore, not directly exposed to changes in market credit spreads, but instead to long-term default risk over the term of the assets.
This liquidity premium will be replaced with the corresponding Solvency II ‘Matching Adjustment’ when the rules and interpretation
relating to this Solvency II calculation are clarified;
(ii) The impact of transitional arrangements on technical provisions, for which no allowance has been made in the economic capital
position, but which may apply under Solvency II (although the use of this transitional is subject to regulatory approval and the extent
to which it is permitted is likely to depend on the final Solvency II capital position); and
(iii) The credit risk adjustment to the risk-free rate, which is currently set at 10 basis points, consistent with the specification in
Quantitative Impact Study 5, but where discussions are ongoing at a European level as part of the process to agree the more
detailed Solvency II rules.
Further, current drafts of the Solvency II rules remain unclear in relation to capital tiering requirements and, therefore, tiering limits are
not yet applied. Prudential’s methodology in the areas highlighted above will evolve in the future as the final Solvency II requirements
become clearer.
In addition, there are a range of other calibration issues which will remain unclear until Solvency II requirements have been finalised
and our Solvency II internal model has been reviewed and approved by the Prudential Regulation Authority. Therefore, the capital
position may change as methodology is refined in the lead up to 2016 when Solvency II is expected to formally replace the current
IGD regime.
Prudential plc Annual Report 2013Additional information 356
III: Other information continued
Assumptions
The key assumptions required for the economic capital calibration are:
(i) Assumptions used to derive non-market related best estimate liability cash flows, which are based on EEV best estimate assumptions;
(ii) Assumptions used to derive market related best estimate liability cash flows, which are based on market data at the valuation date
where this data is reliable and comes from a deep and liquid market, or on appropriate extrapolation methodologies where markets
are not sufficiently liquid to be reliable;
(iii) Assumptions underlying the calculation of the best estimate liability in respect of dynamic management actions and policyholder behaviour;
(iv) Assumptions underlying the risk models used to calculate the 1-in-200 level capital requirements for the Economic Capital Requirement
which are set using a combination of historic market, demographic and operating experience data and expert judgement; and
(v) Assumptions on the dependencies between risks, which are calibrated using a combination of historic data and expert judgement.
The risk-free curve at which best estimate liability cash flows are discounted is based on market swap rates (with the exception of
Vietnam where no liquid swap market exists and government bond yields are therefore used), with a deduction of 10 basis points to allow
for a ‘credit risk adjustment’ to swap rates. In addition, a liquidity premium is added to the liability discount rate for UK annuities, in both
the base balance sheet and in the stressed conditions underlying the Economic Capital Requirement. In the absence of a Matching
Adjustment calibration, the liquidity premium has been derived by reference to existing Solvency I allowances and a range of other
industry benchmarks. The allowances vary by fund reflecting the nature of the respective asset portfolios and the extent of asset-liability
cash flow matching, which are also likely to be key inputs into the Solvency II Matching Adjustment calculation. The resulting liquidity
premium allowances are summarised in the table below. The final Solvency II discount curve is subject to considerable uncertainties and
may vary significantly from these assumptions.
Line of business
PRIL annuities
PAC non-profit sub-fund annuities
31 December 2013
Base liquidity
premium – bps
(relative to swaps)
£m
Percentage of
total stressed
credit spreads
attributed to
liquidity premium
%
61
55
51%
52%
Aside from UK annuities, no liquidity premium allowance has been assumed for any other lines of business.
Reconciliation of IFRS to economic available capital
The table below shows the reconciliation of Group IFRS shareholders’ equity to available capital.
Reconciliation of IFRS equity to economic available capital
IFRS shareholders' equity at 31 December 2013
Adjustment to restate US insurance entities onto a US Risk Based Capital basis
Remove DAC, goodwill and intangibles
Add subordinated debt treated as economic available capital
Insurance contract valuation differences
Add value of shareholder transfers
Increase in value of net deferred tax liabilities (resulting from valuation differences above)
Other
Available capital at 31 December 2013
£bn
Available capital
note
9.7
(0.6)
(2.7)
3.8
5.8
4.1
(1.3)
(0.3)
18.5
Note
Based on the Group’s Solvency II internal model which has not been reviewed or approved by the Prudential Regulation Authority.
The key differences between the two metrics are:
— £0.6 billion represents the adjustment required to the Group’s shareholders’ funds in order to convert Jackson’s contribution from
an IFRS basis to the local statutory valuation basis which underpins the US Risk Based Capital regime;
— £2.7 billion due to the removal of DAC and goodwill from the IFRS balance sheet;
— £3.8 billion due to the addition of subordinated debt which is treated as available capital on an economic basis but as a liability under IFRS;
— £5.8 billion due to differences in insurance valuation requirements between economic capital and IFRS, with available capital partially
capturing the economic value of in-force business which is excluded from IFRS, offset to some extent by the inclusion of a risk margin
which is not required under IFRS;
— £4.1 billion due to the inclusion of the value of future shareholder transfers from with-profits business on the economic balance sheet
in the UK and Asia, which is excluded from the determination of the Group’s IFRS shareholders’ funds; and
— £1.3 billion due to the impact on the valuation of deferred tax assets and liabilities resulting from the other valuation differences
noted above.
Prudential plc Annual Report 2013 Additional information Additional unaudited financial informationAdditional unaudited financial information continued Analysis of movement in the economic capital position
The table below shows the movement during the financial year in the Group’s economic capital surplus.
Analysis of movement from 1 January to 31 December 2013
Economic solvency position as at 1 January 2013
Model changes
Operating experience
Non-operating experience
Other capital movements:
Acquisitions/disposals
Foreign currency translation movements
Subordinated debt issuance
Dividends
Economic solvency position as at 31 December 2013
357
Economic
capital
surplus
£bn
note
Economic
solvency
ratio
%
note
8.8
0.1
2.1
0.9
(0.5)
(0.4)
1.1
(0.8)
11.3
215%
2%
31%
12%
(8)%
0%
16%
(11)%
257%
Note
Based on the Group’s Solvency II internal model which has not been reviewed or approved by the Prudential Regulation Authority.
During 2013, the Group’s economic capital surplus increased from £8.8 billion to £11.3 billion. The total movement over the year was
equivalent to a 42 percentage point increase in the Group economic solvency ratio, driven by:
— Model changes: a positive impact to Group surplus arising from a number of modelling enhancements and refinements;
— Operating experience: generated by in-force business, new business written in 2013, the beneficial impact of management actions
taken during 2013 to de-risk the business, and small impacts from non-market assumption changes and non-market experience
variances over the year;
— Non-operating experience: mainly arising from positive market experience during 2013; and
— Other capital movements: a reduction in surplus from the acquisition of Thanachart Life and the preparation for sale of the Japanese
business, the negative impact of exchange rate movements, an increase in surplus from new subordinated debt issuances and a
reduction in surplus due to dividend payments in 2013.
Analysis of Group Economic Capital Requirement
The table below shows the split of the £7.2 billion Group Economic Capital Requirement by risk type1 at 31 December 2013. However,
there are material areas of uncertainty with regard to methodology and assumptions in the internal model which remain subject to review
and approval by the Prudential Regulation Authority. Therefore, the results shown below should not be interpreted as outputs from an
approved internal model.
Market:
Equity
Credit
Yields (interest rates)
Other
Insurance:
Mortality/morbidity
Lapse
Longevity
Operational/expense
% of
undiversified
Economic
Capital
Requirement2
% of
diversified
Economic
Capital
Requirement2
53%
15%
20%
13%
5%
36%
8%
19%
9%
11%
64%
24%
37%
0%
3%
28%
4%
21%
3%
8%
Notes
1
2
The Group Economic Capital Requirement by risk type includes capital requirements in respect of Jackson’s risk exposures, based on 250% of the US RBC
Company Action Level.
Based on the Group’s Solvency II internal model which has not been reviewed or approved by the Prudential Regulation Authority.
Prudential plc Annual Report 2013Additional information
358
III: Other information continued
The Group’s most material risk exposures are to financial markets, in particular to equities and credit spreads, which we hold to generate a
higher return on capital over the long term. The Group also has material insurance risk exposures including longevity risk from UK
annuities, lapse risk across a wide range of products, and mortality and morbidity risk mainly arising from protection products written in
Asia. These risks diversify strongly with market risks, even after allowing for market-related policyholder behaviour, thereby, increasing
the return on capital which can be earned from the balanced mix of risks. A brief description of the most material risks is set out below:
— The Group’s exposure to equities mainly arises from UK shareholder transfers linked to policyholder funds (partially offset by
economic equity hedges) and from future fund management charges on unit-linked funds in Asia. The equity exposure arising from
Jackson’s variable annuity business is mostly hedge;
— The Group also has significant exposure to credit risk, mainly from the UK annuity portfolio and from Jackson’s fixed annuity credit
portfolio. Credit exposures across the Group are carefully monitored and managed as part of the Group’s risk management
framework;
— The Group is exposed to movements in yields (interest rates), while falling interest rates increase the risks arising from policyholder
guarantees in with-profits funds and variable annuities, falling interest rates also increase the value of future insurance profits;
— The most material insurance risk exposures arise from UK longevity risk, and lapse, mortality and morbidity risk in Asia; and
— The Group is also exposed to expense and operational risk, which is closely monitored and managed through internal
control processes.
Sensitivity testing of Group economic solvency position
Stress testing the economic capital position gives the following results (as at 31 December 2013):
— An instantaneous 20 per cent fall in equity markets would reduce surplus by £0.3 billion but increase the economic solvency ratio to
260 per cent;
— An instantaneous 40 per cent fall in equity markets would reduce surplus by £1.0 billion but increase the economic solvency ratio to
258 per cent;
— A 100 basis points reduction in interest rates (subject to a floor of zero) would reduce surplus by £1.3 billion and reduce the economic
solvency ratio to 225 per cent;
— A 100 basis points increase in interest rates would increase surplus by £0.8 billion and increase the economic solvency ratio to
284 per cent; and
— A 100 basis points increase in credit spreads2 would reduce surplus by £1.3 billion and reduce the economic solvency ratio to
254 per cent.
These sensitivity results demonstrate the resilience of the economic capital position following large falls in equity markets, sizeable
reductions in yields and a severe credit event.
The adverse impact of falling equity markets mainly results from a reduction in the value of with-profits shareholder transfers and
future fund management charges in the UK and Asia. Equity hedging reduces the impact of these exposures and a dynamic equity
hedging programme is also in place to manage the equity risk arising in Jackson’s variable annuities business.
A fall in yields has a material adverse impact on Group surplus which largely arises from a decrease in the value of future with-profits
shareholder transfers and an increase in the size of risk margins. Falling yields also increases the value of the Group’s external debt,
reducing the Group surplus. However, these impacts are partially offset by an increase in the value of future insurance profits and
changes in the value of hedging assets.
Widening credit spreads adversely impacts on the annuity business in the UK since this is deemed to represent an increase, to
some extent, in the expected level of future defaults. Jackson is not exposed to credit spread widening on a US RBC basis, but an increase
in defaults in the Jackson credit book would have a negative impact on the Group capital position and is reflected in the credit stress
test above.
Statement of independent review
The methodology, assumptions and overall result have been subject to examination by KPMG LLP.
Note
2
For the credit spread widening stress 10 times expected defaults are assumed for Jackson since credit spread movements do not directly impact on the
US RBC result.
Prudential plc Annual Report 2013 Additional information Additional unaudited financial informationAdditional unaudited financial information continued 359
III(g) Option schemes
The Group maintains four share option schemes satisfied by the issue of new shares. Executive directors and eligible employees based in
the UK may participate in the UK savings-related share option scheme, executives based in Asia and eligible employees can participate
in the international savings-related share option scheme. Employees based in Dublin 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 B3.2 of the IFRS basis consolidated
financial statements.
All options were granted at £nil consideration. No options have been granted to substantial shareholders, suppliers of goods or
services (excluding options granted to agents under the non-employee savings-related share option scheme) or in excess of the
individual limit for the relevant scheme.
The options schemes will terminate as follows, unless the directors resolve to terminate the plans at an earlier date:
— UK savings-related share option scheme: 16 May 2023;
— International savings-related share option scheme: 31 May 2021;
— Prudential International Assurance sharesave plan: 3 August 2019; and
— 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 2013 was £11.14 (2012: £7.69).
Particulars of options granted to directors are included in the Directors’ Remuneration Report on page 89.
The closing price of the shares immediately before the date on which the options were granted during the current period was £12.02.
The following analyses show the movement in options for each of the option schemes for the year ended 31 December 2013.
UK savings-related share option scheme
Exercise period
Number of options
Date of grant
Exercise
price £
29 Sep 05
20 Apr 06
28 Sep 06
26 Apr 07
27 Sep 07
27 Sep 07
25 Apr 08
25 Apr 08
25 Sep 08
25 Sep 08
27 Apr 09
27 Apr 09
27 Apr 09
25 Sep 09
25 Sep 09
28 Sep 10
28 Sep 10
16 Sep 11
16 Sep 11
21 Sep 12
21 Sep 12
20 Sep 13
20 Sep 13
4.07
5.65
4.75
5.72
5.52
5.52
5.51
5.51
4.38
4.38
2.88
2.88
2.88
4.25
4.25
4.61
4.61
4.66
4.66
6.29
6.29
9.01
9.01
Beginning
01 Dec 12
01 Jun 13
01 Dec 13
01 Jun 14
01 Dec 12
01 Dec 14
01 Jun 13
01 Jun 15
01 Dec 13
01 Dec 15
01 Jun 12
01 Jun 14
01 Jun 16
01 Dec 12
01 Dec 14
01 Dec 13
01 Dec 15
01 Dec 14
01 Dec 16
01 Dec 15
01 Dec 17
01 Dec 16
01 Dec 18
End
Beginning
of period
Granted
Exercised
Cancelled
Forfeited
Lapsed
End of
period
3,780
31 May 13
7,322
30 Nov 13
13,325
31 May 14
503
30 Nov 14
5,108
31 May 13
1,668
31 May 15
26,509
30 Nov 13
1,544
30 Nov 15
43,374
31 May 14
11,205
31 May 16
30 Nov 12
5,709
30 Nov 14 1,719,205
177,492
30 Nov 16
40,985
31 May 13
86,651
31 May 15
256,720
31 May 14
123,861
31 May 16
458,199
31 May 15
184,570
31 May 17
986,901
31 May 16
31 May 18
147,509
31 May 17
31 May 19
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– 422,798
91,054
–
(1,260)
(7,322)
(13,177)
–
(5,108)
–
(26,367)
–
(30,871)
(278)
(5,709)
(27,753)
(343)
(39,875)
(407)
(190,529)
(470)
(2,656)
(1,073)
(1,609)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1,085)
(227)
–
(3,659)
(468)
(669)
(9,306)
(1,960)
(25,004)
(2,623)
(3,992)
–
–
–
–
–
–
–
–
–
–
–
–
(26,797)
(5,686)
(854)
–
(3,081)
–
(9,923)
(653)
(13,132)
(4,771)
(398)
–
(2,520)
–
–
–
–
–
(142)
–
(186)
(54)
–
–
–
148
503
–
1,668
–
1,544
12,317
10,873
–
(7,623) 1,655,947
(111) 171,125
–
(256)
82,407
(178)
(211)
62,431
(467) 122,255
(2,209) 434,105
(2,195) 178,689
(7,147) 940,009
– 140,115
– 418,408
91,054
–
4,302,140
513,852 (354,807)
(48,993)
(65,295)
(23,299) 4,323,598
The total number of securities available for issue under the scheme is 4,323,598 which represents 0.169 per cent of the issued share
capital at 31 December 2013.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the
current period was £12.28.
The weighted average fair value of options granted under the plan in the period was £9.01.
Prudential plc Annual Report 2013Additional information
360
III: Other information continued
International savings-related share option scheme
Exercise period
Number of options
Date of grant
Exercise
price £
26 Apr 07
25 Apr 08
25 Sep 08
27 Apr 09
27 Apr 09
25 Sep 09
25 Sep 09
28 Sep 10
28 Sep 10
16 Sep 11
16 Sep 11
21 Sep 12
21 Sep 12
20 Sep 13
20 Sep 13
5.72
5.51
4.38
2.88
2.88
4.25
4.25
4.61
4.61
4.66
4.66
6.29
6.29
9.01
9.01
Beginning
01 Jun 12
01 Jun 13
01 Dec 13
01 Jun 12
01 Jun 14
01 Dec 12
01 Dec 14
01 Dec 13
01 Dec 15
01 Dec 14
01 Dec 16
01 Dec 15
01 Dec 17
01 Dec 16
01 Dec 18
End
Beginning
of period
Granted
Exercised
Cancelled
Forfeited
Lapsed
End of
period
30 Nov 12
30 Nov 13
31 May 14
30 Nov 12
30 Nov 14
31 May 13
31 May 15
31 May 14
31 May 16
31 May 15
31 May 17
31 May 16
31 May 18
31 May 17
31 May 19
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
–
–
–
–
–
–
–
–
–
–
–
–
–
– 699,724
58,737
–
–
(2,739)
(3,448)
–
(1,372)
(24,469)
–
(82,381)
–
(721)
–
(138)
–
–
–
–
–
–
–
–
(1,181)
–
–
–
(7,014)
–
(5,357)
–
(4,910)
(3,328)
–
–
–
–
(1,188)
–
–
(7,685)
–
(22,994)
–
(46,542)
(8,587)
(3,325)
–
–
(14,489)
1,453
–
3,503
–
–
(63,474)
75,573
–
5,349
(10,542)
2,682
–
29,097
–
6,130
–
– 322,112
–
25,739
– 629,331
26,114
–
(666) 690,823
55,409
–
1,431,404
758,461 (115,268)
(21,790)
(90,321)
(89,171) 1,873,315
The total number of securities available for issue under the scheme is 1,873,315 which represents 0.073 per cent of the issued share
capital at 31 December 2013.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the
current period was £12.15.
The weighted average fair value of options granted under the plan in the period was £9.01.
Prudential International Assurance sharesave plan
Exercise period
Number of options
Date of grant
27 Apr 09
27 Apr 09
25 Sep 09
Exercise
price £
2.88
2.88
4.25
Beginning
01 Jun 12
01 Jun 14
01 Dec 12
End
Beginning
of period
30 Nov 12
30 Nov 14
31 May 13
3,646
6,567
639
10,852
Granted
Exercised
Cancelled
Forfeited
Lapsed
–
–
–
–
–
–
(614)
(614)
–
–
–
–
–
–
–
–
(3,646)
–
(25)
(3,671)
End of
period
–
6,567
–
6,567
The total number of securities available for issue under the scheme is 6,567 which represents 0.0003 per cent of the issued share capital
at 31 December 2013.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the
current period was £9.73.
Prudential plc Annual Report 2013 Additional information Additional unaudited financial informationAdditional unaudited financial information continued
361
Non-employee savings-related share option scheme
Exercise period
Number of options
Date of grant
Exercise
price £
26 Apr 07
27 Sep 07
25 Apr 08
25 Sep 08
27 Apr 09
27 Apr 09
25 Sep 09
25 Sep 09
28 Sep 10
28 Sep 10
16 Sep 11
16 Sep 11
21 Sep 12
21 Sep 12
20 Sep 13
20 Sep 13
5.72
5.52
5.51
4.38
2.88
2.88
4.25
4.25
4.61
4.61
4.66
4.66
6.29
6.29
9.01
9.01
Beginning
01 Jun 12
01 Dec 12
01 Jun 13
01 Dec 13
01 Jun 12
01 Jun 14
01 Dec 12
01 Dec 14
01 Dec 13
01 Dec 15
01 Dec 14
01 Dec 16
01 Dec 15
01 Dec 17
01 Dec 16
01 Dec 18
End
Beginning
of period
Granted
Exercised
Cancelled
Forfeited
Lapsed
End of
period
12,779
30 Nov 12
2,970
31 May 13
3,834
30 Nov 13
13,708
31 May 14
27,532
30 Nov 12
686,366
30 Nov 14
16,676
31 May 13
31 May 15
11,717
31 May 14 1,096,742
368,850
31 May 16
608,943
31 May 15
262,682
31 May 17
443,315
31 May 16
31 May 18
96,300
31 May 17
31 May 19
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– 784,887
– 426,605
–
(2,874)
–
(4,522)
–
–
(16,673)
–
(744,626)
–
–
–
–
–
–
–
–
–
(1,837)
–
–
–
–
(3,950)
(3,347)
(4,336)
(2,003)
(6,011)
(7,425)
–
–
–
–
–
–
–
–
–
(6,363)
(6,636)
(4,678)
(572)
(3,005)
–
–
(1,664)
–
(12,779)
–
(96)
1,997
–
9,186
–
–
27,532
– 686,366
–
(3)
–
11,717
– 341,803
– 362,214
– 600,918
– 257,774
– 438,307
–
90,289
– 777,462
– 424,941
3,652,414 1,211,492 (768,695)
(28,909)
(22,918)
(12,878) 4,030,506
The total number of securities available for issue under the scheme is 4,030,506 which represents 0.157 per cent of the issued share
capital at 31 December 2013.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the
current period was £12.92.
The weighted average fair value of options granted under the plan in the period was £9.01.
Prudential plc Annual Report 2013Additional information
362
Risk factors
A number of factors (risk factors) affect
Prudential’s operating results and financial
condition and, accordingly, the trading price
of its shares. The risk factors mentioned
below should not be regarded as a complete
and comprehensive statement of all
potential risks and uncertainties. The
information given is as of the date of this
document, is not updated, and any
forward-looking statements are made
subject to the reservations specified below
under ‘Forward Looking Statements’.
Prudential’s approaches to managing
risks are explained in the ‘Group Chief Risk
Officer’s report on the risks facing our
business and our capital strength’ section
of this document.
Risks relating to Prudential’s business
Prudential’s businesses are inherently
subject to market fluctuations and
general economic conditions
Prudential’s businesses are inherently
subject to market fluctuations and general
economic conditions. Uncertainty or
negative trends in international economic
and investment climates could adversely
affect Prudential’s business and
profitability. Since 2008 Prudential has
operated against a challenging background
of periods of significant volatility in global
capital and equity markets, interest rates
and liquidity, and widespread economic
uncertainty. Government interest rates
also remain at or near historic lows in the
US, the UK and some Asian countries in
which Prudential operates. These factors
have, at times during this period, had a
material adverse effect on Prudential’s
business and profitability.
In the future, the adverse effects of such
factors would be felt principally through
the following items:
— Investment impairments or reduced
investment returns, which could impair
Prudential’s ability to write significant
volumes of new business and would
have a negative impact on its assets
under management and profit;
— Higher credit defaults and wider credit
and liquidity spreads resulting in
realised and unrealised credit losses;
— Failure of counterparties to transactions
with Prudential or, for derivative
transactions adequate collateral not
being in place;
— Estimates of the value of financial
instruments being difficult because in
certain illiquid or closed markets,
determining the value at which financial
instruments can be realised is highly
subjective. Processes to ascertain such
values require substantial elements of
judgement, assumptions and estimates
(which may change over time); and
— Increased illiquidity also adds to
uncertainty over the accessibility of
financial resources and may reduce
capital resources as valuations decline.
Global financial markets are subject to
uncertainty and volatility created by a
variety of factors, including concerns over
sovereign debt, general slowing in world
growth from subdued or slowdown in
demand and the timing and scale of
quantitative easing programmes of central
banks. Upheavals in the financial 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
profitability. New challenges related to
market fluctuations 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 Asian operations, it
may not be possible to hold assets which
will provide cash flows to match those
relating to policyholder liabilities. This is
particularly true in those countries where
bond markets are not developed and in
certain markets where regulated surrender
values are set with reference to the interest
rate environment prevailing at the time of
policy issue. This results in a mismatch due
to the duration and uncertainty of the
liability cash flows and the lack of sufficient
assets of a suitable duration. While this
residual asset/liability mismatch risk can
be managed, it cannot be eliminated.
Where interest rates in these markets
remain lower than interest rates used to
calculate surrender values over a sustained
period, this could have an adverse impact
on Prudential’s reported profit.
In the US, fluctuations in prevailing
interest rates can affect results from
Jackson which has a significant spread-
based business, with the majority of its
assets invested in fixed income securities.
In particular, fixed annuities and stable
value products written by Jackson expose
Prudential to the risk that changes in
interest rates, which are not fully reflected
in the interest rates credited to customers,
will reduce spread. The spread is the
difference between the rate of return
Jackson is able to earn on the assets
backing the policyholders’ liabilities
and the amounts that are credited to
policyholders in the form of benefit
increases, subject to minimum crediting
rates. Declines in spread from these
products or other spread businesses
that Jackson conducts, and increases in
surrenders levels arising from interest rate
rises, could have a material impact on its
businesses or results of operations.
Jackson also writes a significant amount
of variable annuities that offer capital or
income protection guarantees. The value
of these guarantees is affected by market
factors including interest rates, equity levels,
bond spreads and volatility. There could be
market circumstances where the derivatives
that Jackson enters into to hedge its market
risks may not fully cover its exposures under
the guarantees. The cost of the guarantees
that remain unhedged will also affect
Prudential’s results.
Jackson hedges the guarantees on
its variable annuity book on an economic
basis and, thus, accepts variability in its
accounting results in the short term in
order to achieve the appropriate economic
result. In particular, for Prudential’s Group
IFRS reporting, the measurement of the
Jackson variable annuity guarantees
is typically less sensitive to market
movements than for the corresponding
hedging derivatives, which are held at
market value. However, depending on
the level of hedging conducted regarding
a particular risk type, certain market
movements can drive volatility in the
economic results which may be less
significant under IFRS reporting.
A significant part of the profit from
Prudential’s UK insurance operations
is related to bonuses for policyholders
declared on with-profits products,
which are broadly based on historical
and current rates of return on equity,
real estate and fixed income securities,
as well as Prudential’s expectations of
future investment returns. This profit
could be lower in a sustained low
interest rate environment.
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
held in its investment portfolio. In recent
years, rating agencies have downgraded
the sovereign debt of some countries.
There is a risk of further downgrades.
Investing in sovereign debt 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
Prudential plc Annual Report 2013 Additional information Risk factors 363
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 cash flow
situation, its relations with its central bank,
the extent of its foreign currency reserves,
the availability of sufficient foreign
exchange on the date a payment is due, the
relative size of the debt service burden to
the economy as a whole, the sovereign
debtor’s policy toward local and
international lenders, and the political
constraints to which the sovereign debtor
may be subject.
Moreover, governments may use a
variety of techniques, such as intervention
by their central banks or imposition of
regulatory controls or taxes, to devalue
their currencies’ exchange rates, or may
adopt monetary and other policies
(including to manage their debt burdens)
that have a similar effect, all of which
could adversely impact the value of an
investment in sovereign debt even in the
absence of a technical default. 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.
In addition, if a sovereign default or
other such events described above were to
occur, other financial institutions may also
suffer losses or experience solvency or
other concerns, and Prudential might face
additional risks relating to any debt of such
financial institutions held in its investment
portfolio. There is also risk that public
perceptions about the stability and
creditworthiness of financial institutions
and the financial sector generally might
be affected, as might counter party
relationships between financial institutions.
If a sovereign were to default on its
obligations, or adopt policies that devalue
or otherwise alter the currencies in which
its obligations are denominated this could
have a material adverse effect on
Prudential’s financial condition and
results of operations.
Prudential is subject to the risk of
exchange rate fluctuations owing to
the geographical diversity of its
businesses
Due to the geographical diversity of
Prudential’s businesses, Prudential is
subject to the risk of exchange rate
fluctuations. Prudential’s operations in the
US and Asia, which represent a significant
proportion of operating profit based on
longer-term investment returns and
shareholders’ funds, generally write
policies and invest in assets denominated
in local currencies. Although this practice
limits the effect of exchange rate
fluctuations on local operating results,
it can lead to significant fluctuations in
Prudential’s consolidated financial
statements upon translation of results
into pounds sterling. This exposure is
not currently separately managed.
The currency exposure relating to the
translation of reported earnings could
impact on financial reporting ratios such
as dividend cover, which is calculated
as operating profit after tax on an IFRS
basis, divided by the current year interim
dividend plus the proposed final dividend.
The impact of gains or losses on currency
translations is recorded as a component
of shareholders’ funds within other
comprehensive income. Consequently,
this could impact on Prudential’s gearing
ratios (defined as debt over debt plus
shareholders’ funds).
Prudential conducts its businesses
subject to regulation and associated
regulatory risks, including the effects
of changes in the laws, regulations,
policies and interpretations and any
accounting standards in the markets
in which it operates
Changes in government policy, legislation
(including tax) or regulatory interpretation
applying to companies in the financial
services and insurance industries in any of
the markets in which Prudential operates,
which in some circumstances may be
applied retrospectively, may adversely
affect Prudential’s product range,
distribution channels, profitability, capital
requirements and, consequently, reported
results and financing requirements.
Also, regulators in jurisdictions in which
Prudential operates may change the level
of capital required to be held by individual
businesses or could introduce possible
changes in the regulatory framework for
pension arrangements and policies, the
regulation of selling practices and solvency
requirements. Furthermore, as a result of
interventions by governments in response
to recent financial and global economic
conditions, it is widely expected that there
will continue to be a substantial increase in
government regulation and supervision of
the financial services industry, including
the possibility of higher capital
requirements, restrictions on certain types
of transaction structure and enhanced
supervisory powers.
Current EU directives, including the EU
Insurance Groups Directive (‘IGD’)
require EU financial services groups
to demonstrate net aggregate surplus
capital in excess of solvency requirements
at the group level in respect of
shareholder-owned entities. The test is a
continuous requirement, so that Prudential
needs to maintain a higher amount of
regulatory capital at the group level than
otherwise necessary in respect of some of
its individual businesses to accommodate,
for example, short-term movements in
global foreign exchange rates, interest
rates, deterioration in credit quality and
equity markets. The EU is also developing a
new prudential 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.
The Solvency II Directive covers
valuation, the treatment of insurance
groups, the definition of capital and the
overall level of capital requirements. A key
aspect of Solvency II is that the assessment
of risks and capital requirements 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 Prudential Regulation Authority
(‘PRA’). The Solvency II Directive was
formally approved by the Economic and
Financial Affairs Council in November
2009 although its implementation was
delayed pending agreement on a directive
known as Omnibus II which, once adopted,
will amend certain aspects of the
Solvency II Directive. In November 2013,
representatives from the European
Parliament, the European Commission and
the Council of the European Union reached
an agreement on the Omnibus II Directive,
which is currently expected to be adopted
in early 2014. As a result, Solvency II is
now expected to be implemented as of
1 January 2016, although the European
Commission and the European Insurance
and Occupational Pensions Authority
(EIOPA) are continuing to develop the
detailed rules that will complement the
high-level principles of the Solvency II
and Omnibus II Directives, which are not
currently expected to be finalised until
mid-2015. Further, the effective application
of a number of key measures incorporated
in the Omnibus II Directive, including the
provisions for third-country equivalence,
is expected to be subject to supervisory
judgement and approval. As a result there
is a risk that the effect of the measures
Prudential plc Annual Report 2013Additional information 364
finally adopted could be adverse for
Prudential, including potentially a
significant increase in the capital required
to support its business and that Prudential
may be placed at a competitive
disadvantage to other European and
non-European financial services groups.
Currently there are also a number of
other 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 Global
Systemically Important Insurers (G-SIIs)
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 financial
services industry within the United States
that, among other reforms to financial
services entities, products and markets,
may subject financial institutions
designated as systemically important
to heightened prudential and other
requirements intended to prevent or
mitigate the impact of future disruptions
in the US financial 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.
In July 2013, the FSB announced the
initial list of nine insurance groups that
have been designated as G-SIIs. This list
included Prudential as well as a number of
its competitors. The designation as a
G-SII is likely to lead to additional policy
measures being applied to the designated
group. Based on a policy framework
released by the IAIS concurrently with the
initial list, these additional policy measures
will include enhanced Group-wide
supervision. This enhanced supervision is
intended to commence immediately and
will include the development by July 2014
of a Systemic Risk Management Plan
(SRMP) under supervisory oversight and
implementation thereafter and, by the end
of 2014, a group Recovery and Resolution
Plan (RRP) and Liquidity Risk Management
Plan (LRMP). The G-SII regime also
introduces two types of capital
requirements, the first, a Basic Capital
Requirement (BCR), designed to act as a
minimum group capital requirement and
the second, a higher loss absorption (HLA)
requirement for conducting non-traditional
insurance and non-insurance activities.
The IAIS released a consultation paper on
the BCR in December 2013 and Prudential
will participate in the field testing of the
proposals (expected in the first half of
2014). Prudential is monitoring the
development of, and the potential impact
of, the framework of policy measures and
engaging with the PRA on the implications
of this designation. The IAIS currently
expects to finalise the BCR and HLA
proposals by November 2014 and the end
of 2015 respectively. Implementation of
the regime is likely to be phased in over a
period of years with the BCR expected to
be introduced between 2015 and 2019.
The HLA requirement will apply from
January 2019 to the insurance groups
identified as G-SIIs in November 2017.
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
and standards for group supervision and
so may increase the focus of regulators in
some jurisdictions. It is also expected to
include some prescriptive requirements,
including an Insurance Capital Standard
(ICS). A revised draft ComFrame proposal
was released for consultation in October
2013. The IAIS will undertake a field testing
exercise from 2014 to 2018 to assess the
impacts of the quantitative and qualitative
requirements proposed under ComFrame.
ComFrame is expected to be implemented
in 2019.
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 its first
Exposure Draft for its Phase II on insurance
accounting, which would introduce
significant changes to the statutory
reporting of insurance entities that prepare
accounts according to IFRS. A revised
Exposure Draft was issued in June 2013.
It remains uncertain whether the proposals
in the Exposure Draft will become the final
IASB standard. The timing of the changes
taking effect is uncertain but not expected
to be before 2018.
Any changes or modification of IFRS
accounting policies may require a change
in the future results or a retrospective
adjustment of reported results.
The resolution of several issues
affecting the financial services
industry could have a negative
impact on Prudential’s reported
results or on its relations with
current and potential customers
Prudential is, and in the future may be,
subject to legal and regulatory actions in
the ordinary course of its business, both in
the UK and internationally. These actions
could involve a review of types 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, lines of business 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 deficiencies
of third party distributors.
In the US, federal and state regulators
have focused on, and continue to devote
substantial attention to, the mutual fund,
fixed index annuity and insurance product
industries. This focus includes new
regulations in respect of the suitability of
sales of certain products such as alternative
investments. As a result of publicity relating
to widespread perceptions of industry
abuses, there have been numerous
regulatory inquiries and proposals for
legislative and regulatory reforms.
In Asia, regulatory regimes are
developing at different speeds, driven by
a combination of global factors and local
considerations. There is a risk that new
requirements are introduced that
challenge current practices, or are
retrospectively applied to sales made
prior to their introduction.
Litigation, disputes and regulatory
investigations may adversely affect
Prudential’s profitability and
financial condition
Prudential is, and may be in the future,
subject to legal actions, disputes and
regulatory investigations in 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 specific to
Prudential, or that are common to
Prudential plc Annual Report 2013 Additional information Risk factorsRisk factors continued 365
companies that operate in Prudential’s
markets. Legal actions and disputes may
arise under contracts, regulations
(including tax) or from a course of conduct
taken by Prudential, and may be class
actions. Although Prudential believes that
it has adequately provided in all material
aspects for the costs of litigation and
regulatory matters, no assurance can be
provided that such provisions are sufficient.
Given the large or indeterminate amounts
of damages sometimes sought, 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 flows.
Prudential’s businesses are
conducted in highly competitive
environments with developing
demographic trends and continued
profitability depends on
management’s ability to respond to
these pressures and trends
The markets for financial services in the
UK, US and Asia are highly competitive,
with several factors affecting Prudential’s
ability to sell its products and continued
profitability, including price and yields
offered, financial strength and ratings,
range of product lines and product quality,
brand strength and name recognition,
investment management performance,
historical bonus levels, developing
demographic trends and customer appetite
for certain savings products. In some of its
markets, Prudential faces competitors that
are larger, have greater financial resources
or a greater market share, offer a broader
range of products or have higher bonus
rates or claims paying ratios. Further,
heightened competition for talented and
skilled employees and agents with local
experience, particularly in Asia, may limit
Prudential’s potential to grow its business
as quickly as planned.
In Asia, the Group’s principal
competitors in the region are international
financial companies, including global life
insurers such as Allianz, AXA, AIA, and
Manulife and multinational asset managers
such as J.P. Morgan Asset Management,
Schroders, HSBC Global Asset
Management and Franklin Templeton. In a
number of markets, local companies have a
very significant market presence.
Within the UK, Prudential’s principal
competitors include many of the major
retail financial services companies and
fund management companies including, in
particular, Aviva, Legal & General, Lloyds
Banking Group, Standard Life, Schroders,
Invesco Perpetual and Fidelity.
Jackson’s competitors in the US
include major stock and mutual insurance
companies, mutual fund organisations,
banks and other financial services
companies such as AIG, AXA Financial
Inc., Hartford Life Inc., 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
significantly upon its capacity to anticipate
and respond appropriately to these
competitive pressures.
Downgrades in Prudential’s financial
strength and credit ratings could
significantly impact its competitive
position and damage its relationships
with creditors or trading
counterparties
Prudential’s financial strength and credit
ratings, which are used by the market to
measure its ability to meet policyholder
obligations, are an important factor
affecting public confidence in Prudential’s
products, and as a result its
competitiveness. Downgrades in
Prudential’s ratings, as a result of, for
example, decreased profitability, increased
costs, increased indebtedness or other
concerns, could have an adverse effect on
its ability to market products; retain current
policyholders; and on the Group’s financial
flexibility. In addition, the interest rates
Prudential pays on its borrowings are
affected by its 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. These ratings have a
stable 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 financial strength is rated Aa2 by
Moody’s, AA by Standard & Poor’s and AA
by Fitch. These ratings have a stable outlook.
Jackson’s financial strength is rated AA
by Standard & Poor’s and Fitch, A1 by
Moody’s, and A+ by AM Best. These
ratings have a stable outlook.
In addition, changes in methodologies
and criteria used by rating agencies could
result in downgrades that do not reflect
changes in the general economic conditions
or Prudential’s financial condition.
Adverse experience in the
operational risks inherent in
Prudential’s business could have a
negative impact on its results of
operations
Operational risks are present in all of
Prudential’s businesses, including the risk
of direct or indirect loss resulting from
inadequate or failed internal and external
processes, systems and human error or
from external events. Prudential’s business
is dependent on processing a large number
of 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
significant periods.
These factors, among others, result in
significant reliance on and require
significant investment in IT, compliance
and other operational systems, personnel
and processes. In addition, Prudential
outsources several operations, including a
significant part of its UK back office and
customer facing functions as well as a
number of IT functions, resulting in reliance
upon the operational processing
performance of its outsourcing partners.
Although Prudential’s IT, compliance
and other operational 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 Prudential
has not experienced a material failure or
breach in relation to its legacy and other IT
systems and processes to date, it has been,
and likely will continue to be, subject to
computer viruses, attempts at unauthorised
access and cyber-security attacks.
Prudential’s legacy and other IT systems
and processes, as with operational systems
and processes generally, may be
susceptible to failure or breaches. Such
events could, among other things, harm
Prudential’s ability to perform necessary
business functions, result in the loss of
confidential or proprietary data (exposing
it to potential legal claims and regulatory
sanctions) and damage 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
identified any operational risks in its
systems or processes during 2013, which
have subsequently caused, or are expected
to cause, a significant negative impact on
its results of operations.
Prudential plc Annual Report 2013Additional information Prudential’s Articles of Association
contain an exclusive jurisdiction
provision
Under Prudential’s Articles of Association,
certain legal proceedings may only be
brought in the courts of England and
Wales. This applies to legal proceedings
by a shareholder (in its capacity as such)
against Prudential and/or its directors
and/or its professional service providers.
It also applies to legal proceedings
between Prudential and its directors
and/or Prudential and Prudential’s
professional service providers that arise
in connection with legal proceedings
between the shareholder and such
professional service provider. This
provision could make it difficult for
US and other non-UK shareholders to
enforce their shareholder rights.
Changes in tax legislation may result
in adverse tax consequences
Tax rules, including those relating to the
insurance industry, and their interpretation,
may change, possibly with retrospective
effect, in any of the jurisdictions in which
Prudential operates. Significant tax
disputes with tax authorities, and any
change in the tax status of any member
of the Group or in taxation legislation or
its scope or interpretation could affect
Prudential’s financial condition and results
of operations.
366
Adverse experience relative to
the assumptions used in pricing
products and reporting business
results could significantly affect
Prudential’s results of operations
Prudential needs to make assumptions
about a number of factors in determining
the pricing of its products, 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 significantly
exceed the improvement assumed,
Prudential’s results of operations could
be adversely affected.
A further example is the assumption
that Prudential makes about future
expected levels of the rates of early
termination of products by its customers
(persistency). This is particularly relevant
to its lines of business other than its UK
annuity business. Prudential’s persistency
assumptions reflect recent past experience
for each relevant line of business.
Any expected deterioration in future
persistency is also reflected in the
assumption. If actual levels of future
persistency are significantly lower than
assumed (that is, policy termination rates
are significantly higher than assumed), the
Group’s results of operations could be
adversely affected.
Another example is the impact of
epidemics and other effects that cause
a large number of deaths. Significant
influenza epidemics have occurred three
times in the last century, but the likelihood,
timing, or the severity of future epidemics
cannot be predicted. The effectiveness of
external parties, including governmental
and non-governmental organisations, in
combating the spread and severity of any
epidemics could have a material impact
on the Group’s loss experience.
In common with other life insurers, the
profitability of the Group’s businesses
depends on a mix of factors including
mortality and morbidity levels and trends,
policy surrender rates, investment
performance and impairments, unit cost
of administration and new business
acquisition expense.
As a holding company, Prudential is
dependent upon its subsidiaries to
cover operating expenses and
dividend payments
The Group’s insurance and investment
management operations are generally
conducted through direct and indirect
subsidiaries.
As a holding company, Prudential’s
principal sources of funds are remittances
from subsidiaries, shareholder-backed
funds, the shareholder transfer from
long-term funds and any amounts that may
be raised through the issuance of equity,
debt and commercial paper. Certain of the
subsidiaries are restricted by applicable
insurance, foreign exchange and tax laws,
rules and regulations that can limit the
payment of dividends, which in some
circumstances could limit the ability to
pay dividends to shareholders or to make
available funds held in certain subsidiaries
to cover operating expenses of other
members of the Group.
Prudential operates in a number
of markets through joint ventures
and other arrangements with third
parties (including in China and
India), involving certain risks that
Prudential does not face with respect
to its consolidated subsidiaries
Prudential operates, and in certain markets
is required by local regulation to operate,
through joint ventures (including in China
and India). For the Group’s joint venture
operations, management control is
exercised jointly with the venture
participants. The level of control
exercisable by the Group depends on the
terms of the joint venture agreements, in
particular, the allocation of control among,
and continued co-operation between, the
joint venture participants. Prudential may
face financial, reputational and other
exposure (including regulatory censure)
in the event that any of its joint venture
partners fails to meet its obligations under
the joint venture, encounters financial
difficulty, or fails to comply with local
regulation or international standards such
as those for the prevention of financial
crime. In addition, a significant proportion
of the Group’s product distribution is
carried out through arrangements with
third parties not controlled by Prudential
and is dependent upon continuation of
these relationships. A temporary or
permanent disruption to these distribution
arrangements or material failure in controls
(such as those for the prevention of
financial crime) could adversely affect
the results of operations of Prudential.
Prudential plc Annual Report 2013 Additional information Risk factorsRisk factors continued Glossary
AER
Actual Exchange Rates are actual historical
exchange rates for the specific 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.
Bulk annuity
A bulk annuity, sometimes referred to as a
bulk purchase annuity, is a contract
between a defined benefit pension scheme
and an insurance company, whereby an
insurance company insures some or all of
the liabilities of the pension scheme.
Cash surrender value
The amount of cash available to a policy
holder 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 reflect actual results and also
constant exchange rates (CER) so as to
eliminate the impact from exchange
translation. CER results are calculated by
translating prior year results using current
period foreign currency exchange rates ie
current period average rates for the income
statements and current period closing rate
for the balance sheet.
Closed-book life insurance business
A ‘closed book’ is essentially a group of
insurance policies that are no longer sold,
but are still featured on the books of a life
insurer as a premium-paying policy. The
insurance company has ‘closed the books’
on new sales of these products which will
remain in run-off until the policies expire
and all claims are settled.
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
flows, income or expenses will be affected
by changes in exchange rates. Also
referred to as foreign exchange risk.
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 specified 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. AFS securities are measured at
fair value on the statement of financial
position with unrealised gains and losses
being booked in Other Comprehensive
Income instead of the income statement.
Back book of business
The insurance policies sold in past periods
that are still in-force and hence are still
recorded on the insurer’s balance sheet.
Bonuses
Bonuses refer to the non-guaranteed
benefit added to participating life insurance
policies and are the way in which
policyholders receive their share of the
profits of the policies. There are normally
two types of bonus:
— 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
— 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 final bonus
may not be paid. Final bonuses may
vary and are not guaranteed.
367
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 specified age.
Discretionary participation features
or DPF
A contractual right to receive, as a
supplement to guaranteed benefits,
additional benefits:
— That are likely to be a significant portion
of the total contractual benefits;
— Whose amount or timing is
contractually at the discretion of the
issuer; and
— That are contractually based on asset,
fund, company or other entity
performance.
Dividend cover
Dividend cover is calculated as operating
profit after tax on an IFRS basis, divided by
the current year interim dividend plus the
proposed final dividend.
Endowment product
An ordinary individual life insurance
product that provides the insured party
with various guaranteed benefits if it
survives specific maturity dates or periods
stated in the policy. Upon the death of the
insured party within the coverage period, a
designated beneficiary receives the face
value of the policy.
European Embedded Value or EEV
Financial results that are prepared on a
supplementary basis to the Group’s
consolidated IFRS results and which are
prepared in accordance with a set of
Principles issued by the Chief Financial
Officers Forum of European Insurance
Companies in May 2004 and expanded by
the Additional Guidance of EEV
Disclosures published in October 2005.
The principles are designed to capture the
value of the new business sold in the period
and of the business in force.
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Prudential plc Annual Report 2013
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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 flexible
pay-out options. The contract holder pays
the insurer a premium, which is credited to
the contract holders’ account. Periodically,
interest is credited to the contract holders’
account and administrative charges are
deducted, as appropriate.
Fixed index annuities
These are similar to fixed annuities in that
the contract holder pays the insurer a
premium, which is credited to the contract
holders’ account and, periodically, interest
is credited to the contract holders’ 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 financial position and
external funds that are managed by
Prudential asset management operations.
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, and
other reserve movements. Specifically, it
includes amounts maturing from the in-force
operations during the period less the
investment in new business, the effect of
market movements and other one-off items.
Guaranteed annuities
Policies that pay out a fixed amount of
benefit for a defined 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 specified 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
benefit (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 specified number of years.
Guaranteed minimum death benefit
(GMDB) (US)
The basic death benefit offered under
variable annuity contracts, which specifies
that if the owner dies before annuity
income payments begin, the beneficiary
will receive a payment equal to the greater
of the contract value or purchase payments
less withdrawals.
Guaranteed minimum income
benefit (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 pay-out base equal to premiums credited
with some interest rate, or the maximum
anniversary value of the account prior
to annuitisation.
Guaranteed minimum withdrawal
benefit (GMWB) (US)
A guarantee in a variable annuity that
promises that the owner may make annual
withdrawals of a defined amount for the life
of the owner or until the total guaranteed
amount is recovered, regardless of market
performance or the actual account balance.
Health and protection
These comprise health and personal
accident insurance products, which provide
morbidity or sickness benefits 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 financial 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 beneficiary 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 reflected
on records that has not expired, matured or
otherwise been surrendered or terminated.
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 flows expected to be earned
over the life time 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.
Internal vesting
Internal vestings are proceeds from a
Prudential policy which the policyholder
has decided to reinvest in a Prudential
annuity product.
International Financial Reporting
Standards (IFRS)
Accounting standards that all publicly listed
groups in the European Union are required
to apply in preparing consolidated financial
statements.
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 fluctuations 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.
Benefits 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.
Prudential plc Annual Report 2013 Additional information GlossaryGlossary continued 369
Liquidity coverage ratio
Prudential calculates this as assets and
resources available to us that are readily
convertible to cash to cover corporate
obligations in a prescribed stress scenario.
We calculate this ratio over a range of time
horizons extending to 12 months.
Liquidity premium
This comprises the premium that is
required to compensate for the lower
liquidity of corporate bonds relative to
swaps and 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.
Market value reduction (MVR)
A reduction applied to the payment on
with-profits 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 ceded to third party reinsurers.
Net worth
Net assets for EEV reporting purposes that
reflect the regulatory basis position,
sometimes with adjustments to achieve
consistency with the IFRS treatment of
certain items.
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.
New business profit
The profits, calculated in accordance with
European Embedded Value Principles,
from business sold in the financial reporting
period under consideration.
Non-participating business
A life insurance policy where the
policyholder is not entitled to a share of the
company’s profits and surplus, but receives
certain guaranteed benefits. Also known
as non-profit in the UK. Examples include
pure risk policies (eg fixed annuities, term
insurance, critical illness) and unit-linked
insurance contracts.
Present value of new business
premiums or 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.
OEIC Open ended investment
company
A collective investment fund structured as
a limited company in which investors can
buy and sell shares.
Operational borrowings
Borrowings which arise in the normal
course of the business.
Participating funds
Distinct portfolios where the policyholders
have a contractual right to receive at the
discretion of the insurer additional benefits
based on factors such as the performance
of a pool of assets held within the fund, as a
supplement to any guaranteed benefits.
The insurer may either have discretion as to
the timing of the allocation of those
benefits to participating policyholders or
may have discretion as to the timing and
the amount of the additional benefits. For
Prudential the most significant participating
funds are with-profits 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 benefits based on factors such as
investment performance, as a supplement
to any guaranteed benefits. This is also
referred to as with-profits business.
Payback period
Payback period is the time in which the
initial ‘cash’ outflow of investment is
expected to be recovered from the ‘cash’
inflows generated by the investment. We
measure cash outflow by our investment of
free surplus in new business sales. The
payback period equals the time taken for
this business to generate free surplus to
cover this investment. Payback periods are
measured on an undiscounted basis.
Prudential Regulation Authority or
PRA
The PRA is a UK regulatory body
responsible for Prudential regulation and
supervision of banks, building societies,
credit unions, insurers and major
investment firms.
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 profit
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 benefit of policyholders of
SAIF. Shareholders of Prudential plc have
no interest in the profits 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.
Prudential plc Annual Report 2013Additional information Unit-linked products or unit-linked
contracts
See ‘investment-linked products or
contracts’ above.
Universal life
An insurance product where the customer
pays flexible premiums, subject to specified
limits, which are accumulated in an account
and are credited with interest (at a rate
either set by the insurer or reflecting
returns on a pool of matching assets). The
customer may vary the death benefit 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 fluctuate, 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
companies separate account. VAs are
similar to unit-linked annuities in the UK.
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-profits 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.
370
Stochastic techniques
Stochastic techniques incorporate results
from repeated simulations using key
financial parameters which are subject to
random variations and are projected into
the future.
Subordinated debt
A fixed 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 financial 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-profits funds. The balance retained
in the unallocated surplus represents
cumulative income arising on the
with-profits business that has not been
allocated to policyholders or shareholders.
Prudential plc Annual Report 2013 Additional information GlossaryGlossary continued Shareholder information
Analysis of shareholder accounts as at 31 December 2013
371
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
2013 final dividend
Ex dividend date
Record date
Payment date
Shareholder enquiries
For enquiries about shareholdings,
including dividends and lost share
certificates, please contact the
Company Registrars:
By post
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
By telephone
Tel
Fax
Textel
0871 384 2035
0871 384 2100
0871 384 2255
(for 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. International
shareholders Tel: +44 (0) 121 415 7026
Number of
shareholder
accounts
% of total
number of
shareholder
accounts
270
145
465
1,750
2,250
14,587
37,546
57,013
0.47
0.25
0.82
3.07
3.95
25.59
65.85
100
Number of
shares
2,240,797,250
104,076,810
108,809,956
47,980,660
15,605,333
32,368,396
10,743,331
2,560,381,736
% of total
number of
shares
87.52
4.06
4.25
1.87
0.61
1.26
0.43
100
Shareholders
registered on
the UK register
and Irish
branch register
Shareholders
registered on
the Hong Kong
branch register
26 March 2014 27 March 2014
28 March 2014 28 March 2014
22 May 2014
22 May 2014
Shareholders
with ordinary
shares standing
to the credit of
their CDP
securities
accounts
Holders of
US American
Depositary
Receipts
26 March 2014 26 March 2014
28 March 2014 28 March 2014
On or about
29 May 2014
On or about
2 June 2014
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 Limited (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
If you are an overseas shareholder then
you may be able to make use of the
overseas payment service provided by
Equiniti which enables your dividends to be
paid in local currency direct to your bank
account. This service is currently available
to over 90 countries worldwide. To obtain
further information about this service
please call Equiniti on the number above or
alternatively visit www.shareview.com/
overseaspayments
Electronic communications
Shareholders are encouraged to elect
to receive shareholder documents
electronically by registering with
Shareview at www.shareview.co.uk
This will save on printing and distribution
costs, and create environmental benefits.
Shareholders who have registered will be
sent an email notification 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 certificate or proxy
form. The option to receive shareholder
documents electronically is not available to
shareholders holding shares through The
Central Depository (Pte) Limited (CDP).
Please contact Equiniti if you require any
assistance or further information.
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
Equiniti shareview service
Information on how to manage shareholdings
can be found at https://help.shareview.co.uk
The pages at this web address provide
the following:
— Answers to commonly-asked questions
regarding shareholder registration;
— Links to downloadable forms, guidance
notes and Company history fact sheets;
and
— A choice of contact methods – via email,
telephone or post.
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Prudential plc Annual Report 2013
372
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 opposite 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 only a 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 obtained 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 Asset
Services, Shareholder solutions (Ireland),
PO Box 7117, Dublin 2, Ireland, 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 J.P. Morgan, the
authorised depositary bank, at J.P. Morgan
Chase Bank N.A, PO Box 64504, St. Paul,
MN 55164-0854, USA. Telephone General
+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.
Prudential plc Annual Report 2013 Additional information Shareholder informationShareholder information continued 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 Officer
Pierre-Olivier Bouée
Group Chief Risk Officer
John Foley
Group Investment Director
Peter Goerke
Group Human Resources Director
John Murray
Group Communications Director
Margaret Coltman
Group General Counsel
Alan Porter
Group Company Secretary
Prudential UK & Europe
3 Sheldon Square
London W2 6PR
Tel +44 (0)800 000 000
www.pru.co.uk
Jackie Hunt
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
373
Jackson National Life Insurance
Company
1 Corporate Way
Lansing
Michigan 48951
USA
Tel +1 517 381 5500
www.jackson.com
Mike Wells
President & Chief Executive Officer
Institutional Analyst and Investor
Enquiries
Tel +44 (0)20 7548 3300
E-mail: investor.relations@prudential.co.uk
UK Register Private Shareholder
Enquiries
Tel 0871 384 2035
International shareholders
Tel +44 (0) 121 415 7026
Irish Branch Register 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
www.prudential.co.uk/media/enquiries
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Prudential plc Annual Report 2013
374
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 by the Prudential Regulation
Authority and the Financial Conduct
Authority.
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
financial condition, performance, results,
strategy and objectives. Statements that
are not historical facts, including
statements about Prudential’s beliefs and
expectations and including, without
limitation, statements containing the words
‘may’, ‘will’, ‘should’, ‘continue’, ‘aims’,
‘estimates’, ‘projects’, ‘believes’, ‘intends’,
‘expects’, ‘plans’, ‘seeks’ and ‘anticipates’,
and words of similar meaning, are
forward-looking statements. These
statements are based on plans, estimates
and projections as at the time they are
made, and therefore undue reliance should
not be placed on them. By their nature, all
forward-looking statements involve risk
and uncertainty. A number of important
factors could cause Prudential’s actual
future financial condition or performance
or other indicated results to differ
materially from those indicated in any
forward-looking statement. Such factors
include, but are not limited to, future
market conditions, including fluctuations in
interest rates and exchange rates and the
potential for a sustained low-interest rate
environment, and the performance of
financial markets generally; the policies
and actions of regulatory authorities,
including, for example, new government
initiatives related to the financial crisis and
the effect of the European Union’s
‘Solvency II’ requirements on Prudential’s
capital maintenance requirements; the
impact of continuing designation as a
Global Systemically Important Insurer or
‘G-SII’; the impact of competition, economic
growth, inflation, and deflation; experience
in particular with regard to mortality and
morbidity trends, lapse rates and policy
renewal rates; the timing, impact and other
uncertainties of future acquisitions or
combinations within relevant industries;
the impact of changes in capital, solvency
standards, accounting standards or
relevant regulatory frameworks, and tax
and other legislation and regulations in the
jurisdictions in which Prudential and its
affiliates operate; and the impact of legal
actions and disputes. These and other
important factors may for example result in
changes to assumptions used for
determining results of operations or
re-estimations of reserves for future policy
benefits. Further discussion of these and
other important factors that could cause
Prudential’s actual future financial
condition or performance or other
indicated results to differ, possibly
materially, from those anticipated in
Prudential’s forward-looking statements
can be found under the ‘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.
Prudential plc Annual Report 2013 Additional information How to contact usHow to contact us continued 375
Prudential plc Annual Report 2013Additional information 376
Prudential plc Annual Report 2013
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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.