Long-term
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Prudential plc Annual Report 2014
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Contents
1
Group overview
03–13
04 Chairman’s statement
06 Group Chief Executive’s report
2 Strategic report
16 Our world
18
Our strategy and operating
principles
15-70
19 How our business works
20 Measuring our performance
22
Our businesses and their
performance
3 Governance
72 Board of Directors
76 Chairman’s introduction
77 Board governance
80 Group governance
71-91
39
51
Chief Financial Offi cer’s
report on our 2014 fi nancial
performance
Group Chief Risk Offi cer’s report
on the risks facing our business
and our capital strength
61 Corporate responsibility review
81 Board committee reports
89 Additional information
90 Statutory and regulatory disclosures
91
Index to principal Directors’
Report disclosures
93-120
4 Directors’ remuneration report
Annual statement from the
Chairman of the Remuneration
Committee
Our executive remuneration
at a glance
94
96
Summary of Directors’ remuneration policy
98
101 Annual report on remuneration
116 Supplementary information
5 Financial statements
121-273
6 European Embedded Value (EEV)
basis results
275-309
311-352
7 Additional information
313 Additional unaudited fi nancial information
338 Risk factors
344 Glossary
348 Shareholder information
351 How to contact us
Long-term
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Prudential plc Annual Report 2014
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Long-term
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Prudential plc Annual Report 2014
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www.prudential.co.uk
Prudential plc Annual Report 2014
01
Delivering long-term value
Prudential delivered a strong, broad-based performance
in 2014. Our core strategy of focusing on the three main
opportunities available to us in Asia, the US and the UK –
serving the protection and investment needs of the growing
middle class in Asia, providing income in retirement to
American baby boomers and meeting the fi nancial needs
of an ageing British population – is unchanged. It continues
to serve us well.
The execution of this strategy, driven by the operating
principles set out in 2009, is central to the Group’s continued
success and refl ects the dedication and quality of our people
and their focus on meeting the distinct needs of our
customers across the business. This has been one of the key
factors enabling us to outperform in the markets in which we
compete, delivering value for our customers and sustainable
returns for our shareholders.
Creating value
Customers
24m
life customers worldwide
Investors
173%
total shareholders’ return1
achieved since 2010
Employees
23,047
employees worldwide
Societies
£19.6m
total community
investment spend
Measuring our performance page 20
The Directors’ Report of Prudential plc for the year ended 31 December 2014 is set out on pages 1 to 14, 71 to 92
and 313 to 352 and includes the sections of the Annual Report referred to in these pages.
Key to report
In focus – fi nd out more about what we do and how we do it
Read more on this topic within the report
More information online
Note
1 Total shareholders’ 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.
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Prudential plc Annual Report 2014
Section 1
Group overview
Prudential plc Annual Report 2014
03
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Chairman’s statement
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0 6 Group Chief Executive’s report
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04
Prudential plc Annual Report 2014 Group overview
Chairman ’s statement
Value for our customers and
growing returns for our shareholders
Prudential was established
on the principles of integrity,
security and prudence.
Those principles are still
central to our culture, while
we also take the initiative to
capture new opportunities.
Paul Manduca
Chairman
I am pleased to introduce
Prudential’s 2014 Annual Report.
The Group has produced another
strong performance, delivering
value to our customers, benefi ts
to the communities in which we
operate and good returns for
our shareholders.
This performance has been driven by
a consistent focus on the long term and
on the needs of our customers. We build
sustainable businesses and we know that
the service we provide to our customers is
central to this goal. As our businesses grow
and we continue to develop our high-
performing teams in Asia, the US, the UK,
Europe, and now in Africa, we ensure that
this clear focus is at the core of everything
we do.
We also make sure that we adhere to
our founding values. We were established
in London in 1848 on the principles of
integrity, security and prudence. More
than 166 years later, those principles are
still central to our culture, while we also
take the initiative to capture new
opportunities.
Our commitment to creating sustainable
value for our customers and our principled
approach enable us also to deliver strong
returns for our shareholders. I am delighted
to report that all four of our major business
units have made signifi cant contributions
to our profi tability in 2014, with Asia
remaining our primary focus for growth.
Our success is based on a number of
key factors. First, we have a clear and
disciplined strategy, focused on the long
term. Following our success in achieving
our previous demanding set of targets, at
the end of 2013 our executive team set new
objectives to reach by 2017. These are just
as testing as their predecessors, and I am
pleased to say that we are making solid
progress towards them.
Our second key advantage is the
strength of our leadership. Tidjane
Thiam has been an exceptional servant
of the Group since 2008, fi rst as Chief
Financial Offi cer and then as Group Chief
Executive. As announced, he will be
leaving Prudential once his successor is
appointed. We will be sorry to see him
go but understand his desire to take on
a new challenge elsewhere and we wish
him every success in his new role at Credit
Suisse. We are fortunate to have strength
in depth in our management team and
the Board has been very focused on
succession planning. At the time of writing,
I can say that we expect to announce a new
Group Chief Executive very shortly.
Our third key strength is our robust
corporate governance. Good governance
is critical to success in fi nancial services.
It is one of the factors that has allowed
Prudential to fl ourish for more than a
century and a half, by ensuring our
purpose and values inform the behaviours
and culture of our organisation, and that
decisions are taken within proper, effective
and transparent reporting structures.
Central to good governance is an
experienced and skilled Board that is able
both to support the executive and provide
appropriate challenge, and we have
continued to meet our commitment to
implement changes that strengthen
our Board.
In line with that commitment, we have
made a number of changes. In April 2014
we announced that our Group Chief Risk
Offi cer, Pierre-Olivier Bouée, was joining
the Board. It is important that at a large,
complex fi nancial services business such as
ours, the Chief Risk Offi cer is represented,
and Pierre-Olivier brings extensive
expertise and experience to the Board.
At the same time, our former Chief Risk
Offi cer, John Foley, stepped down from
the Board, while continuing in his role as
Group Investment Director. I would like
to thank John for his contribution and
I am pleased that he is continuing to fulfi l
the vital role of Group oversight of
fi nancial investments as a member of
the Group Executive Committee.
In October we also announced that Lord
Turnbull, who has been a member of the
Board since May 2006, as well as Chairman
of the Remuneration Committee since June
2011, would be stepping down at our next
Annual General Meeting. I would like to
thank Lord Turnbull for his contribution
over nine years, which has been of
considerable value to the Group.
He will be succeeded as Chairman of the
Remuneration Committee by Anthony
Nightingale CMG, who will also join the
Nomination Committee.
I am determined to ensure that our
Board makes the greatest contribution that
it can to Prudential’s success, providing the
best possible governance, forming a clear
05
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channel for discussion with shareholders
and maintaining good relationships with
regulators. The changes we have made in
2014 ensure it is well placed to deal with
both the opportunities and the challenges
we face.
I am particularly proud of the thousands
of our employees who take part in these
activities. Last year our colleagues
contributed more than 62,000 hours
of their time to help improve the lives
of others.
The fourth key factor in our success is
Many of these volunteers take part in
the Chairman’s Challenge, our flagship
volunteering programme. Last year I took
the opportunity to visit our winning 2013
Chairman’s Challenge project in Hong
Kong, and it was highly rewarding to see
the great work our people are doing there
and the tangible benefits they are creating.
The 2014 Chairman’s Challenge
programme was our most successful
yet, with more than 6,000 employees
volunteering their time across more than
25 projects. These included a work-
readiness and financial literacy programme
in Michigan, a life skills programme for
children in Thailand, a homebuilding
project in India and a series of business
and enterprise lessons for primary
schoolchildren in Tower Hamlets in London.
Our volunteers on these many different
projects are achieving great things. I will
continue to work with our excellent
corporate responsibility teams to increase
further our impact in these areas.
Finally, I would like to thank all our
employees for their contribution to another
strong year for Prudential. The skill,
commitment and hard work of our people
in all our businesses enable us to continue
executing our successful strategy and
delivering for our customers, our
shareholders and the communities in
which we operate. I am confident that with
that strategy, our strong management and
the commitment of our people, we will
continue to provide excellent value for
our customers and growing returns for
our shareholders.
Paul Manduca
Chairman
Our strategy and operating principles page 18
that we benefit from a stable and high-
quality shareholder base. We respect our
shareholders’ views and we take the time
and effort to engage with them. Being
accessible and transparent towards our
shareholders is essential to our success,
and we are ensuring that we do everything
we can to understand their needs and meet
their requirements.
The Board has decided to rebase the
full-year dividend upwards by 10 per cent,
reflecting the 2014 financial performance
of the Group. In line with this, the directors
recommend a final dividend of 25.74 pence
per share (2013: 23.84 pence), which
brings the total dividend for the year to
36.93 pence (2013: 33.57 pence). This
rebase has been made possible by the
continued exceptionally strong
performance of the Group.
Although the Board has been able to
recommend such a rebase in 2014, 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.
Alongside the benefits provided by our
core activities, we also engage in corporate
responsibility programmes in the markets
in which we operate around the world. In
partnership with charitable organisations,
we provide long-term funding and deploy
the expertise of the many volunteers from
our workforce on projects that help to
improve the lives of individuals and
strengthen communities in many
different ways.
In 2014, we increased the scale of
our corporate responsibility activities,
deepening the impact we are having in this
area. The projects we support range from
encouraging street children in Indonesia
to develop life skills and helping with
disaster preparedness across South-east
Asia, to teaching new skills to financially
disadvantaged people in the US and
providing apprenticeship opportunities in
our businesses here in the UK. We are also
beginning equivalent programmes in our
new markets in Africa, offering much-
needed scholarships in high schools and
supporting students of actuarial science.
full-year dividend
36.93p
10%
increase on 2013
£29.2bn
EEV shareholders’ funds
equivalent to
1,136p
per share
Prudential plc Annual Report 2014
06
Prudential plc Annual Report 2014 Group overview
Group Chief Executive ’s report
Producing profi table growth
over the long term
The Group delivered double-
digit growth across our key
metrics of IFRS operating profi t,
new business profi t and cash.
Tidjane Thiam
Group Chief Executive
I am pleased to report that
Prudential delivered a strong,
broad-based performance in
2014. Our core strategy of focusing
on the three main opportunities
available to us in Asia, the US and
the UK – serving the protection and
investment needs of the growing
middle class in Asia, providing
income in retirement to American
baby boomers and meeting the
fi nancial needs of an ageing British
population – is unchanged. It
continues to serve us well.
appropriate way to assess the actual
performance of these businesses is to
look at what they have achieved on a local
currency basis, in other words in terms of
the actual fl ows they have collected, rather
than the translation of those fl ows into
sterling. Therefore, in this section, every
time we comment on the performance
of our businesses, we focus on their
performance measured in local currency
(presented here by reference to
percentage growth expressed at constant
exchange rates) unless otherwise stated.
The execution of this strategy, driven by
Group performance1
the operating principles set out in 2009, is
central to the Group’s continued success
and refl ects the dedication and quality of
our people and their focus on meeting the
distinct needs of our customers across the
business. This has been one of the key
factors enabling Prudential to outperform in
the markets in which it competes, delivering
value for our customers and sustainable
returns for our shareholders.
Currency volatility
The last two years have seen signifi cant
fl uctuations in the value of sterling against
the local currencies in the US and in some
of our key markets in Asia. This has been
driven by ongoing speculation about the
relative growth trajectories in the world’s
major economies, together with often
divergent views on the timing, extent
and effectiveness of government and
central bank intervention. While sterling
strengthened signifi cantly in the second
half of 2013, driven by expectations that
a stronger recovery of the UK economy
would lead to an earlier shift in UK
monetary policy, the latter part of 2014 has
seen a partial reversal of this movement as
the relative outlook improved in other areas
of the global economy, particularly in the
US. However, the negative impact of
sterling strength in late 2013 and early
2014 on the fi nancial performance of our
overseas businesses is recognised mainly
in 2014, as we use average actual exchange
rates to report our results in sterling.
In that context, it is important to note
that the actual fl ows that we collect from
our customers in Asia and the US are
received in local currency. We believe that
in periods of currency volatility, the most
The Group delivered double-digit growth
across our key metrics of IFRS operating
profi t, new business profi t and cash, with
all four of our business units delivering
good performance in challenging
operating conditions.
Our Group IFRS operating profi t
based on longer-term investment returns
increased by 14 per cent during the year to
£3,186 million.
— Asia life and asset management
operating profi t was up 17 per cent to
£1,140 million. Our ability to proactively
manage our diverse portfolio of
businesses at the regional level has
enabled us to partially offset the
short-term headwinds experienced in
a few of our key Asia markets. Strong
external net infl ows of £5.4 billion and
positive market movements have driven
operating profi t and total funds under
management to record levels at
Eastspring, our Asia-based asset
management business;
— US life IFRS operating profi t increased
21 per cent to £1,431 million. The strong
variable annuity infl ows we have been
able to capture at attractive margins
generate higher levels of fee income.
This, combined with favourable market
movements, increased the value of
separate account assets, a key driver
of our profi ts in the US;
Note
1 The comparative results referenced above and
elsewhere in this report have been prepared
using constant exchange rates basis except
where otherwise stated. Comparative results on
an actual exchange rate basis are also shown in
fi nancial tables in the Chief Financial Offi cer’s
report on our 2014 fi nancial performance.
Prudential plc Annual Report 2014
07
The Group’s strategy remains
unchanged and is focused on
capturing three long-term
opportunities:
— The signifi cant protection gap
and investment needs of the
Asian middle class;
— The transition of US baby
boomers into retirement; and
— The UK ‘savings gap’ and
ageing population in need
of returns and income.
Our disciplined execution of this
strategy has continued to drive
profi table growth and higher cash
generation, underlining our
commitment to delivering both
‘Growth and Cash’.
Our strategy and operating principles page 18
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Our strategy and operating principles
Balanced
metrics and
disclosures
Asia:
accelera t e
Disciplined
capital
allocation
Focus on
customers and
distribution
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Sustainable
value for our
stakeholders
Proactive risk
management
IFRS operating profi t
£ 3,186m
14%
increase1 on 2013
Measuring our performance page 20
— UK life IFRS operating profi t grew by
7 per cent to £752 million, benefi ting
from higher contributions from bulk
annuities, which outweighed the impact
of signifi cantly lower sales of individual
annuities following UK market reforms;
and
— M&G delivered operating profi t of
£488 million2, an increase of 11 per cent,
refl ecting continued strong third-party
net infl ows combined with favourable
market movements in the period, which
together have increased M&G’s
external funds under management by
£11.0 billion to a record £137.0 billion.
Net cash remittances from our businesses
increased by 11 per cent to £1,482 million,
driven by strong organic cash generation and
supported by robust local capital positions.
Cash remittances of £400 million from Asia
were consistent with 2013, the US was up
41 per cent to a record of £415 million, the
UK remitted cash of £325 million, as we have
been increasing our level of investment in the
business in response to the UK market
reforms, while M&G (including Prudential
Capital) delivered an increase of 17 per cent
to a new high of £342 million. Such levels of
cash generation are the bedrock of our
fi nancial strength. Underlying free surplus
generation from our life and asset
management businesses, a key indicator
of cash production in these businesses,
was 9 per cent higher at £2,579 million
after reinvestment in new business. We
deliberately run the Group to seek to
generate organically signifi cant amounts
of cash in each of our businesses. The
successful implementation of this approach
gives us added strategic and fi nancial
fl exibility, as illustrated by our ability to agree
a new deal with Standard Chartered Bank in
2014. The ability of the Group to generate
both growth and cash remains a distinctive
feature of Prudential in our industry.
New business profi t3 was up
10 per cent to £2,126 million, driven in
2014 by a combination of higher volumes
and pricing and product actions aimed at
enhancing profi tability. All three of our life
businesses made strong contributions,
with new business profi ts from Asia
growing by 13 per cent to £1,162 million,
the US delivering £694 million, up
4 per cent, and the UK reporting
£270 million, up 14 per cent.
APE sales4 increased by 12 per cent
to £4,650 million. In Asia, APE sales were
15 per cent higher at £2,237 million with
APE sales from our ‘sweet spot’ markets5
continuing to be a strong driver of growth.
In the US, APE sales were up 4 per cent
at £1,556 million as we continued to
proactively manage our sales of variable
annuities with guarantees. We continue to
diversify our product mix with sales of Elite
Access, our innovative variable annuity
without guarantees, increasing by
26 per cent and contributing to an increase
in the proportion of variable annuities sold
without living benefi t guarantees to
34 per cent of total variable annuity sales.
In the UK, APE sales grew by 18 per cent to
£857 million, refl ecting strong bulk annuity
and investment bond volumes which offset
the signifi cant contraction of the retail annuity
market that followed the Budget reform.
M&G delivered net infl ows of £7.1 billion
(2013: £9.5 billion) as it continued to benefi t
from high levels of retail sales from
Continental Europe, while Eastspring
08
Prudential plc Annual Report 2014 Group overview
Group Chief Executive ’s report continued
2017 objectives*
Asia objectives
1. Asia IFRS operating profi t
Asia life and asset management pre-tax IFRS operating profi t
to grow at a compound annual rate of at least 15 per cent over
the period 2012–2017 (2012: £924 million8)
£1,075m £1,140m
£924m
2. Asia underlying free surplus
Asia underlying free surplus generation7 of £0.9 billion
to £1.1 billion in 2017 (2012: £484 million)
2012
2013
2014
2015
2016
2017
objective
£573m £592m
£484m
2012
2013
2014
2015
2016
2017
objective
>£1,858m
£1.1bn
£0.9bn
Group objective
3. Group cumulative underlying free surplus
Cumulative Group underlying free surplus generation of at least
£10 billion over the four-year period from 2014 to end-2017
> £10bn
> £10bn
£2.6bn
2014–2017 objective
Key
2017 objective
* 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.
Investments, our Asia asset management
business, delivered record third-party net
infl ows of £5.4 billion (2013: £1.4 billion,
on a constant exchange rate basis).
Our balance sheet continues to be
defensively positioned and at the end of
the period our Insurance Groups Directive
(IGD) surplus6 was estimated at £4.7 billion,
equating to coverage of 2.4 times.
We are continuing to make solid
progress towards our 2017 objectives
announced in December 2013 as for the
Asia objectives, we have now passed
four half-year reporting periods out of
the 10 half-year reporting periods of
this programme.
Chief Financial Offi cer’s report on our 2014
fi nancial performance page 39
Our operating performance
by business unit
Asia
Asia delivered excellent results across all
metrics during 2014. IFRS operating profi t
of £1,140 million was up 17 per cent over
2013 (6 per cent on actual exchange rate
basis) and free surplus generation increased
15 per cent to £592 million (3 per cent on
actual exchange rate basis), refl ecting our
discipline and our focus on quality growth
and value creation. Net cash remittances
were £400 million, in line with 2013.
Our consistent delivery in Asia is
underpinned by our focus on regular
premium, protection-orientated solutions
that genuinely address the long-term
fi nancial needs of Asia’s growing middle
classes in the ‘sweet spot’ markets5 of
South-east Asia and Hong Kong. Our
strategy is to be strongly diversifi ed in
terms of geography, products and
distribution in a world economy that is
increasingly hard to predict. That
diversifi cation is at the heart of our ability
to continue to perform well across a broad
range of metrics as the breadth of our
portfolio provides considerable resilience
against the impacts of short-term market
disturbances in individual countries, such
as the elections and natural disasters
experienced during 2014.
Our multichannel distribution platform
continues to play a key role in our strategy:
— In the agency channel we continued to
add to the existing scale of our platform
during 2014 through recruitment. In
parallel we also improved individual
productivity, thanks to our investments
in agency management technology and
analytics; and
— Regarding our bank partnerships, we
announced in the fi rst quarter that we
extended and expanded our long-
established and market-leading
partnership with Standard Chartered
Bank for another 15 years to 2029,
effective since July 2014. Encouragingly,
second-half APE sales via Standard
Chartered Bank grew over 33 per cent
compared to the same period in 2013,
including a record month in December.
The distribution channel mix remained
in line with prior year, with agency
generating 61 per cent, bancassurance
32 per cent and other channels, mainly
direct and telemarketing, 7 per cent.
In our product portfolio, the proportion
of protection business has remained
consistent with prior years at 28 per cent of
APE sales. Within the savings products, we
have seen an increase in participating
business, driven mainly by strong demand
for our established with-profi ts products in
Hong Kong. We continue to innovate with
new benefi ts and features, with more than
25 per cent of APE sales in 2014 from
products that were launched in the past
two years.
While product innovations are
important we are increasingly fi nding that
customer service is a key differentiator in
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the marketplace, an evolution we welcome
given the emphasis we have always placed
on service and customer satisfaction. For
example, our pioneering PRUhospital
Friend concierge service in Indonesia is
now four years old and has been extended
to 49 hospitals covering 15 cities. It handles
over 50 per cent of all protection claims.
In Singapore, PRUhealthcare assist is the
fi rst-to-market dedicated hotline, staffed
by experts who help customers to decide
what treatments to pursue and which
hospitals to use. Across the region, our
success in looking after our customers and
anticipating their needs is demonstrated by
our ‘repeat sales’ to our existing customers:
more than 40 per cent of new business APE
sales in 2014 were generated by existing
customers and our customer retention rate
was over 90 per cent, a very important
indicator of quality for us. The incentives of
our staff in Asia are well aligned with this
philosophy of emphasising quality growth
and customer satisfaction.
In 2014 we produced £1,162 million of
new business profi t, 13 per cent higher
than 2013, refl ecting our continued
progress in Asia.
In Hong Kong, APE sales grew
39 per cent, driven mainly by increases in
agency headcount as well as increases in
productivity. Hong Kong also directly
benefi ted from signifi cantly improved
second-half sales following the renewal of
the Standard Chartered Bank partnership.
We have been working for a few years on
increasing the proportion of protection
sales in Hong Kong and this has paid off in
2014, contributing to a strong sales
increase of 50 per cent. The Hong Kong
branch of the Prudential Assurance
Company was successfully domesticated
with effect from 1 January 2014.
In Singapore, we continue to lead the
market with our popular regular premium
and PRUshield products. Agency APE
sales grew by 16 per cent as a result of
increases in manpower and productivity.
Bancassurance sales volumes were
impacted by the cessation of the Maybank
partnership during 2014, although volumes
increased from our successful partnerships
with Standard Chartered Bank and United
Overseas Bank (‘UOB’).
Indonesia had a challenging year, with
exceptional fl ooding disrupting sales in the
fi rst quarter, and the transition to a new
president impacting sentiment during the
year. Although APE sales were down
4 per cent on prior year, the resilience of
our business is demonstrated by our
signifi cant market outperformance, which
has seen our market share increased to
24 per cent9 as other providers were more
severely affected by these factors than we
were. We remain very optimistic about the
outlook for the Indonesian economy and
increase1 on 2013
EEV new business profi t
£2,126m
10 %
£2,579m
9 %
increase1 on 2013
underlying free surplus generation
we experienced an encouraging rebound
in activity during December 2014, with APE
sales 36 per cent higher than November,
passing the 1 trillion rupiah level for the
fi rst time.
In Malaysia, our decision to refocus our
agency business on health and protection
and to grow distribution by Bumiputra
agents (‘Bumi’), delivered an encouraging
17 per cent increase in agency activity. The
overall increase in APE sales of 6 per cent
during 2014 refl ects structurally lower
average case sizes in the Bumi channel,
where we are determined to grow in the
next phase of development of our strategy
in the country. We deliberately
de-emphasised sales of some top-up
products that negatively impacted top-line
growth – an indicator which for us always
comes second to growth in new business
profi t. Finally, fuel reforms and the
prospect of the introduction of a new
goods and services tax generated market
uncertainty, which weighed on the
economy and on our sector.
Thailand includes the fi rst full year of
operation of our exclusive bancassurance
agreement with Thanachart Bank, which
together with our other bancassurance
partners, UOB and Standard Chartered
Bank, has driven a 36 per cent increase
in APE sales. The transformation of our
business in the Philippines is continuing,
with a signifi cant increase in agency
activity. Refl ecting this, regular premium
sales were up 30 per cent on prior year
and protection business increased by
36 per cent. Vietnam also had a good year,
growing APE sales by 20 per cent on higher
levels of agency activity.
Prudential plc Annual Report 2014
09
Our joint venture with CITIC in China
continues to perform well, with APE sales
increasing by 35 per cent, with progress in
both the agency and bank channels. In
India our joint venture with ICICI Bank
remains the leader in the private sector
with a market share of 10 per cent, and
post-elections in May we have seen a
signifi cant increase in new business.
In Taiwan and Korea we remain
selective in our participation and as a result
we are content to experience fl uctuations
in new business volumes. Both businesses
have generated higher IFRS operating
profi t in 2014.
In addition to running these established
businesses, we continue to keep an eye on
the future and are setting foundations for
growth in new markets. Following the
successful launch of our life business in
Cambodia in 2013, we are now the market
leader. We also opened a representative
offi ce in Myanmar during 2014 and
recently received a licence for a
representative offi ce in Laos.
In 2014, Asia EEV life operating profi t3
increased by 12 per cent to £1,900 million,
largely as a result of the growth in new
business profi t and a 10 per cent increase
in the contribution from the larger
in-force book.
Eastspring Investments, our Asia asset
management business, generated record
third-party net infl ows of £5.4 billion, 3.8
times higher than in 2013, with success in
securing new equity fl ows, particularly
from institutional clients, mitigating lower
net infl ows in fi xed income. Including
internal funds, total funds under
management as at 31 December 2014 were
a record £77.3 billion, up 28 per cent on the
prior year as a result of net infl ows and
positive market movements. IFRS
operating profi t increased 32 per cent to
£90 million, driven by the positive impact
on revenue from higher levels of average
assets under management.
Our businesses and their performance – Asia
page 22
US
Our US business delivered a strong
performance in 2014, with total IFRS
operating profi t of £1,443 million, up
17 per cent (11 per cent on an actual
exchange rate basis). Jackson’s life IFRS
operating profi t grew 21 per cent
(15 per cent on an actual exchange rate
basis) to £1,431 million, driven primarily by
increased fee income from higher levels of
separate account assets. The growth in
operating profi t underpinned signifi cant
levels of capital generation in the period,
enabling Jackson to remit a record
£415 million of cash to the Group
10
Prudential plc Annual Report 2014 Group overview
Group Chief Executive ’s report continued
(2013: £294 million), while maintaining a
healthy balance sheet. Jackson’s risk-based
capital ratio at the end of 2014 was
456 per cent, compared to 450 per cent at
the end of 2013.
During 2014, the US continued to see
signs of an improving economy, with
declining unemployment rates, evidence
of recovery in the housing market and
stronger GDP growth. The S&P 500 Index
rose 11 per cent and the 10-year Treasury
rate remained above the 2012 low levels,
but declined signifi cantly during the course
of the year. Overall, the US competitive
landscape has been more stable than in
recent periods, as most annuity writers
appear to have committed to a particular
course of action for the near term. Variable
annuity providers continue to modify their
product offerings through reductions in
fund availability and increased fees. In
addition, an increasing number of
investment-only variable annuity products
have been launched, following the success
of Elite Access, our variable annuity
without living benefi ts.
Jackson achieved total retail APE sales
of £1,491 million in 2014, an increase of
6 per cent compared to 2013. These sales
were achieved while continuing to write
new business at aggregate internal rates
of return in excess of 20 per cent and with
a payback period of one year. Including
institutional sales, total APE sales increased
4 per cent to £1,556 million, driving new
business profi t3 growth of 4 per cent to
£694 million.
Total variable annuity APE sales
increased 10 per cent to £1,401 million in
2014. Within this, APE sales of Elite Access
rose 26 per cent to £311 million. The
economics of our variable annuity business
continue to be very attractive. With the
success of Elite Access, we continue to
improve the diversifi cation of our product
mix, contributing to an increase in the share
of non-living benefi t variable annuity sales
to a new high of 34 per cent of total variable
annuity APE sales (2013: 31 per cent).
Jackson remains focused on proactively
managing sales volumes of variable
annuities with living benefi ts to match our
annual risk appetite. Jackson’s statutory
separate account assets increased by
17 per cent, from £69.8 billion in 2013 to
£81.7 billion in 2014 (up 24 per cent on an
actual exchange rate basis), refl ecting both
positive net fl ows and the growth in the
underlying market value of the separate
account assets.
Fixed annuity APE sales of £53 million
remained relatively fl at compared to 2013,
while fi xed index annuity APE sales of
£37 million decreased 57 per cent,
primarily as a result of product changes
implemented in late 2013 to ensure
appropriate returns on shareholder capital.
EEV life operating profi t3 was
£1,528 million, up 5 per cent from 2013,
refl ecting growth in the scale of our
in-force book, favourable experience
variances, and higher new business profi t.
We continue to write business at overall
new business margins close to post-crisis
highs, demonstrating the positive effect of
proactive product and pricing actions that
have helped to mitigate the adverse impact
of the low interest rate environment.
IFRS operating profi t from non-life
operations in the US decreased to
£12 million (2013: £56 million), due to a
Curian loss of £18 million that included a
£38 million charge related primarily to the
refund of certain fees by Curian.
Jackson’s strategy is unchanged,
serving the 77 million baby boomers as
they enter retirement, while delivering
operating earnings and cash. We continue
to price new business on a conservative
basis, targeting value over volume. Our
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.
Thanks to this approach, Jackson has been
able to deliver signifi cant profi table growth
across the cycle, while maintaining a strong
balance sheet. Since 1 January 2008,
Jackson has remitted nearly US$2.6 billion
of cash to the Group. Jackson’s approach
has successfully translated into value for
customers and into profi ts and cash for
shareholders, the metrics through which
we ultimately measure the success of
our strategy.
Our businesses and their performance –
United States page 27
net cash remittances from business units
£ 1,482m
11%
increase on 2013
UK, Europe and Africa
Our UK business continues to focus on its
core strengths of investment (with the
with-profi ts offering as a core proposition)
and retirement solutions. In 2014,
Prudential UK delivered life IFRS operating
profi t of £752 million, up 7 per cent
year-on-year, primarily as a result of higher
sales of bulk annuities, partially offset by
the impact of the contraction of the
individual annuities market following
market reforms. Cash remitted to the
Group was £325 million, compared to
£355 million in 2013, as we increased
our investment in new business and
upgraded our UK pre- and post-retirement
customer proposition.
The UK market continues to be heavily
infl uenced by a high level of regulatory and
legislative change. The signifi cant reforms
of the pensions industry announced by the
UK government, including removal of the
requirement to purchase a pension annuity
from April 2015, have resulted in an
increasing proportion of customers
deferring the decision to convert their
pension savings into retirement income.
The increased fl exibility afforded by these
reforms should ultimately help create an
environment where more people are
encouraged to save. The changes have also
opened up opportunities for us to meet
customer needs for alternative retirement
solutions, including income drawdown.
In December 2014 we launched a fl exible
drawdown product ahead of the
introduction of the April 2015 pension
reforms. This product will allow customers
to access income drawdown without limits
from April 2015, and is suited to customers
who want more choice over how they use
their retirement savings for income.
Retail sales growth across our range of
investment products refl ected the strength
of our distribution capability, particularly
our intermediary channel, as we
responded to the challenges and
opportunities created by the pension
reforms. Sales in this segment, which
includes onshore and offshore bonds,
individual pensions and income
drawdown, together delivered APE sales
growth of 41 per cent. We will continue to
develop our with-profi ts proposition,
enhancing the range of investment choices
available to policyholders, and have
recently made PruFund available in the
Individual Savings Account market. The
growth in our investment products was
offset by a 49 per cent reduction in APE
sales of individual annuities, refl ecting the
market contraction since the UK budget
announcement. Despite this market
disruption, overall retail APE sales of
£686 million were 2 per cent lower than
2013 and increased by 3 per cent in the
second half of the year compared with the
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same period in 2013. Retail new business
profi t was 23 per cent lower at £165 million,
largely due to the reduced sales of
higher-margin individual annuities.
Onshore bonds APE sales of
£232 million increased by 32 per cent,
refl ecting the strength of our investment
proposition. APE sales from with-profi ts
bonds of £214 million were 34 per cent
higher, due to continuing demand for our
non-guaranteed bond. We expect
signifi cant ongoing demand for our
with-profi ts bond, with customers
attracted by the benefi t of a smoothed
return to help manage market volatility and
a strong track record of investment growth.
APE sales from other retail products,
including individual pensions, income
drawdown and offshore bonds, increased
by 44 per cent to £201 million. Offshore
bond APE sales were 44 per cent higher,
refl ecting the growing popularity of our
with-profi ts fund. Income drawdown APE
sales grew by 133 per cent to £35 million and
individual pensions APE sales increased by
44 per cent to £72 million, both driven by
the strength of our with-profi ts PruFund
offering, and by customers selecting more
fl exible retirement income solutions in
anticipation of the pension reforms.
In total, PruFund assets under
management increased 27 per cent to
£11.6 billion in 2014.
Corporate pensions APE sales of
£147 million were 15 per cent lower, mainly
due to changes to public sector pension
schemes. We remain the largest provider
of Additional Voluntary Contribution plans
within the public sector, where we provide
schemes for 72 of the 99 public sector
authorities in the UK (2013: 69 of the 99).
Prudential’s continuing focus on the
delivery of excellent customer service was
recognised at the 2014 Financial Adviser
Service Awards where we received an
outstanding achievement award for
retaining our two ‘Five Star’ ratings in the
Life & Pensions and Investment categories
for the fourth year running.
In the wholesale market we wrote
seven new bulk annuity deals in 2014
(2013: three), generating APE sales of
£171 million (2013: £28 million) and new
business profi t3 of £105 million (2013:
£24 million). Our approach to bulk
transactions in the UK will continue to be
one of selective participation, where we
can bring both signifi cant value to our
customers and meet our shareholder
return requirements. Through our
longstanding presence in this segment
of the life and pensions market, we have
developed considerable longevity
experience, operational scale and a good
investment track record, which together
represent expertise and capabilities that
are increasingly in demand.
The strength and focus
of our teams and of our
businesses enabled us
to deliver good fi nancial
and operational progress.
Tidjane Thiam
Group Chief Executive
In Poland, our new life company,
Prudential Polska, conducted its second
year of business in 2014, growing ahead
of plan. Headquartered in Warsaw, the
business now has 15 branches across the
country and 712 fi nancial planning
consultants. Its success is evidence of our
ability to build franchises in new territories,
leveraging effectively in this case some of
our Asian staff and skills.
EEV life operating profi t3 of £746 million
was 10 per cent lower than 2013, refl ecting
a non-recurring contribution of £98 million
in 2013 from the reduction in the rate of UK
corporation tax.
On 10 November 2014, Prudential
Assurance Company Limited announced
the sale of its 25 per cent equity stake in the
PruHealth and PruProtect businesses to
Discovery Group Europe Limited for
£155 million in cash, generating an IFRS
profi t on disposal of £86 million. This
transaction enabled Prudential UK to
realise its investment at attractive terms
and creates strategic fl exibility for future
participation in the UK protection market.
During 2014, we completed the
acquisition of Express Life in Ghana and
Shield Assurance Company in Kenya,
marking the Group’s entry into the nascent
African life insurance industry. We are
positive about the long-term opportunities
in Africa, where we see many of the
favourable structural characteristics of our
preferred Asia markets, although most
sub-Saharan life insurance markets are in
the very early stages of development and
therefore are not likely to be material in the
short term.
Our businesses and their performance –
United Kingdom page 31
Prudential plc Annual Report 2014
11
M&G
M&G is an investment-led business that
has managed money on behalf of individual
and institutional investors for more than
80 years. Its focus on producing superior
long-term investment returns, coupled
with well-established distribution in the
UK and across Europe, has underpinned
another strong set of fi nancial results, with
funds under management and profi ts both
reaching new highs.
IFRS operating profi t increased
13 per cent to £446 million in 2014, marking
the fi fth consecutive year of record profi ts.
Over this period operating profi t has grown
by a compound annual growth rate of
16 per cent. While higher equity markets
and buoyant bond markets have both
contributed to improving profi tability,
strong net infl ows of client assets since
2009, particularly in the retail market, have
been a key driver of the increase in profi t
achieved by M&G. Refl ecting this
continued strong operating performance,
M&G remitted £285 million of cash to
Group in 2014, 21 per cent more than
in 2013.
During 2014, the combination of
continued net fund infl ows and generally
positive market movements increased
M&G’s total funds under management by
8 per cent to £264 billion at the end of the
year. Within this, external funds under
management grew by 9 per cent to
£137 billion and now account for
52 per cent of M&G’s total funds under
management, compared with 40 per cent
fi ve years ago.
Within our retail business, we continue
to make strong progress, with expansion of
distribution in Continental Europe in recent
years transforming the scale of funds under
management and helping to diversify the
business. Today, international clients
account for 43 per cent of retail funds
under management, compared with just
16 per cent fi ve years ago, and M&G’s
retail funds are now registered in
22 jurisdictions. Net infl ows across
Continental Europe were at a record
level of £8.1 billion in 2014, compared to
£7.6 billion in 2013. This more than offset
a net outfl ow of £1.7 billion in the UK
(2013: net outfl ow of £0.7 billion). In the
UK, M&G achieved record net infl ows into
the M&G Property Portfolio Fund, which
directly invests across different property
sectors such as retail, offi ces and industrial
on behalf of its UK retail client base. The
Property Portfolio Fund fi nished 2014 with
external funds under management of
£3.0 billion, placing it as the largest retail
property fund in the UK market.
M&G also continues to pursue business
diversifi cation by fund, with seven of its
retail funds, representing all the major asset
classes, achieving net infl ows of at least
12
Group Chief Executive’s report continued
estimated IGD capital surplus
covering capital requirements
£4.7bn
2.4
times
£250 million during the year. One of
these, the M&G Optimal Income Fund,
became the top-selling10 European
cross-border fund in 2014, based on
annual net flows as of 31 December 2014.
At the end of 2014 retail funds under
management were £74.3 billion, up
11 per cent from 2013 levels, driven by
positive net inflows, which totalled
£6.7 billion (2013: net inflows of
£7.3 billion), including the contribution
from our associate entity in South Africa.
A track record of innovation in the
institutional market has enabled M&G to
be at the forefront of a number of specialist
fixed income markets, including leveraged
finance and infrastructure investment. The
consistency of institutional investment
performance and its reputation for
innovation earned M&G the prestigious
2014 Financial News Institutional Asset
Management Awards for both fixed
income and real estate for the second
consecutive year.
Net institutional inflows were
£401 million, compared with £2.1 billion
in 2013. As expected, a number of
segregated clients withdrew money from
public debt funds as they reallocated
scheme assets. There were also further
planned redemptions from a large
low-margin mandate. In general, outgoing
assets have been replaced by flows into
higher-margin products, helping to
improve the profitability of the institutional
business. M&G has in place a multi-billion-
pound pipeline of institutional commitments
at the end of 2014 across a diverse range of
investment strategies that has yet to
be invested.
External institutional funds under
management increased 7 per cent in 2014
to £62.7 billion.
The recent increase in headcount and
investment in operational infrastructure
required to preserve service quality as the
scale of the business grows, has been more
than matched by revenue growth in 2014.
As a result the cost-income ratio11 of
58 per cent in 2014 has improved slightly
over the prior year (2013: 59 per cent).
M&G remains focused on producing
superior long-term investment returns for
clients, while continuing to diversify its
business by geography and asset class and
providing capital-efficient profits and cash
generation for the Group.
Our businesses and their performance –
Asset management page 35
Capital and risk management
We continue to take a disciplined
approach to capital management and have
implemented a number of measures over
the last few years to enable us to make our
capital work both more efficiently and
more effectively for the Group. Using the
regulatory measures of the IGD, our Group
capital surplus position6 at 31 December
2014 was estimated at £4.7 billion (2013:
£5.1 billion), after funding the fees payable
for the new 15-year exclusive distribution
agreement with Standard Chartered Bank.
The IGD surplus is stated before allowing
for the final dividend and is equivalent to a
cover of 2.4 times.
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 (GSII).
In July 2014 the International Association
of Insurance Supervisors released a
consultation paper on the Basic Capital
Requirement, one of the two types of
capital requirement proposed under the
GSII framework. Prudential is monitoring
the development and potential impact of
the framework of policy measures and
engaging closely with the Prudential
Regulation Authority on the implication
of this designation.
Solvency II is scheduled to come
into effect on 1 January 2016 and our
preparations are well advanced. While the
Omnibus II Directive is now in place, there
are still many areas which require further
interpretation. We continue to work with
the Prudential Regulation Authority on
shaping the outcome to ensure that the
practical details of Solvency II, including
the final implementing measures, are both
workable and effective.
On an economic capital basis12 our
surplus at 31 December 2014 of £9.7 billion
(2013: £11.3 billion) is equivalent to an
economic capital ratio of 218 per cent
(2013: 257 per cent). These results are
based on outputs from our Solvency II
internal model, which has not yet been
approved by the Prudential Regulation
Authority. The results assume US
equivalence, place no restrictions on the
economic value of overseas surplus, and
incorporate a number of other working
assumptions. Certain aspects of the
methodology and assumptions
underpinning these results will differ from
those which are applied in obtaining final
Solvency II Pillar I internal model approval.
The eventual Solvency II Pillar I ratio,
therefore, remains uncertain and is
expected to be lower than our economic
capital ratio.
Group Chief Risk Officer’s report on the risks
facing our business and our capital strength
page 51
Dividend
The Board has decided to rebase the
full-year dividend upwards by 10 per cent,
reflecting the 2014 financial performance
of the Group. In line with this, the directors
recommend a final dividend of 25.74 pence
per share (2013: 23.84 pence), which
brings the total dividend for the year to
36.93 pence (2013: 33.57 pence). This
rebase has been made possible by the
continued exceptionally strong
performance of the Group.
Although the Board has been able to
recommend such a rebase in 2014, 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.
Full-year dividend
36.93 +10%
33.57
29.19
23.85
25.19
2010
2011
2012
2013
2014
Prudential plc Annual Report 2014 Group overview
13
generate profitable growth while delivering
value for our customers.
In the US and the UK, we continue to
utilise our established market position,
distribution strength and distinctive
products to ensure the delivery of earnings
and cash, with strict allocation of capital to
segments of the market that offer higher,
capital-efficient margins. The UK life
insurance market has been subject to
significant reform, the ramifications of
which are still playing out, but which we
believe will ultimately lead to greater
customer demand for savings and
retirement solutions and create new
opportunities for Prudential UK and M&G
to leverage their existing expertise.
We remain confident in our ability to
produce profitable growth over the long
term and to continue to create value for
our customers and shareholders.
It has been a privilege and a pleasure
to lead Prudential, one of the iconic
companies in UK financial services.
We have successfully navigated some
challenging times, including the global
financial crisis, and have emerged with four
profitable and strongly cash-generative
businesses. I owe an enormous debt of
gratitude to the staff and agents of
Prudential around the world who have
made these achievements possible and
I want to thank them personally for their
hard work and dedication. I leave the
Group in good shape and look forward to
seeing shareholders at my final Annual
General Meeting as Group Chief Executive
in May.
Tidjane Thiam
Group Chief Executive
Outlook
2014 was a successful year for the Group,
where the strength and focus of our teams
and of our businesses enabled us to deliver
good financial and operational progress
and maintain a robust capital position,
despite a number of challenges both
globally and locally.
It is clear that we are operating
in a period of considerable change.
2015 has already seen a continuation
of macroeconomic volatility, political
upheaval and unexpected shifts in central
bank positioning, with the uncertainty of
election outcomes in many countries in
Europe, including in the UK, still to come
before the end of the year. As a result,
investment markets generally remain
cautious on the global outlook, reflected in
further declines in long-term interest rates
in most of the major economies in early
2015. The persistently low level of interest
rates is a challenge for insurance
companies. However, in recent years we
have positioned the Group through
proactive actions on product mix, pricing
and our balance sheet to mitigate the
negative effects of the low interest rate
environment and continue to grow our
earnings. We have had the same strategy
since 2009 and it has served us well. We
continue to execute with discipline and
purpose and we believe our strategy and
operating principles enable us to deliver
relative outperformance across the cycle,
as evidenced during the financial crisis.
Asia, with its strong economic growth,
young and growing population with
savings and protection needs, and low
levels of insurance penetration, continues
to represent the most attractive
opportunity in our industry today and
therefore remains the primary focus of
our profitable growth ambitions. Our
established, growing multi-distribution
platform puts us in a strong position to
continue to capture profitably the
opportunities available to us in Asia, while
the breadth of our franchise, by geography,
product and channel, provides us with the
resilience that has allowed us to achieve
relative outperformance through the cycle,
even when individual countries presented
short-term challenges. We will continue
to invest in enhancing our agency and
bancassurance distribution capabilities,
to ensure our customers have effective
advice-led access to our products. This
was most recently evidenced by the
renewal in 2014 of our pan-regional
relationship with Standard Chartered Bank
for another 15 years. The strong underlying
fundamentals of economic growth and
increasing affluence in Asia, and the quality
of our products, people and distribution,
remain powerful drivers of our ability to
Notes
1 The comparative results referenced above and
elsewhere in this report have been prepared
using constant exchange rates basis except
where otherwise stated. Comparative results on
an actual exchange rate basis are also shown in
financial tables in the Chief Financial Officer’s
report on our 2014 financial performance.
Including Prudential Capital.
2
3 The 2014 EEV results of the Group are presented
on a post-tax basis and, accordingly, 2013 results
are shown on a comparable basis.
4 Annual Premium Equivalent (APE) sales
5
comprise regular premium sales plus one-tenth
of single premium insurance sales.
‘Sweet spot’ markets are Indonesia, Singapore,
Hong Kong, Malaysia, Philippines, Vietnam and
Thailand.
6 Before allowing for final dividend.
7 Underlying free surplus generation comprises
underlying free surplus released 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 2012
one-off gain of £51 million from the sale of the
Group’s holding in China Life Insurance
Company of Taiwan.
8 Asia 2012 IFRS operating profit of £924 million is
based on the retrospective application of new
and amended accounting standards as at
31 December 2013, and excludes the 2012 one-off
gain of £51 million from the sale of the Group’s
holding in China Life Insurance Company of
Taiwan.
9 Based on AAJI statistics to 30 September 2014.
10 Source: Lipper FMI, FundFile as of 31 December
2014.
11 Excluding performance fees, carried interest and
share of profits from associate entity, PPM South
Africa.
12 The methodology and assumptions used in
calculating the economic capital results are set
out in note II (c) of Additional unaudited financial
information. The economic capital ratio is based
on outputs from 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 remain on track to
submit our Solvency II internal model to the
Prudential Regulation Authority for approval in
2015 but given the degree of uncertainty
remaining these economic capital disclosures
should not be interpreted as outputs from an
approved internal model.
Prudential plc Annual Report 2014Group overviewGroup Chief Executive’s report 14
Prudential plc Annual Report 2014
Section 2
Strategic report
Prudential plc Annual Report 2014
15
16
18
19
20
22
39
51
61
Our world
Our strategy and operating principles
How our business works
Measuring our performance
Our businesses and their performance
22
27
31
35
Chief Financial Offi cer’s report on our
2014 fi nancial performance
Group Chief Risk Offi cer’s report on the risks
facing our business and our capital strength
Corporate responsibility review
Asia
United States
United Kingdom
Asset management
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Prudential plc Annual Report 2014 Strategic report
Our world
Prudential plc is an international fi nancial services group serving around 24 million
insurance customers and with £496 billion of assets under management. We are listed
on stock exchanges in London, Hong Kong, Singapore and New York.
% of GDP growth* 2014–2019
Prudential life business
footprint (63%)
Rest of world (37%)
US$13.9 trillion – global growth
* IMF World Economic Outlook – October 2014
United States
United Kingdom
The US ‘baby boomer’ generation is the wealthiest
demographic group in the global economy. Over the
next 20 years they will be retiring at a rate of
10,000 per day, creating signifi cant demand for
retirement services.
Jackson
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 advisers
with the products, tools and support to design effective
retirement solutions for their clients.
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.
Prudential UK & Europe
Prudential is a long-established leading provider of life and
pensions, with a relentless focus on the needs of the age
cohorts where wealth is most heavily concentrated. Our core
strengths in with-profi ts and retirement are underpinned by
our expertise in areas such as longevity, risk management and
multi-asset investment, together with our fi nancial strength
and highly respected brand.
Our businesses and their performance —
United States page 27
Our businesses and their performance —
United Kingdom page 31
Prudential plc Annual Report 2014
17
life customers worldwide
24m
£496 bn
assets under management
stock exchange listings
4
166 years
of providing fi nancial security
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Asset management
Asia
Europe is home to the second-largest retail asset
management industry in the world, with over
£6.2 trillion of assets. Asset managers with trusted
brands and superior investment performance
will see increasing demand for their products.
The Asian middle class population is forecast to double
between 2009 and 2020 and will by then represent
over half of the global middle class. This group is getting
wealthier and will have signifi cant and growing needs
for protection against illness and accident.
M&G
M&G has been investing money for individual and
institutional clients for over 80 years. M&G 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, developing a deep understanding
of the companies and organisations in whose equities,
bonds or property M&G invests.
Prudential Corporation Asia
Prudential is a leading international life insurer in Asia with
operations in 14 markets and serving the emerging middle
class families of the region’s outperforming economies.
We have built a high-performing business with effective
multichannel distribution, a product portfolio centred on
regular savings and protection, award-winning customer
services and a well-respected brand.
Our businesses and their performance —
Asset management page 35
Our businesses and their performance —
Asia page 22
18
Prudential plc Annual Report 2014 Strategic report
Our strategy and operating principles
Our strategy is designed to create sustainable economic value for our customers
and our shareholders. It is focused on three long-term opportunities:
— The signifi cant protection gap and investment needs of the Asian middle class;
— The transition of US baby boomers into retirement; and
— The UK ‘savings gap’ and ageing population in need of returns and income.
Balanced
metrics and
disclosures
Asia:
accelera t e
Disciplined
capital
allocation
Focus on
customers and
distribution
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Sustainable
value for our
stakeholders
Proactive risk
management
Our strategy is underpinned by a set of key operating principles
Focus on customers
and distribution
We believe that in order to do well
for our shareholders we must fi rst
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,
death or critical life events.
Satisfi ed 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
capabilities 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.
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 fi nancial disclosures
to enable our stakeholders to fairly
assess our long-term performance.
We have three objectives:
— To demonstrate how we
generate profi ts under the
different accounting regimes; for
example, by analysing our IFRS
profi t by source as set out in the
Chief Financial Offi cer’s report;
— To show how we think about
capital allocation via measures
that highlight the returns we
generate on capital invested in
new business, including
internal rates of return, payback
periods and new business
profi tability; and
— To highlight the cash
generation of our business,
which over time is the ultimate
measure of performance.
Disciplined capital
allocation
We rigorously allocate capital to
the highest-return products and
geographical locations with the
shortest payback periods, in line
with our risk appetite. This has had
a positive and signifi cant impact.
Over the last fi ve years, our new
business profi ts have increased by
48 per cent (on an actual exchange
rate basis) even though we
invested 6 per cent less capital.
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
£3.2 billion in 2014 compared to
£2.3 billion fi ve years ago (on an
actual exchange rate basis). This
transformation enabled our
business operations to remit
£1,482 million to the Group in
2014, nearly double the level of
remittance fi ve 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 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
£2.2 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.
Prudential plc Annual Report 2014
19
How our business works
We provide protection and savings opportunities to our customers, social and
economic benefi ts to the communities in which we operate, jobs and opportunities
to our employees, and long-term value for our investors. By off ering 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 off er security
for individuals and benefi t societies
Markets
Operate in markets with suitable demographics
and opportunities
Products
Design products that meet our customers’
savings, income and protection needs
Brands and distribution
Develop trusted brands and effective distribution
channels that enable us to better understand and
service customers’ fi nancial needs
Customers
Invest customers’ savings in a way that refl ects their
personal needs and risk tolerance. Provide fi nancial
protection to customers for adverse events
Shareholders
Generate value for shareholders through being
rewarded for managing customers’ savings and
through insurance profi ts from the protection
given to policyholders
Delivering for our stakeholders
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Asset management
Prudential helps customers to grow and
protect their savings and investments
Markets
Operate in suitable markets and identify
investment opportunities with attractive
risk-return profi le
Products
Offer valued and innovative products
underpinned by good investment performance
Brands and distribution
Trusted brands, market span and strong
distribution links help us to attract new monies
and retain existing assets
Customers
Generate valuable returns for our customers
through good investment performance
Shareholders
Generate value for shareholders through fee
income from managing growing funds under
management
Leverage asset
management
capabilities to generate
value for our customers
and shareholders
We create fi nancial benefi ts for our investors and deliver economic and social benefi ts for our customers, employees and the societies in which we operate
Customers
Providing fi nancial security and
wealth creation
Investors
Growing dividends and share
price performance enhances
shareholder value
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
24m
life customers
worldwide
173%
total shareholders’ return2
achieved since 2010
23,047
employees
worldwide
£19.6m
total community
investment spend
Notes
1 On a Statutory (Pillar 1) basis.
2
Total shareholders’ 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.
20
Prudential plc Annual Report 2014 Strategic report
Measuring our performance
To create sustainable economic value for our shareholders we focus on delivering
growth and cash while maintaining appropriate capital.
Our strategy and operating principles
Balanced
metrics and
disclosures
Asia:
accelera t e
Disciplined
capital
allocation
Focus on
customers and
distribution
A
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ent:
Proactive risk
management
Profi t, cash and capital
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Prudential takes a balanced
approach to performance
management across IFRS, EEV and
cash. We aim to demonstrate how
we generate profi ts under diff erent
accounting bases, refl ecting the
returns we generate on capital
invested, and highlight the cash
generation of our business.
Sustainable
value for our
stakeholders
Our strategy and operating principles page 18
What we measure and why
Performance1
Commentary
IFRS operating profi t2 (£m)
IFRS operating profi t is our primary measure of
profi tability. This measure of profi tability provides
an underlying operating result based on longer-
term investment returns and excludes non-
operating items.
CAGR
+15%
2,520
3,186
2,954
1,823
2,017
EEV new business profi t3 (£m)
Life insurance products are, by their nature,
long term and generate profi t over a signifi cant
number of years. Embedded value reporting
provides investors with a measure of the future
profi ts streams of the Group. EEV new business
profi t refl ects the value of future profi t streams
which are not fully captured in the year of sale
under IFRS reporting.
EEV operating profi t3 (£m)
EEV operating profi t is provided as an additional
measure of profi tability. This measure includes
EEV new business profi t, the change in the value
of the Group’s long-term in-force business, and
profi t from our asset management and other
businesses. As with IFRS, EEV operating profi t
refl ects the underlying results based on longer-
term investment returns.
2010
2011
2012
2013
2014
CAGR
+10%
1,791
2,082
2,126
1,433
1,536
2010
2011
2012
2013
2014
CAGR
+9%
4,204
4,096
2,868
2,937
3,174
2010
2011
2012
2013
2014
— Group IFRS operating profi t in
2014 increased by 14 per cent
on a constant exchange rate
basis (8 per cent on an actual
exchange rate basis), compared
to 2013, refl ecting strong
growth in Asia and the US. IFRS
operating profi t in both business
units was up 17 per cent, on a
constant exchange rate basis.
— EEV new business profi t in 2014
increased by 10 per cent on a
constant exchange rate basis
(2 per cent on an actual exchange
rate basis), compared to 2013,
driven by a combination of
higher volumes and pricing and
product actions to increase
profi tability.
— Group EEV operating profi t in
2014 increased by 4 per cent on
a constant exchange rate basis
(decreased 3 per cent on an
actual exchange rate basis),
compared to 2013, refl ecting
higher new business profi ts and
higher contributions from the
in-force business.
Prudential plc Annual Report 2014
21
What we measure and why
Performance1
Commentary
Group free surplus generation4 (£m)
Free surplus generation is used to measure the internal
cash generation of our business units. For 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 profi t for the period.
Business unit remittances (£m)
Remittances measure the cash transferred from
business units to the Group. Cash fl ows across the
Group refl ect our aim of achieving a balance between
ensuring suffi cient net remittances from business units
to cover the dividend (after corporate costs) and the
use of cash for reinvestment in profi table opportunities
available to the Group.
IGD capital surplus before fi nal dividend5 (£bn)
Prudential is subject to the capital adequacy
requirements of the European Union 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
diversifi cation benefi t is recognised.
CAGR
+11%
2,462
2,579
1,982
2,080
1,687
2010
2011
2012
2013
2014
CAGR
+12%
1,482
1,341
1,105
1,200
935
2010
2011
2012
2013
2014
5.1
5.1
4.7
4.3
4.0
2010
2011
2012
2013
2014
— Underlying free surplus in
2014 increased by 9 per cent,
on a constant exchange rate
basis (5 per cent on an actual
exchange rate basis),
compared to 2013, driven by
growth of the in-force portfolio,
and continued discipline in the
investments made to support
new business growth.
— Business unit remittances
increased by 11 per cent in
2014, compared to 2013,
with higher contributions
from the US and M&G.
— We operate with a strong
solvency position, with our
estimated IGD capital
surplus after funding the
fees paid for renewing our
exclusive distribution
agreement with Standard
Chartered Bank until 2029
and before fi nal dividend
covering the capital
requirements 2.4 times.
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Chief Financial Offi cer’s report on our 2014 fi nancial performance page 39
2017 objectives7
We are making solid progress towards these objectives.
Asia objectives
Asia life and asset management IFRS operating profi t
Asia underlying free surplus generation8
Group objective for cumulative period 1 January 2014 to 31 December 2017
Cumulative Group underlying free surplus generation from 2014 onwards
Reported actuals
2012 £m9
2013 £m
2014 £m
Objectives7
2017
924
484
1,075
573
1,140
592
>£1,858m
£0.9 – £1.1bn
Actual
1 Jan 2014
to 31 Dec 2014
£2.6bn
Objective
1 Jan 2014 to
31 Dec 2017
> £10bn
Notes
1
2
The comparative results shown above 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 in fi nancial
tables in the Chief Financial Offi cers’ report on our 2014 fi nancial performance.
CAGR is Compound Annual Growth Rate.
The basis of IFRS operating profi t based on longer-term investment returns is
discussed in note B1.3 of the IFRS fi nancial statements. The IFRS profi t before
tax attributable to shareholders have been prepared in accordance with the
accounting policies discussed in note A of the IFRS fi nancial statements.
3 The EEV basis results have been prepared in accordance with the EEV
principles discussed in note 1 of EEV basis supplementary information.
The 2014 EEV results of the Group are presented on a post-tax basis, and
accordingly, prior years’ results are shown on a comparable basis.
4 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 reclassifi cation as held for sale, operating results exclude the
result of the Japan Life insurance business.
5 Estimated.
6 Excludes subordinated debt issues that qualify as capital.
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 holdings in China Life Insurance Company in Taiwan.
9 Asia 2012 IFRS operating profi t 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 in Taiwan.
22
Prudential plc Annual Report 2014 Strategic report
Our businesses and their performance
Asia:
accelerate
Performance highlights
— Performance is on track to deliver the
New business profi t1 £m
Total IFRS operating profi t £m
2017 fi nancial objectives
— Continued delivery across key value
creation metrics. On a constant
exchange rate basis, new business
profi t up 13 per cent, IFRS profi ts up
17 per cent, free surplus generation up
14 per cent
— Increased agency2 active manpower,
up 6 per cent and improved
productivity, up 12 per cent
— Renewed our long-standing distribution
partnership with Standard Chartered
Bank for a further 15 years and
delivered APE growth of 20 per cent
— Delivered record third-party net
in-fl ows at Eastspring Investments
and won multiple industry awards
1,139
1,162
982
811
671
51*
924
1,075
1,140
774
591
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
Net cash remittances £m
* Gain on sale of China Life Insurance Company
in Taiwan
Eastspring Investments funds under
management £bn
400
400
341
77
52
50
58
60
233
206
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
www.prudentialcorporation-asia.com
Measuring our performance page 20
Prudential plc Annual Report 2014
23
Market overview
Drivers of wealth creation4
Asia (excluding Japan) 2013–2018 $tn
Life insurance is a key driver in
the development of economies.
We provide fi nancial protection
for families and also off er them
savings opportunities tailored
to their needs. We then channel
these savings into investments in
the economy which help to drive
further economic growth. We
are very much an organisation
that does well by doing good.
Barry Stowe
Chief Executive
Prudential Corporation Asia
Asia ’s economic transformation continues
to generate material increases in personal
wealth and drives signifi cant demand for
solutions to individuals’ fi nancial planning
needs. During 2014 macroeconomic and
geopolitical turbulence, both regional and
international, created some short-term
impacts but the region’s fundamental
economic drivers remain highly compelling.
The degree of state-sponsored fi nancial
provision for healthcare and other social
services varies by market, but is typically
very basic and it is widely appreciated that
the private sector has a very important
complementary role. Protection gaps
remain high across the region and the
regulators have tasked the industry with
improving levels of fi nancial literacy and
addressing this issue. Consequently the
regulations governing the industry
continue to evolve in largely positive ways
with good outcomes for customers and
shareholders.
There is a healthy competitive
environment with a good mix of domestic,
regional and international companies
although barriers to entry remain high in
terms of the availability of new licences, the
signifi cant capital investment and the
challenge in building distribution scale
and quality.
Given the low penetration rates of
insurance and investment products we see
considerable growth opportunities over
the long term.
Our strategy and operating principles
Balanced
metrics and
disclosures
acceler a t e
Asia:
U
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a
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s
n
:
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Disciplined
capital
allocation
Focus on
customers and
distribution
Sustainable
value for our
stakeholders
A
s
s
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t
m
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p
t
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a
m
g
e
is
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m
ent:
m:
Kingdo
fo cus
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U n it e
Proactive risk
management
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61
8
37
2013 Existing
asset
growth
Newly
created
wealth
2018
45% 56% 31%
24%
Asia share of global total
Favourable economic trends
Asia (excluding Japan) is leading the world
in terms of gross domestic product (GDP)
growth. In the period 2014 to 2018, it is
expected to generate US$5.5 trillion3 of
new GDP, 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. Within our
preferred ‘sweet spot’ markets of South-
east Asia and Hong Kong, the middle class
will be represented by over 400 million
people. Families are getting smaller, life
expectancies are lengthening and the
incidence of chronic diseases is increasing
signifi cantly.
Prudential’s strategy ‘to accelerate’
in Asia is well established and
prioritises long-term, profi table
growth driven by:
— Focus on the long-term protection and
savings needs of Asia’s rapidly growing
middle classes;
— High-quality, multichannel distribution;
and
— Regional asset management expertise.
Our strategy and operating principles page 18
24
Prudential plc Annual Report 2014 Strategic report
Our businesses and their performance continued
Prudential Corporation Asia is a powerful franchise with a wide
footprint in the right markets, established go-to market capabilities
and superior brand strength.
‘Sweet spot’ middle-class population5
number of people
403m +112m
291m
Prudential
customer
% of middle
class6
3%
2010
2020
UAE
life customers
13 m
90%+
life customer retention rate
China
Korea
Japan
Taiwan
Hong Kong
India
Vietnam
Cambodia
Philippines
Thailand
Malaysia
Singapore
Our world page 16
Indonesia
Key
Our ‘sweet spot’ markets
Our other Asia markets
Prudential plc Annual Report 2014
25
Our ‘sweet spot’ markets
Indonesia
Singapore
Hong Kong
Malaysia
Unmatched platform
with scale and
geographic reach
— 371 agency offi ces in
152 cities
— Largest agency force
— Hi-tech agency training
and licensing
— ‘All-in-one’ product solution
combines protection,
investment and savings
— Conventional and Takaful
options
— Value-add services such as
‘PRUHospital Friends’
Professional agency
complemented by a
distinctive range of
bank partners
— Market-leading PruShield
product drives customer
acquisition
— Number one for regular
premium new business
— Expanding high net worth
segment
Resilient distribution
platform
— Leading insurer with scale in
agency and bank distribution
— 2014 saw 24 per cent increase
in active manpower and a
24 per cent increase in
productivity
— Successful partnership with
Standard Chartered Bank
now in 17th year
— Product innovations drive
new customer acquisition and
repeat sales
Well positioned to
capture emerging
opportunity in Bumi
segment
— Most productive agency7
in the industry
— Pioneer in linked policies with
riders for fl exible savings and
protection
— Over 31 per cent7 market
share of Takaful (Sharia
compliant) life business
Ranked* 1
Ranked* 1
Ranked* 3
Ranked* 1
www.prudential.co.id
www.prudential.com.sg
www.prudential.com.hk
www.prudential.com.my
Philippines
Vietnam
Thailand
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Rapidly scaling up
distribution
— More than doubled agency
size in less than two years
— Expanding across country
— Improving effi ciency –
80 per cent of policies now
processed ‘straight through’
— Market leader in linked-with-
protection policies
Long-term industry
leader
— Industry number one
since 2007
— 32 per cent of industry’s
agents, productivity
increased by 9 per cent
in 2014
— Building bancassurance;
eight partners and access to
260 branches
Excellent bancassurance
platform
— Doubled market share
following acquisition of
Thanachart Life in 2013
— Access to 800 branches
nationwide with partners –
SCB, UOB and Thanachart
Bank
Ranked* 2
Ranked* 1
Ranked* 8
www.prulifeuk.com.ph
www.prudential.com.vn
www.prudential.co.th
* 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.
Notes
1
The 2014 EEV results of the Group
are presented on a post-tax basis
and, accordingly, prior years’
results are shown on a
comparable basis.
2 Agency excluding India.
3
Prudential estimates based
on IMF data – October 2013.
Source: BCG Global Wealth 2014
– Riding a wave of growth.
Asian Development Bank (ADB)
– Key indicators for Asia and the
Pacifi c 2010. Prudential estimates.
Prudential customers as at
30 September 2014.
Based on APE sales. Source: LIAM
and ISM.
4
5
6
7
26
Prudential plc Annual Report 2014 Strategic report
Our businesses and their performance continued
Strong demand for savings and
protection products
As people move into the middle class,
their increased wealth and higher income
provide the incentive to make fi nancial
plans. Typically the fi rst 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 families’
lifestyle 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 fi nancial solutions to
signifi cantly 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 fi nancial 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 likely that
customers will increasingly seek access to
different asset classes through mutual funds
as their wealth grows and fi nancial needs
become more sophisticated.
Life insurance distribution
Prudential Corporation Asia is well
positioned in terms of its scale and
diversity of distribution. Over 500,000
agents produce around 60 per cent of
sales, with the remainder mainly coming
from bancassurance that includes exclusive
agreements with Standard Chartered
Bank, UOB and Thanachart. At the core
of our distribution model is face-to-face
interaction with customers that delivers
high-quality, needs-based advice.
Products
Our product portfolio is tailored to suit the
savings and protection needs of customers
in each market.
For example, in markets such as
Indonesia and Malaysia there is a high
demand for regular premium unit-linked
policies that provide coverage for hospital
and surgical and critical illnesses,
combined with savings for items such as
children’s education. In Hong Kong there is
high demand for participating products
where the smoothed investment returns
are particularly appealing as part of a
broader fi nancial plan.
In focus
Help when customers need it the most
PRUhealthcare assist (PHA),
launched in May 2014, is a fi rst-to-
market helpline service available
exclusively to PRUshield medical
insurance customers in Singapore;
the fi rst such service in this market.
The helpline is manned by medically-
trained professionals, and helps
customers make informed decisions
based on individual circumstances about
treatment, surgery, hospitalisation and
medical insurance coverage. PHA also
assists customers with priority booking
of appointments with specialists, and
provides medical information that focuses
on clinical and service quality.
In addition, PHA advises PRUshield
customers on their eligibility to claim on
policy benefi ts on various medical
conditions, surgical and laboratory
procedures.
Prudential is the only insurance
company in Singapore to provide such a
service to all its Shield customers, and at
no extra charge.
www.prudential.com.sg/corp/prudential_en_sg/solutions/protect/PRUshield.html
Customers
Prudential Corporation Asia has over
13 million life insurance customers and over
22 million in-force policies. We actively
monitor customer satisfaction levels across
multiple indicators, but key statistics are the
numbers of customers who keep their
policies (our retention rate is over
90 per cent), and the number of customers
who buy more policies from us (in 2014
more than 40 per cent of APE sales were
from existing customers). This refl ects 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 a key component is also
innovation with the human touch, such as
Singapore’s PRUhealthcare assist.
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 won multiple
awards at the 2014 Asia Asset Management’s
‘Best of the Best Awards’ including ‘Best
Asset Management and Asian Bond House’,
‘Best performance over three years for
Japanese Equities’, ‘Best Korean Equity
Manager’ and ‘Best Indian Fund House’.
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
fi nancial literacy and children’s education.
During 2014, Prudential extended its
highly successful children’s fi nancial
literacy programme, ‘Cha-Ching’. We also
launched the SafeSteps programme with
an initial series of six infomercials, featuring
SafeSteps ambassador Manny Pacquiao,
that provide life-saving advice in the event
of a natural disaster. These have been very
well received.
In November 2013, the Philippines
suffered one of the worst disasters in its
history, Typhoon Haiyan. Prudential has
now made three trips to the area with
volunteer staff and agents who have
assisted in the rebuilding efforts.
Prudential plc Annual Report 2014
27
United States:
build on strength
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Performance highlights
— Cash remittance increased by 41 per cent
New business profi t1 £m
IFRS operating profi t £m
to a record level of £415 million
— Continued strong returns on
shareholder capital across all key
fi nancial metrics
— Elite Access sales of £3,108 million
in the second full year after launch,
making Jackson the most successful
player in the non-guarantee variable
annuity market
— Successfully managed sales of variable
annuities with guarantees in line with
risk appetite
— Awarded ‘World Class Certifi cation’ by
Service Quality Measurement Group,
Inc. and ‘Highest Customer Satisfaction
by Industry’ award – the ninth
consecutive year of recognition for
customer service performance in these
two categories
706
694
1,443
1,302
530
568
495
1,003
750
675
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
Net cash remittances £m
Growth in statutory admitted assets
US$bn
415
122*
200
294
249
190.0
170.9
142.8
97.5
107.6
80
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
*One-off release of excess surplus
www.jackson.com
Measuring our performance page 20
28
Prudential plc Annual Report 2014 Strategic report
Our businesses and their performance continued
Jackson’s strategy remains
focused on providing value
to its customers and driving
shareholder value while
operating within a conservative
risk-management framework.
This approach has enabled us
to successfully navigate the
signifi cant macroeconomic
and fi nancial market
challenges of the last six years
and ensured a continuation of
our strong performance in 2014.
Mike Wells
President and Chief Executive Offi cer
Jackson National Life Insurance
Company
Our strategy and operating principles
Balanced
metrics and
disclosures
acceler a t e
Asia:
U
build
nite
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Kingdo
fo cus
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U n it e
Disciplined
capital
allocation
Focus on
customers and
distribution
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m
ent:
Proactive risk
management
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$2.6 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 signifi cant
opportunity for those companies that are
able to provide the ‘baby boomers’ with
long-term retirement solutions.
US economic environment
In 2014, the US economy continued to
show signs of improvements, with stronger
GDP growth, declining unemployment
rates, and evidence of a recovery in the
housing market. The S&P 500 Index rose
11 per cent, following a 30 per cent jump in
2013. In late October, the Federal Reserve
announced an end to its Quantitative
Easing programme due to an improved US
economy. As part of quantitative easing,
the Federal Reserve purchased trillions of
dollars of bonds in order to add more
money to the US economy. Despite these
signs of strength domestically, longer-
dated treasury yields pulled back in
2014, but remained above the lows
experienced in 2012.
Competitive landscape
The market share shift in the US annuity
market has slowed down, and Jackson
continues to hold the leading position in
the industry while generating healthy
margins. Variable annuity providers
continue to modify their product offerings
through reductions in fund availability and
increased fees. 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 benefi ts, changes to the
availability of investment options,
subsequent premium restrictions on
in-force contracts and buyback 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
fi nancial strength.
Regulatory environment
The fi nancial services industry continues
to deal with a multitude of emerging
regulatory initiatives in response to the
fi nancial crisis. Many of these broader
fi nancial services initiatives specifi cally
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 amplifi ed
focus on enterprise risk management, as
well as initiatives in the area of fi nancial
reporting. While discussions continue
across many initiatives, they are resulting
in signifi cant resources being expended
across the industry. Finding the appropriate
path through all of the regulatory changes
clearly remains a challenge.
Prudential’s strategy of ‘build on
strength’ in the US is well established
and continues to focus on:
— Capitalising on the ‘baby boomer’
retirement opportunities;
— Maintaining a balanced product suite
throughout the economic cycle;
Sustainable
value for our
stakeholders
— Streamlining operating platforms,
driving further operational effi ciencies;
and
— Conservative, economic-based
approach to pricing and risk
management.
Our strategy and operating principles page 18
Prudential plc Annual Report 2014
29
What we do and how we do it
In focus
Jackson’s long-term strategy consists
of capitalising on the profi table growth
opportunities created by the demands
for retirement income and accumulation
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 fi nancial
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, fi xed
annuities, fi xed-index annuities, and
separately managed accounts. As would
be expected in the current historically low
interest rate environment, variable
annuities continue to outsell fi xed-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
protection while still being able to invest in
a broad range of assets as well as the
benefi t 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 fi nancial stability through the
crisis and remain as a consistent presence
within the market, has 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 three years after its launch, Elite
Access is the fourth best-selling variable
annuity product in the US. As of third
quarter of 2014, Jackson offers three of the
top 10 best-selling variable annuity
products across the industry.
The success of Elite Access has helped
increase the diversifi cation of our product
mix with 34 per cent (2013: 31 per cent)
Elite Access: go beyond traditional investing
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US$10bn
sales since inception
Jackson’s Elite Access is a new style
of variable annuity that enhances
traditional investing through
diverse investment options, access
to portfolios previously unavailable
to retail investors, and tax advantages
which help customers seek
opportunities and manage risk
throughout the economic cycle.
Elite Access is a logical extension
of Jackson’s variable annuity investment
freedom philosophy, which provides
customers with a large set of investment
options and the ability to tailor the
portfolio as they desire.
Elite Access helps customers prepare
for any market conditions by offering:
— Additional diversifi cation from
alternative assets and strategies
that help customers modernise
their portfolio;
— Access to expertise previously
available to only institutional and
accredited investors, through
ready-to-go Guidance PortfoliosSM
managed and crafted to meet
specifi c investment objectives
using a complement of
investments and strategies;
— Tactical management strategies,
designed to provide asset allocation
fl exibility, that adjust to all market
cycles – positive or negative; and
— A wide array of traditional equity and
fi xed-income investments that provide
core market exposure;
— Tax-deferred investment growth and
legacy planning options through all
phases of the economic cycle.
www.elite-access.com
Variable annuity sales US$bn
Elite access sales US$bn
20.9
6.4
14.5
23.1
8.0
15.1
34%
2013
2014
Without living benefit guarantees
With living benefit guarantees
+26%
5.1
6.4
4.0
2013
2014
30
Prudential plc Annual Report 2014 Strategic report
Our businesses and their performance continued
Operational effi ciencies
We support our industry-leading
distribution teams with award-winning
customer service. Jackson was awarded by
Service Quality Measurement Group, Inc.
‘World Class Certifi cation’ in customer
satisfaction and received the ‘Highest
Customer Satisfaction by Industry’ award,
achieving the top rating for the fi nancial
industry, for the ninth consecutive year.
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
fl exibility of our information technology
systems contributes to our ability to
manufacture, distribute and service an
unbundled product design and to
distinguish us from others in the industry.
This focus on our operational platforms,
and the effi ciencies achieved as a result,
have provided us with among the lowest
general and administration expense-to-
asset ratio relative to competitors.
Disciplined approach
Jackson operates within a well-defi ned
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 suffi cient resources to
support our hedging programme.
Our hedge philosophy has not changed
in 2014. Jackson is able to aggregate
fi nancial risks across the Company, obtain
a unifi ed 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 benefi t
from the fact that the competitive
environment continues to favour
companies with good fi nancial strength
ratings and a strong track record of
fi nancial discipline, both key elements
of our long-term strategy.
of our 2014 variable annuities sales not
featuring living benefi t guarantees.
While sales of fi xed annuities and fi xed
index annuities have been lower, though
relatively in line with the market, they still
make up a signifi cant 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. The purchase of Reassure
America Life Insurance Company (REALIC)
in 2012 has contributed signifi cantly to
shape Jackson’s earnings while helping to
diversify Jackson’s overall risk profi le. 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
across a variety of topics to these advisers,
and in 2014 continued to focus training
efforts around its newest product, Elite
Access, with a total of 374 Elite Access
meetings and over 10,000 advisers
in attendance.
National Planning Holdings, an affi liate
of Jackson, is the sixth5 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 specifi c needs of three key distribution
channels: independent representatives,
fi nancial 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 signifi cant benefi ts
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 fi nancial advisers
effi cient access to a broad range of
investment solutions that are developed
with institutional-level investment manager
due diligence, portfolio construction and
asset allocation resources.
4m
life customers
Notes
1
The 2014 EEV results of the Group are presented
on a post-tax basis and, accordingly, prior years’
results are shown on a comparable basis.
According to LIMRA, U.S. Individual Annuities
Survey Participant’s Report (Q3 2014).
Source: US Census Bureau.
Based on total annuity sales, LIMRA, U.S.
Individual Annuities Survey Participant’s
Report (Q3 2014). Jackson is ranked fi rst in total
variable annuities sales out of 30 participating
companies in LIMRA’s quarterly sales survey.
Investment News Broker-Dealer Rankings
– April 2014 (as reported at the 2014 Investor
Conference).
2
3
4
5
Prudential plc Annual Report 2014
31
United Kingdom:
focus
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Performance highlights
— Two ‘fi ve star’ ratings for excellent
service2, achieved for fourth
consecutive year
— Outstanding Achievement Award for
continuous customer-service excellence
— FT Adviser – Online Outstanding
Achievement Award 2014
— Robust performance despite signifi cant
regulatory change impacting retirement
income market
— Diversifi ed distribution model focusing
on intermediaries, Prudential Financial
Planning (our direct advice service) and
individual customers via mail, email
and telephone
— Continued strong performance of
with-profi ts, in particular PruFund
— Product innovation to meet changing
face of UK retirement market
— Strong growth across investment
products
www.pru.co.uk
New business profi t1 £m
IFRS operating profi t £m
266
76
190
195
19
176
241
30
211
237
24
213
270
105
165
719
63
656
723
23
700
736
31
705
735
25
710
776
105
671
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
Wholesale
Retail
Wholesale
Retail
Net cash remittances £m
Inherited estate £bn
120*
300
297
313
355
325
6.8
6.1
7.0
8.0
7.2
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014*
* One-off release of excess surplus.
* Aft er the eff ect of completing the domestication of
the Hong Kong branch of the PAC with-profi ts fund.
Measuring our performance page 20
32
Prudential plc Annual Report 2014 Strategic report
Our businesses and their performance continued
Market overview
The evolution of saving in the UK
The confi guration of the UK market is
unchanged, characterised by an ageing
population with wealth concentrated in the
50+ age group and a younger generation of
savers who are typically less well-funded.
While the announcement of pensions
freedoms in the 2014 Budget has
signifi cantly reduced restrictions on how
these individuals will access their savings
to help fund an income in retirement, the
need to accumulate savings remains. It
constitutes a signifi cant opportunity for
companies with a strong brand and a solid
track record in the long-term savings market.
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-profi ts and retirement
income provision.
The changing regulatory landscape
The UK life and pensions industry
continues to undergo signifi cant change.
The announcement by the UK Chancellor
in the 2014 Budget to remove compulsory
annuitisation and introduce new pension
freedoms from April 2015 has been
described as a once in a 100-year change.
We are supportive of this change and more
generally of policy initiatives that will help
encourage people to save in greater
numbers, and more often, particularly in
an environment where there is a signifi cant
savings gap. Simultaneously, we are
witnessing a shift in how customers view
retirement. The distinction between
accumulating funds and then using
them to provide an income in retirement
is no longer clear-cut. We expect to
see further opportunities created in the
saving and investment market with
demand for fi nancial advice increasing
and customers engaging more frequently
with their providers.
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 166 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 experience, multi-asset
investment capabilities and our fi nancial
strength. In the UK the Prudential brand
is long established, well-known and,
importantly, well-trusted both in the
intermediary fi nancial adviser and the retail
marketplaces. This trust and recognition
positions us favourably to help customers
save with confi dence and to understand
how to secure a dependable retirement
income, through our range of market-
leading with-profi ts and retirement
income products.
The business proved resilient
despite unprecedented
regulatory change in 2014,
delivering a stable, robust
fi nancial performance while
favourable brand recognition,
diversifi ed distribution and a
market leading with-profi ts
proposition positions us
strongly to help customers save
with confi dence to secure a
dependable retirement income.
Jackie Hunt
Chief Executive
Prudential UK & Europe
Our strategy and operating principles
Balanced
metrics and
disclosures
acceler a t e
Asia:
U
build
nite
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:
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Disciplined
capital
allocation
Focus on
customers and
distribution
Sustainable
value for our
stakeholders
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Proactive risk
management
The strategy in the UK business
continues to be one of ‘focus’:
— Selective participation;
— Capital discipline;
— Sustainable cash generation;
— Delivering value through cost and
persistency management;
— Provision of market-leading with-profi ts
investment returns to our customers;
and
— Opportunities for growth:
– broaden risk-managed products
and retirement solutions
– enhance distribution.
Our strategy and operating principles page 18
Prudential plc Annual Report 2014
33
We continue to focus on meeting
In focus
customer needs:
— Products and retirement solutions to
help customers take advantage of the
new pension freedoms;
— 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;
— Our market-leading PruFund investment
range with optional guarantees to suit
customers’ attitude to risk; and
— Driving year-on-year improvement
in service for both customers and
intermediaries. Our ongoing
commitment to customer service
improvement was recognised at the
Financial Adviser Service Awards,
where we retained our two fi ve star
ratings in the Life & Pensions and
Investment categories while also
receiving the Outstanding
Achievement Award for 2014.
PruFund – a market-leading proposition
When investing or saving for
retirement, many of our customers
value the potential for both growth
and a degree of security against
losing money. Prudential UK’s
PruFund off ers these features.
With its market-leading multi-asset
fund offering, Prudential UK provides
access to our fund management
expertise, with:
— Funds with innovative designs that
spread risk by investing in many
different assets;
— A smoothing process that offers
potential growth in the value of the
funds, while helping to manage
short-term volatility; and
— A range of guarantee options to tie
in with customers’ future needs.
Strong growth in assets under management £bn
11.6
9.1
7.5
0.1
0.3
2006
2007
0.9
2008
5.4
4.1
2.5
2009
2010
2011
2012
2013
2014
www.pru.co.uk/investments/bonds/investment_bond_fund_range/pmg_multiasset_funds/prufund/
Strong product capability
Prudential is a leader in its chosen markets,
benefi ting from a strong investment track
record, a fi nancially strong with-profi ts
fund and a recognised reputation for
developing innovative products such
as the PruFund range.
The introduction of new regulations in
the form of pension freedoms will allow
new ways for our customers to secure an
income in retirement. Most notably the
removal of compulsory annuitisation has
created new and exciting opportunities
that play to our strengths. Against the
backdrop of a changing regulatory
environment, our strong product capability,
fi nancial strength, reputation and
experience provide a very solid foundation
for us to enable customers to save and
invest today for the outcomes they wish to
achieve in the future.
We have a competitive advantage in
with-profi ts and a distinctive investment
franchise in the PruFund range, which in
2014 celebrated its 10th anniversary.
Demand remains strong for our products
offering downside protection against the
volatility of the market, while still providing
a steady return over the medium to long term.
We provide a comprehensive range of
risk-managed investments, including
with-profi ts bonds and pensions, which
continue to outperform other competitors’
propositions. We will continue to develop
our with-profi ts proposition, enhancing the
range of investment choices available to
policyholders and have recently made
PruFund available in the Individual Savings
Account market – a market with customer
holdings of £470 billion.
In addition to our customers, our
shareholders also continue to benefi t from
the steady performance of our with-profi ts
based products and the cash they
generate. The chart overleaf shows the
outperformance of our with-profi t funds
when compared to peers. This
performance has allowed us to add an
estimated £1.9 billion to with-profi ts policies
in the year. Policyholders will typically
have seen year-on-year increases
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Budget 2014: merging of accumulation and decumulation
The past
(typical)
The future
(likely)
Work
Save for retirement
— Pension (DB & DC)
Retirement
Take income in retirement
— Annuities
Accumulate
Save for retirement
— Pension (DC)
— Greater use of other vehicles
Decumulate
Increasing fl exibility
— Drawdown
— Bonds
— ISAs
— Annuities
— Property
— Long-term care
Increased attractiveness of pensions and ISA
Increased range of options and solutions
Our product set and balance sheet strength position us well for the change
34
Prudential plc Annual Report 2014 Strategic report
Our businesses and their performance continued
needs of our existing direct customer base.
At the end of 2014, its third year of trading,
adviser partner numbers had reached 210.
Distribution through fi nancial advisers
continues to be our most signifi cant route
to market in the UK. 2014 was another
successful year, with sales growth of
24 per cent over the same period in 2013
being achieved by our intermediary
sales teams.
Our new life company, Prudential
Polska, conducted its second year of
business in 2014, growing ahead of plan.
Headquartered in Warsaw, the business
now has 15 branches across the country
and 712 fi nancial planning consultants. Its
success demonstrates our ability to build a
new business franchise and generate value
in the European context.
We are also positive about the
long-term opportunities in Africa, where
we see many of the favourable structural
characteristics of our Asia markets,
although most sub-Saharan life insurance
markets are in the very early stages of
development and therefore are not likely to
be material for many years. During 2014 we
acquired Express Life in Ghana and Shield
Assurance Company in Kenya, both of
which have been renamed using the
Prudential brand.
In November 2014 we completed the
sale of our 25 per cent equity stake in the
PruHealth and PruProtect businesses to
Discovery Group Europe Limited for
£155 million in cash. This represents an
excellent return on our investment and
creates the future strategic fl exibility to
participate in the UK protection market.
Prudential UK & Europe will continue to
focus on its core strengths of with-profi ts
and retirement income, while utilising its
highly regarded brand franchise in order to
help its consumers accumulate savings to
help fund a dependable income in
retirement. It will do so by expanding the
PruFund range initially to the Individual
Savings Account market, developing its
annuity and income drawdown
propositions, and exploring the
opportunity to bring further saving and
investment products to market following
the introduction of pensions freedoms
in April 2015.
With-profi ts fund
outperforming competitors
5-, 10- and 15-year cumulative return
to end 20143
153%
109%
96%
115%
97%
108%
101%
15 years
10 years
52%
5 years
Prudential with-profits
58%
15 years
10 years
45%
5 years
FTSE 100 index
15 years
10 years
52%
5 years
Company A with-profits
15 years
10 years
57%
5 years
Company B with-profits
15 years
10 years
88%
82%
40%
5 years
Company C with-profits
of between 5 per cent and 8 per cent in
accumulating with-profi ts 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 Prudential is the
market leader, providing schemes for 72 of
the 99 public-sector authorities in the UK.
Prudential has a long-standing
reputation as a leading provider in the bulk
annuity marketplace participating at the
higher end of the market with the seven
transactions completed in 2014 generating
sales in excess of £1.7 billion. In a market
that has around £1.8 trillion4 of liabilities
that scheme trustees are increasingly keen
to remove from their balance sheets, we
selectively participate where premiums
are larger and the added complexity and
greater focus on fi nancial strength is better
suited to our core capabilities.
Broad distribution
Prudential has developed a diversifi ed
distribution model focusing both on
fi nancial advisers and the individual
customer through a direct non-advised
channel and its own fi nancial planning arm
– Prudential Financial Planning – which
focuses primarily on the fi nancial planning
7m
life customers
Notes
1
The 2014 EEV results of the Group are presented
on a post-tax basis and, accordingly, prior years’
results are shown on a comparable basis.
Financial Adviser Service Awards.
Prudential, Financial Express. All fi gures to
31 December 2014. The with-profi ts gross
performance is gross of tax, charges and the
eff ects of smoothing. Cumulative returns for
Company A, B and C have been calculated
internally based on bonus announcements
gathered from publicly available sources; these
may diff er from fi gures quoted by the Company.
KPMG analysis based on Purple Book 2013.
2
3
4
Prudential plc Annual Report 2014
35
Asset management:
optimise
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Performance highlights
— Record external funds under
management of £137 billion
— 34 per cent growth in European retail
funds to £31.8 billion under management
— Record 2014 profi ts of £446 million
— Recognised for its investment
performance with numerous awards,
including Real Estate Manager and
Fixed Income Manager of the Year at
the Financial News Awards 2014 for
the second consecutive year
M&G external net fl ows £bn
M&G European retail funds under
management £bn
16.9
9.0*
7.9
9.5
2.1
7.4
7.1
0.4
6.7
31.8
23.7
14.4
9.0
8.2
2012
2013
2014
2010
2011
2012
2013
2014
Retail
9.1
1.7
7.4
4.4
0.5
3.9
2010
2011
Institutional
*Including £7.6 billion mandate
Net cash remittances £m
IFRS operating profi t1 £m
285
213
206
235
150
446
395
301
320
246
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
www.mandg.com
Measuring our performance page 20
36
Prudential plc Annual Report 2014 Strategic report
Our businesses and their performance continued
Market overview
The European asset management market is
the second largest region in the world with
total assets of £6.2 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 fl ows of new money.
The UK asset management industry,
M&G’s core market, is the second largest
national market in the world with
£835 billion3 of assets, and is a global centre
of excellence for investment management
and a major source of long-term funding for
the UK economy.
Across its chosen markets, M&G serves
the needs of both retail and institutional
investors.
Market backdrop over the past year
The global economy appeared to lose
momentum towards the end of 2014.
While the US showed signs of improving
economics, the Eurozone and Japan
struggled to generate positive growth with
the Chinese economy softening. Concerns
about slower economic activity fuelled an
upsurge in market volatility, as investors
worried whether central banks would be
able to navigate the slowdown and
whether ongoing geopolitical tensions
would disrupt the recovery.
European investors continue to favour
fi xed-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 third-party investors for more
than 80 years. We have long believed that
our active approach to investment –
selecting investments 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 45 per cent of M&G’s retail
assets under management.
In the institutional market, M&G
provides a range of strategies that help
pension funds, sovereign wealth funds and
other large investors match liabilities and
achieve growth targets. Some of these
strategies were developed originally for
Prudential’s insurance funds.
Today M&G is an international asset
manager with a physical presence in
M&G’s objective is to produce
superior long-term investment
returns for its clients –
individual and institutional
investors – and its shareholder.
We continue to diversify our
business by geography and
asset class, while providing
capital effi cient profi ts and
cash generation for the Group.
Michael McLintock
Chief Executive Offi cer
M&G
Our strategy and operating principles
Balanced
metrics and
disclosures
acceler a t e
Asia:
U
build
nite
o
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n
S
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a
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s
n
:
g
t
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Disciplined
capital
allocation
Focus on
customers and
distribution
Sustainable
value for our
stakeholders
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U n it e
Proactive risk
management
Prudential believes the value
of M&G’s asset management
capabilities is allowing the business
to focus on the generation of
superior long-term returns for
investors.
Through its proven ability to convert
investment performance into signifi cant
fund fl ows, M&G is able to increase its
exposure to markets and so maximise
revenue from the long-term stock of
funds under management.
The pillars of M&G’s business that
support this approach are:
— People – an environment that attracts,
fosters and retains talented individuals;
— Performance – an investment-led
business focused on the delivery of
long-term returns through active
investment management;
— Innovative investment ideas which
meet client needs and a proven ability
to convert these ideas into signifi cant
fund fl ows; and
— Diversifi cation by asset class, client
type, fund and investment strategy
and country.
£264bn
funds under management
In focus
M&G in Italy
17 countries and retail products which are
distributed in 22 jurisdictions.
Our success is evident in the fact that
we have achieved positive net infl ows
from external clients for 12 consecutive
years, refl ecting the attractiveness of our
diverse fund range and strong investment
returns. M&G recorded net fund infl ows
of £7.1 billion in 2014, compared with
£9.5 billion during 2013. While these levels
are lower, we expected new business to
return to more normal levels following an
exceptionally strong period since 2009.
It is the consistency with which we
generate net sales that drives our business
growth and profi tability. During the last
fi ve years, we have produced average
annual net sales of £9.4 billion with external
funds under management growing at a
compound rate of 14 per cent per annum
over the same period. Our ability to
maintain a strong sales performance over
such a time period demonstrates M&G’s
ongoing strength in depth across all the
principal asset classes and distribution
channels. In 2014, no fewer than seven
of M&G’s retail funds, representing all
of the main asset classes, achieved net
sales in excess of £250 million over the
full year.
M&G’s retail market position
Retail fund markets are highly fragmented,
with no single company dominating. This
refl ects the competitive nature of the
business and the multiplicity of providers.
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 fi nancial adviser
or discretionary fund manager. By total
UK assets under management, M&G is the
second largest retail fund manager, with
£40.7 billion of assets under management,
equivalent to a market share of 7.7 per cent4.
In Europe, where M&G has distributed
funds since 2002, it has over £31.8 billion
of assets under management and a market
share of 0.59 per cent5.
M&G’s institutional market position
Institutional clients require investment
strategies that help them meet future
outgoings, from a pension scheme making
payments to retired employees to a
sovereign wealth fund that fi nances
schools, transport and other infrastructure
developments. M&G’s ability to design
and commercialise investment strategies
for such clients is founded on the quality
of its people and their acknowledged
£10bn
funds under management in Italy
www.mandgitalia.it
expertise in the world’s credit and real
estate markets.
Many of the innovative strategies
developed for today’s institutional clients
are long-term, illiquid investments – from
infrastructure and housing to solar parks
and corporate lending. Such investments
often require a client to sign up for multiple
years, creating long-term stability and
security in the yields received by the client
and the fees received by M&G.
Our institutional fi xed-income clients
include 63 per cent of the UK’s 44 largest
pension funds, 38 UK local-authority
pension schemes and a number of
M&G funds under management £bn
120*
198
109
47
42
201
109
48
44
228
116
57
55
244
118
59
67
264
127
63
74
2010
2011
2012
2013
2014
Internal*
Institutional
Retail
*Invested by Prudential’s insurance funds
Prudential plc Annual Report 2014
37
Since establishing the business in
2012, Italy is now the biggest market
for M&G outside the UK with just
under £10 billion of retail funds under
management at the end of 2014.
These assets represent a 7 per cent4
share of the Italian cross-border market
and have been sourced through organic
business development. Business growth
has been especially strong in the past
few years as Italian savers have embraced
our market-leading fi xed-income and
multi-asset products as alternatives
to government bonds. M&G is the
number-one4 cross-border choice for
fi xed-income funds as at the end
of December 2014.
New relationships with private banks
and ‘promotori’, Italy’s fi nancial advisers,
have been accompanied by substantial
investment in the M&G brand. Last year we
staged prominent brand advertisements
in seven Italian ski resorts and sponsored
four ski schools, as well as running
product advertisements on the side of
trams in Milan. M&G also sponsored the
Marc Chagall exhibition in Milan.
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sovereign wealth funds. M&G Real Estate
is one of the world’s largest international
property investors enabling clients to
access a wide range of investment
opportunities in real estate across all the
major sectors in the UK, Europe and Asia.
People
Our investment edge is our people. We
employ more than 1,900 people operating
from offi ces 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 benefi t from the provision of
high-quality support staff and investment
infrastructure: from analysts and dealers to
operations, risk and compliance. Refl ecting
the need for local expertise in real estate,
we also 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
38
Prudential plc Annual Report 2014 Strategic report
Our businesses and their performance continued
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. We aim to put our
customers at the heart of everything we
do and seek to be a trusted partner for all
our clients.
Investment expertise
M&G’s investment expertise spans all the
principal asset classes – equities, fi xed
income and real estate – 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 fi xed-income investors. Our fund
managers benefi t from one of the region’s
largest and most experienced in-house
credit research teams, whose knowledge
covers the full range of fi xed-income
investment, from the management of
sovereign debt and public corporate bond
portfolios, through to private debt such as
leveraged fi nance, real estate fi nance,
direct lending and infrastructure. In a
ranking of global private debt managers
for 2014, M&G ranked fi fth6 and was
the only European fi rm in the top 105.
Multi-asset: M&G’s multi-asset team,
the Macro Investment Business, is
responsible for the management of a
range of funds for retail investors and
segregated accounts for institutional
clients. The team applies a top-down
‘macro’ approach, with a strong valuation
framework, which can be applied
across markets and regions in many
market conditions.
Real estate: M&G Real Estate is a
leading global property investor and
manager covering all major real estate
sectors including business space, retail
and leisure, residential and alternatives.
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.
We also have a track record for identifying
and exploiting real-estate development
opportunities and for the successful
delivery of projects. M&G concluded 2014
with circa £4 billion of global transactions.
This included £3.2 billion of acquisitions
with an average deal size of £50 million.
A history of innovation
Since launching the UK’s fi rst 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 signifi cant fund fl ows.
It is these two qualities that make
M&G distinctive.
M&G has become a pioneer in
fi xed-income investing over the last two
decades with the backing of one of the
most experienced and well-resourced
teams in the UK. Since the launch of the
group’s fi rst retail corporate bond fund in
1994, the Company has created a suite of
fi xed-income products designed to suit the
varying needs of investors.
Our latest offering, the M&G Global
Floating Rate High Yield Bond Fund, was
successfully launched in September 2014
and registered in the UK and across
Continental Europe. We believe that
this is the fi rst time that retail investors
have been given access to the high yield
fl oating rate note market through a
collective fund. For bond investors
concerned about the risk of an increase
in interest rates, this fund offers a means
not only to protect their savings but also
to benefi t from rising yields.
In the institutional market, pension
funds, sovereign wealth funds and other
large clients require stable, longer-term
cash fl ows that help meet their liabilities.
Over the last few years, M&G has met
this need by building a comprehensive
range of fi xed-income credit funds
designed to provide returns above either
infl ation or an interest rate. The range
includes a public corporate bond fund for
clients with daily dealing requirements,
funds that allocate to private and illiquid
credit (such as corporate and social
housing loans) and a fund with the
fl exibility to seek the best investment
opportunities across public and private
debt markets.
Diversifi cation
M&G has pursued business
diversifi cation across:
— Asset class: expertise across equities,
fi xed-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
benefi t from a wide-range of pooled
and/or segregated fi xed-income, equity
and real estate strategies; and
— Country.
Notes
1
2
Excludes Prudential Capital.
Based on data as at Q3 2014. European Fund &
Asset Management Association (published on
8 January 2015).
Source: Investment Association, 31 December
2014.
Source: Assogestioni as of 31 December 2014.
Cross-border market is based on assets and
fl ows of funds domiciled outside Italy and
managed by foreign groups only.
Lipper FMI FundFile, 31 December 2014, based
on Europe excluding UK and International
region. M&G data sourced internally.
Private Debt Investor fi gures based on amount
of capital raised over the last fi ve years for
discrete private debt strategies.
3
4
5
6
39
Chief Financial Officer’s report on our 2014 financial performance
Ongoing enhancements
in the quality of our earnings
The resilience of our earnings
during another year of market
volatility and macroeconomic
uncertainty, is underpinned
by our focus on business with
high-return, fast-payback
characteristics and by our
cautious approach
to risk management.
Performance highlights
IFRS operating profit1 £m
EEV operating profit £m
CAGR
+15%
2,520
3,186
2,954
CAGR
+9%
4,204
4,096
2,868
2,937
3,174
1,823
2,017
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
Nic Nicandrou
Chief Financial Officer
Group free surplus generation8,9 £m
Business unit remittances £m
CAGR
+11%
2,462
2,579
CAGR
+12%
1,482
1,341
1,982
2,080
1,687
1,105
1,200
935
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
Our strategy and operating principles
Measuring our performance page 20
Balanced
metrics and
disclosures
Asia:
accelera t e
Disciplined
capital
allocation
Focus on
customers and
distribution
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Proactive risk
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Sustainable
value for our
stakeholders
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:
—— To—demonstrate—how—we—
generate—profits;—
—— To—show—how—we—think—about—
capital—allocation;—and—
—— To—highlight—the—cash—generation—
of—our—business.
Our strategy and operating principles page 18
Strategic reportChief Financial Officer’s report on our 2014 financial performance Prudential plc Annual Report 2014
40
Prudential plc Annual Report 2014 Strategic report
Chief Financial Offi cer ’s report on our 2014 fi nancial performance continued
IFRS operating profi t
£ 3,186m
14%
increase on 2013
Measuring our performance page 20
In 2014 Prudential delivered
strong growth in IFRS operating
profi t and underlying free surplus
generation, the two metrics that
underpin our 2017 fi nancial
objectives. The Group’s overall
fi nancial performance increasingly
benefi ts from ongoing enhancements
in the quality of our earnings –
delivered through stronger growth in
non-interest sensitive sources – and
from improvements in the balance of
profi t and cash across diff erent
geographies, products and
distribution channels.
The resilience of our earnings during
another year of market volatility and
macroeconomic uncertainty, is
underpinned by our focus on business with
high-return, fast-payback characteristics
and by our cautious approach to risk
management. Prudential’s balance sheet
remains conservatively positioned and the
Group is strongly capitalised, with
suffi cient capital available to both fund
new growth opportunities and absorb the
effects of unexpected market shocks.
During 2014, the performance of the
equity markets in the countries that we
operate in has been broadly positive, with
the US S&P 500 index up 11 per cent, while
the UK FTSE 100 index and the MSCI Asia
ex-Japan index were fl at. Continued
speculation on global growth prospects and
the timing of key interest rate decisions has
led to some volatility in long-term yields,
with most markets experiencing a signifi cant
decline in 10-year bond yields during 2014,
largely reversing the increases seen in 2013.
As signifi cant long-term holders of
investment securities, insurance company
results refl ect the negative and positive
fl uctuations in the value of these assets.
We include the impact of these short-term
market movements outside the operating
result, which is based on longer-term
investment assumptions, on both the IFRS
and the European Embedded Value (‘EEV’)
reporting bases. In addition, we continue to
take steps to protect ourselves from the
downside risks to the Group’s fi nancial
position associated with the guarantees that
we offer to our customers and this also gives
rise to short-term investment fl uctuations,
particularly on the IFRS reporting basis
where the corresponding movement in the
economic effects associated with these
fl uctuations is not recognised. Therefore,
in the remainder of my report, my
comments on the Group’s operating
performance exclude these short-term,
market-driven effects.
In evaluating the 2014 fi nancial
performance of the Group, I have
presented percentage growth rates
before the impact of the pronounced
fl uctuations in the value of sterling against
local currencies in the US and Asia, as this
approach allows a more meaningful
assessment of underlying performance
trends. This is because our businesses in
the US and Asia receive premiums and
pay claims in local currencies and are,
therefore, not exposed to any cross-
currency trading effects. Growth rates
based on actual exchange rates are also
shown in the fi nancial tables presented in
this report. As the assets and liabilities of
our overseas businesses are translated at
period-end exchange rates, the effect of
these currency movements has been fully
incorporated within reported shareholders’
equity as at 31 December 2014.
The key fi nancial highlights of 2014 were:
— Group IFRS operating profi t of
£3,186 million, up 14 per cent;
— Group profi t before tax attributable
to shareholders on an IFRS basis
increased to £2,614 million from
£1,532 million in 2013, including the
fi nancial impact of short-term
movements in investment values and
other items reported outside the
operating result;
— Underlying free surplus generation9
(net of investment in new business) of
£2,579 million, 9 per cent higher;
— On the European Embedded Value
(EEV) basis of reporting performance,
new business profi t1 increased
10 per cent to £2,126 million,
contributing to a 4 per cent increase
in EEV operating profi t1 to
£4,096 million; and
— EEV basis shareholders’ funds at
31 December 2014 increased to
£29.2 billion, 17 per cent higher than
the previous year-end on an actual
exchange rate basis.
Prudential plc Annual Report 2014
41
IFRS profi ts
Operating profi t before tax
Long-term business:
Asia2
US
UK
Long-term business operating profi t2
UK general insurance commission
Asset management business:
M&G (including Prudential Capital)
Eastspring Investments
US
Other income and expenditure3
Total operating profi t based on longer-term investment
returns
Short-term fl uctuations in investment returns:
Insurance operations
Other operations
Other non-operating items3
Profi t before tax attributable to shareholders
Tax charge attributable to shareholders ’ returns
Profi t for the year attributable to shareholders
IFRS Earnings per share
Actual exchange rate
Constant exchange rate
2014 £m
2013 £m
Change %
2013 £m
Change %
1,050
1,431
752
3,233
24
488
90
12
(661)
1,001
1,243
706
2,950
29
441
74
59
(599)
5
15
7
10
(17)
11
22
(80)
(10)
905
1,181
706
2,792
29
441
68
56
(599)
3,186
2,954
8
2,787
(461)
(113)
(574)
2
2,614
(398)
2,216
(1,083)
(27)
(1,110)
(209)
1,635
(289)
1,346
57
(319)
48
(101)
60
(38)
65
(1,036)
(27)
(1,063)
(192)
1,532
(262)
1,270
16
21
7
16
(17)
11
32
(79)
(10)
14
56
(319)
(46)
(101)
71
(52)
74
Basic earnings per share based on operating profi t after tax
Basic earnings per share based on total profi t after tax
Actual exchange rate
Constant exchange rate
2014
pence
96.6
86.9
2013
pence
90.9
52.8
Change %
6
65
2013
pence
85.9
49.8
Change %
12
74
Note B1: Analysis of performance by segment page 143 and Note B6: Earnings per share page 163
IFRS operating profi t
Total IFRS operating profi t increased by
14 per cent in 2014 to £3,186 million. The
improvement in profi tability was broad-
based, with all four of our business
operations in Asia, the US, UK life and
M&G reporting higher operating profi t.
— Asia total operating profi t of
£1,140 million was 17 per cent higher
than the previous year, (6 per cent on an
actual exchange rate basis), with strong
growth in both life insurance and
Eastspring Investments, our Asia-based
asset management business
— US total operating profi t at
£1,443 million increased by 17 per cent
(11 per cent on an actual exchange rate
basis), driven by higher fee income from
growth in separate account assets held
by the life operations
— UK total operating profi t was
6 per cent higher at £776 million,
refl ecting higher contributions from
bulk annuity transactions
— M&G operating profi t (excluding
Prudential Capital) was 13 per cent
higher at £446 million, benefi ting from
continued growth in assets managed
Life insurance operations: taken
together, IFRS operating profi t from our
life insurance operations in Asia, the US
and the UK increased 16 per cent to
£3,233 million. This increase refl ects the
growth in the scale of these operations,
driven primarily by positive business
infl ows. We track the progress that we
make in growing our life insurance business
by reference to the scale of our obligations
to our customers, which are referred to in
the fi nancial statements as policyholder
liabilities. Each year these liabilities
increase as we collect premiums, and
decrease as we pay claims and policies
mature. The overall scale of these
policyholder liabilities is relevant in
evaluating our profi t potential, in that it
refl ects, for example, 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.
S
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42
Prudential plc Annual Report 2014 Strategic report
Chief Financial Offi cer ’s report on our 2014 fi nancial performance continued
Shareholder-backed policyholder liabilities and net liability fl ows4
2014 £m
Actual exchange rate
Net liability
fl ows5
Market
and other
movements
1,937
8,263
(610)
2,542
11,072
4,840
2013 £m
Actual exchange rate
At 31
December
2014
26,410
126,746
55,009
At 1
January
2013
21,213
92,261
49,505
Net liability
fl ows5
Market
and other
movements*
At 31
December
2013
2,349
9,635
(1,038)
(1,631)
5,515
2,312
21,931
107,411
50,779
9,590
18,454
208,165
162,979
10,946
6,196
180,121
At 1
January
2014
21,931
107,411
50,779
180,121
Asia
US
UK
Total Group
* Including reduction of £1,026 million following reclassifi cation of Japan as held for sale
Note C4: Policyholder liabilities and unallocated surplus of with-profi ts funds page 204
Focusing on the business supported by
shareholder capital – which generates the
majority of the life profi ts – in the course of
2014, policyholder liabilities increased
from £180.1 billion at the start of the year
to £208.2 billion at 31 December 2014.
The consistent addition of high-quality
profi table new business and proactive
management of the existing in-force
portfolio underpins this increase, resulting
in positive net fl ows5 into policyholder
liabilities of £9.6 billion in 2014 driven by
our US and Asia businesses. Net fl ows into
our Jackson business in the US were
£8.3 billion in 2014, refl ecting continued
success in attracting new variable annuity
business. Net fl ows into Asia continue to be
positive at £1.9 billion, representing the
increased levels of new regular premium
business added this year, offset by higher
levels of maturities of products reaching
their term. Positive foreign currency
translation effects, together with favourable
investment market and other movements,
have contributed a further £18.5 billion to
the increase in policyholder liabilities since
the start of the year.
Analysis of long-term insurance business pre-tax IFRS operating profi t based on longer-term investment
returns by driver6
Actual exchange rate
Constant exchange rate
Spread income
Fee income
With-profi ts
Insurance margin
Margin on revenues
Acquisition costs*
Administration expenses
DAC adjustments
Expected return on shareholder assets
Operating profi t based on longer-term
investment returns
1,131 67,252
1,618 110,955
298 101,290
1,441
1,721
(2,014)
4,650
(1,454) 186,049
277
215
3,233
2014
Operating
profi t
£m
Average
liability
£m
Margin
bps
Operating
profi t
£m
2013
Average
liability
£m
64,312
96,337
97,393
2013
Average
liability
£m
62,909
93,339
97,374
Margin
bps
Operating
profi t
£m
167
144
31
1,029
1,318
295
1,264
1,600
(46)% (1,899)
168
146
29
1,073
1,391
298
1,356
1,749
(43)% (2,039)
4,423
(1,428) 169,158
(78)
4,165
(1,338) 164,362
(84)
334
216
2,950
315
208
2,792
Margin
bps
164
141
30
(46)%
(81)
* The ratio of acquisition costs is calculated as a percentage of APE sales including with-profi ts sales. Acquisition costs include only those relating to shareholder-
backed business.
Note 1(a): Analysis of long-term insurance business pre-tax IFRS operating profi t based on longer-term investment returns by driver page 313
In 2014, alongside growing our overall level
of life operating profi t, we continued to
focus on improving its quality. We achieved
this by maintaining our bias for sources of
income such as insurance margin and fee
income, ahead of spread income: insurance
margin because it is relatively insensitive to
the equity and interest rate cycle, and fee
income because it is capital-effi cient. Our
strategic emphasis on growing our offering
of risk products such as health and
protection, drove insurance margin
14 per cent higher (6 per cent on an actual
exchange rate basis), while fee income was
up 23 per cent (16 per cent on an actual
exchange rate basis) primarily refl ecting
the growth in the level of assets that we
manage on behalf of our customers. In
contrast, the contribution to our profi ts
from spread income increased at a more
subdued rate of 10 per cent (5 per cent
on an actual exchange rate basis). The fact
that insurance margin and fee income
generated a higher and growing proportion
of our income represents a healthy
evolution in the quality, resilience and
balance of our earnings. Our share of
returns from with-profi ts operations was
in line with 2013, providing a stable and
reliable source of income for both
shareholders and customers invested in
these funds.
The costs we have incurred in writing
new business and in administering the
in-force life businesses 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.
Prudential plc Annual Report 2014
43
S
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IFRS operating profi t from our portfolio
of life insurance operations in Asia was up
16 per cent to £1,050 million, driven by the
increasing scale of the in-force business and
our regular premium health and protection-
oriented product focus. Indonesia IFRS
operating profi t, our largest market on
this measure, was up by 27 per cent to
£309 million, refl ecting growth in insurance
and fee income following the high level of
protection and savings product sales in
recent years. We are also encouraged to
see further progress among our smaller,
fast-growing businesses in South-east Asia,
with Thailand, the Philippines and Vietnam
now accounting for 15 per cent of Asia’s life
operating profi t compared to just 5 per cent
only two years ago.
In the US, life IFRS operating profi t
increased by 21 per cent to £1,431 million,
primarily as a result of a 26 per cent
increase in fee income, which is now
Jackson’s main source of income. The
uplift in fee income refl ects the growth in
average separate account assets from
£57.1 billion in 2013 to £72.5 billion in 2014,
equating to an increase of 27 per cent on a
constant exchange rate basis, driven by
variable annuity net premium infl ows and
appreciation in US equity markets. The
contribution from insurance margin has
also increased by 20 per cent, as we
continue to realise the benefi ts of the
REALIC acquisition. We remain focused
on improving the balance of Jackson’s
profi ts and diversifying its sources of
earnings, and we are pleased with the
growing contribution to sales of Elite
Access, our variable annuity product
without living benefi ts.
UK life IFRS operating profi t was
7 per cent higher than 2013 at £752 million
(2013: £706 million), principally due to a
£105 million profi t contribution from bulk
annuity transactions (2013: £25 million),
the result of our selective approach of only
writing this business on attractive returns.
The UK market reforms announced
in March 2014 triggered a dramatic
market-wide decline in sales of individual
annuities. Our UK life business was
similarly affected and experienced a
£53 million decline in profi t from new retail
annuity sales (from £110 million in 2013 to
£57 million in 2014). Life IFRS operating
profi t includes a contribution of £23 million
from our 25 per cent share of the PruHealth
and PruProtect businesses which we
disposed in November 2014.
Asset management net infl ows and external funds under management7
M&G
Retail
Institutional
M&G
Eastspring Investments8
Total asset management
Total asset management
(including MMF)
External net infl ows
External funds under management
Actual exchange rate
Constant exchange rate
Actual exchange rate
2014 £m
2013 £m
Change %
2013 £m
Change %
2014 £m
2013 £m
Change %
6,686
401
7,087
5,430
7,342
2,148
9,490
1,575
12,517
11,065
(9)
(81)
(25)
245
13
7,342
2,148
9,490
1,439
(9)
(81)
74,289
62,758
(25) 137,047
25,333
277
67,202
58,787
125,989
17,927
10,929
15
162,380
143,916
12,526
11,587
8
11,409
10
167,180
148,212
11
7
9
41
13
13
Note 1(c): Analysis of asset management operating profi t based on longer-term investment returns page 319
Asset management: our asset
management businesses in the UK
and Asia collectively contributed IFRS
operating profi t of £578 million, up
14 per cent on 2013. Similar to the trend
observed in our life operations, growth
in asset management operating profi t
primarily refl ects the increased scale of
these businesses, as measured by funds
managed on behalf of external institutional
and retail customers and our internal life
insurance operations. Net infl ows from
external parties into these funds, excluding
Money Market Funds (MMF), were
£12.5 billion in 2014 (2013: £10.9 billion on
a constant exchange rate basis) and helped
drive external retail and institutional funds
under management (excluding MMF) to
£162.4 billion at 31 December 2014
compared to £143.9 billion at
31 December 2013.
M&G’s IFRS operating profi t increased
13 per cent to £446 million (2013:
£395 million), refl ecting a 12 per cent rise in
underlying profi t to £400 million (2013:
£358 million), higher performance-related
fees at £33 million (2013: £25 million) and
£13 million from earnings from associates
(2013: £12 million). The increase in
underlying profi t was principally driven
by higher average levels of funds under
management, following a period of
strong net infl ows and positive market
movements. The increasing proportion
of higher-margin external retail business
improved M&G’s average fee income to
38 basis points (2013: 37 basis points).
Higher income more than matched the rise
in operating costs driven by increased
headcount and infrastructure investment.
Refl ecting this, the underlying cost income
ratio, which excludes revenue from
performance-related payments and
earnings from associates, improved to
58 per cent (2013: 59 per cent).
Our Asia asset management business,
Eastspring Investments, has also
benefi ted from growth in funds under
management, with IFRS operating profi t of
£90 million, up 32 per cent. In the US, our
asset management businesses, PPM
America and Curian, together with our
broker-dealer network, National Planning
Holdings, collectively generated IFRS
operating profi t of £12 million (2013: profi t
of £56 million on a constant exchange rate
basis) after a £38 million charge which
related primarily to the refund of certain
fees by Curian.
IFRS short-term fl uctuations
IFRS operating profi t is based on longer-
term investment return assumptions. The
difference between actual investment
returns recorded in the income statement
and the assumed longer-term returns is
reported within short-term fl uctuations in
investment returns. In 2014 the total
short-term fl uctuations in investment
returns relating to the life operations were
negative £461 million, comprising positive
£178 million for Asia, negative
£1,103 million in the US and positive
£464 million in the UK.
44
Prudential plc Annual Report 2014 Strategic report
Chief Financial Offi cer ’s report on our 2014 fi nancial performance continued
In Asia, the positive short-term
fl uctuations of £178 million primarily refl ect
net unrealised gains on fi xed-income
securities following falls in bond yields
across the region during the year.
Negative short-term fl uctuations of
£1,103 million in the US mainly refl ected
the net value movement on the guarantees
offered by Jackson and the associated
derivatives held to manage market
exposures. Under IFRS accounting the
movement in the valuation of derivatives,
which are fair valued, is asymmetrical to
the movement in the guarantee liabilities,
which are not fair valued in all cases. The
rise in equity markets in 2014 generated
negative value movements on the equity
derivatives that are held to mitigate against
the downside risk of a decline in equity
markets. Due to IFRS accounting practice,
the corresponding offset in the valuation
of obligations to customers is not fully
recognised, leading to a negative overall
movement within IFRS profi ts. Declining
interest rates and unfavourable
movements in implied volatility also led to
net negative value movements, due to
similar accounting asymmetries. Jackson
designs its hedge programme to protect
the economics of the business from large
movements in investment markets, and
therefore accepts variability in the
accounting results. Viewed through the
local regulatory risk-based capital lens,
the hedge programme was essentially
break-even on this basis, as movements
in hedge assets and guarantee reserves
broadly offset. As a result, Jackson’s
regulatory risk-based capital ratio was
broadly unchanged at 456 per cent at the
end of 2014 (31 December 2013:
450 per cent).
The positive short-term fl uctuations
of £464 million in the UK include net
unrealised gains on fi xed-income assets
supporting the capital of the shareholder-
backed annuity business.
IFRS eff ective tax rates
In 2014, the effective tax rate on IFRS
operating profi t based on longer-term
investment returns was 23 per cent, in
line with the 22 per cent equivalent rate
in 2013.
The 2014 effective tax rate on the
total IFRS profi t was 15 per cent (2013:
18 per cent), refl ecting corporate tax rate
reductions in certain jurisdictions and a
change in the overall geographic mix of
profi t which is subject to different tax rates.
Total tax contribution
The Group continues to make signifi cant
tax contributions in the countries in which
it operates, with £2,237 million remitted to
tax authorities in 2014. This was higher
than the equivalent amount of
£1,797 million in 2013, refl ecting increased
profi ts and the non-recurrence of the 2013
tax refunds for previous overpaid taxes.
Taxes paid in:
Asia
US
UK
Other
Total tax paid
2014 £m
2013 £m
Corporation
taxes
Other
taxes
Taxes
collected
Total
Corporation
taxes
Other
taxes
Taxes
collected
199
205
314
3
721
52
35
202
4
293
87
375
759
2
1,223
338
615
1,275
9
2,237
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 include amounts paid on
taxable profi ts which, in certain countries
such as the UK, include policyholder
investment returns on certain life insurance
products. Other taxes include property
taxes, withholding taxes, 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 include
sales taxes, employee and annuitant
payroll taxes.
Free surplus generation
Free surplus generation is the fi nancial
metric we use to measure the internal cash
generation of our business operations. For
life insurance operations it represents
amounts maturing from the in-force
business during the year, net of amounts
reinvested in writing new business. For
asset management it equates to post-tax
IFRS profi t for the year. In 2014 underlying
free surplus generation, after investment in
new business, increased by 9 per cent to
£2,579 million.
underlying free surplus generation
£ 2,579m
9%
increase on 2013
Measuring our performance page 20
Prudential plc Annual Report 2014
45
Free surplus generation
Free surplus generation9
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
Effect of domestication of Hong Kong branch
Free surplus at end of year
Note 11: Analysis of movement in free surplus page 289
Actual exchange rate
Constant exchange rate
2014 £m
2013 £m
Change %
2013 £m
Change %
6
2
(5)
12
3
5
5
801
1,109
702
346
2,958
(597)
2,361
17
8
(5)
12
8
(2)
9
938
1,197
664
386
3,185
(606)
2,579
(6)
(1,482)
1,091
4,003
(35)
5,059
883
1,168
702
346
3,099
(637)
2,462
(807)
(1,341)
314
3,689
–
4,003
The increase in free surplus generated by
our life insurance businesses refl ects our
growing scale and the highly capital
generative nature of our business model.
We drive this metric by targeting markets
and products that have low-strain,
high-return and fast-payback profi les, and
by delivering both good service and value
to improve customer retention. Our ability
to generate both growth and cash is a
distinctive feature of Prudential in our
industry. In line with this approach, Asia
and the US reported strong increases in
free surplus generation. In the UK, a higher
underlying contribution from the in-force
portfolio was masked by the non-
recurrence of a positive assumption change
in 2013. The closing value of free surplus in
our life and asset management operations
increased to £5,059 million at 31 December
2014 (31 December 2013: £4,003 million,
on an actual exchange rate basis), after
fi nancing reinvestment in new business
and funding cash remittances from the
business units to Group.
We invested £606 million of the free
surplus generated during the year in
writing new business (2013: £597 million
on a constant exchange rate basis)
equivalent to a re-investment rate10 of
19 per cent, which is in line with recent
periods. Asia remained the primary
destination of our new business
investment, given the superior profi table
growth opportunities available in that
region. In the US, new business investment
decreased despite higher new business
volumes, mainly due to proactive actions to
reduce commissions and changes in
product mix. New business investment
in the UK increased to £73 million
(2013: £29 million), refl ecting changes to
business mix, in particular the higher level
of bulk annuity business written in 2014.
The internal rates of return achieved
on new business remain attractive at over
20 per cent across all three business
operations, and the average payback
period11 for business written in 2014
was three years for Asia, one year for
the US and four years for the UK.
We continue to manage cash fl ows
across the Group with a view to achieving
a balance between ensuring suffi cient
remittances are made to service central
requirements (including paying the
external dividend) and maximising
value to shareholders through retention
and reinvestment of capital in
business opportunities.
S
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Holding company cash12
Net cash remitted by business units:
Asia
US
UK
M&G
Prudential Capital
Net cash remitted by business units
Holding company cash at 31 December
Note II(a): Holding company cash fl ow page 320
Actual exchange rate
2014 £m
2013 £m
Change %
400
415
325
285
57
400
294
355
235
57
1,482
1,341
1,480
2,230
–
41
(8)
21
–
11
46
Prudential plc Annual Report 2014 Strategic report
Chief Financial Offi cer ’s report on our 2014 fi nancial performance continued
net cash remittances from business units
£ 1,482m
11%
increase on 2013
Measuring our performance page 20
Cash remitted by the business units to
the corporate centre in 2014 increased
by 11 per cent to £1,482 million with
signifi cant contributions from each of
our four major business units. The higher
overall total in 2014 has been driven by
growth in the remittance from the US to
a record £415 million (2013: £294 million),
refl ecting both the strong capital
generation of Jackson’s life business in
the year and its effective approach to risk
management. Notwithstanding the
depreciation of many Asia currencies
against sterling, net remittances from these
operations proved resilient at £400 million.
As announced earlier in 2014, regulatory
developments in the UK require us to
increase the level of investment in new
business and in upgrading our UK pre-
and post-retirement customer proposition.
This investment will temper remittances in
the short term from our UK life business.
M&G increased its remittance to
£285 million, refl ecting underlying
earnings growth.
Cash remitted to the Group in 2014 was
used to meet central costs of £353 million
(2013: £315 million), pay dividends of
£895 million (2013: £781 million) and
repay £445 million (US$750 million) of
11.75 per cent perpetual subordinated
debt. In addition, £503 million
(US$850 million) of central cash was used
to fi nance the initial up-front payment for
the renewal of the distribution agreement
with Standard Chartered Bank. Refl ecting
these movements in the year, total holding
company cash at the end of 2014 was
£1,480 million compared to £2,230 million
at the end of 2013.
Post-tax operating profi t based on longer-term investment
returns
4,096
4,204
(3)
3,933
EEV profi ts1
Post-tax operating profi t
Long-term business:
Asia2
US
UK
Long-term business operating profi t2
UK general insurance commission
Asset management business:
M&G (including Prudential Capital)
Eastspring Investments
US
Other income and expenditure13
Short-term fl uctuations in investment returns:
Insurance operations
Other operations
Effect of changes in economic assumptions
Other non-operating items13
Profi t attributable to shareholders
Earnings per share
Basic earnings per share based on post-tax operating profi t
Basic earnings per share based on post-tax total profi t
Note 2: Results analysis by business area page 280
Actual exchange rate
Constant exchange rate
2014 £m
2013 £m1
Change %
2013 £m1
Change %
1,900
1,528
746
4,174
19
386
78
6
(567)
1,891
1,526
832
4,249
22
346
64
39
(516)
–
–
(10)
(2)
(14)
12
22
(85)
(10)
1,704
1,449
832
3,985
22
346
59
37
(516)
856
(93)
763
(369)
(147)
(560)
(4)
(564)
629
89
4,343
4,358
253
–
235
(159)
(265)
–
(525)
(4)
(529)
623
94
4,121
12
5
(10)
5
(14)
12
32
(84)
(10)
4
263
–
244
(159)
(256)
5
Actual Exchange Rate
Constant Exchange Rate
2014
pence
160.7
170.4
2013
pence
165.0
171.0
Change %
(3)
–
2013
pence
154.4
161.7
Change %
4
5
EEV operating profi t1
On an EEV basis, Group post-tax operating
profi t based on longer-term investment
returns was 4 per cent higher (negative
3 per cent on an actual exchange rate basis)
at £4,096 million in 2014. The increase is
primarily due to higher new business profi t
from the Group’s life businesses, which
increased by 10 per cent to £2,126 million.
Contributions both from new business and
from our in-force portfolio were negatively
impacted by the fall in long-term interest
rates over 2014. If long-term interest rates
at the end of 2014 had remained at the
same levels as those at the start of the year,
new business profi t and EEV operating
profi t would have increased year-on-year
by 14 per cent and 11 per cent respectively
(on a constant exchange rate basis).
In Asia, EEV life operating profi t was up
12 per cent to £1,900 million2, with in-force
profi t up 10 per cent to £738 million2,
benefi ting from increased scale across all
our operations. Asia new business profi t
was 13 per cent higher at £1,162 million,
refl ecting volume growth from the
continued build out of our distribution
platform, as well as management actions to
improve product mix, geographic mix and
pricing. The increase in new business profi t
continues to be driven by our seven ‘sweet
spot’ markets14 of South-east Asia
including Hong Kong, which increased
their combined contribution by 16 per cent,
despite a broadly unchanged result
from Indonesia.
Jackson’s EEV life operating profi t
increased by 5 per cent to £1,528 million,
driven by growth in the scale of our in-force
book and higher new business profi t.
In-force profi t increased by 7 per cent
compared to the prior year, refl ecting
higher unwind from the larger book of
existing business and an increased
contribution from spread, persistency and
mortality experience profi ts, the result of
our disciplined approach to the way we
manage and reserve for the risks of this
business. US new business profi t was up
4 per cent to £694 million, consistent with
the 4 per cent increase in sales volume.
Jackson’s ongoing product and pricing
actions have mitigated the adverse impact
on new business profi t of the 88 basis
points reduction in 10-year treasury yields
since the end of 2013.
In the UK, EEV life operating profi t fell
by 10 per cent to £746 million. The decline
is mainly due to the non-recurrence of a
£98 million positive assumption change in
2013, representing the benefi cial effect
arising from the reduction in UK
corporation tax rates. New business profi t
increased 14 per cent to £270 million
(2013: £237 million), refl ecting a
contribution of £105 million from seven
EEV new business profi t
£ 2,126m
10%
increase on 2013
Measuring our performance page 20
bulk annuity transactions in 2014 (2013:
three, £24 million). In UK retail, new
business profi t was 23 per cent lower at
£165 million (2013: £213 million), due to
decline in sales of individual annuities
which typically attract higher margins.
EEV non-operating result1
EEV operating profi t is based on longer-
term investment returns and excludes the
effect of short-term volatility arising from
market movements and the effect of
changes from economic assumptions.
These items are captured in non-operating
profi t which increased the 2014 results by a
net £247 million (2013: net increase of
£154 million on an actual exchange
rate basis).
EEV short-term fl uctuations1
Short-term fl uctuations in investment
returns refl ect the element of non-
operating profi t which relates to the
difference between the actual investment
returns achieved and those assumed in
arriving at the reported operating profi t.
Short-term fl uctuations in investment
returns for life operations of positive
£856 million include positive £439 million
for Asia, negative £166 million for our
US operations and positive £583 million
in the UK.
In Asia and the UK, positive short-term
fl uctuations principally refl ect unrealised
movements on bond holdings in the year. In
Prudential plc Annual Report 2014
47
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the US, the variance represents the
favourable impact of market movements
on the expected level of future fee income
from variable annuity separate accounts
balances, offset by the net value movements
on derivatives held to manage the Group’s
equity and interest rates exposure.
Eff ect of changes in economic
assumptions1
The reduction in long-term yields since the
end of 2013 has an adverse impact on the
overall level of 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
negative movement of £369 million in 2014
(2013: positive £629 million on an actual
exchange rate basis) partly offsetting the
overall positive short-term fl uctuations
reported in the year.
Capital position, fi nancing 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 2014 our Insurance Groups
Directive surplus is estimated at £4.7 billion
before deducting the 2014 fi nal dividend,
equivalent to a solvency cover of 2.4 times.
All our subsidiaries continue to hold
strong capital positions on a local
regulatory basis. Jackson’s Risk-Based
Capital ratio at the end of 2014 was
456 per cent, having remitted £415 million
to Group earlier in the year, which
underlines our disciplined approach to
managing the balance between volume,
value, risk and cash in this business. We
experienced no default losses and
reported modest levels of impairments
across our fi xed-income securities
portfolios. Notwithstanding, we have
retained our cautious stance on credit
risk and have maintained our £2.2 billion
credit default reserves in our UK annuity
operations. Further information on our
capital and solvency position is provided
in the Group Chief Risk Offi cer’s report.
Solvency II is scheduled to come into
effect on 1 January 2016. Along with the
full-year 2013 results, we published for the
fi rst time the Group’s end-2013 economic
capital position. At 31 December 2014, our
economic capital15 surplus was £9.7 billion
(2013: £11.3 billion), which is equivalent to
an economic capital ratio of 218 per cent
(2013: ratio of 257 per cent).
The methodology underpinning this
measure is highly sensitive to market
movements. Economic capital generated
from new and in-force business of
£1.8 billion, was offset by the negative
48
Prudential plc Annual Report 2014 Strategic report
Chief Financial Offi cer ’s report on our 2014 fi nancial performance continued
market effects of £0.9 billion, refl ecting
the sharp decline in UK interest rates, and
by the payment of £0.9 billion of dividends
to shareholders. Corporate actions
during 2014, comprising new distribution
agreements, debt repayment,
domestication of the Hong Kong branch,
impact of disposals, and foreign exchange
utilised a combined £1.3 billion of
economic capital. Model refi nements
accounted for the remaining year-on-year
movement.
These results are based on outputs from
our Solvency II internal model, which has
not yet been approved by the Prudential
Regulation Authority. The results assume
US equivalence, place no restrictions on
the economic value of overseas surplus,
and incorporate a number of other working
assumptions. Certain aspects of the
methodology and assumptions
underpinning these results will differ from
those which are applied in obtaining fi nal
Solvency II internal model approval. The
eventual Solvency II Pillar I ratio therefore,
remains uncertain and is expected to be
lower than our economic capital ratio.
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
2014 £m
Mark to
market
value
579
–
42
621
IFRS
basis
3,869
275
160
4,304
EEV
basis
4,448
275
202
4,925
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
investments
(1,480)
–
(1,480)
(2,230)
–
(2,230)
Net core structural borrowings of shareholder-
fi nanced operations
2,824
621
3,445
2,406
430
2,836
Note C6.1: Core structural borrowings of shareholder-fi nanced operations page 225
Our fi nancing and liquidity position
remained strong throughout the period.
Our central cash resources amounted
to £1.5 billion at 31 December 2014,
compared with £2.2 billion at the end of
2013, and we currently retain a further
£2.6 billion of untapped committed
liquidity facilities.
On an IFRS basis, the Group’s core
structural borrowings at 31 December
2014 were £4,304 million (31 December
2013: £4,636 million on an actual exchange
rate basis) and comprised £3,869 million
(31 December 2013: £4,211 million on an
actual exchange rate basis) of debt held by
the holding company, and £435 million
(31 December 2013: £425 million on an
actual exchange rate basis) of debt held by
the Group’s subsidiaries, Prudential Capital
and Jackson. The Group redeemed
US$750 million of 11.75 per cent perpetual
subordinated capital securities during
the year.
In addition to its net core structural
borrowings of shareholder-fi nanced
operations set out above, the Group also
has access to funding via the money
markets and has in place an unlimited
global commercial paper programme.
As at 31 December 2014, we had issued
commercial paper under this programme
totalling £365 million, US$1,926 million
and ¤135 million to fi nance non-core
borrowings.
Prudential’s holding company currently
has access to £2.6 billion of syndicated and
bilateral committed revolving credit
facilities, provided by 19 major
international banks, expiring in 2018 and
2019. Apart from small drawdowns to test
the process, these facilities have never
been drawn, and there were no amounts
outstanding at 31 December 2014. The
medium-term note programme, the SEC
registered US shelf 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 fl exible
funding capacity.
Prudential manages the Group’s core
Prudential manages the Group’s core
debt within a target level consistent with its
debt within a target level consistent with its
current debt ratings. At 31 December 2014,
current debt ratings. At 31 December
the gearing ratio (debt, net of cash
2014, the gearing ratio (debt, net of cash
and short-term investments, as a
proportion of IFRS shareholders’ funds
plus net debt) was 19 per cent, compared
to 20 per cent at 31 December 2013.
Prudential plc has strong debt ratings from
Standard & Poor’s, Moody’s and Fitch.
Prudential plc’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 except PAC, which
was placed on negative outlook by
Moody’s in April 2014 following the UK
market reforms announced in the March
2014 UK Budget.
The fi nancial strength of PAC is rated
AA by Standard & Poor’s, Aa2 by Moody’s
and AA by Fitch.
Jackson National Life Insurance
Company’s fi nancial strength is rated AA
by Standard & Poor’s, A1 by Moody’s and
AA by Fitch.
Prudential Assurance Co Singapore
(Pte) Ltd’s (Prudential Singapore) fi nancial
strength is rated AA by Standard & Poor’s.
Prudential plc Annual Report 2014
49
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Shareholders’ funds
Profi t aft er tax for the year
Exchange movements, net of related tax
Unrealised gains and losses on Jackson fi xed-income securities classifi ed
as available for sale16
Dividends
Other
Net increase (decrease) in shareholders’ funds
Shareholders’ funds at beginning of the year
Effect of domestication of Hong Kong branch
Shareholders’ funds at end of the year
Shareholders' value per share
Return on shareholders' funds17
IFRS
EEV
2014 £m
2013 £m
2014 £m
2013 £m
2,216
220
565
(895)
55
2,161
9,650
–
11,811
460p
26%
1,346
(255)
(1,034)
(781)
15
(709)
10,359
–
9,650
377p
23%
4,343
737
–
(895)
131
4,316
24,856
(11)
29,161
1,136p
16%
4,358
(1,077)
–
(781)
(87)
2,413
22,443
–
24,856
971p
19%
IFRS Consolidated statement of changes in equity page 125 and Note 12: Reconciliation of movement in shareholders’ equity page 291
In the second half of 2014 the US dollar
appreciated strongly relative to sterling
refl ecting market expectations of a
sustained recovery in the US. With
approximately 36 per cent of the Group’s
IFRS net assets (52 per cent of EEV net
assets) denominated in US dollars (or
currencies that are either pegged or
managed by reference to US dollars), this
generated a positive foreign exchange
movement on net assets in the year. In
addition, the reduction in US 10-year
treasury rates, produced unrealised gains
on fi xed-income securities held by Jackson
that are accounted on an amortised cost
basis under IFRS.
Taking these non-operating movements
into account, the Group’s IFRS
shareholders’ funds at 31 December 2014
increased by 22 per cent to £11.8 billion
(31 December 2013: £9.6 billion on an
actual exchange rate basis).
£ 29.2bn
EEV shareholders’ funds
equivalent to
1,136p
per share
Measuring our performance page 20
The Group’s EEV shareholders’ funds
also increased by 17 per cent to £29.2 billion
(31 December 2013: £24.9 billion on an
actual exchange rate basis). On a per share
basis the Group’s embedded value at
31 December 2014 stood at 1,136 pence, up
from 971 pence at 31 December 2013.
Corporate transactions
Bancassurance partnership with
Standard Chartered Bank PLC
On 12 March 2014 the Group announced
that it had entered into an agreement
expanding the term and geographic scope
of its strategic pan-Asia bancassurance
partnership with Standard Chartered Bank
PLC. Under the new 15-year agreement,
which commenced on 1 July 2014, a wide
range of Prudential life insurance products
are exclusively distributed through
Standard Chartered Bank branches in
nine markets – Hong Kong, Singapore,
Indonesia, Thailand, Malaysia, the
Philippines, Vietnam, India and Taiwan –
subject to applicable regulations in each
country. In China and South Korea,
Standard Chartered Bank distributes
Prudential’s life insurance products on a
preferred basis. Prudential and Standard
Chartered Bank have also agreed to
explore additional opportunities to
collaborate in due course elsewhere in Asia
and in Africa, subject to existing exclusivity
arrangements and regulatory restrictions.
As part of this transaction, Prudential
agreed to pay Standard Chartered Bank an
initial fee of US$1.25 billion which is not
dependent on future sales volumes. Of this
total, US$850 million was settled in the fi rst
half of 2014. The remainder will be paid in
two equal instalments of US$200 million
each in April 2015 and April 2016.
Sale of PruHealth and PruProtect
On 10 November 2014, Prudential
Assurance Company Limited completed
the sale of its 25 per cent equity stake in
the PruHealth and PruProtect businesses
to Discovery Group Europe Limited for
£155 million in cash. This resulted in an
IFRS profi t of £86 million and EEV gain of
£44 million, both of which have been
included in non-operating profi t.
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,
£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) were transferred.
Disposal of Japan life business
In February 2015 the Group completed the
disposal of its closed book life insurance
business in Japan, PCA Life Insurance
Company Limited (PCA Life Japan), to
SBI Holdings for US$85 million cash
consideration, of which US$17 million is
deferred and is dependent upon the future
performance of PCA Life Japan.
50
Prudential plc Annual Report 2014 Strategic report
Chief Financial Offi cer ’s report on our 2014 fi nancial performance continued
Entrance into Ghana and Kenya
life insurance markets
In April 2014 we completed the acquisition
of Express Life of Ghana, and in September
2014 we entered the Kenyan life insurance
market via our acquisition of Shield
Assurance Company Limited.
Dividend
The Board has decided to rebase the
full-year dividend upwards by 10 per cent,
refl ecting the 2014 fi nancial performance
of the Group. In line with this, the directors
recommend a fi nal dividend of 25.74 pence
per share (2013: 23.84 pence), which
brings the total dividend for the year to
36.93 pence (2013: 33.57 pence). This
rebase has been made possible by the
continued exceptionally strong
performance of the Group.
Although the Board has been able to
recommend such a rebase in 2014, 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 fi nancial fl exibility and
our assessment of opportunities to
generate attractive returns by investing in
specifi c areas of the business. The Board
believes that in the medium term
a dividend cover of around two times
is appropriate.
Notes
1 The 2014 EEV results of the Group are presented
on a post-tax basis and, accordingly 2013 results
are shown on a comparable basis.
2 Aft er Asia development costs.
3 Refer to note B1.1 in IFRS fi nancial statements for
4
the breakdown of other income and
expenditure, and other non-operating items.
Includes Group’s proportionate share of the
liabilities and associated fl ows of the insurance
joint ventures in Asia.
5 Defi ned as movements in shareholder-backed
policyholder liabilities arising from premiums
(net of charges), surrenders/withdrawals,
maturities and deaths.
6 For basis of preparation, see note I (a) of
7
additional unaudited IFRS fi nancial information.
Includes Group’s proportionate share in PPM
South Africa and the Asia asset management
joint ventures.
8 Net infl ows exclude Asia Money Market Fund
(MMF) infl ows of £9 million (2013: net infl ows
£522 million). External funds under
management exclude Asia MMF balances of
£4,800 million (2013: £4,296 million).
9 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 reclassifi cation as held for
sale during 2013, operating results exclude the
result of the Japan life insurance business.
Investment in new business as a percentage of
underlying free surplus generated from in-force
life business and asset management.
10
11 Payback period, measured on an undiscounted
basis, is the time in which the initial ‘cash’
outfl ow of investment is expected to be
recovered from the ‘cash’ infl ows generated by
the investment. The ‘cash’ outfl ow is measured
by our investment of free surplus in new
business sales. The payback period equals the
time taken for new business sales to generate
free surplus to cover this investment.
12 The full holding company cash fl ow is disclosed
in note II (a) of additional unaudited IFRS
fi nancial information.
13 Refer to the EEV basis supplementary
information – post-tax operating profi t based on
longer-term investment returns and post-tax
summarised consolidated income statement,
for the breakdown of other income and
expenditure, and other non-operating items.
‘Sweet spot’ markets are Indonesia, Singapore,
Hong Kong, Malaysia, Philippines, Vietnam and
Thailand.
14
15 The methodology and assumptions used in
calculating the economic capital results are set
out in note II (c) of additional unaudited fi nancial
information. The economic capital ratio is based
on outputs from 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 remain on
track to submit our Solvency II internal model to
the Prudential Regulation Authority for
approval in 2015 but, given the degree of
uncertainty remaining, these economic capital
disclosures should not be interpreted as outputs
from an approved internal model.
16 Net of related charges to deferred acquisition
costs and tax.
17 Operating profi t aft er tax and non-controlling
interests as percentage of opening shareholders’
funds.
Group Chief Risk Officer’s report on the risks
facing our business and our capital strength
Creating value on
a risk-adjusted basis
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—Group—aims—to—help—customers—
achieve—their—long-term—financial—goals—by—
providing—and—promoting—a—range—of—
products—and—services—that—meet—customer—
needs,—are—easy—to—understand—and—that—
deliver—real—value.—
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.—
We take exposure to risks
that are consistent with our
risk appetite framework
and philosophy towards
risk-taking, and where doing
so contributes to value creation
on a risk-adjusted basis.
Pierre-Olivier Bouée
Group Chief Risk Officer
Our strategy and operating principles
Balanced
metrics and
disclosures
Asia:
accelera t e
Disciplined
capital
allocation
Focus on
customers and
distribution
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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.—
The—diagram—overleaf—outlines—the—Group—
level—framework.
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.—Some—of—the—
key—responsibilities—of—the—Group—Risk—
Committee—include—the—responsibility—for—
recommending—the—Own—Risk—and—Solvency—
Assessment—and—other—regulatory—
submissions—to—the—Board,—keeping—the—
‘three—lines—of—defence’—framework—under—
review—and—monitoring—the—effectiveness—of—
the—Group—Chief—Risk—Officer.—
—
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Prudential retains material risks
only where consistent with our risk
appetite and risk-taking philosophy,
that is:
—— They—contribute—to—value—creation;—
—— Adverse—outcomes—can—be—
withstood;—and—
Sustainable
value for our
stakeholders
—— We—have—the—capabilities,—
expertise,—processes—and—controls—
to—manage—them.
Proactive risk
management
Our strategy and operating principles page 18
Prudential plc Annual Report 2014
52
Prudential plc Annual Report 2014 Strategic report
Group Chief Risk Offi cer’s report on the risks facing
our business and our capital strength continued
Risk-taking and the management
thereof forms the fi rst 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 Offi cer, with functional
oversight provided by Group Risk, Group
Compliance and Group Security.
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 verifi cation of
compliance with regulatory standards and
informs the Board, as well as the Group’s
management, on key regulatory issues
affecting the Group. Group Security is
responsible for developing and delivering
appropriate security measures with a view
to protecting the Group’s staff, physical
assets and intellectual property.
Principles and objective
(Unaudited)
Risk is defi ned as the uncertainty
that Prudential faces in successfully
implementing its strategies and objectives.
This includes all internal or external events,
acts or omissions that have the potential to
threaten the success and survival of
Prudential.
The control procedures and systems
established within the Group are designed
to manage rather than eliminate the risk of
failure to meet business objectives. They
can only provide reasonable and not
absolute assurance against material
misstatement or loss and focus on
aligning the levels of risk-taking with the
achievement of business objectives.
Material risks will only be retained
where this is consistent with Prudential’s
risk appetite framework and its philosophy
towards risk-taking. The Group’s current
approach is to retain such risks where
doing so contributes to value creation and
the Group is able to withstand the impact
of an adverse outcome, and has the
necessary capabilities, expertise,
processes and controls to appropriately
manage the risk.
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 defi ned 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 defi ne and monitor aggregate risk
limits based on fi nancial and non-fi nancial
stresses for our earnings volatility, liquidity
and capital requirements as follows:
Earnings volatility: the objectives of the
limits are to ensure that:
a. the volatility of earnings is consistent
with the expectations of stakeholders;
b. the Group has adequate earnings (and
cash fl ows) to service debt, expected
dividends and to withstand unexpected
shocks; and
c. earnings (and cash fl ows) are managed
properly across geographies and are
consistent with funding strategies.
Group level framework
Board
Board
Nomination
Committee
Remuneration
Committee
Risk
Committee
Audit
Committee
Risk objectives
In keeping with this philosophy, the
Group has fi ve 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
1st line of defence
2nd line of defence
3rd line of defence
2 Monitoring
Executives
GEC
BSCMC
Management
Group CEO
CFO
GERC
Group CRO
TAC
GCRC
GORC
GwIRC
GAB-
CSC
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
Group Executive Committee
Balance Sheet & Capital Management Committee
Group Executive Risk Committee
Technical Actuarial Committee
Group Credit Risk Committee
Group Operational Risk Committee
Group-wide information Risk Committee
GEC
BSCMC
GERC
TAC
GCRC
GORC
GwIRC
GABCSC Group Anti-Bribery and Corruption Steering Committee
STOC
Solvency II Technical Oversight Committee
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 to manage
the response to potentially
extreme events
4 Communication
Eff ectively communicate the
Group’s risk, capital and
profi tability position to both
internal and external
stakeholders
5 Culture
Foster a risk management
culture, providing quality
assurance and facilitating the
sharing of best practice
Prudential plc Annual Report 2014
53
Risk management – the fi rst line of defence
Risk-taking and the management thereof forms the fi rst 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.
Meets: Usually fortnightly
Balance Sheet and Capital Management Committee (BSCMC)
Purpose: Supports the Chief Financial Offi cer in the
management of the Group’s balance sheet, as well as providing
oversight to the activities of Prudential Capital, which
undertakes the treasury function for the Group. The BSCMC is
comprised of a number of functional specialists.
Meets: Monthly
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 Offi cer or the Group Chief Risk Offi cer, 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
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 oft en as required
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
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
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The Group-level risk committees are supported by the Group Chief Risk Offi cer, with functional oversight provided by Group Security,
Group Compliance and Group Risk. Group Security is responsible for developing and delivering appropriate security measures with a
view to protecting the Group’s staff , physical assets and intellectual property. Group Compliance provides verifi cation of compliance
with regulatory standards and informs the Board, as well as management, on key regulatory issues aff ecting 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
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, its Audit and Risk Committees and the Group Executive Committee, to help protect the assets, sustainability and reputation
of the Group.
54
Prudential plc Annual Report 2014 Strategic report
Group Chief Risk Offi cer’s report on the risks facing
our business and our capital strength continued
The two measures used to monitor the
volatility of earnings are EEV operating
profi t and IFRS operating profi t,
although EEV and IFRS total profi ts are
also considered.
Liquidity: the objective is to ensure that
the Group is able to generate suffi cient
cash resources to meet fi nancial obligations
as they fall due in business as usual and
stressed scenarios.
Capital requirements: the limits aim to
ensure that:
a. the Group meets its internal economic
capital requirements;
b. the Group achieves its desired target
rating to meet its business objectives; and
c. supervisory intervention is avoided.
The two measures 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 defi ne risk appetite statements
and measures (ie limits, triggers and
indicators) for the major constituents of
each risk type as categorised and defi ned
in the Group Risk Framework, where
appropriate. These appetite statements
and measures cover the most signifi cant
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.
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
diversifi cation effects between business
units) relative to the aggregate risk limits.
Risk policies
(Audited)
Risk policies set out specifi c 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 Offi ce
and business units confi rm 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. by the leadership and behaviours
demonstrated by management;
b. by building skills and capabilities to
support management; and
c. by including risk management (through
the balance of risk with profi tability 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 Offi cer
advises the Group Remuneration
Committee on adherence to our risk
framework and appetite.
Risk reporting
(Unaudited)
An annual ‘top-down’ identifi cation of our
top risks assesses the risks that have the
greatest potential to impact the Group’s
operating results and fi nancial condition.
The management information received by
the Group Risk Committee 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.
Group Risk Framework risk categorisation
Category
Risk type
Defi nition
Financial risks
Market risk
Credit risk
Insurance risk
The risk of loss for the Group’s business, or of adverse change in the fi nancial situation,
resulting, directly or indirectly, from fl uctuations in the level or volatility of market prices
of assets and liabilities.
The risk of loss for the Group’s business or of adverse change in the fi nancial position,
resulting from fl uctuations in the credit standing of issuers of securities, counterparties
and any debtors in the form of default or other signifi cant credit event (e.g. downgrade
or spread widening).
The risk of loss for the Group’s business or of adverse change in the value of insurance
liabilities, resulting from changes in the level, trend or volatility of a number of insurance
risk drivers. This includes adverse mortality, longevity, morbidity, persistency and
expense experience.
Liquidity risk
The risk of the Group being unable to generate suffi cient cash resources or to meet
fi nancial obligations as they fall due in business as usual and stress scenarios.
Non-fi nancial risks Operational risk
The risk of loss arising from inadequate or failed internal processes, or from personnel
and systems, or from external events other than those covered by business environment
risk.
Business
environment risk
Exposure to forces in the external environment that could signifi cantly change the
fundamentals that drive the business’s overall strategy.
Strategic risk
Ineffective, ineffi cient or inadequate senior management processes for the development
and implementation of business strategy in relation to the business environment and the
Group’s capabilities.
Prudential plc Annual Report 2014
55
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Key risks
Market risk
(i) Investment risk
(Audited)
In Prudential UK, investment risk arising on
the assets in the with-profi ts fund 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 value of the future transfers is partially
protected against equity falls by hedging
conducted outside of the fund. The fund’s
large inherited estate – estimated at
£7.2 billion as at 31 December 2014
(1 January 2014: £6.8 billion, after the
domestication of Hong Kong business) –
can absorb market fl uctuations and protect
the fund’s solvency. The inherited estate is
partially protected against falls in equity
markets through an active hedging policy
within the fund.
In Asia, our shareholder exposure to
equities relates to revenue from unit-linked
products and to the effect of falling equity
markets on its with-profi ts businesses.
In Jackson, investment risk arises in
relation to the assets backing the policies.
In the case of the ‘spread business’,
including fi xed annuities, these assets are
generally bonds. For the variable annuity
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
repricing 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 suffi cient to fund the cost incurred
to hedge or reinsure the 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 either more or less signifi cant 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
reprice 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 fl ows
for annuity payments with those from
investments; movements in interest rates
may have an impact on profi ts 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-profi ts business is exposed to
interest rate risk as a result of underlying
guarantees. Such risk is largely borne by
the with-profi ts 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 fl ows 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 fi xed, fi xed index and variable annuity
books. Movements in interest rates can
infl uence 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
fl uctuations. Our international operations
in the US and Asia, which represent a
signifi cant proportion of our operating
profi t and shareholders’ funds, generally
write policies and invest in assets
denominated in local currency. Although
this practice limits the effect of exchange
rate fl uctuations on local operating results,
it can lead to signifi cant fl uctuations in our
consolidated fi nancial 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
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 signifi cant 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 signifi cant shareholder exposures to
foreign exchange risks in currencies
outside the local territory. Currency
borrowings, swaps and other derivatives
are used to manage exposures.
Credit risk
(Audited)
We invest in fi xed 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 defi ned
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 fi xed income assets
represent 37 per cent or £31.7 billion
of our exposure. Credit risk arising from
£46.6 billion of fi xed income assets is
largely borne by the with-profi ts fund,
although shareholder support may be
required should the with-profi ts fund
become unable to meet its liabilities.
The debt portfolio of our Asia business
totalled £23.6 billion at 31 December 2014.
Of this, approximately 67 per cent was in
unit-linked and with-profi ts funds with
minimal shareholder risk. The remaining
33 per cent is shareholder exposure.
Credit risk arises in the general account
of our US business, where £33.0 billion of
fi xed income assets back shareholder
liabilities including those arising from fi xed
annuities, fi xed index annuities and life
insurance. Included in the portfolio are
£2.3 billion of commercial mortgage-
backed securities and £1.6 billion of
residential mortgage-backed securities, of
which £0.8 billion (52 per cent) are issued
by US government-sponsored agencies.
The shareholder-owned debt and
loan portfolio of the Group’s asset
56
Prudential plc Annual Report 2014 Strategic report
Group Chief Risk Offi cer’s report on the risks facing
our business and our capital strength continued
management operations of £2.3 billion as
at 31 December 2014 is principally related to
Prudential Capital operations. Prudential
Capital generates revenue by providing
bridging fi nance, managing investments
and operating a securities lending and cash
management business for the Prudential
Group and our clients.
The Group’s credit exposure to the oil
and gas sector represents circa 5 per cent
or £3.4 billion of the shareholder portfolio.
Some counterparties may experience
stress from ongoing low oil prices but this is
not currently expected to have a material
adverse impact on the Group’s exposure.
The oil and gas sector is subject to ongoing
monitoring and regular management
information reporting to the Group’s
risk committees.
Further details of the composition
and quality of our debt portfolio, and
exposure to loans, can be found in the
IFRS fi nancial statements.
(ii) Group sovereign debt and bank
debt exposure
(Audited)
Sovereign debt1 represented 15 per cent or
£11.0 billion of the debt portfolio backing
shareholder business at 31 December 2014
(31 December 2013: 15 per cent or
£10.2 billion). 43 per cent of this was rated
AAA and 95 per cent investment grade
(31 December 2013: 44 per cent AAA,
92 per cent investment grade). At
31 December 2014, the Group’s
shareholder-backed business’s holding in
Eurozone sovereign debt1 was £476 million.
82 per cent of this was AAA rated
(31 December 2013: 84 per cent AAA
rated). Shareholder exposure to the
Eurozone sovereigns of Italy and Spain is
£63 million (31 December 2013:
£54 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 fi nancial 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’s risk committees
and the Board.
The exposures held by the shareholder-
backed business and with-profi ts funds in
sovereign debt and bank debt securities at
31 December 2014 are given in Note
C3.3(f) of the Group’s IFRS fi nancial
statements.
(iii) Counterparty credit risk
(Audited)
We enter into a variety of exchange traded
and over-the-counter derivative fi nancial
instruments, including futures, options,
forward currency contracts and swaps
such as interest rate swaps, infl ation 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 International Swaps and
Derivatives Association Inc master
agreements and we have collateral
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.
Note C3.3: Debt securities page 190
Note C3.4: Loans portfolio page 197
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
profi tability 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 both industry data and
experience from our substantial annuity
portfolio. The assumptions that we make
about future rates of mortality
improvement within our UK annuity
portfolio are key to our pricing and
reserving. Recent changes to UK
legislation, removing an individual’s
requirement to convert a pension fund
into an annuity, are also demanding
particular scrutiny. We continue to seek
opportunities to transfer longevity risk to
reinsurers or to the capital markets and
have transacted when terms are suffi ciently
attractive and aligned with our risk
management framework.
Morbidity risk is mitigated by
appropriate underwriting and use of
reinsurance. Our morbidity assumptions
refl ect our recent experience and
expectation of future trends for each
relevant line of business. In Asia, a key
assumption is the rate of medical infl ation,
typically in excess of general price infl ation.
Our persistency assumptions refl ect
recent experience for each relevant line of
business, and any expectations of future
persistency. Persistency risk is mitigated by
appropriate training and sales processes
and managed locally post-sale through
regular experience monitoring and the
identifi cation of common characteristics
of poor persistency business. 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 signifi cant
internal sources of liquidity that are
suffi cient to meet all of its expected
requirements for the foreseeable future
without having to make use of external
funding. In aggregate, the Group currently
has £2.6 billion of undrawn committed
facilities, expiring in 2018 and 2019. 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 suffi cient.
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
signifi cant 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 identifi ed 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
Prudential plc Annual Report 2014
57
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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.
The EU has developed 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, having been adopted
by the Council of the European Union
in April 2014, amended certain aspects
of the Solvency II Directive. The new
approach is based on the concept
of three pillars – minimum capital
requirements, supervisory review
of fi rms’ assessments of risk, and
enhanced disclosure requirements.
Specifi cally, Pillar 1 covers the
quantitative requirements around own
funds, valuation rules for assets and
liabilities and capital requirements. Pillar 2
provides the qualitative requirements for
risk management, governance and
controls, including the requirement for
insurers to submit an Own Risk and
Solvency Assessment which will be used
by the regulator as part of the supervisory
review process. Pillar 3 deals with the
enhanced requirements for supervisory
reporting and public disclosure.
A key aspect of Solvency II is that the
assessment of risks and capital
requirements are intended to be aligned
more closely with economic capital
methodologies and may allow us to make
use of our internal capital models if
approved by the Prudential Regulation
Authority.
Following adoption of the Omnibus II
Directive, Solvency II will be implemented
on 1 January 2016, although the European
Commission and the European Insurance
and Occupational Pensions Authority
(EIOPA) are continuing to develop the
detailed rules and guidelines that will
supplement the high-level rules
and principles of the Solvency II and
Omnibus II Directives, which are not
currently expected to be fi nalised until
mid-late 2015.
There is signifi cant uncertainty
regarding the fi nal outcome from 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
clarifi ed 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 and whether restrictions are
placed on the economic value of overseas
surplus, are subject to supervisory
judgement and approval. There is a risk
that the effect of the measures fi nally
adopted could be adverse for us, including
potentially a signifi cant 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 fi nancial services groups.
We are actively participating in shaping the
outcome through our involvement in
industry bodies and trade associations,
including the Pan-European Insurance
Forum, Chief Risk Offi cer Forum and Chief
Financial Offi cer Forum, 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 fl exibility 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 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 and the Common Framework for
the Supervision of Internationally Active
Insurance Groups (ComFrame) being
developed by the International Association
of Insurance Supervisors.
The Dodd-Frank Act represents a
comprehensive overhaul of the fi nancial
services industry within the US that,
among other reforms to fi nancial services
entities, products and markets, may
subject fi nancial institutions designated
as systemically important to heightened
prudential and other requirements
intended to prevent or mitigate the impact
of future disruptions in the US fi nancial
system. The full impact of the Dodd-Frank
Act on our 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 Financial Stability
Board announced the initial list of nine
insurance groups that have been
designated as Global Systemically
Important Insurers. Following another
assessment in 2014, the Financial Stability
Board confi rmed the same nine insurance
groups as Global Systemically Important
Insurers on 6 November 2014. This list
included Prudential as well as a number of
its competitors. Designation as a Global
Systemically Important Insurer has led to
additional policy measures being applied
to the designated group. Based on the
policy framework released by the IAIS
and subsequent guidance papers these
additional policy measures include
enhanced group-wide supervision,
effective resolution measures of the group
in the event of failure, loss absorption, and
higher loss absorption capacity. This
enhanced supervision commenced
immediately and included the annual
submission of a Systemic Risk Management
Plan (SRMP), a group Recovery Plan (RCP)
and Liquidity Risk Management Plan
(LRMP). Prudential is monitoring the
development and potential impact of the
framework of policy measures and is
continuing to engage with the Prudential
Regulation Authority on the implications
of the policy measures and Prudential’s
designation as a G-SII. The G-SII regime
also introduces two types of capital
requirements; the fi rst, a Basic Capital
Requirement (BCR), designed to act as a
minimum group capital requirement and
the second, a Higher Loss Absorption
(HLA) requirement, that should refl ect the
drivers of the assessment of G-SII
designation. A consultation paper on BCR
was released in July 2014 and the Group
participated in fi eld testing ahead of the
58
Group Chief Risk Officer’s report on the risks facing
our business and our capital strength continued
BCR being agreed with the FSB and
G20 in 2014. The IAIS has published a list
of principles on HLA and a more detailed
consultation paper is expected in June
2015 ahead of the IAIS finalising HLA by
the end of 2015. Implementation of the
regime is likely to be phased in over a
number of years with the BCR being
introduced in 2015 on a confidential
reporting basis to group-wide supervisors.
The HLA requirement is expected to 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 outline a set of common
global principles and standards for group
supervision and may increase the focus of
regulators in some jurisdictions. One of
the framework’s key components is an
Insurance Capital Standard (ICS) which
would be expected to form the group
solvency capital standard under
ComFrame. In December 2014, the IAIS
issued a comprehensive consultation
paper on ICS and a quantitative field test
is planned during 2015, which will be
followed by another consultation
in December 2015. Further field testing
exercises are planned until 2018 to assess
the impact 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.
Capital management
Offset by:
We continue to operate with a strong
solvency position, while maintaining high
levels of liquidity and capital generation.
This is testament to our capital discipline,
the effectiveness of our hedging activities,
our low direct Eurozone exposure, the
minimal level of credit impairments and
the natural offsets in our portfolio of
businesses which dampen the effects of
movements in interest rates.
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. We estimate that our IGD
capital surplus is £4.7 billion at
31 December 2014 (before taking into
account 2014 final dividend), with available
capital covering our capital requirements
2.4 times. This compares to a capital
surplus of £5.1 billion at the end of 2013
(before taking into account the 2013
final dividend).
The movements in 2014 mainly
comprise:
— Net capital generation (inclusive of
market and foreign exchange
movements) mainly through operating
earnings (in-force releases less
investment in new business, net of tax)
of £2.5 billion.
estimated IGD capital surplus
covering capital requirements
£4.7bn
2.4
times
Measuring our performance page 20
— The cost of new intangibles acquired in
the year including renewal of the
bancassurance partnership agreement
with Standard Chartered Bank of
£0.8 billion;
— £0.4 billion of subordinated debt
repayment;
— £0.2 billion due to reduction in the
shareholders’ interest in future transfers
from the UK’s with-profits fund asset
allowance (as discussed below) and
other smaller one-off items;
— Final 2013 dividend of £0.6 billion and
interim 2014 dividend of £0.3 billion;
and
— External financing costs and other
central costs, net of tax, of £0.6 billion
IGD surplus represents the accumulation of
surpluses across all of our operations based
on local regulatory minimum capital
requirements with some adjustments,
pursuant to the requirements of Solvency I.
The calculation does not fully adjust capital
requirements for risk nor does it capture
the true economic value of assets.
There is broad agreement that
ultimately it would be beneficial to replace
the IGD regime with a regime that is
appropriately risk-based.
(Unaudited)
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 (SHIFT) from the
UK’s with-profits business and this
remained in place, contributing £0.2 billion
to the IGD at 31 December 2013. As per
guidance received from the PRA in January
2013, credit taken for the SHIFT asset was
reduced to zero in January 2014.
Stress testing
(Unaudited)
As at 31 December 2014, 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 2014
levels would have no impact on the
IGD surplus;
Prudential plc Annual Report 2014 Strategic report Prudential plc Annual Report 2014
59
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— A 40 per cent fall in equity markets
(comprising an instantaneous
20 per cent fall followed by a further
20 per cent fall over a four-week period)
would reduce the IGD surplus by
£950 million;
— A 100 basis points reduction (subject to
a fl oor of zero) in interest rates would
reduce the IGD surplus by £450 million;
and
— Credit defaults of 10 times the expected
level would reduce IGD surplus by
£700 million.
The impact of the 100 basis points
reduction in interest rates is exacerbated
by the current regulatory permitted
practice used by Jackson, which values all
interest rate swaps at book value rather
than fair value for regulatory purposes.
At 31 December 2014, removing the
permitted practice would have increased
reported IGD surplus to £5.1 billion. As at
31 December 2014, it is estimated that a
100 basis point reduction in interest rates
(subject to a fl oor of zero) would have
resulted in an IGD surplus of £4.9 billion,
excluding the permitted practice.
Prudential believes that the results of
these stress tests, together with the
Group’s strong underlying earnings
capacity, our established hedging
programmes and our additional areas of
fi nancial fl exibility, demonstrate that we
are in a position to withstand signifi cant
deterioration in market conditions.
Other capital metrics
(Unaudited)
We use an internal economic capital
assessment calibrated on a multi-term basis
to monitor our capital requirements across
the Group. This approach considers, by risk
drivers, the timeframe over which each risk
can threaten the ability of the Group to
meet claims as they fall due, allowing for
realistic diversifi cation benefi ts. This
assessment provides valuable insights
into our risk profi le and for continuing
to maintain a strong capital position.
All of our subsidiaries continue to
hold strong capital positions on a local
regulatory basis. Jackson’s risk-based
capital ratio level as of 31 December 2014
was 456 per cent after remitting
£415 million to the Group in 2014 while
supporting its balance sheet growth and
maintaining adequate capital. The value of
the estate of our UK With-Profi ts fund as at
31 December 2014 is estimated at
£7.2 billion after the effect of completing
the domestication of the Hong Kong
branch business of the PAC With-Profi ts
fund, which was effective on 1 January
2014 (1 January 2014: £6.8 billion, after the
effect of the transfer). The value of the
shareholders’ interest in future transfers
from the with-profi ts funds in the UK is
estimated at £2.2 billion (1 January 2014:
£2.3 billion, after the effect of the transfer).
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 year, at 31 December 2014 we
maintained sizeable credit default reserves
at £2.2 billion (31 December 2013:
£1.9 billion), representing 41 per cent of the
portfolio spread over swaps, compared
with 47 per cent at 31 December 2013.
Economic capital position (based
on our Solvency II internal model)
(Unaudited)
Following ratifi cation of the Solvency II
Omnibus II Directive on 16 April 2014,
Solvency II is scheduled to come into force
on 1 January 2016. Our economic capital
results are based on outputs from our
Solvency II internal model. Although the
Solvency II and Omnibus II Directives,
together with the Level 2 ‘Delegated Act’
published on 17 January 2015, provide a
framework for the calculation of Solvency II
results, there remain material areas of
policy 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 remain on track
to submit our Solvency II internal model to
the Prudential Regulation Authority for
approval in 2015 but given the degree of
uncertainty remaining the economic capital
position disclosed below should not be
interpreted as output from an approved
internal model.
At 31 December 2014 the Group had
economic capital surplus2 of £9.7 billion
(2013: £11.3 billion) and an economic
capital ratio of 218 per cent (2013:
257 per cent) before taking into account
the 2014 fi nal dividend.
During 2014, the Group economic
capital surplus reduced from £11.3 billion
to £9.7 billion. The total movement in the
Group economic capital surplus over the
year was driven by:
— Operating experience positive
£1.8 billion: generated by in-force
business, new business written in 2014,
the impact of non-market assumption
changes and non-market experience
variances over the year;
— Non-operating experience negative
— Other capital movements negative
£2.2 billion: representing a reduction
in surplus from the repayment of
subordinated debt (negative
£0.4 billion), renewal of the
bancassurance partnership agreement
with Standard Chartered Bank
(negative £0.8 billion), the negative
capital effect of the domestication of
the Hong Kong branch (negative
£0.3 billion), the sale of the PruHealth
and PruProtect businesses (positive
£0.1 billion), foreign currency
translation effects (positive £0.1 billion)
and dividend payments in 2014
(negative £0.9 billion); and
— Model changes negative £0.3 billion: a
negative impact to Group surplus, for the
estimated impact of evolving the liability
discount rate for UK shareholder-backed
annuity business from one based on a
liquidity premium to one based on the
matching adjustment, and other internal
model refi nements.
The economic capital results are based on
outputs from our Solvency II internal model
with a number of key working assumptions.
Further explanation of the underlying
methodology and assumptions are set out
in note II of Additional unaudited fi nancial
information. Certain aspects of the
methodology and assumptions
underpinning these results will differ from
those which are applied in obtaining fi nal
internal model approval. The eventual
Solvency II Pillar I ratio, therefore, remains
uncertain and is expected to be lower than
our economic capital ratio.
Stress testing
(Unaudited)
At 31 December 2014, stress testing the
economic capital position gives the
following results and demonstrates the
Group’s ability to withstand signifi cant
deteriorations in market conditions:
— An instantaneous 20 per cent fall in
equity markets would reduce surplus by
£0.6 billion and reduce the economic
solvency ratio to 214 per cent;
— An instantaneous 40 per cent fall in
equity markets would reduce surplus by
£2.2 billion and reduce the economic
solvency ratio to 195 per cent;
— A 50 basis points reduction in interest
rates (subject to a fl oor of zero) would
reduce surplus by £1.4 billion and
reduce the economic solvency ratio to
195 per cent;
£0.9 billion: mainly arising from negative
market experience during 2014,
principally driven by the reduction in
long-term interest rates in the UK;
— A 100 basis points increase in interest
rates would increase surplus by
£1.8 billion and increase the economic
solvency ratio to 254 per cent; and
60
Prudential plc Annual Report 2014 Strategic report
Group Chief Risk Offi cer’s report on the risks facing
our business and our capital strength continued
— A 100 basis points increase in credit
spreads (with 15 per cent downgrades
in the UK annuity portfolio and credit
defaults of 10 times the expected level
in Jackson) would reduce surplus by
£2.1 billion and reduce the economic
solvency ratio to 190 per cent.
Note II(c): Development of economic capital
page 322
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 effi ciently
allocate capital, we measure the use of,
and the return on, capital.
We use a variety of metrics for
measuring capital performance and
profi tability, including traditional
accounting metrics and economic returns.
Capital allocation decisions are supported
by this quantitative analysis, as well as
strategic considerations.
The economic framework measures
risk-adjusted returns on economic capital,
a methodology that ensures meaningful
comparison across the Group. Capital
utilisation, return on capital and new
business value creation are measured at
the product level as part of the business
planning process.
Notes
1 Excludes Group’s proportionate share in joint
ventures and unit-linked assets and holdings of
consolidated unit trusts and similar funds.
2 The methodology and assumptions used in
calculating the economic capital results are set
out in note II (c) of Additional unaudited
fi nancial information. The economic capital
ratio is based on outputs from 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
remain on track to submit our Solvency II
internal model to the Prudential Regulation
Authority for approval in 2015 but given the
degree of uncertainty remaining these
economic capital disclosures should not be
interpreted as outputs from an approved
internal model.
61
Supporting local
communities
We—seek—to—make—a—
positive—contribution—
to—our—communities—
through—long-term—
partnerships—
with—charitable—
organisations—
that—make—a—real—
difference—
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:
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—— Serving—our—customers;
P r o te cting the
v iro n m ent
n
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—— Valuing—our—people;
—— Supporting—local—communities;—and
—— Protecting—the—environment.—
Protecting the
environment
We—take—
responsibility—for—
the—environment—
in—which—we—operate—
Page 68
prudential.co.uk/corporate-responsibility
Corporate responsibility review
Helping build
strong communities
Our corporate responsibility strategy
u r
e r s
Servin g o
custo m
V
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Long-term
sustainable
value
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Serving our
customers
We—aim—to—provide—
fair—and—transparent—
products—that—
meet—our—
customers’—needs—
Page 62
Valuing our
people
We—aspire—to—
retain—and—develop—
highly—engaged—
employees—
Page 63
Performance highlights
total community investment
£19.6m
170,000
children in Asia supported to read over
three years through First Read programme
62,309 hours
volunteered by employees across the
Prudential Group
£518,101
donated by employees through payroll
giving across the Group
In 2014 we increased the scale
of our corporate responsibility
activities. In partnership with
charitable organisations, we
provide long-term funding
and deploy the expertise of
the many volunteers from
our workforce on projects
that help to improve the
lives of individuals and
strengthen communities.
Paul Manduca
Chairman
Strategic reportCorporate responsibility review Prudential plc Annual Report 2014
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Corporate responsibility review continued
Our corporate responsibility approach
We create social value through our
day-to-day operations, by providing
savings, income, investment and
protection products and services. We
off er customers ways to help manage
uncertainty and build a more secure
future. Furthermore, in seeking to
match the long-term liabilities we
have towards our customers with
similarly long-term fi nancial assets,
we are able to provide capital
that fi nances businesses, builds
infrastructure and fosters
economic and social development.
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 corporate responsibility principles:
— Serving our customers: we aim to
provide fair and transparent products
that meet our customers’ needs;
— Valuing our people: we aspire to
retain and develop highly engaged
employees;
— Supporting local communities:
we seek to make a positive contribution
to our communities through long-term
partnerships with charitable
organisations that make a real
difference; and
— Protecting the environment: we take
responsibility for the environment in
which we operate.
These themes provide a framework for
our businesses as to how they should focus
their corporate responsibility efforts and
resources in the context of their
individual markets.
This review gives an overview of our
activities and progress in 2014. More
detailed information is available online at
www.prudential.co.uk/corporate-
responsibility
Serving our customers
Prudential has been meeting people’s
needs for 166 years and today we serve
around 24 million insurance customers in
diverse markets.
In each of our businesses, we are
focused on providing for a distinct set
of customers’ needs: the signifi cant and
growing demand for saving and protection
of the middle class in Asia; the retirement
income requirements of baby boomers in
the US; and the fi nancial needs of the UK’s
ageing population, which needs both to
save more and to access secure income
in retirement.
We want our customers to stay with
us for the long term. This means we must
listen to them to understand and respond
to their changing needs, and maintain their
trust in us with fair, transparent products
and services.
Asia
Listening to and understanding customers’
needs is the fi rst step before the launch of
any new initiative, product or service.
This results in fi nancial solutions that are
customised to the needs of each segment
of the population, from young parents
starting a family to middle-aged people
providing for their extended family. The
business has been operating in Asia for
more than 90 years and has become a
leading provider of health and protection
products, typically attached to a long-term
savings policy. These products are driven
by the needs of Asia’s rapidly growing
middle classes and their aspirations to save
for the future, protect their families and
increase their wealth.
In 2014, Prudential Corporation Asia
introduced a number of tailored products
and services.
Prudential Hong Kong introduced
PRUmyhealth cancer protector, a lifetime
guaranteed renewable cancer protection
plan which offers customers
reimbursement of both inpatient and
outpatient cancer treatment costs,
from diagnostic tests to post-treatment
monitoring, at an affordable premium rate.
Specifi cally designed for the Hong Kong
market, PRUmyhealth cancer protector
also covers the costs of chemotherapy,
radiotherapy, targeted therapy and
hormonal therapy conducted on an
outpatient basis, which are usually not
covered under traditional medical
insurance plans.
product in the market that offers customers
real-time fi nancial support for medical
treatment following an accident. To
support this product a mobile application
called PruCarePlus provides a quick and
convenient guide to hospitals and medical
practitioners in Vietnam.
US
Prudential’s US operation develops and
distributes products that seek to address
the retirement needs of its more than
four million contract-holders through the
ups and downs of fi nancial market cycles.
Jackson offers a diverse suite of variable,
fi xed and fi xed-index annuity products,
designed with a variety of customisable
features and options to fi t a wide range
of investor needs, wants and goals.
As many investors entering or
approaching retirement possess similar
needs in the form of guaranteed income
after leaving the workforce and protections
for assets accrued over a lifetime,
consumer demand for insured retirement
products in the US remains high.
Jackson is committed to ensuring
customers are well informed and have
access to the most up-to-date information,
and in 2013 launched the Center for
Financial Insight website. This aims to
ensure that consumers have the knowledge
and confi dence needed to make informed
decisions regarding their fi nancial future,
regardless of whether they choose Jackson
products. For example, to help meet the
growing need for knowledge related to
Alzheimer’s disease, the centre has featured
articles relating to the risks posed by the
condition, which currently affects one in
nine older Americans, and actions people
can take to prepare for a future affected by
dementia. While some of the most popular
content appealed to a pre-retiree or
retirement age demographic, other popular
articles were geared more towards younger
generations of investors developing an
interest in their fi nancial future.
Prudential Assurance Malaysia Berhad
Since its launch the site has seen more
introduced PRUcancer plan, a fi rst-of-its-
kind cancer plan in the market where
underwriting is based on cancer risk only.
Conditions such as stroke, hypertension,
obesity and diabetes, which have very little
or no correlation with cancer risk, may not
be taken into consideration when
determining eligibility to the plan. Further
protection is provided as the remaining
sum assured will revert to the full
original amount six months after the
policyholder has been diagnosed with
early-stage cancer.
Prudential Vietnam Life introduced a
new personal accident insurance product
called Phu-Tam An, a comprehensive
protection solution with wide coverage
against all accidental risks. It is the fi rst
than 625,000 unique visits, which is an
average of more than 29,000 per month.
There have been more than 1.87 million
page views, which is an average of more
than 90,000 per month. The site is on track
to reach two million page views by the
second anniversary of its launch.
UK and Europe
The UK Government’s 2014 Budget saw
the announcement of the most widespread
changes to pensions regulations for more
than a generation. The business welcomed
the changes as a boost to help address the
‘savings gap’ in the UK, while recognising it
would also provide signifi cant long-term
opportunities for our business.
Prudential plc Annual Report 2014
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Prudential UK & Europe acted quickly
after the Budget and proactively contacted
customers who had recently purchased an
annuity and were immediately impacted by
the changes. The ‘cooling-off’ period was
extended and the necessary product and
system modifi cations were made to
accommodate the new rules for pension
drawdown customers – all in just a few
days. This proactive approach and ability
to give customers the information they
needed at a very uncertain time
demonstrated the commitment of the
business to ‘doing the right thing’ for
customers. The most signifi cant changes
from the 2014 Budget come into force
from April 2015 and will allow savers
greater choice over how they take their
pensions. We have undertaken a wide
ranging and challenging body of work to
ensure our readiness to accommodate
these changes and keep our customers at
the heart of everything we do.
This commitment to quality is refl ected
in Prudential UK & Europe’s continued
success in the Financial Adviser Service
Awards. These awards are highly regarded
in the industry and recognise the
importance of the service given by product
providers to fi nancial advisers and
intermediaries. Product providers are rated
across a number of core criteria and only
those that perform consistently well in all
areas are considered for a fi ve star award.
For the fourth year running Prudential UK
& Europe retained its two fi ve star ratings
– in the Life and Pensions, and Investments
categories. Due to the consistently strong
performance over the last four years, the
business was also presented with an
outstanding achievement award.
Asset management
Throughout its history M&G, Prudential’s
UK and European asset management
business, has pioneered fresh approaches
to investment to enhance returns for
clients, including the fi rst monthly savings
plan for mutual funds in the 1950s and the
fi rst equity dividend fund in the 1960s.
M&G continues to provide market
insights to clients, intermediaries and
others through a number of channels,
including a programme of roadshows and
events such as Meet the Managers and the
Annual Investment Forum, and its Bond
Vigilantes blog. The recently launched
M&G Client Council is an innovative new
way for investors to communicate what
they want from M&G and help to shape the
products and services offered. A group of
investors has been invited to join the fi rst
council and take part in regular online
surveys and interviews throughout the
year. More than 300 M&G direct clients are
currently taking part. The feedback is used
to make changes and improvements to
services and communications, and to
keep all members informed via regular
emails and online updates through a
dedicated website.
M&G is a long-term, active investor that
takes seriously its responsibility to look
after clients’ assets, often working closely
with the management of the companies in
which it invests. Active voting is an integral
part of M&G’s investment approach both
adding value and protecting our interests
as shareholders. The M&G website
provides an overview of voting history:
www.mandg.co.uk/corporate/
about-mg/investment-philosophy/
corporate-governance/voting-history/
Valuing our people
We foster an environment in which our
people fi nd value and meaning in their
work, and deliver outstanding
performance for our customers,
shareholders and communities. This is
achieved through our continued focus
on diversity and inclusion, talent
development, employee engagement,
and performance and reward.
Diversity and inclusion
Prudential believes that a diversity of skill
sets and backgrounds enriches the
organisation. As a company, we believe in
supporting human rights, acting responsibly
and with integrity. We monitor the diversity
of our leadership and our leadership
pipeline, with diversity and inclusion KPIs
reported to the Board annually.
Our policies are guided by the principles
of the UN’s Universal Declaration of
Human Rights and the International Labour
Organisation’s core labour standards.
These are also incorporated into our Group
Code of Business Conduct, which sets out
the Group values and expected standards
of behaviour for all employees, and in our
Group Outsourcing and Third-Party
Supply Policy.
We maintain an inclusive culture that is
sensitive to the needs of all employees and
provide opportunities for our people
regardless of their gender, ethnicity, age,
religion, caring responsibilities, sexual
orientation or disability status. We make
appropriate disability adjustments as
required, and provide training and career
development opportunities for all. We also
give full and fair consideration and
encouragement to all applicants with
suitable aptitude and abilities.
Across our businesses, our commitment
to diversity and inclusion is supported by
initiatives such as reviews of pay and
performance management consistency,
providing training to staff and engaging
with recruitment fi rms to mitigate
unconscious bias, and awareness
campaigns to diversify the pool of potential
candidates. In addition, we have
collaborative partnerships with
organisations and participate in events that
further the diversity and inclusion agenda,
including a long-term partnership with
Peckham, an American non-profi t
community rehabilitation organisation.
Prudential UK is an active member and
supporter of Workingmums, a recruitment
agency that supports working mothers in
returning to the workplace.
In 2014 we also launched two affi nity
networks: M&G Pride for LGBT employees
and allies, and the London-based
Prudential Women’s Professional Network.
A second cohort of colleagues based in
the UK have joined The Pearls Programme,
a UK-based development initiative
designed to support women in middle to
senior management positions in building
confi dence, capabilities and contacts.
Gender diversity across Prudential as of
31 December 2014 is shown below:
Gender diversity
Headcount
Total* Male* Female*
9
7
11
7
6
9
2
1
2
78
63
15
23,047 10,652 12,395
Chairman and
independent
non-executive
directors
Executive directors
Group Executive
Committee (GEC)
(includes executive
directors)
Senior managers
(excludes the
Chairman, all
directors and GEC
members)
Whole Company
(includes the
Chairman, all
directors and GEC
members)
* Excludes PCA Joint Ventures
Talent development
We recognise that people are our key
resource, that investment in their
development is essential to deliver our
strategy, and that the quality of leadership
across the Group is fundamental to the
future growth and success of the business.
We review our talent annually and offer a
range of programmes that enable our
people to continue to grow and develop.
The majority of these are managed by our
business units, while Group Human Resources
focuses on tailored programmes for
64
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business units have shown excellent
results, and we have received prestigious
awards. For example, our Singapore
business won the 2014 Asia’s Best
Employer award and an award for Leading
HR Practices in Quality Work-Life from
Asia Pacifi c HRM. M&G was once again
voted by employees as one of the four best
places to work in the City by the website
‘Here is the City News’.
In addition, our businesses in the UK
have a long-standing relationship with the
union Unite.
We encourage volunteering through
which our employees can support our
communities and acquire new skills. See
page 67 for further details.
Performance and reward
At Prudential, our reward packages are
designed to attract, motivate and retain
high-calibre people across all levels. Each
individual contributes to the success of the
Group and should be rewarded accordingly.
We recognise and reward high
performance while operating a fair and
transparent system of reward. Reward is
linked to the delivery of business goals and
expected behaviours, and we ensure that
rewards for our people are consistent with
our values and do not incentivise
inappropriate risk-taking. To enable this,
employees are not only regularly assessed
on ‘what’ they have achieved, but also on
‘how’ they did so.
There are several recognition initiatives
running across our businesses, including
the High Five recognition programme in
the US, which allows associates to choose
from a list of ‘badges’ for actions such as
teamwork, innovation and inspiration, to
formally recognise when colleagues have
gone above and beyond expectations.
Similarly, at Group Head Offi ce the
Prudential Stars awards are made to
individuals nominated by their colleagues
for outstanding examples of execution,
impact and engagement.
We believe in the importance of
enabling our employees to have the
opportunity to benefi t from the Group’s
success through share ownership, and
operate employee share plans across the
UK and Asia.
senior leaders across the organisation,
succession planning for senior roles, and
development of our leadership talent
pipeline. We invest in succession planning
for our leaders and critical specialists, and
segment our talent to identify short,
medium and long-term successors and
support them with the appropriate
development and career planning, to ensure
that we maintain an appropriate balance of
internal progression and external hires.
Individually tailored development
offerings are provided for our most senior
executives so they are well prepared to
deliver the long-term ambitions of the
Group. In addition, in 2014 more than
130 senior high-potential individuals have
participated in our Group-wide leadership
development programmes ‘Impact’ and
‘Agility’, developed in partnership with
world-leading academic institutions such
as Duke Corporate Education and the
Oxford Saïd Business School.
Within our businesses there are many
examples of our continuing commitment to
talent development. Prudential Corporation
Asia is driving organisational change
through mobilising talent pool networks to
coordinate on strategic business projects,
and in the US, a Women in Business
Symposium was held internally to provide
career development education and
opportunities for women to network with
senior colleagues. Within Prudential UK,
the Leading Managers Programme was
launched for individuals who are
transitioning to managing managers, and a
range of online business skills programmes
have been refreshed and are available to
all. M&G continues to develop individuals
with the potential to excel as investors,
leaders and managers, through a diverse
range of innovative programmes, and at
Group Head Offi ce, all employees have
access to sessions that focus on cross-
cultural awareness, building effective
partnerships and self-motivation.
Employee engagement
An array of initiatives is in place within our
different businesses to drive employee
engagement. These include colleague
appreciation days, employee focus groups,
induction programmes for colleagues to
learn about the history and strategy of the
Group, opportunities to meet senior
managers, and facilities to network with
other colleagues. We also have policies to
encourage and support volunteering for
charitable causes, including a programme
in Jackson for colleagues to support public
school systems and improve STEM
(science, technology, engineering,
mathematics) education.
The success of our efforts has again
been recognised internally and externally.
In 2014, engagement surveys in various
Supporting local communities
Our community programmes are grouped
around the broad theme of ‘Strong foundations’.
This refl ects our focus on helping communities
establish those fundamental building blocks
essential for their long-term futures. Our three
‘building blocks’ represent areas of primary need:
Education and life skills
Strengthening numeracy, fi nancial literacy and
employment training
Disaster readiness and relief
Providing long-term support to help prevent
disasters and deal with their impact
Wellbeing and protection
Helping provide resources, such as clean water
and shelter, that are essential for health and a
thriving future
The inherent long-term social value of our
business is complemented by community
investments in each of the markets within
which we operate. We provide support to
charitable organisations through both
funding and the experience and expertise
of our employees.
We establish long-term relationships
with our charity partners to ensure that the
projects we support are sustainable and we
work closely with them to ensure that our
programmes continuously improve.
The diversity of our markets means
that our programmes vary from region
to region, but a shared focus for our
community investment is education and
life skills. These activities include fi nancial
education, support to improve social
mobility and employee volunteering.
Education and life skills
In Asia, the Prudence Foundation provides
a unifi ed charitable platform for aligning
our regional philanthropic activities to our
business, maximising the impact of our
efforts in the countries where we have a
presence. Its mission is to make a lasting
contribution to Asian societies through
sustainable initiatives focused on three
pillars: children, education, and disaster
preparedness and recovery.
First Read was launched in 2013 in
partnership with Save the Children. It is a
distinctive programme that works closely
with parents of pre-school children to
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promote cognitive development, enabling
children to benefi t from future schooling,
and preventing repetition of grades and
drop-outs. First Read also works closely
with local book publishers to help develop
and create new books written in local
languages. Over three years, the
programme will benefi t over 170,000
children up to six years old as well as adults,
through learning and reading materials
with home-based early childhood care
and development.
We further support the educational
needs of Asian families by continuing to
extend our long-standing commitment to
fi nancial literacy.
Prudence Foundation launched
Cha-Ching, a multi-media programme built
around a series of three-minute animated
music videos, in 2011 to help parents instil
‘money-smart skills’ in children aged seven
to 12. This was developed with Cartoon
Network and children’s education
specialist, Dr Alice Wilder, to help children
learn the fundamental money management
concepts of earn, save, spend and donate.
The programme has gained international
recognition for promoting fi nancial literacy
and won several industry awards. Over the
past few years it has grown to become one
of the top-rated children’s television
programmes in Asia. In 2014, Cha-Ching
began airing in Korea, making it now
available in nine languages through
Cartoon Network, reaching 26 million
households a day across Asia. Two new
episodes were launched during the year,
including Sweet Pepper Designs, which
has received almost one million views on
YouTube. The Cha-Ching school contact
programme, which brings Cha-Ching
directly to school children across Asia,
continues to develop and expand. To date
it has reached 157,000 school children in
nine countries. We have also started to
work with Junior Achievement on
developing a standardised school
curriculum for Cha-Ching. This will help
meet the need for stronger fi nancial literacy
capabilities in students across Asia.
In the US in 2013, Jackson opened The
Zone, a satellite offi ce next to the Michigan
State University campus, with the aim of
offering students real-life work experience
that could potentially lead to career
opportunities after graduation. In 2014,
The Zone grew from 152 to 255 student
employees and has been a successful
talent pipeline and staffi ng support to the
whole organisation. Of the original 152
employees, 100 are still with Jackson.
Furthermore, in its fi rst year the Strategic
Support Programme, which includes
employees at The Zone, has promoted
more than 40 people to full-time positions
with the company or professional
internships in their area of study. While
working at The Zone, the employees often
work on projects that support Jackson
business operations and process
improvement, while providing strategic
staffi ng support in a timely, effi cient and
cost-effective manner.
At Jackson’s operations in Nashville,
employees are collaborating with public
schools to foster a passion for IT among
students. At the start of the 2014 to 2015
school year, Jackson became an offi cial IT
academy partner with Overton, a local
public high school. Overton is one of
Nashville’s many academy high schools;
schools that follow the state curriculum
while also offering focused classes in
specifi c areas including science,
engineering, performing arts and
technology. Academy schools integrate
traditional curriculum with professional
experiences such as job shadowing, fi eld
trips to Jackson’s offi ces and career fairs.
In the UK youth unemployment is one of
the most pressing issues and Prudential UK
& Europe continues to play its part in
supporting young people as they embark
on their careers post-education. Our
annual apprenticeship programme has
taken on a new cohort of 40 young people
to train and gain valuable work experience
while continuing their education and
providing a platform for a future career.
Prudential UK & Europe’s award-
winning Business Class programme is now
fi rmly established. As national champion of
the programme, Prudential UK is at the
core of helping to promote and set
direction for a nationwide programme and,
through the commitment of its colleagues,
directly partners with three schools. The
Business Class programme provides a rich
vein of skilled volunteering opportunities,
with around 70 colleagues being involved
with partner schools.
M&G continues to fund a literacy centre
at a primary school in the London Borough
of Lambeth by funding the work of
Springboard for Children, a charity that
provides support to children who are
signifi cantly below their national average
reading age.
In our new markets in Africa we have
committed to provide support for
academically able but fi nancially
disadvantaged high school students, and
to help build capacity for training in
actuarial sciences at local universities. We
have worked with Plan Ghana to introduce
a scholarship programme for senior high
school students. Over fi ve years, the
programme aims to support at least 500
disadvantaged but academically able
senior high school students. In addition we
have established the Prudential Actuarial
Support System (PASS) awards for
actuarial science in two Ghanaian
universities to support the top 10
graduating students for three years.
We will be rolling out complementary
scholarship programmes and educational
initiatives in Kenya.
Disaster readiness and relief
As a life insurance and asset management
company, our core business is the provision
of protection, security and risk mitigation to
families. Over the past four decades, the
Asia Pacifi c region has experienced
75 per cent of the world’s natural disasters,
resulting in a loss of nearly two million lives.
The Prudence Foundation is working with
NGOs to help communities be better
prepared with vital skills before
disasters strike.
In May 2014 the Prudence Foundation,
in partnership with National Geographic
Channel and endorsed by the International
Federation of Red Cross and Red Crescent
Societies, launched Safe Steps, a fi rst-of-
its-kind pan-Asian public service initiative
to enhance disaster preparedness and
awareness through the dissemination of
educational survival tips in the event of
natural disasters. Safe Steps is a
programme with multiple platforms
covering on-air videos, an informative
website and educational collateral that can
be shared through community outreach
initiatives. Core to the programme is a
series of 60-second educational videos
featuring Safe Steps ambassador Manny
Pacquiao, a renowned Filipino ten-time
world champion boxer, who advises
individuals and households on what they
should do when disasters strike. The public
service announcements cover what to do
in a typhoon, earthquake, fl ood or fi re and
how to prepare an emergency kit.
Since its launch, Safe Steps has been
well received across the region, with
numerous partnerships being established
to widen the reach of the programme. In
the Philippines, we partnered with the
Offi ce of the President, the Ministry of
Defence, and the National Disaster Risk
Reduction Management Council to
have the campaign rolled out under
existing national Disaster Risk
Reduction programmes.
Furthermore, the Philippines’ Movie
and Television Review Commission Board
has approved the public service
announcements to be shown in cinemas
throughout the country. The Prudence
Foundation is also partnering with major
national TV networks in the region to have
Safe Steps run on free-to-air television. In
2014, Filipino network GMA, Myanmar
network MRTV-4 and Cambodian network
CTN all started to air the announcements.
Lastly, international NGOs such as Plan
International, Save the Children and
ActionAid will also be running Safe Steps
across their existing Disaster Risk
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In focus
Thailand – developing
fi nancial and life skills
In Thailand, 60 Prudential
volunteers worked with more than
2,500 school children to enhance
their fi nancial knowledge through
a banking project and delivered
a series of disaster relief reduction
and preparedness activities. Over
three years the project will provide
4,500 girls and boys from eight
schools in Chiang Mai Province,
Thailand, with fi nancial literacy
knowledge by setting up school
and environmental banks.
Through running their own banks,
students learn how to save and acquire
basic business skills. The environmental
banking forums extend the concept of
banking by encouraging children to
develop their enterprise and business
skills. The activities of the environmental
banks include the development of
garbage banks, fertiliser banks and tree
banks, which contributed to increased
resilience to disasters.
their lives to normal. This area suffered
90 per cent housing destruction and the
local economy was severely affected by
the typhoon. Recognising the importance
of helping the community re-establish its
livelihood, the Prudence Foundation also
funded the provision of 183 new motorised
fi shing boats with nets and 142 new
pedicabs for members of the community,
who were selected by the Mayor and his
municipality offi ce.
As a Group, Prudential has been a
partner of Save the Children’s Emergency
Fund for a number of years and has
committed to a further three years. The
Children’s Emergency Fund enables the
charity to respond immediately to
emergencies in countries where there is
the greatest need and where children are
most at risk.
In response to the Ebola crisis in West
Africa and to support international efforts
in containing the outbreak, Prudential has
made signifi cant donations to two agencies
working on the ground, Médecins sans
Frontières and Save the Children. We will
look at what further help we can provide in
the longer term including building
resilience against future outbreaks.
Wellbeing and protection
We help to provide the resources that are
essential to secure a healthy, thriving future
for our customers, our people and our
communities. For example, Jackson
employees are actively engaged in our
commitment to communities by leading
giving programmes such as the Jackson
National Community Fund Advisory
Committee and the employee nominated
matching programme. The Jackson
National Community Fund (JNCF) funds
charities that support the elderly and
children through quarterly grants in
locations where Jackson’s four largest
offi ces are located. Jackson’s matching
programme offers a two-to-one match on
all employee donations made to approved
charities. This programme ensures that
causes important to employees are given
charitable consideration and ensures
Jackson’s support is received by
responsible organisations where funding
will create a signifi cant impact.
Prudential UK & Europe works with
Age UK on programmes and initiatives
that centre on making a difference to older
people who are vulnerable and in need of
support. Call in Time volunteers contact a
matched older person on a regular basis,
usually once a week, for around 20-30
minutes. In many cases, this is the only
phone call the older person receives
that week. The Age UK Call in Time
coordinators match the employee
volunteers and older people based on
420 hours
spent by Prudential
volunteers delivering
educational programmes
to young people
prudential.co.uk/indonesia
Reduction programmes. The Prudence
Foundation aims to develop new partners
across the region to ensure the Safe Steps
content reaches as many people
as possible.
In 2013 the Prudence Foundation
pledged a total of £1.25 million to help with
recovery efforts in the Philippines after the
devastating impact of Typhoon Haiyan.
The funds were used not only to provide
immediate emergency relief (working with
Plan International and Save the Children),
but also for longer-term focused recovery
programmes. These programmes aim to
help build greater resilience in the
communities so they can withstand the
impact of future typhoons.
One of these programmes was with
Habitat for Humanity, under which the
Prudence Foundation has funded the
construction of 135 new disaster-resilient
homes for the community of Santa Fe in
Bantayan Island. To further demonstrate
our commitment in 2014, we also arranged
for two Prudential regional volunteers
programmes to help with rebuilding the
new homes on Bantayan Island. Each
group comprised around 100 volunteers
from across 12 markets in Asia and the UK.
The volunteers generously gave one
week of their time and energy to work
closely with Habitat for Humanity and the
local community members, helping restore
Prudential plc Annual Report 2014
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personal history and shared interests. Each
volunteer is provided with full training and
ongoing support. Through the Call in Time
programme in 2014, 66 lonely and isolated
older people have been supported by
Prudential volunteers, with 58 volunteers
actively calling and totalling more than
1,250 hours of volunteering time.
Age UK and Prudential’s Planning for
Later Life programme has already helped
over 5,000 older people across the UK.
Launched in April 2012, this scheme
provides help with fi nancial planning,
advice on benefi ts and support during hard
times, such as a move into a care home, or
following the death of a loved one. The
funding of this programme was increased
by 100 per cent to support 22 local
Age UK centres in the neediest areas of
the UK to help deliver this much-needed
advice programme.
Since 2012, M&G has supported the
Good Times project at the Dulwich Picture
Gallery. Good Times partners with over
100 community centres and organisations
for the elderly, and reaches over 2,000
people each year. Working with day
centres, community centres and care
homes, the project challenges negative
perceptions about ageing and dementia
and improves links between generations
by celebrating the positive contributions
that older people make in society.
The Chairman’s Challenge and
employee volunteering
Many of our employees play an active role
in their communities through volunteering,
charitable donations and fundraising.
In the UK, the US and Asia we offer our
employees the opportunity to support
charities through payroll giving.
programme. Charity partners use this
money to seed-fund charitable projects
for Prudential volunteers. Employees
across the Group are involved in the
voting process to decide the most
innovative projects.
As well as volunteering efforts on
behalf of the Chairman’s Challenge,
employees around the Group volunteered
on a number of other charitable projects.
Prudential Corporation Asia employees
donated nearly 36,000 hours of their
time to support activities across Asia.
An example is the fi nancial literacy
programme run for women in Indonesia
as a collaboration between the Prudence
Foundation and three government
ministries. In 2014, there were 25 sessions
led by volunteers, conducted in 12 cities
with 6,320 women participating. Financial
literacy is a key area of focus for the
Prudence Foundation in Indonesia and
its local community investment efforts.
Since 2009, it has helped more than
19,000 women.
In the US, the Lansing Corporate Social
Responsibility team has moved to The
Zone to expand the existing Jackson in
Action volunteer programme and
connect the East Lansing staff with new
opportunities. More than 100 Zone
employees have participated in a Jackson
in Action volunteer project in the past year,
donating nearly 1,000 hours of service
throughout the Lansing community. The
partnership between Jackson, the city of
East Lansing and Michigan State University
has helped provide professional work
experience for students and recent
graduates. Overall, Jackson employees
spent more than 12,000 hours
volunteering in 2014.
In 2014, employees across the Group
Jackson is dedicated to supporting
volunteered in their communities on a
range of projects, providing a total of
62,309 hours of volunteering. We
recognise that employee volunteering
brings benefi t not only to the charities but
also to the development of our people,
and we actively encourage colleagues
to participate in our programmes.
More than 6,000 employees
volunteered through Prudential’s fl agship
international programme, the Chairman’s
Challenge, which encourages people from
across the Group to volunteer on projects
initiated by our global charity partners,
including Plan International, Help Age
International and Junior Achievement.
Each volunteering project focuses on one
or more of our Strong Foundations themes
and allows us to support both large, well
established charities and innovative,
smaller-scale activities with volunteers as
well as fi nancial support. Prudential
donates £150 to our charity partners for
every employee who registers for the
Walks to End Alzheimer’s across the
country and engaging associates in
educational events, fundraising and
awareness efforts. Last autumn,
Jackson employees across the country
volunteered more than 160 hours towards
ending Alzheimer’s disease and, with
additional support from the Jackson
National Community Fund, raised
more than US$151,500 to support the
Alzheimer’s Association.
In 2014, Jackson also partnered with a
Nashville Board Training programme, the
Young Leaders Council, to educate rising
leaders in the Nashville offi ce about the
importance of board leadership in the
charity community. Within a year of
graduating from the Board Training class,
half of the participants were placed on
charity boards throughout the community.
Following the success of the Nashville
offi ce, Jackson will expand this annual
programme to its Lansing and Denver
locations by creating the Jackson Board
Corps. The Jackson Board Corps
participants will better understand issues
facing local communities while developing
confl ict management, communication and
leadership skills, in addition to
strengthening Jackson’s presence in local
communities. The programme will train up
to 45 associates to serve in leadership
positions with Jackson charity partners
in 2015.
Prudential UK & Europe employees
engaged in volunteering activities, totalling
more than 11,000 hours in 2014. This
included mentoring schoolchildren,
supporting the elderly, and skills-sharing
with local charities and has supported
more than 150 different charities, whether
through giving time, sharing skills or
making charity donations.
M&G also recognises the valuable
contribution made by employees by their
charitable activities. To support, encourage
and recognise the contribution made by
employees, every M&G employee is
eligible to apply for a donation, payable to
their nominated charity, of up to £500 per
calendar year in recognition of either their
participation in an event to raise funds for
charity or in recognition of time they have
volunteered on an ongoing basis to a
charity. In 2014, M&G employees spent a
total of 2,081 hours volunteering.
Prudential RideLondon
The second Prudential RideLondon event
was held in August 2014. The number of
cyclists who took part rose from 65,000
in 2013 to a total of 80,000 with the
number of participants in the fl agship
100-mile ride rising from 16,000 to over
20,000. Furthermore, a total of more than
£10 million was raised for charities, up from
£7 million the year before.
Charitable arts sponsorships
Prudential has a proud tradition as a
supporter of the arts. In the UK, we
support a number of charitable institutions
including the Royal Opera House, the
National Theatre, Barbican Centre, the
National Gallery and the British Museum.
With each of these institutions we seek to
focus our partnerships on education and
access to the arts for the wider community.
Charitable donations
We calculate our community investment
spend using the internationally recognised
London Benchmarking Group standard.
This includes cash donations to registered
charitable organisations, as well as a cash
equivalent for in-kind contributions.
In 2014, the Group spent £19.6 million
supporting community activities, an
increase of 5.7 per cent on 2013.
The direct cash donations to charitable
organisations amounted to £15.9 million,
68
Prudential plc Annual Report 2014 Strategic report
Corporate responsibility review continued
of which approximately £5.3 million
came from our UK and EU operations, which
are principally our UK insurance operation
and M&G. The remaining £10.6 million was
contributed to charitable organisations by
Jackson National Life Insurance Company
and Prudential Corporation Asia.
The cash contribution to charitable
organisations from our UK and EU
operations is broken down as follows:
education £1,840,000; social, welfare
and environment £2,969,000; cultural
£404,000 and staff volunteering £84,000.
The balance of the amount includes
in-kind donations as set out in our
Corporate responsibility report and
prepared in accordance with London
Benchmarking Group (LBG) guidelines.
Political donations
It is the Group’s policy neither to make
donations to political parties nor to incur
political expenditure, within the meaning
of those expressions as defi ned in the
Political Parties, Elections and
Referendums Act 2000. The Group did not
make any such donations or incur any such
expenditure in 2014.
Protecting the environment
The management of environmental issues
is an integral part of managing the total risks
faced by our business. Part of our strategy to
mitigate against climate change includes:
— Measuring, reporting and improving
the environmental performance of our
global operations;
— Investing in the low-carbon economy;
and
— Improving the indirect environmental
impacts as an asset owner.
In addition to our own internal reduction
targets, we also participate in the Carbon
Disclosure Project. This survey captures
data on a whole range of different aspects
of an organisation’s impact on the global
environment. Over the last three years we
have been able to provide increasing levels
of detail and this has improved our
disclosure score from 70 per cent in 2013 to
97 per cent in 2014 and our performance
rating from D to B. In 2014, Prudential was
recognised as a leader for the depth and
quality of our climate change disclosure to
investors and was awarded a position on
the FTSE 350 Climate Disclosure
Leadership Index.
As a fi nancial services business we
recognise that the most signifi cant direct
impact on the environment results from the
operation of the properties we occupy and
invest in.
Reducing our direct impact:
occupied properties
We monitor energy consumption and
carbon dioxide emissions globally for all
sites where we have operational control.
We have strategies in place to reduce
energy, waste generated, water
consumption and paper use.
In the past year several environmental
improvement activities have taken place
across the Group, including recycling and
energy-saving initiatives, as well as new
offi ce builds utilising innovative
environmental construction practices.
Prudential’s UK Occupied estate has been
certifi ed to the international Environmental
Management standard ISO 14001 by the
British Standards Institute since 2008.
Prudential was re-certifi ed for the standard
in August this year and commended for
its performance.
Reducing our impact: property
investment portfolio
M&G Real Estate forms part of the
M&G group of companies, the asset
management arm of Prudential plc in
the UK and Europe. Its approach to
Responsible Property Investment enables
it to manage and respond to the growing
range of environmental and social issues
that can impact property values. This
approach also helps M&G Real Estate to
protect and enhance fund and asset
performance for its clients.
Responsible Property Investment is
well integrated within M&G Real Estate’s
day-to-day investment practices. It enables
them to adapt and respond to the challenges
and opportunities posed by various issues,
such as rising energy and resource costs,
greater legislative demands and stronger
tenant and investor requirements.
M&G Real Estate’s focus on embedding
Responsible Property Investment
principles into its investment activities has
achieved some signifi cant results. In the
past year, M&G Real Estate has:
— Reduced global energy consumption
and carbon emissions by 6 per cent
at properties held consistently for
two years;
— Achieved three Green Stars in the
Global Real Estate Sustainability
Benchmark survey in recognition of
its market-leading performance; and
— Ensured that more than 1,000,000m2
of fl oor space now has environmental
certifi cation, providing independent
verifi cation of its performance.
M&G Real Estate’s progress can be
found in its annual Responsible Property
Investment report at www.mandg.co.uk/-/
media/Literature/UK/Institutional/
MG-Real-Estate-RPI-Report-2014.pdf
Prudential plc – greenhouse gas emissions statement
We have compiled our greenhouse gas
emissions data in accordance with the
Companies Act 2006 (Strategic and
Directors’ Reports) Regulations 2013.
We have included full reporting for all
Scope 1 (direct emissions such as combustion
of gas for heating, fugitive emissions and
emissions from owned vehicles) and Scope 2
(indirect emissions for consumption of
electricity, heat or steam) emissions where
operational control of the emissions of the
sources concerned was demonstrated. We
have also reported on a number of Scope 3
emissions as a matter of best practice. These
are emissions arising as a consequence of
the activities of the Company, but occur
from sources not owned or controlled by
the Company.
For the purpose of the 2014 report,
these Scope 3 emissions include: waste
generated in operations and business travel
booked from the UK. We are continuously
working with our business units to review
the extent of our Scope 3 reporting and
increase where practicable.
Prudential plc Annual Report 2014
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Prudential plc – greenhouse gas emissions statement continued
Assessment parameters
Baseline year: 01 October 2012 to 30 September 2013
Assurance: Deloitte LLP has provided limited assurance over selected environmental metrics in
accordance with the International Auditing and Assurance Standards Board’s ISAE 3000 International
Standard on Assurance Engagement. Please refer to the 2014 Prudential Corporate responsibility
report for further detail
Consolidation approach
Operational control
Boundary summary
All entities and all facilities under operational control (including those owned) were included
Consistency with the fi nancial
statements
This period does not correspond with the Directors’ Report period (January 2014 to December 2014).
The reporting period was brought forward by three months to improve the availability of invoice data
(which often lags by one month or more after the usage period) and reduce the reliance on estimated data.
Prudential owns assets, which are held on its balance sheet in the fi nancial statements, over which it
does not have operational control. These are excluded from the data below. Assets not included on the
balance sheet but held under an operating lease and where we have operational control are included.
Emission factor data source
DEFRA 2014 – obtained from www.ukconversionfactorscarbonsmart.co.uk
Assessment methodology
The Greenhouse Gas Protocol Revised ‘A Corporate Accounting and Reporting Standard
(Revised Edition)’ 2004
Materiality threshold
5 per cent
Intensity ratio
Tonnes of carbon dioxide equivalent per metre squared (net lettable area)
Greenhouse gas emissions source
Scope 1 total
Fuel combustion
Vehicle fl eet
Fugitive emissions
Scope 2 total
Purchased electricity
2014
2013
% change from 2013
(tCO2e)
tCO2e per m2
(tCO2e)
tCO2e per m2
23,355
0.0061
21,827
0.0067
21
19
1,013
5,196
6,250
13,609
759
53
892
55
1,759
0
0
0
412
65
477
1,260
0.0001
0.0014
0.0127
0.0458
0.0114
0.0041
0.0022
0.0040
0.0112
0.0005
0.0032
0.0000
0.0000
0.0000
0.0052
0.0006
0.0009
0.0004
35
21
1,216
1,448
2,720
15,122
1,004
94
1,421
39
2,558
0
0
0
305
437
742
686
0.0001
0.0097
0.0155
0.0136
0.0053
0.0055
0.0031
0.0083
0.0182
0.0004
0.0049
0.0000
0.0000
0.0000
0.0039
0.0041
0.0014
0.0002
119,292
0.0310
132,517
0.0405
26,104
1,559
12,437
21,450
61,550
57,742
0.0768
0.1172
0.1560
0.1890
0.1126
0.0175
27,305
1,400
11,212
25,813
65,730
66,787
0.0849
0.1829
0.1433
0.2424
0.1269
0.0242
Absolute
% change
Normalised
% change
7%
(41%)
(9%)
(17%)
259%
130%
(10%)
(24%)
(44%)
(37%)
40%
(31%)
0%
0%
0%
35%
(85%)
(36%)
84%
(10%)
(4%)
11%
11%
(17%)
(6%)
(14%)
(9%)
(44%)
(85%)
(18%)
237%
118%
(25%)
(28%)
(52%)
(38%)
21%
(35%)
0%
0%
0%
33%
(86%)
(39%)
53%
(23%)
(10%)
(36%)
9%
(22%)
(11%)
(28%)
Asia Occupied
Continental Europe Occupied
UK Occupied
US Occupied
Occupied total
Investment total
Asia Occupied
Continental Europe Occupied
UK Occupied
US Occupied
Occupied total
Investment total
Asia Occupied
Continental Europe Occupied
UK Occupied
US Occupied
Occupied total
Investment total
Asia Occupied
Continental Europe Occupied
UK Occupied
US Occupied
Occupied total
Investment total
70
Greenhouse gas emissions source
2014
2013
% change from 2013
(tCO2e)
tCO2e per m2
(tCO2e)
tCO2e per m2
Absolute
% change
Normalised
% change
Statutory total CO2e
emissions (Scope 1 & 2)*
Scope 3 CO2e emissions
Waste generated
in operations
Business travel booked
by UK employees only
Scope 1, 2 and 3 total
UK—Occupied
US—Occupied
Occupied total
Investment—total
142,647
0.0371
154,344
0.0471
10,541
0.0027
10,404
0.0032
23
178
201
522
0.0003
0.0016
0.0010
0.0002
50
116
166
840
0.0006
0.0011
0.0009
0.0003
Occupied—total
9,818
0.1232
9,398
0.1201
153,188
0.0398
164,748
0.0503
(8%)
1%
(54%)
54%
21%
(38%)
4%
(7%)
(21%)
(14%)
(54%)
44%
16%
(48%)
3%
(21%)
*Statutory carbon reporting disclosures required by Companies Act 2006.
—
— 2014—is—the—second—year—of—full—greenhouse—
—— Continental—Europe:—a—growing—
gas—disclosure—and—represents—the—first—year—
for—comparison—against—our—2013—baseline.—
Due—to—the—changing—size—and—nature—of—
the—investment—portfolio,—absolute—and—
normalised—comparisons—between—years—
are—not—comparative.—Net—lettable—area—is—
reported—for—all—properties—held—within—the—
reporting—period.—In—line—with—best—practice—
environmental—data—is—collected—for—
properties—at—acquisition—and—at—date—of—
divestment—therefore,—comparisons—for—
absolute—change—and—normalised—change—
are—not—directly—comparative.—For—more—
information—on—sustainability—progress,—
please—refer—to—the—annual—M&G—Real—
Estate—Responsible—Property—Investment—
report—for—further—details,—including—
like-for-like—comparisons.
Overall—Scope—1—and—2—emissions—in—the—
global—Occupied—estate—have—reduced—by—
2—per—cent.—Other—regional—movements—are:
—— Asia:—while—activities—to—reduce—
emissions—have—taken—place,—a—more—
material—proportion—of—the—reduction—has—
resulted—from—an—improvement—in—the—
data—capture—process,—with—a—greater—
proportion—of—actual—versus—estimate—data;
presence—in—this—region—has—resulted—in—
an—overall—increase—in—combined—Scope—1—
and—2—emissions;—
—— UK:—an—increase—in—operational—control—in—
a—larger—asset—has—resulted—in—an—increase—
in—combined—Scope—1—and—2—emissions;—and
—— US:—there—has—been—an—overall—decrease—
in—combined—Scope—1—and—2—emissions—in—
this—region—which—was—driven—by—a—
decrease—in—electricity—consumption.
Accountability and governance for
corporate responsibility
The Board
The—Board—regularly—reviews—the—Group’s—
corporate—responsibility—performance—and—
scrutinises—and—approves—the—Group—
corporate—responsibility—report—and—
strategy—on—an—annual—basis.
Code of Business Conduct
Consideration—of—environmental,—social—and—
community—matters—is—integrated—in—our—
Code—of—Business—Conduct.—Our—code—is—
reviewed—by—the—Board—on—an—annual—basis.—
Risk assessment
For—more—information—on—the—risks—facing—our—
business—see—page—51.
Local governance
In—M&G,—Jackson—and—Prudential—UK—there—
are—governance—committees—in—place—–—with—
senior—management—representation—–—that—
agree—strategy—and—spend.—In—Asia—the—
Prudence—Foundation—has—been—established—
as—a—unified—charitable—platform—to—align—and—
maximise—the—impact—of—community—efforts—
across—the—region.
Supply chain management
Prudential—recognises—that—its—own—social,—
environmental—and—economic—impacts—go—
beyond—the—products—and—services—it—
supplies—to—include—the—performance—of—its—
third—parties—and—contractors.
It—is—our—policy—to—work—in—partnership—
with—third—parties—whose—values—and—
standards—are—aligned—with—our—Group—Code—
of—Business—Conduct.
Procurement—practices—in—Prudential—UK—
have—been—successfully—accredited—with—the—
Chartered—Institute—of—Purchasing—and—
Supply—certification,—an—industry—
benchmark—of—recognised—good—practice.—
—
Strategic report approval by the
Board of Directors
The—Strategic—report—set—out—on—pages—15—
to—70—is—approved—by—the—Board—of—Directors.
Signed—on—behalf—of—the—Board—of—Directors
Tidjane Thiam
Group Chief Executive
9 March 2015
Prudential plc Annual Report 2014 Strategic reportCorporate responsibility review continued Section 3
Governance
Prudential plc Annual Report 2014
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Board of Directors
76
Chairman’s introduction
Board governance
77
80 Group governance
81
89
90
91
Board committee reports
Additional information
Statutory and regulatory disclosures
Index to principal Directors’ Report disclosures
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Prudential plc Annual Report 2014 Governance
Board of Directors
Chairman
Paul Manduca
Chairman
Appointment: October 2010
Chairman: July 2012
Committee: Nomination (Chair)
Paul 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
joined the Nomination Committee
in January 2011.
Group Chief Executive
Tidjane Thiam
Group Chief Executive
Appointment: March 2008
Group Chief Executive:
October 2009
Tidjane was the Chief Financial
Offi cer from March 2008 until
his appointment as Group
Chief Executive.
and Allied Dunbar. Paul has
also served as Chairman of the
Association of Investment
Companies from 1991 to 1993
and is a former member of the
Takeover Panel.
Current external
appointments
Paul is a member of the Securities
Institute and Chairman of
Henderson Diversifi ed Income
Limited. Age 63.
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 Services
Round Table since 2013. He was
elected to the Board of Directors
of 21st Century Fox, Inc. on
12 November 2014, where he
serves as a non-executive director.
Tidjane was awarded the Légion
d’Honneur by the French President
in July 2011 and the 2013 Grand
Prix de l’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 52.
Relevant skills and experience
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. From
September 2005 until March 2011,
Paul was a non-executive director
of Wm Morrison Supermarkets Plc.
During his tenure, he was the
Senior Independent Director, the
fi rst Audit Committee Chairman
and Chair of the Remuneration
Committee. 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
Relevant skills and experience
Tidjane spent the fi rst part of his
professional career with McKinsey
& Company in Paris and New York,
serving insurance companies and
banks. He then spent a number of
years in Africa where he was Chief
Executive and later Chairman of
the National Bureau for Technical
Studies and Development in
Côte d’Ivoire and a cabinet
member as Secretary of Planning
and Development. Tidjane
returned to France to become a
partner with McKinsey & Company
and one of the leaders of their
Financial Institutions practice
before joining Aviva in 2002.
He worked at Aviva until 2008,
holding successively the positions
of Group Strategy and
Development Director, Managing
Director of Aviva International,
Group Executive Director and
Chief Executive Offi cer, Europe.
Current external
appointments
Tidjane is a member of the Board
of the Association of British
Insurers (ABI) and was Chairman
from July 2012 to October 2014.
He is a member of the Council
Executive directors
Prudential plc Annual Report 2014
73
Nicolaos Nicandrou ACA
Chief Financial Offi cer
Appointment: October 2009
Nic is Chief Financial Offi cer,
a position he has held since
October 2009.
Pierre-Olivier Bouée
Group Chief Risk Offi cer
Appointment: April 2014
Pierre-Olivier is Group Chief Risk
Offi cer, a position he has held since
August 2013.
Jacqueline Hunt
Executive director
Appointment: September 2013
Jackie is Chief Executive,
Prudential UK & Europe, a position
she has held since September 2013,
and she took on responsibility for
Africa in early 2014.
Michael McLintock
Executive director
Appointment: September 2000
Michael is the Chief Executive of
M&G, a position he held at the time
of M&G’s acquisition by Prudential
in 1999.
Barry Stowe
Executive director
Appointment: November 2006
Barry is the Chief Executive
of Prudential Corporation Asia,
a position he has held since
October 2006.
Michael Wells
Executive director
Appointment: January 2011
Mike is President and Chief
Executive Offi cer of Jackson
National Life Insurance Company
(Jackson), a position he has held
since January 2011.
Relevant skills and experience
Before joining Prudential, Nic
worked at Aviva, where he held
a number of senior fi nance roles,
including Norwich Union Life
Finance Director and Board
Member, Aviva Group Financial
Control Director, Aviva Group
Financial Management and
Reporting Director and CGNU
Group Financial Reporting
Relevant skills and experience
Pierre-Olivier joined Prudential
in 2008 and has held positions as
Business Representative for Asia,
Director of Strategy and Corporate
Development and Managing
Director CEO Offi ce.
From 2004 until 2008,
Pierre-Olivier worked for Aviva,
fi rst as Director, Group Strategy
and then as Director, Central &
Relevant skills and experience
Jackie joined Prudential from
Standard Life where she was
Chief Financial Offi cer. Prior to this,
Jackie held a number of senior
fi nancial management positions
in companies including Norwich
Union Insurance, Aviva, Hibernian
Group, Royal & Sun Alliance and
PricewaterhouseCoopers.
Relevant skills and experience
Michael joined M&G in 1992.
He also served on the Board of
Close Brothers as a non-executive
director from 2001 to 2008.
Current external appointments
Michael has been a Trustee of the
Grosvenor Estate since October
2008 and was appointed as a
non-executive director of
Relevant skills and experience
Before joining Prudential, Barry
was President, Accident & Health
Worldwide for AIG Life Companies.
He joined AIG in 1995, and prior
to that was President and CEO
of Nisus, a subsidiary of
Pan-American Life, from 1992 to
1995. Before joining Nisus, Barry
spent 12 years at Willis Corroon
in the US. From October 2008
Relevant skills and experience
Mike has served in a number of
strategic and leadership roles at
Jackson over the last 19 years,
responsible for Jackson and its
United States affi liates. During this
period he has led the development
of Jackson’s variable annuity
business and has been responsible
for IT, strategy, operations,
Director. Nic started his career at
PricewaterhouseCoopers where
he worked in both London and
Paris. In December 2014 Nic
was appointed Chairman of the
European Insurance CFO Forum.
Age 49.
Eastern Europe. Pierre-Olivier
began his career as a civil servant
in the French Treasury, where
he worked at the Secretariat of
the Paris Club, before joining
McKinsey in 2000 as a consultant
working mainly in the international
fi nancial institutions sector.
Age 44.
Current external appointments
Jackie is the Senior Independent
Director of National Express Group
PLC and a non-executive director
of TheCityUK. She is also a
member of the FCA Practitioner
Panel. Age 46.
Grosvenor Group Limited in March
2012. He has been a member of the
Finance Committee of the MCC
since October 2005. Age 53.
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to October 2011, Barry was a
director of the Life Insurance
Marketing Research Association
(LIMRA) and the Life Offi ce
Management Association (LOMA).
Current external appointments
Barry is a member of the Board
of Directors of the International
Insurance Society. Age 57.
communications, distributions,
Curian and the retail broker
dealers. Age 54.
74
Prudential plc Annual Report 2014 Governance
Board of Directors continued
Non-executive directors
Takeover Panel 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.
Current external appointments
Philip is a Deputy Chairman of the
Takeover Panel, a non-executive
director of Severn Trent plc (since
March 2014) and Senior
Independent Director of UK
Financial Investments Limited.
Philip is also Chairman of City
of London Investment Trust plc
(since 2011). Age 60.
Current external appointments
Sir Howard is Chairman of the
Phoenix Group, and a Professor at
Institut d’Études Politiques
(Sciences Po). He is also Chairman
of the UK Government’s Airports
Commission. He chairs the
International Advisory Board of
the China Securities Regulatory
Commission and is a member of
the International Advisory Board
of the China Banking Regulatory
Commission. In addition, Sir
North America in 1995. Between
1996 and 2003 Ann held a number
of CFO and CEO posts in different
businesses within Swiss Re and
from 2003 until February 2007,
Ann was Chief Financial Offi cer
of the Swiss Re Group. From its
nationalisation in 2008 until
January 2009, Ann was Interim
Chief Financial Offi cer and
Executive director of Northern
Rock. She was also a director of
Atrium Underwriting Group
Limited and Atrium Underwriters
Limited (until March 2014), as well
as Arden Holdings Limited (until
November 2014).
International Managing Partner
– Global Markets and UK Vice
Chairman. Latterly he served as
a Global Vice Chairman of KPMG
from 2007 to 2010.
Alistair acted as a non-executive
director of the Foreign &
Commonwealth Offi ce from 2005
to 2010 and chaired the Audit
Committee until 2009.
Howard is an independent director
of Morgan Stanley Inc and a
Director of the National Theatre.
Age 64.
Current external appointments
Ann is a non-executive director of
British American Tobacco p.l.c., Rio
Tinto plc, Rio Tinto Limited, UBS
Group AG and UBS AG. Age 59.
Current external appointments
Alistair is a visiting Professor at
Cass Business School, a Trustee
of the Design Museum in London
and a Trustee of The Royal
Academy of Arts. Age 62.
The Hon. Philip Remnant
CBE ACA
Senior Independent Director
Appointment: January 2013
Committees: Audit, Nomination
and Remuneration
Relevant skills and experience
Philip 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
Sir Howard Davies
Independent
non-executive director
Appointment: October 2010
Committees: Risk (Chair), Audit
and Nomination
Relevant skills and experience
Sir Howard has a wealth of
experience in the fi nancial services
industry, across civil service,
consultancy, asset management,
regulatory and academia.
Ann Godbehere FCPA FCGA
Independent
non-executive director
Appointment: August 2007
Committees: Audit (Chair),
Nomination and Risk
Relevant 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
Alexander (Alistair) Johnston
CMG FCA
Independent
non-executive director
Appointment: January 2012
Committee: Audit
Relevant 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,
Prudential plc Annual Report 2014
75
Non-executive directors continued
Current external appointments
Kai is 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 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 64.
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-offi cial member of the
Commission on Strategic
Development in Hong Kong and
Chairman of the Mission to Seamen
in Hong Kong. Age 67.
Current external appointments
Alice is CEO of WebTurnerCorp.
and a member of the National
Association of Corporate Directors
and of WomenCorporateDirectors.
Age 58.
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Current external appointments
Lord Turnbull is a non-executive
director of Frontier Economics
Limited and The British Land
Company PLC. Age 70.
Kaikhushru Nargolwala FCA
Independent
non-executive director
Appointment: January 2012
Committees: Remuneration
and Risk
Relevant skills and experience
Kai was the non-executive
Chairman of Credit Suisse Asia
Pacifi c until December 2011,
having joined Credit Suisse in 2008
as a member of the Executive
Board and CEO of the Asia Pacifi c
region. From 1998 to 2007,
Kai worked for Standard Chartered
PLC where he was a Group
Executive director responsible for
Asia Governance and Risk. Prior to
that, he spent 19 years at Bank of
America and from 1990 was based
in Asia as Group Executive Vice
President and Head of the Asia
Wholesale Banking Group. From
2004 to 2007, he was a non-
executive director at Tate & Lyle plc
and at Visa International, where he
served on the Asia Pacifi c Board.
Anthony Nightingale CMG
SBS JP
Independent
non-executive director
Appointment: June 2013
Committee : Remuneration
Relevant skills and experience
Anthony 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.
Current external appointments
Anthony is a non-executive
director of Schindler Holding AG
and China Xintiandi Limited. He is
a Hong Kong representative to the
APEC Business Advisory Council
Alice Schroeder
Independent
non-executive director
Appointment: June 2013
Committee: Audit
Relevant skills and experience
Alice began her career as a
qualifi ed 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. Alice was an
independent board member of the
Cetera Financial Group until April
2014. She is author of the offi cial
biography of Warren Buffett.
Lord Turnbull KCB CVO
Independent
non-executive director
Appointment: May 2006
Committees: Remuneration
(Chair), Risk and Nomination
Relevant skills and experience
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. 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.
76
Prudential plc Annual Report 2014 Governance
Chairman’s introduction
Strong, eff ective and
transparent governance
Dear Shareholder
Good governance is a key ingredient
of Prudential’s success. Our
governance policies, structures and
processes contribute to the growth of
our business, and the Board ensures
that we have appropriate governance
arrangements in place both to
support our operations and protect
our shareholders’ interests.
In line with our listings on the
London and Hong Kong stock
exchanges, we apply the principles
of both the United Kingdom and
Hong Kong corporate governance
codes (‘the Codes’), complying with
the relevant provisions set out in
the Codes. We also work to ensure
that our board composition and
Group governance continue to be
appropriate for the business and the
markets in which we operate around
the world, while supporting our
strategic goals.
It is vital to us that, as well as being
strong and eff ective, our governance
is transparent. We are committed to
reporting on our governance and
ensuring that it remains as eff ective
as it can be and continues to
contribute to the long-term strength
of the Group.
Paul Manduca
Chairman
Board committees
Board of Directors
Committee
Audit
Nomination
Risk
Remuneration
Chairman
Ann Godbehere
Paul Manduca
Howard Davies
Lord Turnbull
Composition
All members are
independent non-
executive directors
Chaired by the
Chairman of the Board,
all other members
are independent
non-executive directors
All members are
independent
non-executive directors
All members are
independent
non-executive directors
Role
Monitoring the integrity
of the Group’s fi nancial
reporting, including the
effectiveness of the
internal control and risk
management systems;
and monitoring the
effectiveness of
internal audit and
the performance,
independence and
objectivity of external
auditors.
Ensuring that the Board
retains an appropriate
balance of skills to
support the strategic
objectives of the Group,
has a formal rigorous
and transparent
approach to the
appointment and
re-election of directors
and maintains an
effective framework for
succession planning.
Providing leadership,
direction and oversight
of the Group’s overall
risk appetite and risk
tolerance, as well as
the Group’s risk
and investment
management
frameworks.
Determining the overall
remuneration policy for
the Group, including
the individual
remuneration packages
of the Chairman and
executive directors,
as well as overseeing
the remuneration
arrangements of the
senior management.
Audit Committee report
page 81
Nomination Committee
report page 85
Risk Committee report
page 87
Remuneration
Committee report
page 101
Prudential plc Annual Report 2014
77
Board governance
The Board is accountable for the long-term
success of the Group and for providing
leadership within a framework of effective
controls. The control environment enables
the Board to identify signifi cant risks and
apply appropriate measures to manage and
mitigate them. The Board is responsible for
approving the strategy and for ensuring
that the Group is suitably resourced to
achieve it. In doing so, the Board takes
account of its responsibilities to the Group’s
stakeholders, including its shareholders,
employees, suppliers and the communities
in which Prudential operates.
The Board has terms of reference which
specifi cally set out matters reserved for its
decision. These include matters such as
approving 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 that requires all business units
to seek approval from the Board for matters
exceeding pre-determined authority limits.
More information on this framework can be
found on page 80.
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.
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.
Authority for the operational
management of the Group’s businesses
has been delegated 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 business unit and each
has established a management board
comprised of its key executives.
Composition of the Board
At the date of approving the Annual
Report, the Board comprises sixteen
individuals: the Chairman; eight non-
executive directors considered under the
UK and HK Codes to be independent and
seven executive directors.
On 1 April 2014, Pierre-Olivier Bouée,
Group Chief Risk Offi cer, was appointed as
a director. He replaced John Foley as Group
Chief Risk Offi cer in August 2013, when
the latter was appointed to the new role of
Group Investment Director.
How the Board spent its time
Succession planning
Transactions (3%)
Other (2%)
Risk, compliance and
governance (19%)
Group strategy (27%)
Performance
monitoring and
financial reporting (18%)
Business unit reviews (31%)
The Board is actively engaged in
succession planning for both executive and
non-executive roles to ensure that Board
composition is progressively refreshed and
that the Board retains its effectiveness. 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 85. 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.
Performance evaluation
The Board undertook an external
evaluation of its performance and that of
its committees in 2014. The review was
facilitated by Independent Board
Evaluation, a specialist consultancy
which undertakes no other business for
the Company. Internal evaluations were
carried out in 2012 and 2013, and the
Company undertook the external
evaluation in 2014, in keeping with the
provision in the UK Corporate Governance
Code on external evaluations on no less
than three-yearly intervals.
John stepped down from the Board on
The Chairman, together with the Group
1 April 2014 and continues in his role as
Group Investment Director. In October
2014, the Company announced that Lord
Turnbull would not be standing for
re-election at the 2015 AGM in May and
that he would be succeeded as Chairman
of the Remuneration Committee by
Anthony Nightingale.
The directors’ biographies, including
the skills and experience they bring to the
Board, can be found on pages 72 to 75.
Chairman and Chief Executive
The roles of the Chairman and Group Chief
Executive are separate and clearly defi ned.
The scope of these roles is approved and
kept under regular review by the Board so
that no individual has unfettered decision-
making powers.
The Chairman is responsible for the
leadership and governance of the Board
and the Group Chief Executive for the
management of the Group and
implementation of strategy and policy
on the Board’s behalf. In discharging his
responsibilities, the Group Chief Executive
is advised and assisted by the Group
Executive Committee which comprises the
business unit heads and a Group Head
Offi ce team of functional specialists.
Chief Executive and Group Company
Secretary, provided a comprehensive
briefi ng to the assessment team. The
evaluation included attendance and
observation at Board and committee
meetings, as well as access to additional
supporting materials to enhance the
assessment team’s understanding of how
the Board and its committees operate.
In addition, detailed interviews were
conducted with every director using a
tailor-made agenda. The assessment team
consulted senior managers and advisers,
who have close contact with the Board and
its committees, to obtain their input to
the review.
The evaluation concluded that the
overall message from the directors was
that they believed that the Board and its
committees were operating to a very
high standard. Directors took their
responsibilities seriously and the Board
covered all bases thoroughly. While the
Board feels the weight of regulatory work
acutely, particularly at committee level,
high standards were given priority over
minimising workload. With a stable
strategy and strong business performance
against that strategy, the directors are
minded to fi ne-tune rather than materially
change Board practices.
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78
Prudential plc Annual Report 2014 Governance
Board governance continued
2014 Board performance evaluation
Through the evaluation and subsequent discussion at the Board meeting in February
2015, the Board identifi ed areas of particular focus and the related actions set out in
the table below:
Theme
Action
Board composition
Relationship with
senior management
Selection processes
Board papers
Prioritise operational experience, gender balance and
relevant geographical representation, where possible,
in making new appointments to the Board. Keep the
balance of executive and non-executive directors
under review.
Consider ways of further increasing informal contact
between non-executive directors and senior
management, for example, inviting additional senior
managers to attend committee meetings where
appropriate and continuing to create opportunities for
contact with local management during overseas visits.
Provide more detailed updates and information on
potential Board candidates to the whole Board as early
as possible.
Continue to review and streamline Board and
committee papers.
Throughout the year, the Board also
tracked progress through to completion
against the actions agreed in respect of the
2013 performance evaluation of the Board
and its committees. These actions focused
on three broad areas:
— Increasing Board time spent on business
operations generally and on specifi c
markets, which was addressed by
extending time spent at Board away
visits, allowing greater focus on
operational aspects;
— Continuing work on succession
planning and reporting to the Board,
with particular emphasis on Board
committees and executive level
succession planning. This has been
refl ected in the work of the Nomination
Committee and by continuing the
more detailed reporting to the Board,
introduced during 2013, on senior
management development initiatives;
and
— Fine tuning the timing, format and
content of Board meetings. These
elements have been reviewed and
adjusted to ensure Board time is used
in the best possible way, balancing time
spent on strategic and operational
issues and management contact with
time spent on regulatory and
governance issues.
Philip Remnant, the Senior Independent
Director, led the performance evaluation of
Paul Manduca and was assisted by
Independent Board Evaluation in this
process. Feedback on the outcome was
provided to the Chairman.
Re-election of directors
All directors will retire from the Board at the
2015 AGM and, with the exception of Lord
Turnbull, each wishes to seek re-election.
The performance of each director formed
part of the overall performance evaluation
of the Board and the feedback compiled
assisted the Chairman, and the
Nomination Committee, in the assessment
of the contribution and commitment of
the individual directors. This exercise
concluded that each director’s
performance continued to be effective and
supported the Nomination Committee’s
recommendation to shareholders to
re-elect all directors.
The Board believes that the non-
executive directors bring a wide range
of business, fi nancial and international
experience to the Board and its
committees. The executive directors, who
head the main businesses of the Group,
each bring an in-depth understanding to
the Board of their particular business, its
markets and challenges, ensuring the
Group’s principal activities are represented.
Independence
The independence of the non-executive
directors is determined with reference to
the United Kingdom (UK) and Hong Kong
(HK) corporate governance codes.
Prudential is required to affi rm annually
the independence of all non-executive
directors under the HK Listing Rules
and the independence of its Audit
Committee members under the
Sarbanes-Oxley legislation.
The Board has appropriate processes in
place to manage any potential confl icts of
interest. Additional information on these
processes can be found on page 89.
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
confi rmation of independence from each of
the independent non-executive directors
as required by the HK 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 fi nancial or other interest in KPMG.
The Board does not consider that this
former relationship with KPMG affects
Alistair’s status as an independent
director of Prudential.
Prudential is one of the UK’s largest
institutional investors and the Board does
not believe that this compromises the
independence of those non-executive
directors who are on the boards of
companies in which the Group has a
shareholding. The Board also believes that
such shareholdings should not preclude
the Company from having the most
appropriate and highest calibre non-
executive directors.
Induction
The Chairman is responsible for ensuring
that induction programmes are provided
for all new directors. These are tailored to
refl ect the experience of each director and
their position as either executive or
non-executive directors. On appointment,
all directors embark upon a wide-ranging
induction programme covering, among
other things, the principal bases of
accounting for the Group’s results, the role
of the Board and its key committees, the
Group’s key risks and the risk management
framework within which these sit, as well as
the compliance environment in which the
Group operates. In addition, they receive
detailed briefi ngs on the Group’s principal
businesses, its product range, the markets
in which it operates and the overall
competitive environment. These sessions
are facilitated through meetings with
executive management and other senior
members of the management team. Other
areas addressed include the directors’
obligations under the different listing
regimes, legal and regulatory issues
affecting directors of fi nancial services
companies, the Group’s governance
arrangements and its investor
relations programme, as well as its
remuneration policies.
Prudential plc Annual Report 2014
79
Ongoing development
legal and regulatory area that could impact
the Group.
Meetings
The Board met on ten occasions during the
year, which included an overseas meeting
held at the Group’s operations in Jakarta.
The Board also held one strategy event
during the year. Individual directors’
attendance for meetings throughout the
year is set out in the table below.
During the year, the Chairman met with
the non-executive directors without the
executive directors being present on
several occasions.
In the ordinary course of business,
Board and committee papers are provided
one week in advance of each meeting and
where a director was unable to attend
Board meetings, their views were
canvassed by the Chairman prior to the
meeting.
The Chairman is also responsible for
ensuring that all directors continually
update their skills, knowledge and
familiarity with the Company. Directors
regularly receive reports facilitating greater
awareness and understanding of the
Group’s businesses and the regulatory and
industry-specifi c environments in which it
operates. The Board’s overseas visit
enabled the directors to develop a fuller
understanding of the Group’s operations
and provided the opportunity to meet with
the local senior management teams.
Committee members received detailed
presentations at committee meetings
focussing on areas of particular relevance
to the respective committees and were
kept updated on ongoing developments
in these areas, as well as the impact these
have on the Group. In 2014, the Audit
Committee and Risk Committee held a joint
session providing an update on the status
of Solvency II and the Board received
additional information on a number of key
regulatory reports such as the Own Risk
Solvency Assessment (ORSA) and new
investment management metrics
developed following the appointment of
the Group Investment Director.
In addition, directors were provided
with updates throughout the year on other
general changes and developments in the
Board and committee meeting attendance during 2014
Number of meetings held
Chairman
Paul Manduca
Executive directors
Tidjane Thiam
Nic Nicandrou
Pierre-Olivier Bouée1
John Foley2
Jackie Hunt
Michael McLintock
Barry Stowe
Mike Wells
Non-executive directors
Philip Remnant
Howard Davies
Ann Godbehere
Alistair Johnston
Kai Nargolwala
Anthony Nightingale
Alice Schroeder
Lord Turnbull
Board
10
10
10
10
8/8
2/2
10
10
10
10
10
10
10
10
10
10
10
10
Audit
Committee
11
Nomination
Committee
3
Remuneration
Committee
6
Risk
Committee
6
General
Meeting
1
–
–
–
–
–
–
–
–
–
11
9
11
11
–
–
11
–
3
–
–
–
–
–
–
–
–
3
3
3
–
–
–
–
3
–
–
–
–
–
–
–
–
–
6
–
–
–
6
6
–
6
–
–
–
–
–
–
–
–
–
–
6
6
–
6
–
–
5
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
Notes
1
2
Pierre-Olivier Bouée was appointed as a director on 1 April 2014.
John Foley stepped down as a director from 1 April 2014.
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80
Prudential plc Annual Report 2014 Governance
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 a framework of internal
governance which is based on full
accountability and transparency across
all parts of the Group.
Summary of Group Risk Framework
Sets out the Group-wide approach to risk management and the key risk provisions which support
compliance with the Group’s internal, statutory and regulatory requirements in this area
Framework
Establishes the six key components of the framework which are governance, appetite, policies,
culture, processes, and defi nition and categorisation
Risk policies
There are fi ve Group Risk Policies covering credit, insurance, liquidity, market and
operational risks
The Group Risk Framework is supported by the Group Dealing Controls Policy, Group Outsourcing
and Third-Party Supply Policy and Group–wide Tax Risk Management Framework
Internal control standards and guidance also support the Group Risk Framework
does not apply to certain material joint
ventures where the Group does not
exercise full management control. In these
cases, the Group satisfi es itself that suitable
governance and risk management
arrangements are in place to protect the
Group’s interests. However, the relevant
Group company which is party to the joint
venture must, in respect of any services it
provides in support of the joint venture,
comply with the requirements of the
Group’s internal governance framework.
Eff ectiveness
The Board reviewed the framework of
internal governance in December 2014 and
the effectiveness of the system of internal
control in February 2015, covering all
material controls, including fi nancial,
operational and compliance controls, risk
management systems and the adequacy
of the resources, qualifi cations and
experience of staff of the Group’s
accounting and fi nancial reporting
function. The Board confi rms that there
is an ongoing process for identifying,
evaluating and managing the signifi cant
risks faced by the Group, which has been
in place throughout the period and up to
the date of this report and confi rms that the
system remains effective and adequate.
The framework of internal governance
centres on clear delegated authorities,
ensuring there is appropriate Board
oversight and control of important
decisions and the day-to-day business
is managed effectively.
The Group Governance Manual sets
out the policies and processes by which the
Group operates within the framework and
it takes account of relevant statutory,
regulatory and governance matters.
The Group Risk Framework forms a key
component of the Group Governance
Framework and sets out the Group-wide
approach to managing risk, as part of the
internal control system.
The Strategic report contains more
detail on risk governance on page 51.
The framework of internal governance
is underpinned by the Group Code of
Business Conduct, which sets out the
ethical standards the Board requires of
itself, employees, agents and others
working in the Group.
Compliance, reporting and review
The Chief Executive and Chief Financial
Offi cer of each business unit, including
Group Head Offi ce, annually certify
compliance with the Group’s governance,
internal control and risk management
requirements. The Group Risk function
facilitates a review of the matters identifi ed
by this certifi cation process. This includes
the assessment of any risk and control
issues reported during the year, risk and
control matters identifi ed and reported by
the other Group oversight functions and
the fi ndings from the work of the internal
audit function, which carries out risk-based
audit plans across the Group, and issues
arising from any external regulatory
engagement. The system of internal
control and its effectiveness is reviewed
by the Audit Committee as described
on page 82.
The system of internal control complies
with the UK and HK Codes, as well as the
relevant provisions required by the
Company’s secondary listings in New York
and Singapore.
For the purposes of the effectiveness
review, the Group has followed the 2005
Turnbull Guidance on internal control
effectiveness. In line with the Turnbull
Guidance, the certifi cation provided above
Prudential plc Annual Report 2014
81
Board committee report s
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 governance framework.
Audit Committee report
Ann Godbehere
Chairman of the Audit Committee
Members
— Ann Godbehere (Chairman)
— Howard Davies
— Alistair Johnston
— Philip Remnant
— Alice Schroeder
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Role and responsibilities
The role and responsibilities of the
Committee are set out in its terms of
reference, which are reviewed by
the Committee and approved by the
Board on an annual basis. The terms
of reference can be found on the
Company’s website. In overview,
the Committee’s oversight
responsibilities fall into the following
principal areas: fi nancial reporting,
the eff ectiveness of internal control
and risk management, external audit,
compliance, fi nancial crime and
whistleblowing, internal audit and
the Group governance framework.
Governance
The Committee members are all
independent non-executive directors.
In keeping with the provisions of the UK
and HK governance codes, the Board is
satisfi ed that Ann Godbehere has recent
and relevant fi nancial experience.
Ann Godbehere is also designated as the
Audit Committee fi nancial expert for the
purposes of US legislation. This will be
reviewed in 2015 in conjunction with
the publication of the Form 20-F.
During 2014, the Committee held
11 meetings. Attendance is set out in
the table on page 79. The Committee
continued to work closely with the Risk
Committee to ensure that any signifi cant
areas of overlap were appropriately
addressed. Ann Godbehere, the
Committee Chairman, is a member of the
Risk Committee and the Chairman of the
Risk Committee is likewise a member of the
Audit Committee. This cross-membership
helps to ensure that both Committees work
together effectively to cover all relevant
issues. Where there is a perceived overlap
of responsibilities between these two
committees, the terms of reference enable
the respective Committee Chairmen to
determine which committee is the most
appropriate to fulfi l the obligation.
The Committee Chairmen reported
matters of signifi cance to the Board after
each meeting and the minutes of the
meetings are made available to all Board
members.
The Chairman of the Board, the Group
Chief Executive, the Chief Financial
Offi cer, the Group Chief Risk Offi cer, the
Group General Counsel and the Director
of Group-wide Internal Audit, as well as
other senior staff from the Group Finance,
Group-wide Internal Audit, Risk,
Compliance and Security functions
attended meetings of the Committee by
invitation to contribute to the discussions
relating to their respective areas of
expertise. The external auditor also
attended all meetings.
The Committee received the minutes
from the Disclosure Committee (see the
section entitled ‘US regulation and
legislation’ on page 89 for more information
on this Committee) and the Assumptions
Approval Committee. The latter reviews
the key assumptions used for fi nancial
reporting, business planning, forecasting
and the IAS 19 valuation of the three
UK-defi ned benefi t pension schemes.
Where it affects the results of the
assurances under the Turnbull compliance
statement, the Committee also received
appropriate reporting from Group Risk.
In performing its duties, the Committee
has access to all employees and their
fi nancial or other relevant expertise across
the Group and external advisers as
necessary.
How the Committee discharged
its responsibilities
Financial reporting
The Committee assessed whether suitable
accounting policies had been adopted
throughout the accounting period and
whether management had made
appropriate estimates and judgements
over recognition, measurement and
presentation of the fi nancial results.
There were no new or altered accounting
standards in 2014 that had a material effect
on the Group’s fi nancial statements.
82
Prudential plc Annual Report 2014 Governance
Board committee report s continued
Key areas of review in 2014
— Approving the audit plan and monitoring the
auditor’s independence
— Considering the audit fi ndings report and the terms
of engagement and fees to be paid to the auditor
— Considering key
accounting
judgements and
estimates
— Formulating a view
as to whether the
Annual Report was
fair, balanced and
understandable
— Monitoring the
integrity of the
fi nancial
statements
— Reviewing
procedures for
handling
allegations from
whistleblowers
— Reviewing
procedures to
combat fi nancial
crime
External
audit
Financial
reporting
Assurance
— Monitoring the
Procedures and
framework
Internal
control
Compliance
— Approving the
internal audit plan,
including
resources, coverage
and delivery
— Considering the
conclusions of the
internal audit
reports
eff ectiveness and
performance of
Group-wide
internal audit
— Reviewing the
eff ectiveness of
internal control
— Considering the
statements in the
Annual Report
regarding the
eff ectiveness of
internal control
— Reviewing the
— Approving the annual compliance plan for the
— Reviewing
eff ectiveness of the
Group governance
framework
Group and monitoring its delivery
— Considering the eff ectiveness of the Group’s
compliance arrangements
compliance with
Sarbanes-Oxley
The Committee also focused on the
accounting for material transactions,
clarity of disclosures in fi nancial reports,
the going-concern assumptions, and
compliance with accounting standards
and obligations under applicable laws,
regulations and governance codes. The
Committee further considered the fair,
balanced and understandable requirement
under the UK Code, providing advice to
the Board in respect of this requirement.
In addition, with the expansion of the
term and geographic scope of our strategic
pan-Asia bancassurance partnership with
Standard Chartered Bank, the Committee
reviewed the IFRS and EEV accounting
bases applied to distribution rights.
The Committee also considered the impact
that the disposal of the Group’s remaining
stake in PruHealth and PruProtect and the
disposal of the Japan life business would
have on the fi nancial statements.
Key assumptions and judgements
in respect of the Group’s investments,
insurance liabilities, and deferred
acquisition costs are important. In this
regard, the main areas of focus were
consideration of the assumptions applied
and operation of internal controls in the
preparation of the results, including in
relation to the following items:
— 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 and presentation
of deferred tax assets and liabilities.
The Committee received papers from
management regarding Group and
subsidiary capital and liquidity prior to
recommending to the Board that it could
conclude that the fi nancial 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. In particular, in relation
to the Group’s supplementary reporting on
the European Embedded Value (EEV)
basis, the Committee considered the
appropriateness of the economic
assumptions underpinning the projected
rates of return and risk discount rates, and
of changes to EEV operating assumptions
and the level of operating experience
variances. The Committee reviewed the
effect of moving EEV reporting to a
post-tax basis, including the
appropriateness of effective tax rates.
For economic capital, the Committee,
in conjunction with the Risk Committee,
reviewed the methodology for the basis
of calculation and the disclosures within
the supplementary information included
in the full-year results announcement and
Annual Report.
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. The impact of these market-driven
effects on the accounting, presentation
and disclosure of the Group’s longer-term
investment return assumptions and
short-term fl uctuations in investment
return was an area of focus.
For all the above areas, the Committee
received input from management and the
external auditor prior to reaching its
conclusions.
In addition to these reporting matters,
the Committee also received and
considered regular updates from
management on the status and implications
for the Group’s preparations for the Phase
II insurance accounting standard which is
under development by the International
Accounting Standards Board, and other
fi nancial reporting developments.
Internal control and risk
management
The Committee reviewed the Group’s
system of internal control and the
developments having an impact on it
over the course of 2014. The Committee
considered the process used to evaluate
the effectiveness of the system, as well as
the fi ndings of the review. In light of these
fi ndings, the Committee assessed the
statement on internal control systems
prior to its endorsement by the Board.
The Board’s assessment as to the
effectiveness of the system can be found on
page 80 under the heading ‘Effectiveness’.
Pursuant to the requirements of Section
404 of the Sarbanes-Oxley Act, the Group
undertakes an annual assessment of the
effectiveness of internal control over
fi nancial reporting.
External audit
The Group’s external auditor is KPMG LLP
and oversight of the relationship with
them is one of the Committee’s key
responsibilities. The Committee approved
KPMG’s terms of engagement and
recommended their remuneration for the
statutory audit. The Committee met
privately with the auditor on two occasions
during 2014 and the Committee Chairman
maintained regular contact with the audit
partner throughout the year.
Prudential plc Annual Report 2014
83
Eff ectiveness
To assess the effectiveness of the auditor,
the Committee reviewed the audit
approach and strategy and received a
report on their performance. The evaluation
was conducted using a questionnaire
which was circulated to the Committee,
the Chief Financial Offi cer and the Group’s
senior fi nance leadership for completion.
The feedback provided was reviewed and
compiled into a report for the Committee
which covered areas such as the knowledge
and expertise of the partners and team
members, their understanding of the
Group, the resourcing applied to the audit
and continuity of the team, liaison with
Group-wide internal audit and approach to
resolution of issues, as well as factors such
as their coordination across the Group’s
multiple jurisdictions and quality of their
written and oral communication. The
degree of challenge and robustness
of approach to the audit were key
components of the evaluation. Audit fees
and the FRC Audit Quality review fi ndings
were also considered.
The Committee Chairman invited other
Group stakeholders to provide their views on
the performance of the auditor, and KPMG
was given the opportunity to respond to
the fi ndings in the report. On completion of
the exercise, the Committee concluded
that the audit had been effective and the
challenge appropriately robust across all
parts of the Group.
Auditor independence and objectivity
The Committee is responsible for
monitoring auditor independence and
objectivity and is supported in doing so by
the Group’s Auditor Independence Policy
(the ‘Policy’). The Policy sets out the
circumstances in which the external
auditor may be permitted to undertake
non-audit services and is based on four key
principles which specify that the auditor
should not:
— Audit its own fi rm’s work;
— Make management decisions for
the Group;
— Have a mutuality of fi nancial interest
with the Group; or
— Be put in the role of advocate for
the Group.
The Policy has two permissible service
types: those that require specifi c 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
approved these permissible services,
classifi ed as either audit or non-audit
services, and monitored the annual limits
on a quarterly basis. All non-audit services
undertaken by KPMG were agreed prior
to the commencement of work and were
confi rmed as permissible for the external
auditor to undertake under the provisions
of the Sarbanes-Oxley Act.
In keeping with professional ethical
standards, KPMG also confi rmed their
independence to the Committee and set
out the supporting evidence for their
conclusion in a report which was
considered by the Committee prior to
the publication of the fi nancial results.
Fees paid to the auditor
The fees paid to KPMG for the year
ended 31 December 2014 amounted to
£16.6 million, of which £5.1 million was
payable in respect of non-audit services.
Non-audit services accounted for
31 per cent of total fees payable.
A further breakdown on the fees paid
to KPMG can be found in Note B3.4 to the
fi nancial statements on page 157.
Re-appointment
Based on the outcome of the effectiveness
evaluation and all other considerations,
the Committee recommended to the Board
that KPMG be re-appointed as the auditor.
A resolution to this effect will be proposed
to shareholders at the 2015 Annual
General Meeting.
Audit tender
The Group operates a policy under which
at least once every fi ve years a formal review
is undertaken by the Committee to assess
whether the external audit should be
re-tendered. The external audit was last put
out to competitive tender in 1999 when the
present auditor was appointed. Since 2005,
the Committee has annually considered
the need to re-tender the external audit
service and it again considered this
in February 2015, 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
European rules on mandatory audit
rotation and audit tendering. In light of this,
and conforming to the requirements of the
European Union rules, it is expected that the
Company will be required to change auditor
no later than for the 2023 fi nancial year-end.
The Committee also recognises that the
industry is in a period of unprecedented
change with the introduction of Solvency II
in 2016, and the IASB expecting to issue a
new insurance accounting standard for
implementation, mostly likely, in 2019. The
Committee currently believes any change
of auditor should be scheduled to limit
operational disruption during such a period
of change and, as a consequence, is not
currently planning to re-tender the audit
ahead of 2019, subject to the Committee’s
normal annual review.
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 fi nancial year.
Internal audit
The independent assurance provided
by Group-wide Internal Audit formed a
fundamental part of the Committee’s
deliberations on the Group’s overall control
environment. The Committee approved
Group-wide Internal Audit’s annual plan,
resource and budget, and considered the
performance of the Director of Group-
wide Internal Audit.
Each of the Group’s business units has
an internal audit team, the heads of which
report to the Director of Group-wide
Internal Audit. The function also has a
Quality Assurance Director, whose primary
role is to monitor and evaluate adherence
to industry practice guidelines and
Group-wide Internal Audit’s own standards
and methodology. Internal audit resources,
plans, budgets and its work are overseen
by both the Committee and the relevant
business unit audit committee. The
Director of Group-wide Internal Audit
reports functionally to the Chairman of the
Committee and for management purposes
to the Group Chief Executive.
As part of its remit, the Committee
periodically meets with the Director of
Group-wide Internal Audit without the
presence of management, a practice
replicated at the business unit level.
Internal auditor performance
In addition to the periodic external
effectiveness review required every fi ve
years (last conducted by PwC in 2012);
the Committee annually assesses the
performance and effectiveness of the
internal audit function. The internal
effectiveness review, performed by the
Group-wide Internal Audit Quality
Assurance Director, was conducted in
accordance with the professional practice
standards of the Chartered Institute of
Internal Auditors (CIIA). The review
concluded that Group-wide Internal Audit
continued to comply with the requirements
of internal audit policies, procedures and
practices, and standards in all material
respects and that the function continued to
be aligned with its mandated objectives.
Furthermore, following the introduction
in July 2013 of the CIIA guidance for
Effective Internal Audit in the Financial
Services (the Code), an independent third
party has assessed Group-wide Internal
Audit’s conformance with the Code.
In February 2015, their conclusions for
2014 were reported to the Group Audit
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84
Prudential plc Annual Report 2014 Governance
Board committee report s continued
Committee. They reported that the
function had designed and implemented
enhanced practices to comply with the
CIIA guidelines, that Group-wide Internal
Audit was generally conformant with the
Code, with most areas of the Code
embedded and with work well advanced
to embed the remaining areas in 2015.
The Committee considered the fi ndings
of the Quality Assurance review and the
opinion provided by the external
verifi cation, and concluded that Group-
wide Internal Audit had continued to
operate effectively during 2014.
Group Compliance
Regular updates from Group Compliance
were provided to the Committee. This
function 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 identifi cation,
mitigation and reporting of regulatory
risks arising from both current business
activities and from changes in the
regulatory environment.
Group Compliance is responsible for
ensuring Group-wide compliance policies
remain up to date and fi t for purpose. These
include the Group Compliance Policy,
Group Sanctions Policy, Group Anti-Money
Laundering Policy and the Policy regulating
communications with the Prudential
Regulation Authority and Financial
Conduct Authority. All these were
reviewed during the year and changes
considered by the Committee in October.
Financial crime and whistleblowing
The Committee is responsible for
reviewing the Group’s whistleblowing
procedures, and received regular updates
on concerns raised through these
channels, as well as management actions
taken in response.
The Confi dential Helpline Reporting
Policy is kept under regular review by the
Committee and is maintained as part of the
Group Governance Manual. The Group
Resilience Director is responsible for the
policy and the Committee met with him
privately during the year as required to
discuss any concerns regarding such issues.
Ongoing development
Note of thanks from the Committee
Finally, the Committee would like to note
that this report is the 30th Prudential
annual report to which David Martin, our
Head of Financial Accounting, has been a
key contributor. The Committee would like
to congratulate him on this achievement
and thank him for his support and
dedication.
Throughout the year, the Committee
received detailed presentations on a
range of topics including updated
fi nancial accounting developments,
new reporting requirements and briefi ngs
on developments in the regulatory
environment. Members of the Committee
and relevant executive directors attended
a joint session with the Risk Committee in
respect of the results of the internal model
developed under Solvency II provisions.
Committee eff ectiveness
The Committee reviewed compliance with
various applicable regulations and codes
of conduct. The results of this assessment
were presented to the meeting
in December 2014.
The effectiveness of the Committee
was evaluated as part of the overall
performance evaluation of the Board which
confi rmed that the Committee continued
to operate effectively during the year.
More information on this exercise can be
found under the Performance Evaluation
section on page 77.
Business unit audit committees
The Committee is supported by the work
carried out by the business unit audit
committees. These committees provide
oversight of the respective business units
and are comprised primarily of senior
management who are independent of
the business unit. The minutes of these
committees are reported regularly to
the Committee, and their meetings are
attended by the external auditor as well
as senior management from the business
unit (including the BU Chief Executive,
heads of Finance, Risk, Compliance
and Group-wide Internal Audit).
Group-wide Internal Audit assesses the
effectiveness of each business unit audit
committee annually and provides
a report to the Committee.
Each business unit audit committee
has adopted the Group’s standard terms
of reference, with minor variations to
address local regulations or the particular
requirements of the business. During
2014, and with the approval of the
Committee, these were updated to
improve alignment with the Committee’s
own terms of reference. The Committee
Chairman also reviewed and approved
appointments of business unit audit
committee members during the year.
Eff ectiveness
Group-wide Internal Audit carries out an
annual assessment of the effectiveness
of the business unit audit committees.
This is to ensure that these committees
continue to function effectively and
provide appropriate support enabling
the Committee to fulfi l its responsibilities.
Internal audit teams in each of the
business units carried out the
assessments, considering whether
each of the committees fulfi lled the
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 Committee considered a report
on the fi ndings of the assessment at
its October meeting, noting the
conclusion that these continued to
operate effectively.
Nomination Committee report
Prudential plc Annual Report 2014
85
Paul Manduca
Chairman of the
Nomination Committee
Members
— Paul Manduca (Chairman)
— Howard Davies
— Ann Godbehere
— Philip Remnant
— Lord Turnbull
Role and responsibilities
The role and responsibilities of the
Committee are set out in its terms
of reference, which are reviewed by
the Committee and approved by the
Board on an annual basis. The terms
of reference can be found on the
Company’s website. The Committee’s
responsibilities include keeping
under review the composition of the
Board, identifying and nominating
candidates for approval by the Board
to fi ll any vacancies, evaluating the
independence of the non-executive
directors and authorising actual or
potential confl icts of interest.
Governance
With the exception of the Chairman,
all the members of the Committee are
non-executive directors. As announced
in October 2014, Anthony Nightingale is
to join the Committee in May 2015.
The Committee met three times during
the year and the Chairman reported to the
Board on matters of signifi cance after each
meeting. Attendance is set out in the table
on page 79. The Group Chief Executive
is closely involved in the work of the
Committee and was invited to attend and
contribute to meetings, as was the Group
HR Director.
How the Committee discharged
its responsibilities
Board composition and
succession planning
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
to oversee the achievement of the Group’s
Key areas of review in 2014
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 fi lling vacancies due to future
retirements. The Committee reviewed
the succession plans for both executive
and non-executive directors, taking into
account the board composition criteria
outlined previously, as well as the level of
diversity desirable for a global Group.
The process included consideration of
the anticipated demands of the business,
and the skills and knowledge required to
successfully deliver against these.
Confl icts of interest
and independence
The Board has delegated authority to the
Committee to consider, and where
necessary authorise, any actual or potential
confl icts of interest arising in respect of
the directors. The Committee considered
potential confl icts of interest as they arose
during the course of the year, and in respect
of the appointment of new directors.
The Committee also reviewed confl icts
previously considered and authorised prior
to the publication of the Annual Report,
and considered the independence of the
non-executive directors in the context of
the criteria set out in the UK and HK Codes.
Committee eff ectiveness
The effectiveness of the Committee
was evaluated as part of the overall
performance evaluation of the Board.
These assessments confi rmed that
the Committee continued to operate
effectively during the year. More
information on this exercise can be found
under the Performance Evaluation section
on page 77.
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— Considering the
eff ectiveness of the
composition of Board
and Committees
— Evaluating the Board’s
diversity including
experience, perspective
and knowledge
— Conducting the annual
review of the confl icts-
of-interest register
— Considering potential
confl icts of interest
for existing directors
and individuals
recommended to the
Board for appointment
as directors
Board
composition
Confl icts
of interest
Succession
planning
— Considering the future retirement
of non-executive directors
— Considering the overall skills and
knowledge required to support
strategic goals of the Group
86
Prudential plc Annual Report 2014 Governance
Board committee report s continued
Diversity
Independence
Tenure of non-executive directors
Given the global reach of the Group’s
operations, the Board makes every effort
to ensure it is able to recruit directors
from different backgrounds, with diverse
experience, perspectives and skills. This
diversity not only contributes towards
Board effectiveness but is essential for
successfully delivering the strategy of an
international Group. The Board is duty
bound to recruit the best available talent
and remains committed to appointing the
most appropriate candidate for each role.
This same approach is applied by all our
businesses and bringing the right skills
and knowledge to every role is key to the
ongoing success of the Group.
As part of a much wider approach to
diversity, the Board takes care to consider
gender when selecting new members.
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.
More information on diversity and
inclusion across the Group can be found
in the Strategic report on page 63.
Chairman (6%)
Executive
directors (44%)
Non-executive
directors (50%)
Experience
Gender
Other (6%)
Government and/or
regulatory (13%)
Insurance (44%)
Financial
services
(37%)
0-3 years (62%)
4-6 years (13%)
7-9 years (25%)
Male (81%)
Female (19%)
Risk Committee report
Sir Howard Davies
Chairman of the Risk Committee
Members
— Howard Davies (Chairman)
— Ann Godbehere
— Kai Nargolwala
— Lord Turnbull
Prudential plc Annual Report 2014
87
Role and responsibilities
The role and responsibilities of the
Committee are set out in its terms
of reference, which are reviewed by
the Committee and approved by the
Board on an annual basis. The terms
of reference can be found on the
Company’s website. The Committee
is responsible for recommending
the Group’s overall risk appetite and
tolerance to the Board for approval,
considering the Group’s key risks,
advising the Board on the risks
inherent in strategic transactions and
business plans, reviewing the Group
investment framework and advising
the Remuneration Committee on
risk weightings. The Committee has
oversight for a number of risk-related
regulatory submissions and for the
‘three lines of defence’ model
which forms the basis for the
Group’s approach to managing risk.
The Committee also monitors the
eff ectiveness of the Group Chief
Risk Offi cer.
Governance
The Committee met on six occasions
during the year and continued to maintain
close links to the Audit Committee.
Attendance is set out in the table on
page 79. Howard Davies, the Committee
Chairman, is a member of the Audit
Committee and similarly, the Audit
Committee Chairman is a member of
the Committee. This cross-membership
facilitates an effective linkage between
both Committees, ensuring that any risk
assurance relevant to fi nancial reporting
is referred to the Audit Committee.
In addition, where there is a perceived
overlap of responsibilities between these
two committees, the terms of reference
Key ar eas of review in 2014
enable the respective Committee Chairmen
to determine which committee is the most
appropriate to fulfi l the obligation.
The Committee Chairmen reported
matters of signifi cance to the Board after
each meeting and the minutes of the
meetings are made available to all Board
members.
The Chairman of the Board, the Group
Chief Executive, the Chief Financial
Offi cer, the Group Chief Risk Offi cer, the
Group Investment Director, the Group-
wide Internal Audit Director, the Group
General Counsel, as well as senior staff
from the Group Risk function, attended
meetings of the Committee by invitation
to contribute to the discussions relating to
their respective areas of expertise.
The Committee received the minutes
of the Group Executive Risk Committee,
along with any matters escalated by the
other risk management committees. The
Committee is provided with regular reports
on the activities of the Group Risk function
and, where it affects the results of the
assurances under the Turnbull compliance
statement, the Audit Committee also
receives appropriate reporting from
this function.
The Group’s capital position and overall
position against risk limits are reviewed
regularly by the Committee. Key economic
capital metrics, as well as risk-adjusted
profi tability information, are included in
the business plans which are reviewed
by the Group Executive Risk Committee,
the Committee and the Board.
How the Committee discharged
its responsibilities
Risk management and the Group
Risk Framework
The Committee continued to receive
detailed reports on key risk exposures,
emerging and potential risks, and the
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— Considering the economic
capital methodology and
results including feedback
to Prudential Regulation
Authority
— Overseeing the
development of the
Internal Model
— Monitoring the
eff ectiveness of Group
Risk Framework
— Monitoring business and
regulatory developments
with risk implications
— Overseeing the process
for compiling and the
detailed review of the ORSA,
making recommendations
to the Board
Capital model
development
G-SII
designation
Risk
management
and Group Risk
Framework
Group
Investment
framework
— Monitoring
developments within
the developing
G-SII process
— Overseeing and signing-
off on key deliverables,
including the Recovery
Plan, Systemic Risk
Management Plan,
Liquidity Risk
Management Plan
— Considering the remit
of the Group Investment
Director and scope of
the Group investment
function
— Overseeing the
alignment of the Group’s
risk and investment
frameworks
88
Prudential plc Annual Report 2014 Governance
Board committee report s continued
drivers of risk throughout the Group.
It received regular updates from the
Group Investment Director and various
departments on market conditions and
their impact on the business as a whole.
The committee considered the stress
scenarios and results of the Group’s
stress testing, and considered the
appropriateness of the ‘three lines of
defence’ model on which the Group Risk
Framework is based. More information
on the model can be found in the Group
Chief Risk Offi cer’s report on page 51.
The information received enabled the
committee to monitor capital and liquidity
management, and to assess and challenge
both the effectiveness and appropriateness
of the Group Risk Framework, ensuring that
it continued to support the risk appetite as
determined by the Board. Adjustments to
specifi c limits and policies within the
established risk appetite were considered
and approved by the committee.
The fi ndings of the regular survey
on risk culture across the Group were
reviewed by the Committee and provided
a backdrop to the environment in which
the Group Risk Framework is implemented.
Cyber risk
The committee reviewed an in-depth
report into the Group’s arrangements
for managing cyber risk. This included
measuring the current arrangements
against the approved appetite and
tolerance and considering the levels
of inter-connectedness between the
Group’s operating business units.
Economic capital models and
regulatory reporting
The committee continued to oversee the
development of the Group’s economic
capital model ahead on the implementation
of Solvency II in 2016. The model continues
to be based on draft rules and a number
of working assumptions as set out in
the Additional information on page 324. The
committee’s oversight will continue through
2015 as the model is fi nalised and agreed
with the Prudential Regulation Authority.
The committee reviewed a number of
regulatory submissions and recommended
them to the Board for approval. One of the
key new submissions in the year was the
Group’s Own Risk and Solvency
Assessment (ORSA). The committee was
also kept updated on the discussions with
the Prudential Regulation Authority in
respect of the fi ndings of the ORSA.
The Group’s response to the 2014
European Insurance and Occupational
Pensions Authority Guidelines on the
System of Governance stress test was
considered by the committee prior to its
submission to the Regulator.
Globally Systemically Important
Insurer (G-SII)
In July 2013, the Group was designated
as a Globally Systemically Important
Insurer by the Financial Stability Board.
The committee continued to oversee the
deliverables required as a result of the
Group’s designation and dialogue
remained ongoing with the Prudential
Regulation Authority in respect of the
growing scope of this project.
between the relevant lines of defence.
The Group Risk Framework already
encompassed established limits and
processes in respect of managing credit,
liquidity, market, operational and other
risks, and it was deemed appropriate to
use this framework to enhance the Group’s
oversight of its investment approach.
The committee’s terms of reference
were updated accordingly to refl ect
this responsibility.
Ongoing development
The committee regularly received updates
from the Group Investment Director,
Group Risk and Group Treasury functions
on industry and market developments and
their impact on the Group. Members of
the committee and relevant executive
directors attended a joint session with the
Audit Committee in respect of the results
of the internal model developed under
Solvency II provisions.
Committee eff ectiveness
The effectiveness of the committee
was evaluated as part of the overall
performance evaluation of the Board which
confi rmed that the committee continued to
operate effectively during the year. More
information on this exercise can be found
under the Performance Evaluation section
on page 77.
Group investment framework
The alignment of the Group risk and
investment frameworks was considered
by the committee. The views of the Group
Chief Risk Offi cer and Group Investment
Director were taken into account, as was
the need to maintain a clear separation
Remuneration Committee report
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 93 to 120.
Corporate governance codes
In line with its primary listings on the
London and Hong Kong stock exchanges,
the Company has applied the principles
of the UK and HK Codes as set out in
the Governance report on pages 71 to 91
and also in the Directors’ Remuneration
Report, which can be found on pages 93
to 120.
The Board confi rms that it has complied
with all relevant principles 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 UK Code, issued in 2012, can be
viewed on the Financial Reporting
Council’s website, with the HK Code
available on the website of the HK Stock
Exchange.
Prudential plc Annual Report 2014
89
Additional information
Appointment of Directors
The Board, or the members in a general
meeting, may appoint a maximum of
20 directors as set out in the Company’s
Articles of Association. Their removal and
resignation is also governed by the Articles,
as well as provisions of the governance
codes which the Company abides by and
as stipulated in the relevant provisions of
the Companies Act 2006.
Confl icts of interest
Directors have a statutory duty to avoid
confl icts of interest with the Company.
The Company’s Articles of Association
allow its directors to authorise confl icts of
interest and the Board has adopted a policy
and effective procedures to manage and,
where appropriate, approve confl icts or
potential confl icts of interest. Under these
procedures, directors are required to
declare all directorships in companies which
are not part of the Group, along with other
positions which could result in confl icts
or could give rise to a potential confl ict.
The Nomination Committee, or the
Board where appropriate, evaluates and
approves each such situation individually
where applicable and reviews
authorisations annually prior to the
publication of the Annual Report.
Directors’ external appointments
Directors may hold directorships or other
signifi cant interests in companies outside
the Group which may have business
relationships with the Group.
Non-executive directors may hold
positions on a number of external company
boards or other bodies provided that they
are able to demonstrate satisfactory time
commitment to their role at Prudential and
that they discuss any new appointment
with the Chairman prior to accepting.
This ensures that they do not compromise
their independence and that any potential
confl icts of interest and any possible issues
arising out of the time commitments
required by the new role can be identifi ed
and addressed appropriately. The major
commitments of the non-executive
directors are detailed in their biographies
on pages 74 to 75.
Executive directors may accept external
directorships and retain any fees earned
from those directorships subject to prior
discussion with either the Chairman or
Group Chief Executive and, where
necessary, consideration by the
Nomination Committee. Permission is
granted provided that they do not lead
to any confl icts of interest.
Some executive directors hold
directorships of other listed companies,
but would not be expected to hold more
than one such appointment, nor hold
the chairmanship of a FTSE 100 company.
In addition, executive directors may also
hold directorships or trustee positions
of unquoted companies or institutions.
Details of any fees retained are included
in the Directors’ Remuneration Report
on page 114.
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.
Relevant controls are applied to the
handling and dissemination of inside
information which form part of the Group’s
internal governance framework.
Directors’ indemnities and protections
Powers of the Board
The Company’s Articles of Association
permit the directors and offi cers of the
Company to be indemnifi ed in respect of
liabilities incurred as a result of their offi ce.
Suitable insurance cover is in place in
respect of legal action against directors
and senior managers of companies within
the Group. Directors and certain senior
managers of companies within the Group
are provided with protection against
personal fi nancial exposure which may be
incurred in their capacity as such. These
include qualifying third party indemnity
provisions (as defi ned by the Companies
Act 2006) for the benefi t of directors of
Prudential plc and other such persons
including, where applicable, in their
capacity as directors of other companies
within the Group. These indemnities were
in force during 2014 and remain in force.
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
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 generally support
the practice of serving longer than nine years
on the Board as a non-executive director.
Compensation for loss of offi ce
The Company’s policy on loss of offi ce
payments for directors formed part of the
directors’ remuneration policy which was
approved by shareholders at the 2014
AGM. A copy of this can be found on the
Company’s website.
Share dealing and inside information
Prudential confi rms that it has adopted
a code of conduct regarding securities
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.
US regulation and legislation
As a result of its listing on the New York
stock exchange, the Company is required
to comply with the relevant provisions of
the Sarbanes-Oxley Act 2002 as they apply
to foreign private issuers and has adopted
procedures to ensure such compliance.
In particular, in relation to s.302 of the
Sarbanes-Oxley Act 2002 which covers
disclosure controls and procedures,
a Disclosure Committee has been
established, reporting to the Group Chief
Executive, chaired by the Chief Financial
Offi cer and comprising members of senior
management. The work of the Disclosure
Committee supports the Group Chief
Executive and Chief Financial Offi cer in
making the certifi cations regarding the
effectiveness of the Group’s disclosure
procedures.
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.
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Prudential plc Annual Report 2014 Governance
Additional information continued
Signifi cant contracts
Customers
At no time during the year did any director
hold a material interest in any contract
of signifi cance with the Company or any
subsidiary undertaking.
The fi ve largest customers of the Group
constituted in aggregate less than
30 per cent of its total sales for each
of 2014 and 2013.
For the year ended 31 December 2014,
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.
Statutory and regulatory disclosures
Financial reporting
The directors have a duty to report to
shareholders on the performance and
fi nancial position of the Group and are
responsible for preparing the fi nancial
statements on pages 123 to 269 and the
supplementary information on pages 277
to 307. It is the responsibility of the auditor
to form independent opinions, based on its
audit of the fi nancial statements and its
audit of the EEV basis supplementary
information, and to report its opinions to
the Company’s shareholders and to the
Company. Its opinions are given on
pages 271 to 273 and 309.
Company law requires the directors
to prepare fi nancial statements for each
fi nancial year which give a true and fair
view of the fi nancial affairs of the Company
and of the Group. The criteria applied in
the preparation of the fi nancial statements
are set out in the statement of directors’
responsibilities on page 270 and page 308.
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 fi nancial 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
confi rm 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 confi rmation is
included in the statement of directors’
responsibilities on pages 270 and 308.
The Strategic report provides, on pages
47 to 49, 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 Offi cer’s report on the risks facing
our business and our capital strength.
The directors who held offi ce at the
date of approval of this directors’ report
confi rm that, so far as they are each aware,
there is no relevant audit information of
which the Company’s auditor is unaware;
each director has taken all the steps that he
or she ought to have taken as a director to
make himself or herself aware of any
relevant audit information and to establish
that the Company’s auditor is aware of that
information. This confi rmation is given and
should be interpreted in accordance with
the provisions of Section 418 of the
Companies Act 2006.
Going concern
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
suffi cient 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 39 to 50. The risks
facing the Group’s capital and liquidity
positions and their sensitivities are referred
to in the Strategic report on pages 51 to 60.
Specifi cally, the Group’s borrowings are
detailed in note C6 on pages 225 to 226,
the market risk and liquidity analysis
associated with the Group’s assets and
liabilities can be found in note C3.5(a) on
pages 199 to 200, policyholder liability
maturity profi le by business units in notes
C4.1(b), (c) and (d) on pages 207, 209 and
210 respectively, cash fl ow details in the
consolidated statement of cash fl ows and
provisions and contingencies in note C12
on page 254 . The directors therefore have
continued to adopt the going concern basis
of accounting in preparing the fi nancial
statements for the year ended
31 December 2014.
Prudential plc Annual Report 2014
91
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 offi ce during the year
Dividend recommended for the year
Section in Annual Report
Strategic report
Additional information
Board of Directors
Strategic report
Details of qualifying third-party indemnity provisions
Governance report
Corporate responsibility governance
Political donations and expenditure
Greenhouse gas emissions
Corporate responsibility review
Corporate responsibility review
Corporate responsibility review
Financial instruments – risk management objectives
and policies
Strategic report
Post-balance sheet events
Note D4 of the Notes on the Group fi nancial 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
signifi cant shareholders
Shareholder information
Rules governing appointments of directors
Governance report
Remuneration Committee report
Directors’ interests in shares
Directors’ remuneration report
Directors’ remuneration report
Rules governing changes to the Articles of Association
Shareholder information
Powers of directors
Governance report
Signifi cant agreements impacted by a change of control Governance report
Agreements for compensation for loss of offi ce
or employment on takeover
Governance report
Page number(s)
15
90
72-75
50
89
70
68
69
51
259
13
63-66
348
89
101
112
348
89
89
89
In addition, the risk factors set out on pages 338 to 343 and the additional unaudited fi nancial information set out on pages 313 to 337,
are incorporated by reference into this Directors’ Report.
Signed on behalf of the Board of Directors
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Alan F Porter
Group Company Secretary
9 March 2015
92
Prudential plc Annual Report 2014
Prudential plc Annual Report 2014
93
Section 4
Directors’ remuneration report
94
Annual statement from the Chairman of the
Remuneration Committee
Our executive remuneration at a glance
96
98 Summary of Directors’ remuneration policy
101 Annual report on remuneration
116 Supplementary information
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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.
The following sections were subject to audit: Salary information
table in section entitled ‘Base salary’, Annual Bonus, Long Term
Incentive Plans with performance periods ending on
31 December 2014, Pension entitlements, Table of 2014 and 2013
executive director total remuneration ‘The Single Figure’ and
related notes, Long-term incentives awarded in 2014, Non-
executive director remuneration in 2014, Statement of directors’
shareholdings, Outstanding share options, Recruitment
Arrangements and Payments to past directors.
94
Prudential plc Annual Report 2014 Directors’ remuneration report
Directors’ remuneration report
Annual statement from the Chairman
of the Remuneration Committee
Lord Turnbull
Chairman of the
Remuneration Committee
Dear shareholder,
I am pleased to present the
Remuneration Committee’s report
for the year to 31 December 2014.
This will be the last report that
I present as Chairman of the Remuneration
Committee before I step down from the
Board at the AGM. I am pleased that
Anthony Nightingale, who has served
the Remuneration Committee since June
2013, has agreed to undertake this role
going forward.
— A summary of our Directors’
Remuneration Policy on pages 98 to 100,
this describes how we pay directors and
the rationale for these arrangements.
This Policy was approved by
shareholders at the 2014 AGM;
— Our annual report on remuneration on
pages 101 to 115 which describes how
the Committee applied the Remuneration
Policy in 2014 and the decisions it has
made in respect of 2015; and
The Committee’s report is presented in
— Supplementary information on pages
the following sections:
116 to 120.
— An ‘at a glance’ summary of the Group’s
remuneration arrangements on pages
96 to 97;
This letter shares the Committee’s thinking
on a number of the key decisions that we
took about rewarding the performance
achieved in 2014 and about remuneration
arrangements for 2015.
Rewarding 2014 Performance
As set out in the Business Review section earlier in this Annual Report, the Group’s
fi nancial performance in 2014 was strong:
Strategic priority
Group performance £m
IFRS operating profi t
Prudential’s primary measure of
profi tability and a key driver of
shareholder value
EEV new business profi t
A measure of the future profi tability
of the new business sold during the
year and indicates the profi table growth
of the Group
Business unit remittances
Cash fl ows across the Group balance these
net remittances (which support dividend
payments) with the retention of cash for
profi table reinvestment
Measuring our performance page 20
CAGR
+15%
2,520
3,186
2,954
1,823
2,017
2010
2011
2012
2013
2014
CAGR
+10%
1,791
2,082
2,126
1,433
1,536
2010
2011
2012
2013
2014
CAGR
+12%
1,482
1,341
1,105
1,200
935
2010
2011
2012
2013
2014
95
External pay data does not drive the
level of executive directors’ salaries or
non-executive directors’ fees. When the
Committee has resolved on planned
increases, we reference data as a sense
check to ensure that the remuneration paid
by the Company remains fair, competitive
and within the range of that offered by
similar organisations.
In conclusion
I trust that you will find this report a clear
account of the way in which the Committee
has implemented the Directors’
Remuneration Policy during 2014.
I look forward to your continued
support for the Company’s remuneration
arrangements.
Lord Turnbull
Chairman of the
Remuneration Committee
9 March 2015
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All businesses reported strong
performance in 2014, notwithstanding the
challenges the Group faced which included
the decline in long-term interest rates and
the UK budget changes announced
in March 2014. These results were
achieved while maintaining appropriate
levels of capital and operating within the
Group’s risk appetite and framework. The
Committee believes that the bonuses it
awarded to executive directors for 2014
appropriately reflect this strong
performance.
The Group achievements in 2014 built
on the strong results achieved in recent
years. Over the longer term, the Group has
created substantial value for shareholders
through share price rises and by increasing
dividend payments. £100 invested in
Prudential on 1 January 2012 was worth
£257 on 31 December 2014. This
performance outstripped that of other
international insurance companies; this
measure of total returns was the
performance condition attached to the
Group Performance Share Plan awards
made in 2012, therefore the Committee
determined that these awards should be
released in full in Spring 2015.
Executives’ community of interest with
other shareholders is fostered by annual
and long-term incentive plans and is
underscored by their personal
shareholdings. Many of the executive
directors have shareholdings which far
exceed the guidelines that they are asked
to meet. For instance, on 31 December
2014, Tidjane Thiam had a beneficial
interest in shares with a value of almost
1,000 per cent of his salary.
Implementing the Policy approved
by shareholders
The Committee was pleased with the level
of support which shareholders gave the
Company’s Directors’ Remuneration Policy
at the 2014 AGM. The Committee believes
that the Policy remains appropriate and
does not intend to present the Policy to
shareholders for their approval in 2015.
The Committee will implement two
refinements to executive pay arrangements
in 2015 within the current Policy:
— Economic capital measure – as the
Group prepares for the implementation
of Solvency II, it is increasingly using
economic capital as a key measure of
capital adequacy. To reflect this change,
part of executive directors’ 2015 bonuses
will be determined by the achievement
of economic capital targets; and
— Power to recover incentive payments
– the Committee has determined that it
is appropriate for it to have the power to
recover (‘clawback’) incentives after
they are received by executives.
Clawback provisions will apply to 2015
bonuses and long-term incentive
awards, and may be applied in certain
circumstances including the mis-
statement of financial results.
Reflecting the growth of the Group
Recent years have seen significant
increases in the complexity and scale of
the Group. The Company’s geographic
footprint and range of products have
continued to grow in response to
customers’ savings and protection needs.
While these developments have delivered
real and sustained value to shareholders,
they have also required the organisation
to operate in a more complex regulatory
environment and to build effective
relationships with new and more diverse
groups of stakeholders. As a result,
leadership roles have become more
demanding and time consuming.
It was in this context that the Committee
reviewed the Chairman’s fee during 2014.
Paul Manduca’s fee has been fixed since
his appointment as Chairman in July 2012.
On his appointment, Mr Manduca agreed
that Prudential would be his principal focus
but his actual time commitment has been
significantly higher than we anticipated at
that time. The Committee has decided to
increase the Chairman’s fee from £600,000
to £700,000 with effect from 1 July 2015
to recognise the increased demands of
the role.
In determining executive directors’
packages for 2015, the Committee was
conscious to balance restraint with the need
to recognise particular changes in the scope
of some roles. All executive directors
received a 2015 salary increase of 3 per cent.
These increases are in line with those
awarded to other Group employees. The
exception was the Chief Executive of PCA,
who received a 5 per cent increase to reflect
inflation and employee salary increases in
the Asian market. Changes were made to
the maximum bonus opportunities and
long-term incentive awards of the Chief
Executives of PCA and of UK & Europe,
as described in the Annual Report on
Remuneration. These changes reflect the
growing scale and strategic impact of these
roles, and the personal contribution made
by the incumbents. A number of the
Company’s largest shareholders were
consulted on these changes.
Prudential plc Annual Report 2014
96
Prudential plc Annual Report 2014 Directors’ remuneration report
Directors’ remuneration report
Our executive remuneration
at a glance
Our remuneration strategy and principles
Our remuneration strategy remains unchanged from that previously approved by shareholders:
To attract and retain the high-calibre executives required to lead and develop the Group
Reward must be:
— Valued by executives; and
— 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:
— Determined by delivery of the Group’s annual and longer term business objectives;
— Aligned with shareholder value creation; and
— Consistent with the Group’s risk appetite so that the delivery of the business plan can be sustained.
Our remuneration architecture
Key elements1
Salary
Cash
bonus
Deferred
bonus
Prudential
Long Term
Incentive Plan
( ‘PLTIP ’)
Financial and
personal objectives
set with reference
to business plans
approved by
the Board.
Stretching IFRS
profi t ranges set
with reference to
business plans
approved by the
Board.
TSR vesting
schedule relative to
insurance peers.
Key features of our policy
How we implemented the policy
5
1
0
2
6
1
0
2
7
1
0
2
8
1
0
2
9
1
0
2
Broadly aligned with pay review
budgets for other employees.
— Salary increases of 3% in 2014.
— Salary increases of 3% in 20152.
The maximum opportunity is up to
200% of salary.
A signifi cant proportion, currently
40%, of bonus is deferred into shares
for three years.
Award is subject to malus and
clawback provisions.
The Group Chief Executive has a
maximum AIP opportunity of 200%
of salary. For other executives the
maximum is 180%.
2014 bonuses were paid based on
performance measures related to
profi t, cash fl ow 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:
Relative TSR; and
Group IFRS Profi t; or
Business unit IFRS profi t
Measured over the three fi nancial
years from year of award.
Awards in 2014 and 2015 are below
plan limits:
— Group Chief Executive: 400% of
salary
— CEO JNL: 460% of salary
— Other PLTIP awards were 250%
of salary, or less.
For business unit CEOs, awards vest
based on TSR and business unit
IFRS profi t. For other executives,
awards are subject to TSR and
Group IFRS profi t targets.
The Committee keeps the
performance conditions under
review to ensure that future awards
remain aligned with strategy.
Share
ownership
guidelines
We have signifi cant share ownership guidelines for all executives3 as follows:
— 350% of salary for the Group Chief Executive; and
— 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 CEO, PCA 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 2014
97
What this 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 94, sustained growth across all of our key performance metrics has delivered substantial value to our shareholders.
This has been refl ected 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 2012 had stretching performance conditions attached to
vesting and were denominated in shares. The value generated for shareholders through share price growth and dividends paid over the
last three years is therefore refl ected in the value of the 2014 long-term incentive plan (‘LTIP’) releases, as illustrated in the chart below.
Value of LTIP releases
£000
9,000
7,500
6,000
4,500
3,000
1,500
0
319
On
grant
(2012)
8,254
6,292
743
1,124
1,420
1,272
1,256
1,257
2,715
2,925
2,929
3,546
2,701
On
vesting
(2015)
On
grant
(2013)
On
vesting
(2015)
On
grant
(2012)
On
vesting
(2015)
On
grant
(2012)
On
vesting
(2015)
On
grant
(2012)
On
vesting
(2015)
On
grant
(2012)
On
vesting
(2015)
On
grant
(2012)
On
vesting
(2015)
Pierre-Olivier Bouée
Jackie Hunt
Michael McLintock Nic Nicandrou
Barry Stowe
Tidjane Thiam
Mike Wells
Share price growth
Dividends
Award size
The value of these performance-related elements of remuneration are added to the fi xed packages provided to executive directors to
calculate the 2014 ‘single fi gure’ of total remuneration. These are outlined in the table below:
Executive director
Role
Group Investment Director
Chief Executive, UK & Europe
Pierre-Olivier Bouée1 Group Chief Risk Offi cer
John Foley2
Jackie Hunt
Michael McLintock CEO, M&G
Nic Nicandrou
Barry Stowe
Tidjane Thiam
Mike Wells
Chief Financial Offi cer
CEO, PCA
Group Chief Executive
President & CEO, JNL
Fixed pay
Performance-related
2014
salary
473
162
644
382
682
665
1,061
676
Pension &
benefi ts
193
65
324
190
267
879
397
77
2014
bonus
752
255
1,016
2,292
1,186
1,046
2,122
4,348
LTIP
vesting
2014
‘Single Figure’
2013
‘Single Figure’
743
3,147
1,420
2,715
2,925
2,929
8,254
6,292
2,161
3,629
3,404
5,579
5,060
5,519
11,834
11,393
n/a
4,040
3,564
6,491
4,160
4,959
8,702
11,883
Notes
1
2
Pierre-Olivier Bouée was appointed to the Board on 1 April 2014. The remuneration above was paid in respect of his service as an executive director.
John Foley stepped down from the Board on 1 April 2014. The remuneration above was paid in respect of his service as an executive director.
Aligning 2015 pay to performance
The Remuneration Committee awarded 2015 salary increases to all executive directors in line with the budget for the wider workforce.
Some changes have been made to incentive opportunities to refl ect the growing scope and impact of these roles. As stated above, no
changes have been made to the remuneration architecture. We believe remuneration packages remain strongly aligned with
performance over both the short and the long term.
The resultant remuneration packages for 2015 are set out in detail in the Annual Report on Remuneration and summarised in the
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Executive director
Role
Chief Executive, UK & Europe
Pierre-Olivier Bouée Group Chief Risk Offi cer
Jackie Hunt
Michael McLintock1 CEO, M&G
Nic Nicandrou
Barry Stowe
Tidjane Thiam
Mike Wells2
Chief Financial Offi cer
CEO, PCA
Group Chief Executive
President & CEO, JNL
2015 salary
increase
3%
3%
3%
3%
5%
3%
3%
2015 salary
£649,000
£664,000
£394,000
£703,000
HK$8,920,000
£1,093,000
US$1,148,000
Maximum AIP (% salary)
Maximum
bonus
Bonus
deferred
LTI Award
(% salary)
160%
175%
600%
175%
180%
200%
160%
40%
40%
40%
40%
40%
40%
40%
250%
250%
450%
250%
250%
400%
460%
Notes
1
2
The bonus opportunity for the CEO, M&G remains at the lower of 0.75 per cent of M&G’s IFRS profi t or six times salary. He continues to receive awards under the
Prudential LTIP and the M&G Executive LTIP, which are both included in the above LTI award.
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.
98
Prudential plc Annual Report 2014 Directors’ remuneration report
Directors’ remuneration report
Summary of Directors’
remuneration policy
The Company’s Directors’ Remuneration Policy was approved by shareholders at the 2014 AGM. This Policy came into effect following
the AGM on 15 May 2014 and will apply for a period of three years unless shareholders approve a revised Policy within that time.
The pages that follow present a summary of the Remuneration Policy. The complete Policy can be found on our website at
www.prudential.co.uk/site-services/governance-and-policies/directors-remuneration-policy
Remuneration for executive directors
Fixed pay
Element
Salary
Benefi ts
Provision for
an income in
retirement
Operation
Opportunity
The Committee reviews salaries annually, considering
factors such as:
— Salary increases for all employees;
— The performance and experience of the executive;
— Group or business unit fi nancial performance;
— Internal relativities; and
— Economic factors such as infl ation.
Market data is also reviewed so that salaries remain a
competitive range relative to each executive director’s
local market.
Executive directors are offered benefi ts which refl ect their
individual circumstances and are competitive within their
local market, including:
— Health and wellness benefi ts;
— Protection and security benefi ts;
— Transport benefi ts;
— Family and education benefi ts;
— All employee share plans and savings plans; and
— Relocation and expatriate benefi ts.
Current executives have the option to:
— Receive payments into a defi ned contribution scheme;
and/or
— Take a cash supplement in lieu of contributions.
Jackson’s Defi ned 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 profi tability of JNL.
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 benefi ts. The cost of
benefi ts 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.
In addition, the Chief Executive, PCA receives
statutory contributions into the Mandatory
Provident Fund.
Prudential plc Annual Report 2014
99
Variable pay
Element
Operation
Opportunity
Annual bonus
Currently all executive directors participate in the Annual
Incentive Plan (AIP).
AIP awards for all executive directors are subject to the
achievement of fi nancial and personal objectives. Business unit
chief executives either have measures of their business unit’s
fi nancial performance in the AIP or they may participate in a
business unit specifi c bonus plan. For example, the President
and CEO, JNL currently participates in the Jackson Senior
Management Bonus Pool as well as in the AIP.
The fi nancial measures used for the annual bonus will typically
include profi t, cash and capital adequacy. Jackson’s profi tability
and other key fi nancial measures determine the value of the
Jackson Senior Management Bonus Pool.
In specifi c circumstances, the Committee also has the power to
recover all (or part of) bonuses and share awards for a period
after they are awarded to executives. These clawback powers
apply to the cash and deferred elements of 2015 and
subsequent bonuses and to long-term incentive awards made
on or after 1 January 2015.
Executive directors are required to defer a percentage
(currently 40 per cent) of their total annual bonus into Prudential
shares for three years. The release of awards is not subject to
any further performance conditions. The Committee has the
authority to apply a malus adjustment to all, or a portion of, an
outstanding deferred award in specifi c circumstances. From
2015 and future awards, the Committee also has the power to
recover all, or a portion of, amounts already paid in specifi c
circumstances and within a defi ned timeframe (clawback).
Deferred bonus
shares
The Chief Executive, M&G has a bonus
opportunity of the lower of six times salary or
0.75 per cent of M&G’s IFRS profi t. 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 maximum vesting under this arrangement
is 100 per cent of the original deferral plus
accrued dividend shares.
Prudential Long
Term Incentive
Plan (‘PLTIP’)
Currently all executive directors participate in the Prudential
Long Term Incentive Plan (‘PLTIP’). The PLTIP has a three-year
performance period. Vesting of outstanding awards is
dependent on:
The value of shares awarded under the PLTIP
(in any given fi nancial year) may not exceed
550 per cent of the executive’s annual
basic salary.
— Relative TSR (50 per cent of award); and
— Group IFRS profi t (50 per cent of award); or
— Business unit IFRS profi t (50 per cent of award).
The performance measures attached to each award are
dependent on the role of the executive and will be disclosed in
the relevant Annual Report on Remuneration. The Chief
Executive, M&G’s PLTIP awards are subject only to the TSR
performance condition as the IFRS profi t of M&G is a
performance condition under the M&G Executive LTIP.
The Committee has the authority to apply a malus adjustment
to all, or a portion of, an outstanding award in specifi c
circumstances. From 2015 and future awards, the Committee
also has the power to recover all, or a portion of, amounts
already paid in specifi c circumstances and within a defi ned
timeframe (clawback).
The Chief Executive, M&G currently receives awards under this
plan. He receives an annual award of phantom shares each with
a notional starting share price of £1. The phantom share price at
vesting is currently determined by M&G’s profi tability with
profi t and investment performance 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 award in specifi c circumstances.
Awards made in a particular year are usually
signifi cantly below this limit and are disclosed
in the relevant Annual Report on
Remuneration. The Committee would consult
with major shareholders before increasing
award levels during the life of this Policy.
The maximum vesting under the PLTIP is
100 per cent of the original share award plus
accrued dividend shares.
The Chief Executive, M&G receives an award
with an initial value of 300 per cent of salary
under this plan. Maximum vesting is
100 per cent of the number of phantom shares
originally awarded.
M&G Executive
LTIP
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Prudential plc Annual Report 2014 Directors’ remuneration report
Summary of Directors’ remuneration policy continued
Share ownership guidelines
Operation
The guidelines for share ownership were increased to the following levels in 2013:
— 350 per cent of salary for the Group Chief Executive; and
— 200 per cent of salary for other executive directors.
Executives have fi ve years from the implementation of these increased guidelines (or from the date of their appointment, if later) to
build this level of ownership.
The full Policy sets out the Committee’s powers in respect of executive directors joining or leaving the Board, where a change in
performance conditions is appropriate or in the case of corporate transactions (such as a takeover, merger or rights issue). The Policy also
describes legacy long-term incentive plans under which some executive directors continue to hold awards.
Remuneration for non-executive directors and the Chairman
Non-executive directors
Fees
Benefi ts
Share Ownership Guidelines
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. Fees are reviewed annually by the
Board with any changes effective from 1 July.
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 Chairman
Travel and expenses for non-executive
directors 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.
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 are
expected to attain this level of
share ownership within three
years of their appointment.
Fees
Benefi ts
Share Ownership Guidelines
The Chairman receives an annual fee for the
performance of their role. On appointment, the fee
may be fi xed for a specifi ed period of time. Fees will
otherwise be reviewed annually with any changes
effective from 1 July.
The Chairman is not eligible to participate in annual
bonus plans or long-term incentive plans.
The Chairman has a share
ownership guideline of one times
their annual fee and is expected
to attain this level of share
ownership within fi ve years of the
date of his appointment.
The Chairman may be offered benefi ts
including:
— Health and wellness benefi ts;
— Protection and security benefi ts;
— Transport benefi ts; and
— Relocation and expatriate benefi ts
(where appropriate).
The Chairman is not eligible to receive a
pension allowance or to participate in the
Group’s employee pension schemes.
In setting the Directors’ Remuneration Policy, the Committee considers a range of factors including:
Conditions elsewhere in 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.
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 their feedback which is provided and takes this into account
when determining executive remuneration.
Prudential plc Annual Report 2014
101
Directors’ remuneration report
Annual report on remuneration
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 governance framework.
The operation of the Committee
Members
Lord Turnbull (Chairman)
Anthony Nightingale
Kai Nargolwala
Philip Remnant
Role and responsibility
The role and responsibilities of the Committee are set out in its terms of reference, which are reviewed by the Committee and approved
by the Board on an annual basis, and which can be found on the Company’s website. The Committee’s role is to assist the Board in
meeting its responsibilities regarding the determination of the overall remuneration policy for the Group, including the remuneration of
the Chairman and executive directors, as well as overseeing the remuneration arrangements of the senior executives across the Group.
The principal responsibilities of the Committee are:
— Determining and recommending to the Board for approval, the framework and policy for the remuneration of the Chairman and
executive directors;
— Approving the design of performance-related pay schemes operated for the executive directors and determining the targets and
individual payouts under such schemes;
— Reviewing the design and development of all share plans requiring approval by the Board and/or the Company’s shareholders;
— Approving the share ownership guidelines for the Chairman and executive directors and monitoring compliance;
— Reviewing and approving individual packages for the executive directors and the Chairman fee;
— Review and approve packages to be offered to newly recruited executive directors;
— Reviewing and approving the structure and quantum of any severance package for executive directors;
— Ensuring the process for establishing remuneration policy is transparent and consistent with the Group’s risk appetite, encourages
strong risk management and solvency management practices and takes account of remuneration practices across the Group; and
— Monitoring the remuneration and risk management implications of remuneration of senior executives across the Group, senior staff in
the risk, control and governance functions and those with an opportunity to earn in excess of £1 million in a particular year.
The effectiveness of the Committee was evaluated as part of the overall performance evaluation of the Board. This assessment
confi rmed that the Committee continued to operate effectively during the year. More information on this exercise can be found under
the Performance Evaluation section on page 77.
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Prudential plc Annual Report 2014 Directors’ remuneration report
Annual report on remuneration continued
In 2014, the Committee met six times. Key activities at each meeting are shown in the table below:
Meeting
Key activities
February 2014
March 2014
June 2014
September 2014
2 meetings
December 2014
Approve the 2013 directors’ remuneration report; consider 2013 bonus awards for executive directors; consider
vesting of the long-term incentive awards with a performance period ending on 31 December 2013; approve
2014 long-term incentive awards, performance measures and Plan documentation; approve changes to the
all-employee Sharesave and SIP limits; and consider the package for the Group Chief Risk Offi cer.
Confi rm 2013 annual bonuses and the vesting of long-term incentive awards with a performance period ending
on 31 December 2013, in light of audited fi nancial results.
Review the remuneration of senior executives across the Group, senior risk staff and of employees with a
remuneration opportunity over £1 million per annum; and review progress towards share ownership guidelines
by the Chairman, executive directors and Group Executive Committee members.
Consider performance for outstanding long-term incentive awards, based on the half-year results; review
termination arrangements for a member of Senior Management; review the dilution levels resulting from the
Company’s share plans; review total proposed 2015 remuneration of executive directors ahead of consultation
with shareholders; consider proposed changes to the Chairman's fee; and review the Remuneration
Committee's terms of reference.
Review the level of participation in the Company’s all-employee share plans; consider feedback received from
shareholders about executive remuneration in 2015; approve executive directors’ 2015 salaries and incentive
opportunities; consider the annual bonus and long-term incentive measures and targets to be used in 2015;
review an initial draft of the 2014 directors’ remuneration report; consider the introduction of a clawback facility;
and approve the Committee’s 2015 work plan.
The Chairman and the Group Chief Executive attend meetings by invitation. The Committee also had the benefi t of advice from:
— Group Chief Risk Offi cer;
— Chief Financial Offi cer;
— Group Human Resources Director; and
— Director of Group Reward and Employee Relations.
Individuals are never present when their own remuneration is discussed.
During 2014, Deloitte LLP were the independent adviser 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 confl icts 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 providing 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 2014 were
£80,500 charged on a time and materials basis. During 2014, Deloitte also gave Prudential management advice on remuneration, as well
as providing guidance on Solvency II, taxation, internal audit, real estate and other fi nancial, risk and regulatory matters. Remuneration
advice is provided by an entirely separate team within Deloitte.
In addition, management received external advice and data from a number of other providers. This included market data and legal
counsel. This advice, and these services, are not considered to be material.
During the year, the Company has complied with the appropriate provisions of the UK Corporate Governance Code which were then
in force regarding directors’ remuneration.
Prudential plc Annual Report 2014
103
Remuneration in respect of performance in 2014
Base salary
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;
— The performance and experience of each executive;
— The relative size of each director’s role; and
— The performance of the Group.
Salary increases for the wider workforce vary across our business units, refl ecting local market conditions; in 2014 salary budgets
increased between 2.8 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:
Executive
John Foley1
Jackie Hunt
Role
Benchmark(s) used to assess remuneration
Group Investment Director
FTSE 40
Chief Executive, UK & Europe
FTSE 40
International Insurance Companies
Michael McLintock
Chief Executive, M&G
Nic Nicandrou
Chief Financial Offi cer
Barry Stowe
Tidjane Thiam
Chief Executive, PCA
Group Chief Executive
Mike Wells
President & CEO, JNL
Note
1
John Foley stepped down from the Board on 1 April 2014.
McLagan UK Investment Management Survey
International Insurance Companies
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 for all executive directors with the exception of the
Chief Financial Offi cer. Mr Nicandrou’s base salary increase of 5 per cent was part of a wider change to his remuneration package.
Executive
Pierre-Olivier Bouée1
John Foley2
Jackie Hunt
Michael McLintock
Nic Nicandrou
Barry Stowe
Tidjane Thiam
Mike Wells
2013 salary
2014 salary
n/a
£628,300
£625,000
£370,800
£648,900
HK$8,240,000
£1,030,000
US$1,081,500
£630,000
£648,000
£644,000
£382,000
£682,000
HK$8,490,000
£1,061,000
US$1,114,000
Notes
1
2
Pierre-Olivier Bouée was appointed to the Board on 1 April 2014.
John Foley stepped down from the Board on 1 April 2014. He remains a member of the Group Executive Committee.
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Prudential plc Annual Report 2014 Directors’ remuneration report
Annual report on remuneration continued
Annual bonus
2014 annual bonus opportunities
Executive directors’ bonus opportunities, the weighting of performance measures for 2014 and the proportion of annual bonuses
deferred are set out below:
Executive
Pierre-Olivier Bouée1
John Foley2
Jackie Hunt
Michael McLintock3
Nic Nicandrou
Barry Stowe
Tidjane Thiam
Mike Wells4
Weighting of measures
Financial measures
Maximum
AIP opportunity
(% of salary) Deferral requirement
Group
Business Unit
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
50%
50%
20%
20%
80%
20%
80%
80%
–
–
60%
60%
–
60%
–
–
Personal
objectives
50%
50%
20%
20%
20%
20%
20%
20%
Notes
1
2
3
4
Pierre-Olivier Bouée was appointed to the Board on 1 April 2014. The maximum bonus opportunity shown represents his annual opportunity as an executive
director – this was pro-rated for the portion of the year for which he was an Executive director. Please see the section on ‘2014 Annual Incentive Plan Payments’
for details.
John Foley stepped down from the Board on 1 April 2014. The maximum bonus opportunity shown represents his annual opportunity as an executive director
– this was pro-rated for the portion of the year for which he was an Executive director. Please see the section on ‘2014 Annual Incentive Plan Payments’ for details.
Michael McLintock’s annual bonus opportunity in 2014 was the lower of 0.75 per cent of M&G’s IFRS profi t and six times annual salary. M&G’s IFRS profi t in 2014
was £446 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 fi nancial performance
of Jackson.
2014 AIP performance measures and achievement
Financial performance
The fi nancial performance measures set for 2014 are shown below. Prior to the start of the year the Committee set stretching
performance ranges for each of these measures in line with the Group’s performance targets. The Committee reviewed performance
against these ranges at its meeting in February 2015; in all of our key performance metrics the Group’s 2014 results exceeded those
achieved in 2013. The Committee also reviewed a report from the Group Chief Risk Offi cer which confi rmed that these results were
achieved within 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 further details 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
UK & Europe
M&G
Note
1
The weighting of each measure within the Group fi nancial element of the bonuses for all executives excluding the Chief Executive, M&G. In addition,
investment performance (measured over a one- and three-year period) forms 30 per cent of the Chief Executive, M&G’s annual bonus weighting.
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 specifi c goals
related to their functional and/or business unit role. 2014 objectives were set for each executive prior to the start of the fi nancial year and
performance against these objectives was assessed by the Committee at its meeting in February 2015.
Prudential plc Annual Report 2014
105
2014 Annual Incentive Plan payments
On the basis of the outstanding performance of the Group and its business units, and the Committee’s assessment of each executive’s
personal performance, the Committee determined the following 2014 AIP payments:
Executive
Role
Group Investment Director
Chief Executive, UK & Europe
Pierre-Olivier Bouée1 Group Chief Risk Offi cer
John Foley2
Jackie Hunt
Michael McLintock3 Chief Executive, M&G
Chief Financial Offi cer
Nic Nicandrou
Chief Executive, PCA
Barry Stowe
Group Chief Executive
Tidjane Thiam
Mike Wells4
President & CEO, JNL
2014 salary
£630,000
£648,000
£644,000
£382,000
£682,000
HK$8,490,000
£1,061,000
US$1,114,000
Maximum
2014
AIP
2014 AIP
payment
(as a percentage
of maximum)
160%
160%
160%
600%
175%
160%
200%
160%
99.5%
98.5%
98.6%
100.0%
99.4%
98.4%
100.0%
99.8%
2014 AIP
payment
£752,220
£255,312
£1,015,717
£2,292,000
£1,186,339
HK$13,370,052
£2,122,000
US$1,778,835
Notes
1
2
3
4
Pierre-Olivier Bouée was appointed to the Board on 1 April 2014. The bonus shown above was paid in respect of his services as an Executive director.
John Foley stepped down from the Board on 1 April 2014. The bonus shown above was paid in respect of his services as an Executive director. Please see the
‘Payments to past directors’ section for details.
Michael McLintock’s annual bonus opportunity in 2014 was the lower of 0.75 per cent of M&G’s IFRS profi t and six times annual salary. M&G’s IFRS profi t in 2014
was £446 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$7,163,061.
2014 Jackson bonus pool
In 2014 the Jackson bonus pool was determined by Jackson’s profi tability, 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$5,384,226.
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106
Prudential plc Annual Report 2014 Directors’ remuneration report
Annual report on remuneration continued
Long-term incentive plans with performance periods ending on 31 December 2014
Our long-term incentive plans have stretching performance conditions which are aligned to the strategic priorities of the Group. In
deciding the portion of the awards to be released, the Committee considered actual fi nancial results against these performance targets.
The Committee also reviewed underlying Company performance to ensure vesting levels were appropriate. The Remuneration Policy
Report contains further details of the design of Prudential’s long-term incentive plans.
Group Performance Share Plan (GPSP) and UK BUPP awards
In 2012, all executive directors were made awards under the GPSP. The line chart below compares Prudential’s TSR during the
performance period (1 January 2012 to 31 December 2014) with that of the peer group index TSR. Identical performance conditions
apply to the PLTIP award made to Jackie Hunt on her recruitment which replaced a 2012 award made by her previous employer. As a
result of Prudential’s excellent TSR performance, which was in excess of 120 per cent of the index, these awards will be released in full:
Group Performance Share Plan (GPSP) and UK BUPP awards
260%
240%
220%
200%
180%
160%
140%
120%
100%
257.4
243.0
222.8
202.5
Dec 2011
Dec 2012
Dec 2013
Dec 2014
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%
Notes
1
2
Companies in the peer group for the 2012 GPSP and UK BUPP awards are:
Aegon, Allianz, Aviva, Axa, Generali, ING, Legal & General, Manulife, Old Mutual and Standard Life
A 2012 UK BUPP award was made to Rob Devey subject to identical performance conditions. This will be pro-rated for time employed as detailed in the 2013
Annual Report.
Asia BUPP
In 2012 Barry Stowe received an award under the Asia BUPP. This award vests based on new business profi t, IFRS profi t and cash
remittances of the Asian business. The chart below illustrates the achievement against performance ranges for the 2012 Asia
BUPP award:
Measure
Threshold
Mid
Maximum
Overall 2014 vesting
1/3 cumulative new business profit
1/3 cumulative IFRS profit
1/3 cumulative cash remittances
93.96%
M&G Executive Long-Term Incentive Plan
The phantom share price at vesting for the 2012 M&G Executive Long-Term Incentive award is determined by the increase or decrease in
M&G’s profi tability 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 are shown below:
Award
3-year profi t growth of M&G
3-year investment performance
2014 Phantom share price
2012 M&G Executive LTIP
62%
Second quartile
£2.07
Prudential plc Annual Report 2014
107
Jackson BUPP
Mike Wells received an award under the Jackson BUPP in 2012. The Jackson BUPP award vests subject to Shareholder Capital Value
(SCV) growth over the performance period. This performance measure is an estimation of the shareholder value created by the Jackson
business over the period. As a result of excellent SCV growth of 20.5 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%
20.5%
The value generated for shareholders through share price growth and dividends paid over the last three years is refl ected in the value of
2014 LTIP releases, as illustrated in the chart below.
Value of LTIP releases
£000
9,000
7,500
6,000
4,500
3,000
1,500
0
319
On
grant
(2012)
8,254
6,292
743
1,124
1,420
1,272
1,256
1,257
2,715
2,925
2,929
3,546
2,701
On
vesting
(2015)
On
grant
(2013)
On
vesting
(2015)
On
grant
(2012)
On
vesting
(2015)
On
grant
(2012)
On
vesting
(2015)
On
grant
(2012)
On
vesting
(2015)
On
grant
(2012)
On
vesting
(2015)
On
grant
(2012)
On
vesting
(2015)
Pierre-Olivier Bouée
Jackie Hunt
Michael McLintock Nic Nicandrou
Barry Stowe
Tidjane Thiam
Mike Wells
Share price growth
Dividends
Award size
Pension entitlements
Pension provisions in 2014 were:
Executive
Barry Stowe
Mike Wells
2014 pension arrangement
Pension supplement in lieu of pension of 25 per cent of salary and a
HK$33,500 payment to the Hong Kong Mandatory Provident Fund.
Matching contributions of 6 per cent of base salary capped at
US$260,000.
An annual profi t sharing contribution equivalent to 6 per cent of
pensionable salary was made in 2014.
Life assurance provision
Four times salary
Two times salary
Pierre-Olivier Bouée
Contributions into the defi ned 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 defi ned benefi t scheme which was open at the time he joined the Company.
The scheme provided a target pension of two thirds of fi nal pensionable earnings on retirement for an employee with 30 years or more
potential service who remained in service to Normal Retirement Date, he is now a deferred member of the scheme. Mr McLintock’s
Normal Retirement Date under the scheme is age 60, should he claim his deferred pension before this age it will be subject to an actuarial
reduction. There are no additional benefi ts payable should Mr McLintock retire early.
At the end of 2014 the transfer value of this entitlement was £1,364,404. This equates to an annual pension of £58,990 which will
increase broadly in line with infl ation in the period before Mr McLintock’s retirement.
During the portion of the year he served as an executive director, John Foley received contributions into the defi ned contribution
scheme and a cash supplement with a total value of 25 per cent of salary.
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Prudential plc Annual Report 2014 Directors’ remuneration report
Annual report on remuneration continued
Table of 2014 executive director total remuneration ‘The Single Figure’
Of which:
£000
Pierre-Olivier Bouée1
John Foley2
Jackie Hunt
Michael McLintock
Nic Nicandrou
Barry Stowe3
Tidjane Thiam
Mike Wells4
Total
2014
salary
473
162
644
382
682
665
1,061
676
4,745
2014
taxable
benefi ts*
75
24
163
94
96
710
132
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2014
total
bonus
752
255
1,016
2,292
1,186
1,046
2,122
4,348
1,352
13,017
Amount
paid in
cash
451
153
610
1,375
712
628
1,273
2,609
7,811
Amount
deferred
into
Prudential
shares
301
102
406
917
474
418
849
1,739
2014
LTIP
releases†
2014
pension
benefi ts‡
Total 2014
remuneration
‘The Single
Figure’§
743
3,147
1,420
2,715
2,925
2,929
8,254
6,292
118
41
161
96
171
169
265
19
2,161
3,629
3,404
5,579
5,060
5,519
11,834
11,393
48,579
5,206
28,425
1,040
* Benefi ts include (where provided) the cost of providing the use of a car and driver, medical insurance, security arrangements and relocation/expatriate benefi ts.
† 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 2014. The actual
value of LTIPs, based on the share price on the date awards are released, will be shown in the 2015 report.
‡ 2014 pension benefi ts include cash supplements for pension purposes, and contributions into DC schemes as outlined on the previous page.
§ Each remuneration element is rounded to the nearest £1,000 and totals are the sum of these rounded fi gures. Total remuneration is calculated using the
methodology prescribed by Schedule 8 of the Companies Act.
Notes
1
2
3
4
Pierre-Olivier Bouée was appointed to the Board on 1 April 2014. The remuneration above was paid in respect of his service as an executive director.
John Foley stepped down from the Board on 1 April 2014. The remuneration above was paid in respect of his service as an executive director.
Barry Stowe’s 2014 benefi ts relate primarily to his expatriate status, including costs of £217,393 for housing, £18,272 for children’s education, £76,319 for home
leave and a £340,473 Executive Director Location Allowance.
Mike Wells’ bonus fi gure excludes a contribution of £9,469 from a profi t sharing plan which has been made into a 401(k) retirement plan. This is included under
2014 pension benefi ts.
Table of 2013 executive director total remuneration ‘The Single Figure’
Of which:
£000
John Foley
Jackie Hunt1
Michael McLintock
Nic Nicandrou
Barry Stowe2
Tidjane Thiam
Mike Wells3
Total
2013
salary
628
199
371
649
679
1,030
691
4,247
2013
taxable
benefi ts*
118
224
92
92
624
123
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2013
total
bonus
1,004
935
2,225
1,124
1,037
2,056
3,415
1,331
11,796
Amount
paid in
cash
602
561
1,335
674
622
1,234
2,049
7,077
Amount
deferred
into
Prudential
shares
402
374
890
450
415
822
1,366
2013
LTIP
releases†
2013
pension
benefi ts‡
Other
payments
Total 2013
remuneration
‘The Single
Figure’§
2,133
1,355
3,710
2,133
2,447
5,235
7,699
157
50
93
162
172
258
20
912
–
801
–
–
–
–
–
801
4,040
3,564
6,491
4,160
4,959
8,702
11,883
43,799
4,719
24,712
* Benefi ts include (where provided) the cost of providing the use of a car and driver, medical insurance, security arrangements and relocation/expatriate benefi ts.
† In line with the regulations, the value of LTIP releases has been re-calculated based on the actual value of LTIPs, based on the share price on the date awards
were released.
‡ 2013 pension benefi ts include cash supplements for pension purposes, and contributions into DC schemes as outlined in the 2013 report.
§ Each remuneration element is rounded to the nearest £1,000 and totals are the sum of these rounded fi gures. Total remuneration is calculated using the
methodology prescribed by Schedule 8 of the Companies Act.
Notes
1
2
3
Jackie Hunt joined the Company on 5 September 2013. Her benefi ts included a one-off relocation payment of £188,679 to cover additional expenses such as
stamp duty and estate agent fees. She also received an ‘Other Payment’ in 2013 (of £801,000) consisting of a cash payment in respect of shares forfeited when
leaving Standard Life, the net value of which was used to purchase Prudential shares.
Barry Stowe’s benefi ts 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.
Mike Wells’ bonus fi gure excludes a contribution of £9,779 from a profi t sharing plan which has been made into a 401(k) retirement plan. This is included under
2013 pension benefi ts.
Prudential plc Annual Report 2014
109
Performance graph and table
The chart below illustrates the TSR performance of Prudential, the FTSE 100 and International Insurers over the past six 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 six years to December 2014
£600
£500
£400
£300
£200
£100
£513
£220
£191
Dec 2008
Dec 2009
Dec 2010
Dec 2011
Dec 2012
Dec 2013
Dec 2014
Prudential
FTSE 100
International Insurers
£000
2009
2009
2010
2011
2012
2013
2014
Group Chief Executive
Salary, pension and benefi ts
Annual bonus payment
(As % of maximum)
Long-term incentive vesting
(As % of maximum)
Other payments
Mark Tucker
1,013
841
(92%)
1,575
(100%)
308
Tidjane Thiam Tidjane Thiam
1,189
1,570
(97%)
2,534
(100%)
–
286
354
(90%)
–
–
–
Tidjane Thiam Tidjane Thiam Tidjane Thiam Tidjane Thiam
1,458
2,122
(100%)
8,254
(100%)
–
1,411
2,056
(99.8%)
5,235
(100%)
–
1,241
1,570
(97%)
2,528
(100%)
–
1,373
2,000
(100%)
6,160
(100%)
–
Group Chief Executive
Single Figure of total
remuneration
3,737
640
5,293
5,339
9,533
8,702
11,834
Note
1
Mark Tucker left the Company on 30 September 2009. Tidjane Thiam became Group Chief Executive on 1 October 2009. The fi gures 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 2013 and 2014 compared to a wider
employee comparator group:
Group Chief Executive
All UK employees
Salary
3.0%
3.1%
Benefi ts
7.3%
10.4%
Bonus
3.2%
11.2%
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 Offi ce and refl ects the average change in pay for employees employed in both 2013 and
2014. 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 workforce has been chosen as the most appropriate comparator group as it refl ects 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 2013 and 2014 on all employee pay and dividends:
All employee pay (£m)1
Dividends (£m)
Note
1
All employee pay as taken from note B3.1 to the fi nancial statements.
2013
1,562
859
2014
1,543
945
Percentage
change
–1.2%
+10.0%
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110
Prudential plc Annual Report 2014 Directors’ remuneration report
Annual report on remuneration continued
Long-term incentives awarded in 2014
2014 share-based long-term incentive awards
The table below shows the awards made to executive directors in 2014 under share based long-term incentive plans and the
performance conditions attached to these awards:
Executive
Role
Pierre-Olivier Bouée1 Group Chief Risk Offi cer
Jackie Hunt
Michael McLintock2
Nic Nicandrou
Barry Stowe
Tidjane Thiam
Mike Wells
Chief Executive, UK & Europe
Chief Executive, M&G
Chief Financial Offi cer
Chief Executive, PCA
Group Chief Executive
President & CEO, JNL
Face value
of award
(% of
salary)
250%
225%
150%
250%
225%
400%
460%
Face value
of award*
£s
1,574,992
1,449,000
572,993
1,704,990
1,478,933
4,243,999
3,077,728
Percentage
of awards
released for
achieving
threshold
targets†
25%
25%
25%
25%
25%
25%
25%
Weighting of performance
conditions
IFRS Profi t
End of
performance
period
Group
TSR
50%
31 Dec 16
31 Dec 16
50%
31 Dec 16 100%
50%
31 Dec 16
50%
31 Dec 16
50%
31 Dec 16
50%
31 Dec 16
Group Asia
US UK
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 (1 April 2014).
† The percentage of award released for achieving maximum targets is 100 per cent.
Notes
1
2
3
Pierre-Olivier Bouée was appointed to the Board on 1 April 2014. The table above shows his entire 2014 award.
The awards made under the PLTIP to the Chief Executive, M&G are subject only to the TSR performance condition. The IFRS profi t of M&G is a performance
condition under the M&G Executive LTIP.
John Foley received an LTIP award equivalent to 250% of base salary on 1 April 2014.
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 2014 awards is:
Aegon
Allianz
Legal & General
Old Mutual
Swiss Re
Afl ac
Aviva
Manulife
Prudential Financial
Zurich Insurance Group
AIA
AXA
MetLife
Standard Life
AIG
Generali
Munich Re
Sun Life Financial
Performance ranges for IFRS operating profi t 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.
2014 cash long-term incentive awards
In addition to his PLTIP award, Michael McLintock receives an annual award under the M&G Executive LTIP. In 2014 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
target
End of
performance
period
Michael McLintock
Chief Executive, M&G
300%
1,146,000
See note
31 Dec 16
Note
The value of the award on vesting will be based on the profi tability and investment performance of M&G over the performance period as described in the directors’
remuneration policy.
Prudential plc Annual Report 2014
111
Non-executive director remuneration in 2014
Chairman’s fees
The annual fee paid to the Chairman, Paul Manduca, remained unchanged at £600,000 during 2014.
Mr Manduca’s fee has been fi xed since his appointment as Chairman in July 2012. On his appointment, Mr Manduca agreed that
Prudential would be his principal focus but his actual time commitment has been signifi cantly higher than we anticipated at the time. The
Committee has decided to increase the Chairman’s fee from £600,000 to £700,000 with effect from 1 July 2015 to recognise the
increased demands of the role. This fee will next be reviewed in 2016.
Non-executive director fees
An increase of just under 3 per cent was made to the basic non-executive director fee with effect from 1 July 2014. There were no
changes made to the fees for Committee Chairmanship/Membership. 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 2013
(£)
90,000
70,000
25,000
60,000
25,000
65,000
25,000
10,000
50,000
From
1 July 2014
(£)
92,500
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 Manduca
Non-executive directors
Howard Davies
Ann Godbehere
Alistair Johnston
Kai Nargolwala
Anthony Nightingale
Philip Remnant
Alice Schroeder
Lord Turnbull
Total
2014 fees
2013 fees
2014 taxable
benefi ts*
2013
benefi ts*
Total 2014
remuneration:
‘The Single
Figure’†
Total 2013
remuneration:
‘The Single
Figure’†
600
191
196
116
141
116
201
116
186
600
181
189
114
139
67
194
64
174
114
129
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
714
191
196
116
141
116
201
116
186
729
181
189
114
139
67
194
64
174
1,863
1,722
114
129
1,977
1,851
* Benefi ts include the cost of providing the use of a car and driver, medical insurance and security arrangements.
† Each remuneration element is rounded to the nearest £1,000 and totals are the sum of these rounded fi gures. 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.
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Prudential plc Annual Report 2014 Directors’ remuneration report
Annual report on remuneration continued
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
Yes
Yes
Notes
1
2
Holding requirement of the Articles of Association (2,500 ordinary shares) must be obtained within one year of appointment to the Board.
The increased guidelines for executive directors were introduced with eff ect from 1 January 2013. Executive directors have fi ve 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. ‘Benefi cial interest’ includes shares owned outright,
shares acquired under the Share Incentive Plan and deferred annual incentive awards, detailed in the ‘Supplementary information’
section. It is only these shares that count towards the share ownership guidelines.
Chairman
Paul Manduca
Executive directors
Pierre-Olivier Bouée1
John Foley2
Jackie Hunt
Michael McLintock
Nic Nicandrou
Barry Stowe3
Tidjane Thiam
Mike Wells4
Non-executive directors
Howard Davies
Ann Godbehere
Alistair Johnston
Kaikhushru Nargolwala
Anthony Nightingale
Philip Remnant
Alice Schroeder5
Lord Turnbull
1 Jan 2014
Total
benefi cial
interest
(number of
shares)
31 Dec 2014
Total
benefi cial
interest
(number of
shares)
Benefi cial
interest as
a percentage
of salary/
basic fee*
Number of
shares
subject to
performance
conditions†
Total
interest in
shares
09 Mar 2015
Total
benefi cial
interest
(number of
shares)
42,500
42,500
106%
–
42,500
42,500
n/a
240,047
36,360
453,820
302,885
407,588
892,684
407,888
8,316
15,914
10,000
50,000
15,000
4,709
2,000
16,624
81,630
n/a
86,788
443,744
289,809
284,288
690,867
445,580
8,521
15,914
10,000
50,000
30,000
5,816
2,500
16,624
193%
n/a
201%
1,733%
634%
624%
972%
979%
137%
257%
161%
806%
484%
94%
40%
268%
200,418
n/a
326,125
138,253
440,303
437,374
1,198,437
910,936
282,048
n/a
412,913
581,997
730,112
721,662
1,889,304
1,356,516
–
–
–
–
–
–
–
–
8,521
15,914
10,000
50,000
30,000
5,816
2,500
16,624
81,654
n/a
86,813
443,768
289,834
284,288
690,891
445,580
8,521
15,914
10,000
50,000
30,000
5,816
2,500
16,624
* Based on the closing share price on 31 December 2014 (£14.92)
† Further information on share awards subject to performance conditions are detailed in the ‘share-based long-term incentive awards’ section of the Supplementary
information.
The Company and its directors, chief executives and shareholders have been granted a partial exemption from the disclosure requirements under part XV of the
SFO. As a result of this exemption, directors, chief executives and shareholders do not have an obligation under the SFO to notify the Company of shareholding
interests, and the Company is not required to maintain a register of directors’ and chief executives’ interests under section 352 of the SFO, nor a register of interests of
substantial shareholders under section 336 of the SFO. The Company is, however, required to fi le with the Hong Kong Stock Exchange any disclosure of interests
notifi ed to it in the United Kingdom.
Notes
1
2
3
4
5
Pierre-Olivier Bouée was appointed to the Board on 1 April 2014.
John Foley stepped down from the Board on 1 April 2014.
For the 1 January 2014 fi gure Barry Stowe’s benefi cial interest in shares is made up of 203,794 ADRs (representing 407,588 ordinary shares), (8,513.73 of these
ADRs are held within an investment account which secures premium fi nancing for a life assurance policy). For the 31 December 2014 fi gure the benefi cial
interest in shares is made up of 142,144 ADRs (representing 284,288 ordinary shares).
For the 1 January 2014 fi gure Mike Wells’ benefi cial interest in shares is made up of 203,944 ADRs (representing 407,888 ordinary shares). For the 31 December
2014 fi gure his benefi cial interest in shares is made up of 222,790 ADRs (representing 445,580 ordinary shares).
For the 1 January 2014 fi gure Alice Schroeder’s benefi cial interest in shares is made up of 1,000 ADRs (representing 2,000 ordinary shares). For the 31 December
2014 fi gure her benefi cial interest in shares is made up of 1,250 ADRs (representing 2,500 ordinary shares).
Prudential plc Annual Report 2014
113
Outstanding share options
The following table sets out the share options held by the directors in the UK Savings-Related Share Option Scheme (SAYE) as at the end
of the period. No other directors held shares in any other option scheme.
Exercise period
Number of options
Market
price
at 31
December
2014
(pence)
Date of
grant
Exercise
price
(pence)
Beginning
End
of period Granted Exercised Cancelled
Forfeited Lapsed
Beginning
End of
period
Pierre-Olivier
Bouée
Jackie Hunt
Michael
23 Sep 14 1,155
23 Sep 14 1,155
McLintock 23 Sep 14 1,155
466
Nic Nicandrou 16 Sep 11
Nic Nicandrou 23 Sep 14 1,155
466
Tidjane Thiam 16 Sep 11
Tidjane Thiam 20 Sep 13
901
Tidjane Thiam 23 Sep 14 1,155
1,492
1,492
1,492
1,492
1,492
1,492
1,492
1,492
1 Dec 17 31 May 18
1 Dec 17 31 May 18
–
–
1,558
1,558
1 Dec 19 31 May 20
1 Dec 16 31 May 17
1 Dec 19 31 May 20
1 Dec 14 29 May 15
1 Dec 16 31 May 17
1 Dec 17 31 May 18
–
3,268
–
965
499
–
2,622
–
1,311
–
–
1,168
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– 1,558
– 1,558
– 2,622
– 3,268
– 1,311
965
–
–
499
– 1,168
Notes
1
2
3
4
5
No gain was made by directors in 2014 on the exercise of SAYE options.
No price was paid for the award of any option.
The highest and lowest closing share prices during 2014 were 1,552.5 pence and 1,204 pence respectively.
All exercise prices are shown to the nearest pence.
John Foley participated in this plan during his time as an executive director.
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
Pierre-Olivier Bouée
John Foley1
Jackie Hunt
Michael McLintock
Nic Nicandrou
Barry Stowe
Tidjane Thiam
Mike Wells2
Date of contract
6 August 2013
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
2
John Foley stepped down from the Board on 1 April 2014.
The contract for Mike Wells is a renewable one-year fi xed term contract. The contract is renewable automatically upon the same terms and conditions unless
the Company or the director gives at least 90 days’ notice prior to the end of the relevant term.
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Prudential plc Annual Report 2014 Directors’ remuneration report
Annual report on remuneration continued
Letters of appointment of the Chairman and non-executive directors
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/Chairman
Chairman
Paul Manduca
Non-executive director
Howard Davies
Ann Godbehere
Alistair Johnston
Kaikhushru Nargolwala
Anthony Nightingale
Philip Remnant
Alice Schroeder
Lord Turnbull
Appointment
by the Board
Initial election
by shareholders
at AGM
Notice period
Expiration of
current term of
appointment
15 October 2010
AGM 2011
12 months
AGM 2018
15 October 2010
2 August 2007
1 January 2012
1 January 2012
1 June 2013
1 January 2013
10 June 2013
18 May 2006
AGM 2011
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
AGM 2017
AGM 2015
AGM 2015
AGM 2015
AGM 2017
AGM 2016
AGM 2017
AGM 2015
Note
1
Ann Godbehere was reappointed in 2014 for one year. The Board will consider a further renewal term in May 2015.
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. Fees payable are retained by the executive directors. During 2014:
— Jackie Hunt received £59,500 as a non-executive director for another organisation;
— Michael McLintock received £65,000 as a trustee and non-executive director of another organisation; and
— Tidjane Thiam received £22,285 as a non-executive director for another organisation. This sum included deferred stock units.
Other directors served on the boards of educational, development, charitable and cultural organisations without receiving a fee for
these services.
Recruitment arrangements
Pierre-Olivier Bouée
Pierre-Olivier Bouée was appointed to the Prudential Board on 1 April 2014 in his role as Group Chief Risk Offi cer. He did not receive any
recruitment payments on joining the Board. His outstanding share awards under deferred bonus plans and long-term incentives awarded
before his appointment to the Board will continue to vest on the normal timescale and subject to the original performance conditions.
Payments to past directors
Rob Devey
Rob Devey’s employment in the Group ended on 31 October 2013. The 2013 directors’ remuneration report provided details of the
remuneration arrangements that would apply to Rob Devey after his resignation. These arrangements were implemented as intended
by the Committee. In line with his contractual entitlements, Mr Devey was entitled to receive a payment in lieu of salary and pension
allowance for the period 1 November 2013 to 25 April 2014. This entitlement was subject to mitigation if Mr Devey commenced other
employment during this period, which he did on 15 April 2014. As a result the total amount paid in 2014 was £236,809. Medical and life
assurance cover was provided until 25 April 2014.
As set out in the section on ‘Remuneration in respect of performance in 2014’, the performance conditions attached to Rob Devey’s
2012 GPSP and UK BUPP awards were met in full and 100 per cent of these awards will be released in 2015. These awards were pro-rated
based on the time Mr Devey was employed by Prudential as a proportion of the performance periods (22 of 36 months).
John Foley
On stepping down from the Board, John Foley received no loss of offi ce payment and his outstanding share awards under deferred bonus
plans and long-term incentives will continue to vest on the normal timescale and subject to the original performance conditions.
Other directors
A number of former directors receive retiree medical benefi ts 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 benefi ts provided to a past director under this amount will not be reported.
115
Statement of voting at general meeting
At the 2014 Annual General Meeting, shareholders were asked to vote on the following remuneration items:
— Directors’ Remuneration Policy; and
— The 2013 Directors’ Remuneration Report.
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
To approve the Directors’ Remuneration Policy
To approve the Directors’ Remuneration Report
1,745,240,139
1,755,231,894
91.85% 154,778,305
94.54% 101,417,177
8.15% 1,900,018,444
5.46% 1,856,649,071
46,152,673
89,522,046
Statement of implementation in 2015
Executive directors’ salaries were reviewed in 2014 with changes effective from 1 January 2015. When the Committee took these
decisions, it considered the salary increases awarded to other employees in 2014 and the expected increases in 2015. The Committee
also took account of the performance and experience of each executive, and the relative size of each director’s role, as well as the
performance of the Group. The external markets used to provide context to the Committee were identical to those used for 2014 salaries.
— The 2015 salary increase for the Chief Executive, PCA was 5 per cent, all other executive directors received a 3 per cent increase.
These uplifts are in line with 2015 salary increase budgets for other employees across our business units (2.5 per cent to 5 per cent).
2015 salaries are set out in the ‘Our executive remuneration at a glance’ section.
— Changes were made to the maximum opportunities under the annual incentive plan and long-term incentive awards for two executive
directors – Chief Executive, PCA and Chief Executive, UK & Europe; there were no changes to the maximum opportunities for the
other executive directors
– Chief Executive, PCA; increase in maximum AIP and LTIP awards to 180 per cent and 250 per cent of salary respectively. This
reflects the importance of PCA’s 2017 strategic initiatives which are crucial to the achievement of Group wide objectives. The
incumbent has also demonstrated considerable personal performance and contribution to the Group.
– Chief Executive, UK & Europe; increase in maximum AIP and LTIP awards to 175 per cent and 250 per cent of salary respectively.
The scope of the incumbent’s role has increased due to the Group’s expansion into Africa. Additionally, to reflect the ambition of the
UK & Europe business as it relates to the Group’s growth and cash ambitions. The incumbent has also demonstrated considerable
personal performance and contribution to the Group.
— In making these adjustments, the Remuneration Committee was mindful to ensure that the majority of the additional opportunity 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.
— In preparation for the implementation of Solvency II, part of executive directors’ 2015 bonuses will be determined by the achievement
of economic capital targets. The performance measures attached to long-term incentive awards remain unchanged from those set out
in the ‘Remuneration in respect of 2014’ section of this report.
— From 1 January 2015, the Committee has, at its discretion, the power to recover all (or part of) bonuses and share awards for a period
after they are received by executives. These clawback provisions complement the Committee’s existing malus powers which enable
unvested share awards to be reduced or cancelled in specific circumstances.
Signed on behalf of the Board of Directors
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Chairman of the Remuneration Committee
9 March 2015
Paul Manduca
Chairman
9 March 2015
Prudential plc Annual Report 2014
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Prudential plc Annual Report 2014 Directors’ remuneration report
Directors’ 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 2014
Conditional
awards in
2014
Market
price
at date of
award
(Number of
shares)
(Number of
shares)
48,517
47,079
31,057
122,282
(pence)
733.5
678
1,203
1,317
Rights
exercised
in 2014
Rights
lapsed
in 2014
Conditional
share awards
outstanding at
31 Dec 2014
Date of
end of
performance
period
Dividend
equivalents on
vested shares
(Number of
shares
released)2
4,971
48,517
(Number of
shares)
– 31 Dec 13
47,079 31 Dec 14
31,057 31 Dec 15
122,282 31 Dec 16
126,653
122,282
4,971
48,517
200,418
Pierre-Olivier Bouée GPSP
GPSP
PLTIP
PLTIP
PLTIP
PLTIP
GPSP
PLTIP
GPSP
GPSP
PLTIP
PLTIP
GPSP
GPSP
PLTIP
PLTIP
GPSP
BUPP
GPSP
BUPP
PLTIP
PLTIP
GPSP
GPSP
PLTIP
PLTIP
Jackie Hunt
Michael McLintock
Nic Nicandrou
Barry Stowe 1
Tidjane Thiam
Mike Wells 1,3
2011
2012
2013
2014
2013
2013
2013
2014
2011
2012
2013
2014
2011
2012
2013
2014
2011
2011
2012
2012
2013
2014
2011
2012
2013
2014
106,805
95,585
118,040
112,500
320,430
112,500
48,517
47,079
46,687
142,283
152,484
185,374
122,554
44,487
44,487
132,375
460,412
132,375
88,270
88,270
95,642
95,642
131,266
114,824
499,090
114,824
374,279
523,103
345,831
329,503
1,243,213
329,503
JNL PSP 2010
2011
GPSP
2011
BUPP
2012
GPSP
2012
BUPP
2013
PLTIP
2014
PLTIP
141,000
197,648
197,648
199,256
199,256
273,470
238,954
1,176
1,176
1,176
1,317
733.5
678
1,203
1,317
733.5
678
1,203
1,317
733.5
733.5
678
678
1,203
1,317
733.5
678
1,203
1,317
568.5
733.5
733.5
678
678
1,203
1,317
106,805
– 31 Dec 13
95,585 31 Dec 14
118,040 31 Dec 15
112,500 31 Dec 16
106,805
326,125
4,971
48,517
4,971
48,517
15,633 152,484
– 31 Dec 13
47,079 31 Dec 14
46,687 31 Dec 15
44,487 31 Dec 16
138,253
– 31 Dec 13
185,374 31 Dec 14
122,554 31 Dec 15
132,375 31 Dec 16
15,633 152,484
440,303
9,106
8,932
88,270
86,584
1,686
– 31 Dec 13
– 31 Dec 13
95,642 31 Dec 14
95,642 31 Dec 14
131,266 31 Dec 15
114,824 31 Dec 16
18,038 174,854
1,686
437,374
38,374 374,279
38,374 374,279
113,890
20,400 197,648
20,400 197,648
– 31 Dec 13
523,103 31 Dec 14
345,831 31 Dec 15
329,503 31 Dec 16
1,198,437
– 31 Dec 13
– 31 Dec 13
– 31 Dec 13
199,256 31 Dec 14
199,256 31 Dec 14
273,470 31 Dec 15
238,954 31 Dec 16
1,208,278
238,954
40,800 509,186
910,936
Notes
1
2
3
The awards for Barry Stowe and Mike Wells were made in ADRs (1 ADR = 2 ordinary shares). The fi gures in the table are represented in terms of ordinary shares.
In 2011, 2012, 2013 and 2014 a DRIP dividend equivalent was accumulated on these awards.
The table above refl ects the maximum number of shares (150 per cent of the original conditional amount awarded) which could have been subsequently
released to Mike Wells under the JNL Performance Share Plan. This maximum number of shares could have been released if stretch performance targets were
achieved. For the 2010 award, 121.16 per cent of the original conditional amount awarded was released to Mike Wells.
Prudential plc Annual Report 2014
117
Business-specifi c cash-based long-term incentive plans
Details of all outstanding awards under cash-based long-term incentive plans are set out in the table below. The performance period
for all M&G Executive LTIP awards is three years:
Michael McLintock
M&G Executive LTIP
M&G Executive LTIP
M&G Executive LTIP
M&G Executive LTIP
Total payments made in 2014
Mike Wells
JNL LTIP
Total payments made in 2014
Year of initial
award
Face value of
conditional
share awards
outstanding at
1 January 2014
£000
Conditionally
awarded
in 2014
£000
Payments
made
in 2014
£000
Face value of
conditional
share awards
outstanding at
31 December
2014
£000
Date of end of
performance
period
2011
2012
2013
2014
1,318
953
1,112
1,146
2010
906
3,032
3,032
634
634
–
953
1,112
1,146
31 Dec 13
31 Dec 14
31 Dec 15
31 Dec 16
–
31 Dec 13
Note
Under the M&G Executive LTIP, the value of each unit at award is £1. The value of units changes based on M&G’s profi t growth and investment performance over the
performance period. For the 2011 award of 1,318,148 units, the unit price at the end of the performance period was £2.30 which resulted in a payment of £3,031,740 to
Michael McLintock during 2014. For the 2012 award of 952,960 units, the unit price at the end of the performance period was £2.07. This will result in payment of
£1,972,627 to Michael McLintock in 2015.
As outlined in the 2013 Directors’ Remuneration Report, on 31 December 2013 the performance period for the JNL LTIP came to an end. Over the four-year
performance period the shareholder value of the US business grew by 70.848 per cent. This resulted in 70.848 per cent of Mike Wells’ cash-settled award vesting. This
was the last JNL LTIP award 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 value of the award has been calculated using the average exchange rate for the year in which the grant was made. The dollar value of conditional
awards outstanding on 1 January 2014 and 31 December was US$1,400,000 and nil respectively.
Other share awards
The table below sets out executive directors’ deferred bonus share awards.
Year of
grant
Conditional
share awards
outstanding at
1 January 2014
(Number of
shares)
Conditionally
awarded
in 2014
(Number of
shares)
Dividends
accumulated
in 2014
(Number of
shares)2
Shares
released
in 2014
(Number of
shares)
Conditional
share awards
outstanding at
31 December
2014
(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)
2011
12,083
12,083
– 31 Dec 13 31 Mar 14
721.5 1,268.5
Pierre-Olivier Bouée
Deferred 2010 Group
deferred bonus
plan award
Deferred 2011 Group
deferred bonus
plan award
Deferred 2012 Group
deferred bonus
plan award
Deferred 2013 annual
incentive award
Jackie Hunt
Deferred 2013 annual
incentive award
2014
2012
11,228
2013
2014
8,106
31,417
277
199
362
838
717
717
14,667
14,667
29,017
29,017
11,505 31 Dec 14
8,305 31 Dec 15
15,029 31 Dec 16
750
1,055
1,317
12,083
34,839
29,734 31 Dec 16
1,317
29,734
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Prudential plc Annual Report 2014 Directors’ remuneration report
Supplementary information continued
Year of
grant
Conditional
share awards
outstanding at
1 January 2014
(Number of
shares)
Conditionally
awarded
in 2014
(Number of
shares)
Dividends
accumulated
in 2014
(Number of
shares)2
Shares
released
in 2014
(Number of
shares)
Conditional
share awards
outstanding at
31 December
2014
(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)
Michael McLintock
Deferred 2010 annual
incentive award
Deferred 2011 annual
incentive award
Deferred 2012 annual
incentive award
Deferred 2013 annual
incentive award
Nic Nicandrou
Deferred 2010 annual
incentive award
Deferred 2011 annual
incentive award
Deferred 2012 annual
incentive award
Deferred 2013 annual
incentive award
Barry Stowe 1
Deferred 2010 annual
incentive award
Deferred 2011 annual
incentive award
Deferred 2012 annual
incentive award
Deferred 2013 annual
incentive award
2011
2012
2013
2014
2011
2012
2013
2014
2011
2012
2013
2014
82,838
38,246
36,831
157,915
69,093
69,093
51,149
46,223
39,839
137,211
34,903
34,903
59,836
53,814
38,710
152,360
30,244
30,244
82,838
– 31 Dec 13 31 Mar 14
721.5 1,268.5
39,191 31 Dec 14
37,741 31 Dec 15
70,801 31 Dec 16
750
1,055
1,317
82,838
147,733
51,149
– 31 Dec 13 31 Mar 14
721.5 1,268.5
47,365 31 Dec 14
40,823 31 Dec 15
35,765 31 Dec 16
750
1,055
1,317
945
910
1,708
3,563
1,142
984
862
2,988
51,149
123,953
59,836
– 31 Dec 13 31 Mar 14
721.5 1,268.5
1,340
964
752
55,154 31 Dec 14
39,674 31 Dec 15
30,996 31 Dec 16
750
1,055
1,317
3,056
59,836
125,824
Prudential plc Annual Report 2014
119
Year of
grant
Conditional
share awards
outstanding at
1 January 2014
(Number of
shares)
Conditionally
awarded
in 2014
(Number of
shares)
Dividends
accumulated
in 2014
(Number of
shares)2
Shares
released
in 2014
(Number of
shares)
Conditional
share awards
outstanding at
31 December
2014
(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)
2011
235,444
2012
107,424
235,444
– 31 Dec 13 31 Mar 14
721.5 1,268.5
2,655
2,256
1,578
110,079 31 Dec 14
93,507 31 Dec 15
65,425 31 Dec 16
750
1,055
1,317
6,489 235,444
269,011
63,847
63,847
96,536
– 31 Dec 13 14 Mar 14
721.5
1,346
2,464
2,054
2,484
7,002
101,314 31 Dec 14
84,514 31 Dec 15
102,130 31 Dec 16
750
1,055
1,317
96,536
287,958
277,846
99,646
99,646
Tidjane Thiam
Deferred 2010 annual
incentive award
Deferred 2011 annual
incentive award
Deferred 2012 annual
incentive award
Deferred 2013 annual
incentive award
Mike Wells 1
Deferred 2010 Group
Deferred Bonus
Plan award
Deferred 2011 annual
incentive award
Deferred 2012 annual
incentive award
Deferred 2013 annual
incentive award
2013
2014
2011
2012
2013
2014
91,251
434,119
96,536
98,850
82,460
Notes
1
2
3
The Deferred Share Awards for Barry Stowe and Mike Wells were made in ADRs (1 ADR = 2 ordinary shares). The fi gures in the table are represented in terms
of ordinary shares.
The number of shares awarded initially awarded is calculated using the average share price over the three business days prior to the date of grant. For the
awards from the 2013 annual incentives, made in 2014, the average share price was 1,288 pence.
DRIP dividend equivalents accumulate on these awards.
All-employee share plans
It is important that all employees are offered the opportunity to own shares in Prudential, connecting them both to the success of the
Company and to the interests of other shareholders. Executive directors are invited to participate in these plans on the same basis as
other staff in their location.
Save As You Earn (SAYE) schemes
UK based executive directors are eligible to participate in the HM Revenue & 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 2014 participants could elect to enter into savings contracts of up to £500 per month for a period of three or fi ve years. At the end
of this term, participants may exercise their options within six months and purchase shares. If an option is not exercised within six months,
participants are entitled to a refund of their cash savings plus interest if applicable under the rules. Shares are issued to satisfy those
options which are exercised. No options may be granted under the schemes if the grant would cause the number of shares which have
been issued, or which remain issuable pursuant to options granted in the preceding 10 years under the scheme and any other option
schemes operated by the Company, or which have been issued under any other share incentive scheme of the Company, to exceed
10 per cent of the Company’s ordinary share capital at the proposed date of grant.
Details of executive directors’ rights under the SAYE scheme are set out in the ‘Statement of directors’ shareholdings‘.
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Supplementary information continued
Share Incentive Plan (SIP)
UK-based executive directors are also eligible to participate in the Company’s Share Incentive Plan (SIP). From April 2014, all UK based
employees were able to purchase Prudential plc shares up to a value of £150 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.
Pierre-Olivier Bouée
Jackie Hunt
Michael McLintock
Nic Nicandrou
Tidjane Thiam
Year of
initial grant
Share Incentive
Plan awards
held in trust at
1 Jan 2014
(Number of
shares)
Partnership
shares
accumulated
in 2014
(Number of
shares)
Matching
shares
accumulated
in 2014
(Number of
shares)
Dividend
shares
accumulated
in 2014
(Number of
shares)
Share Incentive
Plan awards
held in trust
at 31 Dec 2014
(Number of
shares)
2014
2013
2014
2010
2014
–
23
–
1,064
–
85
109
85
123
85
21
28
21
31
21
–
1
–
28
–
106
161
106
1,246
106
Dilution
Releases from the Prudential Long Term Incentive Plan, GPSP and BUPP are satisfi ed using new issue shares rather than by purchasing
shares in the open market. Shares relating to options granted under all-employee share plans are also satisfi ed by new issue shares.
The combined dilution from all outstanding shares and options at 31 December 2014 was 0.1 per cent of the total share capital at the
time. Deferred shares will continue to be satisfi ed by the purchase of shares in the open market.
Five highest paid individuals
Of the fi ve individuals with the highest emoluments in 2014, two were directors whose emoluments are disclosed in this report.
The aggregate of the emoluments of the other three individuals for 2014 were as follows:
Base salaries, allowances and benefi ts in kind
Pension contributions
Performance-related pay
Compensation for loss of offi ce1
Total
Note
1
Includes amounts for short- and long-term incentive awards
2014
£000
1,321
235
22,911
4,249
28,716
Their emoluments were within the following bands:
£5,800,001 – £5,900,000
£7,500,001 – £7,600,000
£15,300,001 – £15,400,000
Number of fi ve
highest paid
employees 2014
1
1
1
Prudential plc Annual Report 2014
121
Section 5
Financial statements
122
261
262
270
271
Index to Group IFRS fi nancial statements
Balance sheet of the parent company
Notes on the parent company fi nancial statements
Statement of directors’ responsibilities in respect
of the annual report and the fi nancial statements
Independent auditor’s report to the members
of Prudential plc only
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Prudential plc Annual Report 2014 Financial statements
Index to Group IFRS fi nancial statements
Primary statements
123
124
125
126
127
129
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated statement of changes in equity: 2014
2013
Consolidated statement of fi nancial position
Consolidated statement of cash fl ows
Notes to Primary statements
A1
A2
A3
Section A: Background and accounting policies
130
130
Basis of preparation and exchange rates
Adoption of new accounting pronouncements in 2014
Accounting policies
A3.1
Accounting policies and use of estimates
and judgements
A3.2 New accounting pronouncements not yet eff ective
131
142
Section B: Earnings performance
B1
B2
B3
B4
B5
B6
B7
143
144
146
150
152
153
154
155
157
157
158
159
163
164
B1.3
Analysis of performance by segment
B1.1
B1.2
Segment results – profi t before tax
Short-term fl uctuations 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 payment
Key management remuneration
Fees payable to the auditor
B1.4
B1.5
Profi t before tax – asset management operations
Acquisition costs and other expenditure
B3.1
B3.2
B3.3
B3.4
Eff ect 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
165
170
172
173
175
177
178
182
190
197
199
201
201
203
Analysis of Group position by segment and business type
C1.1
Group statement of fi nancial position –
analysis by segment
Group statement of fi nancial position –
analysis by business type
C1.2
Asia insurance operations
Group assets and liabilities – Classifi cation
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 – Classifi cation and Measurement
C3.1
C3.2
C3.3 Debt securities
Loans portfolio
C3.4
C3.5
Financial instruments – additional information
C3.5(a) Market risk
C3.5(b) Derivatives and hedging
C3.5(c) Derecognition, collateral and off setting
C3.5(d) Impairment of fi nancial assets
C4
C5
C6
C7
C8
C9
C10
C11
Policyholder liabilities and unallocated surplus
of with-profi ts 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
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
Products and determining contract liabilities
attributable to shareholders
Intangible assets attributable to with-profi ts funds
C5.2
Borrowings
C6.1
Core structural borrowings of
shareholder-fi nanced operations
Group overview
US insurance operations
UK insurance operations
Asset management and other operations
C6.2 Other borrowings
C6.3 Maturity analysis
Risk and sensitivity analysis
C7.1
C7.2 Asia insurance operations
C7.3
C7.4
C7.5
Tax assets and liabilities
C8.1
C8.2
Defi ned benefi t pension schemes
Share capital, share premium and own shares
Capital position statement
C11.1
C11.2
Life assurance business
Asset management operations
– regulatory and other surplus
Deferred tax
Current tax
C12
C13
C14
Provisions
Property, plant and equipment
Investment properties
204
207
209
210
212
213
216
220
221
224
225
225
226
226
228
230
235
237
238
238
239
246
248
253
254
254
255
Section D: Other notes
256
257
257
259
259
259
260
260
D1
D2
D3
D4
D5
D6
D7
D8
Corporate transactions
Domestication of the Hong Kong branch business
Contingencies and related obligations
Post balance sheet events
Subsidiary undertakings
Investments in joint ventures and associates
Related party transactions
Commitments
Consolidated income statement
Year ended 31 December
Gross premiums earned
Outward reinsurance premiums
Earned premiums, net of reinsurance
Investment return
Other income
Total revenue, net of reinsurance
Benefi ts and claims
Outward reinsurers’ share of benefi t and claims
Movement in unallocated surplus of with-profi ts funds
Benefi ts and claims and movement in unallocated surplus of with-profi ts funds,
net of reinsurance
Acquisition costs and other expenditure
Finance costs: interest on core structural borrowings of shareholder-fi nanced operations
Remeasurement of carrying value of Japan life business classifi ed as held for sale
Total charges, net of reinsurance
Share of profi ts from joint ventures and associates, net of related tax
Profi t before tax (being tax attributable to shareholders’ and policyholders’ returns)*
Less tax charge attributable to policyholders' returns
Profi t 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
Profi t for the year attributable to equity holders of the Company
Earnings per share (in pence)
Based on profi t attributable to the equity holders of the Company:
Basic
Diluted
Prudential plc Annual Report 2014
123
Note
2014 £m
2013 £m
B1.5
B1.5
B1.5
B1.4
B3
D1
B1.4
D6
B1.1
B5
B5
B6
32,832
(799)
32,033
25,787
2,306
60,126
(50,736)
631
(64)
(50,169)
(6,752)
(341)
(13)
(57,275)
303
3,154
(540)
2,614
(938)
540
(398)
2,216
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
2014
2013
86.9p
86.8p
52.8p
52.7p
* This measure is the formal profi t before tax measure under IFRS but it is not the result attributable to shareholders. This is principally because the corporate taxes
of the Group include those on the income of consolidated with-profi ts and unit-linked funds that, through adjustments to benefi ts, are borne by policyholders.
These amounts are required to be included in the tax charge of the Company under IAS 12. Consequently, the profi t before all taxes measure (which is determined
aft er deducting the cost of policyholder benefi ts and movements in the liability for unallocated surplus of the PAC with-profi ts fund aft er adjusting for taxes borne
by policyholders) is not representative of pre-tax profi ts attributable to shareholders.
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Prudential plc Annual Report 2014 Financial statements Primary statements
Consolidated statement of comprehensive income
Year ended 31 December
Profi t for the year
Note
2014 £m
2013 £m
2,216
1,346
Other comprehensive income:
Items that may be reclassifi ed subsequently to profi t 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 classifi ed
as available-for-sale:
Net unrealised holding gains (losses) arising during the year
Net losses 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 reclassifi ed to profi t or loss
Shareholders' share of actuarial and other gains and losses on defi ned benefi t pension schemes:
Gross
Related tax
Other comprehensive income (loss) for the year, net of related tax
Total comprehensive income for the year
A1
C3.3
C5.1(b)
215
5
220
1,039
(83)
956
(87)
(304)
565
785
(12)
2
(10)
(255)
–
(255)
(2,025)
(64)
(2,089)
498
557
(1,034)
(1,289)
(62)
14
(48)
775
(1,337)
2,991
9
Consolidated statement of changes in equity
Prudential plc Annual Report 2014
125
2014 £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
–
2,216
–
–
2,216
–
2,216
Year ended 31 December
Reserves
Profi t 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
defi ned benefi t pension schemes,
net of tax
Total other comprehensive (loss) income
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 in equity
At beginning of year
At end of year
–
–
–
–
–
–
–
–
–
–
–
–
B7
C10
–
–
–
–
–
–
–
–
–
–
(10)
(10)
2,206
(895)
106
–
13
–
–
–
(48)
(6)
1,363
7,425
8,788
–
128
128
13
1,895
1,908
220
–
220
–
220
–
565
565
–
565
–
220
220
–
565
565
–
–
–
–
–
–
–
–
–
–
–
–
(10)
775
2,991
(895)
106
–
13
(48)
(6)
220
(189)
31
565
391
956
2,161
9,650
11,811
–
–
–
–
–
–
–
–
–
–
1
1
(10)
775
2,991
(895)
106
–
13
(48)
(6)
2,161
9,651
11,812
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Prudential plc Annual Report 2014 Financial statements Primary statements
Consolidated statement of changes in equity continued
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
Profi t 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
defi ned benefi t pension schemes,
net of tax
Total other comprehensive loss
Total comprehensive income (loss)
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
Prudential plc Annual Report 2014
127
Consolidated statement of fi nancial position
Assets
31 December
Note
2014 £m
2013 £m
Intangible assets attributable to shareholders:
Goodwill
Deferred acquisition costs and other intangible assets
Total
Intangible assets attributable to with-profi ts 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
* Included within fi nancial investments are £4,578 million (2013: £3,791 million) of lent securities.
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
D6
C3.4
C3.3
1,463
7,261
8,724
186
61
247
1,461
5,295
6,756
177
72
249
8,971
7,005
978
7,167
2,765
117
2,667
1,852
920
6,838
2,412
244
2,609
1,746
15,546
14,769
12,764
11,477
1,017
809
12,841
144,862
145,251
7,623
13,096
337,454
12,566
120,222
132,905
6,265
12,213
296,457
D1(b)
824
6,409
916
6,785
C1,C3.1
369,204
325,932
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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
2014 £m
2013 £m
11,811
1
11,812
9,650
1
9,651
250,038
39,277
20,224
12,450
321,989
218,185
35,592
20,176
12,061
286,014
3,320
984
4,304
2,263
1,093
2,347
7,357
4,291
617
947
4,262
724
2,323
4,105
3,662
974
4,636
2,152
895
2,074
5,278
3,778
395
824
3,307
635
1,689
3,736
26,973
770
357,392
369,204
21,716
868
316,281
325,932
C4.1(a)
C6.1
C6.2
C6.2
C8.1
C8.2
C12
C3.5(b)
D1(b)
C1,C3.1
The consolidated financial statements on pages 123 to 260 were approved by the Board of Directors on 9 March 2015. They were signed
on its behalf:
Paul Manduca
Chairman
Tidjane Thiam
Group Chief Executive
Nic Nicandrou
Chief Financial Officer
Prudential plc Annual Report 2014 Financial statements Primary statements Prudential plc Annual Report 2014
129
Consolidated statement of cash fl ows
Year ended 31 December
Note
2014 £m
2013 £m
Cash fl ows from operating activities
Profi t before tax (being tax attributable to shareholders' and policyholders' returns)note (i)
Non-cash movements in operating assets and liabilities refl ected in profi t before tax:
3,154
2,082
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 fl ows from operating activities
Cash fl ows from investing activities
Purchases of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Acquisition of subsidiaries and distribution rights, net of cash balance
Sale of PruHealth and PruProtect businessesnote (iii)
Net cash fl ows from investing activities
Cash fl ows from fi nancing activities
Structural borrowings of the Group:
Shareholder-fi nanced operations:note (iv)
Issue of subordinated debt, net of costs
Redemption of subordinated debt
Interest paid
With-profi ts operations:note (v)
Interest paid
Equity capital:
Issues of ordinary share capital
Dividends paid
Net cash fl ows from fi nancing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of exchange rate changes on cash and cash equivalents
Cash and cash equivalents at end of year
B5
C13
D1
D1
C6.1
C6.2
(30,746)
(1,521)
27,292
3,797
(8,315)
174
7,155
1,559
(721)
1,828
(172)
10
(535)
152
(545)
–
(445)
(330)
(9)
13
(895)
(1,666)
(383)
6,785
7
6,409
(23,487)
(1,146)
21,951
1,907
(8,345)
81
6,961
1,738
(418)
1,324
(221)
42
(405)
–
(584)
1,124
–
(291)
(9)
6
(781)
49
789
6,126
(130)
6,785
Notes
(i)
(ii) Other non-cash items consist of the adjustment of non-cash items to profi t before tax together with other net items, net purchases of treasury shares and other
This measure is the formal profi t before tax measure under IFRS but it is not the result attributable to shareholders.
(iii)
(iv)
(v)
net movements in equity.
In November 2014 PAC sold its 25 per cent equity stake in the PruHealth and PruProtect businesses to Discovery Group Europe Limited resulting in a net cash
infl ow of £152 million.
Structural borrowings of shareholder-fi nanced operations exclude borrowings to support short-term fi xed income securities programmes, non-recourse
borrowings of investment subsidiaries of shareholder-fi nanced operations and other borrowings of shareholder-fi nanced operations. Cash fl ows in respect
of these borrowings are included within cash fl ows from operating activities.
Interest paid on structural borrowings of with-profi ts operations relate solely to the £100 million 8.5 per cent undated subordinated guaranteed bonds, which
contribute to the solvency base of the Scottish Amicable Insurance Fund (SAIF), a ring-fenced sub-fund of the PAC with-profi ts fund. Cash fl ows in respect
of other borrowings of with-profi ts funds, which principally relate to consolidated investment funds, are included within cash fl ows from operating activities.
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130
Prudential plc Annual Report 2014 Financial statements Notes to primary statements
A: Background and accounting policies
A1: Basis of preparation and exchange rates
Prudential plc (the Company) together with its subsidiaries (collectively, the Group or Prudential) is an international fi nancial services
group with its principal operations in Asia, the US and the UK. Prudential offers a wide range of retail fi nancial products and services and
asset management services throughout these territories. The retail fi nancial products and services principally include life insurance,
pensions and annuities, as well as collective investment schemes.
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 2014, there were no
unendorsed standards effective for the two years ended 31 December 2014 affecting the consolidated fi nancial 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 fi nancial statements for the year ended 31 December 2013.
Exchange rates
The exchange 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
Thailand
US
Closing
rate at
31 Dec 2014
Average
rate for
2014
Closing
rate at
31 Dec 2013
Average
rate for
2013
12.09
19,311.31
5.45
2.07
98.42
33,348.46
51.30
1.56
12.78
19,538.56
5.39
2.09
100.53
34,924.62
53.51
1.65
12.84
20,156.57
5.43
2.09
102.45
34,938.60
54.42
1.66
12.14
16,376.89
4.93
1.96
91.75
32,904.71
48.11
1.56
Certain notes to the fi nancial statements present 2013 comparative information at Constant Exchange Rates (CER), in addition to the
reporting at Actual Exchange Rates (AER) used throughout the consolidated fi nancial statements. AER are actual historical exchange
rates for the specifi c accounting period, being the average rates over the period for the income statement and the closing rates for the
balance sheet at the balance sheet date. CER results are calculated by translating prior period results using the current period foreign
exchange rate ie current period average rates for the income statement and current period closing rates for the balance sheet.
The exchange movement arising during 2014 recognised in other comprehensive income is:
Asia operations
US operations
Unallocated to a segment (central funds)*
2014 £m
2013 £m
109
243
(137)
215
(319)
(37)
101
(255)
* The exchange rate movement unallocated to a segment mainly refl ects the translation of currency borrowings which have been designated as a net investment
hedge against the currency risk of the investment in Jackson.
A2: Adoption of new accounting pronouncements in 2014
The Group has adopted the following accounting pronouncements in 2014 but their adoption has had no material impact on the results
and fi nancial position of the Group:
— Amendments to IAS 32 ‘Offsetting fi nancial assets and fi nancial liabilities’; and
— IFRIC 21 ‘Levies’.
This is not intended to be a complete list as only those accounting pronouncements that could have an impact upon the Group’s fi nancial
statements are described.
Prudential plc Annual Report 2014
131
A3: Accounting policies
A3.1 Accounting policies and use of estimates and judgements
This note provides detailed accounting policies adopted by the Group to prepare the consolidated fi nancial statements.
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 referenced in the table below:
Critical accounting policies
Classifi cation of insurance and investment contracts
Measurement of policyholder liabilities and unallocated surplus of with-profi ts 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 fi nancial statements requires Prudential to make estimates and judgements that affect the reported amounts of
assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. 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 critical estimates and judgements in applying the relevant accounting policy:
Critical accounting estimates and assumptions
Classifi cation of insurance and investment contracts
Measurement of policyholder liabilities
Measurement of deferred acquisition costs
Determination of fair value of fi nancial investments
Determining impairment relating to fi nancial 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; and
(3) it has ability to use its power over the investee to affect its own returns.
i Subsidiaries
Subsidiaries are those investees which the Group controls. The vast majority of the 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:
The Group’s insurance operations invest 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 holds 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 fi nancial 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
signifi cantly affect the generation of economic returns from the limited partnership’s operation;
— The Group has the power to obtain the signifi cant benefi ts of the activities of the limited partnerships. Generally, it is presumed that
the Group has signifi cant benefi ts 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 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 profi t or loss within fi nancial investments in the
consolidated statement of fi nancial position.
The limited partnerships consolidated by the Group include Qualifying Partnerships as defi ned under the UK Partnerships (Accounts)
Regulations 2008 (the ‘Partnerships Act’). Certain of these limited partnerships have taken advantage of the exemption under regulation
7 of the Partnerships Act from the fi nancial statements requirements under regulations 4 to 6, on the basis that these limited partnerships
are dealt with on a consolidated basis in these fi nancial statements.
The Group does not have subsidiaries with a material percentage of non-controlling interests.
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132
Prudential plc Annual Report 2014 Financial statements Notes to primary statements
A: Background and accounting policies continued
A3: Accounting policies continued
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 signifi cant infl uence, but it does not control. Generally it is presumed that the Group
has signifi cant infl uence if it holds between 20 per cent and 50 per cent voting rights of the entity.
With the exception of those referred to below, the Group accounts for its investments in joint ventures and associates by using the
equity method of accounting. The Group’s share of profi t 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. The equity method of
accounting does not apply to investments in associates and joint ventures held by the Group’s insurance or investment funds including
venture capital business or mutual funds or unit trusts, which as allowed by IAS 28 ‘Investments in Associates and Joint Ventures’, are
carried at fair value through profi t or loss.
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), 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 OEICs and UTs, which invest mainly in equities, bonds, cash and cash equivalents, and properties. The Group’s
percentage ownership in these entities can fl uctuate on a daily basis according to the participation of the Group 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 signifi cant investment in the entity; and
— Where the entity is managed by asset managers outside the Group, Prudential has existing rights that gives 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 a limited number of OEICs and UTs 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 signifi cant infl uence 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 classifi ed as liabilities and appear as net asset value attributable to unit holders of consolidated unit trusts and
similar funds.
Where the Group does not control these entities (as it is deemed to be acting as an agent) and they do not meet the defi nition of
associates, they are carried at fair value through profi t or loss within fi nancial investments in the consolidated statement of fi nancial position.
Where the Group’s asset manager set up the OEICs and UTs 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 OEICs and UTs.
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 OEICs and UTs. For these OEICs and UTs, the Group is not deemed to control the
entities but to be acting as an agent.
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, fi xed 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 Governors or trustees for which the majority of the members are independent of Jackson or any affi liated 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’ advisers, including asset managers managing the investment
vehicles. Accordingly, the Group does not control these vehicles. These investments are carried at fair value through profi t or loss within
fi nancial investments in the consolidated statement of fi nancial position.
Prudential plc Annual Report 2014
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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 profi t or loss within fi nancial investments in the consolidated statement of fi nancial position.
The table below provides aggregate carrying amounts of the investments in unconsolidated structured entities reported in the
Group’s statement of fi nancial position:
Statement of fi nancial position line items
Equity securities and portfolio holdings in
unit trusts
Debt securities
Total
2014 £m
2013 £m
OEICs/UTs
Separate
account
assets
Other
structured
entities
OEICs/UTs
Separate
account
assets
Other
structured
entities
12,690
–
12,690
81,741
–
81,741
–
12,715
12,715
13,175
–
13,175
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 2014, the Group does not have an agreement, contractual or otherwise, or intention to provide fi nancial support
to structured entities that could expose the Group to a loss.
c Classifi cation of insurance and investment contracts
IFRS 4 requires contracts written by insurers to be classifi ed as either ‘insurance contracts’ or ‘investment contracts’ depending on the
level of insurance risk transferred. Insurance risk is a pre-existing risk, other than fi nancial risk, transferred from the contract holder to the
contract issuer. If signifi cant insurance risk is transferred to the Group then it is classifi ed as an insurance contract. Contracts that transfer
fi nancial risk to the Group, but not signifi cant insurance risk, are termed investment contracts. Furthermore, some contracts, both
insurance and investment, contain discretionary participating features representing the contractual right to receive additional benefi ts
as a supplement to guaranteed benefi ts:
a That are likely to be a signifi cant portion of the total contract benefi ts;
b Whose amount or timing is contractually at the discretion of the insurer; and
c That are contractually based on asset or fund performance, as discussed in IFRS 4.
Business units
Asia
US
UK
Insurance contracts and investment contracts
with discretionary participation features
Investment contracts without discretionary
participation features
— With-profi ts 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-profi ts 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-profi ts funds
The measurement basis of policyholder liabilities is dependent upon the classifi cation of the contracts under IFRS 4 described in note
A3.1(c) above.
IFRS 4 permits the continued usage of previously applied Generally Accepted Accounting Practices (GAAP) for insurance contracts
and investment contracts with discretionary participating features. Accordingly, except for UK regulated with-profi ts funds as discussed
below, the modifi ed statutory basis of reporting as set in the Statement of Recommended Practice issued by Association of British
Insurers (ABI) was adopted by the Group on fi rst time adoption 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-profi ts 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-profi ts 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.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
A: Background and accounting policies continued
A3: Accounting policies continued
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 modifi ed statutory basis. Refi nements to the local reserving methodology are generally treated
as changes in estimates, dependent on their nature.
For the operations in India, Japan and Taiwan the local GAAP is not appropriate as a starting point in the context of the modifi ed
statutory basis, 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 benefi t 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 benefi t 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.
While the basis of valuation of liabilities in this business is in accordance with the requirements of the ABI SORP, it may differ from that
determined on the modifi ed statutory basis for UK operations with the same features.
US insurance operations
In accordance with the modifi ed statutory basis, 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 note A3.1(f) below.
UK insurance operations
The UK regulated with-profi ts 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-profi ts benefi ts reserve; plus
— Future policy related liabilities; plus
— The realistic current liabilities of the fund.
The with-profi ts benefi ts reserve is primarily based on the retrospective calculation of accumulated asset shares but is adjusted to refl ect
future policyholder benefi ts and other outgoings. Asset shares broadly refl ect the policyholders’ share of the with-profi ts fund assets
attributable to their policies.
The 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-profi ts 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 fi nancial 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 signifi cant insurance risk include unit-linked, annuity and other non-profi t business.
For the purposes of local regulations, segregated accounts are established for linked business for which policyholder benefi ts are wholly
or partly determined by reference to specifi c investments or to an investment-related index. The interest rates used in establishing
policyholder benefi t provisions for pension annuities in the course of payment are adjusted each year. Mortality rates used in establishing
policyholder benefi ts are based on published mortality tables adjusted to refl ect actual experience.
ii Investment contracts with discretionary participation features
For investment contracts with discretionary participation features, the accounting basis is consistent with the accounting for similar
with-profi ts insurance contracts. Other investment contracts are accounted for on a basis that refl ects the hybrid nature of the
arrangements, where part is accounted for as a fi nancial instrument under IAS 39 and the investment management service component
is accounted for under IAS 18.
For those investment contracts in the US with fi xed and guaranteed terms, the Group uses the amortised cost model to measure
the liability.
Those investment contracts without fi xed and guaranteed terms are designated as fair value through profi t or 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 refl ect
the deposit nature of the arrangement, with premiums and claims refl ected as deposits and withdrawals and taken directly to the
statement of fi nancial position as movements in the fi nancial liability balance.
Prudential plc Annual Report 2014
135
Under IFRS, investment contracts (excluding those with discretionary participation features) accounted for as fi nancial liabilities in
accordance with IAS 39 which also offer investment management services, require the application of IAS 18 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-profi ts funds
Unallocated surplus represents the excess of assets over policyholder liabilities for the Group’s with-profi ts funds that have yet to be
appropriated between policyholders and shareholders. As allowed under IFRS 4, the Group has opted to continue to record unallocated
surplus of with-profi ts funds wholly as a liability with no allocation to equity. The annual excess (shortfall) of income over expenditure of
the with-profi ts funds, after declaration and attribution of the cost of bonuses to policyholders and shareholders, is transferred to (from)
the unallocated surplus each year through a charge (credit) to the income statement. The balance retained in the unallocated surplus
represents cumulative income arising on the with-profi ts business that has not been allocated to policyholders or shareholders.
The balance of the unallocated surplus is determined after full provision for deferred tax on unrealised appreciation on investments.
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.
f Deferred acquisition costs for insurance contracts
Except for acquisition costs of with-profi ts contracts of the UK regulated with-profi ts funds, which are accounted for under the realistic
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 specifi cally identifi ed and capitalised as part of deferred acquisition costs. In general, this
deferral is presentationally shown by an explicit carrying value in the balance sheet. However, in some Asia operations the deferral is
implicit through the reserving methodology. The recoverability of the explicitly and implicitly deferred acquisition costs is measured and
are deemed impaired if the projected margins are less than the carrying value. To the extent that the future margins differ from those
anticipated, then an adjustment to the carrying value will be necessary.
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 term business, acquisition costs are deferred and amortised in line with expected premiums. For annuity and interest-sensitive life
business, acquisition costs are deferred and amortised in line with expected gross profi ts on the relevant contracts. For interest-sensitive
business, the key assumption is the long-term spread between the earned rate on investments and the rate credited to policyholders,
which is based on an annual spread analysis. In addition, expected gross profi ts depend on mortality assumptions, assumed unit costs
and terminations other than deaths (including the related charges), all of which are based on a combination of Jackson’s actual industry
experience and future expectations. A detailed analysis of actual mortality, lapse and expenses experience is performed using internally
developed experience studies.
For US variable annuity business, 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 fi ve years are fl exed (subject to
capping) so that, combined with the actual rates of return for the current and the previous two years is maintained. The projected rates
of return are capped at no more than 15 per cent for each of the next fi ve years. These returns affect the level of future expected profi ts
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 fi nancial 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).
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
refl ect the change in deferred acquisition costs that would have arisen if the assets held in the statement of fi nancial position had been
sold, crystallising unrealised gains or losses, and the proceeds reinvested at the yields currently available in the market.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
A: Background and accounting policies continued
A3: Accounting policies continued
UK insurance operations
For UK regulated with-profi ts funds where the realistic FSA regime is applied, the basis of setting liabilities is such that it would be
inappropriate for acquisition costs to be deferred, therefore these costs are expensed as incurred. The majority of the UK shareholder-
backed business is individual and group annuity business where the incidence of acquisition costs is negligible.
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 suffi cient to cover current estimates of future cash fl ows.
Any defi ciency is immediately charged to the income statement.
h Earned premiums, policy fees and claims paid
Premium and annuity considerations for conventional with-profi ts policies and other protection type insurance policies are recognised as
revenue when due. Premiums and annuity considerations for linked policies, unitised with-profi ts and other investment type policies are
recognised as revenue when received or, in the case of unitised or unit-linked policies, when units are issued. These amounts exclude
premium taxes and similar duties where Prudential collects and settles taxes borne by the customer.
Policy fees charged on linked and unitised with-profi ts policies for mortality, asset management and policy administration are
recognised as revenue when related services are provided.
Claims paid include maturities, annuities, surrenders and deaths. Maturity claims are recorded as charges on the policy maturity date.
Annuity claims are recorded when each annuity instalment becomes due for payment. Surrenders are charged to the income statement
when paid and death claims are recorded when notifi ed.
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 profi t or 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 classifi ed as long-term business contracts
i Investment classifi cation
The Group holds fi nancial investments in accordance with IAS 39, whereby subject to specifi c criteria, fi nancial instruments are required
to be accounted for under one of the following categories:
— Financial assets and liabilities at fair value through profi t or loss – this comprises assets and liabilities designated by management as
fair value through profi t or 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 as available-for-sale
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 fi nancial instrument or, when appropriate, a shorter period to the net carrying amount of the fi nancial 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 profi t or loss or available-for-sale, these instruments
comprise non-quoted investments that have fi xed 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 fi nancial 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 as described further in note C3.2. If there is no active established market for an investment,
the Group applies an appropriate valuation technique such as a discounted cash fl ow technique.
Determining the fair value of fi nancial investments when the markets are not active
The Group holds certain fi nancial investments for which the markets are not active. These can include fi nancial investments which are
not quoted on active markets and fi nancial investments for which markets are no longer active as a result of market conditions eg market
illiquidity. When the markets are not active, there is generally no or limited observable market data to account for fi nancial investments at
fair value. The determination of whether an active market exists for a fi nancial investment requires management’s judgement.
Prudential plc Annual Report 2014
137
If the market for a fi nancial investment of the Group is not active, the fair value is determined by using valuation techniques.
The Group establishes fair value for these fi nancial investments by using quotations from independent third parties, such as brokers or
pricing services, or by using internally developed pricing models. Priority is given to publicly available prices from independent sources
when available, but overall the source of pricing and/or the valuation technique is chosen with the objective of arriving at a fair value
measurement which refl ects the price at which an orderly transaction would take place between market participants on the
measurement date. The valuation techniques include the use of recent arm’s length transactions, reference to other instruments that are
substantially the same, discounted cash fl ow analysis, option-adjusted spread models and, if applicable, enterprise valuation and may
include a number of assumptions relating to variables such as credit risk and interest rates. Changes in assumptions relating to these
variables could positively or negatively impact the reported fair value of these fi nancial investments.
Financial investments measured at fair value are classifi ed into a three level hierarchy as described in note C3.2(b).
iii Determining impairments’ relation to fi nancial assets
Available-for-sale securities
The majority of Jackson’s debt securities portfolio are 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
fi nancial investment’s fair value
is substantial
The impact of the duration of
the security on the calculation of
the revised estimated cash fl ows
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 fl ows.
The duration of a security to maturity helps to inform whether assessments of estimated future cash
fl ows that are higher than market value are reasonable.
This factor provides an indication of how the contractual cash fl ows and effective interest rate of
a fi nancial asset compares with the implicit market estimate of cash fl ows and the risk attaching to
a ‘fair value’ measurement. The length of time for which that level of difference has been in place
may also provide further evidence as to whether the market assessment implies an impairment loss
has arisen.
The fi nancial 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 fl ows is identifi ed, 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 fl ows 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 classifi ed as available-for-sale,
the model used to analyse cash fl ows, begins with the current delinquency experience of the underlying collateral pool for the
structure, by applying assumptions about how much of the currently delinquent loans will eventually default, and multiplying this by an
assumed loss severity. Additional factors are applied to anticipate ageing effects. After applying a cash fl ow simulation an indication is
obtained as to whether or not the security has suffered, or is anticipated to suffer, contractual principal or interest payment shortfalls.
If a shortfall applies an impairment charge is recorded. The difference between the fair value and book cost for unimpaired securities
designated as available-for-sale is accounted for as unrealised gains or losses, with the movements in the accounting period being
included in other comprehensive income.
The Group’s review of fair value involves several criteria, including economic conditions, credit loss experience, other issuer-specifi c
developments and future cash fl ows. These assessments are based on the best available information at the time. Factors such as market
liquidity, the widening of bid/ask spreads and a change in cash fl ow assumptions can contribute to future price volatility. If actual
experience differs negatively from the assumptions and other considerations used in the consolidated fi nancial statements, unrealised
losses currently in equity may be recognised in the income statement in future periods. Additional details on the impairments of the
available-for-sale securities of Jackson are described in note C3.5(d).
Assets held at amortised cost
Financial assets classifi ed as loans and receivables under IAS 39 are carried at amortised cost using the effective interest rate method.
The loans and receivables include loans collateralised by mortgages, deposits and loans to policyholders. In estimating future cash fl ows,
the Group looks at the expected cash fl ows of the assets and applies historical loss experience of assets with similar credit risks that has
been adjusted for conditions in the historical loss experience which no longer exist, or for conditions that are expected to arise. The
estimated future cash fl ows are discounted using the fi nancial asset’s original or variable effective interest rate and exclude credit losses
that have not yet been incurred.
The risks inherent in reviewing the impairment of any investment include: the risk that market results may differ from expectations;
facts and circumstances may change in the future and differ from estimates and assumptions; or the Group may later decide to sell the
asset as a result of changed circumstances.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
A: Background and accounting policies continued
A3: Accounting policies continued
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 profi t or 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).
iv Derivatives and hedge accounting
Derivative fi nancial instruments are used to reduce or manage investment, interest rate and currency exposures, to facilitate effi cient
portfolio management and for investment purposes.
The Group may designate certain derivatives as hedges.
For hedges of net investments in foreign operations, the effective portion of any change in fair value of derivatives or other fi nancial
instruments designated as net investment hedges is recognised in other comprehensive income. The ineffective portion of changes
in the fair value of the hedging instrument is recorded in the income statement. The gain or loss on the hedging instrument is recognised
directly in other comprehensive income while the foreign operation is held.
For fair value hedges, movements in the fair value of the hedged item attributable to the hedged risk are recognised in the income statement.
The Group does not regularly seek to apply fair value or cash fl ow hedging treatment under IAS 39. The exceptions, where hedge
accounting has been applied in 2014 and 2013, 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-profi ts funds and
annuity business, and Jackson.
For UK with-profi ts funds the derivative programme derivatives are used for the purposes of effi cient portfolio management or
reduction in investment risk.
For shareholder-backed UK annuity business the derivatives are held to contribute to the matching as far as practical, of asset returns
and duration with those of liabilities to policyholders. The carrying value of these liabilities is sensitive to the return on the matching
fi nancial assets including derivatives held.
For Jackson, an extensive derivative programme is maintained. Value movements on the derivatives held can be very signifi cant
in their effect on shareholder results. Further details on this aspect of the Group’s fi nancial reporting are described in note B1.2.
v Measurement and presentation of derivatives and debt securities of US insurance operations
The policies for these items are signifi cant 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
fi nancial 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 diffi culties 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 fi nally
— Whether it is possible or desirable, without an unacceptable level of costs and constraint on commercial activity, to achieve the
accounting hedge effectiveness required under IAS 39.
Taking account of these considerations, the Group has decided that, except for occasional circumstances, it is not appropriate to seek
to achieve hedge accounting under IAS 39. As a result of this decision, the total income statement results are more volatile as the
movements in the value of Jackson’s derivatives are refl ected within it. This volatility is refl ected in the level of short-term fl uctuations
in investment returns, as shown in 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 fi nancial assets as held-to-maturity.
Debt securities of Jackson are designated as available-for-sale with value movements, unless impaired, being recorded as movements
within other comprehensive income. Impairments are recorded in the income statement.
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 fi nancial instruments and insurance contracts to create hybrid instruments. Embedded derivatives
meeting the defi nition of an insurance contract are accounted for under IFRS 4. Where economic characteristics and risks of the
Prudential plc Annual Report 2014
139
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
Benefi t 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-profi ts investment contracts whose strike price is either a fi xed amount or a fi xed amount plus interest. Further details on the
valuation basis for embedded derivatives attaching to Jackson’s life assurance contracts are provided in note C4.2.
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 classifi cation.
The Group’s policy is that collateral in excess of 100 per cent of the fair value of securities loaned is required from all securities’ borrowers
and typically consists of cash, debt securities, equity securities or letters of credit.
In cases where the Group takes possession of the collateral under its securities lending programme, the collateral, and corresponding
obligation to return such collateral, are recognised in the consolidated statement of fi nancial position.
viii Derecognition of fi nancial assets and liabilities
The Group’s policy is to derecognise fi nancial assets when it is deemed that substantially all the risks and rewards of ownership have been
transferred.
The Group derecognises fi nancial liabilities only when the obligation specifi ed in the contract is discharged, cancelled or has expired.
ix Financial liabilities designated at fair value through profi t or loss
Consistent with the Group’s risk management and investment strategy and the nature of the products concerned, the Group has
designated under IAS 39 classifi cation certain fi nancial liabilities at fair value through profi t or 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 refl ects tax that, in addition to relating to shareholders’ profi ts, is also attributable to policyholders and
unallocated surplus of with-profi ts funds and unit-linked policies. This is explained in more detail in note B5. Reported profi t before the
total tax charge is not representative of pre-tax profi ts attributable to shareholders. Accordingly, in order to provide a measure of pre-tax
profi ts attributable to shareholders the Group has chosen to adopt an income statement presentation of the tax charge and pre-tax
results that distinguishes between policyholder and shareholder components.
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 identifi ed by the Group refl ect the Group’s organisational structure, which is by both geography (Asia, US
and UK) and by product line (insurance operations and asset management).
The products of the insurance operations contain both signifi cant and insignifi cant 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 adviser, 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 profi t 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 classifi ed as loans and receivables
at amortised cost, all fi nancial investments and investment property are designated as assets at fair value through profi t or loss. The
short-term fl uctuations affect the result for the year and the Group provides additional analysis of results before and after short-term
fl uctuations in investment returns, together with other items that are of a short-term, volatile or one-off nature. Short-term fl uctuations
in investment returns on such assets held by with-profi ts funds, do not affect directly reported shareholder results. This is because
(i) the unallocated surplus of with-profi ts funds is accounted for as a liability and (ii) excess or defi cits of income and expenditure
of the funds over the required surplus for distribution are transferred to or from unallocated surplus.
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.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
A: Background and accounting policies continued
A3: Accounting policies continued
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 qualifi ed 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 classifi ed as fi nance leases
(leasehold property). Finance leases are capitalised at the lease’s inception at the lower of the fair value of the leased property and the
present value of the minimum lease payments.
p Pension schemes
For the Group’s defi ned benefi t schemes, if the present value of the defi ned benefi t obligation exceeds the fair value of the scheme
assets, then a liability is recorded in the Group’s statement of fi nancial position. By contrast, if the fair value of the assets exceeds the
present value of the defi ned benefi t obligation then the surplus will only be recognised if the nature of the arrangements under the trust
deed, and funding arrangements between the Trustee and the Company, support the availability of refunds or recoverability through
agreed reductions in future contributions. In addition, if there is a constructive obligation for the Company to pay defi cit funding, this
is also recognised such that the fi nancial position recorded for the scheme refl ects the higher of any underlying IAS 19 defi cit and the
obligation for defi cit funding.
The Group utilises the projected unit credit method to calculate the defi ned benefi t obligation. This method sees each period
of service as giving rise to an additional unit of benefi t entitlement and measures each unit separately to build up the fi nal obligation.
Estimated future cash fl ows are then discounted at a high-quality corporate bond rate, adjusted to allow for the difference in duration
between the bond index and the pension liabilities where appropriate, to determine its present value. These calculations are performed
by independent actuaries.
The plan assets of the Group’s pension schemes exclude several insurance contracts that have been issued by the Group. These
assets are excluded from plan assets in determining the pension obligation recognised in the consolidated statement of fi nancial position.
The aggregate of the actuarially determined service costs of the currently employed personnel and the net interest on the net defi ned
benefi t 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 defi ned contribution schemes are expensed when due.
q Share-based payment 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 indefi nitely to be offset against profi ts arising from the same company.
Deferred taxes are provided under the liability method for all relevant temporary differences. IAS 12 ‘Income Taxes’ does not require
all temporary differences to be provided for, in particular, the Group does not provide for deferred tax on undistributed earnings of
subsidiaries where the Group is able to control the timing of the distribution and the temporary difference created is not expected to
reverse in the foreseeable future. Deferred tax assets are only recognised when it is more likely than not that future taxable profi ts will
be available against which these losses can be utilised.
The tax charge for long-term business includes tax expense attributable to both policyholders and shareholders. In the UK, life
insurance companies are taxed on both their shareholders’ profi ts and on their policyholders’ insurance and investment returns on
certain insurance and investment products. Tax on shareholders’ profi ts is calculated at the standard corporation tax rate, and tax on
policyholders’ investment returns is calculated at the basic rate of income tax. Although both types of tax are included in the total tax
charge in the Group’s consolidated income statement, they are presented separately in the income statement to provide the most
relevant information about tax that the Group pays on its profi ts.
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.
Prudential plc Annual Report 2014
141
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.
t Goodwill
Goodwill arising on acquisitions of subsidiaries and businesses is capitalised and carried on the Group statement of fi nancial position as
an intangible asset at initial value less any accumulated impairment losses. Goodwill impairment testing is conducted annually and when
there is an indication of impairment. For the purposes of impairment testing, goodwill is allocated to cash generating units.
u Intangible assets
Intangible assets acquired on the purchase of a subsidiary or portfolio of contracts are measured at fair value on acquisition. Deferred
acquisition costs are accounted for as described in notes A3.1(d) and A3.1(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 refl ect the pattern
in which the future economic benefi ts 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. Amortisation of intangible assets is charged to the ‘acquisition costs’ and other expenditure line in
the income statement.
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 day’s 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 classifi ed as equity. The difference between the proceeds received on issue
of the shares, net of share issue costs, and the nominal value of the shares issued, is credited to share premium. Where the Company
purchases shares for the purposes of employee incentive plans, the consideration paid, net of issue costs, is deducted from retained
earnings. Upon issue or sale any consideration received is credited to retained earnings net of related costs.
y Foreign exchange
The Group’s consolidated fi nancial statements are presented in pounds sterling, the Group’s presentation currency. Accordingly, the
results and fi nancial position of foreign subsidiaries must be translated into the presentation currency of the Group from their functional
currencies, ie the currency of the primary economic environment in which the entity operates. All assets and liabilities of foreign
subsidiaries are converted at year end exchange rates while 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 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.
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142
Prudential plc Annual Report 2014 Financial statements Notes to primary statements
A: Background and accounting policies continued
A3: Accounting policies continued
A3.2 New accounting pronouncements not yet eff ective
The following standards, interpretations and amendments have been issued but are not yet effective in 2014, including those which have
not yet been adopted in the EU. This is not intended to be a complete list as only those standards, interpretations and amendments that
could have an impact upon the Group’s fi nancial statements are discussed.
a Accounting pronouncements endorsed by the EU but not yet eff ective
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 amendment to IFRS 2 ‘Share-based Payment’ and IFRS 3 ‘Business Combinations’ included in Annual improvements to IFRSs
2010-2012 cycle are applied to share-based payment transactions for which the grant date is on or after 1 July 2014 and to business
combinations for which the date of acquisition is on or after 1 July 2014, respectively. In these fi nancial statements, the Group had no
transactions on or after 1 July that were affected by these amendments. The Group is assessing the impact of the remaining amendments,
but they are not expected to have a signifi cant impact on the Group’s fi nancial statements.
b Accounting pronouncements not yet endorsed by the EU
Clarifi cation of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38)
The amendments published in May 2014 provide additional guidance on how the depreciation or amortisation of property, plant and
equipment and intangible assets should be calculated. They are effective for annual periods beginning on or after 1 January 2016, with
earlier application being permitted. The Group does not expect these amendments to have a signifi cant impact on the Group’s fi nancial
statements.
IFRS 15 ‘Revenue from Contracts with Customers’
This standard effective for annual periods beginning on or after 1 January 2017, provides a single framework to recognise revenue for
contracts with different characteristics and overrides the framework provided for such contracts in other standards. The following
contracts are exempt from this standard:
— Lease contracts within IAS 17;
— Insurance contracts within IFRS 4;
— Financial instruments as covered within IAS 39, IFRS 9, 10 and 11; and
— IAS 27, IAS 28 and IAS 29.
The Group is assessing the impact of this standard but it is not expected to have a signifi cant impact on the Group’s fi nancial statements.
IFRS 9 ‘Financial Instruments: Classifi cation and measurement’
In July 2014, the IASB published a complete version of IFRS 9 with the exception of macro hedge accounting. The standard becomes
mandatorily effective for the annual periods beginning on or after 1 January 2018, with early application permitted and transitional rules
apply. This standard replaces the existing IAS 39 ’Financial Instruments: Recognition and measurement’, and will affect:
— The classifi cation and the measurement of fi nancial assets and liabilities.
Under IFRS 9, fi nancial assets are classifi ed under one of the following categories: amortised cost, fair value through other
comprehensive income (FVOCI) and fair value through profi t or loss (FVTPL) based on their contractual cash fl ow characteristics
and/or the business model in which they are held. The existing amortised cost measurement for fi nancial liabilities is largely
maintained under IFRS 9, but for fi nancial liabilities designated at FVTPL, changes in fair value due to changes in entity’s own credit
risk are to be recognised in other comprehensive income;
— The calculation of the impairment charge relevant for fi nancial assets held at amortised cost or FVOCI. A new impairment model
based on an expected credit loss approach replaces the existing IAS 39 incurred loss impairment model; and
— The hedge accounting requirements which are more closely aligned with the risk management activities of the Company.
The Group is assessing the impact of this standard in conjunction with the requirements of the IASB’s proposals for insurance contracts
accounting as they are developed to a fi nal standard. The adoption of the requirements of IFRS 9 may result in reclassifi cation of certain
of the Group’s fi nancial assets and hence lead to a change in the measurement of these instruments or the performance reporting of
value movements. In addition, for the Group’s investments classifi ed as FVOCI, as noted above, the impairment provisioning approach
is altered. The Group does not currently apply hedge accounting for most of its derivative programmes but will reconsider its approach
in light of new requirements under the standard on adoption.
B: Earnings performance
B1: Analysis of performance by segment
B1.1 Segment results – profi t before tax
Asia operations
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 profi t
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 profi t based on longer-term investment returns
Short-term fl uctuations in investment returns on shareholder-
backed business
Gain on sale of PruHealth and PruProtectnote (iv)
Amortisation of acquisition accounting adjustmentsnote (vi)
Loss attaching to held for sale Japan life business
Costs of domestication of Hong Kong branch
Profi t before tax attributable to shareholders
Basic earnings per share (in pence)
Based on operating profi t based on longer-term investment returns
Based on profi t for the year
Prudential plc Annual Report 2014
143
Note
B4(a)
B4(b)
B4(c)
B1.2
D1
D1
D2
B6
2014 £m
2013 £m
%
AER
note (v)
CER
note (v)
2013 AER
vs 2014
note (v)
2013 CER
vs 2014
note (v)
1,052
(2)
1,050
90
1,140
1,003
(2)
1,001
74
1,075
907
(2)
905
68
973
5%
0%
5%
22%
6%
16%
0%
16%
32%
17%
1,431
12
1,443
1,243
59
1,302
1,181
56
1,237
15%
(80)%
11%
21%
(79)%
17%
752
24
776
488
706
29
735
441
706
29
735
441
1,264
3,847
1,176
3,553
1,176
3,386
15
(341)
(293)
(619)
(28)
(14)
10
(305)
(263)
(558)
(29)
(12)
10
(305)
(263)
(558)
(29)
(12)
3,186
2,954
2,787
(574)
86
(79)
–
(5)
(1,110)
–
(72)
(102)
(35)
(1,063)
–
(68)
(89)
(35)
2,614
1,635
1,532
7%
(17)%
7%
(17)%
6%
11%
7%
8%
50%
(12)%
(11)%
(11)%
3%
(17)%
8%
48%
n/a
(10)%
100%
86%
60%
6%
11%
7%
14%
50%
(12)%
(11)%
(11)%
3%
(17)%
14%
46%
n/a
(16)%
100%
86%
71%
2014
2013
%
AER
note (v)
90.9p
52.8p
CER
note (v)
85.9p
49.8p
2013 AER
vs 2014
note (v)
2013 CER
vs 2014
note (v)
6%
65%
12%
74%
96.6p
86.9p
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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, which terminates at the end of 2016.
Corporate expenditure, as shown above, is for Group Head Offi ce and Asia Regional Head Offi ce.
(ii)
(iii) Restructuring costs are incurred in the UK and represent one-off business development expenses.
(iv)
(v)
(vi) Amortisation of acquisition accounting adjustments principally relate to the acquired REALIC business of Jackson.
In November 2014, PAC completed the sale of its 25 per cent equity stake in the PruHealth and PruProtect businesses to Discovery Group Europe Limited.
For defi nitions of AER and CER refer to note A1.
144
Prudential plc Annual Report 2014 Financial statements Notes to primary statements
B: Earnings performance continued
B1: Analysis of performance by segment continued
B1.2 Short-term fl uctuations in investment returns on shareholder-backed business
Insurance operations:
Asianote (i)
USnote (ii)
UKnote (iii)
Other operationsnote (iv)
Total
2014 £m
2013 £m
178
(1,103)
464
(113)
(574)
(204)
(625)
(254)
(27)
(1,110)
Notes
(i)
Asia insurance operations
In Asia, the positive short-term fl uctuations of £178 million (2013: negative £(204) million) primarily refl ect net unrealised movements on bond holdings
following falls in bond yields across the region during the year.
(ii) US insurance operations
The short-term fl uctuations in investment returns for US insurance operations comprise amounts, net of related change in amortisation of deferred acquisition
costs, in respect of the following items:
Net equity hedge resultnote (a)
Other than equity-related derivativesnote (b)
Debt securitiesnote (c)
Equity-type investments: actual less longer-term return
Other items
Total
2014 £m
2013 £m
(1,574)
391
47
16
17
(1,103)
(255)
(531)
42
89
30
(625)
The short-term fl uctuations in investment returns shown in the table above are stated net of a credit for the related change in amortisation of deferred
acquisition costs of £653 million (2013: credit of £228 million). See note C5.1(b).
Notes
(a) Net equity hedge result
This result comprises the net eff ect of:
– The accounting value movements on the variable and fi xed index annuity guarantee liabilities;
– Fair value movements on free-standing equity derivatives;
– Fee assessments and claim payments in respect of guarantee liabilities; and
– Related changes to DAC amortisation.
Movements in the accounting values of the variable and fi xed index annuity guarantee liabilities comprise those for:
– The Guaranteed Minimum Death Benefi t (GMDB) and Guaranteed Minimum Withdrawal Benefi t (GMWB) ‘for life’ guarantees which are valued under the
US GAAP insurance measurement basis applied for IFRS in a way that substantially does not recognise the eff ect of equity market and interest rate
changes. These represent the majority of the guarantees off ered by Jackson; and
– GMWB ‘not for life’ embedded derivative liabilities which are required to be fair valued. Fair value movements on these liabilities include the eff ects
of changes to levels of equity markets, implied volatility and interest rates.
The free-standing equity derivatives are held to manage equity exposures of the variable annuity and fi xed index annuity guarantees.
The net equity hedge result therefore includes signifi cant accounting mismatches and other factors that detract from the presentation of an economic
result caused by:
– The variable annuity and fi xed annuity business guarantees being only partially fair valued under grandfathered GAAP;
– The interest rate exposure being managed through the other than equity-related derivative programme explained in note (b) below; and
– Jackson’s management of its economic exposures for a number of other factors that are treated diff erently in the accounting frameworks, such as future
fees and assumed volatility levels.
(b) Other than equity-related derivatives
The fl uctuations for this item comprise the net eff ect of:
– Fair value movements on free-standing, other than equity-related derivatives;
– Accounting eff ects of the Guaranteed Minimum Income Benefi t (GMIB) and its reinsurance; and
– Related changes to DAC amortisation.
The free-standing, other than equity-related derivatives, are held to manage interest rate exposures and durations within the general account and the
variable annuity and fi xed index annuity guarantees described in note (a) above.
The GMIB liability is valued using the US GAAP measurement basis applied for IFRS reporting in a way that substantially does not recognise the eff ects
of market movements. Reinsurance arrangements are in place so as to essentially fully insulate Jackson from the GMIB exposure. Notwithstanding that the
liability is essentially fully reinsured, as the reinsurance asset is net settled it is deemed a derivative under IAS 39 which requires fair valuation.
The fl uctuations for this item therefore include signifi cant accounting mismatches caused by:
– The fair value movements booked in the income statement on the derivative programme being in respect of the management of interest rate exposures
of the variable and fi xed index annuity business, as well as the fi xed annuity business guarantees and durations within the general account;
– Fair value movements on Jackson’s debt securities of the general account being booked in other comprehensive income rather than the income
statement; and
– The mixed measurement model that applies for the GMIB and its reinsurance.
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(c) Short-term fl uctuations related to debt securities
Short-term fl uctuations relating to debt securities
Credits (charges) in the year:
Losses on sales of impaired and deteriorating bonds
Bond write downs
Recoveries/reversals
Total credits (charges) in the year
Less: Risk margin allowance deducted from operating profi t based on longer-term investment returnsnote
Interest-related realised gains:
Arising in the year
Less: Amortisation of gains and losses arising in current and prior years to operating profi t based on longer-term
investment returns
Related amortisation of deferred acquisition costs
Total short-term fl uctuations related to debt securities
2014 £m
2013 £m
(5)
(4)
19
10
78
88
63
(87)
(24)
(17)
47
(5)
(8)
10
(3)
85
82
64
(89)
(25)
(15)
42
Note
The debt securities of Jackson are held in the general account of the business. Realised gains and losses are recorded in the income statement with
normalised returns included in operating profi t with variations from year to year included in the short-term fl uctuations category. The risk margin reserve
charge for longer-term credit-related losses included in operating profi t based on longer-term investment returns of Jackson for 2014 is based on an average
annual risk margin reserve of 24 basis points (2013: 25 basis points) on average book values of US$54.5 billion (2013: US$54.4 billion) as shown below:
Moody’s rating category (or equivalent under
NAIC ratings of mortgage-backed securities)
A3 or higher
Baa1, 2 or 3
Ba1, 2 or 3
B1, 2 or 3
Below B3
Total
Average
book
value
US$m
27,912
24,714
1,390
385
92
54,493
2014
2013
RMR
Annual
expected loss
Average
book
value
RMR
Annual
expected loss
%
US$m
0.12
0.25
1.23
3.04
3.70
0.24
(34)
(62)
(17)
(12)
(4)
(129)
£m
(21)
(38)
(10)
(7)
(2)
(78)
US$m
%
US$m
27,557
24,430
1,521
530
317
54,355
0.11
0.25
1.18
2.80
2.32
0.25
(32)
(62)
(18)
(15)
(7)
(134)
£m
(20)
(40)
(11)
(9)
(5)
(85)
Related amortisation of deferred acquisition costs
(see below)
Risk margin reserve charge to operating profi t for
longer-term credit related losses
25
15
25
16
(104)
(63)
(109)
(69)
Consistent with the basis of measurement of insurance assets and liabilities for Jackson’s IFRS results, the charges and credits to operating profi ts based
on longer-term investment returns are partially off set by related amortisation of deferred acquisition costs.
In addition to the accounting for realised gains and losses described above for Jackson general account debt securities, included within the statement
of other comprehensive income is a pre-tax credit for unrealised gains on debt securities classifi ed as available-for-sale net of related change in amortisation
of deferred acquisition costs of £869 million (2013: net unrealised losses of £(1,591) million). Temporary market value movements do not refl ect defaults
or impairments. Additional details of the movement in the value of the Jackson portfolio are included in note C3.3(b).
(iii) UK insurance operations
The positive short-term fl uctuations in investment returns for UK insurance operations of £464 million (2013: negative £(254) million) include net unrealised
movements on fi xed income assets supporting the capital of the shareholder-backed annuity business, refl ecting the fall in bond yields since the end of 2013.
(iv) Other
Short-term fl uctuations in investment returns of other operations, were negative £(113) million (2013: negative £(27) million) representing unrealised value
movements on investments and foreign exchange items.
(v) Default losses
The Group did not experience any default losses on its shareholder-backed debt securities portfolio in 2014 or 2013.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
B: Earnings performance continued
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
— Eastspring Investments
— US broker-dealer and asset management (including Curian)
— M&G (including Prudential Capital)
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 profi t attributable to shareholders based
on longer-term investment returns, as described below. This measurement basis distinguishes operating profi t based on long-term
investment returns from other constituents of the total profi t as follows:
— Short-term fl uctuations in investment returns;
— Gain on sale of the Group’s stake in PruHealth and PruProtect businesses in 2014 as explained in note D1;
— 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;
— Loss attaching to the held for sale Japan life business. See note D1 for further details; and
— The costs associated with the domestication of the Hong Kong branch which became effective on 1 January 2014.
Segment results that are reported to the Group Executive Committee include items directly attributable to a segment, as well as those
that can be allocated on a reasonable basis. Unallocated items are mainly in relation to the Group Head Offi ce and the Asia Regional
Head Offi ce.
Determination of operating profi t based on longer-term investment return for investment and liability movements:
a General principles
(i) UK style with-profi ts business
The operating profi t based on longer-term returns refl ects the statutory transfer gross of attributable tax. Value movements in the
underlying assets of the with-profi ts funds do not affect directly the determination of operating profi t.
(ii) Unit-linked business
The policyholder unit liabilities are directly refl ective of the asset value movements. Accordingly, the operating results based on
longer-term investment returns refl ect the current period value movements in both the unit liabilities and the backing assets.
(iii) US variable annuity and fi xed index annuity business
This business has guarantee liabilities which are measured on a combination of fair value and other, US GAAP derived, principles.
These liabilities are subject to an extensive derivative programme to manage equity and, with those of the general account, interest rate
exposures. The principles for determination of the operating profi t and short-term fl uctuations are necessarily bespoke, as discussed
in section (c) below.
(iv) Business where policyholder liabilities are sensitive to market conditions
Under IFRS, the degree to which the carrying values of liabilities to policyholders are sensitive to current market conditions varies
between territories depending upon the nature of the ‘grandfathered’ measurement basis. In general, in those instances where the
liabilities are particularly sensitive to routine changes in market conditions, the accounting basis is such that the impact of market
movements on the assets and liabilities is broadly equivalent in the income statement, and operating profi t based on longer-term
investments returns is not distorted. In these circumstances, there is no need for the movement in the liability to be bifurcated between
the elements that relate to longer-term market conditions and short-term effects.
However, some types of business movements in liabilities do require bifurcation to ensure that at the net level (ie after allocated
investment return and change for policyholder benefi ts) the operating result refl ects longer-term market returns.
Examples of where such bifurcation is necessary are in Hong Kong and for UK shareholder-backed annuity business, as explained
in sections b(i) and d(i), respectively.
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(v) Other shareholder-fi nanced business
The measurement of operating profi t based on longer-term investment returns refl ects the particular features of long-term insurance
business where assets and liabilities are held for the long-term and for which the accounting basis for insurance liabilities under current
IFRS is not generally conducive to demonstrating trends in underlying performance of life businesses exclusive of the effects of
short-term fl uctuations in market conditions. In determining the profi t on this basis, the following key elements are applied to the
results of the Group’s shareholder-fi nanced operations.
Except in the case of assets backing liabilities which are directly matched (such as linked business) or closely correlated with
value movements (as discussed below) operating profi t based on longer-term investment returns for shareholder-fi nanced business
is determined on the basis of expected longer-term investment returns.
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 refl ected in short-term fl uctuations 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.
At 31 December 2014, the level of unamortised interest-related realised gains and losses related to previously sold bonds for the Group
was a net gain of £467 million (2013: £461 million).
Equity type securities
For equity-type securities, the longer-term rates of return are estimates of the long-term trend investment returns for income and capital
having regard to past performance, current trends and future expectations. Equity-type securities held for shareholder-fi nanced
operations other than the UK annuity business, unit-linked and US variable annuity are of signifi cance for the US and Asia insurance
operations. Different rates apply to different categories of equity-type securities.
Derivative value movements
Generally, derivative value movements are excluded from operating results based on longer-term investment returns (unless those
derivative value movements broadly offset changes in the accounting value of other assets and liabilities included in operating profi t).
The principal example of non-equity based derivatives (for example interest rate swaps and swaptions) whose value movements are
excluded from operating profi t arises in Jackson, as discussed below in section (c).
b Asia insurance operations
(i) Business where policyholder liabilities are sensitive to market conditions
For certain Asia non-participating business, for example in Hong Kong, the economic features are more akin to asset management
products with policyholder liabilities refl ecting asset shares over the contract term. For these products, the charge for policyholder
benefi ts in the operating results should refl ect the asset share feature, rather than volatile movements that would otherwise be refl ected
if the local regulatory basis (also applied for IFRS basis) was used.
For certain other types of non-participating business, longer-term interest rates are used to determine the movement in policyholder
liabilities for determining operating results.
(ii) Other Asia shareholder-fi nanced business
Debt securities
For this business 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.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
B: Earnings performance continued
B1: Analysis of performance by segment continued
Equity-type securities
For Asia insurance operations, excluding assets of the Japan life held for sale business, investments in equity securities held for non-
linked shareholder-fi nanced operations amounted to £932 million as at 31 December 2014 (2013: £571 million). The rates of return
applied in the years 2014 and 2013 ranged from 2.73 per cent to 13.75 per cent with the rates applied varying by territory. These rates are
determined after consideration by the Group’s in-house economists of long-term expected real government bond returns, equity risk
premium and long-term infl ation. These rates are broadly stable from period to period but may be different between countries refl ecting,
for example, differing expectations of infl ation in each territory. The assumptions are for returns expected to apply in equilibrium
conditions. The assumed rates of return do not refl ect any cyclical variability in economic performance and are not set by reference
to prevailing asset valuations.
The longer-term investment returns for the Asia insurance joint ventures accounted for using the equity method are determined
on a similar basis as the other Asia insurance operations described above.
c US Insurance operations
(i) Separate account business
For such business, the policyholder unit liabilities are directly refl ective of the asset value movements. Accordingly, the operating results
based on longer-term investment returns refl ect the current period value movements in unit liabilities and the backing assets.
(ii) US variable and fi xed index annuity business
The following value movements for Jackson’s variable and fi xed index annuity business are excluded from operating profi t based
on longer-term investment returns. See note B1.2 note (ii):
— Fair value movements for equity-based derivatives;
— Fair value movements for embedded derivatives for Guaranteed Minimum Withdrawal Benefi t ‘not for life’ and fi xed index annuity
business, and Guaranteed Minimum Income Benefi t reinsurance (see below);
— Movements in accounts carrying value of Guaranteed Minimum Death Benefi t and Guaranteed Minimum Withdrawal Benefi t ‘for
life’ and Guaranteed Minimum Income Benefi t 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.
Embedded derivatives for variable annuity guarantee features
The Guaranteed Minimum Income Benefi t liability, which is essentially fully reinsured, subject to a deductible and annual claims limit,
is accounted for in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codifi cation (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 Benefi t is economically reinsured
the mark to market element of the reinsurance asset is included as a component of short-term fl uctuations in investment returns.
(iii) Other derivative value movements
The principal example of non-equity based derivatives (for example interest rate swaps and swaptions) whose value movements are
excluded from operating profi t arises in Jackson. Non-equity based derivatives are primarily held by Jackson as part of a broadly-based
hedging programme for features of Jackson’s bond portfolio (for which value movements are booked in the statement of comprehensive
income rather than the income statement), product liabilities (for which US GAAP accounting as ‘grandfathered’ under IFRS 4 does not
fully refl ect the economic features being hedged), and the interest rate exposure attaching to equity-based embedded derivatives.
(iv) Other US shareholder-fi nanced business
Debt securities
Jackson is the shareholder-backed operation for which the distinction between impairment losses and interest-related realised gains
and losses is in practice relevant to a signifi cant extent. Jackson has used the ratings by Nationally Recognised Statistical Ratings
Organisations (NRSRO) or ratings resulting from the regulatory ratings detail issued by the National Association of Insurance
Commissioners (NAIC) developed by external third parties such as PIMCO or BlackRock Solutions to determine the average annual
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.
Prudential plc Annual Report 2014
149
Equity-type securities
As at 31 December 2014, the equity-type securities for US insurance non-separate account operations amounted to £1,094 million
(2013: £1,118 million). For these operations, the longer-term rates of return for income and capital applied in 2014 and 2013, which refl ect
the combination of the average risk free rates over the period 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
6.2% to 6.7%
8.2% to 8.7%
5.7% to 6.8%
7.7% to 9.0%
2014
2013
d UK Insurance operations
(i) Shareholder-backed annuity business
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 fl uctuations in investment returns.
The operating results based on longer-term investment returns refl ects the impact of value movements on policyholder liabilities for
annuity business in PRIL and the PAC non-profi t sub-fund after adjustments to allocate the following elements of the movement to the
category of short-term fl uctuations in investment returns:
— 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 refl ects the impact of defaults and other similar experience, such as asset exchanges arising from debt restructuring
by issuers that include effectively an element of permanent impairment of the security held. Positive or negative experience compared
to assumptions is included within short-term fl uctuations in investment returns without further adjustment. 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.
(ii) Non-linked shareholder-fi nanced business
For debt securities backing non-linked shareholder-fi nanced business of the UK insurance operations (other than the annuity business)
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.
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 in the operating result with temporary unrealised gains and losses being included in short-term fl uctuations.
In some instances, it may also be appropriate to amortise realised gains and losses on derivatives and other fi nancial instruments
to operating results over a time period that refl ects the underlying economic substance of the arrangements.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
B: Earnings performance continued
B1: Analysis of performance by segment continued
B1.4 Segmental income statement
Insurance operations
Asset management
2014 £m
Asia
US
UK
M&G
US
Eastspring
Invest-
ments
Total
segment
Unallo-
cated to a
segment
(central
operations)
note (iii)
Group
total
Gross premiums earned
Outward reinsurance premiums
11,193
(311)
15,654
(265)
7,358
(1,596)
–
–
Earned premiums, net of reinsurance
Investment returnnote (ii)
Other income
10,882
3,888
49
15,389
5,438
(2)
5,762
16,447
240
–
104
1,291
Total revenue, net of reinsurance
14,819
20,825
22,449
1,395
Benefi ts and claims
Outward reinsurers’ share of benefi ts
and claims
Movement in unallocated surplus of
with-profi ts funds
Benefi ts and claims and movements in
unallocated surplus of with-profi ts
funds, net of reinsurance
Acquisition costs and other operating
(11,521) (19,788) (20,880)
254
20
27
1,803
–
(84)
(11,247) (19,761) (19,161)
–
–
–
–
–
–
–
(2)
808
806
–
–
–
–
– 34,205
(2,172)
–
(1,373) 32,832
(799)
1,373
– 32,033
25,878
3
2,693
307
– 32,033
(91) 25,787
2,306
(387)
310
60,604
(478) 60,126
– (52,189)
1,453 (50,736)
–
–
2,084
(1,453)
631
(64)
–
(64)
– (50,169)
– (50,169)
expenditureB3
(2,367)
(795)
(1,660)
(920)
(794)
(249)
(6,785)
33
(6,752)
Finance costs: interest on core structural
borrowings of shareholder-fi nanced
operations
Remeasurement of carrying value of
Japan life business classifi ed as held
for sale
–
(12)
(13)
–
–
–
(17)
–
–
–
–
–
(29)
(312)
(341)
(13)
–
(13)
Total charges, net of reinsurance
(13,627) (20,568) (20,821)
(937)
(794)
(249) (56,996)
(279) (57,275)
Share of profi t from joint ventures and
associates, net of related tax
133
–
128
13
–
29
303
–
303
Profi t (loss) before tax (being tax
attributable to shareholders’ and
policyholders’ returns)note (i)
Tax charge attributable to policyholders’
1,325
257
1,756
471
returns
(105)
–
(435)
–
Profi t (loss) before tax attributable
to shareholders
1,220
257
1,321
471
12
–
12
90
3,911
(757)
3,154
–
(540)
–
(540)
90
3,371
(757)
2,614
The segmental analysis of profi t (loss) before tax attributable to shareholders as represented in note B1.1 is analysed below:
Insurance operations
Asset management
2014 £m
Asia
US
UK
M&G
1,050
1,431
776
488
178
–
(1,103)
–
464
86
(8)
–
(71)
–
–
(5)
(17)
–
–
–
US
12
–
–
–
–
Eastspring
Invest-
ments
Total
segment
Unallo-
cated to a
segment
(central
operations)
Group
total
90
3,847
(661)
3,186
–
–
–
–
(478)
86
(79)
(5)
(96)
–
(574)
86
–
–
(79)
(5)
1,220
257
1,321
471
12
90
3,371
(757)
2,614
Operating profi t (loss) based on
longer-term investment returns
Short-term fl uctuations in investment
returns on shareholder-backed
business
Gain on sale of PruHealth and PruProtect
Amortisation of acquisition accounting
adjustments
Costs of domestication of Hong Kong
branch
Profi t (loss) before tax attributable
to shareholders
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Insurance operations
Asset management
2013 £m
Asia
US
UK
M&G
US
Eastspring
Invest-
ments
Total
segment
Unallo-
cated to a
segment
(central
operations)
note (iii)
Group
total
Gross premiums earned
Outward reinsurance premiums
Earned premiums, net of reinsurance
Investment returnnote (ii)
Other income
Total revenue, net of reinsurance
Benefi ts and claims
Outward reinsurers’ share of benefi ts
9,061
(190)
8,871
895
48
9,814
15,661
(278)
15,383
10,003
(2)
5,780
(190)
5,590
9,372
226
25,384
15,188
(6,825)
(24,206)
(11,196)
and claims
150
500
(28)
Movement in unallocated surplus of
with-profi ts funds
Benefi ts and claims and movements in
unallocated surplus of with-profi ts
funds, net of reinsurance
Acquisition costs and other operating
(255)
–
(1,294)
(6,930)
(23,706)
(12,518)
–
–
–
143
1,165
1,308
–
–
–
–
–
–
–
11
855
866
–
–
–
–
–
–
30,502
(658)
–
(1)
245
29,844
20,423
2,537
–
–
30,502
(658)
–
(76)
(353)
29,844
20,347
2,184
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-fi nanced
operations
Remeasurement of carrying value of
Japan life business classifi ed 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 profi t from joint ventures and
associates, net of related tax
Profi t (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)
–
Profi t (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
The segmental analysis of profi t (loss) before tax attributable to shareholders as represented in note B1.1 is analysed below:
Operating profi t (loss) based on
longer-term investment returns
Short-term fl uctuations 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
Profi t (loss) before tax attributable
to shareholders
Insurance operations
Asset management
2013 £m
Asia
US
UK
M&G
1,001
1,243
735
441
(204)
(625)
(254)
22
(7)
(65)
(102)
–
–
–
–
–
(35)
–
–
–
US
59
–
–
–
–
Eastspring
Invest-
ments
Total
segment
Unallo-
cated to a
segment
(central
operations)
Group
total
74
3,553
(599)
2,954
–
–
–
–
(1,061)
(49)
(1,110)
(72)
(102)
(35)
–
–
–
(72)
(102)
(35)
688
553
446
463
59
74
2,283
(648)
1,635
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
B: Earnings performance continued
B1: Analysis of performance by segment continued
Notes
(i)
(ii)
(iii)
This measure is the formal profi t (loss) before tax measure under IFRS but is not the result attributable to shareholders.
Investment return principally comprises:
– Interest and dividends;
– Realised and unrealised gains and losses on securities and derivatives classifi ed as fair value through profi t or loss under IAS 39; and
– Realised gains and losses, including impairment losses, on securities classifi ed as available-for-sale under IAS 39.
In addition to the results of the central operations, unallocated to a segment includes intra-group eliminations. In 2014, this column includes the elimination
of the intra-group reinsurance contract entered into during the year between the UK with-profi ts and Asia with-profi ts operations.
2014 £m
2013 £m
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 profi t or loss
Realised and unrealised losses and gains on derivatives at fair value through profi t or 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
Notes
(i)
The segmental analysis of interest income is as follows:
Insurance operations
Asset management operations
£m
29,973
2,637
222
(799)
32,033
16,532
142
84
(61)
6,802
1,559
729
25,787
2,306
60,126
2014
2013
Asia
777
562
US
UK
M&G
1,857
1,981
4,053
4,178
101
112
US
–
1
Unallo-
cated to a
segment
(central
operations)
Eastspring
Invest-
ments
2
1
12
(64)
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
Total
6,802
6,771
Interest income includes £3 million (2013: £5 million) accrued in respect of impaired securities.
(ii)
(iii) Fee income includes £23 million (2013: £44 million) relating to fi nancial instruments that are not held at fair value through profi t or 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:
2014 £m
2013 £m
Asia
US
UK
Intra-
group
Total
Asia
US
UK
Intra-
group
Total
Revenue from external
customers:
Insurance operations
Asset management
Unallocated corporate
Intra-group revenue*
Total revenue from external
9,558
307
–
(146)
15,387
808
–
(84)
7,375
1,291
62
(219)
–
(449)
–
449
32,320
1,957
62
–
8,919
245
–
(98)
15,381
855
–
(86)
5,816
1,165
26
(195)
–
(379)
–
379
30,116
1,886
26
–
customers
9,719
16,111
8,509
–
34,339
9,066
16,150
6,812
–
32,028
* Eliminated on consolidation.
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
2014 £m
2013 £m
32,033
2,306
34,339
29,844
2,184
32,028
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The asset management operations, M&G, Eastspring Investments and US asset management provides 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
2014 £m
2013 £m
219
84
146
449
195
98
86
379
Revenue from external customers of Asia, US and UK insurance operations shown above are net of outwards reinsurance premiums of
£311 million, £265 million, and £223 million respectively (2013: £190 million, £278 million and £190 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 £2,554 million (2013: Hong Kong £2,243 million).
Due to the nature of the business of the Group, there is no reliance on any major customers.
B2: Profi t before tax – asset management operations
The profi t included in the income statement in respect of asset management operations for the year is as follows:
Revenue (excluding NPH broker-dealer fees)
NPH broker-dealer feesnote (i)
Gross revenue
Charges (excluding NPH broker-dealer fees)
NPH broker-dealer feesnote (i)
Gross charges
Share of profi t from joint ventures and associates, net of
related tax
Profi t before tax
Comprising:
Operating profi t based on longer-term investment returnsnote (ii)
Short-term fl uctuations in investment returnsnote (iii)
Profi t before tax
2014 £m
2013 £m
M&G
1,395
–
1,395
(937)
–
(937)
13
471
488
(17)
471
US
note (iv)
303
503
806
(291)
(503)
(794)
–
12
12
–
12
Eastspring
Investments
Total
Total
310
–
310
(249)
–
(249)
29
90
90
–
90
2,008
503
2,511
(1,477)
(503)
(1,980)
42
573
590
(17)
573
1,914
504
2,418
(1,353)
(504)
(1,857)
35
596
574
22
596
Notes
(i)
NPH broker-dealer fees represent commissions received that are then paid on to the writing brokers on sales of investment products. To refl ect their
commercial nature the amounts are also wholly refl ected as charges within the income statement. Aft er allowing for these charges, there is no eff ect on profi t
from this item. The presentation in the table above shows separately the amounts attributable to this item so that the underlying revenue and charges can be seen.
(ii) M&G operating profi t based on longer-term investment returns:
Asset management fee income
Other income
Staff costs
Other costs
Underlying profi t before performance-related fees
Share of associate results
Performance-related fees
Operating profi t from asset management operations
Operating profi t from Prudential Capital
Total M&G operating profi t based on longer-term investment returns
2014 £m
2013 £m
953
1
(351)
(203)
400
13
33
446
42
488
859
4
(339)
(166)
358
12
25
395
46
441
The revenue shown above for M&G of £987 million (2013: £888 million), comprising asset management fee income, other income and performance-related fees,
is diff erent to the amount of £1,395 million shown in the main table of this note primarily due to the inclusion of the revenue of Prudential Capital of £104 million
(2013: £144 million) in the latter. In addition, the £987 million (2013: £888 million) is aft er deducting commissions which would have been included as charges
in the main table. The diff erence in the presentation of commission is aligned with how management reviews the business.
(iii) Short-term fl uctuations in investment returns for M&G are primarily in respect of unrealised fair value movements on Prudential Capital’s bond portfolio.
(iv) The US asset management results include a charge of £38 million related primarily to the refund of certain fees by Curian.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
B: Earnings performance continued
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
2014 £m
2013 £m
(2,668)
916
(4,486)
(514)
(6,752)
(2,553)
566
(4,303)
(571)
(6,861)
Total acquisition costs and other expenditure includes:
(a) Total depreciation and amortisation expense of £(159) million (2013: £(510) 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 £(1,752) million
(2013: £(1,987) million). These amounts comprise £(1,714) million and £(38) million for insurance and investment contracts
respectively (2013: £(1,953) million and £(34) million, respectively);
(c) Interest expense, excluding interest on core structural borrowings of shareholder-fi nanced operations, amounted to £(128) million
(2013: £(120) million) and is included as part of investment management expenses. The segmental interest expense is analysed below;
(d) Finance costs of £(341) million (2013: £(305)million) comprises £(312) million (2013: £(275) million) interest on core debt of the parent
company, £(12) million (2013: £(13) million) of interest on US insurance operations’ surplus notes and £(17) million (2013: £(17) 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 £(258) million (2013: £(583) million) for UK insurance operations and a charge of
£(256) million (2013: a credit of £12 million) for Asia insurance operations;
(f) Analysis of depreciation and amortisation expense, and interest expense:
£m
Insurance operations
Asset management operations
Asia
US
UK
M&G
US
Eastspring
Invest-
ments
Total
segment
Unallo-
cated to a
segment
(central
operations)
(206)
(221)
140
(198)
–
–
(13)
(11)
(64)
(68)
(81)
(70)
(10)
(7)
(26)
(27)
(2)
(1)
–
–
(2)
(3)
–
–
(144)
(498)
(120)
(108)
(15)
(12)
(8)
(12)
Total
(159)
(510)
(128)
(120)
Depreciation and amortisation expense
2014
2013
Interest expense
2014
2013
(g) There were no fee expenses relating to fi nancial liabilities held at amortised cost included in acquisition costs in 2014 and 2013.
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
* The charge incorporates the eff ect of actuarial gains and losses.
2014
2013
13,957
4,494
5,464
23,915
12,239
4,414
5,533
22,186
2014 £m
2013 £m
1,323
100
120
1,543
1,272
94
196
1,562
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155
B3.2 Share-based payment
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
Prudential Corporation Asia
Long-Term Incentive Plan
(PCA LTIP)
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 fi nal awards under this arrangement were made in 2012.
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 fi nancial 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. Staff based in Ireland
and Asia are eligible for the Share Participation Plan.
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.
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 2014 and 2013:
Options outstanding
under SAYE schemes
Awards outstanding under
incentive plans including
conditional options
2014
2013
2014
2013
Number
of options
millions
10.2
2.6
(3.8)
(0.2)
(0.1)
(0.1)
8.6
0.5
Weighted
average
exercise
price
£
5.60
11.55
3.55
6.77
7.66
5.60
8.29
4.65
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
27.1
10.9
(8.5)
(0.7)
–
–
28.8
23.7
11.9
(7.8)
(0.6)
–
(0.1)
27.1
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 2014 was £13.75 compared to £11.14 for the
year ended 31 December 2013.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
B: Earnings performance continued
B3: Acquisition costs and other expenditure continued
The following table provides a summary of the range of exercise prices for Prudential plc options outstanding at 31 December.
Outstanding
Weighted
average remaining
contractual life
years
Number
outstanding
millions
Exercisable
Weighted average
exercise prices
£
Number
exercisable
millions
Weighted average
exercise prices
£
Between £2 and £3
Between £4 and £5
Between £5 and £6
Between £6 and £7
Between £9 and £10
Between £11 and £12
2014
2013
2014
2013
2014
0.2
1.4
–
2.1
2.3
2.6
2.6
2.9
–
2.3
2.4
–
1.9
1.4
0.8
1.6
2.9
4.2
8.6
10.2
2.7
1.0
1.7
0.8
2.6
3.9
–
2.3
2.88
4.64
5.51
6.29
9.01
11.55
8.29
2013
2.88
4.63
5.53
6.29
9.01
–
–
0.5
–
–
–
–
5.60
0.5
2014
–
4.65
5.52
–
–
–
4.65
2013
2.88
4.59
5.51
–
–
–
4.50
–
0.5
–
–
–
–
0.5
2014
2013
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 (TSR)
–
21.91
1.25
–
–
13.18
6.07
2014
SAYE
options
2.40
20.77
1.51
3.77
11.55
14.02
3.00
2013
Other
awards
Prudential
LTIP/GPSP (TSR)
SAYE
options
–
–
–
–
–
–
12.84
–
23.64
0.73
–
–
11.80
7.38
2.73
24.27
1.06
3.46
9.01
11.85
2.57
Other
awards
–
–
–
–
–
–
11.06
Compensation costs for all share-based compensation plans are determined using the Black-Scholes model or Monte Carlo
option-pricing model. 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) for which the
Group uses a Monte Carlo model in order to allow for the impact of the LTIP (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 as quoted on Bloomberg. The Prudential
specifi c 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 taken from government bond spot rates with projections for two-year, three-year and fi ve-year terms to
match corresponding vesting periods. Dividend yield is determined as the average yield over a period of 12 months up to and including
the date of grant. For the Prudential LTIP (TSR), volatility and correlation between Prudential and a basket of 18 competitor companies
is required. For grants in 2014, the average volatility for the basket of competitors was 23.4 per cent. Correlations for the basket are
calculated for each pairing from the log of daily TSR returns between April 2011 and the valuation date. 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.
Prudential plc Annual Report 2014
157
d Share-based payment expense charged to the income statement
Total expense recognised in the year in the consolidated fi nancial statements related to share-based compensation is as follows:
Share-based compensation expense
Amount accounted for as equity-settled
Carrying value at 31 December of liabilities arising from share-based payment transactions
Intrinsic value of above liabilities for which rights had vested at 31 December
2014 £m
2013 £m
99
93
16
9
83
63
23
17
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 benefi ts
Post-employment benefi ts
Share-based payments
2014 £m
2013 £m
15.9
1.0
16.2
33.1
16.5
1.0
14.3
31.8
The share-based payments charge comprises £11.0 million (2013: £9.3 million), which is determined in accordance with IFRS 2
‘Share-based Payment’ (see note B3.2) and £5.2 million (2013: £5.0 million) of deferred share awards.
Total key management remuneration includes total directors’ remuneration of £50.5 million (2013: £48.9 million) less LTIP releases
of £28.4 million (2013: £26.4 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 fi nance transactions
All other services
Total fees paid to the auditor
In addition, there were fees incurred of £0.1 million (2013: £0.1 million) for the audit of pension schemes.
2014 £m
2013 £m
2.0
6.6
2.9
0.7
1.9
0.1
2.4
2.0
6.8
2.8
0.8
1.1
0.5
1.2
16.6
15.2
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
B: Earnings performance continued
B4: Eff ect of changes and other accounting features on insurance assets and liabilities
The following features are of particular relevance to the determination of the 2014 results:
a Asia insurance operations
In 2014, the IFRS operating profi t based on longer-term investment returns for Asia insurance operations included a profi t of £49 million
(2013: £44 million) representing a number of non-recurring items, none of which are individually signifi cant.
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 profi ts 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 2014, there was a charge for accelerated amortisation of £13 million (2013: a credit for decelerated
amortisation of £82 million) to the operating profi t 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 benefi t of £6 million to profi t before tax in 2013.
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 refl ected 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.
The weighted components of the bond spread over swap rates for shareholder-backed fi xed and linked annuity business for PRIL,
based on the asset mix at 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 Dec 2014 bps
31 Dec 2013 bps
Pillar 1
regulatory
basis
143
14
44
58
85
Adjustment
–
–
(12)
(12)
12
Pillar 1
regulatory
basis
133
15
47
62
71
Adjustment
–
–
(19)
(19)
19
IFRS
143
14
32
46
97
IFRS
133
15
28
43
90
Notes
(i)
(ii)
Bond spread over swap rates refl ect market observed data.
Long-term expected defaults are derived by applying Moody’s data from 1970 to 2009 and the defi nition of the credit rating used is the second highest credit
rating published by Moody’s, Standard & Poor’s and Fitch.
(iii) Additional provisions comprise credit risk premium, which is derived from Moody’s data from 1970 to 2009, an allowance for a one-notch downgrade of the
portfolio subject to credit risk and an additional allowance for short-term defaults.
The prudent Pillar 1 regulatory basis refl ects the overriding objective of maintaining suffi cient provisions and capital to ensure payments to policyholders
can be made. The approach for IFRS aims to establish liabilities that are closer to ‘best estimate’.
Prudential plc Annual Report 2014
159
Movement in the credit risk allowance for PRIL
The movement during 2014 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 2013
Credit rating changes
Asset trading
Other effects (including for new business)
Total allowance for credit risk at 31 December 2014
Pillar 1
regulatory
basis
bps
Total
62
1
(1)
(4)
58
IFRS
bps
Total
43
1
(1)
3
46
Overall the movement has led to the credit allowance for Pillar 1 purposes to be 41 per cent (2013: 47 per cent) of the bond spread over
swap rates. For IFRS purposes it represents 32 per cent (2013: 32 per cent) of the bond spread over swap rates.
The reserves for credit risk allowance at 31 December 2014 for the UK shareholder annuity fund were as follows:
PRIL
PAC non-profi t sub-fund
Total 31 December 2014
Total 31 December 2013
Pillar 1
regulatory
basis
£bn
Total
2.0
0.2
2.2
1.9
IFRS
£bn
Total
1.6
0.1
1.7
1.3
Other assumption changes
For the shareholder-backed business, the net effect of other assumption changes and modelling adjustments was a credit of £28 million
(2013: a credit of £20 million).
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) credit
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 credit (charge)
Total tax charge
Current
tax
(579)
(529)
(1,108)
2014 £m
Deferred
tax
1
169
170
2013 £m
Total
(300)
(436)
(736)
Total
(578)
(360)
(938)
F
i
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a
n
c
i
a
l
s
t
a
t
e
m
e
n
t
s
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n
i
n
g
s
p
e
r
f
o
r
m
a
n
c
e
2014 £m
2013 £m
(1,102)
(6)
(1,108)
163
1
6
170
(938)
(414)
15
(399)
(392)
55
–
(337)
(736)
160
Prudential plc Annual Report 2014 Financial statements Notes to primary statements
B: Earnings performance continued
B5: Tax charge continued
The current tax charge of £1,108 million includes £37 million (2013: £18 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 profi ts, depending on the nature of the business written.
The total tax charge comprises tax attributable to policyholders and unallocated surplus of with-profi ts funds, unit-linked policies and
shareholders as shown below:
Tax charge
Tax charge to policyholders' returns
Tax charge attributable to shareholders
Total tax (charge) credit
Current
tax
(449)
(659)
(1,108)
2014 £m
Deferred
tax
(91)
261
170
2013* £m
Total
(447)
(289)
(736)
Total
(540)
(398)
(938)
The principal reason for the increase in the tax charge attributable to policyholders’ returns is an increase in current tax in the with-profi ts
life fund in the UK insurance operations. The main elements of the deferred tax credit shown in the table below are a credit of
£309 million on short-term temporary differences refl ecting future tax relief arising from increases in policy reserves in the US insurance
operations and a charge of £127 million on unrealised gains and losses on investments refl ecting an increase in unrealised gains on
investments in the UK and Asia insurance operations.
The total deferred tax credit (charge) arises as follows:
Unrealised gains and losses on investments
Balances relating to investment and insurance contracts
Short-term temporary differences
Capital allowances
Unused tax losses
Deferred tax credit (charge)
2014 £m
2013 £m
(127)
(43)
309
(4)
35
170
69
(44)
(314)
(7)
(41)
(337)
In 2014, a deferred tax charge of £295 million (2013: credit of £580 million) has been taken through other comprehensive income.
b Reconciliation of eff ective tax rate
For the purposes of explaining the relationship between tax expense and accounting profi t, it is appropriate to consider the sources
of profi t and tax by reference to those that are attributable to shareholders and policyholders. A reconciliation of tax charge on profi t
attributable to shareholders is provided below.
Overview of reconciliation of eff ective tax rate
Profi t before tax
Taxation charge:
Expected tax rate
Expected tax charge
Variance from expected tax charge
Actual tax charge
Average effective tax rate
2014 £m
2013 £m
Attributable to
shareholders
Attributable to
policyholders*
2,614
540
23%
(594)
196
(398)
15%
100%
(540)
–
(540)
100%
Total
3,154
36%
(1,134)
196
(938)
30%
Attributable to
shareholders
Attributable to
policyholders*
1,635
26%
(429)
140
(289)
18%
447
100%
(447)
–
(447)
100%
Total
2,082
42%
(876)
140
(736)
35%
* For the column entitled ‘Attributable to policyholders’, the profi t before tax represents income before tax attributable to policyholders and unallocated surplus of
with-profi ts funds and unit-linked policies. This income has been determined aft er deduction of charges for policyholder benefi ts and movements on unallocated
surplus which are determined net of tax. Hence, the pre-tax results attributable to policyholders is the inverse of the tax charge attributable to policyholders.
Prudential plc Annual Report 2014
161
Reconciliation of tax charge on profi t attributable to shareholders
2014 £m (except for tax rates)
Asia
insurance
operations
US
insurance
operations
UK
insurance
operations
Other
operations
Operating profi t (loss) based on longer-term investment returns
Non-operating profi t (loss)
Profi t (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
Effect of different basis of tax in local jurisdiction
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 profi t (loss) based on
longer-term investment returns
Tax charge (credit) on non-operating profi t (loss)
Actual tax rate:
Operating profi t based on longer-term investment returns
Total profi t
1,050
170
1,220
22%
268
1,431
(1,174)
257
35%
90
776
545
1,321
21%
277
(2)
7
(17)
13
(44)
(1)
(8)
(40)
–
(4)
172
171
1
16%
14%
(1)
–
(82)
–
–
–
–
–
–
1
8
419
(411)
29%
3%
3
–
–
7
–
2
(7)
(8)
–
(3)
271
168
103
22%
21%
(71)
(113)
(184)
22%
(41)
(7)
(26)
(2)
9
–
–
(11)
(10)
27
8
(53)
(34)
(19)
48%
29%
Total
3,186
(572)
2,614
23%
594
(7)
(19)
(101)
29
(44)
1
(26)
(58)
27
2
398
724
(326)
23%
15%
* The expected tax rates shown in the table above (rounded to the nearest whole percentage) refl ect the corporation tax rates generally applied to taxable profi ts of the
relevant country jurisdictions. For Asia operations, the expected tax rates refl ect the corporation tax rates weighted by reference to the source of profi ts of operations
contributing to the aggregate business result. The expected tax rate for other operations refl ects the mix of business between UK and overseas non-insurance
operations, which are taxed at a variety of rates. The rates will fl uctuate from year to year dependent on the mix of profi ts.
F
i
n
a
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c
i
a
l
s
t
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m
e
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
B: Earnings performance continued
B5: Tax charge continued
2013 £m (except for tax rates)
Asia
insurance
operations†
US
insurance
operations
UK
insurance
operations
Other
operations
Operating profi t (loss) based on longer-term investment returns
Non-operating loss
Profi t (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 profi t (loss) based on
longer-term investment returns
Tax credit on non-operating loss
Actual tax rate:
Operating profi t based on longer-term investment returns
Total profi t
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 tax rates shown in the table above refl ect the corporation tax rates generally applied to taxable profi ts of the relevant country jurisdictions. For Asia
operations, the expected tax rates refl ect the corporation tax rates weighted by reference to the source of profi ts of operations contributing to the aggregate business
result. The expected tax rate for Other operations refl ects the mix of business between UK and overseas non-insurance operations, which are taxed at a variety
of rates. The rates will fl uctuate from year to year dependent on the mix of profi ts.
† The expected and actual tax rates as shown includes the impact of the held for sale Japan life business. For 2014, the tax rates for Asia insurance and Group, excluding
the impact of the held for sale Japan life business are the same. For 2013, the tax rates for Asia insurance and Group, excluding the impact of the held for sale Japan life
business, are as follows:
Asia insurance
Total Group
Expected tax rate on total profi t
Actual tax rate:
Operating profi t based on longer-term investment returns
Total profi t
23%
17%
19%
27%
22%
17%
Prudential plc Annual Report 2014
163
Before
tax
note B1.1
£m
Tax
note B5
£m
2014
Net of tax
Basic
earnings
per share
Diluted
earnings
per share
£m
Pence
Pence
3,186
(724)
2,462
96.6p
96.5p
(574)
86
(79)
(5)
299
–
26
1
(275)
86
(53)
(4)
2,614
(398)
2,216
(10.8)p
3.4p
(10.8)p
3.4p
(2.1)p
(0.2)p
86.9p
(2.1)p
(0.2)p
86.8p
Before
tax
note B1.1
£m
Tax
note B5
£m
2013
Net of tax
Basic
earnings
per share
Diluted
earnings
per share
£m
Pence
Pence
2,954
(638)
2,316
90.9p
90.7p
(1,110)
(72)
(102)
(35)
1,635
318
24
–
7
(792)
(31.1)p
(31.0)p
(48)
(102)
(28)
(1.9)p
(4.0)p
(1.1)p
52.8p
(1.9)p
(4.0)p
(1.1)p
52.7p
(289)
1,346
B6: Earnings per share
Based on operating profi t based on longer-term
investment returns
Short-term fl uctuations in investment returns on
shareholder-backed business
Gain on sale of PruHealth and PruProtect
Amortisation of acquisition accounting
adjustments
Costs of domestication of Hong Kong branch
Based on profi t for the year
Based on operating profi t based on longer-term
investment returns
Short-term fl uctuations 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
Based on profi t for the year
Note
B1.2
D1
D2
Note
B1.2
D1
D2
In order to facilitate comparisons of operating profi t based on longer-term investment returns that refl ect the Group’s retained
operations, the results attributable to the held for sale Japan life business are included separately within the supplementary analysis
of profi t as shown above.
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
2014
millions
2013
millions
2,549
9
(6)
2,552
2,548
10
(6)
2,552
F
i
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a
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t
a
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m
e
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t
s
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
B: Earnings performance continued
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
2014
Pence
per share
11.19p
25.74p
36.93p
11.19p
23.84p
35.03p
2013
Pence
per share
9.73p
23.84p
33.57p
9.73p
20.79p
30.52p
£m
287
658
945
285
610
895
£m
249
610
859
249
532
781
Dividend per share
Interim dividends are recorded in the period in which they are paid. Final dividends are recorded in the period in which they are approved
by shareholders. The fi nal dividend for the year ended 31 December 2013 of 23.84 pence per ordinary share was paid to eligible
shareholders on 22 May 2014 and the 2014 interim dividend of 11.19 pence per ordinary share was paid to eligible shareholders
on 25 September 2014.
The 2014 fi nal dividend of 25.74 pence per ordinary share will be paid on 21 May 2015 in sterling to shareholders on the principal
register and the Irish branch register at 6.00pm BST on 27 March 2015 (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 29 May 2015. The fi nal dividend will be paid on or
about 28 May 2015 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 9 March 2015. The
exchange rate at which the dividend payable to the SG Shareholders will be translated into Singapore dollars, will be determined by CDP.
Shareholders on the principal register and Irish branch register will be able to participate in a Dividend Reinvestment Plan.
C: Balance sheet notes
Prudential plc Annual Report 2014
165
C1: Analysis of Group position by segment and business type
To explain the assets, liabilities and capital of the Group’s businesses more comprehensively, it is appropriate to provide analyses of the
Group’s statement of fi nancial position by operating segment and type of business.
C1.1 Group statement of fi nancial position – analysis by segment
a Position as at 31 December 2014
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-
profi ts 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
2014 £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)
Elimin-
ation
of intra-
group
debtors
and
creditors
C5.1(a)
233
–
–
233
1,230
C5.1(b)
1,911
2,144
5,197
5,197
86
86
7,194
7,427
21
1,251
C5.2(a)
C5.2(b)
–
54
54
–
–
–
2,198
84
5,197
2,343
C8
186
7
193
279
132
186
61
247
–
–
–
7,674
2,559
1,251
141
–
46
46
–
–
–
46
65
–
–
–
–
–
–
–
–
31 Dec
Group
Total
1,463
7,261
8,724
186
61
247
8,971
2,765
3,111
6,617
6,826
16,554
1,464
5,058 (10,295) 12,781
–
28
12,736
12,764
–
D6
374
–
536
910
C3.4
1,014
6,719
4,254
11,987
C3.3
19,200
23,629
48
769
82,081
32,980
1,670
43,468 144,749
86,349 142,958
7,500
13,022
5,782
– 12,253
45,034 123,478 165,378 333,890
–
–
–
34
–
2
–
36
–
320
– 12,764
–
1,017
– 12,841
– 144,862
– 145,251
–
7,623
– 13,096
– 337,454
–
–
824
6,409
107
854
79
2,293
121
74
3,528
–
1,044
F
i
n
a
n
c
i
a
l
s
t
a
t
e
m
e
n
t
s
C
:
B
a
l
a
n
c
e
s
h
e
e
t
n
o
t
e
s
Assets held for sale
Cash and cash equivalents note (iii)
D1(b)
819
1,684
–
904
5
2,457
824
5,045
Total assets
C3.1
52,930 138,539 175,077 366,546
7,428
5,525 (10,295) 369,204
166
Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C1: Analysis of Group position by segment and business type continued
2014 £m
Insurance operations
Note
Asia
US
UK
Total
insurance
operations
Asset
manage-
ment
operations
Unallo-
cated
to a
segment
(central
opera-
tions)
Elimin-
ation
of intra-
group
debtors
and
creditors
31 Dec
Group
Total
3,548
1
3,549
4,067
–
3,804
–
11,419
1
2,077
–
(1,685)
–
4,067
3,804
11,420
2,077
(1,685)
– 11,811
1
–
– 11,812
39,670 124,076
87,655 251,401
218
– 39,059
39,277
180
2,670
17,374
20,224
2,102
– 10,348
12,450
C4
42,170 126,746 154,436 323,352
–
–
–
–
–
–
–
–
–
(1,363) 250,038
– 39,277
– 20,224
– 12,450
–
(1,363) 321,989
–
–
–
–
–
–
160
160
–
–
–
–
160
160
–
275
275
179
74
253
–
1,093
1,093
–
1,156
1,191
2,347
3,320
549
3,869
2,004
–
–
–
–
–
–
–
3,320
984
4,304
2,263
1,093
–
2,347
6
–
–
2,161
719
65
123
2,434
110
143
686
6,441
770
22
2,308
1
–
776
5
251
2,868
5,174
1,228
414
441
5,159
202
1,381
480
7,357
4,255
480
564
8,369
317
1,775
4,034
–
22
66
328
4,054
335
233
32
–
14
71
55
771
72
315
39
–
–
–
–
(8,932)
–
–
–
7,357
4,291
617
947
4,262
724
2,323
4,105
7,387
15,670
29,498
5,070
1,337
(8,932) 26,973
–
–
770
–
–
–
770
C6.1
C6.2
C6.2
C8.1
C8.2
C12
C3.5(b)
D1(b)
By operating segment
Equity and liabilities
Equity
Shareholders’ equity
Non-controlling interests
Total equity
Liabilities
Policyholder liabilities and unallocated
surplus of with-profi ts funds:
Insurance contract liabilities
Investment contract liabilities with
discretionary participation features
Investment contract liabilities without
discretionary participation features
Unallocated surplus of with-profi ts
funds
Total policyholder liabilities and
unallocated surplus of with-profi ts
funds
Core structural borrowings of
shareholder-fi nanced operations:
Subordinated debt
Other
Total
Operational borrowings attributable to
shareholder-fi nanced operations
Borrowings attributable to with-profi ts
operations
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 note (iv)
Total
Liabilities held for sale
Total liabilities
Total equity and liabilities
52,930 138,539 175,077 366,546
C3.1
49,381 134,472 171,273 355,126
5,351
7,428
7,210 (10,295) 357,392
5,525 (10,295) 369,204
Prudential plc Annual Report 2014
167
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)
Elimin-
ation
of intra-
group
debtors
and
creditors
b Position as at 31 December 2013
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-profi ts funds:
Goodwill in respect of acquired
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
subsidiaries for venture fund and
other investment purposes
Deferred acquisition costs and other
intangible assets
C5.2(a)
C5.2(b)
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
–
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
D6
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
4,603
12,148
11,252
35,065 104,260 153,684 293,009
65
2,045
61
65
3,424
–
1,562
7,711
Assets held for sale
Cash and cash equivalents note (iii)
Total assets
D1
916
1,522
–
604
–
2,586
916
4,712
C3.1
39,954 117,756 162,493 320,203
31 Dec
Group
Total
1,461
5,295
6,756
177
72
249
7,005
2,412
–
19
19
–
–
–
19
54
–
–
–
–
–
–
–
–
–
–
–
21
–
3
–
24
–
511
–
11,477
–
–
809
12,566
– 120,222
– 132,905
6,265
–
12,213
–
– 296,457
–
–
916
6,785
5,108
(7,090) 325,932
F
i
n
a
n
c
i
a
l
s
t
a
t
e
m
e
n
t
s
C
:
B
a
l
a
n
c
e
s
h
e
e
t
n
o
t
e
s
1,073
6,710
5,808
13,591
1,356
4,500
(7,090)
12,357
168
Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
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-profi ts funds:
Insurance contract liabilities
Investment contract liabilities with
discretionary participation features
Investment contract liabilities without
discretionary participation features
Unallocated surplus of with-profi ts
funds
Total policyholder liabilities and
unallocated surplus of with-profi ts
funds
Core structural borrowings of
shareholder-fi nanced operations:
Subordinated debt
Other
Total
Operational borrowings attributable to
shareholder-fi nanced operations
Borrowings attributable to with-profi ts
operations
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 note (iv)
Total
Liabilities held for sale
Total liabilities
2013 £m
Insurance operations
Note
Asia
US
UK
Total
insurance
operations
Asset
manage-
ment
operations
Unallo-
cated
to a
segment
(central
opera-
tions)
Elimin-
ation
of intra-
group
debtors
and
creditors
31 Dec
Group
Total
2,795
1
2,796
3,446
–
3,446
2,998
–
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
6,607
11,910
22,820
–
–
868
37,158 114,310 159,495 310,963
C6.1
C6.2
C6.2
C8.1
C8.2
C12
C3.5(b)
D1(b)
–
–
–
–
–
–
275
275
3
–
–
–
14
8
302
4,684
298
112
24
5,442
–
5,720
7,711
–
–
–
–
–
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
6,688
5,108
(7,090) 316,281
(7,090) 325,932
Total equity and liabilities
C3.1
39,954 117,756 162,493 320,203
Prudential plc Annual Report 2014
169
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 defi ned as fi nancial instruments or related to insurance contracts are
excluded. The Group’s total non-current assets at 31 December comprise:
UK including insurance operations, M&G and central operations
US
Asia*
Total
2014 £m
2013 £m
2,138
203
1,618
3,959
2,090
157
827
3,074
* 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 £2,667 million (2013: £2,609 million) and other debtors
of £1,852 million (2013: £1,746 million).
Accrued investment income and other debtors
Interest receivable
Other
Total accrued investment income
Other debtors comprise:
Amounts due from
Policyholders
Intermediaries
Reinsurers
Other
Total other debtors
Total accrued investment income and other debtors
2014 £m
2013 £m
1,932
735
2,667
335
20
61
1,436
1,852
4,519
1,951
658
2,609
303
26
16
1,401
1,746
4,355
Of the other £4,519 million (2013: £4,355 million) of accrued investment income and other debtors, £381 million (2013: £350 million) is expected to be settled aft er
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
2014 £m
2013 £m
5,166
1,243
6,409
5,605
1,180
6,785
Of the total cash and cash equivalents, £304 million (31 December 2013: £511 million) is 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 benefi t of policyholders.
(iv) Other liabilities comprise:
Creditors arising from direct insurance and reinsurance operations
Interest payable
Other items*
Total
2014 £m
2013 £m
1,431
59
2,615
4,105
1,159
56
2,521
3,736
* Of the £2,615 million (2013: £2,521 million) other items as at 31 December 2014, £2,201 million (2013: £2,051 million) related to liabilities for funds withheld under
reinsurance arrangement of the REALIC business.
F
i
n
a
n
c
i
a
l
s
t
a
t
e
m
e
n
t
s
C
:
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a
l
a
n
c
e
s
h
e
e
t
n
o
t
e
s
170
Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C1: Analysis of Group position by segment and business type continued
C1.2 Group statement of fi nancial position – analysis by business type
2014 £m
2013 £m
Policyholder
Shareholder-backed business
Unit-
linked
and
variable
annuity
Non-
linked
business
Asset
manage-
ment
operations
Unallo-
cated
to a
segment
(central
operations)
Note
Participating
funds
Elimin-
ation
of intra-
group
debtors
and
creditors
–
–
–
186
61
247
247
71
–
–
–
–
–
–
–
–
233
1,230
7,194
7,427
21
1,251
–
–
–
–
–
–
7,427
2,488
1,251
141
–
46
46
–
–
–
46
65
–
–
–
–
–
–
–
–
31 Dec
Group
Total
31 Dec
Group
Total
1,463
1,461
7,261
8,724
5,295
6,756
186
61
247
177
72
249
8,971
2,765
7,005
2,412
C5.1(a)
C5.1(b)
Assets
Intangible assets attributable to
shareholders:
Goodwill
Deferred acquisition costs and
other intangible assets
Total
Intangible assets attributable to
with-profi ts funds:
In respect of acquired subsidiaries
for venture fund and other
investment purposes
Deferred acquisition costs and
other intangible assets
Total
Total
Deferred tax assets
Other non-investment and non-cash
C8
assets
Investments of long-term business
2,943
635
10,135
1,464
5,058
(7,454) 12,781
12,357
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
Total assets
10,371
694
1,699
–
536
C3.4
3,209
–
–
374
8,778
C3.3
D1(b)
34,662 108,749
10,895
59,573
33
5,345
938
10,444
1,338
72,490
2,122
1,640
124,140 121,309
88,441
–
1,967
286
863
538
2,215
107
854
79
2,293
121
74
3,528
–
1,044
–
–
–
34
–
2
–
36
–
320
– 12,764
11,477
–
1,017
809
– 12,841
12,566
– 144,862 120,222
– 145,251 132,905
6,265
–
7,623
12,213
– 13,096
– 337,454 296,457
–
–
824
6,409
916
6,785
129,368 123,093 111,244
7,428
5,525
(7,454) 369,204 325,932
Equity and liabilities
Equity
Shareholders’ equity
Non-controlling interests
Total equity
Liabilities
Policyholder liabilities and unallocated
surplus of with-profi ts funds:
Contract liabilities (including
amounts in respect of contracts
classifi ed as investment
contracts under IFRS 4)
Unallocated surplus of with-profi ts
funds
Total policyholder liabilities
and unallocated surplus
of with-profi ts funds
Core structural borrowings of
shareholder-fi nanced operations:
Subordinated debt
Other
Total
Operational borrowings attributable to
shareholder-fi nanced operations
Borrowings attributable to with-profi ts
operations
Deferred tax liabilities
Other non-insurance liabilities
Liabilities held for sale
Total liabilities
Total equity and liabilities
Prudential plc Annual Report 2014
171
2014 £m
2013 £m
Policyholder
Shareholder-backed business
Unit-
linked
and
variable
annuity
Non-
linked
business
Asset
manage-
ment
operations
Unallo-
cated
to a
segment
(central
operations)
Note
Participating
funds
Elimin-
ation
of intra-
group
debtors
and
creditors
31 Dec
Group
Total
31 Dec
Group
Total
–
–
–
– 11,419
1
–
2,077
–
(1,685)
–
– 11,420
2,077
(1,685)
– 11,811
1
–
– 11,812
9,650
1
9,651
105,589 118,915
85,035
12,450
–
–
C4.1(a)
118,039 118,915
85,035
–
–
–
–
–
–
– 309,539 273,953
– 12,450
12,061
– 321,989 286,014
C6.1
C6.2
C6.2
C8
D1(b)
–
–
–
–
–
–
–
4
–
160
160
249
–
275
275
3,320
549
3,869
6
2,004
–
–
–
–
3,320
984
4,304
3,662
974
4,636
2,263
2,152
1,093
1,307
8,929
–
–
38
3,855
281
–
2,910
10,981
489
129,368 123,093
99,824
129,368 123,093 111,244
–
22
5,048
–
5,351
7,428
–
14
1,323
–
–
–
1,093
4,291
(7,454) 22,682
770
–
895
3,778
17,938
868
7,210
(7,454) 357,392 316,281
5,525
(7,454) 369,204 325,932
F
i
n
a
n
c
i
a
l
s
t
a
t
e
m
e
n
t
s
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a
l
a
n
c
e
s
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e
e
t
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o
t
e
s
172
Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C2: Analysis of segment position by business type
To show the statement of fi nancial position by reference to the differing degrees of policyholder and shareholder economic interest of the
different types of business, the analysis below is structured to show the 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-profi ts funds:
Deferred acquisition costs and other intangible assets
Deferred tax assets
Other non-investment and non-cash assets
Investments of long-term business and other operations:
Investment properties
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-profi ts funds:
Contract liabilities (including amounts in respect of contracts
classifi ed as investment contracts under IFRS 4)
Unallocated surplus of with-profi ts funds note (ii)
Total C4.1(b)
Deferred tax liabilities
Other non-insurance liabilities
Liabilities held for sale
Total liabilities
Total equity and liabilities
2014 £m
2013 £m
With-profi ts
business
note (i)
Unit-linked
assets and
liabilities
Other
business
31 Dec
Total
31 Dec
Total
–
–
–
54
–
1,943
–
–
544
6,974
12,927
18
190
20,653
–
547
–
–
–
–
–
168
–
–
–
11,294
2,847
20
243
14,404
281
329
233
1,911
2,144
–
84
1,000
–
374
470
932
7,855
10
336
9,977
538
808
233
1,911
2,144
54
84
3,111
–
374
1,014
19,200
23,629
48
769
45,034
819
1,684
23,197
15,182
14,551
52,930
231
1,026
1,257
66
55
1,073
1
268
922
14,383
18,554
41
896
35,065
916
1,522
39,954
–
–
–
–
–
–
3,548
1
3,549
3,548
1
3,549
2,795
1
2,796
17,873
2,102
19,975
458
2,764
–
23,197
23,197
13,874
–
13,874
38
989
281
15,182
15,182
8,321
–
8,321
223
1,969
489
11,002
14,551
40,068
2,102
42,170
719
5,722
770
49,381
52,930
31,910
77
31,987
594
3,709
868
37,158
39,954
Notes
(i)
The statement of fi nancial position for with-profi ts business comprises the with-profi ts assets and liabilities of the Hong Kong, Malaysia and Singapore
with-profi ts operations. Assets and liabilities of other participating business are included in the column for ‘Other business’.
(ii) On 1 January 2014, the Hong Kong branch of PAC was transferred to separate subsidiaries established in Hong Kong. From this date, the unallocated surplus
of the Hong Kong with-profi ts business is reported within the Asia insurance segment. Up until 31 December 2013, for the purpose of the presentation
of unallocated surplus of with-profi ts within the statement of fi nancial position, the Hong Kong branch balance was reported within the unallocated surplus
of the PAC with-profi ts sub-fund of the UK insurance operations.
Prudential plc Annual Report 2014
173
2014 £m
2013 £m
Variable
annuity
separate
account
assets and
liabilities
note (i)
Fixed annuity,
GIC and other
business
note (i)
31 Dec
Total
31 Dec
Total
–
–
–
–
–
–
81,741
–
–
81,741
–
5,197
5,197
2,343
6,617
28
6,719
340
32,980
1,670
41,737
904
5,197
5,197
2,343
6,617
28
6,719
82,081
32,980
1,670
4,140
4,140
2,042
6,710
28
6,375
66,008
30,292
1,557
123,478
104,260
904
604
81,741
56,798
138,539
117,756
–
–
4,067
4,067
4,067
4,067
3,446
3,446
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)
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)
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 classifi ed
as investment contracts under IFRS 4) note (v)
Total C4.1 (c)
Core structural borrowings of shareholder-fi nanced operations
Operational borrowings attributable to shareholder-fi nanced operations
Deferred tax liabilities
Other non-insurance liabilities note (v)
Total liabilities
Total equity and liabilities
81,741
81,741
–
–
–
–
81,741
81,741
45,005
45,005
160
179
2,308
5,079
52,731
56,798
126,746
126,746
160
179
2,308
5,079
134,472
138,539
107,411
107,411
150
142
1,948
4,659
114,310
117,756
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†
2014 £m
2013 £m
916
754
1,670
766
791
1,557
* Aft er taking account of the derivative liabilities of £251 million (2013: £515 million), which are also included in other non-insurance liabilities, the derivative
position for US operations is a net asset of £665 million (2013: £251 million).
† Partnerships in investment pools and other comprise primarily investments in limited partnerships. These include interests in the PPM America Private Equity
Fund and diversifi ed investments in 164 (2013: 166) other partnerships by independent money managers that generally invest in various equities and fi xed-income
loans and securities.
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(iii) Equity securities and portfolio holdings in unit trusts include investments in mutual funds, the majority of which are equity-based.
(iv)
Included within other non-investment and non-cash assets of £6,617 million (2013: £6,710 million) were balances of £5,979 million (2013: £6,065 million) for
reinsurers’ share of insurance contract liabilities. Of the £5,979 million as at 31 December 2014, £5,174 million related to the reinsurance ceded by the REALIC
business (2013: £5,410 million). Jackson holds collateral for certain of these reinsurance arrangements with a corresponding funds withheld liability.
As of 31 December 2014, the funds withheld liability of £2,201 million (2013: £2,051 million) was recorded within other non-insurance liabilities.
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, £844 million (2013: £485 million) and are included in other non-insurance
liabilities in the statement of fi nancial position above.
(v)
174
Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C2: Analysis of segment position by business type continued
(vi) Changes in shareholders’ equity:
Operating profi t based on longer-term investment returns B1.1
Short-term fl uctuations in investment returns B1.2
Amortisation of acquisition accounting adjustments arising from the purchase of REALIC
Profi t before shareholder tax
Tax B5
Profi t for the year
Profi t for the year (as above)
Items recognised in other comprehensive income:
Exchange movements
Unrealised valuation movements on securities classifi ed as available-for-sale:
Unrealised holding gains (losses) arising during the year
Deduct net gains included in the income statement
Total unrealised valuation movements
Related amortisation of deferred acquisition costs C5.1(b)
Related tax
Total other comprehensive income (loss)
Total comprehensive income (loss) for the year
Dividends, interest payments to central companies and other movements
Net increase (decrease) in equity
Shareholders’ equity at beginning of year
Shareholders’ equity at end of year
2014 £m
2013 £m
1,431
(1,103)
(71)
257
(8)
249
1,243
(625)
(65)
553
(101)
452
2014 £m
2013 £m
249
235
1,039
(83)
956
(87)
(304)
800
1,049
(428)
621
3,446
4,067
452
(32)
(2,025)
(64)
(2,089)
498
557
(1,066)
(614)
(283)
(897)
4,343
3,446
Prudential plc Annual Report 2014
175
C2.3 UK insurance operations
Of the total investments of £165 billion in UK insurance operations, £103 billion of investments are held by Scottish Amicable Insurance
Fund and the PAC with-profi ts sub-fund. Shareholders are exposed only indirectly to value movements on these assets.
By operating segment
Assets
Intangible assets attributable to shareholders:
Deferred acquisition costs and other intangible assets
Total
Intangible assets attributable to with-profi ts funds:
In respect of acquired subsidiaries for venture fund and
other investment purposes
Deferred acquisition costs
Total
Total
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:
2014 £m
2013 £m
Other funds and subsidiaries
Scottish
Amicable
Insurance
Fund
note (ii)
PAC with-
profi ts
sub-fund
note (i)
Unit-
linked
assets and
liabilities
Annuity
and other
long-term
business
Total
31 Dec
Total
31 Dec
Total
–
–
–
–
–
–
–
–
186
7
193
193
–
–
–
–
–
–
–
208
71
3,633
–
467
86
86
–
–
–
86
86
–
–
–
86
61
2,518
86
61
2,985
86
86
186
7
193
279
90
90
177
6
183
273
132
6,826
142
5,808
390
9,981
694
1,671
2,365
12,736
11,448
–
536
–
–
–
536
449
Loans C3.4
Equity securities and portfolio holdings in unit trusts
Debt securities C3.3
Other investments note (iii)
Deposits
66
2,508
2,709
283
728
2,599
25,180
43,937
5,044
9,526
–
15,714
8,048
13
695
1,589
66
31,655
442
1,304
1,589
15,780
39,703
455
1,999
4,254
43,468
86,349
5,782
12,253
4,173
39,745
82,014
4,603
11,252
Total investments
Properties held for sale
Cash and cash equivalents
Total assets
6,684
96,803
25,164
36,727
61,891 165,378
153,684
–
84
–
1,336
5
534
–
503
5
1,037
5
2,457
–
2,586
6,976 102,036
26,170
39,895
66,065 175,077
162,493
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C2: Analysis of segment position by business type continued
Equity
Shareholders’ equity
Total equity
Liabilities
Policyholder liabilities and unallocated surplus of
with-profi ts funds:
Contract liabilities (including amounts in respect of contracts
classifi ed as investment contracts under IFRS 4)
Unallocated surplus of with-profi ts funds (refl ecting
application of ‘realistic’ basis provisions for UK
regulated with-profi ts funds) C4.1(d)
Total
Operational borrowings attributable to shareholder-fi nanced
operations
Borrowings attributable to with-profi ts funds
Deferred tax liabilities
Other non-insurance liabilities
Total liabilities
Total equity and liabilities
2014 £m
2013 £m
Other funds and subsidiaries
Scottish
Amicable
Insurance
Fund
note (ii)
PAC with-
profi ts
sub-fund
note (i)
Unit-
linked
assets and
liabilities
Annuity
and other
long-term
business
Total
31 Dec
Total
31 Dec
Total
–
–
–
–
–
–
3,804
3,804
3,804
3,804
3,804
3,804
2,998
2,998
6,690
82,389
23,300
31,709
55,009 144,088
134,632
– 10,348
–
–
– 10,348
11,984
6,690
92,737
23,300
31,709
55,009 154,436
146,616
–
11
45
230
–
1,082
804
7,413
4
–
–
2,866
70
–
379
3,933
74
–
379
6,799
74
1,093
1,228
14,442
74
895
1,213
10,697
6,976 102,036
26,170
36,091
62,261 171,273
159,495
6,976 102,036
26,170
39,895
66,065 175,077
162,493
Notes
(i)
(ii)
The PAC with-profi ts sub-fund (WPSF) mainly contains with-profi ts business but it also contains some non-profi t business (unit-linked, term assurances and
annuities). Included in the PAC with-profi ts fund is £11.7 billion (2013: £12.2 billion) of non-profi ts annuities liabilities. The WPSF’s profi ts are apportioned
90 per cent to its policyholders and 10 per cent to shareholders as surplus for distribution is determined via the annual actuarial valuation. For the purposes
of this table and subsequent explanation, references to the WPSF also include, for convenience, the amounts attaching to the Defi ned Charges Participating
Sub-fund which comprises 3.8 per cent of the total assets of the WPSF and includes the with-profi ts annuity business transferred to Prudential from the
Equitable Life Assurance Society on 1 December 2007 (with assets of approximately £1.7 billion). Profi ts to shareholders on this with-profi ts annuity business
emerge on a ‘charges less expenses’ basis and policyholders are entitled to 100 per cent of the investment earnings.
The fund is solely for the benefi t of policyholders of SAIF. Shareholders have no interest in the profi ts of this fund although they are entitled to asset
management fees on this business. SAIF is a separate sub-fund within the PAC long-term business fund.
(iii) Other investments comprise:
Derivative assets*
Partnerships in investment pools and other†
2014 £m
2013 £m
2,344
3,438
5,782
1,472
3,131
4,603
* Aft er including derivative liabilities of £1,381 million (2013: £804 million), which are also included in the statement of fi nancial position, the overall derivative
position was a net asset of £963 million (2013: £668 million).
† Partnerships in investment pools and other comprise mainly investments held by the PAC with-profi ts fund. These investments are primarily investments
in limited partnerships and additionally, investments in property funds.
Prudential plc Annual Report 2014
177
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-fi nanced operations
Operational borrowings attributable to shareholder-fi nanced
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
2014 £m
Eastspring
Investments
US
31 Dec
Total
2013 £m
31 Dec
Total
16
2
18
228
–
–
–
–
12
40
52
76
374
157
157
–
–
–
217
217
374
61
1
62
69
72
–
18
–
–
34
124
111
366
274
274
–
–
–
92
92
366
1,230
21
1,251
1,605
107
854
79
2,293
121
74
3,528
1,044
7,428
2,077
2,077
275
6
2,004
3,066
5,351
7,428
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
M&G
note (i)
1,153
18
1,171
1,308
35
854
61
2,293
109
–
3,352
857
6,688
1,646
1,646
275
6
2,004
2,757
5,042
6,688
Notes
(i)
(ii)
The M&G statement of fi nancial position includes the assets and liabilities in respect of Prudential Capital.
Intra-group debt represented by operational borrowings at Group level, which are in respect of Prudential Capital’s short-term fi xed income security
programme and comprise:
Commercial paper
Medium Term Notes
Total intra-group debt represented by operational borrowings at Group level
(iii) Other non-insurance liabilities consist primarily of intra-group balances, derivative liabilities and other creditors.
2014 £m
2013 £m
1,704
300
2,004
1,634
299
1,933
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C3: Assets and liabilities – Classifi cation and Measurement
C3.1 Group assets and liabilities – Classifi cation
The classifi cation of the Group’s assets and liabilities, and its corresponding accounting carrying values refl ect the requirements of IFRS.
For fi nancial investments the basis of valuation refl ects 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:
Intangible assets attributable to shareholders:
Goodwill
Deferred acquisition costs and other intangible assets
Total
Intangible assets attributable to with-profi ts funds:
In respect of acquired subsidiaries for venture fund and
other investment purposes
Deferred acquisition costs and other intangible assets
Total
Total intangible assets
Other non-investment and non-cash assets:
Property, plant and equipment
Reinsurers’ share of insurance contract liabilities
Deferred tax assets
Current tax recoverable
Accrued investment income
Other debtors
Total
Investments of long-term business and other operations: note (ii)
Investment properties
Investments accounted for using the equity method
Loans note (iv)
Equity securities and portfolio holdings in unit trusts
Debt securities note (v)
Other investments note (vi)
Deposits
Total investments
Assets held for sale note (vii)
Cash and cash equivalents
Total assets
2014 £m
Cost/
amortised
cost/IFRS 4
basis value
note (i)
Total
carrying
value
Fair value,
where
applicable
At fair value
Through profi t
or loss
Available-
for-sale
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,463
7,261
8,724
1,463
7,261
8,724
186
61
247
186
61
247
8,971
8,971
978
7,167
2,765
117
2,667
1,852
978
7,167
2,765
117
2,667
1,852
15,546
15,546
2,667
1,852
12,764
–
2,291
144,862
112,354
7,623
–
279,894
824
–
–
–
–
–
32,897
–
–
32,897
–
1,017
10,550
–
–
–
13,096
12,764
1,017
12,841
144,862
145,251
7,623
13,096
12,764
13,548
144,862
145,251
7,623
13,096
24,663
337,454
–
–
–
6,409
824
6,409
824
6,409
280,718
32,897
55,589
369,204
Prudential plc Annual Report 2014
179
Liabilities
Policyholder liabilities and unallocated surplus
of with-profi ts funds:
Insurance contract liabilities
Investment contract liabilities with discretionary
participation features note (iii)
Investment contract liabilities without discretionary
participation features
Unallocated surplus of with-profi ts funds
Total
Core structural borrowings of shareholder-fi nanced operations
Other borrowings:
Operational borrowings attributable to shareholder-
fi nanced operations
Borrowings attributable to with-profi ts operations
Other non-insurance liabilities:
Obligations under funding, securities lending and sale and
repurchase agreements
Net asset value attributable to unit holders of consolidated
unit trusts and similar funds
Deferred tax liabilities
Current tax liabilities
Accruals and deferred income
Other creditors
Provisions
Derivative liabilities
Other liabilities note (vii)
Total
Liabilities held for sale
Total liabilities
2014 £m
Cost/
amortised
cost/IFRS 4
basis value
note (i)
Total
carrying
value
Fair value,
where
applicable
At fair value
Through profi t
or loss
Available-
for-sale
–
–
17,554
–
17,554
–
–
–
–
7,357
–
–
–
327
–
2,323
2,201
12,208
770
30,532
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
250,038
250,038
39,277
39,277
2,670
12,450
20,224
12,450
304,435
321,989
20,211
4,304
4,304
4,925
2,263
1,093
2,263
1,093
2,263
1,108
2,347
2,347
2,361
–
4,291
617
947
3,935
724
–
1,904
7,357
4,291
617
947
4,262
724
2,323
4,105
7,357
4,262
2,323
4,105
14,765
26,973
–
770
770
326,860
357,392
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C3: Assets and liabilities – Classifi cation and Measurement continued
Intangible assets attributable to shareholders:
Goodwill
Deferred acquisition costs and other intangible assets
Total
Intangible assets attributable to with-profi ts funds:
In respect of acquired subsidiaries for venture fund and
other investment purposes
Deferred acquisition costs and other intangible assets
Total
Total intangible assets
Other non-investment and non-cash assets:
Property, plant and equipment
Reinsurers’ share of insurance contract liabilities
Deferred tax assets
Current tax recoverable
Accrued investment income
Other debtors
Total
Investments of long-term business and other operations: note (ii)
Investment properties
Investments accounted for using the equity method
Loans note (iv)
Equity securities and portfolio holdings in unit trusts
Debt securities note (v)
Other investments note (vi)
Deposits
Total investments
Assets held for sale note (vii)
Cash and cash equivalents
Total assets
At fair value
Through profi t
or loss
Available-
for-sale
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
11,477
–
2,137
120,222
102,700
6,265
–
242,801
916
–
–
–
–
–
30,205
–
–
30,205
–
–
2013 £m
Cost/
amortised
cost/IFRS 4
basis value
note (i)
1,461
5,295
6,756
177
72
249
Total
carrying
value
Fair value,
where
applicable
1,461
5,295
6,756
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
–
809
10,429
–
–
–
12,213
23,451
–
6,785
11,477
809
12,566
120,222
132,905
6,265
12,213
296,457
916
6,785
2,609
1,746
11,477
12,995
120,222
132,905
6,265
12,213
916
6,785
243,717
30,205
52,010
325,932
Prudential plc Annual Report 2014
181
2013 £m
Cost/
amortised
cost/IFRS 4
basis value
note (i)
Total
carrying
value
Fair value,
where
applicable
At fair value
Through profi t
or loss
Available-
for-sale
Liabilities
Policyholder liabilities and unallocated surplus
of with-profi ts funds:
Insurance contract liabilities
Investment contract liabilities with discretionary
participation features note (iii)
Investment contract liabilities without discretionary
participation features
Unallocated surplus of with-profi ts funds
Total
Core structural borrowings of shareholder-fi nanced operations
Other borrowings:
Operational borrowings attributable to shareholder-
fi nanced operations
Borrowings attributable to with-profi ts operations
Other non-insurance liabilities:
Obligations under funding, securities lending and sale and
repurchase agreements
Net asset value attributable to unit holders of consolidated
unit trusts and similar funds
Deferred tax liabilities
Current tax liabilities
Accruals and deferred income
Other creditors
Provisions
Derivative liabilities
Other liabilities note (vii)
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
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 specifi c 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 2014 recognised in the income statement amounted to a net gain of £2.9 billion (2013: £2.5 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 £21 million (2013: £62 million).
(v) As at 31 December 2014, £477 million (2013: £495 million) of convertible bonds were included in debt securities and £1,148 million (2013: £1,078 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-profi ts fund’s participation in various investment funds
and limited liability property partnerships.
(vii) Assets and liabilities held for sale are valued at fair value less costs to sell.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C3: Assets and liabilities – Classifi cation and Measurement continued
C3.2 Group assets and liabilities – Measurement
The section provides detail of the designation and valuation of the Group’s fi nancial assets and liabilities shown under following categories:
a Determination of fair value
The fair values of the assets and liabilities of the Group as shown in this note have been determined on the following bases.
The fair values of the fi nancial instruments for which fair valuation is required under IFRS are determined by the use of current market
bid prices for exchange-quoted investments, or by using quotations from independent third parties, such as brokers and pricing services
or by using appropriate valuation techniques.
The estimated fair value of derivative fi nancial instruments refl ects the estimated amount the Group would receive or pay in an arm’s
length transaction. This amount is determined using quoted prices if exchange listed, quotations from independent third parties or
valued internally using standard market practices.
The loans and receivables have been shown net of provisions for impairment. The fair value of loans has been estimated from
discounted cash fl ows expected to be received. The rate of discount used was the market rate of interest where applicable.
The fair value of investment properties is based on market values as assessed by professionally qualifi ed external valuers or by the
Group’s qualifi ed surveyors.
The fair value of the subordinated and senior debt issued by the parent company is determined using quoted prices from independent
third parties.
The fair value of fi nancial liabilities (other than derivative fi nancial instruments) is determined using discounted cash fl ows 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 fi nancial position
The table below shows the assets and liabilities carried at fair value analysed by level of the IFRS 13 ‘Fair Value Measurement’ defi ned fair
value hierarchy. This hierarchy is based on the inputs to the fair value measurement and refl ects the lowest level input that is signifi cant
to that measurement.
Prudential plc Annual Report 2014
183
31 Dec 2014 £m
Level 1
Level 2
Level 3
Total
Quoted
prices
(unadjusted)
in active
markets
Valuation
based on
signifi cant
observable
market inputs
Valuation
based on
signifi cant
unobservable
market inputs
31,136
16,415
96
(72)
47,575
48%
108,392
4,509
4
(10)
112,895
94%
–
1,303
15,806
–
–
17,109
22%
2,832
42,576
1,997
(1,024)
46,381
47%
336
6,375
29
(12)
6,728
6%
266
116
58,780
1,469
(867)
59,764
75%
–
140,831
36,730
100
(82)
266
3,284
107,731
3,495
(1,903)
177,579
112,873
694
582
3,252
–
4,528
5%
21
11
–
–
32
0%
2,025
32
197
776
(338)
2,692
3%
2,025
747
790
4,028
(338)
7,252
34,662
59,573
5,345
(1,096)
98,484
100%
108,749
10,895
33
(22)
119,655
100%
2,291
1,451
74,783
2,245
(1,205)
79,565
100%
2,291
144,862
145,251
7,623
(2,323)
297,704
–
(17,554)
–
(17,554)
(5,395)
–
172,184
64%
(671)
(327)
94,321
35%
(1,291)
(2,201)
3,760
1%
(7,357)
(2,528)
270,265
100%
Financial instruments at fair value
Analysis of fi nancial investments, net of derivative liabilities by business type
With-profi ts
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total fi nancial investments, net of derivative liabilities
Percentage of total
Unit-linked and variable annuity separate account
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total fi nancial investments, net of derivative liabilities
Percentage of total
Non-linked shareholder-backed
Loans
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total fi nancial investments, net of derivative liabilities
Percentage of total
Group total analysis, including other fi nancial liabilities held at fair value
Group total
Loans*
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total fi nancial investments, net of derivative liabilities
Investment contracts liabilities without discretionary participation features
held at fair value
Net asset value attributable to unit holders of consolidated unit trusts and
similar funds
Other fi nancial liabilities held at fair value
Total fi nancial instruments at fair value
Percentage of total
* Loans in the above table are those classifi ed as fair value through profi t and loss in note C3.1.
In addition to the fi nancial instruments shown above, the assets and liabilities held for sale on the consolidated statement of fi nancial
position at 31 December 2014 in respect of Japan life business included a net fi nancial instruments balance of £844 million, primarily for
equity securities and debt securities. Of this amount, £814 million has been classifi ed as level 1 and £30 million as level 2.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C3: Assets and liabilities – Classifi cation and Measurement continued
Analysis of fi nancial investments, net of derivative liabilities by business type
With-profi ts
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total fi nancial investments, net of derivative liabilities
Percentage of total
Unit-linked and variable annuity separate account
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total fi nancial investments, net of derivative liabilities
Percentage of total
Non-linked shareholder-backed
Loans
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total fi nancial investments, net of derivative liabilities
Percentage of total
Group total analysis, including other fi nancial liabilities held at fair value
Group total
Loans*
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total fi nancial investments, net of derivative liabilities
Investment contracts liabilities without discretionary participation features
held at fair value
Borrowings attributable to the with-profi ts funds held at fair value
Net asset value attributable to unit holders of consolidated unit trusts and
similar funds
Other fi nancial liabilities held at fair value
Total fi nancial instruments at fair value
Percentage of total
* Loans in the above table are those classifi ed as fair value through profi t or loss in note C3.1.
31 Dec 2013 £m
Level 1
Level 2
Level 3
Total
Quoted
prices
(unadjusted)
in active
markets
Valuation
based on
signifi cant
observable
market inputs
Valuation
based on
signifi cant
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
–
–
(17,736)
(18)
(3,703)
–
144,560
61%
(248)
(263)
86,549
37%
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
–
–
(1,327)
(2,051)
3,385
2%
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)
(5,278)
(2,314)
234,494
100%
Prudential plc Annual Report 2014
185
Investment properties at fair value
2014
2013
£m
Level 1
Level 2
Level 3
Total
Quoted
prices
(unadjusted)
in active
markets
Valuation
based on
signifi cant
observable
market inputs
Valuation
based on
signifi cant
unobservable
inputs
–
–
–
–
12,764
11,477
12,764
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 fi nancial position but for which fair value
is disclosed in the fi nancial 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-fi nanced operations
Operational borrowings attributable to shareholder-fi nanced operations
Borrowings attributable to the with-profi ts funds
Obligations under funding, securities lending and sale and repurchase
agreements
Assets
Loans
Liabilities
Investment contract liabilities without discretionary participation features
Core structural borrowings of shareholder-fi nanced operations
Operational borrowings attributable to shareholder-fi nanced operations
Borrowings attributable to the with-profi ts funds
Obligations under funding, securities lending and sale and repurchase
agreements
31 Dec 2014 £m
Level 1
Level 2
Level 3
Total
Quoted
prices
(unadjusted)
in active
markets
Valuation
based on
signifi cant
observable
market inputs
Valuation
based on
signifi cant
unobservable
market inputs
–
4,446
6,811
11,257
–
–
–
–
–
–
(4,926)
(2,241)
(1,050)
(2,657)
–
(22)
(58)
(2,657)
(4,926)
(2,263)
(1,108)
(1,505)
(856)
(2,361)
31 Dec 2013 £m
Level 1
Level 2
Level 3
Total
Quoted
prices
(unadjusted)
in active
markets
Valuation
based on
signifi cant
observable
market inputs
Valuation
based on
signifi cant
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 fl ows expected to be received or paid. Where appropriate, the observable
market interest rate has been used and the assets and liabilities are classifi ed 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.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C3: Assets and liabilities – Classifi cation and Measurement continued
c Valuation approach for level 2 fair valued assets and liabilities
A signifi cant proportion of the Group’s level 2 assets are corporate bonds, structured securities and other non-national government debt
securities. These assets, in line with market practice, are generally valued using independent pricing services or third-party broker
quotes. These valuations are determined using independent external quotations from multiple sources and are subject to a number of
monitoring controls, such as monthly price variances, 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 refl ect fair value (eg either because the value is
stale and/or the values are extremely diverse in range). These are usually securities which are distressed or that could be subject to a debt
restructure or where reliable market prices are no longer available due to an inactive market or market dislocation. In these instances,
prices are derived using internal valuation techniques including those as described below in this note with the objective of arriving at
a fair value measurement which refl ects the price at which an orderly transaction would take place between market participants on the
measurement date. The techniques used require a number of assumptions relating to variables such as credit risk and interest rates.
Examples of such variables include an average credit spread based on the corporate bond universe and the relevant duration of the asset
being valued. Prudential determines the input assumptions based on the best available information at the measurement dates.
Securities valued in such manner are classifi ed as level 3 where these signifi cant inputs are not based on observable market data.
Of the total level 2 debt securities of £107,731 million at 31 December 2014 (2013: £100,687 million), £10,093 million are valued
internally (2013: £8,556 million). The majority of such securities are valued using matrix pricing, which is based on assessing the credit
quality of the underlying borrower to derive a suitable discount rate relative to government securities of a comparable duration.
Under matrix pricing, the debt securities are priced taking the credit spreads on comparable quoted public debt securities and applying
these to the equivalent debt instruments factoring in a specifi ed liquidity premium. The majority of the parameters used in this valuation
technique are readily observable in the market and, therefore, are not subject to interpretation.
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 2014 to that presented at 31 December 2014.
Prudential plc Annual Report 2014
187
Financial instruments at fair value
Total
gains/
losses
recorded
as other
compre-
hensive
income Purchases
Total
gains/
losses in
income
statement
At
1 Jan
£m
Sales
Settled
Issued
1,887
1
118
–
–
(175)
194
649
670
118
271
3,758
(201)
337
(138)
2
(7)
36
–
26
49
(50)
(169)
371
–
(474)
–
–
–
–
–
–
–
–
–
Reclassi-
fi cation of
Japan life
as held
for sale
in 2013
–
–
–
–
–
Transfers
into
level 3
Transfers
out of
level 3
At
31 Dec
–
–
2,025
2
11
–
–
–
(35)
747
790
–
1
4,028
(338)
6,763
589
149
446
(693)
(175)
194
–
13
(34)
7,252
(1,327)
(14)
–
(18)
(2,051)
(10)
(129)
–
18
–
123
279
(73)
(290)
3,385
565
20
428
(675)
227
(169)
1,842
4
(37)
–
–
(66)
144
568
729
50
60
3,335
(195)
426
(6)
(3)
(4)
(1)
–
26
16
80
–
(73)
(146)
(215)
–
–
(1)
–
–
–
–
81
–
–
–
–
–
–
(28)
–
–
–
–
–
–
(1,291)
(2,201)
13
(34)
3,760
–
–
1,887
84
92
52
–
(3)
(48)
649
670
–
–
3,758
(201)
6,279
534
(45)
122
(434)
(67)
225
(28)
228
(51)
6,763
(1,224)
(57)
(2,021)
3
(1)
41
–
–
2
–
94
(141)
144
(218)
–
–
–
–
–
–
(1,327)
(2,051)
3,034
480
(5)
122
(432)
171
(134)
(28)
228
(51)
3,385
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Loans
Equity securities and
portfolio holdings
in unit trusts
Debt securities
Other investments
(including
derivative assets)
Derivative liabilities
Total fi nancial
investments, net
of derivative
liabilities
Net asset value
attributable to
unit holders of
consolidated unit
trusts and similar
funds
Other fi nancial
liabilities
Total fi nancial
instruments at fair
value
2013
Loans
Equity securities and
portfolio holdings
in unit trusts
Debt securities
Other investments
(including
derivative assets)
Derivative liabilities
Total fi nancial
investments, net
of derivative
liabilities
Net asset value
attributable to
unit holders of
consolidated unit
trusts and similar
funds
Other fi nancial
liabilities
Total fi nancial
instruments at fair
value
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C3: Assets and liabilities – Classifi cation and Measurement continued
Of the total net gains and losses in the income statement of £565 million (2013: £480 million), £344 million (2013: £415 million) relates
to net unrealised gains of fi nancial instruments still held at the end of the year, which can be analysed as follows:
Investment properties
Equity securities
Debt securities
Other investments
Derivative liabilities
Net asset value attributable to unit holders of consolidated unit trusts and similar funds
Other fi nancial liabilities
Total
Other assets at fair value – investment properties
2014 £m
2013 £m
70
149
284
(137)
(14)
(8)
344
46
30
397
(8)
(57)
7
415
£m
Total gains/
losses in
income
statement
914
441
At
1 Jan
11,477
10,554
Total gains/
losses
in other
compre-
hensive
income
20
(15)
Purchases
728
1,110
Sales
(370)
(613)
Transfers
into level 3
Transfers
out of level 3
–
–
(5)
–
At
31 Dec
12,764
11,477
2014
2013
Of the total net gains and losses in the income statement of £914 million (2013: £441 million), £851 million (2013: £410 million) relates to
net unrealised gains of investment properties still held at the end of the year.
Valuation approach for level 3 fair valued assets and liabilities
Financial instruments at fair value
Investments valued using valuation techniques include fi nancial investments which by their nature do not have an externally quoted
price based on regular trades, and fi nancial investments for which markets are no longer active as a result of market conditions eg market
illiquidity. The valuation techniques used include comparison to recent arm’s length transactions, reference to other instruments that are
substantially the same, discounted cash fl ow analysis, option adjusted spread models and, if applicable, enterprise valuation. These
techniques may include a number of assumptions relating to variables such as credit risk and interest rates. Changes in assumptions
relating to these variables could positively or negatively impact the reported fair value of these instruments. When determining the
inputs into the valuation techniques used priority is given to publicly available prices from independent sources when available, but
overall the source of pricing is chosen with the objective of arriving at a fair value measurement which refl ects the price at which
an orderly transaction would take place between market participants on the measurement date.
The fair value estimates are made at a specifi c point in time, based upon available market information and judgements about the
fi nancial instruments, including estimates of the timing and amount of expected future cash fl ows and the credit standing of
counterparties. Such estimates do not refl ect any premium or discount that could result from offering for sale at one time the Group’s
entire holdings of a particular fi nancial instrument, nor do they consider the tax impact of the realisation of unrealised gains or losses from
selling the fi nancial instrument being fair valued. In some cases the disclosed value cannot be realised in immediate settlement of the
fi nancial instrument.
In accordance with the Group’s risk management framework, the estimated fair value of derivative fi nancial instruments valued
internally using standard market practices are subject to assessment against external counterparties’ valuations.
At 31 December 2014, the Group held £3,760 million (2013: £3,385 million) of net fi nancial instruments at fair value within level 3.
This represents 1 per cent (2013: 2 per cent) of the total fair valued fi nancial assets net of fair valued fi nancial liabilities.
Included within these amounts were loans of £2,025 million at 31 December 2014 (2013: £1,887 million), measured as the loan
outstanding balance, attached to REALIC and held to back the liabilities for funds withheld under reinsurance arrangements. The funds
withheld liability of £2,201 million at 31 December 2014 (2013: £2,051 million) was also classifi ed within level 3, accounted for on a fair
value basis being equivalent to the carrying value of the underlying assets.
Prudential plc Annual Report 2014
189
Excluding the loans and funds withheld liability under REALIC’s reinsurance arrangements as described above, which amounted
to a net liability of £(176) million (2013: £(164) million), the level 3 fair valued fi nancial assets net of fi nancial liabilities were £3,936 million
(2013: £3,549 million). Of this amount, a net asset of £11 million (2013: net liability of £(304) million) were internally valued, representing
less than 0.1 per cent of the total fair valued fi nancial assets net of fi nancial liabilities (2013: 0.1 per cent). Internal valuations are inherently
more subjective than external valuations. Included within these internally valued net asset/liability were:
(a) Debt securities of £298 million (2013: £118 million), which were either valued on a discounted cash fl ow method with an internally
developed discount rate or on external prices adjusted to refl ect the specifi c known conditions relating to these securities (eg
distressed securities or securities which were being restructured).
(b) Private equity and venture investments of £1,002 million (2013: £878 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 £(1,269) million (2013: £(1,301) million) for the net asset value attributable to external unit holders in respect of the
consolidated investment funds, which are non-recourse to the Group. These liabilities are valued by reference to the underlying
assets.
(d) Derivative liabilities of £(23) million (2013: £nil) which are valued internally using standard market practices but are subject to
independent assessment against external counterparties’ valuations.
(e) Other sundry individual fi nancial investments of £3 million (2013: £1 million).
Of the internally valued net asset referred to above of £11 million (2013: net liability of £(304) million):
(a) A net liability of £(133) million (2013: net liability of £(380) million) was held by the Group’s participating funds and therefore
shareholders’ profi t and equity are not impacted by movements in the valuation of these fi nancial instruments.
(b) A net asset of £144 million (2013: £76 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 £14 million (2013: £8 million), which would reduce shareholders’ equity by this amount before tax. Of
this amount, a decrease of £13 million (2013: a decrease of £6 million) would pass through the income statement substantially as part
of short-term fl uctuations in investment returns outside of operating profi t and a £1 million decrease (2013: a decrease of £2 million)
would be included as part of other comprehensive income, being unrealised movements on assets classifi ed 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
qualifi ed 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 2014, the transfers between levels within the Group’s portfolio were primarily transfers from level 1 to 2 of £618 million and
transfers from level 2 to level 1 of £223 million. These transfers which relate to equity securities and debt securities arose to refl ect the
change in the observability of the inputs used in valuing these securities.
In addition, in 2014, the transfers into level 3 were £13 million and the transfers out of level 3 were £34 million. 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 fi nancial reporting governance processes. The procedures undertaken include approval of valuation
methodologies, verifi cation processes, and resolution of signifi cant or complex valuation issues. In undertaking these activities the Group
makes use of the extensive expertise of its asset management functions.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C3: Assets and liabilities – Classifi cation and Measurement continued
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 fi nancial position are analysed as follows, with
further information relating to the credit quality of the Group’s debt securities at 31 December 2014 provided in the notes below.
Insurance operations:
Asia note (a)
US note (b)
UK note (c)
Asset management operations note (d)
Total
2014 £m
2013 £m
23,629
32,980
86,349
2,293
18,554
30,292
82,014
2,045
145,251
132,905
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.
a Asia 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
Total debt securities
2014 £m
With-profi ts
business
Unit-linked
assets
Other
business
728
5,076
1,980
1,667
499
9,950
757
42
193
167
49
1,208
559
1,210
48
323
367
755
251
1,744
194
14
90
276
13
587
110
406
186
933
1,575
1,123
1,089
4,906
331
1,085
83
142
6
1,647
340
962
2013 £m
Total
724
4,733
2,896
2,717
1,433
Total
962
6,332
3,922
3,545
1,839
16,600
12,503
1,282
1,141
366
585
68
3,442
1,009
2,578
1,728
176
177
572
76
2,729
728
2,594
12,927
2,847
7,855
23,629
18,554
In addition to the debt securities shown above, the assets held for sale on the consolidated statement of fi nancial position at
31 December 2014 in respect of Japan life business included a debt securities balance of £351 million (2013: £387 million).
Of this amount, £321 million were rated as AA+ to AA- (2013: £356 million) and £30 million (2013: £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*
Other
* Rated as investment grade by local external ratings agencies.
2014 £m
2013 £m
174
654
134
962
387
491
81
959
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†
Prudential plc Annual Report 2014
191
2014 £m
2013 £m
3,972
20,745
3,745
28,462
1,567
2,343
608
32,980
3,330
18,875
3,395
25,600
1,760
2,339
593
30,292
* A 1990 SEC rule that facilitates the resale of privately placed securities under Rule 144A that are without SEC registration to qualifi ed institutional investors.
The rule was designed to develop a more liquid and effi cient institutional resale market for unregistered securities.
† Debt securities for US operations included in the statement of fi nancial position comprise:
Available-for-sale
Fair value through profi t or loss:
Securities held to back liabilities for funds withheld under reinsurance arrangement
2014 £m
2013 £m
32,897
83
32,980
30,205
87
30,292
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 classifi cation of the fair values applied by the Group into a three level hierarchy. At 31 December 2014,
0.1 per cent of Jackson’s debt securities were classifi ed as level 3 (31 December 2013: 0.1 per cent) comprising of fair values where there
are signifi cant 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
classifi ed 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 on available-for-sale securities
There was a movement in the statement of fi nancial position value for debt securities classifi ed as available-for-sale from a net unrealised
gain of £781 million to a net unrealised gain of £1,840 million as analysed in the table below. This increase refl ects the effects of
decreasing long-term interest rates.
Assets fair valued at below book value
Book value*
Unrealised (loss) gain
Fair value (as included in statement of fi nancial position)
Assets fair valued at or above book value
Book value*
Unrealised gain
Fair value (as included in statement of fi nancial position)
Total
Book value*
Net unrealised gain
Fair value (as included in the footnote above in the overview table and the
statement of fi nancial position)
* Book value represents cost/amortised cost of the debt securities.
† Translated at the average rate of US$1.6476: £1.00.
2014 £m
2013 £m
Changes in
unrealised
appreciation†
Foreign
exchange
translation
Refl ected as part of
movement in other
comprehensive income
683
(14)
273
117
956
103
5,899
(180)
5,719
25,158
2,020
27,178
31,057
1,840
32,897
10,825
(849)
9,976
18,599
1,630
20,229
29,424
781
30,205
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C: Balance sheet notes continued
C3: Assets and liabilities – Classifi cation and Measurement continued
Debt securities classifi ed 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%:
Residential mortgage-backed securities – sub-prime
Commercial mortgage-backed securities
Other asset-backed securities
Government bonds
Corporates
2014 £m
2013 £m
Fair
value
5,429
245
4
10
9
–
22
45
Unrealised
loss
(124)
(37)
(1)
(3)
(6)
–
(9)
(19)
Fair
value
7,624
1,780
4
16
9
521
22
572
Total
5,719
(180)
9,976
Unrealised
loss
(310)
(331)
(1)
(6)
(6)
(188)
(7)
(208)
(849)
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
2014 £m
2013 £m
(5)
(90)
(54)
(31)
(180)
(5)
(224)
(558)
(62)
(849)
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
(18)
(1)
(6)
(1)
(7)
(33)
(46)
(1)
(51)
(36)
(13)
(147)
(180)
Non-
investment
grade
2014 £m
Investment
grade
Non-
investment
grade
2013 £m
Investment
grade
(2)
(12)
(2)
(1)
(13)
(30)
(52)
(329)
(423)
–
(15)
(819)
Total
(54)
(341)
(425)
(1)
(28)
(849)
Total
(64)
(2)
(57)
(37)
(20)
Further, the following table shows the age analysis as at 31 December 2014, 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
2014 £m
2013 £m
Fair value
Unrealised
loss
Fair value
Unrealised
loss
17
3
25
45
(7)
(1)
(11)
(19)
93
418
61
572
(24)
(159)
(25)
(208)
Prudential plc Annual Report 2014
193
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†
2014 £m
2013 £m
164
6,067
8,640
10,308
1,016
26,195
84
29
27
72
8
220
2,786
85
58
2,929
300
3,336
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
Total debt securities (see overview table in note (i) above)
32,980
30,292
* The Securities Valuation Offi ce of the NAIC classifi es debt securities into six quality categories range from Class 1 (the highest) to Class 6 (the lowest).
Performing securities are designated as Classes 1 to 5 and securities in or near default are designated Class 6.
† The amounts within ‘Other’ which are not rated by S&P, Moody’s nor Fitch, nor are MBS securities using the revised regulatory ratings, have the following
NAIC classifi cations:
NAIC 1
NAIC 2
NAIC 3-6
2014 £m
2013 £m
1,322
1,890
124
3,336
1,165
1,836
54
3,055
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).
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C3: Assets and liabilities – Classifi cation and Measurement continued
c UK insurance operations
2014 £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-profi ts
fund
Unit-linked
assets
231
506
752
585
158
2,232
59
52
48
31
6
196
15
266
3,984
5,443
10,815
9,212
2,177
31,631
1,375
2,370
970
807
390
5,912
484
5,910
1,257
1,118
1,764
1,898
215
6,252
200
1,110
88
126
14
1,538
97
161
Other
annuity and
long-term
business
388
458
836
714
45
PRIL
3,516
3,724
7,324
4,332
272
19,168
2,441
377
3,048
1,412
363
26
5,226
232
3,464
52
549
168
49
–
818
20
286
Total debt securities
2,709
43,937
8,048
28,090
3,565
2014
Total
£m
9,376
11,249
21,491
16,741
2,867
61,724
2,063
7,129
2,686
1,376
436
13,690
848
10,087
86,349
2013
Total
£m
8,837
10,690
20,891
17,125
3,255
60,798
2,333
6,420
2,077
1,214
140
12,184
611
8,421
82,014
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 £10,087 million total debt securities
held at 31 December 2014 (2013: £8,421 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
2014 £m
2013 £m
4,917
3,755
1,415
10,087
3,691
3,456
1,274
8,421
The majority of unrated debt security investments were held in SAIF and the PAC with-profi ts fund and relate to convertible debt
and other investments which are not covered by ratings analysts nor have an internal rating attributed to them. The non-linked
shareholder-backed business of PRIL and other annuity and long-term business includes £3,750 million which are not externally rated.
The internal ratings for these securities consists of £1,082 million AA+ to AA-, £1,336 million A+ to A-, £1,183 million BBB+ to BBB-,
£60 million BB+ to BB- and £89 million that were rated B+ and below or unrated.
d Asset management operations
The debt securities are all held by M&G (including Prudential Capital).
M&G
AAA to A- by S&P or equivalent ratings
Other
Total M&G (including Prudential Capital)
2014 £m
2013 £m
2,056
237
2,293
1,690
355
2,045
Prudential plc Annual Report 2014
195
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 2014 is as follows:
Shareholder-backed operations:
Asia insurance operations note (i)
US insurance operations note (ii)
UK insurance operations (2014: 25% AAA, 42% AA) note (iii)
Other operations note (iv)
With-profi ts operations:
Asia insurance operations note (i)
UK insurance operations (2014: 57% AAA, 17% AA) note (iii)
Total
2014 £m
2013 £m
104
4,518
1,864
875
7,361
228
5,126
5,354
139
4,692
1,727
667
7,225
200
5,765
5,965
12,715
13,190
Notes
(i)
Asia insurance operations
The Asia insurance operations’ exposure to asset-backed securities is primarily held by the with-profi ts operations. Of the £228 million, 99 per cent
(2013: 94 per cent) are investment graded.
(ii) US insurance operations
US insurance operations’ exposure to asset-backed securities at 31 December 2014 comprises:
RMBS
Sub-prime (2014: 7% AAA, 11% AA, 8% A)
Alt-A (2014: 1% AA, 4% A)
Prime including agency (2014: 76% AA, 2% A)
CMBS (2014: 50% AAA, 23% AA, 22% A)
CDO funds (2014: 21% AAA, 1% AA, 23% A), including £nil exposure to sub-prime
Other ABS (2014: 27% AAA, 17% AA, 45% A), including £72 million exposure to sub-prime
Total
(iii) UK insurance operations
2014 £m
2013 £m
235
244
1,088
2,343
53
555
4,518
255
270
1,235
2,339
46
547
4,692
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-profi ts operations, £1,333 million (2013: £1,490 million) relates to exposure to the US markets with the remaining exposure being primarily to the UK market.
(iv) Other operations
Asset management operations’ exposure to asset-backed securities is held by Prudential Capital with no sub-prime exposure. Of the £875 million, 89 per cent
(2013: 85 per cent) are graded AAA.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C3: Assets and liabilities – Classifi cation and Measurement continued
f Group sovereign debt and bank debt exposure
The Group exposures held by the shareholder-backed business and with-profi ts funds in sovereign debts and bank debt securities
at 31 December 2014:
Exposure to sovereign debts
Italy
Spain
France
Germany*
Other Eurozone (principally Belgium)
Total Eurozone
United Kingdom
United States†
Other, predominantly Asia
Total
2014 £m
2013 £m
Shareholder-
backed
business
With-profi ts
funds
Shareholder-
backed
business
With-profi ts
funds
62
1
20
388
5
476
4,104
3,607
2,787
10,974
61
18
–
336
29
444
2,065
5,771
1,714
9,994
53
1
19
413
5
491
3,516
3,045
3,124
10,176
53
14
–
389
28
484
2,432
4,026
1,525
8,467
* Including bonds guaranteed by the federal government.
† 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.
Exposure to bank debt securities
2014 £m
Senior debt
Subordinated debt
Shareholder-backed business
Covered
Senior
Italy
Spain
France
Germany
Netherlands
Other Eurozone
Total Eurozone
United Kingdom
United States
Other, predominantly Asia
Total
With-profi ts funds
Italy
Spain
France
Germany
Netherlands
Other Eurozone
Total Eurozone
United Kingdom
United States
Other, predominantly Asia
Total
–
109
20
17
–
–
146
393
–
19
558
7
134
7
104
–
5
257
549
–
140
946
31
11
136
25
13
42
258
235
1,905
294
2,692
60
52
138
24
195
19
488
460
1,821
842
3,611
Total
senior
debt
31
120
156
42
13
42
404
628
1,905
313
3,250
67
186
145
128
195
24
745
1,009
1,821
982
4,557
Tier 1
Tier 2
Total
sub-
ordinated
debt
–
–
17
–
75
–
92
35
56
56
–
13
76
69
36
11
205
633
523
366
–
13
93
69
111
11
297
668
579
422
239
1,727
1,966
–
–
–
–
–
–
–
6
116
142
264
–
–
61
–
–
–
61
546
127
272
–
–
61
–
–
–
61
552
243
414
1,006
1,270
2014
Total
£m
31
133
249
111
124
53
701
1,296
2,484
735
5,216
67
186
206
128
195
24
806
1,561
2,064
1,396
5,827
2013
Total
£m
30
135
175
66
152
74
632
1,369
2,163
698
4,862
82
149
237
24
215
16
723
1,695
2,214
1,102
5,734
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.
Prudential plc Annual Report 2014
197
g Group oil and gas industries debt exposure
The Group exposures held by the shareholder-backed business in debt securities issued by the oil and gas industries
at 31 December 2014 are analysed as follows:
AAA
AA
A
BBB
BB or below
Total
2014 £m
Exploration
and
production
Integrated
oils
Refi ning
and
marketing
Oil and
gas services
Pipeline/
mid-stream
–
43
324
499
73
939
8
244
334
281
4
871
–
–
–
192
15
207
–
90
81
299
16
486
–
2
21
659
212
894
Total
8
379
760
1,930
320
3,397
The exposure is well diversifi ed by issuer, sub-sector and geography with 138 issuers across the fi ve sub-sectors. The average holding
is £25 million.
The exposure by business unit is as follows:
AAA
AA
A
BBB
BB or below
Total
2014 £m
US general
account
UK
(annuities fund)
8
199
567
1,610*
280*
2,664
–
140
153
161
31
485
Other
–
40
40
159
9
248
Total
8
379
760
1,930
320
3,397
* Total exposure to the more directly impacted sub-segments of Exploration and Production and Oil and Gas services is £779 million.
The tables above exclude 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 oil and gas debt holdings of the Group’s joint venture operations.
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 profi t or 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. See note (b).
The amounts included in the statement of fi nancial position are analysed as follows:
Insurance operations:
Asia note (a)
US note (b)
UK note (c)
Asset management operations:
M&G note (d)
Total
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
2014 £m
2013 £m
1,014
6,719
4,254
854
12,841
922
6,375
4,173
1,096
12,566
2014 £m
2013 £m
88
672
254
1,014
57
611
254
922
* 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.
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C3: Assets and liabilities – Classifi cation and Measurement continued
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
–
2,025
2,025
2014 £m
Other loans
3,847
847
4,694
Loans backing
liabilities for
funds withheld
–
1,887
1,887
Total
3,847
2,872
6,719
2013 £m
Other loans
3,671
817
4,488
Total
3,671
2,704
6,375
* All of the mortgage loans are commercial mortgage loans which are collateralised by properties. The property types are industrial, multi-family residential, suburban
offi ce, retail and hotel.
† The policy loans are fully secured by individual life insurance policies or annuity policies. Policy loans backing liabilities for funds withheld under reinsurance
arrangements are accounted for at fair value through profi t or loss. All other policy loans are accounted for at amortised cost, less any impair.
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 £7.2 million
(2013: £6.5 million). The portfolio has a current estimated average loan to value of 59 per cent (2013: 61 per cent).
At 31 December 2014, Jackson had mortgage loans with a carrying value of £13 million (2013: £47 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
2014 £m
2013 £m
1,145
10
1,510
2,665
1,585
4
1,589
4,254
1,183
12
1,629
2,824
1,345
4
1,349
4,173
* The mortgage loans are collateralised by properties. By carrying value, 74 per cent of the £1,585 million held for shareholder-backed business relates to lifetime
(equity release) mortgage business which has an average loan to property value of 29 per cent.
† Other loans held by the PAC with-profi ts fund are all commercial loans and comprise mainly syndicated loans.
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-
A+ to A-
BBB+ to BBB-
BB+ to BB-
B and other
Total M&G (including Prudential Capital) loans
2014 £m
2013 £m
101
–
161
244
49
299
854
108
28
–
516
174
270
1,096
Prudential plc Annual Report 2014
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C3.5 Financial instruments – additional information
a Market risk
i Liquidity analysis
Contractual maturities of fi nancial liabilities on an undiscounted cash fl ow basis
The following table sets out the contractual maturities for applicable classes of fi nancial liabilities, excluding derivative liabilities and
investment contracts that are separately presented. The fi nancial liabilities are included in the column relating to the contractual
maturities at the undiscounted cash fl ows (including contractual interest payments) due to be paid assuming conditions are consistent
with those of year end.
Total
carrying
value
1 year
or less
Aft er 1
year to
5 years
Aft er 5
years to
10 years
Aft er 10
years to
15 years
Aft er 15
years to
20 years
Over
20 years
No stated
maturity
Total
2014 £m
4,304
166
927
1,079
1,064
914
2,456
1,796
8,402
Financial liabilities
Core structural borrowings of
shareholder-fi nanced operations C6.1
Operational borrowings attributable to
shareholder-fi nanced operations C6.2
Borrowings attributable to with-profi ts
2,263
2,202
65
–
funds C6.2
1,093
97
717
205
Obligations under funding, securities
lending and sale and repurchase
agreements
Other liabilities
Net asset value attributable to unit
holders of consolidated unit trusts
and similar funds
Other creditors
2,347
4,105
2,347
1,678
–
133
7,357
4,262
7,357
3,941
–
24
–
13
–
44
–
25
–
–
–
86
–
11
–
–
–
78
–
63
–
2,267
162
1,280
–
–
–
2,281
2,347
4,105
–
365
–
–
7,357
4,538
25,731
17,788
1,866
1,341
1,175
1,003
2,884
4,239
30,296
Total
carrying
value
1 year
or less
Aft er 1
year to
5 years
Aft er 5
years to
10 years
Aft er 10
years to
15 years
Aft er 15
years to
20 years
Over
20 years
No stated
maturity
Total
2013 £m
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
–
48
–
–
–
79
–
12
–
–
–
74
–
70
–
2,165
189
1,054
–
–
–
2,108
2,074
3,736
–
386
–
–
5,278
3,651
22,078
14,001
1,777
1,408
950
1,282
2,998
4,018
26,434
Financial liabilities
Core structural borrowings of
shareholder-fi nanced operations C6.1
Operational borrowings attributable to
shareholder-fi nanced operations C6.2
Borrowings attributable to with-profi ts
funds C6.2
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
Maturity analysis of derivatives
The following table shows the gross and net derivative positions together with a maturity profi le of the net derivative position:
2014
2013
Carrying value of net derivatives £m
Maturity profi le of net derivative position £m
Derivative
assets
Derivative
liabilities
Net
derivative
position
3,412
2,329
(2,323)
1,089
(1,689)
640
1 year
or less
1,245
697
Aft er 1
year to
3 years
Aft er 3
years to
5 years
(14)
(12)
(9)
(9)
Aft er 5
years
10
18
Total
1,232
694
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C3: Assets and liabilities – Classifi cation and Measurement continued
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 fl ow hedges and in
general, contractual maturities are not considered essential for an understanding of the timing of the cash fl ows for these instruments.
The only exception is certain identifi ed interest rate swaps which are fully expected to be held until maturity solely for the purposes of
matching cash fl ows on separately held assets and liabilities. For these instruments the undiscounted cash fl ows (including contractual
interest amounts) due to be paid under the swap contract assuming conditions are consistent with those at year end are included in the
column relating to the contractual maturity of the derivative.
Maturity analysis of investment contracts
The table below shows the maturity profi le for investment contracts on undiscounted cash fl ow projections of expected benefi t
payments as part of the determination of the value of in-force business when preparing EEV basis results.
2014
2013
£bn
1 year
or less
6
5
Aft er 1
year to
5 years
Aft er 5
years to
10 years
Aft er 10
years to
15 years
Aft er 15
year to
20 years
Over
20 years
19
18
18
17
13
13
10
10
8
9
Total
undis-
counted
value
74
72
Total
carrying
value
59
56
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 mean these are
unlikely to be exercised in practice and the more useful information is to present information on expected payment.
The maturity profi le above excludes certain corporate unit-linked business with gross policyholder liabilities of £13 billion
(2013: £13 billion) which have no stated maturity but which are repayable on demand.
The vast majority of the Group’s fi nancial assets are held to back the Group’s policyholder liabilities. Although asset/liability matching
is an important component of managing policyholder liabilities (both those classifi ed as insurance and those classifi ed as investments),
this profi le is mainly relevant for managing market risk rather than liquidity risk. Within each business unit this asset/liability matching
is performed on a portfolio-by-portfolio basis.
In terms of liquidity risk a large proportion of the policyholder liabilities contain discretionary surrender values or surrender charges,
meaning that many of the Group’s liabilities are expected to be held for the long term. Much of the Group’s investment portfolios 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 fi nancial risks
The Group’s maximum exposure to credit risk of fi nancial instruments before any allowance for collateral or allocation of losses to
policyholders is represented by the carrying value of fi nancial instruments on the balance sheet that have exposures to credit risk
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 C3.5(b) below for derivative assets. The collateral in place in relation to derivatives is
described in note C3.5(c) below. Note C3.4 describes the security for these loans held by the Group, as disclosed at the start of this note.
Of the total loans and receivables held, £11 million (2013: £14 million) are past their due date but are not impaired. Of the total past
due but not impaired, £5 million are less than one year past their due date (2013: £9 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 £13 million (2013: £59 million).
In addition, during 2014 and 2013 the Group did not take possession of any other collateral held as security.
Further details of collateral and pledges are provided in note C3.5(c) below.
iii Foreign exchange risk
As at 31 December 2014, the Group held 22 per cent (2013: 20 per cent) and 9 per cent (2013: 7 per cent) of its fi nancial assets and
fi nancial liabilities respectively, in currencies, mainly US dollar and Euro, other than the functional currency of the relevant business unit.
Of these fi nancial assets, 56 per cent (2013: 58 per cent) are held by the PAC with-profi ts fund, allowing the fund to obtain exposure
to foreign equity markets.
Of these fi nancial liabilities, 47 per cent (2013: 28 per cent) are held by the PAC with-profi ts 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 C3.5(b) below).
The amount of exchange gain recognised in the income statement in 2014, except for those arising on fi nancial instruments measured
at fair value through profi t or loss, is £89 million (2013: £284 million loss). This constitutes £1 million loss (2013: £1 million gain) on
Medium Term Notes liabilities and £90 million of net gain (2013: £285 million net loss), mainly arising on investments of the PAC
with-profi ts 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 profi t or loss.
Prudential plc Annual Report 2014
201
b Derivatives and hedging
Derivatives
The Group enters into a variety of exchange traded and over-the-counter derivative fi nancial instruments, including futures, options,
forward currency contracts and swaps such as interest rate swaps, cross-currency swaps, swaptions and credit default swaps.
All over-the-counter derivative transactions, with the exception of some Asia transactions, are conducted under standardised ISDA
(International Swaps and Derivatives Association Inc) master agreements and the Group has collateral agreements between the
individual Group entities and relevant counterparties in place under each of these market master agreements.
The total fair value balances of derivative assets and liabilities as at 31 December 2014 were as follows:
Derivative assets
Derivative liabilities
Derivative assets
Derivative liabilities
2014 £m
Asia
insurance
operations
US
insurance
operations
UK
insurance
operations
Asset
management
Unallocated
to a segment
47
(143)
(96)
916
(251)
665
2,344
(1,381)
963
103
(233)
(130)
2
(315)
(313)
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)
Group
total
3,412
(2,323)
1,089
Group
total
2,329
(1,689)
640
The derivative assets are included in ‘other investments’ in the statement of fi nancial position and are used for effi cient portfolio
management to obtain cost effective and effi cient 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-profi ts funds use derivatives for effi cient portfolio management or reduction in investment risks. For UK annuity business
derivatives are used to assist with asset and liability cash fl ow matching;
— 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 indices. 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.
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 fi xed to fl oating rate swaps which hedge the fair value exposure to
interest rate movements of certain of the Group’s operational borrowings. All of these hedges were terminated by January 2013.
Movements in the fair value of the hedging instruments of a net gain of £0.3 million and the hedged items of a net loss of £0.3 million
were recorded in the 2013 income statement in respect of these fair value hedges.
Net investment hedges
At 31 December 2014, the Group has designated perpetual subordinated capital securities totalling US$2.8 billion (2013: US$3.55 billion)
as a net investment hedge to hedge the currency risks related to the net investment in Jackson. The carrying value of the subordinated
capital securities was £1,789 million as at 31 December 2014 (2013: £2,133 million). The foreign exchange loss of £96 million (2013: gain
of £46 million) on translation of the borrowings to pounds sterling at the statement of fi nancial position date is recognised in the
translation reserve in shareholders’ equity. This net investment hedge was 100 per cent effective.
The Group has no cash fl ow hedges in place.
c Derecognition, collateral and off setting
Securities lending and reverse repurchase agreements
The Group has entered into securities lending (including repurchase agreements) whereby blocks of securities are loaned to third
parties, primarily major brokerage fi rms. The amounts above the fair value of the loaned securities required to be 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 fi nancial position, rather they are retained within the appropriate investment classifi cation.
Collateral typically consists of cash, debt securities, equity securities and letters of credit.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C3: Assets and liabilities – Classifi cation and Measurement continued
At 31 December 2014, the Group had lent £4,578 million (2013: £3,791 million) of securities of which £3,129 million (2013: £2,910 million)
was lent by the PAC with-profi ts fund and held cash and securities collateral under such agreements of £4,887 million
(2013: £3,930 million) of which £3,400 million (2013: £3,012 million) was held by the PAC with-profi ts fund.
At 31 December 2014, 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 £12,857 million
(2013: £9,931 million).
In addition, at 31 December 2014, the Group had entered into repurchase transactions for which the fair value of the collateral
pledged was securities of £186 million (2013: cash pledged of £17 million and securities pledged of £524 million).
Collateral and pledges under derivative transactions
At 31 December 2014, the Group had pledged £1,411 million (2013: £780 million) for liabilities and held collateral of £2,388 million
(2013: £1,432 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.
Off setting 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 fi nancial instruments subject to master netting
arrangements:
Financial assets:
Derivative assets
Reverse repurchase agreements
Total fi nancial assets
Financial liabilities:
Derivative liabilities
Securities lending
Repurchase agreements
Total fi nancial liabilities
Financial assets:
Derivative assets
Reverse repurchase agreements
Total fi nancial assets
Financial liabilities:
Derivative liabilities
Securities lending
Repurchase agreements
Total fi nancial liabilities
Gross amount
presented in the
consolidated
statement of
fi nancial
position
note (i)
31 Dec 2014 £m
Related amounts not off set in the
consolidated statement of fi nancial position
Financial
instruments
note (ii)
Cash
collateral
Securities
collateral
note (iii)
Net amount
3,271
10,537
13,808
(2,036)
(1,317)
(186)
(3,539)
(1,030)
–
(1,030)
1,030
–
–
1,030
(1,131)
–
(1,131)
391
1,317
–
1,708
(824)
(10,537)
(11,361)
543
–
186
729
286
–
286
(72)
–
–
(72)
31 Dec 2013 £m
Gross amount
presented in the
consolidated
statement of
fi nancial
position
note (i)
Related amounts not off set in the
consolidated statement of fi nancial position
Financial
instruments
note (ii)
Cash
collateral
Securities
collateral
note (iii)
Net amount
2,136
9,931
12,067
(1,479)
(1,242)
(541)
(3,262)
(832)
–
(832)
832
–
–
832
(555)
–
(555)
222
1,242
17
1,481
(631)
(9,931)
(10,562)
333
–
524
857
118
–
118
(92)
–
–
(92)
Notes
(i)
(ii) Represents the amount that could be off set under master netting or similar arrangements where Group does not satisfy the full criteria to off set on the
The Group has not off set any of the amounts presented in the consolidated statement of fi nancial position.
consolidated statement of fi nancial position.
(iii) Excludes initial margin amounts for exchange-traded derivatives.
Prudential plc Annual Report 2014
203
In the tables above, the amounts of assets or liabilities presented in the consolidated statement of fi nancial position are offset fi rst by
fi nancial 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.
d Impairment of fi nancial assets
In accordance with the Group’s accounting policy set out in note A3.1j(iii), 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 2014, net impairment reversals of £37 million (2013: £17 million) were recognised for
available-for-sale securities and loans and receivables analysed as follows:
Available-for-sale debt securities held by Jackson
Loans and receivables*
Net credit for impairment net of reversals
* Relates to loans held by the UK with-profi ts fund and mortgage loans held by Jackson.
Impairment recognised on available-for-sale securities amounted to £(7) million (2013: £(8) million) arising from:
Residential mortgage-backed securities
Other
2014 £m
2013 £m
(7)
44
37
(8)
25
17
2014 £m
2013 £m
(2)
(5)
(7)
(3)
(5)
(8)
The impairment recorded on the residential mortgage-backed securities was primarily due to reduced cash fl ow expectations on such
securities that are collateralised by diversifi ed pools of primarily below investment grade securities. Of the impaired losses of £7 million
(2013: £8 million), the top fi ve individual corporate issuers made up 76 per cent (2013: 57 per cent), refl ecting a deteriorating business
outlook of the companies concerned. The impairment losses have been recorded in ‘investment return’ in the income statement.
Jackson’s portfolio of debt securities is managed proactively with credit analysts closely monitoring and reporting on the credit quality
of its holdings. Jackson continues to review its investments on a case-by-case basis to determine whether any decline in fair value
represents an impairment. In addition, investments in structured securities are subject to a rigorous review of their future estimated cash
fl ows, including expected and stress case scenarios, to identify potential shortfalls in contractual payments (both interest and principal).
Impairment charges are recorded on structured securities when the Company forecasts a contractual payment shortfall. Situations
where such a shortfall would not lead to a recognition of a loss are rare. However, some structured securities do not have a single
determined set of future cash fl ows and instead, there can be a reasonable range of estimates that could potentially emerge. With this
variability, there could be instances where the projected cash fl ow shortfall under management’s base case set of assumptions is so
minor that relatively small and justifi able changes to the base case assumptions would eliminate the need for an impairment loss to be
recognised. The impairment loss refl ects the difference between the fair value and book value.
In 2014, the Group realised gross losses on sales of available-for-sale securities of £35 million (2013: £22 million) with 68 per cent
(2013: 72 per cent) of these losses related to the disposal of fi xed 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 £35 million (2013: £ 22 million), £5 million
(2013: £5 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 A3.1j(iii). A key indicator of whether such impairment may arise in future, and the
potential amounts at risk, is the profi le of gross unrealised losses for fi xed maturity securities accounted for on an available-for-sale basis
by reference to the time periods by which the securities have been held continuously in an unrealised loss position and by reference
to the maturity date of the securities concerned.
For 2014, the amount of gross unrealised losses for fi xed maturity securities classifi ed as available-for-sale under IFRS in an unrealised
loss position was £180 million (2013: £849 million). Notes B1.2 and C3.3 provide further details on the impairment charges and
unrealised losses of Jackson’s available-for-sale securities.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C4: Policyholder liabilities and unallocated surplus of with-profi ts funds
The note provides information of policyholder liabilities and unallocated surplus of with-profi ts funds held on the Group’s statement
of fi nancial 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-profi ts funds
At 1 January 2013
Comprising:
Insurance operations £m
Asia
note C4.1(b)
US
note C4.1(c)
UK
note C4.1(d)
Total
34,664
92,261
144,438
271,363
Policyholder liabilities on the consolidated statement of fi nancial position
Unallocated surplus of with-profi ts funds on the consolidated statement
31,501
92,261
133,912
257,674
of fi nancial position
Group's share of policyholder liabilities of joint ventures*
Reclassifi cation of Japan life business as held for sale†
Net fl ows:
Premiums
Surrenders
Maturities/Deaths
Net fl ows
Shareholders' transfers post tax
Investment-related items and other movements
Foreign exchange translation differences
Acquisition of Thanachart Lifenote D1
As at 31 December 2013 / 1 January 2014
Comprising:
Policyholder liabilities on the consolidated statement of fi nancial position
Unallocated surplus of with-profi ts funds on the consolidated statement
of fi nancial position
Group's share of policyholder liabilities of joint ventures*
Reallocation of unallocated surplus for the domestication of the
Hong Kong branch‡
Net fl ows:
Premiums
Surrenders
Maturities/Deaths
Net fl ows
Shareholders' transfers post tax
Investment-related items and other movements
Foreign exchange translation differences
At 31 December 2014
Comprising:
Policyholder liabilities on the consolidated statement of fi nancial position§
Unallocated surplus of with-profi ts funds on the consolidated statement
of fi nancial position
Group's share of policyholder liabilities of joint ventures*
Average policyholder liability balances¶
2014
2013
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
1,690
7,058
(2,425)
(1,259)
3,374
(40)
3,480
1,372
–
–
–
15,492
(5,922)
(1,307)
8,263
–
3,712
7,360
11,984
–
(1,690)
7,902
(5,656)
(6,756)
(4,510)
(200)
14,310
(90)
12,061
3,159
–
30,452
(14,003)
(9,322)
7,127
(240)
21,502
8,642
45,022
126,746
154,436
326,204
38,705
126,746
144,088
309,539
2,102
4,215
38,993
34,423
–
–
10,348
–
12,450
4,215
117,079
139,362
295,434
99,836
134,272
268,531
Prudential plc Annual Report 2014
205
* The Group’s investment in joint ventures are accounted for on an equity method basis in the Group’s balance sheet. The Group’s share of the policyholder liabilities
as shown above relate to the joint venture life businesses in China, India and of the Takaful business in Malaysia.
† Liabilities of £1,026 million in respect of the Japan life operation at 1 January 2013 were removed from policyholder liabilities following its reclassifi cation as held
for sale at 31 December 2013. No further amounts are shown within the 2014 or 2013 analysis above in respect of Japan life business.
‡ Up until 31 December 2013 for the purposes of the presentation of unallocated surplus of with-profi ts within the statement of fi nancial position, the Hong Kong branch
balance was reported within the unallocated surplus of the PAC WPSF of the UK insurance operations.
On 1 January 2014, following consultation with the policyholders of PAC and regulators and court approval, the Hong Kong branch of PAC was transferred to
separate subsidiaries established in Hong Kong. From this date, the unallocated surplus of the Hong Kong with-profi ts business is reported within the Asia insurance
operations segment.
§ The policyholder liabilities of the Asia insurance operations of £38,705 million, shown in the table above, is aft er deducting the intra-group reinsurance liabilities ceded
by the UK insurance operations of £1,363 million to the Hong Kong with-profi ts business. Including this amount total Asia policyholder liabilities are £40,068 million.
¶ Averages have been based on opening and closing balances and adjusted for acquisitions, disposals and corporate transactions in the year and exclude unallocated
surplus of with-profi ts funds.
The items above represent the amount attributable to changes in policyholder liabilities and unallocated surplus of with-profi ts funds
as a result of each of the components listed. The policyholder liabilities shown include investment contracts without discretionary
participation features (as defi ned in IFRS 4) and their full movement in the year. The items above are shown gross of external 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
Reclassifi cation of Japan life business as held for salenote (a)
Net fl ows:
Premiums
Surrenders
Maturities/Deaths
Net fl owsnote (b)
Investment-related items and other movements
Acquisition of subsidiaries
Foreign exchange translation differences
At 31 December
Comprising:
Asia
21,213
(1,026)
4,728
(2,016)
(363)
2,349
622
487
(1,714)
2013 £m
US
92,261
–
15,951
(5,087)
(1,229)
9,635
8,219
–
(2,704)
UK
Total
49,505
–
162,979
(1,026)
3,628
(2,320)
(2,346)
(1,038)
2,312
–
–
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 fi nancial position
Group's share of policyholder liabilities relating to joint ventures
18,772
3,159
107,411
–
50,779
–
176,962
3,159
Shareholder-backed business
At 1 January
Net fl ows:
Premiums
Surrenders
Maturities/Deaths
Net fl owsnote (b)
Investment-related items and other movements
Foreign exchange translation differences
At 31 December note (c)
Comprising:
2014 £m
Asia
US
UK
Total
21,931
107,411
50,779
180,121
4,799
(2,218)
(644)
1,937
1,859
683
15,492
(5,922)
(1,307)
8,263
3,712
7,360
4,951
(3,149)
(2,412)
(610)
4,840
–
25,242
(11,289)
(4,363)
9,590
10,411
8,043
26,410
126,746
55,009
208,165
Policyholder liabilities on the consolidated statement of fi nancial position
Group's share of policyholder liabilities relating to joint ventures
22,195
4,215
126,746
–
55,009
–
203,950
4,215
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Notes
(a)
(b)
(c)
The £1,026 million liabilities of the Japan life operation at 1 January 2013 were removed from policyholder liabilities following its reclassifi cation as held for sale
at 31 December 2013. No further amounts are shown within 2014 or 2013 analysis above in respect of Japan life business.
Including net fl ows of the Group’s insurance joint ventures.
Policyholder liabilities relating to shareholder-backed business grew by £28.1 billion from £180.1 billion at 31 December 2013 to £208.2 billion at 31 December 2014
demonstrating the ongoing growth of our business. The increase refl ects positive net fl ows (premiums net of upfront charges less surrenders, withdrawals,
maturities and deaths) of £9.6 billion in 2014 (2013: £10.9 billion), driven by strong infl ows of £8.3 billion in the US and £1.9 billion in Asia.
206
Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C4: Policyholder liabilities and unallocated surplus of with-profi ts funds continued
iii Movement in insurance contract liabilities and unallocated surplus of with-profi ts 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-profi ts funds is provided below:
At 1 January 2013
Reclassifi cation of Japan life business as held for sale
Income and expense included in the income statement and other comprehensive income
Acquisition of Thanachart Life
Foreign exchange translation differences
At 31 December 2013/1 January 2014
Income and expense included in the income statement and other comprehensive income
Foreign exchange translation differences
At 31 December 2014
iv Reinsurers’ share of insurance contract liabilities
Insurance contract liabilities
Gross
£m
205,484
(1,026)
18,133
487
(4,893)
218,185
23,532
8,321
250,038
Reinsurers’
share
£m
6,076
–
56
–
(114)
6,018
(41)
338
6,315
Unallocated
surplus of
with-profi ts
funds
£m
10,589
–
1,507
–
(35)
12,061
54
335
12,450
Insurance contract liabilities
Claims outstanding
Asia
451
37
488
2014 £m
US
5,314
665
5,979
UK
550
150
700
Total
6,315
852
7,167
2013 £m
Total
6,018
820
6,838
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 fi nancial condition of its reinsurers and monitors concentration of credit risk from similar geographic regions, activities or
economic characteristics of the reinsurers to minimise its exposure from reinsurer insolvencies. Of the reinsurers’ share of insurance
contract liabilities balance of £7,167 million at 31 December 2014 (2013: £6,838 million), 93 per cent (2013: 96 per cent) were ceded by
the Group’s UK and US operations, of which 95 per cent (2013: 93 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. Apart from the reinsurance of REALIC business, 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
£35 million and £265 million respectively during 2014 (2013: £37 million and £278 million respectively). There were no deferred gains
or losses on reinsurance contracts in either 2014 or 2013.
The Group’s Asia and UK businesses do not cede signifi cant amounts of business outside the Group. In each of 2014 and 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 benefi t of £30 million (2013: £27 million) to IFRS profi t before tax. The gains and losses recognised in profi t and loss for the
other reinsurance contracts written in the year were immaterial.
Prudential plc Annual Report 2014
207
C4.1(b) Asia insurance operations
i Analysis of movements in policyholder liabilities and unallocated surplus of with-profi ts funds
A reconciliation of the total policyholder liabilities and unallocated surplus of with-profi ts funds of Asia insurance operations from the
beginning of the year to the end of the year is as follows:
At 1 January 2013
Comprising:
With-profi ts
business
£m
Unit-linked
liabilities
£m
13,451
14,028
Other
business
£m
7,185
Total
£m
34,664
Policyholder liabilities on the consolidated statement of fi nancial position
Unallocated surplus of with-profi ts funds on the consolidated statement
13,388
11,969
6,144
31,501
of fi nancial position
Group's share of policyholder liabilities of joint ventures*
Reclassifi cation of Japan life business as held for sale†
Premiums
New business
In-force
Surrendersnote (e)
Maturities/Deaths
Net fl owsnote (d)
Shareholders' transfers post tax
Investment-related items and other movementsnote (f)
Acquisition of Thanachart Lifenote (g)
Foreign exchange translation differencesnote (a)
At 31 December 2013/1 January 2014note (c)
Comprising:
Policyholder liabilities on the consolidated statement of fi nancial position
Unallocated surplus of with-profi ts funds on the consolidated statement
of fi nancial position
Group's share of policyholder liabilities relating to joint ventures*
Reallocation of unallocated surplus for the domestication of the Hong Kong
branchnote (b)
Premiums
New business
In-force
Surrendersnote (e)
Maturities/Deaths
Net fl owsnote (d)
Shareholders' transfers post tax
Investment-related items and other movementsnote (f)
Foreign exchange translation differencesnote (a)
At 31 December 2014note (c)
Comprising:
Policyholder liabilities on the consolidated statement of fi nancial position‡
Unallocated surplus of with-profi ts funds on the consolidated statement
of fi nancial position
Group's share of policyholder liabilities relating to joint ventures*
Average policyholder liability balances§
2014
2013
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)
–
1,041
(660)
902
1,006
1,908
(217)
(317)
1,374
–
253
487
(473)
63
3,100
(1,026)
2,663
3,892
6,555
(2,730)
(997)
2,828
(38)
462
487
(2,231)
13,215
13,765
8,166
35,146
13,138
11,918
6,854
31,910
77
–
–
1,847
–
1,312
77
3,159
1,690
425
1,834
2,259
(207)
(615)
1,437
(40)
1,621
689
–
–
1,690
1,337
1,375
2,712
(1,939)
(40)
733
–
1,336
375
997
1,090
2,087
(279)
(604)
1,204
–
523
308
2,759
4,299
7,058
(2,425)
(1,259)
3,374
(40)
3,480
1,372
18,612
16,209
10,201
45,022
16,510
13,874
8,321
38,705
2,102
–
14,823
13,263
–
2,335
14,987
13,714
–
1,880
9,183
7,446
2,102
4,215
38,993
34,423
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* The Group’s investment in joint ventures are accounted for on an equity method basis and the Group’s share of the policyholder liabilities as shown above relate
to the joint venture life businesses in China, India and of the Takaful business in Malaysia.
† The £1,026 million liabilities of the Japan life operation at 1 January 2013 were removed from policyholder liabilities following its reclassifi cation as held for sale
at 31 December 2013. No further amounts are shown within the 2014 or 2013 analysis above in respect of Japan life business.
‡ The policyholder liabilities of the with-profi ts business of £16,510 million, shown in the table above, is aft er deducting the intra-group reinsurance liabilities ceded
by the UK insurance operations of £1,363 million to the Hong Kong with-profi ts business. Including this amount the Asia with-profi ts policyholder liabilities are
£17,873 million.
§ Averages have been based on opening and closing balances and adjusted for acquisitions and disposals in the year and exclude unallocated surplus of with-profi ts funds.
208
Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C4: Policyholder liabilities and unallocated surplus of with-profi ts funds continued
Notes
(a) Movements in the year have been translated at the average exchange rates for the year ended 31 December 2014. The closing balance has been translated at the
closing spot rates as at 31 December 2014. Diff erences upon retranslation are included in foreign exchange translation diff erences.
(b) Up until 31 December 2013 for the purposes of the presentation of unallocated surplus of with-profi ts within the statement of fi nancial position, the Hong Kong
branch balance was reported within the unallocated surplus of the PAC WPSF of the UK insurance operations.
On 1 January 2014, following consultation with the policyholders of PAC and regulators and court approval, the Hong Kong branch of PAC was transferred
(c)
to separate subsidiaries established in Hong Kong. From this date the unallocated surplus of the Hong Kong with-profi ts business is reported within the Asia
insurance operations segment.
The policyholder liabilities of the Asia insurance operations of £38,705 million as shown in the table above is aft er deducting the intra-group reinsurance
liabilities ceded by the UK insurance operations of £1,363 million to the Hong Kong with-profi ts business. Including this amount total Asia policyholder liabilities
is £40,068 million.
(d) Net fl ows have increased by £546 million to £3,374 million in 2014 compared with £2,828 million in 2013 refl ecting increased fl ows from new business and
growth in the in-force books.
The rate of surrenders for shareholder-backed business (expressed as a percentage of opening liabilities) was 10 per cent in 2014, in line with the 10 per cent
recorded in 2013 (based on opening liabilities aft er the removal of Japan life). Maturities/deaths have increased from £997 million in 2013 to £1,259 million
in 2014, primarily as a result of an increased number of endowment products within Malaysia and Singapore reaching their maturity point.
Investment-related items and other movements for 2014 principally represents unrealised gains on bonds, following the fall in bond yields and positive
investment gains from the Asia equity market.
The acquisition of Thanachart Life refl ects the liabilities acquired at the date of acquisition.
(e)
(f)
(g)
ii Duration of liabilities
The table below shows the carrying value of policyholder liabilities and the maturity profi le of the cash fl ows on a discounted basis for
2014 and 2013, 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
2014 £m
2013 £m
38,705
31,910
%
23
20
17
12
9
19
%
23
20
16
12
9
20
iii Summary policyholder liabilities (net of reinsurance) and unallocated surplus
At 31 December 2014, the policyholder liabilities and unallocated surplus for Asia operations of £40.8 billion (2013: £32.0 billion), net of
reinsurance of £488 million (2013: £251 million), excluding joint ventures, comprised the following:
Hong Kong*
Indonesia
Korea
Malaysia
Singapore
Taiwan
Other countries
Total Asia operations
2014 £m
2013 £m
13,748
2,552
2,702
3,713
12,074
2,569
2,961
40,319
8,655
1,824
2,450
3,434
10,886
2,236
2,251
31,736
* The signifi cant increase for Hong Kong compared to the prior year is primarily due to the eff ect of transferred unallocated surplus from the PAC WPSF
at 1 January 2014 on the domestication of the Hong Kong branch business as discussed in note D2.
Prudential plc Annual Report 2014
209
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 2013
Premiums
Surrenders
Maturities/Deaths
Net fl owsnote (b)
Transfers from general to separate account
Investment-related items and other movementsnote (c)
Foreign exchange translation differencesnote (a)
At 31 December 2013/1 January 2014
Premiums
Surrenders
Maturities/Deaths
Net fl owsnote (b)
Transfers from general to separate account
Investment-related items and other movementsnote (c)
Foreign exchange translation differencesnote (a)
At 31 December 2014
Average policyholder liability balances*
2014
2013
* Averages have been based on opening and closing balances.
Variable
annuity
separate
account
liabilities
£m
49,298
11,377
(2,906)
(485)
7,986
1,603
8,725
(1,931)
65,681
12,220
(3,699)
(547)
7,974
1,395
1,963
4,728
Fixed annuity,
GIC and other
business
£m
42,963
4,574
(2,181)
(744)
1,649
(1,603)
(506)
(773)
Total
£m
92,261
15,951
(5,087)
(1,229)
9,635
–
8,219
(2,704)
41,730
107,411
3,272
(2,223)
(760)
289
(1,395)
1,749
2,632
15,492
(5,922)
(1,307)
8,263
–
3,712
7,360
81,741
45,005
126,746
73,711
57,489
43,368
42,347
117,079
99,836
Notes
(a) Movements in the year have been translated at an average rate of US$1.65/£1.00 (2013: US$1.56/£1.00). The closing balances have been translated at closing rate
of US$1.56/£1.00 (2013: US$1.66/£1.00). Diff erences upon retranslation are included in foreign exchange translation diff erences.
(b) Net fl ows for the year were £8,263 million compared with £9,635 million in 2013 on an actual exchange rate basis and £9,149 million on a constant exchange rate
basis, refl ecting in part lower premiums into the fi xed index annuity business following product changes implemented in late 2013 to ensure appropriate
returns on shareholder capital.
Positive investment-related items and other movements in variable annuity separate account liabilities of £1,963 million for 2014 primarily refl ects the increase
in the US equity market during the year. Fixed annuity, GIC and other business investment and other movements of £1,749 million primarily refl ect the increase
in interest credited to the policyholder accounts in the year and an increase in other guarantee reserves.
(c)
ii Duration of liabilities
The table below shows the carrying value of policyholder liabilities and maturity profi le of the cash fl ows on a discounted basis for 2014
and 2013:
2014 £m
2013 £m
Fixed
annuity and
other business
(including
GICs and
similar
contracts)
45,005
46
27
12
7
4
4
Variable
annuity
81,741
2014 %
48
29
13
6
3
1
Fixed
annuity and
other business
(including
GICs and
similar
contracts)
Total
126,746
41,730
Variable
annuity
65,681
2013 %
Total
107,411
47
29
13
6
3
2
49
27
11
6
4
3
48
31
13
5
2
1
48
30
12
5
3
2
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
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210
Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C4: Policyholder liabilities and unallocated surplus of with-profi ts funds continued
C4.1(d) UK insurance operations
i Analysis of movements in policyholder liabilities and unallocated surplus of with-profi ts funds
A reconciliation of the total policyholder liabilities and unallocated surplus of with-profi ts funds of UK insurance operations from the
beginning of the year to the end of the year is as follows:
At 1 January 2013
Comprising:
Policyholder liabilities
Unallocated surplus of with-profi ts funds
Premiums
Surrenders
Maturities/Deaths
Net fl ows note (b)
Shareholders' transfers post tax
Switches
Investment-related items and other movements
Foreign exchange translation differences
At 31 December 2013/1 January 2014
Comprising:
Policyholder liabilities
Unallocated surplus of with-profi ts funds
Reallocation of unallocated surplus for the domestication of the
Hong Kong branch note (a)
Premiums
Surrenders
Maturities/Deaths
Net fl ows note (b)
Shareholders' transfers post tax
Switches
Investment-related items and other movements note (c)
Foreign exchange translation differences
At 31 December 2014
Comprising:
Policyholder liabilities
Unallocated surplus of with-profi ts funds
Average policyholder liability balances*
2014
2013
Shareholder-backed funds
and subsidiaries
SAIF and PAC
with-profi ts
sub-fund
£m
Unit-linked
liabilities
£m
Annuity
and other
long-term
business
£m
Total
£m
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
23,652
–
27,127
–
134,632
11,984
(1,690)
2,951
(2,507)
(4,344)
(3,900)
(200)
(167)
9,637
(90)
–
1,405
(2,934)
(587)
(2,116)
–
167
1,597
–
–
3,546
(215)
(1,825)
1,506
–
–
3,076
–
(1,690)
7,902
(5,656)
(6,756)
(4,510)
(200)
–
14,310
(90)
99,427
23,300
31,709
154,436
89,079
10,348
86,467
84,130
23,300
–
23,476
22,924
31,709
–
144,088
10,348
29,419
27,218
139,362
134,272
* Averages have been based on opening and closing balances and exclude unallocated surplus of with-profi ts funds.
Notes
(a) Up until 31 December 2013, for the purposes of the presentation of unallocated surplus of with-profi ts within the statement of fi nancial position, the Hong Kong
branch balance was reported within the unallocated surplus of the PAC WPSF of the UK insurance operations.
On 1 January 2014, following consultation with the policyholders of PAC and regulators and court approval, the Hong Kong branch of PAC was transferred
to separate subsidiaries established in Hong Kong. From this date the unallocated surplus of the Hong Kong with-profi ts business is reported within the Asia
insurance operations segment.
(b) Net outfl ows improved from £5,325 million in 2013 to £4,510 million in 2014, due primarily to higher premium fl ows (up £2,068 million to £3,546 million) into our
annuity and other long-term business following an increase in the number of bulk annuity transaction in the year. The levels of infl ows/outfl ows for unit-linked
business is driven by corporate pension schemes with transfers in or out from only a small number of schemes infl uencing the level of fl ows in the year.
Investment-related items and other movements of £14,310 million refl ect both growth in equity markets and fall in long-term bond yields in 2014.
(c)
Prudential plc Annual Report 2014
211
ii Duration of liabilities
With the exception of most unitised with-profi ts bonds and other whole of life contracts the majority of the contracts of the UK insurance
operations have a contract term. In effect, the maturity term of the other contracts refl ects the earlier of death, maturity, or lapsation.
In addition, as described in note A3.1, with-profi ts 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 and the maturity profi le of the cash fl ows for insurance
contracts, as defi ned by IFRS:
With-profi ts business
2014 £m
Annuity business
(Insurance contracts)
Other
Insurance
contracts
Investment
contracts
Total
Non-profi t
annuities
within
WPSF
(including
PAL)
PRIL
Total
Insurance
contracts
Investment
contracts
Total
TOTAL
Policyholder liabilities
38,287
39,084
77,371
11,708
22,186
33,894
15,474
17,349 32,823 144,088
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
40
24
14
9
6
7
39
26
17
11
5
2
39
25
16
10
5
5
31
25
18
11
7
8
2014 %
25
22
18
14
9
12
27
23
18
13
9
10
37
25
16
10
5
7
36
22
16
11
8
7
36
24
16
11
6
7
36
24
17
11
6
6
With-profi ts business
2013 £m
Annuity business
(Insurance contracts)
Other
Insurance
contracts
Investment
contracts
Total
Non-profi t
annuities
within
WPSF
(including
PAL)
PRIL
Total
Insurance
contracts
Investment
contracts
Total
TOTAL
Policyholder 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
— The cash fl ow projections of expected benefi t payments used in the maturity profi le table above are from value of in-force business
and exclude the value of future new business, including future vesting of internal pension contracts;
— Benefi t payments do not refl ect the pattern of bonuses and shareholder transfers in respect of the with-profi ts business;
— Investment contracts under ‘Other’ comprise certain unit-linked and similar contracts accounted for under IAS 39 and IAS 18;
— For business with no maturity term included within the contracts, for example with-profi ts investment bonds such as Prudence
Bonds, an assumption is made as to likely duration based on prior experience; and
— The maturity tables shown above have been prepared on a discounted basis.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C4: Policyholder liabilities and unallocated surplus of with-profi ts 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-profi ts and non-participating term, whole life,
endowment and unit-linked policies. The Asia operations also offer health, disability, critical illness and accident coverage to supplement
its core life products.
The terms and conditions of the contracts written by the Asia operations and, in particular, the products’ options and guarantees, vary
from territory to territory depending upon local market circumstances.
In general terms, the Asia participating products provide savings and protection where the basic sum assured can be enhanced by
a profi t share (or bonus) from the underlying fund as determined at the discretion of the insurers. The Asia operations’ non-participating
term, whole life and endowment products offer savings and/or protection where the benefi ts are guaranteed, or determined by a set of
defi ned market-related parameters. Unit-linked products combine savings with protection, the cash value of the policy depends on the
value of the underlying unitised funds. Health and Protection policies provide mortality or morbidity benefi ts and include health,
disability, critical illness and accident coverage. Health and Protection products are commonly offered as supplements to main life
policies but can be sold separately.
Product guarantees in Asia can be broadly classifi ed 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 Hong Kong, Singapore and Malaysia. Participating products
have both guaranteed and non-guaranteed elements.
Non-participating long-term products are the only ones where the Group is contractually obliged to provide guarantees on all
benefi ts. Unit-linked products have the lowest level of guarantee.
The risks on death coverage through premium rate guarantees are low due to the diversifi ed nature of the business as well as rigorous
product pricing.
Cash value and interest rate guarantees are of three types:
Types
Maturity values
Surrender values
Interest rate guarantees
Features
Maturity values are guaranteed for non-participating products and on the guaranteed portion of
participating products. Declared regular bonuses are also guaranteed once vested. Future bonus rates
and cash dividends are not guaranteed on participating products.
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.
It is common in Asia for regulations or market-driven demand and competition to provide some form of
capital value protection and minimum crediting interest rate guarantees. This would be refl ected within
the guaranteed maturity and surrender values.
The guarantees are borne by shareholders for non-participating and investment-linked (non-investment guarantees only) products.
Participating product guarantees are predominantly supported by the segregated life funds and their estates.
Whole of life contracts with fl oor levels of policyholder benefi ts that accrue at rates set at inception and do not vary subsequently with
market conditions are written in the Korea life operations though this is not to a signifi cant extent as Korea has a much higher proportion
of linked and health business. The Korea business has non-linked liabilities and linked liabilities at 31 December 2014 of £596 million and
£2,109 million respectively (2013: £547 million and £1,905 million respectively).
Determining contract liabilities
For the with-profi ts business, the total value of the with-profi ts funds is driven by the underlying asset valuation with movements
refl ected principally in the accounting value of policyholder liabilities and unallocated surplus. Similarly, for the unit-linked business, the
attaching liabilities refl ect 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 benefi t 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
modifi ed 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 modifi ed 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 fl ows 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 uses an estimation basis aligned substantially to that used by the countries applying the gross premium
valuation method.
Prudential plc Annual Report 2014
213
For India, Japan and Taiwan, US GAAP is applied for measuring insurance assets and liabilities. For these countries, the future
policyholder benefi t provisions for non-linked business are determined using the net level premium method, with an allowance for
surrenders, maintenance and claims expenses. Rates of interest used in establishing the policyholder benefi t provisions vary by
operation depending on the circumstances attaching to each block of business.
The other Asia operations principally adopt a net premium valuation method to determine the future policyholder benefi t 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 and offers the
products discussed below:
i Fixed annuities
Fixed interest rate annuities
At 31 December 2014, fi xed interest rate annuities accounted for 9 per cent (2013: 10 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 fl exible payout options.
The policyholder of a fi xed 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 benefi t payments at a future date as specifi ed in the policy based on the value of the policyholder’s account at that date.
The policy provides that at Jackson’s discretion it may reset the interest rate, subject to a guaranteed minimum. At 31 December 2014,
Jackson had fi xed interest rate annuities totalling £11.7 billion (2013: £11.2 billion) in account value with minimum guaranteed rates
ranging from 1.0 per cent to 5.5 per cent and a 3.03 per cent average guaranteed rate (2013: 1.0 per cent to 5.5 per cent and
a 3.05 per cent average guaranteed rate).
Approximately 57 per cent (2013: 50 per cent) of the fi xed interest rate annuities Jackson wrote in 2014 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 fi xed annuities, Jackson still bears a portion of the surrender risk on policies without this feature, and the investment risk on all
fi xed interest rate annuities.
Fixed index annuities
Fixed index annuities accounted for 6 per cent (2013: 7 per cent) of Jackson’s policy and contract liabilities at 31 December 2014.
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), and provide a guaranteed minimum return. These guaranteed minimum
rates are generally set at 1.0 to 3.0 per cent. At 31 December 2014, Jackson had fi xed index annuities allocated to indexed funds totalling
£6.3 billion (2013: £6.1 billion) in account value with minimum guaranteed rates on index accounts ranging from 1.0 per cent to
3.0 per cent and a 1.83 per cent average guaranteed rate (2013: 1.0 per cent to 3.0 per cent and a 1.85 per cent average guarantee rate).
At 31 December 2014, Jackson also offers fi xed interest accounts on some fi xed index annuity products. At 31 December 2014, fi xed
interest accounts of fi xed index annuities totalled £1.8 billion (2013: £1.5 billion) in account value with minimum guaranteed rates ranging
from 1.0 per cent to 3.0 per cent and a 2.53 per cent average guaranteed rate (2013: 1.0 per cent to 3.0 per cent and a 2.56 per cent
average guaranteed rate).
Jackson hedges the equity return risk on fi xed index products using futures and options linked to the relevant index as well as
through offsetting equity exposure in the variable annuity 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 the surrender risk on these products.
Immediate annuities
At 31 December 2014, immediate annuities accounted for 1 per cent (2013: 1 per cent) of Jackson’s policy and contract liabilities.
Immediate annuities guarantee a series of payments beginning within a year of purchase and continuing over either a fi xed period
of years and/or the life of the policyholder. If the term is for the life of the policyholder, then Jackson’s primary risks are mortality and
reinvestment. 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 2014, variable annuities accounted for 69 per cent (2013: 65 per cent) of Jackson’s policy and contract liabilities.
Variable annuities are deferred annuities that have the same tax advantages and payout options as fi xed interest rate and fi xed 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 fi xed interest rate or fi xed 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 fi xed account or a selection of variable accounts. Investment risk on the variable
account is borne by the policyholder, while investment risk on the fi xed account is borne by Jackson through guaranteed minimum fi xed
rates of return. At 31 December 2014, 5 per cent (2013: 6 per cent) of variable annuity funds were in fi xed accounts. Jackson had variable
annuity funds in fi xed accounts totalling £4.4 billion (2013: £4.2 billion ) with minimum guaranteed rates ranging from 1.0 per cent to
3.0 per cent and a 1.81 per cent average guaranteed rate (2013: 1.0 per cent to 3.0 per cent and a 1.85 per cent average guaranteed rate).
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C4: Policyholder liabilities and unallocated surplus of with-profi ts funds continued
Jackson issues variable annuity contracts where it contractually guarantees to the contractholder either a) a return of no less than total
deposits made to the contract adjusted for any partial withdrawals, b) total deposits made to the contract adjusted for any partial
withdrawals plus a minimum return, or c) the highest contract value on a specifi ed anniversary date adjusted for any withdrawals
following the contract anniversary. These guarantees include benefi ts that are payable in the event of death (guaranteed minimum death
benefi t (GMDB)), at annuitisation (guaranteed minimum income benefi t (GMIB)), at specifi ed dates during the accumulation period
(guaranteed minimum withdrawal benefi t (GMWB)) or at the end of a specifi ed period (guaranteed minimum accumulation benefi t
(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 benefi ts and provides tax
effi cient access to alternative investments. At 31 December 2014, Jackson had in force Elite Access variable annuity contracts with
liability balance of £6.8 billion (2013: £3.4 billion).
iii Life insurance
Life insurance products accounted for 12 per cent (2013: 14 per cent) of Jackson’s policy and contract liabilities at 31 December 2014.
Jackson discontinued new sales of life insurance products effective 1 August 2012. Life products include term life and interest-sensitive
life (universal life and variable universal life). Term life provides protection for a defi ned period and a benefi t that is payable to a
designated benefi ciary upon death of the insured. Universal life provides permanent individual life insurance for the life of the insured
and includes a savings element. Variable universal life is a type of life insurance policy that combines death benefi t protection with the
ability for the policyholder account to be invested in separate account funds. For certain fi xed universal life plans, additional provisions
are held to refl ect the existence of guarantees offered in the past that are no longer supported by earnings on the existing asset portfolio,
or for situations where future mortality charges are not expected to be suffi cient to provide for future mortality costs.
Excluding the business that is subject to the retrocession treaties at 31 December 2014, Jackson had interest sensitive life business in
force with total account value of £5.9 billion (2013: £5.7 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 (2013: 2.5 per cent to 6.0 per cent with a 4.65 per cent average guaranteed rate).
iv Institutional products
Jackson’s institutional products consist of traditional 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 2014, institutional products accounted for 3 per cent of policy and contract liabilities
(2013: 3 per cent). Under a traditional GIC, the policyholder makes a lump sum deposit. The interest rate paid is fi xed and established
when the contract is issued. If deposited funds are withdrawn earlier than the specifi ed term of the contract, an adjustment is made that
approximates a market value adjustment.
Under a funding agreement, the policyholder either makes a lump sum deposit or makes specifi ed periodic deposits. Jackson agrees
to pay a rate of interest, which may be fi xed but is usually a fl oating short-term interest rate linked to an external index. The average term
of the funding agreements is one to two years. In 2014 and 2013, there were no funding agreements terminable by the policyholder with
less than 90 days’ notice.
v Aggregate account values
The table below shows the distribution of account values for fi xed annuities (fi xed interest rate and fi xed index), the fi xed account portion
of variable annuities, and interest sensitive life business within the range of minimum guaranteed interest rates as described in notes
(i) to (iii) above as at 31 December 2014 and 2013:
Minimum guaranteed interest rate
1.00%
> 1.0% – 2.0%
> 2.0% – 3.0%
> 3.0% – 4.0%
> 4.0% – 5.0%
> 5.0%
Total
Fixed annuities and the
fi xed account portion
of variable annuities
£m
Interest sensitive
life business
£m
2014
3,927
7,887
9,365
1,239
1,567
207
2013
3,012
8,349
8,867
1,163
1,460
197
24,192
23,048
2014
–
–
195
2,265
1,971
1,514
5,945
2013
–
–
182
2,182
1,908
1,456
5,728
Prudential plc Annual Report 2014
215
Determining contract liabilities
As permissible under IFRS 4 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).
With minor exceptions, all of Jackson’s contracts are accounted for as investment contracts as defi ned for US GAAP purposes by
applying in the fi rst instance a retrospective deposit method to determine the liability for policyholder benefi ts. This is then augmented
by potentially three additional amounts, namely:
— 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 defi ciency).
Capitalised acquisition costs and deferred income for these contracts are amortised over the life of the book of contracts. The present
value of the estimated gross profi ts is generally computed using the rate of interest that accrues to policyholder balances (sometimes
referred to as the contract rate). Estimated gross profi ts include estimates of the elements, each of which will be determined based
on the best estimate of amounts of the elements over the life of the book of contracts without provision for adverse deviation:
— Amounts expected to be assessed for mortality less benefi t 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.
In the case of variable annuity contracts with guaranteed benefi ts as described above, liabilities for these benefi ts are accounted for
under US GAAP and are valued as described below.
In accordance with US GAAP, the Guaranteed Minimum Death Benefi t and the ‘for life’ portion of Guaranteed Minimum Withdrawal
Benefi t liabilities are determined each period end by estimating the expected value of benefi ts in excess of the projected account balance
and recognising the excess ratably over the life of the contract based on total expected assessments. At 31 December 2014, these
liabilities were valued using a series of deterministic investment performance scenarios, a mean investment return of 7.4 per cent (2013:
7.4 per cent) net of external fund management fees, and assumptions for lapse, mortality and expense that are similar to those used
in amortising the capitalised acquisition costs.
The direct Guaranteed Minimum Income Benefi t liability is determined by estimating the expected value of the annuitisation benefi ts
in excess of the projected account balance at the date of annuitisation and recognising the excess ratably over the accumulation period
based on total expected assessments. The assumptions used for calculating the direct Guaranteed Minimum Income Benefi t liability
at 31 December 2014 and 2013 are consistent with those used for calculating the Guaranteed Minimum Death Benefi t and ‘for life’
Guaranteed Minimum Withdrawal Benefi t liabilities.
Jackson regularly evaluates estimates used and adjusts the additional Guaranteed Minimum Death Benefi t, Guaranteed Minimum
Income Benefi t and Guaranteed Minimum Withdrawal Benefi t ‘for life’ liability balances, with a related charge or credit to benefi t
expense if actual experience or other evidence suggests that earlier assumptions should be revised.
Guaranteed Minimum Income Benefi ts are essentially fully reinsured, subject to a modest deductible and annual claim limits. As this
reinsurance benefi t is net settled, it is considered to be a derivative under IAS 39, and is therefore recognised at fair value with the change
in fair value included as a component of short-term fl uctuations. The direct GMIB liability is not considered a derivative instrument under
IAS 39 and, as such, an accounting difference arises from this one-sided mark to market.
Guaranteed Minimum Withdrawal Benefi t ‘not for life’ features are considered to be embedded derivatives under IAS 39. Therefore,
provisions for these benefi ts are recognised at fair value. The change in these guaranteed benefi t reserves, along with claim payments
and associated fees included in reserves are included along with the hedge results in short-term fl uctuations, resulting in removal of the
market impact from the operating profi t based on longer-term investment returns.
For Guaranteed Minimum Withdrawal Benefi t and Guaranteed Minimum Income Benefi t 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
period, where suffi cient market liquidity is assumed to exist, followed by grading to long-term historical volatility levels beyond that point,
where such long-term historical volatility levels contain an explicit margin for conservatism.
Non-performance risk is incorporated into the calculation through the use of discount interest rates sourced from an AA corporate
credit curve as a proxy for Jackson’s own credit risk. Other risk margins, particularly for policyholder behaviour and long-term volatility,
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 Benefi t, Guaranteed Minimum Income Benefi t, Guaranteed Minimum
Withdrawal Benefi t and Guaranteed Minimum Accumulation Benefi t features of variable annuity contracts, the fi nancial guarantee
features of Jackson’s contracts are in most circumstances not explicitly valued, but the impact of any interest guarantees would be
refl ected as they are earned in the current account value (ie the US GAAP liability).
For traditional life insurance contracts, provisions for future policy benefi ts are determined under US GAAP using the net
level premium method and assumptions as of the issue date as to mortality, interest, policy lapses and expenses plus provisions
for adverse deviation.
Institutional products are accounted for as investment contracts under IFRS with the liability classifi ed as being in respect of fi nancial
instruments rather than insurance contracts, as defi ned by IFRS 4. In practice there is no material difference between the IFRS and
US GAAP basis of recognition and measurement for these contracts.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C4: Policyholder liabilities and unallocated surplus of with-profi ts funds continued
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 any 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-profi ts sub-fund (WPSF), Scottish Amicable Insurance
Funds (SAIF), and the non-profi t sub-fund;
— Prudential Retirement Income Limited (PRIL), a shareholder-owned subsidiary; or
— Other shareholder-backed subsidiaries writing mainly non-profi t unit-linked business.
i With-profi ts products and PAC with-profi ts sub-fund
The WPSF mainly contains with-profi ts business but it also contains some non-profi t business (unit-linked, term assurances and
annuities). The WPSF’s profi ts are apportioned 90 per cent to its policyholders and 10 per cent to shareholders as surplus for distribution
is determined via the annual actuarial valuation. In October 2014, the long-term business of Prudential Annuities Limited (PAL) was
transferred into the WPSF following a Part VII transfer under the Financial Services and Markets Act 2000. PAL is owned by the WPSF.
The WPSF held a provision of £50 million at 31 December 2014 (2013: £36 million) to honour guarantees on a small amount of
guaranteed annuity products. SAIF’s exposure to guaranteed annuities is described below.
With-profi ts products provide returns to policyholders through bonuses that are ‘smoothed’. There are two types of bonuses:
‘regular’ and ‘fi nal’. Regular bonuses are declared once a year, and once credited, are guaranteed in accordance with the terms of the
particular product. Unlike regular bonuses, fi nal bonuses are guaranteed only until the next bonus declaration.
The main factors that infl uence the determination of bonus rates are the return on the investments of the with-profi ts fund, infl ation,
taxation, the expenses of the fund chargeable to policyholders and the degree to which investment returns are smoothed. The overall
rate of return earned on investments and the expectation of future investment returns are the most important infl uences on bonus rates.
A high proportion of the assets backing the with-profi ts business are invested in equities and real estate. If the fi nancial strength of the
with-profi ts business is affected, then a higher proportion of fi xed interest or similar assets might be held by the fund.
Further details on the determination of the two types of the bonuses: ‘regular’ and ‘fi nal’ are provided below.
Regular bonus rates
For regular bonuses, the bonus rates are determined for each type of policy primarily by targeting the bonus level at a prudent proportion
of the long-term expected future investment return on underlying assets. The expected future investment return is reduced as
appropriate for each type of policy to allow for items such as expenses, charges, tax and shareholders’ transfers. However, the rates
declared may differ by product type, or by the date of payment of the premium, or date of issue of the policy, or if the accumulated regular
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 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 fi nal bonus which is normally declared yearly, may be added when a claim is paid or when units of a unitised product are realised.
The rates of fi nal bonus usually vary by type of policy and by reference to the period, usually a year, in which the policy commences or
each premium is paid. These rates are determined by reference to the asset shares for the sample policies but subject to the smoothing
approach as explained below.
In general, the same fi nal bonus scale applies to maturity, death and surrender claims except that:
— The total surrender value may be impacted by the application of a Market Value Reduction for accumulating with-profi ts policies and
by the surrender bases for conventional with-profi ts business; and
— For the SAIF and Scottish Amicable, the fi nal bonus rates applicable on surrender may be adjusted to refl ect expected future bonus rates.
Application of signifi cant judgement
The application of the above method for determining bonuses requires the PAC Board to apply signifi cant judgement in many respects,
including in particular the following:
— Determining what constitutes fair treatment of customers: Prudential is required by UK law and regulation to consider the fair treatment of its
customers in setting bonus levels. The concept of determining what constitutes fair treatment, while established by statute, is not defi ned;
— Smoothing of investment returns: This is an important feature of with-profi ts products. Determining when particular circumstances,
such as a signifi cant rise or fall in market values, warrant variations in the standard bonus smoothing limits that apply in normal
circumstances requires the PAC Board of directors to exercise signifi cant 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.
Prudential plc Annual Report 2014
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Key assumptions
As noted above, the overall rate of return on investments and the expectation of future investment returns are the most important
infl uences in bonus rates, subject to the smoothing described below. Prudential determines the assumptions to apply in respect of these
factors, including the effects of reasonably likely changes in key assumptions, in the context of the overarching discretionary and
smoothing framework that applies to its with-profi ts business as described above. As such, it is not possible to specifi cally quantify the
effects of each of these assumptions, or of reasonably likely changes in these assumptions.
Prudential’s approach, in applying signifi cant judgement and discretion in relation to determining bonus rates, is consistent
conceptually with the approach adopted by other fi rms that manage a with-profi ts business and is also consistent with the requirements
of the Principles and Practices of Financial Management (PPFM) that are applied in the management of their with-profi ts funds.
The principles contain an explanation of how it determines regular and fi nal bonus rates within the discretionary framework that
applies to all with-profi ts policies, subject to the general legislative requirements applicable. Its purpose is therefore to:
— Explain the nature and extent of the discretion available;
— Show how competing or confl icting interests or expectations of different groups and generations of policyholders, and policyholders
and shareholders are managed so that all policyholders and shareholders are treated fairly; and
— Provide a knowledgeable observer (eg a fi nancial adviser) with an understanding of the material risks and rewards from starting and
continuing to invest in a with-profi ts policy with Prudential.
Furthermore, in accordance with industry-wide regulatory requirements, the PAC Board has appointed:
— An Actuarial Function Holder who provides the PAC Board with all actuarial advice;
— A With-Profi ts Actuary whose specifi c duty is to advise the PAC Board on the reasonableness and proportionality of the manner in
which its discretion has been exercised in applying the Principles and Practices of Financial Management and the manner in which
any confl icting interests have been addressed; and
— A With-Profi ts Committee of independent individuals, which assesses the degree of compliance with the Principles and Practices
of Financial Management and the manner in which confl icting rights have been addressed.
Smoothing of investment return
In determining bonus rates for the UK with-profi ts policies, smoothing is applied to the allocation of the overall earnings of the UK
with-profi ts fund of which the investment return is a signifi cant element. The smoothing approach differs between accumulating and
conventional with-profi ts policies to refl ect the different contract features. In normal circumstances, Prudential does not expect most
payout values on policies of the same duration to change by more than 10 per cent up or down from one year to the next, although
some larger changes may occur to balance payout values between different policies. Greater fl exibility may be required in certain
circumstances, for example following a signifi cant rise or fall in market values, and in such situations the PAC Board may decide to vary
the standard bonus smoothing limits in order to protect the overall interests of policyholders.
The degree of smoothing is illustrated numerically by comparing in the following table the relatively ‘smoothed’ level of policyholder
bonuses declared as part of the surplus for distribution, with the more volatile movement in investment return and other items of income
and expenditure of the UK component of the PAC with-profi ts fund for each year presented.
Net income of the fund:
Investment return
Claims incurred
Movement in policyholder liabilities
Add back policyholder bonuses for the year (as shown below)
Claims incurred and movement in policyholder liabilities (including charge for provision for asset
shares and excluding policyholder bonuses)
Earned premiums, net of reinsurance
Other income
Acquisition costs and other expenditure
Share of profi ts 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
2014 £m
2013 £m
8,958
(6,115)
(4,366)
1,812
(8,669)
3,007
72
(961)
129
(440)
2,096
(84)
2,012
1,812
200
2,012
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1,749
(5,129)
3,801
52
(1,025)
88
(308)
3,236
(1,294)
1,942
1,749
193
1,942
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C4: Policyholder liabilities and unallocated surplus of with-profi ts funds continued
ii Annuity business
Prudential’s conventional annuities include level, fi xed-increase and infl ation-linked annuities, the link being to the Retail Price Index
(RPI) in the majority of cases.
Prudential’s fi xed-increase annuities incorporate automatic increases in annuity payments by fi xed amounts over the policyholder’s
life. The RPI annuities that Prudential offers provide for a regular annuity payment to which an additional amount is added periodically
based on the increase in the UK RPI.
Prudential’s with-profi ts annuities, which are written in the WPSF, combine the income features of annuity products with the
investment smoothing features of with-profi ts products and enable policyholders to obtain exposure to investment return on the WPSF’s
equity shares, property and other investment categories over time. Policyholders select a ‘required smoothed return’ bonus from the
specifi c range Prudential offers for the particular product. The amount of the annuity payment each year depends upon the relationship
between the required smoothed return bonus rate selected by the policyholder when the product is purchased and the smoothed return
bonus rates Prudential subsequently declares each year during the term of the product. If the total bonus rates fall below the anticipated
rate, then the annuity income falls.
iii SAIF
SAIF is a ring-fenced sub-fund of the PAC long-term fund formed following the acquisition of the mutually owned Scottish Amicable Life
Assurance Society in 1997. No new business may be written in SAIF, although regular premiums are still being paid on policies in force
at the time of the acquisition and incremental premiums are permitted on these policies.
The fund is solely for the benefi t of policyholders of SAIF. Shareholders have no interest in the profi ts of this fund although they are
entitled to asset management fees on this business.
The process for determining policyholder bonuses of SAIF with-profi ts policies, which constitute the vast majority of obligations of the
funds, is similar to that for the with-profi ts policies of the WPSF. However, in addition, the surplus assets in SAIF are allocated to policies
in an orderly and equitable distribution over time as enhancements to policyholder benefi ts ie in excess of those based on asset share.
Provision is made for the risks attaching to some SAIF unitised with-profi ts policies that have (Market Value Reduction) MVR-free
dates and for those SAIF products which have a guaranteed minimum benefi t on death or maturity of premiums accumulated at
4 per cent per annum.
The Group’s main exposure to guaranteed annuities in the UK is through SAIF and a provision of £549 million was held in SAIF at
31 December 2014 (2013: £328 million) to honour the guarantees. As SAIF is a separate sub-fund solely for the benefi t of policyholders
of SAIF, this provision has no impact on the fi nancial position of the Group’s shareholders’ equity.
iv Unit-linked (non-annuity) and other non-profi t business
Prudential UK insurance operations also have an extensive book of unit-linked policies of varying types and provide a range of other
non-profi t business such as credit life and protection contracts. These contracts do not contain signifi cant fi nancial guarantees.
There are no guaranteed maturity values or guaranteed annuity options on unit-linked policies except for minor amounts for certain
policies linked to cash units within SAIF.
Determining contract liabilities
i Overview
The calculation of the contract liabilities involves the setting of assumptions for future experience. This is done following detailed review
of the relevant experience including in particular mortality, expenses, tax, economic assumptions and, where applicable, persistency.
For with-profi ts business written in the WPSF or SAIF, a market consistent valuation is performed (as described in section (ii) below).
Additional assumptions required are for persistency and the management actions under which the fund is managed. Assumptions used
for a market-consistent valuation typically do not contain margins, whereas those used for the valuation of other classes of business do.
Mortality assumptions are set based on the results of the most recent experience analysis looking at the experience over recent years
of the relevant business. For non-profi t business, a margin for adverse deviation is added. Different assumptions are applied for different
product groups. For annuitant mortality, assumptions for current mortality rates are based on recent experience investigations and
expected future improvements in mortality. The expected future improvements are based on recent experience and projections of the
business and industry experience generally.
Maintenance and, for some classes of business, termination expense assumptions are expressed as per policy amounts. They are set
based on the expenses incurred during the year, including an allowance for ongoing investment expenditure and allocated between
entities and product groups in accordance with the operation’s internal cost allocation model. For non-profi t business a margin for
adverse deviation is added to this amount. Expense infl ation assumptions are set consistent with the economic basis and based on the
difference between yields on nominal gilts and index-linked gilts.
The actual renewal expenses incurred on behalf of SAIF by other Group companies are recharged in full to SAIF.
The assumptions for asset management expenses are based on the charges specifi ed in agreements with the Group’s asset
management operations, plus a margin for adverse deviation for non-profi t business.
Tax assumptions are set equal to current rates of taxation.
For non-profi t business excluding unit-linked business, the valuation interest rates used to discount the liabilities are based on the
yields as at the valuation date on the assets backing the technical provisions. For fi xed interest securities the gross redemption yield is
used except for the non-profi t annuities within PAC and PRIL annuity business where the internal rate of return of the assets backing the
liabilities is used. Properties are valued using the rental yield, and for equities it is the greater of the dividend yield and the average of the
dividend yield and the earnings yield. An adjustment is made to the yield on non-risk-free fi xed interest securities and property to refl ect
credit risk. To calculate the non-unit reserves for linked business, assumptions have been set for the gross unit growth rate and the rate
of infl ation of maintenance expenses, as well as for the valuation interest rate as described above.
Prudential plc Annual Report 2014
219
ii WPSF and SAIF
The policyholder liabilities reported for the WPSF are primarily for two broad types of business. These are accumulating and
conventional with-profi ts contracts. The policyholder liabilities of the WPSF are accounted for under FRS 27.
The provisions have been determined on a basis consistent with the detailed methodology included in regulations contained in the
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-profi ts contracts, which refl ects the amounts expected to be paid based on the current value of investments
held by the with-profi ts funds and current circumstances. These contracts are a combination of insurance and investment contracts with
discretionary participation features, as defi ned by IFRS 4.
The PRA’s Peak 2 calculation under the realistic regime requirement is explained further in note A3.1(d) under the UK regulated
with-profi ts section.
The contract liabilities for with-profi ts business also require assumptions for persistency. These are set based on the results of recent
experience analysis.
The process of determining policyholder liabilities of SAIF is similar to that for the with-profi ts policies of the WPSF.
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.
New mortality projection models are released annually by the Continuous Mortality Investigation (CMI). The CMI 2012 model was
used to produce the 2014 and 2013 results, calibrated to refl ect an appropriate view of future mortality improvements.
For annuities in payment, the tables and range of percentages used are set out below:
CMI Model, with calibration to refl ect
future mortality improvements
Non-profi t annuities
within the WPSF
PRIL
Males
Females
Males
Females
2014
2013
CMI 2012
CMI 2012
For males: with a long-term
improvement rate of 2.25% pa
93% – 99%
PCMA00
89% – 101%
PCFA00
For females: with a long-term
improvement rate of 1.50% pa.
93% – 99%
PCMA00
89% – 101%
PCFA00
91% – 95%
PCMA00
91% – 96%
PCMA00
84% – 98%
PCFA00
84% – 98%
PCFA00
For annuities in deferment, the tables used by both the non-profi t annuities within the WPSF and PRIL were AM92 – 4 years (males) and
AF92 – 4 years (females) for 2014 and 2013.
iv Unit-linked (non-annuity) and other non-profi t business
The majority of other long-term business written in the UK insurance operations is unit-linked business or other business with similar
features. For these contracts the attaching liability refl ects the unit value obligation and provision for expenses and mortality risk.
The latter component is determined by applying mortality assumptions on a basis that is appropriate for the policyholder profi le.
For unit-linked business, the assets covering unit liabilities are exposed to market risk, but the residual risk when considering the
unit-linked liabilities and assets together is limited to the effect on fund-based charges.
For those contracts where the level of insurance risk is insignifi cant, the assets and liabilities arising under the contracts are
distinguished between those that relate to the fi nancial instrument liability and acquisition costs and deferred income that relate to the
component of the contract that relates to investment management. Acquisition costs and deferred income are recognised consistent
with the level of service provision in line with the requirements of IAS 18.
v Eff ect of changes in assumptions used to measure insurance assets and liabilities
Credit risk
There has been no change of approach in the setting of assumption levels of credit risk in 2014 and 2013. However, changes in the
portfolio have given rise to altered levels of credit risk allowance as set out in note B4(c).
Other assumption changes
The effect of other assumption changes and modelling adjustments for the shareholder-backed business is set out in note B4(c).
For the with-profi ts sub-fund, the aggregate effect of assumption changes and modelling adjustments in 2014 was a net charge
to unallocated surplus of £86 million (2013: net credit of £200 million), relating to changes in mortality assumptions, offsetting releases
of margins, and altered expense, persistency and economic assumptions, where appropriate in the two periods.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C5: Intangible assets
C5.1 Intangible assets attributable to shareholders
a Goodwill attributable to shareholders
Cost
At beginning of year
Exchange differences
At end of year
Aggregate impairment
Net book amount at end of year
Goodwill attributable to shareholders comprises:
M&G
Other
2014 £m
2013 £m
1,581
2
1,583
(120)
1,463
1,153
310
1,463
1,589
(8)
1,581
(120)
1,461
1,153
308
1,461
Other goodwill represents amounts allocated to entities in Asia and the US operations. These goodwill amounts by acquired operations
are not individually material.
The aggregate goodwill impairment of £120 million at 31 December 2014 and 2013 relates to the goodwill held in relation to the held
for sale Japan life business (see note D1), which was impaired in 2005.
Impairment testing
Goodwill does not generate cash fl ows 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 16. Any excess of IFRS over EEV carrying value is then
compared with EEV basis value of current and projected future new business to determine whether there is any indication that the
goodwill in the IFRS statement of fi nancial position may be impaired. The assumptions underpinning the Group’s EEV basis of reporting
are included in the EEV basis supplementary information in this Annual Report.
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 fl ows expected to be derived from the M&G operating segment (based upon
management projections).
The discounted cash fl ow valuation has been based on a three-year plan prepared by M&G, and approved by management, and cash
fl ow projections for later years.
The value in use is particularly sensitive to a number of key assumptions as follows:
i
ii
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 fi nancial
projections for the plan;
The assumed growth rate on forecast cash fl ows beyond the terminal year of the plan. A growth rate of 2.5 per cent
(2013: 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 (2013: 12 per cent) has been applied to post-tax cash fl ows.
The pre-tax risk discount rate was 16 per cent (2013: 18 per cent). Management have determined the risk discount rate by reference
to an average implied discount rate for comparable UK listed asset managers calculated by reference to risk-free rates, equity risk
premiums of 5 per cent and an average ‘beta’ factor for relative market risk of comparable UK listed asset managers. A similar
approach has been applied for the other component businesses of M&G; and
iv That asset management contracts continue on similar terms. Management believes that any reasonable change in the key
assumptions would not cause the recoverable amount of M&G to fall below its carrying amount.
Prudential plc Annual Report 2014
221
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 classifi ed under IFRS 4
Deferred acquisition costs related to investment management contracts, including life assurance
contracts classifi ed as fi nancial instruments and investment management contracts under IFRS 4
Present value of acquired in-force policies for insurance contracts as classifi ed under IFRS 4 (PVIF)
Distribution rights and other intangibles
Total of deferred acquisition costs and other intangible assets
2014 £m
2013 £m
5,840
87
5,927
59
1,275
1,334
7,261
4,684
96
4,780
67
448
515
5,295
2014 £m
2013 £m
Deferred acquisition costs
Balance at 1 January
Reclassifi cation of Japan Life as held for sale note D1
Additions and acquisitions of subsidiaries
Amortisation to the income statement:
Operating profi t
Non-operating profi t
Disposals and transfers
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
Asia
553
–
209
(128)
–
(128)
–
16
US
4,121
–
678
(487)
653
166
–
299
–
(87)
650
5,177
UK
89
–
8
(14)
–
(14)
–
–
–
83
Asset
manage-
ment
PVIF and
other
intangibles*
Total
5,295
–
1,768
(696)
653
(43)
(6)
334
Total
4,177
(28)
1,251
(643)
228
(415)
(1)
(187)
515
–
865
(59)
–
(59)
(6)
19
–
(87)
1,334
7,261
498
5,295
17
–
8
(8)
–
(8)
–
–
–
17
* PVIF and other intangibles includes soft ware rights of £66 million (2013: £56 million) with additions of £34 million, amortisation of £25 million and exchange gain
of £1 million.
Note
PVIF and other intangibles comprise PVIF, distribution rights and other intangibles such as soft ware rights. Distribution rights relate to amounts that have been paid
or have become unconditionally due for payment as a result of past events in respect of bancassurance partnership arrangements in Asia. These agreements allow
for bank distribution of Prudential’s insurance products for a fi xed period of time. Additions of £865 million in 2014 principally relate to fees paid and due to extend
the term and expand the geographic scope of the agreement with Standard Chartered Bank and other fees on current distribution deals.
It also includes £18 million for PVIF and other intangibles in 2014 for the acquisition of Express Life of Ghana and Shield Assurance Company Limited in Kenya.
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 booked in other comprehensive income)*
Total DAC for US operations
2014 £m
2013 £m
5,002
759
(584)
5,177
3,716
868
(463)
4,121
* Consequent upon the positive unrealised valuation movement in 2014 of £956 million (2013: negative unrealised valuation movement of £2,089 million), there is
a charge of £87 million (2013: a credit of £498 million) for altered ‘shadow’ DAC amortisation booked within other comprehensive income. These adjustments refl ect
movement from period to period, in the changes to the pattern of reported gross profi ts that would have happened if the assets refl ected in the statement of fi nancial
position had been sold, crystallising the unrealised gains and losses, and the proceeds reinvested at the yields currently available in the market. At 31 December 2014,
the cumulative shadow DAC balance as shown in the table above was negative £584 million (2013: negative £463 million).
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
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 premiums. For annuity and interest-sensitive
life business, acquisition costs are deferred and amortised in line with a combination of historical and future expected gross profi ts on the
relevant contracts. For fi xed interest rate and fi xed 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 profi ts also depend on mortality assumptions, assumed unit costs and terminations other than deaths (including the
related charges), all of which are based on a combination of actual experience of Jackson, industry experience and future expectations.
A detailed analysis of actual mortality, lapse and expense experience is performed using internally developed experience studies.
Acquisition costs for Jackson’s variable annuity products are also amortised in line with the emergence of profi ts. The measurement
of the amortisation in part refl ects current period fees (including those for guaranteed minimum death, income, or withdrawal benefi ts)
earned on assets covering liabilities to policyholders, and the historical and expected level of future gross profi ts which depends on the
assumed level of future fees, as well as components related to mortality, lapse, expense and the long-term cost of hedging.
Mean reversion technique
For variable annuity products, under US GAAP (as ‘grandfathered’ under IFRS 4) the projected gross profi ts, against which acquisition
costs are amortised, refl ect an assumed long-term level of returns on separate account investments which, as referenced in note A3, for
Jackson, is 7.4 per cent (2013: 7.4 per cent) after deduction of net external fund management fees. This is applied to the period end level
of separate account assets after application of a mean reversion technique that removes a portion of the effect of levels of short-term
variability in current market returns.
Under the mean reversion technique applied by Jackson, the projected level of return for each of the next fi ve years is adjusted from
period to period so that in combination with the actual rates of return for the preceding two years and the current period, the 7.4 per cent
(2013: 7.4 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 (2013: 7.4 per cent) assumption.
However, to ensure that the methodology does not over anticipate a reversion to the long-term level of returns following adverse
markets, the mean reversion technique has a cap and fl oor feature whereby the projected returns in each of the next fi ve years can be no
more than 15 per cent per annum and no less than 0 per cent per annum (after deduction of net fund management fees) in each year.
Sensitivity of amortisation charge
The amortisation charge to the income statement is refl ected in both operating profi t and short-term fl uctuations in investment returns.
The amortisation charge to the operating profi t in a reporting period comprises:
i
A core amount that refl ects a relatively stable proportion of underlying premiums or profi t; and
ii
An element of acceleration or deceleration arising from market movements differing from expectations.
In periods where the cap and fl oor feature of the mean reversion technique are not relevant, the technique operates to dampen the
second element above. Nevertheless, extreme market movements can cause material acceleration or deceleration of amortisation in
spite of this dampening effect.
Furthermore, in those periods where the cap or fl oor is relevant, the mean reversion technique provides no further dampening and
additional volatility may result.
In 2014, the DAC amortisation charge for operating profi t was determined after including a charge for accelerated amortisation of
£13 million (2013: credit for decelerated amortisation of £82 million). The 2014 amount primarily refl ects the separate account
performance of 6 per cent, which is lower 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 signifi cant movement in equity markets in
2015 (outside the range of negative 34 per cent to positive 36 per cent) for the mean reversion assumption to move outside the corridor.
Prudential plc Annual Report 2014
223
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 movements 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 classifi ed as available-for-sale note (i)
DAC at 31 December
2014 £m
2013 £m
Insurance
contracts
Investment
management
note (i)
Insurance
contracts
Investment
management
note (i)
4,684
895
33
315
(87)
5,840
96
8
(17)
–
–
87
3,776
920
(372)
(138)
498
4,684
100
14
(18)
–
–
96
Note
(i)
All of the additions are through internal development. The carrying amount of the balance comprises the following gross and accumulated amortisation amounts:
Gross amount
Accumulated amortisation
Net book amount
2014 £m
2013 £m
234
(147)
87
224
(128)
96
Present value of acquired in-force (PVIF) and other intangibles attributable to shareholders
At 1 January
Cost
Accumulated amortisation
Additions (including amounts arising
on acquisition of subsidiaries)
Amortisation charge
Disposals and transfers
Exchange differences and other
movements
At 31 December
Comprising:
Cost
Accumulated amortisation
2014 £m
Other intangibles
2013 £m
Other intangibles
Distribution
rights
Other
intangibles
(including
soft ware)
note (ii)
Total
PVIF
note (i)
Distribution
rights
Soft ware
note (ii)
458
(66)
392
808
(24)
(6)
17
1,187
1,269
(82)
1,187
203
(147)
56
57
(26)
–
1
88
238
(150)
88
882
(367)
515
865
(59)
(6)
19
1,334
1,729
(395)
1,334
217
(153)
64
21
(7)
–
(11)
67
221
(154)
67
230
(53)
177
271
(17)
–
(39)
392
458
(66)
392
184
(124)
60
26
(27)
(1)
(2)
56
203
(147)
56
PVIF
note (i)
221
(154)
67
–
(9)
–
1
59
222
(163)
59
Total
631
(330)
301
318
(51)
(1)
(52)
515
882
(367)
515
Notes
(i)
(ii)
All of the PVIF balances relate to insurance contracts. The PVIF attaching to investment contracts have been fully amortised. Amortisation is charged over the
period of provision of asset management services as those profi ts emerge.
Soft ware is amortised over its useful economic life, which generally represents the licence period of the soft ware acquired.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C5: Intangible assets continued
C5.2 Intangible assets attributable to with-profi ts funds
a Goodwill in respect of acquired investment subsidiaries for venture fund and other investment purposes
At 1 January
Additions in the year
Exchange differences
At 31 December
2014 £m
2013 £m
177
10
(1)
186
178
–
(1)
177
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-profi ts 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 fl ow valuation based on cash fl ow projections to 2016 prepared by management after considering the historical
experience and future growth rates of the business. The key assumption applied in the calculations is the risk discount rate 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 2014 and 2013,
there was no impairment of goodwill.
b Deferred acquisition costs and other intangible assets
Other intangible assets in the Group consolidated statement of fi nancial position attributable to with-profi ts funds consist of:
Deferred acquisition costs related to insurance contracts attributable to the PAC with-profi ts fund note (i)
Distribution rights attributable to with-profi ts funds of the Asia insurance operations
Computer software attributable to with-profi ts funds
2014 £m
2013 £m
3
47
11
61
6
60
6
72
Note
(i)
The above costs relate to non-participating business written by the PAC with-profi ts sub-fund. As the with-profi ts 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-profi ts funds of the Asia insurance operations
Distribution rights relate to facilitation fees paid in relation to the bancassurance partnership arrangements in Asia for the bank
distribution of Prudential’s insurance products for a fi xed period of time. The distribution rights amounts are amortised over the term
of the distribution contracts.
At 1 January
Gross amount
Accumulated amortisation
Amortisation charge
Exchange differences
Disposals and transfers
At 31 December
Comprising:
Gross amount
Accumulated amortisation
2014 £m
2013 £m
91
(31)
60
(20)
3
4
47
98
(51)
47
92
(22)
70
(9)
(1)
–
60
91
(31)
60
Prudential plc Annual Report 2014
225
C6: Borrowings
C6.1 Core structural borrowings of shareholder-fi nanced operations
Holding company operations:
US$1,000m 6.5% Perpetual Subordinated Capital Securities
US$250m 6.75% Perpetual Subordinated Capital Securities note (vii)
US$300m 6.5% Perpetual Subordinated Capital Securities note (vii)
US$750m 11.75% Perpetual Subordinated Capital Securities note (vi)
US$700m 5.25% Perpetual Subordinated Capital Securities notes (iv), (vii)
US$550m 7.75% Perpetual Subordinated Capital Securities note (vii)
2014 £m
2013 £m
641
160
193
–
444
351
604
151
181
451
417
329
Perpetual Subordinated Capital Securities (Innovative Tier 1) note (i)
1,789
2,133
¤20m Medium Term Subordinated Notes 2023 note (viii)
£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)
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$250m 8.15% Surplus Notes 2027 (Lower Tier 2) notes (i), (ix)
Total (per consolidated statement of fi nancial position)
16
429
391
695
1,531
3,320
300
249
3,869
275
160
4,304
17
429
388
695
1,529
3,662
300
249
4,211
275
150
4,636
Notes
(i)
These debt classifi cations are consistent with the treatment of capital for regulatory purposes, as defi ned in the Prudential Regulation Authority handbook.
Tier 1 subordinated debt is entirely US$ denominated. The Group has designated all US$2.80 billion (2013: US$3.55 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 and a £115 million loan also
(iv)
(v)
maturing on 20 December 2017. These two tranches are currently drawn at a cost of 12 month £LIBOR plus 0.40 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) On 23 December 2014, the Company exercised its right to redeem early the US$750 million 11.75 per cent Tier 1 perpetual subordinated capital securities at their
aggregate nominal amount together with accrued interest.
(vii) 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.
(viii) 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.
Jackson’s borrowings are unsecured and subordinated to all present and future indebtedness, policy claims and other creditor claims of Jackson.
(ix)
C6.2 Other borrowings
a Operational borrowings attributable to shareholder-fi nanced operations
Commercial paper
Medium Term Notes 2015
Borrowings in respect of short-term fi xed income securities programmes
Non-recourse borrowings of US operations
Bank loans and overdrafts
Obligations under fi nance leases
Other borrowings note (ii)
Other borrowings
Total notes (i), (iv)
2014 £m
2013 £m
1,704
300
2,004
19
6
4
230
240
1,634
299
1,933
18
3
–
198
201
2,263
2,152
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C6: Borrowings continued
Notes
(i)
In addition to the debt listed above, £200 million Floating Rate Notes were issued by Prudential plc in October 2014 which will mature in October 2015.
These Notes have been wholly subscribed to a Group subsidiary and accordingly have been eliminated on consolidation in the Group fi nancial statements.
These Notes were originally issued in October 2008 and have been reissued upon their maturity.
(ii) Other borrowings mainly include amounts whose repayment to the lender is contingent upon future surplus emerging from certain contracts specifi ed under
the arrangement. If insuffi cient surplus emerges on those contracts, there is no recourse to other assets of the Group and the liability is not payable to the degree
of shortfall. 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 January 2015, the Company issued £300 million Medium Term Notes which will mature in January 2018. The proceeds, net of costs, were £299 million.
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.
(iii)
(iv)
b Borrowings attributable to with-profi ts 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 fi nance leases)
Total
2014 £m
2013 £m
924
100
69
1,093
691
100
104
895
* The interests of the holders of the bonds issued by Scottish Amicable Finance plc, a subsidiary of the Scottish Amicable Insurance Fund, are subordinated to the
entitlements of the policyholders of that fund.
C6.3 Maturity analysis
The following table sets out the remaining contractual maturity analysis of the Group’s borrowings on the statement of fi nancial 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-fi nanced operations
With-profi ts operations
Core structural borrowings
Operational borrowings
Borrowings
2014 £m
2013 £m
2014 £m
2013 £m
2014 £m
2013 £m
–
–
275
–
–
4,029
4,304
–
–
–
275
–
4,361
4,636
2,153
9
1
–
65
35
2,263
1,835
309
8
–
–
–
2,152
119
50
65
74
31
754
1,093
35
126
49
53
59
573
895
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 fi nancial statements including
fi nancial assets, fi nancial 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 Offi cer’s report on the risks facing our business and our capital strength’ within the
Strategic Report.
The fi nancial and insurance assets and liabilities on the Group’s balance sheet are, to varying degrees, subject to market and insurance
risk and other changes of experience assumptions that may have a material effect on IFRS basis profi t or loss and shareholders’ equity.
The market and insurance risks, including how they affect Group’s operations and how they are managed are discussed in the ‘Group
Chief Risk Offi cer’s report on the risks facing our business and our capital strength’.
The most signifi cant items for which the IFRS shareholders’ profi t or loss and shareholders’ equity for the Group’s life assurance
business is sensitive to, are shown in the following tables. The distinction between direct and indirect exposure is not intended to indicate
the relative size of the sensitivity.
Prudential plc Annual Report 2014
227
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-profi ts business Net neutral direct exposure (indirect exposure only)
Unit-linked business Net neutral direct exposure (indirect exposure only)
Non-participating
business
Credit risk
Asset/liability mismatch risk
Interest rates for those
operations where the basis
of insurance liabilities is
sensitive to current market
movements
US insurance operations (see also section C7.3)
Interest rate and price risk
Mortality and
morbidity risk
Persistency risk
Investment performance
subject to smoothing
through declared bonuses
Investment performance
through asset
management fees
All business
Variable annuity
business
Currency risk
Persistency risk
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
Derivative hedge programme
to the extent not fully hedged
against liability
Incidence of equity
participation features
Fixed index annuities,
Fixed annuities and
GIC business
Credit risk Interest rate risk
Profi t and loss and
shareholders’ equity are
volatile for these risks as they
affect the values of derivatives
and embedded derivatives
and impairment losses. In
addition, shareholders’ equity
is volatile for the incidence of
these risks on unrealised
appreciation of fi xed income
securities classifi ed as
available-for-sale under IAS 39
UK insurance operations (see also section C7.4)
With-profi ts business 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)
Asset/liability mismatch risk
Shareholder-backed
annuity business
Credit risk for assets covering
liabilities and shareholder
capital
Interest rate risk for assets in
excess of liabilities ie assets
representing shareholder
capital
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
Investment performance
subject to smoothing
through declared
bonuses
Asset management fees
earned by M&G
Investment performance
through asset
management fees
Persistency risk to
future shareholder
transfers
Persistency risk
Mortality experience
and assumptions
for longevity
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C7: Risk and sensitivity analysis continued
Detailed analyses of sensitivity of IFRS basis profi t 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 profi t or loss and shareholders’ equity
to changes in the relevant risk variables, all of which are reasonably possible at the relevant balance sheet date. In the equity risk
sensitivity analysis shown below, 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 mitigating management actions in place. In addition,
the equity risk sensitivity analysis provided assumed that all equity indices fall by the same percentage.
Impact of diversifi cation on risk exposure
The Group enjoys signifi cant diversifi cation benefi ts achieved through the geographical spread of the Group’s operations and, within
those operations through a broad mix of product 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-fi nancial risk factors.
Correlation across risk factors:
— Longevity risk;
— Expenses;
— Persistency; and
— Other risks.
The effect of Group diversifi cation across the Group’s life businesses is to signifi cantly reduce the aggregate standalone volatility risk
to IFRS operating profi t based on longer-term investment returns. The effect is almost wholly explained by the correlations across risk
types, in particular mortality and longevity risk.
C7.2 Asia insurance operations
Exposure and sensitivity of IFRS basis profi t and shareholders’ equity to market and other risks
The Asia operations sell with-profi ts and unit-linked policies and, although the with-profi ts business generally has a lower terminal bonus
element than in the UK, the investment portfolio still contains a proportion of equities. Non-participating business is largely backed by
debt securities or deposits. The Group’s exposure to market risk arising from its Asia operations is therefore at modest levels. This refl ects
the fact that the Asia operations have a balanced portfolio of with-profi ts, unit-linked and other types of business.
In Asia, adverse persistency experience can impact the IFRS profi tability of certain 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 fi nancial impact of lapses is often mitigated through the specifi c 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 profi t 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 profi t level the Asia result is affected by short-term
value movements on the asset portfolio for non-linked shareholder-backed business.
i Sensitivity to risks other than foreign exchange risk
With-profi ts business
Similar principles to those explained for UK with-profi ts business in C7.4 apply to profi t emergence for the Asia with-profi ts business.
Correspondingly, the profi t emergence refl ects bonus declaration and is relatively insensitive to period by period fl uctuations in
insurance risk or interest rate movements.
Unit-linked business
As for the UK insurance operations, for unit-linked business, the main factor affecting the profi t and shareholders’ equity of the Asia
operations is investment performance through asset management fees. The sensitivity of profi ts and shareholders’ equity to changes
in insurance risk, interest rate risk and credit risk are not material.
Other business
Interest rate risk
Excluding its with-profi t and unit-linked business, the results of the Asia business are sensitive to the vagaries of routine movements
in interest rates.
Prudential plc Annual Report 2014
229
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 2014, 10-year government bond rates vary from territory to territory and range
from 1.6 per cent to 8.0 per cent (2013: 1.7 per cent to 9.0 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 fl oor 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 2014 and 2013 is as follows:
Profi t before tax attributable to shareholders
Related deferred tax (where applicable)
Net effect on profi t and shareholders’ equity
2014 £m
2013 £m
Decrease
of 1%
Increase
of 1%
Decrease
of 1%
Increase
of 1%
(54)
(5)
(59)
(137)
24
(113)
311
(34)
277
(215)
40
(175)
The pre-tax impacts, if they arose, would mostly be recorded within the category short-term fl uctuations in investments returns in
the Group’s segmental analysis of profi t before tax.
The degree of sensitivity of the results of the non-linked shareholder-backed business of the Asia operations to movements in interest
rates depends upon the degree to which the liabilities under the ‘grandfathered’ IFRS 4 measurement basis refl ects market interest rates
from period to period. For example for those countries, such as those applying US GAAP, the results can be more sensitive as the effect
of interest rate movements on the backing investments may not be offset by liability movements.
In addition, the degree of sensitivity of the results shown in the table above is dependent on the interest rate level at that point of
time. In 2014, the lower interest rates in certain countries have had an adverse impact on the degree of sensitivity to a decrease in
interest rates.
Equity price risk
The non-linked shareholder business has limited exposure to equity and property investment (31 December 2014: £932 million).
Generally changes in equity and property investment values are not directly offset by movements in policyholder liabilities.
The estimated sensitivity to a 10 per cent and 20 per cent change in equity and property prices for shareholder-backed Asia other
business, which would be refl ected in the short-term fl uctuation component of the Group’s segmental analysis of profi t before tax,
at 31 December 2014 and 2013 would be as follows:
Profi t before tax attributable to shareholders
Related deferred tax (where applicable)
Net effect on profi t and shareholders’ equity
2014 £m
2013 £m
Decrease
of 20%
Decrease
of 10%
Decrease
of 20%
Decrease
of 10%
(187)
23
(164)
(93)
11
(82)
(114)
24
(90)
(57)
12
(45)
A 10 or 20 per cent increase in their value would have an approximately equal and opposite effect on profi t and shareholders’ equity
to the sensitivities shown above. The market risk sensitivities shown above refl ect the impact of temporary market movements and,
therefore, the primary effect of such movements would, in the Group’s segmental analysis of profi ts, be included within the short-term
fl uctuations in investment returns.
Insurance risk
Many of the territories in Asia are exposed to mortality/morbidity risk and provision is made within policyholder liabilities on a prudent
regulatory basis to cover the potential exposure. If these prudent assumptions were strengthened by 5 per cent then it is estimated that
post-tax profi t and shareholders’ equity would be decreased by approximately £47 million (2013: £38 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.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C7: Risk and sensitivity analysis continued
ii Sensitivity to foreign exchange risk
Consistent with the Group’s accounting policies, the profi ts of the Asia insurance operations are translated at average exchange rates
and shareholders’ equity at the closing rate for the reporting period. For 2014, the rates for the most signifi cant operations are given
in note A1.
A 10 per cent increase (strengthening of the pound sterling) or decrease (weakening of the pound sterling) in these rates would have
reduced or increased profi t before tax attributable to shareholders, profi t for the year and shareholders’ equity, excluding goodwill,
attributable to Asia operations respectively as follows:
Profi t before tax attributable to shareholders
Profi t 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
2014 £m
2013 £m
2014 £m
2013 £m
(111)
(95)
(315)
(63)
(49)
(246)
135
117
384
77
60
300
C7.3 US insurance operations
Exposure and sensitivity of IFRS basis profi t and shareholders’ equity to market and other risks
At the level of operating profi t 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 indirectly 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
(2013: 94 per cent) of its general account investments support fi xed interest rate and fi xed index annuities, life business and surplus and
6 per cent (2013: 6 per cent) support institutional businesses. All of these types of business contain considerable interest rate guarantee
features and, consequently, require that the assets that support them are primarily fi xed income or fi xed maturity.
Jackson is exposed primarily to the following risks:
Risks
Equity risk
Risk of loss
— Related to the incidence of benefi ts related to guarantees issued in connection with its variable
annuity contracts; and
— Related to meeting contractual accumulation requirements in fi xed index annuity contracts.
Interest rate risk
— Related to meeting guaranteed rates of accumulation on fi xed annuity products following a sharp
and sustained fall in interest rates;
— Related to the guarantee features attached 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 prepayment
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 profi t (ie including short-term fl uctuations in investment returns) is very sensitive
to market movements. In addition to these effects the Jackson shareholders’ equity is sensitive to the impact of interest rate and credit
spread movements on the value of fi xed income securities. Movements in unrealised appreciation on these securities are included
as movement in shareholders’ equity (ie outside the income statement).
Prudential plc Annual Report 2014
231
Jackson enters into fi nancial derivative transactions, including those noted below to reduce and manage business risks.
These transactions manage the risk of a change in the value, yield, price, cash fl ows or quantity of, or a degree of exposure with respect
to assets, liabilities or future cash fl ows, which Jackson has acquired or incurred.
Jackson uses free-standing derivative instruments for hedging purposes. Additionally, certain liabilities, primarily trust instruments
supported by funding agreements, fi xed index annuities, certain Guaranteed Minimum Withdrawal Benefi t variable annuity features and
reinsured Guaranteed Minimum Income Benefi t variable annuity features contain embedded derivatives as defi ned by IAS 39, ‘Financial
Instruments: Recognition and Measurement’. Jackson does not account for such derivatives as either fair value or cash fl ow hedges as
might be permitted if the specifi c hedge documentation requirements of IAS 39 were followed. Financial derivatives, including
derivatives embedded in certain host liabilities that have been separated for accounting and fi nancial reporting purposes are carried at
fair value.
Value movements on the derivatives are reported within the income statement. In preparing Jackson’s segment profi t as shown in
note B1.1 value movements on Jackson’s derivative contracts, are included within short-term fl uctuations in investment returns and
excluded from operating results based on longer-term investment returns.
The principal types of derivatives used by Jackson and their purpose are as follows:
Derivative
Purpose
Interest rate swap
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 fi xed and fl oating payments over the period for which Jackson
holds the instrument without an exchange of the underlying principal amount. These agreements are
used for hedging purposes.
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 5 years. Put-swaptions hedge against signifi cant
movements in interest rates.
These derivatives (including various call and put options and interest rate contingent options) are used
to hedge Jackson’s obligations associated with its issuance of fi xed index deferred annuities and
certain VA guarantees. Some of these annuities and guarantees contain embedded options which are
fair valued for fi nancial reporting purposes.
Total return swaps in which Jackson receives equity returns or returns based on reference pools of
assets in exchange for short-term fl oating rate payments based on notional amounts, are held for both
hedging and investment purposes.
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 profi t and shareholders’ equity to equity and interest rate risks provided below is net of the
related changes in amortisation of DAC. The effect on the related changes in amortisation of DAC provided is based on the current
‘grandfathered’ US GAAP DAC basis but does not include any effect from an acceleration or deceleration of amortisation of DAC.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C7: Risk and sensitivity analysis continued
i Sensitivity to equity risk
At 31 December 2014 and 2013, Jackson had variable annuity contracts with guarantees, for which the net amount at risk (‘NAR’) is
defi ned as the amount of guaranteed benefi t in excess of current account value, as follows:
31 December 2014
Return of net deposits plus a minimum return
GMDB
GMWB – Premium only
GMWB*
GMAB – Premium only
Highest specifi ed anniversary account value minus withdrawals
post-anniversary
GMDB
GMWB – Highest anniversary only
GMWB*
Combination net deposits plus minimum return, highest
specifi ed anniversary account value minus withdrawals
post-anniversary
GMDB
GMIB‡
GMWB*
31 December 2013
Return of net deposits plus a minimum return
GMDB
GMWB – Premium only
GMWB*
GMAB – Premium only
Highest specifi ed anniversary account value minus withdrawals
post-anniversary
GMDB
GMWB – Highest anniversary only
GMWB*
Combination net deposits plus minimum return, highest
specifi ed anniversary account value minus withdrawals
post-anniversary
GMDB
GMIB‡
GMWB*
Minimum
return
0-6%
0%
0-5%†
0%
Account
value
£m
64,344
2,151
264
53
6,581
2,131
830
0-6%
0-6%
0-8%†
3,978
1,595
57,323
Minimum
return
0-6%
0%
0-5%†
0%
Account
value
£m
52,985
2,260
289
57
5,522
2,039
875
0-6%
0-6%
0-8%†
3,522
1,642
46,091
Weighted
average
attained age
Period
until
expected
annuitisation
65.0 years
65.0 years
67.5 years
1.4 years
Weighted
average
attained age
Period
until
expected
annuitisation
64.7 years
64.6 years
66.9 years
2.4 years
Net
amount
at risk
£m
1,463
32
17
–
193
85
58
302
360
2,033
Net
amount
at risk
£m
1,248
36
18
–
134
93
63
217
317
1,087
* Amounts shown for Guaranteed Minimum Withdrawal Benefi t comprise sums for the ‘not for life’ portion (where the guaranteed withdrawal base less the account
value equals to the net amount at risk (NAR)), and a ‘for life’ portion (where the NAR has been estimated as the present value of future expected benefi t payment
remaining aft er the amount of the ‘not for life’ guaranteed benefi ts is zero).
† Ranges shown based on simple interest. The upper limits of 5 per cent, or 8 per cent simple interest are approximately equal to 4.1 per cent and 6 per cent respectively,
on a compound interest basis over a typical ten year bonus period. For example 1 + 10 x 0.05 is similar to 1.041 growing at a compound rate of 4.01 per cent for a further
nine years.
‡ The GMIB reinsurance guarantees are essentially fully reinsured.
Prudential plc Annual Report 2014
233
Account balances of contracts with guarantees were invested in variable separate accounts as follows:
Mutual fund type:
Equity
Bond
Balanced
Money market
Total
2014 £m
2013 £m
50,071
11,139
12,901
675
74,786
40,529
10,043
10,797
703
62,072
As noted above, Jackson is exposed to equity risk through the options embedded in the fi xed index annuity liabilities and Guaranteed
Minimum Death Benefi t and Guaranteed Minimum Withdrawal Benefi t guarantees included in certain variable annuity benefi ts as
illustrated above. This risk is managed using an equity hedging programme to minimise the risk of a signifi cant economic impact as a
result of increases or decreases in equity market levels while taking advantage of naturally offsetting exposures in Jackson’s operations.
Jackson purchases external futures and options that hedge the risks inherent in these products, while also considering the impact of
rising and falling separate account fees.
As a result of this hedging programme, if the equity markets were to increase further in the future, the net effect 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
fi nancial reporting the immediate impact of equity market movements as the free-standing derivatives reset immediately while the
hedged liabilities reset more slowly and fees are recognised prospectively. The opposite impact would be observed if the equity markets
were to decrease.
In addition to the exposure explained above, Jackson is also exposed to equity risk from its holding of equity securities, partnerships
in investment pools and other fi nancial derivatives.
At 31 December 2014, the estimated sensitivity of Jackson’s profi t 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 profi t, net of related changes in amortisation
of DAC
Related deferred tax effects
Net sensitivity of profi t after tax and shareholders’
2014 £m
2013 £m
Decrease
of 20%
Decrease
of 10%
Increase
of 20%
Increase
of 10%
Decrease
of 20%
Decrease
of 10%
Increase
of 20%
Increase
of 10%
360
(126)
130
(46)
8
(3)
(25)
9
485
(170)
165
(58)
213
(74)
77
(27)
equity
234
84
5
(16)
315
107
139
50
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 fi xed 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 fi nancial results would vary contingent
upon the volume of new product sales and lapses, changes to the derivative portfolio, correlation of market returns and various other
factors including volatility, interest rates and elapsed time.
The directional movements in the sensitivities refl ect the hedging programme in place at 31 December 2014 and 2013.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C7: Risk and sensitivity analysis continued
ii Sensitivity to interest rate risk
Notwithstanding the market risk exposure previously described, except in the circumstances of interest rate scenarios where the
guarantee rates included in contract terms are higher than crediting rates that can be supported from assets held to cover liabilities, the
accounting measurement of fi xed annuity liabilities of Jackson products is not generally sensitive to interest rate risk. This position derives
from the nature of the products and the US GAAP basis of measurement. The Guaranteed Minimum Withdrawal Benefi t features
attached 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 fl oor of zero) and increase in interest rates at
31 December 2014 and 2013 is as follows:
Profi t and loss:
Pre-tax profi t effect (net of related changes in
amortisation of DAC)
Related effect on charge for deferred tax
Net profi t 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
2014 £m
2013 £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%
(1,398)
489
(909)
(690)
242
(448)
494
(173)
321
875
(306)
569
(128)
45
(83)
(66)
23
(43)
(52)
18
(34)
(161)
56
(105)
2,979
(1,043)
1,663
(582)
(1,663)
582
(2,979)
1,043
1,936
1,027
1,081
(1,081)
(1,936)
633
(760)
(1,367)
2,624
(918)
1,706
1,623
1,477
(517)
(1,477)
517
(2,624)
918
960
917
(960)
(1,706)
(994)
(1,811)
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. Similar to sensitivity to equity risk, the sensitivity movements provided in the table above are at
a point in time and refl ects the hedging programme in place on the balance sheet date, while the actual impact on fi nancial results would
vary contingent upon a number of factors.
iii Sensitivity to foreign exchange risk
Consistent with the Group’s accounting policies, the profi ts of the Group’s US operations are translated at average exchange rates and
shareholders’ equity at the closing rate for the reporting period. For 2014, the average and closing rates were US$1.65 (2013: US$1.56)
and US$1.56 (2013: US$1.66) to £1.00 sterling, respectively. A 10 per cent increase (weakening of the dollar) or decrease (strengthening
of the dollar) in these rates would reduce or increase profi t before tax attributable to shareholders, profi t for the year and shareholders’
equity attributable to US insurance operations respectively as follows:
Profi t before tax attributable to shareholdersnote
Profi t for the year
Shareholders’ equity attributable to US insurance operations
A 10% increase in US$:£
exchange rates
A 10% decrease in US$:£
exchange rates
2014 £m
2013 £m
2014 £m
2013 £m
(23)
(23)
(370)
(50)
(41)
(313)
29
28
452
61
50
383
Note
Sensitivity on profi t (loss) before tax, ie aggregate of the operating profi t based on longer-term investment returns and short-term fl uctuations in investment returns.
Prudential plc Annual Report 2014
235
iv Other sensitivities
Total profi t 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 profi t or loss for Jackson is presented by distinguishing the result for the year between
an operating result based on longer-term investment returns and short-term fl uctuations in investment returns. In this way the most
signifi cant direct effect of market changes that have taken place to the Jackson result are separately identifi ed. The principal determinants
of variations in operating profi t based on longer-term returns are:
— 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 profi ts on the relevant contracts. For interest-sensitive
business, the key assumption is the expected long-term spread between the earned rate and the rate credited to policyholders, which is
based on an annual spread analysis. In addition, expected gross profi ts depend on mortality assumptions, assumed unit costs and
terminations other than deaths (including the related charges) all of which are based on a combination of actual experience of Jackson,
industry experience and future expectations. A detailed analysis of actual experience is measured by internally developed expense,
mortality and persistency studies.
Except to the extent of mortality experience, which primarily affects profi ts through variations in claim payments and Guaranteed
Minimum Death Benefi t reserves, the profi ts of Jackson are relatively insensitive to changes in insurance risk.
Jackson is sensitive to lapse risk and other types of policyholder behaviour, such as the take-up of its Guaranteed Minimum
Withdrawal Benefi t product features. Jackson has extensive derivative programme to seek to manage the exposure for altered equity
markets and interest rates. For example, 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 2014 was
7.4 per cent (2013: 7.4 per cent). The impact of using this return is refl ected in two principal ways, namely:
— Through the projected expected gross profi ts which are used to determine the amortisation of deferred acquisition costs.
This is applied through the use of a mean reversion technique which is described in more detail in note C5.1(b) above; and
— The required level of provision for guaranteed minimum death benefi t claims.
C7.4 UK insurance operations
Exposure and sensitivity of IFRS basis profi t 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 Prudential Retirement Income Limited and the Prudential Assurance Company non-profi t sub-fund. Further details are
described below.
The IFRS operating profi t 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
profi t level, the result is particularly sensitive to temporary value movements on assets backing the capital of the shareholder-backed
annuity business.
With-profi ts business
SAIF
Shareholders have no interest in the profi ts of the ring-fenced fund of SAIF but are entitled to the asset management fees paid on the
assets of the fund.
With-profi ts sub-fund business
The shareholder results of the UK with-profi ts business (including non-participating annuity business of the with-profi ts sub-fund) are
only sensitive to market risk through the indirect effect of investment performance on declared policyholder bonuses.
The investment assets of PAC with-profi ts funds are subject to market risk. Changes in their carrying value, net of related changes
to asset-share liabilities of with-profi t contracts, affect the level of unallocated surplus of the fund. Therefore, the level of unallocated
surplus is particularly sensitive to the level of investment returns on the portion of the assets that represents surplus. However, as
unallocated surplus is accounted for as a liability under IFRS, movements in its value do not affect shareholders’ profi t and equity.
The shareholder results of the UK with-profi ts fund correspond to the shareholders’ share of the cost of bonuses declared on the
with-profi ts business which is currently one-ninth of the cost of bonuses declared. Investment performance is a key driver of bonuses,
and hence the shareholders’ share of the cost of bonuses. Due to the ‘smoothed’ basis of bonus declaration, the sensitivity to investment
performance in a single year is low relative to movements in the period to period performance. However, over multiple periods, it is
important.
Mortality and other insurance risk are relatively minor factors in the determination of the bonus rates. Adverse persistency experience
can affect the level of profi tability from with-profi ts but in any given one year, the shareholders’ share of cost of bonus may only be
marginally affected. However, altered persistency trends may affect future expected shareholder transfers.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C7: Risk and sensitivity analysis continued
Shareholder-backed annuity business
The principal items affecting the IFRS results of the UK shareholder-backed annuity business are mortality experience and assumptions,
and credit risk. The assets covering the liabilities are principally debt securities and other investments that are held to match the expected
duration and payment characteristics of the policyholder liabilities. These liabilities are valued for IFRS reporting purposes by applying
discount rates that refl ect the market rates of return attaching to the covering assets.
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, profi ts 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 pre-tax profi ts by approximately £94 million (2013: £71 million).
A decrease in credit default assumptions of fi ve basis points would increase pre-tax profi ts by £190 million (2013: £151 million). A decrease
in renewal expenses (excluding asset management expenses) of 5 per cent would increase pre-tax profi ts by £30 million (2013:
£27 million). The effect on profi ts would be approximately symmetrical for changes in assumptions that are directionally opposite to
those explained above. The net effect on profi t after tax and shareholders’ equity from all the changes in assumptions as described above
would be an increase of approximately £101 million (2013: £86 million).
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. Profi ts from unit-linked and similar
contracts primarily arise from the excess of charges to policyholders for management of assets, over expenses incurred. The former
is most sensitive to the net accretion of funds under management as a function of new business and lapse and timing of death. The
accounting impact of the latter is dependent upon the amortisation of acquisition costs in line with the emergence of margins (for
insurance contracts) and amortisation in line with service provision (for the investment management component of investment
contracts). By virtue of the design features of most of the contracts which provide low levels of mortality cover, the profi ts are relatively
insensitive to changes in mortality experience.
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 2014 annuity liabilities accounted for 98 per cent
(2013: 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 Prudential Assurance Company with-profi ts sub-fund (for its non-profi t annuity business) and
shareholders (for annuity liabilities of Prudential Retirement Income Limited and the non-profi t sub-fund) is very substantially
ameliorated by virtue of the close matching of assets with appropriate duration. The level of matching from period to period can
vary depending on management actions and economic factors so it is possible for a degree of mis-matching profi ts or losses to arise.
The close matching by the Group of assets of appropriate duration to annuity liabilities is based on maintaining economic and regulatory
capital. The measurement of liabilities under capital reporting requirements and IFRS is not the same with contingency reserves and some
other margins for prudence within the assumptions required under the 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:
2014 £m
2013 £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
11,559
(9,550)
(402)
5,063
(4,250)
(163)
(4,085)
3,454
126
(7,457)
6,297
232
8,602
(7,525)
(215)
3,843
(3,366)
(95)
(3,170)
2,762
82
(5,827)
5,054
155
Net sensitivity of profi t after tax and shareholders’
equity
1,607
650
(505)
(928)
862
382
(326)
(618)
Prudential plc Annual Report 2014
237
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
fl ows to the policyholder, a fall in their value would have given rise to the following effects on pre-tax profi t, profi t after tax and
shareholders’ equity.
Pre-tax profi t
Related deferred tax effects
Net sensitivity of profi t after tax and shareholders’ equity
2014 £m
2013 £m
A decrease
of 20%
A decrease
of 10%
A decrease
of 20%
A decrease
of 10%
(347)
75
(272)
(173)
37
(136)
(309)
72
(237)
(154)
36
(118)
A 10 or 20 per cent increase in their value would have an approximately equal and opposite effect on profi t and shareholders’ equity
to the sensitivities shown above. The market risk sensitivities shown above refl ect the impact of temporary market movements, and,
therefore the primary effect of such movements would, in the Group’s segmental analysis of profi ts, be included within the short-term
fl uctuations in investment returns.
C7.5 Asset management and other operations
a Asset management
i Sensitivities to foreign exchange risk
Consistent with the Group’s accounting policies, the profi ts of Eastspring Investments and US asset management operations are
translated at average exchange rates and shareholders’ equity at the closing rate for the reporting period. The rates for the functional
currencies of most signifi cant operations are shown in note A1.
A 10 per cent increase in the relevant exchange rates would have reduced reported profi t before tax attributable to shareholders and
shareholders’ equity, excluding goodwill attributable to Eastspring Investments and US asset management operations, by £9 million
(2013: £12 million) and £33 million (2013: £29 million) respectively.
ii Sensitivities to other fi nancial risks for asset management operations
The principal sensitivities to other fi nancial risk of asset management operations are credit risk on the bridging loan portfolio 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
2014 by asset management operations were £2,293 million (2013: £2,045 million), the majority of which are held by the Prudential
Capital’s operation. Debt securities held by Prudential Capital are in general variable rate bonds and so market value is limited in
sensitivity to interest rate movements and consequently any change in interest rates would not have a material impact on profi t or
shareholders’ equity. The Group’s asset management operations do not hold signifi cant investments in property or equities.
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 infl ation rates. The possible
permutations cover a wide range of scenarios. For indicative purposes, a reasonably possible range of fair value movements could be plus
or minus £150 million.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C8: Tax assets and liabilities
C8.1 Deferred tax
The statement of fi nancial 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 temporary differences
Capital allowances
Unused deferred tax losses
Total
Deferred tax assets
Deferred tax liabilities
2014 £m
2013 £m
2014 £m
2013 £m
83
4
2,607
9
62
2,765
315
8
2,050
10
29
2,412
(1,697)
(499)
(2,065)
(30)
–
(4,291)
(1,450)
(451)
(1,861)
(16)
–
(3,778)
The deferred tax asset at 31 December 2014 and 2013 arises in the following parts of the Group:
Asia insurance operations
US insurance operations
UK insurance operations
SAIF
PAC with-profi ts fund (including non-profi t annuity business)
Other
Other operations
Total
2014 £m
2013 £m
84
2,343
–
71
61
206
55
2,042
1
82
59
173
2,765
2,412
Deferred tax assets are recognised to the extent that they are regarded as recoverable, that is to the extent that, on the basis of all
available evidence, it can be regarded as more likely than not that there will be suitable taxable profi ts from which the future reversal
of the underlying temporary differences can be deducted.
The table that follows provides a breakdown of the recognised deferred tax assets set out in the table above for both the short-term
temporary differences and unused tax losses split by business unit. The table also shows the period of estimated recoverability for each
respective business unit. For these and each category of deferred tax asset recognised their recoverability against forecast taxable profi ts
is not signifi cantly impacted by any current proposed changes to future accounting standards.
Asia insurance operations
US insurance operations
UK insurance operations
Other operations
Total
Short-term temporary diff erences
Unused tax losses
Expected
period of
recoverability
Expected
period of
recoverability
2014 £m
2014 £m
30
1 to 3 years
2,268 With run-off
of in-force
book
129 1 to 10 years
180 1 to 10 years
2,607
47 3 to 5 years
–
–
– 1 to 3 years
15 1 to 3 years
62
The taxation regimes applicable across the Group often apply separate rules to trading and capital profi ts and losses. The distinction
between temporary differences that arise from items of either a trading or capital nature may affect the recognition of deferred tax assets.
Accordingly, for the 2014 full year results and fi nancial position at 31 December 2014 the possible tax benefi t of approximately
£110 million (2013: £127 million), which may arise from capital losses valued at approximately £0.5 billion (2013: £0.6 billion), is
suffi ciently uncertain that it has not been recognised. In addition, a potential deferred tax asset of £47 million (2013: £61 million), which
may arise from trading tax losses and other potential temporary differences totalling £0.2 billion (2013: £0.4 billion) is suffi ciently
uncertain that it has not been recognised. Of these, losses of £32 million will expire within the next seven years. Of the remaining losses
£1 million will expire within 20 years and the rest have no expiry date.
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 period.
C8.2 Current tax
Of the £117 million (2013: £244 million) current tax recoverable, the majority is expected to be recovered in one year or less.
The current tax liability increased to £617 million (2013: £395 million) refl ecting the increase in shareholder profi ts.
Prudential plc Annual Report 2014
239
C9: Defi ned benefi t pension schemes
a Background and summary economic and IAS 19 fi nancial positions
The Group’s businesses operate a number of pension schemes. The specifi c features of these plans vary in accordance with the
regulations of the country in which the employees are located, although they are, in general, funded by the Group and based either on
a cash balance formula or on years of service and salary earned in the last year or years of employment. The largest defi ned benefi t scheme
is the principal UK scheme, namely the Prudential Staff Pension Scheme (PSPS). PSPS accounts for 84 per cent (2013: 84 per cent) of the
underlying scheme liabilities of the Group’s defi ned benefi t schemes.
The Group also operates two smaller UK defi ned benefi t schemes in respect of Scottish Amicable (SASPS) and M&G (M&GGPS).
In addition, there are two small defi ned benefi t schemes in Taiwan which have negligible defi cits.
Under the IAS 19 ‘Employee Benefi ts’ valuation basis, the Group applies the principles of IFRIC 14, ‘IAS 19 – The Limit on a Defi ned
Benefi t Asset, Minimum Funding Requirements and their Interaction’, whereby a surplus is only recognised to the extent that the
Company is able to access the surplus either through an unconditional right of refund to the surplus or through reduced future
contributions relating to ongoing service, which have been substantively enacted or contractually agreed. Further, the IFRS fi nancial
position recorded, refl ects the higher of any underlying IAS 19 defi cit and any obligation for committed defi cit funding where applicable.
The Group asset/liability in respect of defi ned benefi t pension schemes is as follows:
Underlying economic surplus
(defi cit)
Less: unrecognised surplus note (i)
Economic surplus (defi cit)
(including investment in
Prudential insurance
policies)
Attributable to:
PAC with-profi ts fund
Shareholder-backed operations
Consolidation adjustment
against policyholder
liabilities for investment in
Prudential insurance
policies note (iii)
IAS 19 pension asset (liability)
on the Group statement of
fi nancial position note (iv)
2014 £m
2013 £m
PSPS
note (i)
SASPS
note (ii)
M&GGPS
Other
schemes
Total
PSPS
note (i)
SASPS
note (ii)
M&GGPS
Other
schemes
Total
840
(710)
(144)
–
130
(144)
91
39
(72)
(72)
60
–
60
–
60
(1)
–
755
(710)
726
(602)
(115)
–
(1)
–
(1)
45
19
26
124
(115)
87
37
(58)
(57)
36
–
36
–
36
(1)
–
646
(602)
(1)
–
(1)
44
29
15
–
–
(132)
–
(132)
–
–
(114)
–
(114)
130
(144)
(72)
(1)
(87)
124
(115)
(78)
(1)
(70)
Notes
(i)
For PSPS, the Group does not have an unconditional right of refund to any surplus of the scheme. The PSPS pension asset represents the present value of the
economic benefi t (impact) of the Company from the diff erence between future ongoing contributions to the scheme and estimated accrued cost of service.
No defi cit or other funding is required for PSPS. Defi cit funding, where applicable, is apportioned in the ratio of 70/30 between the PAC with-profi ts fund and
shareholder-backed operations following detailed considerations 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.
The defi cit of SASPS has been allocated approximately 50 per cent to the PAC with-profi ts fund and 50 per cent to the shareholders’ fund.
(ii)
(iii) The underlying position on an economic basis refl ects the assets (including investments in Prudential insurance policies that are off set against liabilities
to policyholders on the Group consolidation) and the liabilities of the schemes.
(iv) At 31 December 2014, the PSPS pension asset of £130 million (2013: £124 million) and the other schemes’ pension liabilities of £217 million (2013: £194 million)
are included within ‘Other debtors’ and ‘Provisions’ respectively on the consolidated statement of fi nancial position.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C9: Defi ned benefi t pension schemes continued
Triennial actuarial valuations
All of the schemes are required to carry out a full actuarial valuation every three years in order to assess the appropriate level of funding
for schemes in relation to their commitments. These valuations include assessments of the likely rate of return on the assets held within
the separate trustee administered funds.
The information on the latest completed actuarial valuation for the UK schemes is shown in the table below:
PSPS
SASPS
M&GGPS
Last completed actuarial
valuation date
5 April 2011
Valuation actuary, all Fellow of the
Institute and Faculty of Actuaries
C.G. Singer
Towers Watson Limited
Funding level at the last valuation
111 per cent*
Defi cit funding arrangement
agreed with the Trustees based
on the last valuation
No defi cit or other funding
required. Future ongoing
contributions for active
members were reduced to the
minimum level required under
the scheme rules from July 2012
(approximately £6 million per
annum excluding expenses)
31 March 2011
Jonathan Seed
Xafi nity Consulting
85 per cent
31 December 2011
Paul Belok
AON Hewitt Limited
83 per cent
£13.1 million per annum until
31 December 2018. The defi cit
will be reviewed every three
years at subsequent valuations
£18.6 million per annum for
two years beginning 1 January
2013; and £9.3 million for the
year beginning 1 January 2015
* Funding level by reference to the Scheme Solvency Target that forms the basis of the scheme’s funding objective.
The market value of PSPS scheme assets as at the 5 April 2011 valuation was £5,255 million. The actuarial assumptions used in
determining benefi t obligations and the net periodic benefi t costs for the purposes of the 2011 valuation were as follows:
Rate of increase in salaries
Rate of infl ation:
Retail Prices Index (RPI)
Consumer Prices Index (CPI)
Rate of increase of pensions in payment for infl ation:
Guaranteed (maximum 5%)
Guaranteed (maximum 2.5%)
Discretionary
Expected returns on plan assets
Mortality assumptions:
The tables used for PSPS pensions in payment at 5 April 2011 were:
%
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 next triennial valuations for the PSPS, SASPS and M&GGPS as at 5 April 2014, 31 March 2014 and 31 December 2014, respectively
are currently in progress.
Prudential plc Annual Report 2014
241
Risks to which the defi ned benefi t schemes expose the Group
Responsibility of making good of any defi cit 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 signifi cant 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 fl ows. Therefore, falling equity markets and bond yields may lead to higher defi cits in the schemes. Details of
the investment portfolio of the schemes are provided in section (c);
— Infl ation risk – the majority of the benefi t obligations of all three schemes are linked to infl ation, and higher infl ation will lead to higher
liabilities; and
— Mortality risk – increases in life expectancy of the members would mean that benefi ts 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 defi ned benefi t section of PSPS, a fi nal salary scheme, specify that, in
exercising its investment powers, the Trustee’s objective is to achieve the best overall investment return consistent with the security
of the assets of the scheme. In doing this, consideration is given to the nature and duration of the scheme’s liabilities. The Trustee sets
the general investment policy and specifi es any restrictions on types of investment and the degrees of divergence permitted from the
benchmark, but delegates the responsibility for selection and realisation of specifi c investments to the Investment Managers.
The Trustee reviews strategy, the asset mix benchmark and the Investment Managers’ objectives every three years, to coincide with
the Actuarial Valuation, or earlier if the Scheme Actuary recommends. Interim reviews are conducted annually based on changing
economic circumstances and fi nancial market levels.
The Trustee 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 defi ned benefi t schemes, (the SASPS and M&GGPS, which are both fi nal
salary schemes), follow similar principles, but have different target allocations refl ecting 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 infl ation. The assets that would most closely match the liabilities are a combination
of index-linked government bonds or investment grade derivatives to match these infl ation-linked liabilities and fi xed interest gilts to
match the fi xed 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 benefi t payments and assets that are expected to achieve a greater return
in the hope of reducing the contributions required or providing additional benefi ts 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 infl ation profi le of its liabilities. This
involved a reallocation from other investments to other assets with an interest and infl ation swap overlay. In broad terms, the scheme is
committed to making a series of payments related to LIBOR on a nominal amount and in return the scheme receives a series of fi xed and
infl ation-linked payments which match a proportion of its liabilities. As at 31 December 2014, the nominal value of the interest and
infl ation-linked swaps amounted to £0.8 billion (2013: £0.8 billion) and negative £3.0 billion (2013: £2.7 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 diversifi ed investments with a portion of the scheme assets invested in infl ation-indexed bonds to provide a partial hedge
against infl ation. The M&G pension scheme also invests in leveraged gilts as part of its asset liability management.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C9: Defi ned benefi t pension schemes continued
b Assumptions
The actuarial assumptions used in determining benefi t obligations and the net periodic benefi t costs for the years ended 31 December
were as follows:
Discount rate*
Rate of increase in salaries
Rate of infl ation†
Retail prices index (RPI)
Consumer prices index (CPI)
Rate of increase of pensions in payment for infl ation:
PSPS:
Guaranteed (maximum 5%)
Guaranteed (maximum 2.5%)
Discretionary
Other schemes
2014 %
2013 %
3.5
3.0
3.0
2.0
2.5
2.5
2.5
3.0
4.4
3.3
3.3
2.3
2.5
2.5
2.5
3.3
* The discount rate has been determined by reference to an ‘AA’ corporate bond index, adjusted where applicable, to allow for the diff erence in duration between the
index and the pension liabilities.
† The rate of infl ation refl ects the long-term assumption for the UK RPI or CPI depending on the tranche of the schemes.
The calculations are based on current actuarially calculated mortality estimates with a specifi c allowance made for future improvements
in mortality. The specifi c allowance made is in line with a custom calibration and has been updated in 2014 to refl ect the 2012 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 2014 were:
Male: 114.0 per cent PNMA00 with improvements in line with a custom calibration of the CMI’s 2012 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 2012 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 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 assumed life expectancies on retirement at age 60, based on the mortality table used was:
Retiring today
Retiring in 20 years’ time
2014 years
2013 years
Male
28.1
30.6
Female
29.7
32.7
Male
27.9
31.5
Female
29.5
32.8
The mean term of the current PSPS liabilities is around 17 years.
Using external actuarial advice provided by the scheme actuaries being Towers Watson for the valuation of PSPS, Xafi nity Consulting
for SASPS and Aon Hewitt Limited for the M&GGPS, the most recent full valuations have been updated to 31 December 2014, applying
the principles prescribed by IAS 19.
c Estimated pension scheme surpluses and defi cits
This section illustrates the fi nancial position of the Group’s defi ned benefi t pension schemes on an economic basis and the IAS 19 basis.
The underlying pension position on an economic basis refl ects the assets (including investments in Prudential policies that are offset
against liabilities to policyholders on the Group consolidation) and the liabilities of the schemes. The IAS 19 basis excludes the
investments in Prudential policies. At 31 December 2014, the investments in Prudential insurance policies comprise £131 million
(2013: £143 million) for PSPS and £132 million (2013: £114 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 scheme 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.
Prudential plc Annual Report 2014
243
Movements on the pension scheme defi cit determined on the economic basis are as follows, with the effect of the application
of IFRIC 14 being shown separately:
2014 £m
(Charge) credit to income
statement or other
comprehensive income
Surplus (defi cit)
in schemes at
1 Jan 2014
Operating
results (based
on longer-term
investment
returns)
Actuarial and
other gains
and losses
Contributions
paid
Surplus (defi cit)
in schemes at
31 Dec 2014
All schemes
Underlying position (without the eff ect of IFRIC 14)
Surplus (defi cit)
Less: amount attributable to PAC with-profi ts fund
Shareholders' share:
Gross of tax surplus (defi cit)
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-profi ts fund
Shareholders' share:
Gross of tax surplus (defi cit)
Related tax
Net of shareholders' tax
With the eff ect of IFRIC 14
Surplus (defi cit)
Less: amount attributable to PAC with-profi ts fund
Shareholders' share:
Gross of tax surplus (defi cit)
Related tax
Net of shareholders' tax
646
(457)
189
(38)
151
(602)
428
(174)
35
(139)
44
(29)
15
(3)
12
(8)
(4)
(12)
2
(10)
(26)
18
(8)
2
(6)
(34)
14
(20)
4
(16)
62
(49)
13
(2)
11
(82)
60
(22)
4
(18)
(20)
11
(9)
2
(7)
55
(15)
40
(8)
32
–
–
–
–
–
55
(15)
40
(8)
32
755
(525)
230
(46)
184
(710)
506
(204)
41
(163)
45
(19)
26
(5)
21
Underlying investments 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’ assets at 31 December comprise the following investments:
Equities
UK
Overseas
Bonds*:
Government
Corporate
Asset-backed securities
Derivatives
Properties
Other assets
Total value of assets
* 94 per cent of the bonds are investment graded (2013: 97 per cent).
2014
Other
schemes
£m
86
317
440
117
26
(13)
57
40
1,070
Total
£m
212
460
5,518
1,048
223
146
150
310
8,067
PSPS
£m
126
143
5,078
931
197
159
93
270
6,997
%
2
6
68
13
3
2
2
4
100
PSPS
£m
133
12
4,288
715
45
91
71
687
6,042
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
%
3
5
66
12
1
1
2
10
100
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C9: Defi ned benefi t pension schemes continued
The movements in the IAS 19 pension schemes’ surplus and defi cit between scheme assets and liabilities as consolidated in the fi nancial
statements were:
Attributable to policyholders and shareholders
Plan assets
note (i)
6,944
Present value
of benefi t
obligations
notes (i), (ii)
(6,298)
(30)
(4)
301
(6)
(266)
55
2
1,037
–
(272)
266
(2)
(975)
3
Net defi cit, beginning of year
Current service cost
Past service cost
Net interest on net defi ned benefi t
liability (asset)
Administration expenses
Benefi t payments
Employers' contributions note (iv)
Employees' contributions
Actuarial and other gains and
losses note (v)
Settlements or curtailments
Transfer out of investment in
Prudential insurance policies
Net surplus (defi cit), end of year
8,067
(7,312)
2014 £m
Net surplus
(defi cit)
(without the
eff ect of
IFRIC 14)
Eff ect of
IFRIC 14 for
derecognition
of PSPS surplus
Economic
basis
net surplus
(defi cit)
646
(30)
(4)
29
(6)
–
55
–
62
3
–
755
(602)
(26)
(82)
(710)
2013 £m
44
(30)
(4)
3
(6)
–
55
–
(20)
3
–
45
Other
adjustments
including for
investments
in Prudential
insurance
policies
note (iii)
(114)
(5)
(4)
–
(9)
(132)
IAS 19 basis
net defi cit
note (i)
(70)
(30)
(4)
(2)
(6)
–
55
–
(24)
3
(9)
(87)
Net surplus
(defi cit)
(without the
eff ect of
IFRIC 14)
Eff ect of
IFRIC 14 for
derecognition
of PSPS surplus
Economic
basis
net surplus
(defi cit)
Other
adjustments
including for
investments
in Prudential
insurance
policies
note (iii)
IAS 19 basis
net defi cit
note (i)
Net defi cit, beginning of year
Current service cost
Net interest on net defi ned benefi t
liability (asset)
Administration expenses paid out
of plan assets
Benefi t payments
Employers' contributions note (iv)
Employees' contributions
Actuarial and other gains and
losses note (v)
Transfer out of investment in
Prudential insurance policies
Plan assets
note (i)
7,197
313
(4)
(254)
56
2
(366)
Present value
of benefi t
obligations
notes (i), (ii)
(6,059)
(27)
(267)
254
(2)
Net surplus (defi cit), end of year
6,944
(6,298)
(1,010)
(39)
1,138
(27)
46
(4)
–
56
–
128
(27)
7
(4)
–
56
–
(197)
(563)
447
(116)
–
646
(602)
–
44
(169)
(8)
1
62
(114)
(41)
(27)
(1)
(4)
–
56
–
(115)
62
(70)
Prudential plc Annual Report 2014
245
Notes
(i)
The IAS 19 basis pensions defi cit can be summarised as follows:
2014 £m
2013 £m
Quoted prices
in an active
market
Other
Total
Quoted prices
in an active
market
Other
Total
Plan assets
Equities:
UK
Overseas
Bonds:
Government
Corporate
Asset-backed securities
Derivatives
Properties
Other assets
Fair value of plan assets, end of year*
Present value of benefi t 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
Defi cit recognised in the statement of fi nancial
position
37
439
5,465
959
223
146
–
306
7,575
3
16
–
26
–
–
150
34
229
40
455
5,465
985
223
146
150
340
7,804
(7,312)
492
(710)
131
(87)
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)
* The IAS 19 basis plan assets at 31 December 2014 of £7,804 million (2013: £6,687 million) is diff erent from the economic basis plan assets of £8,067 million
(2013: £6,944 million) as shown above due to the exclusion of investment in Prudential insurance policies, which are eliminated on consolidation
of £263 million (2013: £257 million) comprising £131 million for PSPS (2013: £143 million) and £132 million for the M&G scheme (2013: £114 million).
None of the scheme assets included shares in Prudential plc or property occupied by the Prudential Group.
(ii) Maturity profi le of the benefi t obligations
The weighted average duration of the benefi t obligations of the schemes is 18.4 years (2013: 18.2 years).
The following table provides an expected maturity analysis of the benefi t obligations as at 31 December:
All schemes £m
2014
2013
1 year or less
Aft er 1 year
to 5 years
Aft er 5 years
to 10 years
Aft er 10 years
to 15 years
Aft er 15 years
to 20 years
237
223
1,012
972
1,538
1,459
1,704
1,672
1,736
1,747
Over
20 years
9,256
10,198
Total
15,483
16,271
(iii) The adjustments for investments in Prudential insurance policies are consolidation adjustments for intra-group assets and liabilities with no impact
to operating results.
(iv) Total employer contributions expected to be paid into the Group defi ned benefi t schemes for the year ending 31 December 2015 amounts to £45 million
(2014: £56 million). These amounts are subject to reassessment when the 2014 triennial valuations are fi nalised.
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 on changes in demographic assumptions
Losses on changes in fi nancial assumptions
Experience losses on scheme liabilities
Effect of derecognition of PSPS (defi cit) surplus
Consolidation adjustment for investments in Prudential insurance policies and other adjustments
2014 £m
2013 £m
1,037
(9)
(939)
(27)
62
(82)
(4)
(24)
(366)
(22)
(174)
(1)
(563)
447
1
(115)
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C9: Defi ned benefi t pension schemes continued
d Sensitivity of the pension scheme liabilities to key variables
The total underlying Group pension scheme liabilities of £7,312 million (2013: £6,298 million) comprise £6,157 million
(2013: £5,316 million) for PSPS and £1,155 million (2013: £982 million) for the other schemes. The table below shows the sensitivity of the
underlying PSPS and the other scheme liabilities at 31 December 2014 and 2013 to changes in discount rate, infl ation 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 as shown above does not directly equate to the impact on the profi t or loss
attributable to shareholders or shareholders’ equity due to the effect of the application of IFRIC 14 on PSPS and the allocation of a share
of the interest in fi nancial position of the PSPS and Scottish Amicable schemes to the PAC with-profi ts fund as described above.
Assumption applied
Discount rate
2014
3.5%
2013
Sensitivity change
in assumption
Impact of sensitivity on scheme liabilities
on IAS 19 basis
2014
2013
4.4% Decrease by 0.2%
Increase in scheme liabilities by:
Discount rate
3.5%
4.4% Increase by 0.2%
Rate of infl ation
3.0% RPI: 3.3% RPI: Decrease by 0.2%
2.0% CPI: 2.3% CPI: Decrease by 0.2%
Mortality rate
with consequent reduction
in salary increases
Increase life expectancy
by 1 year
C10: Share capital, share premium and own shares
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
3.4%
5.2%
3.2%
4.9%
0.6%
4.2%
3.3%
3.0%
3.3%
5.1%
3.1%
4.7%
0.7%
4.6%
2.7%
2.7%
2014
2013
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
2,560,381,736
7,398,214
2,567,779,950
128
–
128
1,895
2,557,242,352
13
3,139,384
1,908
2,560,381,736
128
–
128
1,889
6
1,895
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 2014, there were options outstanding under Save As You Earn schemes to subscribe for shares as follows:
31 December 2014
31 December 2013
Number of
shares to
subscribe for
8,624,491
10,233,986
Share price range
from
288p
288p
to
Exercisable
by year
1,155p
901p
2020
2019
Prudential plc Annual Report 2014
247
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 £195 million as at 31 December 2014
(2013: £141 million) is deducted from retained earnings. The Company has established trusts to facilitate the delivery of shares under
employee incentive plans. At 31 December 2014, 10.3 million (2013: 7.1 million) Prudential plc shares with a market value of
£153.1 million (2013: £94.5 million) were held in such trusts all of which are for employee incentive plans. The maximum number of
shares held during 2014 was 10.3 million which was in December 2014.
The Company purchased the following number of shares in respect of employee incentive plans. The shares purchased each month
are as follows:
January
February
March
April
May
June
July
August
September
October
November
December
Total
2014 share price
2013 share price
Number
of shares
13,740
16,841
4,623,303
149,199
1,361,688
11,290
10,745
11,321
355,268
51,199
51,314
1,223,290
7,879,198
Low
£
13.56
12.77
12.82
13.12
13.90
13.80
13.83
13.22
14.18
13.75
14.36
14.41
High
£
Cost
£
186,314
13.56
12.77
215,060
13.59 60,161,823
13.48
2,006,955
14.13 19,184,679
155,802
13.80
148,550
13.83
149,607
13.22
5,074,731
14.41
704,601
13.84
14.47
737,173
15.47 17,983,248
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
106,708,543
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
£
9.15
9.25
10.15
10.86
11.72
11.11
11.20
11.94
11.38
11.69
12.65
12.93
Cost
£
108,496
100,868
115,121
9,692,613
643,608
176,139
135,132
10,955,609
124,725
1,201,870
151,773
30,377,986
53,783,940
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 2014 was 7.5 million
(2013: 7.1 million) and the cost of acquiring these shares of £67 million (2013: £60 million) is included in the cost of own shares. The
market value of these shares as at 31 December 2014 was £112 million (2013: £95 million). During 2014, these funds made net additions
of 405,940 Prudential shares (2013: net additions of 2,629,816) for a net increase of £7 million to book cost (2013: net increase of
£33 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 2014 or 2013.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
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 2014.
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 provides an analysis of available capital for Group’s life assurance operations, determined by reference to the
local regulations, to meet risks and regulatory requirements.
2014 £m
Other
UK life
assurance
sub-
sidiaries
and funds
note (ii)
Total
PAC
with-
profi ts
fund
2013 £m
Asia life
assurance
sub-
sidiaries
note (i)
Total life
assurance
operations
note (b)
Total life
assurance
operations
Jackson
SAIF
WPSF
note (i)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,347
–
1,347
2,438
3,785
4,067
–
4,067
–
3,315
233
3,548
–
8,729
233
8,962
2,438
4,067
3,548
11,400
6,922
231
7,153
2,064
9,217
– 10,348
(2,503)
–
10,348
(2,503)
–
–
–
–
2,102
–
12,450
(2,503)
12,061
(3,112)
–
–
–
–
–
–
–
–
(3)
–
(3)
–
(83)
–
(5,177)
160
(1,187)
–
(6,450)
160
(5,300)
151
–
–
(47)
(47)
–
–
3,710
–
–
–
3,710
2,610
(47)
(55)
(251)
(344)
(251)
(344)
7,200
7,200
–
(405)
(488)
–
381
–
360
(251)
(8)
(241)
82
(926)
1,275
7,061
6,196
7,200
7,200
3,297
3,141
4,823
18,461
15,413
5,872
31,163
37,035
382
38,677
39,059
6,254
69,840
76,094
–
–
–
–
–
–
– 37,035
41,456
– 39,059
35,453
– 76,094
76,909
Group shareholders' equity
Held outside long-term funds:
Net assets
Goodwill
Total
Held in long-term funds note (iii)
Total Group shareholders' equity
Adjustments to regulatory basis
Unallocated surplus of with-profi ts funds
Shareholders' share of realistic liabilities note (i)
Deferred acquisition costs, distribution rights and
goodwill of non-participating business not
recognised for regulatory reporting
Jackson surplus notes note (iv)
Investment and policyholder liabilities valuation
differences between IFRS and regulatory basis
for Jackson note (vii)
Pension liability difference between IAS 19 and
regulatory basis
Valuation difference on non-profi t annuity liabilities
within WPSF between IFRS basis and regulatory
basis
Other adjustments note (v)
Total adjustments
Total available capital resources of life assurance
businesses on local regulatory bases
Policyholder liabilities
UK regulated with-profi ts funds: note (i)
Insurance contracts
Investment contracts with discretionary
participation features
Total
Other liabilities:
Insurance contracts:
With-profi ts liabilities of non-UK regulated funds note (i)
Unit-linked, including variable annuity
Other life assurance business
–
–
436
–
2,218
10,306
–
2,218
10,742
–
6,004
31,656
– 16,292
16,292
13,696 103,659
93,052
8,319
81,741
42,335
6,744
83,758
86,366
Investment contracts with discretionary participation
features note (i)
Investment contracts without discretionary
participation features note (vi)
–
–
–
25
–
–
–
180
180
–
25
17,349
2,670
218
20,262
20,176
Total
436
12,549
12,985
55,009 126,746
38,705 233,445 197,044
Total policyholder liabilities shown in the
consolidated statement of fi nancial position
6,690
82,389
89,079
55,009 126,746
38,705 309,539 273,953
Prudential plc Annual Report 2014
249
Notes
(i)
Up until 31 December 2013, the PAC WPSF unallocated surplus included amounts related to the Hong Kong branch, while the related policyholder liabilities are
included in the Asia life assurance subsidiaries but classifi ed as being part of the UK regulated with-profi t funds. Following the completion of the process of
domestication of the Hong Kong branch (see note D2 for further information ) on 1 January 2014, the unallocated surplus of the Hong Kong with-profi ts business
is reported within the Asia insurance operations segment from this date. In addition, the related policyholder liabilities are classifi ed as being part of the non-UK
regulated funds. The shareholders’ share of realistic liabilities adjustment to the regulatory basis is only applicable to the UK regulated with-profi ts fund.
(ii)
Excluding PAC shareholders’ equity that is included in ‘parent company and shareholders’ equity of other subsidiaries and funds’. (See note (b) below).
(iii) The term shareholders’ equity held in long-term funds refers to the excess of assets over liabilities attributable to shareholders of funds which are required by
law to be maintained ring-fenced with segregated assets and liabilities.
(iv) For regulatory purposes the Jackson surplus notes are accounted for as capital.
(v) Other adjustments to shareholders’ equity and unallocated surplus include amounts for the value of non-participating business for UK regulated with-profi ts
funds, deferred tax, admissibility and other items measured diff erently on the regulatory basis. For Jackson the principal reconciling item is deferred tax related
to the diff erences between IFRS and regulatory basis as shown in the table above and other methodology diff erences.
(vi) Principally includes unit-linked and similar contracts in the UK and GIC liabilities of Jackson.
(vii) The investment and policyholder liabilities valuation diff erence between IFRS and regulatory bases for Jackson is mainly due to not all investments being
carried at fair value under the regulatory basis and also due to the valuation diff erence on annuity reserves.
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 2014:
Group shareholders' equity
Held outside long-term funds:
Net assets
Goodwill
Total
Held in long-term funds
Total Group shareholders' equity
2014 £m
Total life
assurance
operations
M &G
(including
Prudential
Capital)
Parent
company and
shareholders’
equity of other
subsidiaries
and funds
note (i)
8,729
233
8,962
2,438
11,400
493
1,153
1,646
–
1,646
(1,312)
77
(1,235)
–
(1,235)
Group
total
7,910
1,463
9,373
2,438
11,811
Note
(i)
Including PAC shareholders’ equity. The £(1,235) million includes the core structural borrowings and the elimination of the investment in subsidiaries at the
parent company.
c Movement in total available capital on local regulatory bases
Total available capital for the Group’s life assurance operations has changed as follows:
Other UK
life assurance
subsidiaries
and funds
note (iii)
2,708
53
–
536
3,297
WPSF
note (i)
8,000
(89)
(100)
(611)
7,200
£m
Jackson
note (ii)
2,903
–
–
238
3,141
Asia life
assurance
subsidiaries
note (iv)
1,802
(60)
–
3,081
4,823
Group
total
15,413
(96)
(100)
3,244
18,461
Available capital at 31 December 2013
Changes in assumptions
Changes in management policy
Other factors (including new business)note (v)
Available capital at 31 December 2014
Notes
(i) With-profi ts sub-fund
The decrease in 2014 of £800 million refl ects primarily the transfer of the available capital for the Hong Kong with-profi ts business to Asia life assurance
subsidiaries following the completion of the Hong Kong branch domestication on 1 January 2014 and the negative impact of decreasing yields, partially off set
by the positive impact of investment returns earned on the opening available capital.
Jackson
The increase of £238 million in 2014 refl ects an underlying increase of £57 million (applying the 2014 year end exchange rate of US$1.56: £1.00) and £181 million
of exchange translation gain.
(ii)
(iii) Other UK life assurance subsidiaries and funds
The increase in 2014 of £589 million includes the eff ect of the transfer of the available capital for the Hong Kong non-participating business to the Asia life
assurance subsidiaries. Excluding this eff ect, the increase principally comprises value movement on assets backing surplus capital due to reduction in interest
rates and other investment related profi ts.
(iv) Asia life assurance subsidiaries
The increase of £3,021 million in 2014 refl ects an underlying increase of £2,991 million (applying the relevant 2014 year end exchange rates) and £30 million of
exchange translation gain. The underlying increase of £2,991 million refl ects primarily the transfer of the available capital of the Hong Kong business from the
UK operations on 1 January 2014 and its increase during the year.
(v) Other factors comprise the eff ect of changes in new business, valuation interest rate, investment return, foreign exchange and other factors. In 2014, the net
movement of £3,244 million includes the eff ect of the diff erence between the regulations in the UK and Hong Kong as applied to the calculation of the amounts
of the available capital for the Hong Kong business transferred between the two operations on 1 January 2014.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C11: Capital position statement continued
d Basis of preparation, capital requirements and management
Each of the Group’s long-term business operations is capitalised to a suffi ciently strong level for its individual circumstances. Details by
the Group’s major operations are shown below.
i Asia insurance operations
The available capital shown above of £4,823 million (2013: £1,802 million) represents the excess of local regulatory basis assets over
liabilities before deduction of required capital of £1,514 million (2013: £699 million). The 2014 available capital and required capital for
Asia insurance operations include the amounts for the Hong Kong with-profi ts and non-participating business following its domestication
as described further below.
The businesses in Asia are subject to local capital requirements in the jurisdictions in which they operate. The Hong Kong business
branch of PAC was transferred to separate subsidiaries established in Hong Kong following the completion of the process of the
domestication of the Hong Kong business on 1 January 2014 (see note D2). Prior to 2014, the Hong Kong business branch of PAC and
its capital requirements were subsumed within those of the PAC long-term fund. From 2014, the Hong Kong business is solely regulated
by the relevant regulators in Hong Kong and its local available capital and capital requirements are shown within the Asia insurance
operations in this note. For material Asian operations, the details of the basis of determining regulatory capital and regulatory capital
requirements are as follows:
Hong Kong
As mentioned above, the Hong Kong business branch of PAC was domesticated on 1 January 2014 and the resulting companies
Prudential Hong Kong Limited (PHKL), for long-term business, and Prudential General Insurance Hong Kong Limited (PGHK), for
General Insurance business, were established.
For non-participating business, mathematical reserves are generally calculated using a modifi ed net premium approach with no
allowance for future discontinuance. The underlying assumptions are based on a best estimate basis with prudent margins for adverse
deviations. Cash fl ows are discounted at a valuation interest rate based on a blend between the risk-adjusted portfolio yield and the
reinvestment rate.
For participating business, mathematical reserves are based on the guaranteed benefi ts only and use a modifi ed net premium
approach with no allowance for future discontinuances. Similar to above, the underlying assumptions are based on a best estimate basis
with prudent margins for adverse deviations with the valuation interest rate being a blend of the risk-adjusted portfolio yield and the
reinvestment rate.
For linked business, the value of units is held together with the non-unit reserves calculated in accordance with the standard actuarial
methodology and prevailing regulations.
The capital requirement for solvency margin calculation varies by underlying risk and duration of liabilities but is generally determined
as 4 per cent of mathematical reserves plus 0.3 per cent of the capital at risk.
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.
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
A risk-based capital framework applies in Korea.
Policy reserves for traditional business are determined on a 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.
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.
Malaysia
A risk-based capital framework applies in Malaysia.
For participating business, a gross premium reserve on the guaranteed and non-guaranteed benefi ts determined using best estimate
assumptions is held. The amount held is subject to a minimum of a gross premium reserve on the guaranteed benefi ts, determined using
best estimate assumptions along with provisions of risk margin for adverse deviations discounted at the risk-free rate.
For non-participating business, gross premium reserves are determined using best estimate assumptions along with provisions for risk
margin for adverse deviations. 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 defi cit (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 refl ect its own risk profi le and this is expected to be higher than the Supervisory Target
Capital Level.
Prudential plc Annual Report 2014
251
Singapore
A risk-based capital framework applies in Singapore.
For participating business, a gross premium reserve, determined using prudent best estimate assumptions and which makes
allowance for future bonus, is held. The amount held is subject to a minimum of the higher of the assets attributed to participating
business and a gross premium reserve calculated on specifi ed assumptions, but without allowance for future bonus, that include
prescribed provisions for adverse deviations (PADs).
For non-participating business, gross premium reserves are held. For linked business the value of units is held together with a non-unit
reserve calculated in accordance with standard actuarial methodology.
A registered insurer incorporated in Singapore is required at all times to maintain a minimum level of paid-up ordinary share capital
and to ensure that its fi nancial resources are not less than the greater of (i) the total risk requirement arising from the assets and liabilities
of the insurer calculated in accordance with the Singapore Insurance Act; or (ii) a minimum amount of 5 million Singapore Dollars. The
regulator also has the authority to direct that the insurer satisfy additional capital adequacy requirements in addition to those set forth
under the Singapore Insurance Act if it considers such additional requirements appropriate.
Thailand
A risk-based capital framework applies in Thailand.
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 and the weighted-average yield
curve of the current and prior seven quarters of Thai government bonds, as with a greater weighting on the current quarter.
Life insurers are required by law to maintain capital funds which are not less than the greater of (i) the sum of capital for all risks and
asset as prescribed in the regulation and (ii) a minimum amount of 50 million Thai Baht.
Vietnam
For traditional business, mathematical reserves are calculated using a modifi ed 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 specifi ed percentage of 0.1 per cent of sums at risk for policies
with original term less than or equal to fi ve years or 0.3 per cent of sums at risk for policies with original term of more than fi ve years.
An additional capital requirement of Vietnamese Dong 200 billion is also required for companies transacting unit-linked business.
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 £3,141 million (2013: £2,903 million) refl ects US regulatory basis available capital as
adjusted to exclude asset valuation reserves. The asset valuation reserve, which is refl ected 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 signifi cantly in excess of regulatory requirements. At 31 December 2014, 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 is required to demonstrate the
effectiveness of its interest rate swap programme pursuant to the Michigan Insurance Code. The total effect of this permitted practice,
net of tax, was to decrease statutory surplus by £356 million at 31 December 2014.
Michigan insurance law specifi cally 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 2014, Jackson reported £242 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 insuffi cient, it may draw up its own
Individual Capital Guidance for a fi rm, which can be superimposed as a requirement.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C11: Capital position statement continued
PAC with-profi ts sub-fund and Scottish Amicable Insurance Fund
Under PRA rules, insurers with with-profi ts liabilities of more than £500 million must hold capital equal to the higher of the MCR and the
Enhanced Capital Requirement (ECR). The ECR is intended to provide a more risk responsive and ‘realistic’ measure of a with-profi t
insurer’s capital requirements, whereas the MCR is broadly speaking equivalent to the previous required minimum margin under the
Interim Prudential Sourcebook and satisfi es the minimum EU Standards.
Determination of the ECR involves the comparison of two separate measurements of the fi rm’s resources requirement, which the 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’.
Available capital of the with-profi ts sub-fund and Scottish Amicable Insurance Fund of £7.2 billion (2013: £8.0 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 £1.0 billion at 31 December 2014 (2013: £0.9 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 suffi cient 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 defi ned stress changes in asset values and yields for market risk, credit risk and
termination risk for with-profi ts policies.
PAC has discretion in its management actions in the case of adverse investment conditions. Management actions encompass, but are
not confi ned to, investment allocation decisions, levels of reversionary bonuses, crediting rates and total claim values.
Other UK life assurance subsidiaries and funds
The available capital of £3,297 million (2013: £2,708 million) refl ects the excess of regulatory basis assets over liabilities of the
subsidiaries and funds, before deduction of the capital resources requirement of £1,552 million (2013: £1,364 million).
The capital resources requirement for these companies broadly refl ects a formula which, for active funds, equates to a percentage of
regulatory reserves plus a percentage of death strains. Death strains represent the payments made to policyholders upon death in excess
of amounts explicitly allocated to fund the provisions for policyholder’s claims and maturities.
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 2014, together with market risk sensitivity
disclosure provided to key management, is provided in the Strategic Report section of the Group’s 2014 Annual Report. Following
ratifi cation of the Solvency II Omnibus II Directive on 16 April 2014, Solvency II is expected to come into force on 1 January 2016 and will
replace the existing IGD capital requirements.
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-profi ts sub-fund to shareholders refl ect the shareholders’ one-ninth share of the cost of declared
policyholders’ bonuses.
Accordingly, the excess of assets over liabilities of the PAC long-term fund is retained within that company. The retention of the capital
enables it to support with-profi ts and other business of the fund by, for example, providing the benefi ts associated with smoothing and
guarantees. It also provides investment fl exibility for the fund’s assets by meeting the regulatory capital requirements that demonstrate
solvency and by absorbing the costs of signifi cant events or fundamental changes in its long-term business without affecting the bonus
and investment policies.
For other UK long-term business subsidiaries, the amounts retained within the companies are at levels which provide an appropriate
level of capital strength in excess of the regulatory minimum.
For Jackson, capital retention is maintained at a level consistent with an appropriate rating by Standard & Poor’s. Currently Jackson is
rated AA. Jackson can pay dividends on its capital stock only out of earned surplus unless prior regulatory approval is obtained.
Furthermore, dividends which exceed the greater of statutory net gain from operations for the prior year or 10 per cent of Jackson’s prior
year-end statutory surplus require prior regulatory approval.
For Asia subsidiaries, the amounts retained within the companies are at levels that provide an appropriate level of capital strength in
excess of the local regulatory minimum. For ring-fenced with-profi ts funds, the excess of assets over liabilities is retained with distribution
tied to the shareholders’ share of bonuses through declaration of actuarially determined surplus. The businesses in Asia may, in general,
remit dividends to the UK, provided the statutory insurance fund meets the local regulatory solvency targets.
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.
Prudential plc Annual Report 2014
253
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 refl ecting the different
types of liabilities Prudential has in each business. As a result of the diversity of products offered by Prudential and the different
regulatory requirements in which it operates, Prudential employs differing methods of asset/liability and capital management,
depending on the business concerned.
Stochastic modelling of assets and liabilities is undertaken in the UK, Jackson and Asia to assess the economic capital requirements.
A stochastic approach models the inter-relationship between asset and liability movements, taking into account asset correlation,
management actions and policyholder behaviour under a large number of alternative economic scenarios.
In addition, reserve adequacy testing under a range of scenarios and dynamic solvency testing is carried out, including under certain
scenarios mandated by the UK, US and Asian regulators.
The sensitivity of liabilities and other components of total capital vary depending upon the type of business concerned and this
conditions the approach to asset/liability management.
For example, for businesses that are most sensitive to interest rate changes, such as immediate annuity business, Prudential uses cash
fl ow analysis to create a portfolio of debt securities whose value is expected to change in line with the value of liabilities when interest
rates change. This type of analysis helps protect profi ts from changing interest rates and is used in the UK for annuity business and by
Jackson for its fi xed interest rate and fi xed 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 refl ect the large diversity in returns that equities can produce.
This allows Prudential to devise an investment and with-profi ts policyholder bonus strategy that, based on the model assumptions,
allows it to optimise returns to its policyholders and shareholders over time while maintaining appropriate fi nancial strength. Prudential
uses this methodology extensively in connection with its UK with-profi ts business.
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 benefi t obligations of the policyholders
of the Scottish Amicable Insurance Fund, the PAC long-term fund would be liable to cover any such defi ciency in the fi rst 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
2014 £m
2013 £m
M&G including
Prudential
Capital
US
Eastspring
Investments
Total
Total
309
296
(26)
1
(342)
–
238
134
20
–
–
(5)
8
157
129
80
(8)
–
(62)
–
139
572
396
(34)
1
(409)
8
534
513
424
(4)
8
(365)
(4)
572
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
C: Balance sheet notes continued
C12: Provisions
Provision in respect of defi ned benefi t pension schemes:C9
Other provisions (see below)
Total provisions
Analysis of other provisions:
2014 £m
2013 £m
217
507
724
194
441
635
At 1 January
Charged to income statement:
Additional provisions
Unused amounts released
Used during the year
Exchange differences
Total at 31 December
2014 £m
2013 £m
Legal
provisions
Restruc-
turing
provisions
note (i)
Other
provisions
note (ii)
14
5
(3)
(7)
–
9
13
5
(3)
(4)
–
11
414
357
(10)
(277)
3
487
Legal
provisions
Restruc-
turing
provisions
note (i)
Other
provisions
note (ii)
20
17
(2)
(21)
–
14
27
2
(13)
(3)
–
13
339
183
(10)
(86)
(12)
414
Total
441
367
(16)
(288)
3
507
Total
386
202
(25)
(110)
(12)
441
Notes
(i)
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.
(ii) Other provisions comprise staff benefi ts provisions of £395 million (2013: £332 million), provisions for onerous contracts of £35 million (2013: £41 million) and
regulatory and other provisions of £57 million (2013: £41 million). Staff benefi ts are generally expected to be paid out within the next three years.
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:
Group
occupied
property
2014 £m
Tangible
assets
Group
occupied
property
2013 £m
Tangible
assets
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
357
(50)
307
307
3
(9)
31
–
–
332
390
(58)
332
Total
1,417
(497)
920
920
(15)
(90)
172
1
(10)
978
1,060
(447)
613
613
(18)
(81)
141
1
(10)
646
Total
1,221
(467)
754
754
(3)
(87)
221
78
(43)
920
970
(428)
542
542
(2)
(75)
125
77
(54)
613
251
(39)
212
212
(1)
(12)
96
1
11
307
357
(50)
307
1,165
(519)
646
1,555
(577)
978
1,060
(447)
613
1,417
(497)
920
Tangible assets
Of the £646 million of tangible assets, £521 million were held by the Group’s with-profi ts operations, primarily by the consolidated
subsidiaries for venture fund and other investment purposes of the PAC with-profi ts fund.
Capital expenditure: property, plant and equipment by segment
The capital expenditure of £141 million (2013: £125 million) arose as follows: £82 million in UK, £16 million in US and £20 million in Asia in
insurance operations with the remaining balance of £23 million arising from asset management operations and unallocated corporate
expenditure (2013: £68 million in UK, £16 million in US, £23 million in Asia and £18 million in other operations).
Prudential plc Annual Report 2014
255
C14: Investment properties
Investment properties principally relate to the PAC with-profi ts fund and are carried at fair value. A reconciliation of the carrying amount
of investment properties at the beginning and end of the year is set out below:
At 1 January
Additions:
Resulting from acquisitions
Resulting from expenditure capitalised
Disposals
Net gain from fair value adjustments
Net foreign exchange differences
Transfers (to) from held for sale assets
At 31 December
2014 £m
2013 £m
11,477
10,554
669
59
(370)
914
20
(5)
1,050
42
(613)
441
(15)
18
12,764
11,477
The 2014 income statement includes rental income from investment properties of £729 million (2013: £606 million) and direct operating
expenses including repairs and maintenance arising from these properties of £41 million (2013: £46 million).
Investment properties of £5,263 million (2013: £4,426 million) are held under fi nance leases. A reconciliation between the total
of future minimum lease payments at the statement of fi nancial position date, and their present value is shown below:
Less than 1 year
1 to 5 years
Over 5 years
Total
2014 £m
2013 £m
Future
minimum
payments
Future
fi nance
charges
PV of future
minimum
payments
Future
minimum
payments
Future
fi nance
charges
PV of future
minimum
payments
5
21
936
962
–
(3)
(830)
(833)
5
18
106
129
5
19
824
848
–
(3)
(752)
(755)
5
16
72
93
Contingent rent is that portion of the lease payments that is not fi xed in amount but is based on the future value of a factor that changes
other than with the passage of time. There was no contingent rent recognised as income or expense in 2014 and 2013.
The Group’s policy is to let 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
2014 £m
2013 £m
314
1,098
2,762
4,174
351
1,204
3,294
4,849
The total minimum future rentals to be received on non-cancellable sub-leases for the Group’s investment properties held under fi nance
leases at 31 December 2014 are £2,600 million (2013: £2,315 million).
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
D: Other notes
D1: Corporate transactions
a Sale of PruHealth and PruProtect businesses
On 10 November 2014, the Prudential Assurance Company Limited announced an agreement to sell its 25 per cent equity stake in the
PruHealth and PruProtect businesses to Discovery Group Europe Limited (‘Discovery’) for £155 million in cash.
The sale was completed on 14 November 2014. This transaction gave rise to a gain on disposal of £86 million. This amount is shown
separately in the Group’s supplementary analysis of profi t excluded from the Group’s IFRS operating profi t based on longer-term
investment returns. The net cash infl ow arising from this sale, as shown in the consolidated statement of cash fl ows, of £152 million,
comprised the net cash proceeds received.
b Held for sale Japan life business
On 5 February 2015, the Group announced that it had completed the sale of its closed book life insurance business in Japan, PCA Life
Insurance Company Limited to SBI Holdings, Inc. following regulatory approvals. The transaction was announced on 16 July 2013.
Of the agreed US$85 million cash consideration, the Group received US$68 million on completion of the transaction, and a further
payment of up to US$17 million will be received contingent upon the future performance of the Japan life business.
The Japan life business has been classifi ed as held for sale in these consolidated fi nancial statements in accordance with IFRS 5,
‘Non-current assets held for sale and discontinued operations’.
The assets and liabilities of the Japan life business classifi ed as held for sale on the statement of fi nancial position as at
31 December 2014 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
2014 £m
2013 £m
898
45
943
(124)
819
717
53
770
49
956
80
1,036
(120)
916
814
54
868
48
The remeasurement of the carrying value of the Japan life business on classifi cation as held for sale resulted in a charge of £(13) million
(2013: £(120) million) as shown in the income statement. These amounts, together with the results of the business including short-term
value movements on investments are included within ‘Loss attaching to held for sale Japan life business’ in the supplementary analysis
of profi t of the Group as shown in note B1.1.
c Bancassurance partnership with Standard Chartered Bank
On 12 March 2014, the Group announced that it had entered into an agreement expanding the term and geographic scope of its strategic
pan-Asian bancassurance partnership with Standard Chartered Bank. Under the new 15-year agreement, which commenced on
1 July 2014, a wide range of Prudential life insurance products are exclusively distributed through Standard Chartered Bank branches in
nine markets – Hong Kong, Singapore, Indonesia, Thailand, Malaysia, the Philippines, Vietnam, India and Taiwan – subject to applicable
regulations in each country. In China and South Korea, Standard Chartered Bank distributes Prudential’s life insurance products on
a preferred basis. Prudential and Standard Chartered Bank have also agreed to explore additional opportunities to collaborate in due
course elsewhere in Asia and in Africa, subject to existing exclusivity arrangements and regulatory restrictions.
As part of this transaction Prudential agreed to pay Standard Chartered Bank an initial fee of US$1.25 billion for distribution rights
which is not dependent on future sales volumes. Of this total, US$850 million was settled in the fi rst half of 2014. The remainder will be
paid in two equal instalments of US$200 million each in April 2015 and April 2016.
d 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.
Prudential plc Annual Report 2014
Prudential plc Annual Report 2014
257
257
The consideration for the transaction was 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 refl ect the net asset value
as at completion date, paid in July 2013. In addition a deferred payment of THB 0.535 billion (£12 million) was paid 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.
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) were transferred.
The costs of enabling the domestication in 2014 were £5 million (2013: £35 million). Within the Group’s supplementary analysis of
profi t, these costs have been presented as a separate category of items excluded from operating profi t based on longer-term investment
returns as shown in note B1.1.
D3: Contingencies and related obligations
The Group is involved in a number of litigation and regulatory issues. These include civil proceedings involving Jackson, 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. 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 2014 the pension mis-selling provision was £328 million (2013: £286 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 in the movement in the year is 2.0 per cent
(2013: 3.4 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.
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 fi xed, 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 2014 held a provision of £50 million (2013: £36 million)
within the main with-profi ts fund within policyholder liabilities to honour guarantees on these products. The Group’s main exposure
to guaranteed annuities in the UK is through SAIF and at 31 December 2014 a provision of £549 million (2013: £328 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-profi ts 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-profi ts business by providing the benefi ts associated with smoothing and guarantees,
by providing investment fl exibility for the fund’s assets, by meeting the regulatory capital requirements that demonstrate solvency and
by absorbing the costs of certain signifi cant events or fundamental changes in its long-term business without affecting the bonus
and investment policies. The size of the inherited estate fl uctuates from year to year depending on the investment return and the extent
of its utilisation.
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Prudential plc Annual Report 2014 Financial statements Notes to primary statements
D: Other notes continued
D3: Contingencies and related obligations continued
Support for long-term business funds by shareholders’ funds
As a proprietary insurance company, PAC is liable to meet its obligations to policyholders even if the assets of the long-term funds are
insuffi cient to do so. The assets, represented by the unallocated surplus of with-profi ts funds, in excess of amounts expected to be paid
for future terminal bonuses and related shareholder transfers (‘the excess assets’) in the long-term funds could be materially depleted
over time by, for example, a signifi cant or sustained equity market downturn, costs of signifi cant fundamental strategic change or a
material increase in the pension mis-selling provision. In the unlikely circumstance that the depletion of the excess assets within the
long-term fund was such that the Group’s ability to satisfy policyholders’ reasonable expectations was adversely affected, it might
become necessary to restrict the annual distribution to shareholders or to contribute shareholders’ funds to the long-term funds
to provide fi nancial support.
In 1997, the business of Scottish Amicable Life Assurance Society, a mutual society, was transferred to PAC with the creation of
a separate sub-fund, SAIF within PAC’s long-term business fund containing all the with-profi ts business and all other pension business
that was transferred. No new business has been or will be written in the sub-fund and 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-profi ts life business, all future earnings arising in SAIF are retained for SAIF policyholders. Any excess (defi ciency) of revenue over
expense within SAIF during a period is attributable to the policyholders of the fund. Shareholders have no interest in the profi ts of SAIF
but are entitled to the asset management fees paid on this business.
SAIF with-profi ts policies contain minimum levels of guaranteed benefi t to policyholders. In addition, as mentioned earlier in this note,
certain pensions products have guaranteed annuity rates at retirement. Should the assets of SAIF be inadequate to meet the guaranteed
benefi t obligations of the policyholders of SAIF, the PAC long-term fund would be liable to cover any such defi ciency in the fi rst instance.
Unclaimed Property Provision
Jackson has received regulatory enquiries on an industry-wide matter regarding claims settlement practices and compliance with
unclaimed property laws. Concurrently, some regulators and state legislatures have required 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. 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.
Jackson continually reviews active and recently terminated policies compared to vendors’ databases of known deaths.
At 31 December 2014, Jackson has accrued £13 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 fi nanced by payments assessed on solvent insurance companies based on location, volume and types of business.
The Group estimated its reserve for future guarantee fund assessments for Jackson, included within other liabilities to be £3 million at
31 December 2014 (2013: £13 million). Similar assessments for the UK businesses were not signifi cant. The directors believe that the
reserve is adequate for all anticipated payments for known insolvencies.
At 31 December 2014, Jackson has unfunded commitments of £332 million (2013: £298 million) related to its investments in limited
partnerships and £73 million (2013: £132 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 signifi cant.
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.
Prudential plc Annual Report 2014
Prudential plc Annual Report 2014
259
259
D4: Post balance sheet events
Completion of the sale of Japan life business
On 5 February 2015, the Group announced that it had completed the sale of its closed book life insurance business in Japan, as described
further in note D1(b).
Final dividend
The 2014 fi nal dividend approved by the Board of Directors after 31 December 2014 is as described in note B7.
D5: Subsidiary undertakings
a Principal subsidiaries
The principal subsidiary undertakings (those undertakings whose results or fi nancial position, in the opinion of the directors, principally
affected the Group’s results or fi nancial position) of the Group at 31 December 2014 are disclosed in note 5 ‘Investments of the Company’
of the parent company fi nancial statements.
Details of all Prudential subsidiaries, joint ventures and associates will be annexed to the next Annual Returns of Prudential plc fi led
with the UK Registrar of Companies.
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, UK companies can only declare dividends if they have suffi cient distributable reserves. Further, UK
insurance companies are required to maintain solvency margins in accordance with the rules of the Prudential Regulation Authority.
The Group UK asset management company, M&G Investment Management Ltd is also required to maintain capital in accordance with
regulatory 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 suffi cient distributable reserves.
The Group capital position statement for life assurance businesses is set out in note C11.1, showing the available capital refl ecting the
excess of regulatory basis over liabilities for each fund or group of companies determined by reference to the local regulation of the
subsidiaries. In addition, disclosure is also provided in note C11.1 of the local capital requirement of the principal funds and companies.
D6: Investments in joint ventures and associates
Joint ventures represent arrangements where the controlling parties 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 businesses in China with
CITIC Group, and in India with ICICI Bank. In addition, there is an asset management joint venture in Hong Kong with Bank of China
International Holdings Limited (BOCI) and Takaful general and life insurance joint venture in Malaysia.
The Group has various joint ventures relating to property investments held by the PAC with-profi ts fund. The results of these joint
ventures are refl ected in the movement in the unallocated surplus of the PAC with-profi ts 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 by
using the equity method. For these operations the net of tax results are included in the Group’s profi t 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 fi nancial information up to 31 December is recorded. Accordingly,
the information covers the same period as that of the Group.
The Group’s associates, which are also accounted for under the equity method, include PPM South Africa and PruHealth (until its sale
in 2014, see note D1). 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-profi ts funds where the Group
has signifi cant infl uence. As allowed under IAS 28, these investments are accounted for on a fair value through profi t or loss basis.
The aggregate fair value of associates accounted for at fair value through profi t or loss where there are published price quotations is
approximately £1.2 billion at 31 December 2014 (2013: £0.5 billion).
The Group’s share of the profi ts, 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:
F
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m
e
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s
D
:
O
t
h
e
r
n
o
t
e
s
Shareholder-backed business
PAC with-profi ts fund (prior to offsetting effect in
movement in unallocated surplus)
Total
Joint ventures
Associates
2014 £m
2013 £m
2014 £m
2013 £m
162
129
291
52
88
140
12
–
12
7
–
7
260260
Prudential plc Annual Report 2014 Financial statements Notes to primary statements
D: Other notes continued
D6: Investments in joint ventures and associates continued
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 signifi cant contingent liabilities or capital commitments to which the Group is exposed nor does the Group
have any signifi cant contingent liabilities or capital commitments in relation to its interests in the joint ventures.
D7: 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 fi nancial position
sheet at fair value or amortised cost in accordance with their IAS 39 classifi cations. The transactions are included in the income statement
and include amounts paid on issue of shares or units, amounts received on cancellation of shares or units and paid in respect of the
periodic charge and administration fee.
Further, following the adoption of IFRS 11 in 2013, the Group’s investments in joint ventures are now accounted for on an equity
method basis. There are no material transactions between these joint ventures and other Group companies.
Executive offi cers and directors of the Company may from time to time purchase insurance, asset management or annuity products
marketed by Group companies in the ordinary course of business on substantially the same terms as those prevailing at the time for
comparable transactions with other persons.
In 2014 and 2013, other transactions with directors were not deemed to be signifi cant both by virtue of their size and in the context
of the directors’ fi nancial positions. 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.
D8: Commitments
Operating leases and capital commitments
The Group leases various offi ces to conduct its business. Leases in which a signifi cant portion of the risks and rewards of ownership are
retained by the lessor are classifi ed as operating leases. Payments made under operating leases (net of any incentives received from the
lessor) are charged to the income statement on a straight-line basis over the period of the lease.
Future minimum lease payments for non-cancellable operating leases fall due during the following periods:
Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
Future minimum sub-lease rentals received for non-cancellable operating leases for land and buildings
Minimum lease rental payments included in consolidated income statement
2014 £m
2013 £m
89
214
105
17
95
110
308
333
20
92
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 2014 were £232 million (2013: £92 million).
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
Other debtors
Deferred tax
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 assets (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
Prudential plc Annual Report 2014
261
Note
2014 £m
2013 £m
5
5
6
8
7
7
8
7
7
7
5
9
10
10
11
11
5,373
6,329
11,702
18,216
1,497
19,713
3,785
3
8
2
7
3,805
(1,704)
(500)
(315)
(1,108)
(55)
(3)
(39)
(3,724)
81
3,706
3
9
3
224
3,945
(1,634)
(200)
(199)
(2,462)
(60)
(4)
(40)
(4,599)
(654)
11,783
19,059
(3,320)
(549)
–
–
(3,869)
7,914
31
7,945
128
1,908
5,909
7,945
(3,662)
(549)
(299)
(7,227)
(11,737)
7,322
30
7,352
128
1,895
5,329
7,352
The financial statements of the parent company on pages 261 to 269 were approved by the Board of Directors on
9 March 2015 and signed on its behalf.
Paul Manduca
Chairman
Tidjane Thiam
Group Chief Executive
Nic Nicandrou
Chief Financial Officer
Financial statementsParent company 262
Prudential plc Annual Report 2014 Financial statements Notes on the parent company fi nancial statements
Notes on the parent company fi nancial statements
1 Nature of operations
Prudential plc (the ‘Company’) is a parent holding company. The Company, together with its subsidiaries (collectively the ‘Group’), is
an international fi nancial services group with its principal operations in Asia, the US and the UK. In Asia, the Group has operations in
Hong Kong, Indonesia, Malaysia, Singapore and other 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 Retirement Income Limited and M&G Investment Management Limited.
2 Basis of preparation
The fi nancial statements of the Company, which comprise the balance sheet and related notes, are prepared in accordance with Part
15 of the Companies Act 2006. The Company has taken advantage of the exemption under Section 408 of the Companies Act 2006
from presenting its own profi t and loss account.
The fi nancial statements are prepared in accordance with applicable accounting standards under UK Generally Accepted Accounting
Practice (UK GAAP), including Financial Reporting Standards (FRS) and Statements of Standard Accounting Practice (SSAP).
The Company has not prepared a cash fl ow statement on the basis that its cash fl ow is included within the cash fl ow statement in the
consolidated fi nancial statements. The Company has also taken advantage of the exemption within FRS 29, ‘Financial Instruments:
Disclosures’, from the requirements of this standard, because the Company’s results are included in the publicly available consolidated
fi nancial statements of the Group that include disclosures that comply with IFRS 7, ‘Financial Instruments: Disclosures’, which is
equivalent to FRS 29.
3 Signifi cant accounting policies
Shares in subsidiary undertakings
Shares in subsidiary undertakings are shown at the lower of cost and estimated realisable value.
Loans to subsidiary undertakings
Loans to subsidiary undertakings are shown at cost, less provisions.
Derivatives
Derivative fi nancial instruments are held to manage certain macroeconomic exposures. Derivative fi nancial instruments are carried at fair
value with changes in fair value included in the profi t 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 profi t and loss account to the date of maturity, or, for subordinated
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
Assets and liabilities denominated in foreign currencies, including borrowings that have been used to fi nance or provide a hedge against
Group equity investments in overseas subsidiaries, are translated at year end exchange rates. The impact of these currency translations
is recorded within the profi t and loss account for the year.
Prudential plc Annual Report 2014
263
Tax
Current tax expense is charged or credited to operations based upon amounts estimated to be payable or recoverable as a result of
taxable operations for the current year. To the extent that losses of an individual UK company are not offset in any one year, they can be
carried back for one year or carried forward indefi nitely to be offset against profi ts arising from the same company.
Deferred tax assets and liabilities are recognised in accordance with the provisions of FRS 19, ’Deferred tax’. The Company has
chosen not to apply the option available of recognising such assets and liabilities on a discounted basis to refl ect the time value of money.
Except as set out in FRS 19, deferred tax is recognised in respect of all timing differences that have originated but not reversed by the
balance sheet date. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered.
The Group’s UK subsidiaries each fi le separate tax returns. In accordance with UK tax legislation, where one domestic UK company is
a 75 per cent owned subsidiary of another UK company, or both are 75 per cent owned subsidiaries of a common parent, the companies
are considered to be within the same UK tax group. For companies within the same tax group, trading profi ts and losses arising in the
same accounting period may be offset for the purposes of determining current and deferred taxes.
Pensions
The Company assumes a portion of the pension surplus or defi cit of the Group’s main pension scheme, the Prudential Staff Pension
Scheme (‘PSPS’) and applied the requirements of FRS 17 ‘Retirement Benefi ts’ (as amended in December 2006) to its interest in the PSPS
surplus or defi cit. Further details are disclosed in note 9.
A pension surplus or defi cit is recorded as the difference between the present value of the scheme liabilities and the fair value of the
scheme assets. The Company’s share of pension surplus is recognised to the extent that the Company is able to recover a surplus either
through reduced contributions in the future or through refunds from the scheme.
The assets and liabilities of the defi ned benefi t pension schemes of the Prudential Group are subject to a full triennial actuarial
valuation using the projected unit method. Estimated future cash fl ows are then discounted at a high-quality corporate bond rate,
adjusted to allow for the difference in duration between the bond index and the pension liabilities where appropriate, to determine their
present value. These calculations are performed by independent actuaries.
The aggregate of the actuarially determined service costs of the currently employed personnel and the unwind of the discount on
liabilities at the start of the period, gains and losses on settlements and curtailments, less the expected investment return on the scheme
assets at the start of the period, is recognised in the profi t and loss account. To the extent that part or all of the Company’s interest in the
pension surplus is not recognised as an asset, the unrecognised surplus is initially applied to extinguish any past service costs, losses on
settlements or curtailments that would otherwise be included in the profi t and loss account. Next, the expected investment return on the
scheme’s assets is restricted so that it does not exceed the total of the current service cost, interest cost and any increase in the
recoverable surplus. Any further adjustment for the unrecognised surplus is treated as an actuarial gain or loss.
Actuarial gains and losses as a result of the changes in assumptions, the difference between actual and expected investment return on
scheme assets and experience variances are recorded in the statement of total recognised gains and losses. Actuarial gains and losses
also include adjustment for unrecognised pension surplus as described above.
Share-based payment
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 fi nancial statements, the Company records an increase in the investment in subsidiary undertakings for the value of
the share options and awards granted with a corresponding credit entry recognised directly in equity. The value of the share options and
awards granted is based upon the fair value of the options and awards at the grant date, the vesting period and the vesting conditions.
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264
Prudential plc Annual Report 2014 Financial statements Notes on the parent company fi nancial statements
Notes on the parent company fi nancial statements continued
4 Reconciliation from UK GAAP to IFRS
The Company fi nancial statements are prepared in accordance with UK GAAP and the consolidated fi nancial statements are prepared in
accordance with IFRS as issued by the IASB and endorsed by the EU. The tables below provide a reconciliation between UK GAAP and
IFRS.
Profi t aft er tax
Profi t for the fi nancial year of the Company in accordance with UK GAAP
IFRS adjustment*
Profi t for the fi nancial year of the Company (including dividends from subsidiaries) in accordance with IFRS
Share in the IFRS result of the Group, net of distributions to the Company†
Profi t aft er tax of the Group attributable to shareholders in accordance with IFRS
Net equity
Shareholders’ equity of the Company in accordance with UK GAAP and IFRS
Share in the IFRS net equity of the Group†
Shareholders’ equity of the Group in accordance with IFRS
2014 £m
2013 £m
1,460
3
1,463
753
2,216
1,579
16
1,595
(249)
1,346
2014 £m
2013 £m
7,945
3,866
11,811
7,352
2,298
9,650
* ‘IFRS adjustment’ in the above table represents the diff erence in the accounting treatment for pension schemes between UK GAAP and IFRS.
† The ‘shares in the IFRS result and net equity of the Group’ lines represent the Company’s equity in the earnings and net assets of its subsidiaries and associates.
The profi t for the fi nancial year of the Company in accordance with UK GAAP and IFRS includes dividends declared in the year from
subsidiary undertakings of £1,774 million and £2,332 million for the years ended 31 December 2014 and 2013, respectively.
As stated in note 3, under UK GAAP, the Company accounts for its investments in subsidiary undertakings at the lower of cost and
estimated realisable value. For the purpose of this reconciliation, no adjustment is made to the Company in respect of any valuation
adjustments to shares in subsidiary undertakings which would be eliminated on consolidation.
5 Investments of the Company
At 1 January
Dissolution of subsidiary undertaking
Net reduction in loans
Other movements
At 31 December
Prudential plc Annual Report 2014
265
2014 £m
Shares in
subsidiary
undertakings
Loans to
subsidiary
undertakings
18,216
(12,791)
–
(52)
5,373
1,497
6,326
(1,494)
–
6,329
In February 2014, the Company dissolved part of the Group’s corporate structure relating to central fi nance subsidiaries, resulting
in a reduction of £12,791 million in the cost of shares in subsidiary undertakings. This dissolution was accompanied by an increase
of £6,326 million in loans to subsidiary undertakings and a reduction of £6,114 million in amounts owed to subsidiary undertakings falling
due after more than one year. The balance of £1,113 million owed to subsidiary undertakings was offset against loans to subsidiary
undertakings.
Other movements comprise £6 million in respect of share-based payments, refl ecting the value of payments settled by the Company
for employees of its subsidiary undertakings, offset by cash of £58 million received from those subsidiaries in respect of share awards.
The principal subsidiary undertakings of the Company at 31 December 2014 were:
The Prudential Assurance Company 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*
Prudential Hong Kong Limited*
* Owned by a subsidiary undertaking of the Company.
Main activity
Country of incorporation
Insurance
Insurance
Asset management
Insurance
Insurance
Insurance
Insurance
England and Wales
Scotland
England and Wales
US
Singapore
Indonesia
Hong Kong
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
2014 £m
2013 £m
1
7
8
2
7
9
Deferred tax assets are recognised to the extent that they are regarded as recoverable, that is to the extent that, on the basis of all
available evidence, it can be regarded as more likely than not that there will be suitable taxable profi ts from which the future reversal
of the underlying temporary differences can be deducted.
For each category of deferred tax asset recognised, its recoverability against forecast taxable profi ts is not signifi cantly impacted
by expected changes to accounting standards.
The reduction in the UK corporation tax rate from 21 per cent to 20 per cent from 1 April 2015 was substantively enacted on
2 July 2013. Accordingly, the effect of this change was included in the fi nancial statements for the year ended 31 December 2014.
The change did not have a material impact on the Company’s deferred tax balances as at 31 December 2014.
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Prudential plc Annual Report 2014 Financial statements Notes on the parent company fi nancial statements
Notes on the parent company fi nancial statements continued
7 Borrowings
Core structural borrowingsnote (i)
Other borrowings:
Commercial papernote (ii)
Floating Rate Notesnote (iii)
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
2014 £m
2013 £m
2014 £m
2013 £m
2014 £m
2013 £m
3,869
4,211
–
–
1,704
200
300
2,204
2,204
–
–
2,204
1,634
200
299
2,133
1,834
299
–
2,133
–
–
–
–
–
–
3,869
4,211
–
–
3,869
3,869
549
3,869
–
–
4,211
4,211
3,662
549
4,211
3,869
1,704
200
300
6,073
2,204
–
3,869
6,073
4,211
1,634
200
299
6,344
1,834
299
4,211
6,344
Further details on the core structural borrowings of the Company are provided in note C6.1 of the Group fi nancial statements.
These borrowings support a short-term fi xed income securities programme.
Notes
(i)
(ii)
(iii) The Company issued £200 million Floating Rate Notes in October 2014 which will mature in October 2015. These Notes have been wholly subscribed to by a
Group subsidiary and accordingly have been eliminated on consolidation in the Group fi nancial statements. These Notes were originally issued in October
2008 and have been continually reissued upon their maturity.
(iv) The interests of the holders of the subordinated liabilities are subordinate to the entitlements of other creditors of the Company.
(v)
In January 2015, the Company issued £300 million Medium Term Notes which will mature in January 2018. The proceeds, net of costs, were £299 million.
8 Derivative fi nancial instruments
Cross-currency swap
Infl ation-linked swap
Total
2014 £m
2013 £m
Fair value
assets
Fair value
liabilities
Fair value
assets
Fair value
liabilities
2
–
2
–
315
315
3
–
3
–
199
199
Derivative fi nancial instruments are held to manage certain macroeconomic exposures. The change in fair value of the derivative fi nancial
instruments of the Company was a loss before tax of £115 million (2013: loss before tax of £9 million).
The derivative fi nancial instruments are valued internally using standard market practices. In accordance with the Company’s risk
management framework, all internally generated valuations are subject to independent assessment against external counterparties’
valuations.
Prudential plc Annual Report 2014
267
9 Pension scheme fi nancial position
The majority of UK Prudential staff are members of the Group’s pension schemes. The largest scheme is the Prudential Staff Pension
Scheme (the ‘Scheme’) which is primarily a closed defi ned benefi t scheme.
At 31 December 2005, the allocation of surpluses and defi cits attaching to the Scheme between the Company and the unallocated
surplus of The Prudential Assurance Company Limited (‘PAC’) with-profi ts fund was apportioned in the ratio 30/70 following detailed
consideration of the sourcing of previous contributions. This ratio was applied to the base defi cit position at 1 January 2006 and for the
purpose of determining the allocation of the movements in that position up to 31 December 2014. 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. The triennial valuation of the Scheme as at 5 April 2014 is currently in progress.
Using external actuarial advice provided by the professionally qualifi ed actuaries, Towers Watson, for the valuation of the Scheme,
the most recent full valuations have been updated to 31 December 2014 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 2015 %
2014 %
2013 %
6.4
2.6
5.1
2.0
2.8
7.6
3.8
6.4
2.0
3.7
6.7
2.8
5.5
2.0
2.9
31 Dec 2014
31 Dec 2013
31 Dec 2012
31 Dec 2011
31 Dec 2010
£m
%
£m
%
£m
%
£m
%
£m
269
6,206
93
429
3.9
88.7
1.3
6.1
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
6,997
100.0
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
(6,157)
(5,316)
(5,226)
(4,844)
(4,866)
Equities
Bonds
Properties
Other assets
Total value of assets
Present value of
Scheme liabilities
Underlying surplus in
the Scheme
840
726
37
Surplus in the Scheme
recognised by the Company
39
Amounts refl ected in the
balance sheet of the
Company, net of
deferred tax
31
30
1,174
1,588
485
49
38
52
39
56
41
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-profi ts fund.
F
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Prudential plc Annual Report 2014 Financial statements Notes on the parent company fi nancial statements
Notes on the parent company fi nancial statements continued
9 Pension scheme fi nancial 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 gains
Benefi t payments
Present value of Scheme liabilities, at 31 December
Fair value of Scheme assets, at 1 January
Expected return on Scheme assets
Employee contributions
Employer contributions*
Actuarial gains (losses)
Benefi t payments
Fair value of Scheme assets, at 31 December
2014 £m
2013 £m
5,316
17
4
229
1
830
(240)
6,157
5,226
17
3
225
1
78
(234)
5,316
2014 £m
2013 £m
6,042
219
1
11
964
(240)
6,997
6,400
182
1
11
(318)
(234)
6,042
* The contributions comprise ongoing service contributions and expenses.
Pension charge and actuarial gains (losses) of the Scheme and attributable to the Company
The pension charge of the Scheme and the charge recognised in the Company’s profi t 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
2014 £m
2013 £m
(17)
(4)
(229)
219
(10)
(31)
(17)
(3)
(225)
182
(43)
(63)
Pension charge attributable to the Company
(14)
(25)
The pension charge attributable to the Company is net of the apportionment to the PAC with-profi ts fund and is related to the surplus
recognised on the balance sheet of the Company. No adjustment was made to the pension charge in 2014 or 2013 relating to the
unrecognised portion of the Scheme’s surplus.
Actuarial gains (losses):
2014 £m
2013 £m
2012 £m
2011 £m
2010 £m
Actual less expected return on Scheme assets (14% (2013: 5%)
(2012: 1%) (2011: 15%) (2010: 5%) of assets)
Experience (losses) gains on Scheme liabilities (1% (2013: 0%)
(2012: 0%) (2011: 6%) (2010: 0%) of liabilities)
Changes in assumptions underlying the present value of
Scheme liabilities
Total actuarial gains (losses) (2% (2013: 7%) (2012: 6%) (2011:
17%) (2010: 2%) of the present value of Scheme liabilities)
Actuarial gains (losses) attributable to the Company before tax
964
(34)
(796)
134
11
(318)
(2)
(76)
(396)
8
(45)
(19)
973
295
275
1
(233)
(426)
(370)
(297)
35
842
(16)
(94)
(14)
Prudential plc Annual Report 2014
269
The total actual return on Scheme assets was a gain of £1,183 million (2013: loss of £136 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-profi ts fund and are related to
the surplus recognised in the balance sheet of the Company. In 2014, the actuarial gains attributable to the Company included a charge
of £29 million (2013: a credit of £127 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 £11 million (2013: £8 million) attributable to the Company are recorded in the statement of total
recognised gains and losses. Cumulative actuarial gains as at 31 December 2014 amount to £112 million (2013: £101 million).
Total employer contributions expected to be paid into the Scheme for the year ending 31 December 2015 amount to £11 million,
comprising ongoing service contributions and expenses. This is subject to reassessment when the 2014 triennial valuation is fi nalised
in 2015.
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 2014 is set
out in note C10 of the Group fi nancial statements.
11 Profi t of the Company and reconciliation of the movement in shareholders’ funds
The profi t after tax of the Company for the year was £1,460 million (2013: £1,579 million). After dividends of £895 million (2013:
£781 million), actuarial gains net of tax in respect of the pension scheme of £9 million (2013: £6 million) and share-based payment credits
of £6 million (2013: £6 million), retained profi t at 31 December 2014 amounted to £5,909 million (2013: £5,329 million). The retained
profi t includes distributable reserves of £3,435 million and non-distributable reserves of £2,474 million. The non-distributable reserves
comprise £2,405 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, and £69 million of share-based payment reserves.
The amount of £2,405 million is not able to be regarded as part of the distributable reserves of the parent company because the gains
relate to intra-group transactions. Under English company law, Prudential may pay dividends only if suffi cient distributable reserves of
the Company are available for the purpose and if the amount of its net assets is greater than the aggregate of its called up share capital
and non-distributable 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.
A reconciliation of the movement in shareholders’ funds of the Company is given below:
Profi t 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 in shareholders’ funds
Shareholders’ funds at beginning of year
Shareholders’ funds at end of yearnote 4
12 Other information
2014 £m
2013 £m
1,460
(895)
565
9
6
13
593
7,352
7,945
1,579
(781)
798
6
6
6
816
6,536
7,352
a
Information on directors’ remuneration is given in the directors’ remuneration report section of this Annual Report and note B3.3
of the Group fi nancial statements.
Information on transactions of the directors with the Group is given in note D7 of the Group fi nancial statements.
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts were £0.1 million (2013: £0.1 million) and for
other services were £0.1 million (2013: £0.1 million).
In certain instances, the Company has guaranteed that its subsidiaries will meet their obligations when they fall due for payment.
e
b
c The Company employs no staff.
d
13 Post balance sheet events
Subject to shareholders’ approval, in May 2015 the Company will pay a fi nal dividend for the year ended 31 December 2014.
Further details are provided in note B7 of the Group fi nancial statements.
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Prudential plc Annual Report 2014 Financial statements Statement of directors’ responsibilities/Independent auditor’s report
Statement of directors’ responsibilities in respect
of the annual report and the fi nancial statements
The directors are responsible for
preparing the Annual Report and the
Group and parent company fi nancial
statements in accordance with
applicable law and regulations.
Company law requires the directors to
prepare Group and parent company
fi nancial statements for each fi nancial year.
Under that law, the directors are required
to prepare the Group fi nancial statements
in accordance with International Financial
Reporting Standards (IFRS) as adopted by
the European Union (EU) and applicable
law and have elected to prepare the parent
company fi nancial statements in
accordance with UK Accounting Standards
and applicable law (UK Generally
Accepted Accounting Practice).
Under company law, the directors must
not approve the fi nancial statements unless
they are satisfi ed that they give a true and
fair view of the state of affairs of the Group
and parent company and of their profi t or
loss for that period. In preparing each of the
Group and parent company fi nancial
statements, the directors are required to:
— Select suitable accounting policies and
then apply them consistently;
— Make judgements and estimates that
are reasonable and prudent;
— For the Group fi nancial statements,
state whether they have been prepared
in accordance with IFRS as adopted by
the EU;
— For the parent company fi nancial
statements, state whether applicable
UK Accounting Standards have been
followed, subject to any material
departures disclosed and explained in
the parent company fi nancial
statements; and
— Prepare the fi nancial statements on the
going-concern basis unless it is
inappropriate to presume that the
Group and the parent company will
continue in business.
The directors are responsible for keeping
adequate accounting records that are
suffi cient to show and explain the parent
company’s transactions, and disclose with
reasonable accuracy, at any time, the
fi nancial position of the parent company,
and enable them to ensure that its fi nancial
statements comply with the Companies
Act 2006. They have general responsibility
for taking such steps as are reasonably
open to them to safeguard the assets of the
Group and to prevent and detect fraud and
other irregularities.
Under applicable law and regulations,
the directors are also responsible for
preparing a 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 fi nancial information included on the
Company’s website. Legislation in the UK
governing the preparation and
dissemination of fi nancial statements may
differ from legislation in other jurisdictions.
The directors of Prudential plc, whose
names and positions are set out on
pages 72 to 75 confi rm that to the best
of their knowledge:
— The fi nancial statements, prepared in
accordance with the applicable set of
accounting standards, give a true and
fair view of the assets, liabilities,
fi nancial position and profi t or loss of
the Company and the undertakings
included in the consolidation taken
as a whole;
— 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; and
— The Annual Report and fi nancial
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.
Independent auditor’s report to the members of Prudential plc only
Prudential plc Annual Report 2014
271
Opinions and conclusions arising
from our audit
1. Our opinion on the fi nancial
statements is unmodifi ed
We have audited the fi nancial statements
of Prudential plc for the year ended
31 December 2014 set out on pages 123 to
269. In our opinion:
— The fi nancial statements give a true and
fair view of the state of the Group’s and
of the parent company’s affairs as at
31 December 2014 and of the Group’s
profi t for the year then ended;
— The Group fi nancial statements have
been properly prepared in accordance
with International Financial Reporting
Standards as adopted by the European
Union;
— The parent company fi nancial
statements have been properly
prepared in accordance with UK
Accounting Standards; and
— The fi nancial statements have been
prepared in accordance with the
requirements of the Companies Act
2006 and, as regards the Group
fi nancial statements, Article 4
of the IAS Regulation.
2. Our assessment of risks of
material misstatement
In arriving at our audit opinion above on the
fi nancial statements the risks of material
misstatement that had the greatest effect
on our audit were as follows:
Investments (£337,454 million)
Refer to page 81 (Audit Committee report),
page 136 (accounting policy) and pages
182 to 203 (fi nancial disclosures)
The risk – The Group’s investment
portfolio represents 91 per cent of the
Group’s total assets.
The substantial majority of the portfolio
does not involve signifi cant judgement as
prices are readily available from liquid
market sources.
The areas that involved signifi cant audit
effort and judgement in 2014 were the
valuation of illiquid positions within the
fi nancial investment portfolio representing
2 per cent of the Group’s total assets.
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 our 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 from our own pricing services
using external quotes for liquid
positions and, where available, for
illiquid positions;
— Assessing pricing model methodologies
and assumptions against industry
practice and valuation guidelines;
— Evaluating the testing performed by
the Group in order to identify any
impairment in relation to loans; and
performing our own assessment of loan
fi les to understand the performance
of the loans. We obtained an
understanding of existing and
prospective investee company
cash fl ows to understand whether loans
can be serviced or refi nancing may be
required and considered the impact on
impairment testing performed.
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
(£309,539 million)
Refer to page 81 (Audit Committee report),
page 133 (accounting policy) and pages
204 to 219 (fi nancial disclosures)
The risk: The Group has signifi cant
insurance liabilities representing
87 per cent of the Group’s total liabilities.
This is an area that involves signifi cant
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
signifi cant 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
signifi cant judgement over 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:
(a) Consideration of the appropriateness of
the assumptions used in the stochastic
models for the valuation of the US
variable annuity guarantees. These
included assumptions for investment
mix and projected investment returns
considered by reference to company
specifi c and industry data and for future
growth rates considered by reference
to market trends and market volatility.
We assessed assumptions of
policyholder behaviour by reference
to relevant company historical and
industry data.
(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 the
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 of whether 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
fl ows and challenging the assumptions
adopted in the context of company and
industry experience data and specifi c
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.
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Prudential plc Annual Report 2014 Financial statements Independent auditor’s report
Independent auditor’s report to the members of Prudential plc only continued
Deferred Acquisition Costs (‘DAC’)
(£5,930 million)
Refer to page 81 (Audit Committee report),
page 135 (accounting policy) and pages
220 to 224 (fi nancial disclosures)
The risk – DAC represents 1.6 per cent
of the total assets and involves judgement
in the identifi cation 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 87 per cent
of total DAC, involves the greatest
judgement in terms of measurement and
recoverability. The amortisation and
recoverability assessment of the US DAC
asset is related to the achieved and
projected future profi t profi le. This involves
making assumptions about future
investment returns and the consequential
impact on fee income.
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
Group’s deferral policy by comparing it
against the requirements of relevant
accounting standards;
(ii) evaluating whether costs are deferred
in accordance with the Group’s deferral
policy; and
(iii) assessing the calculations performed
including the appropriateness of the
assumptions used in determining the
profi t profi le 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 fi nancial
statements as a whole was set at
£307 million determined with reference
to a benchmark of IFRS shareholders’
equity (of which it represents 3 per cent).
We consider IFRS shareholders’ equity to
be the most appropriate benchmark as it
represents the residual interest that can be
ascribed to shareholders after policyholder
assets and corresponding liabilities have
been accounted for.
We report to the Group audit
committee any corrected or uncorrected
identifi ed misstatements exceeding
£15 million in addition to other identifi ed
misstatements that warrant reporting on
qualitative grounds.
We subjected the Group’s operations
to audits for Group reporting purposes
as follows:
— Audits for Group reporting purposes in
relation to the fi nancial information of
the insurance operations in the UK, US,
Hong Kong, Indonesia, Singapore,
Malaysia, Korea, Vietnam and fund
management operations in the UK
(M&G). These audits covered
92 per cent of total Group revenue;
88 per cent of Group profi t before
tax; 91 per cent of total Group assets
and 89 per cent of Group
shareholders’ equity.
— Audits of account balances that
correspond to the risks of material
misstatement identifi ed above in
relation to Prudential Capital and the
insurance operations in China, Taiwan
and Thailand. The account balances
audited are investments, policyholder
liabilities and deferred acquisition costs.
These operations covered 2 per cent
of total Group revenue; 4 per cent of
Group profi t before tax; 2 per cent
of total Group assets and 1 per cent
of Group shareholders’ equity.
The remaining operations cover 6 per cent
of total Group revenue, 8 per cent of Group
profi t before tax and 7 per cent of total
Group assets, none of which individually
represented more than 4 per cent of any of
total Group revenue, Group profi t before
tax or total Group assets. For the remaining
operations, we performed analysis at an
aggregated Group level to re-examine our
assessment that there were no signifi cant
risks of material misstatement within these
operations.
The Group team in the UK covered the
UK Group Head offi ce operations.
Component auditors performed the audit
work in the remaining locations.
The Group audit team instructed
component auditors as to the signifi cant
areas to be covered, including the relevant
risks detailed above and the information to
be reported back. The Group audit team
approved the component materialities,
which were set as £110 million for key
reporting components in Asia and
£140 million for all other key reporting
components listed above, having regard
to the size and risk profi le of the Group.
The Group audit team visited 10
component locations in insurance
operations in UK, US, Hong Kong,
Indonesia, Singapore, Malaysia, Korea and
Vietnam, fund management operations in
M&G and Prudential Capital. This included
an assessment of the audit risk and
strategy. Video and telephone conference
meetings were also held with these
component auditors and certain others that
were not physically visited. At these visits
and meetings, the fi ndings reported to the
Group audit team were discussed in more
detail, and any further work required by
the Group audit team was then performed
by the component auditor
The Senior Statutory Auditor, in
conjunction with other senior staff in the
Group team, also regularly attended
Business Unit audit committee meetings
(at a regional level for Asia) and
participated in meetings with local
management to understand at fi rst hand
the key risks and audit issues at a
component level which may affect the
Group fi nancial statements.
4. Our opinion on other matters
prescribed by the Companies Act
2006 is unmodifi ed
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
fi nancial year for which the fi nancial
statements are prepared is consistent
with the fi nancial statements.
273
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Scope of report and responsibilities
As explained more fully in the Directors’
Responsibilities Statement set out on page
270, 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/
auditscopeukco2014a 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 LLP,
Statutory Auditor
Chartered Accountants
London
9 March 2015
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 90, in relation to going
concern; and
— The part of the Corporate Governance
Statement on page 88 relating to the
Company’s compliance with the ten
provisions of the 2012 UK Corporate
Governance Code specified for
our review.
We have nothing to report in respect of the
above responsibilities.
Prudential plc Annual Report 2014
274
Prudential plc Annual Report 2014
Prudential plc Annual Report 2014
275
Section 6
European Embedded Value (EEV)
basis results
276
Index to EEV basis results
Description of EEV basis reporting
In broad terms, IFRS profi ts for long-term business refl ect
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 May 2004 and
subsequently supplemented by Additional Guidance issued
in October 2005. The principles provide consistent defi nitions,
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 profi ts expected to arise from the
current book of long-term business. The results are prepared by
projecting cash fl ows, by product, using best estimate assumptions
for all relevant factors. Furthermore, in determining these
expected profi ts, 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, morbidity and expenses. Further details are explained
in notes 16 and 17.
Post-tax basis of presentation
As previously announced, from 1 January 2014, the basis of
presentation has been altered to be on a post-tax basis and,
accordingly, all comparatives are shown on a comparable basis.
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276
Prudential plc Annual Report 2014 Financial statements European Embedded Value (EEV) basis results
Index to European Embedded Value (EEV) basis results
277
278
278
279
Post-tax operating profi t based on longer-term
investment returns
Post-tax summarised consolidated income statement
Movement in shareholders’ equity
Summary statement of fi nancial position
Notes on the EEV basis results
1 Basis of preparation
2 Results analysis by business area
3 Analysis of new business contribution
4 Operating profi t from business in force
5 Short-term fl uctuations in investment returns
6 Eff ect of changes in economic assumptions
7 Sale of PruHealth and PruProtect businesses
8 Held for sale Japan life business
9 Domestication of the Hong Kong branch business
280
280
282
283
285
286
287
287
288
288 10 Net core structural borrowings of shareholder-
fi nanced operations
289 11 Analysis of movement in free surplus
291 12 Reconciliation of movement in shareholders’ equity
292 13 Reconciliation of movements in net worth and value of
in-force for long-term business
294 14 Expected transfer of value of in-force business to free
surplus
295 15 Sensitivity of results to alternative assumptions
297 16 Methodology and accounting presentation
303 17 Assumptions
307 18 New business premiums and contributions
European Embedded Value (EEV) basis results
Post-tax operating profi t 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 expenditurenote (i)
Solvency II and restructuring costsnote (ii)
Post-tax operating profi t based on longer-term investment returns
Analysed as profi ts (losses) from:
New business
Business in force
Long-term business
Asset management
Other results
Total
Prudential plc Annual Report 2014
277
Note
2014 £m
2013* £m
note (iii)
3
4
3
4
3
4
3
4
1,162
739
1,901
78
(1)
1,978
694
834
1,528
6
1,534
270
476
746
19
765
386
1,151
(531)
(36)
4,096
2,126
2,049
4,175
470
(549)
4,096
1,139
753
1,892
64
(1)
1,955
706
820
1,526
39
1,565
237
595
832
22
854
346
1,200
(482)
(34)
4,204
2,082
2,168
4,250
449
(495)
4,204
* The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis. This approach has been
adopted throughout this supplementary information.
Notes
(i)
(ii)
EEV basis other income and expenditure represents the post-tax IFRS basis result, less the unwind of expected margins on the internal management of the
assets of the covered business (as explained in note 16(a)(vii)).
Solvency II and restructuring costs comprise the net of tax charge recognised on an IFRS basis and the additional amount recognised on the EEV basis for the
shareholders’ share incurred by the PAC with-profi ts fund.
(iii) The comparative results have been prepared using previously reported average exchange rates for the year. For memorandum disclosure purposes, note 2
presents the 2013 results on both actual exchange rates (AER) and constant exchange rates (CER) bases.
F
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278
Prudential plc Annual Report 2014 Financial statements European Embedded Value (EEV) basis results
European Embedded Value (EEV) basis results continued
Post-tax summarised consolidated income statement
Post-tax operating profi t based on longer-term investment returns
Asia operations
US operations
UK operations
Other income and expenditure
Solvency II and restructuring costs
Post-tax operating profi t based on longer-term investment returns
Short-term fl uctuations in investment returns
Effect of changes in economic assumptions
Mark to market value movements on core borrowings
Gain on sale of PruHealth and PruProtect
Loss attaching to held for sale Japan life business
Costs of domestication of Hong Kong branch
Total post-tax non-operating profi t
Profi t for the year attributable to equity holders of the Company
Note
2014 £m
2013* £m
1,978
1,534
1,151
(531)
(36)
4,096
763
(369)
(187)
44
–
(4)
247
4,343
1,955
1,565
1,200
(482)
(34)
4,204
(564)
629
152
–
(35)
(28)
154
4,358
5
6
7
8
9
* The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis – see note 1.
Movement in shareholders’ equity
Profi t for the year attributable to equity shareholders
Items taken directly to equity:
Exchange movements on foreign operations and net investment hedges
Dividends
New share capital subscribed
Shareholders' share of actuarial and other gains and losses on defi ned benefi t 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 own shares purchased by unit trusts consolidated under IFRS
Mark to market value movements on Jackson assets backing surplus and required capital
Net increase in shareholders’ equity
Shareholders’ equity at beginning of year:
As previously reported
Effect of the domestication of Hong Kong branch on 1 January 2014
Shareholders’ equity at end of year
Note
2014 £m
2013* £m
4,343
4,358
737
(895)
13
(11)
106
(48)
(6)
77
(1,077)
(781)
6
(53)
98
(10)
(31)
(97)
12
12
9
12
4,316
2,413
24,856
(11)
24,845
29,161
22,443
–
22,443
24,856
* The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis – see note 1.
Movement in shareholders’ equity
Comprising:
Asia operations
US operations
UK insurance operations
M&G
Other operations
Shareholders’ equity at end of year
Representing:
Net assets excluding acquired goodwill
and holding company net borrowings
Acquired goodwill
Holding company net borrowings at
market value note 10
Summary statement of financial position
31 Dec 2014 £m
Asset
management
and other
operations
274
157
19
1,646
(2,292)
(196)
Long-term
business
operations
note 12
12,545
8,379
8,433
–
–
29,357
Total
12,819
8,536
8,452
1,646
(2,292)
29,161
Long-term
business
operations
note 12
10,536
6,966
7,342
–
–
24,844
31 Dec 2013 £m
Asset
management
and other
operations
255
134
22
1,602
(2,001)
12
29,124
233
1,542
1,230
30,666
1,463
24,613
231
1,155
1,230
–
(2,968)
(2,968)
–
(2,373)
29,357
(196)
29,161
24,844
12
279
Total
10,791
7,100
7,364
1,602
(2,001)
24,856
25,768
1,461
(2,373)
24,856
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)
* Including liabilities in respect of insurance products classified as investment contracts under IFRS 4.
Net asset value per share
Note
31 Dec 2014
£m
31 Dec 2013
£m
326,633
288,826
(314,822)
17,350
(279,176)
15,206
(297,472)
(263,970)
12
29,161
24,856
128
1,908
9,775
11,811
17,350
29,161
128
1,895
7,627
9,650
15,206
24,856
12
12
12
Based on EEV basis shareholders’ equity of £29,161 million (2013: £24,856 million) (in pence)
Number of issued shares at year end (millions)
Annualised return on embedded value*
31 Dec 2014
31 Dec 2013
1,136p
2,568
971p
2,560
16%
19%
* Annualised return on embedded value is based on EEV post-tax operating profit, as a percentage of opening EEV basis shareholders’ equity.
The supplementary information on pages 277 to 307 was approved by the Board of Directors on 9 March 2015.
Paul Manduca
Chairman
Tidjane Thiam
Group Chief Executive
Nic Nicandrou
Chief Financial Officer
Financial statementsEuropean Embedded Value (EEV) basis resultsNotes on the EEV basis results Prudential plc Annual Report 2014
280
Prudential plc Annual Report 2014 Financial statements Notes on the EEV basis results
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 subsequently supplemented by Additional Guidance on EEV Disclosure issued in October 2005. Where appropriate,
the EEV basis results include the effects of adoption of International Financial Reporting Standards (IFRS). The EEV results are presented
on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis.
The directors are responsible for the preparation of the supplementary information in accordance with the EEV Principles.
The auditors have reported on the 2014 EEV basis results supplement to the Company’s statutory accounts for 2014. Their report was
(i) unqualifi ed, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying
their report and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006. Except for the change in
presentation of EEV results from pre-tax to post-tax, as described in the additional unaudited fi nancial information for the 2013 annual
report, the 2013 results have been derived from the EEV basis results supplement to the Company’s statutory accounts for 2013.
A detailed description of the EEV methodology and accounting presentation is provided in note 16.
2 Results analysis by business area
The 2013 comparative results are shown below on both actual exchange rates (AER) and constant exchange rates (CER) bases.
The 2013 CER comparative results are translated at 2014 average exchange rates.
Annual premium and contribution equivalents (APE) (note 16(a)(ii))
Asia operations
US operations
UK operations
Total
Post-tax operating profi t
Asia operations
New business
Business in force
Long-term business
Eastspring Investments
Development costs
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
Solvency II and restructuring costs
2014 £m
2013 £m
% change
Note
3
2,237
1,556
857
4,650
AER
2,125
1,573
725
4,423
CER
1,946
1,494
725
4,165
AER
5%
(1%)
18%
5%
CER
15%
4%
18%
12%
2014 £m
2013 £m
% change
Note
AER
CER
AER
CER
3
4
3
4
3
4
1,162
739
1,901
78
(1)
1,978
694
834
1,528
6
1,534
270
476
746
19
765
386
1,139
753
1,892
64
(1)
1,955
706
820
1,526
39
1,565
237
595
832
22
854
346
1,032
673
1,705
59
(1)
1,763
670
779
1,449
37
1,486
237
595
832
22
854
346
1,151
1,200
1,200
(531)
(36)
(482)
(34)
(482)
(34)
2%
(2)%
0%
22%
0%
1%
(2)%
2%
0%
(85)%
(2)%
14%
(20)%
(10)%
(14)%
(10)%
12%
(4)%
(10)%
(6)%
13%
10%
11%
32%
0%
12%
4%
7%
5%
(84)%
3%
14%
(20)%
(10)%
(14)%
(10)%
12%
(4)%
(10)%
(6)%
Post-tax operating profi t based on longer-term
investment returns
4,096
4,204
3,933
(3)%
4%
Prudential plc Annual Report 2014
281
Note
3
4
2014 £m
2013 £m
% change
AER
CER
AER
CER
2,126
2,049
4,175
470
(549)
2,082
2,168
4,250
449
(495)
1,939
2,047
3,986
442
(495)
2%
(5)%
(2)%
5%
(11)%
10%
0%
5%
6%
(11)%
4,096
4,204
3,933
(3)%
4%
2014 £m
2013 £m
% change
Note
AER
CER
AER
4,096
4,204
3,933
(3)%
5
6
763
(369)
(147)
247
(564)
629
89
154
(529)
623
94
188
235%
(159)%
(265)%
60%
0%
Analysed as profi ts from:
New business
Business in force
Total long-term business
Asset management
Other results
Post-tax operating profi t based on longer-term
investment returns
Post-tax profi t
Post-tax operating profi t based on longer-term
investment returns
Short-term fl uctuations in investment returns
Effect of changes in economic assumptions
Other non-operating profi t
Total post-tax non-operating profi t
Profi t for the year attributable to shareholders
4,343
4,358
4,121
Basic earnings per share (in pence)
Based on post-tax operating profi t including
longer-term investment returns
Based on post-tax profi t
Average number of shares (millions)
2014
2013
% change
AER
CER
AER
160.7p
170.4p
2,549
165.0p
171.0p
2,548
154.4p
161.7p
2,548
(3%)
0%
CER
4%
244%
(159)%
(256)%
31%
5%
CER
4%
5%
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282
Prudential plc Annual Report 2014 Financial statements Notes on the EEV basis results
Notes on the EEV basis results continued
3 Analysis of new business contribution
(i) Group summary
Asia operations(note ii)
US operations
UK insurance operations
Total
Asia operations(note ii)
US operations
UK insurance operations
Total
Annual
premium and
contribution
equivalents
(APE)
note 18
£m
Present value
of new
business
premiums
(PVNBP)
note 18
£m
2,237
1,556
857
4,650
12,331
15,555
7,471
35,357
Annual
premium and
contribution
equivalents
(APE)
note 18
£m
Present value
of new
business
premiums
(PVNBP)
note 18
£m
2,125
1,573
725
4,423
11,375
15,723
5,978
33,076
2014
New business
contribution
note
£m
1,162
694
270
2,126
2013
New business
contribution*
note
£m
1,139
706
237
2,082
New business margin
APE
PVNBP
%
52
45
32
46
%
9.4
4.5
3.6
6.0
New business margin*
APE
PVNBP
%
54
45
33
47
%
10.0
4.5
4.0
6.3
Note
The increase in new business contribution of £44 million from £2,082 million for 2013 to £2,126 million in 2014 comprises an increase on a CER basis of £187 million,
off set by foreign exchange eff ects of £(143) million. The increase of £187 million on the CER basis comprises a contribution of £277 million refl ecting higher sales
volumes and the impact of pricing and product actions, off set by a £(90) million adverse eff ect of reductions in long-term interest rates in the year (analysed as Asia
negative £(17) million, US negative £(63) million and UK negative £(10) million).
(ii) Asia operations
China
Hong Kong
India
Indonesia
Korea
Taiwan
Other
2014 £m
2013* £m
27
405
12
296
11
29
382
AER
28
283
15
359
25
31
398
CER
26
269
14
301
25
29
368
Total Asia operations
1,162
1,139
1,032
* The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis – see note 1.
Prudential plc Annual Report 2014
283
4 Operating profi t from business in force
(i) Group summary
Unwind of discount and other expected returns
Effect of changes in operating assumptions
Experience variances and other items
Total
Unwind of discount and other expected returns
Effect of changes in operating assumptions
Experience variances and other items
Total
2014 £m
Asia
operations
note (ii)
US
operations
note (iii)
648
52
39
739
382
86
366
834
2013* £m
UK
insurance
operations
note (iv)
410
–
66
476
Asia
operations
note (ii)
US
operations
note (iii)
UK
insurance
operations
note (iv)
668
5
80
753
395
76
349
820
437
98
60
595
* The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis – see note 1.
Note
The movements in operating profi t from business in force of £(119) million from £2,168 million in 2013 to £2,049 million for 2014 comprises:
Reduction in unwind of discount and other expected returns:
Foreign exchange effects
Effect of changes in interest rates
Effect of growth in opening value and other items
Non-recurrent benefi t in 2013 of reduction in UK corporate tax rates
Year-on-year change in effects of other operating assumptions, experience variances and other items
Net decrease in operating profi t from business in force
Total
note
1,440
138
471
2,049
Total
note
1,500
179
489
2,168
2014 £m
(80)
(187)
207
(60)
(98)
39
(119)
(ii) Asia operations
Unwind of discount and other expected returnsnote (a)
Effect of changes in operating assumptions:
Mortality and morbiditynote (b)
Persistency and withdrawalsnote (c)
Expense
Othernote (d)
Experience variances and other items:
Mortality and morbiditynote (e)
Persistency and withdrawalsnote (f)
Expensenote (g)
Other
Total Asia operations
2014 £m
2013* £m
648
27
(17)
(5)
47
52
23
44
(27)
(1)
39
739
668
19
(23)
(6)
15
5
33
36
(17)
28
80
753
* The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis – see note 1.
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284
Prudential plc Annual Report 2014 Financial statements Notes on the EEV basis results
Notes on the EEV basis results continued
4 Operating profi t from business in force continued
Notes
(a)
(b)
(c)
(d)
(e)
(f)
(g)
The decrease in unwind of discount and other expected returns of £(20) million from £668 million for 2013 to £648 million for 2014 is impacted by the eff ect
of lower interest rates of £(55) million, and a £(61) million adverse foreign currency translation eff ect, partially off set by £96 million mainly for the increase
in the opening in-force value.
In 2014, the credit of £27 million for mortality and morbidity assumption changes refl ects a number of off setting items, including the eff ect of reduced projected
mortality rates for Hong Kong. In 2013, the credit of £19 million mainly refl ected the benefi cial eff ect arising from the renegotiation of a reinsurance agreement
in Indonesia.
In 2014, the charge of £(17) million for persistency assumptions mainly refl ects increased partial withdrawal assumptions on unit-linked business in Korea.
For 2013, the charge of £(23) million refl ected a number of off setting items including the eff ect of strengthening lapse and premium holiday assumptions in Korea.
In 2014, the credit of £47 million for other assumption changes refl ects a number of off setting items, including the eff ects of modelling improvements and those
arising from asset allocation changes in Hong Kong.
The favourable eff ect of mortality and morbidity experience in 2014 of £23 million (2013: £33 million) refl ects better than expected experience in Indonesia and
Hong Kong, off set by higher claims in Malaysia on medical reimbursement products.
The positive persistency and withdrawals experience variance in 2014 of £44 million (2013: £36 million) refl ects favourable experience principally in Hong
Kong across all product groups.
The expense experience variance at 2014 is negative £(27) million (2013: negative £(17) million). The variance arises in operations which are currently sub-scale
(China, Malaysia Takaful and Taiwan), and from short-term overruns in India and Korea.
(iii) US operations
Unwind of discount and other expected returnsnote (a)
Effect of changes in operating assumptions:
Persistencynote (b)
Othernote (c)
Experience variances and other items:
Spread experience variancenote (d)
Amortisation of interest-related realised gains and lossesnote (e)
Othernote (f)
Total US operations
2014 £m
2013* £m
382
55
31
86
192
56
118
366
834
395
47
29
76
217
58
74
349
820
* The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis – see note 1.
Notes
(a)
(b)
(c)
The decrease in unwind of discount and other expected returns of £(13) million from £395 million for 2013 to £382 million for 2014 refl ects a £(73) million
adverse eff ect of the 90 basis points reduction in the US 10-year treasury rate and a £(19) million adverse foreign currency eff ect, partially off set by a £79 million
eff ect mainly for the underlying growth in the in-force book.
The credit in 2014 of £55 million (2013: £47 million) for persistency assumption changes principally relates to revised assumptions for variable annuity business
to more closely refl ect recent experience.
The eff ect of other changes in operating assumptions of £31 million refl ects a number of off setting items and includes the capitalised eff ect of changes in
projected policyholder variable annuity fees of £46 million (2013: £33 million) which vary depending on the size and mix of variable annuity funds.
(e)
(d) The spread assumption for Jackson is determined on a longer-term basis, net of provision for defaults (see note 17 (ii)). The spread experience variance in 2014
of £192 million (2013: £217 million) includes the positive eff ect of transactions undertaken to more closely match the overall asset and liability duration.
The amortisation of interest-related gains and losses refl ects the fact that when bonds that are neither impaired nor deteriorating are sold and reinvested, there
will be a consequent change in the investment yield. The realised gain or loss is amortised into the result over the year when the bonds would have otherwise
matured to better refl ect the long-term returns included in operating profi ts.
The eff ect of £118 million in 2014 for other experience variances and other items includes the eff ect of favourable persistency, mortality and tax experience
variances, the most signifi cant item arising from the continued positive persistency experience for annuity business of £59 million (2013: £40 million).
(f)
(iv) UK insurance operations
Unwind of discount and other expected returnsnote (a)
Effect of change in UK corporate tax ratenote (b)
Other itemsnote (c)
Total UK insurance operations
2014 £m
2013* £m
410
–
66
476
437
98
60
595
* The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis – see note 1.
Notes
(a)
(b)
The decrease in unwind of discount and other expected returns of £(27) million from £437 million for 2013 to £410 million for 2014 refl ects a £(59) million
adverse impact of the 130 basis point reduction in gilt yields partially off set by £32 million mainly for the underlying growth in the in-force book.
For 2013, the positive contribution from the change in UK corporate tax rates of £98 million refl ected the combined eff ect 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.
(c) Other items of £66 million for 2014 (2013: £60 million) principally refl ect the positive eff ects of rebalancing the investment portfolio backing annuity business
(see note 16(b)(ii)).
5 Short-term fl uctuations in investment returns
Short-term fl uctuations in investment returns included in profi t for the year arise as follows:
(i) Group summary
Insurance operations:
Asianote (ii)
USnote (iii)
UKnote (iv)
Other operationsnote (v)
Total
Prudential plc Annual Report 2014
285
2014 £m
2013* £m
439
(166)
583
856
(93)
763
(308)
(280)
28
(560)
(4)
(564)
* The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis – see note 1.
(ii) Asia operations
The short-term fl uctuations in investment returns for Asia operations comprise amounts in respect of:
Hong Kong
Indonesia
Singapore
Other
Total Asia operations
2014 £m
2013* £m
178
35
92
134
439
(178)
(44)
(80)
(6)
(308)
* The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis – see note 1.
These fl uctuations mainly arise from decreases (2014) and increases (2013) in long-term interest rates as they affect the value of bonds
in the portfolios backing liabilities and related capital. The £134 million credit for other operations in 2014 principally arises in Taiwan
of £23 million and in Thailand of £49 million for unrealised gains on bonds.
(iii) US operations
The short-term fl uctuations in investment returns for US operations comprise:
Investment return related experience on fi xed income securitiesnote (a)
Investment return related impact due to changed expectation of profi ts on in-force variable annuity
business in future periods based on current period separate account return, net of related hedging
activitynote (b)
Other items including actual less long-term return on equity based investmentsnote (c)
Total US operations
2014 £m
2013* £m
31
13
(187)
(10)
(166)
(377)
84
(280)
* The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis – see note 1.
Notes
(a)
(b)
The credit relating to fi xed income securities comprises the following elements:
– The excess of actual realised gains and losses over the amortisation of interest-related realised gains and losses recorded in the profi t and loss account;
– Credit loss experience (versus the longer-term assumption); and
– The impact of changes in the asset portfolio.
This item refl ects the net impact of:
– Variances in projected future fees and future benefi t costs arising from the eff ect of market fl uctuations on the growth in separate account asset values in the
current reporting period; and
– Related hedging activity arising from realised and unrealised gains and losses on equity-related hedges and interest rate options.
For 2013, other items of £84 million primarily refl ected a benefi cial impact of the excess of actual over assumed return from investments in limited partnerships.
(c)
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286
Prudential plc Annual Report 2014 Financial statements Notes on the EEV basis results
Notes on the EEV basis results continued
5 Short-term fl uctuations in investment returns continued
(iv) UK insurance operations
The short-term fl uctuations in investment returns for UK insurance operations comprise:
Shareholder-backed annuitynote (a)
With-profi ts, unit-linked and othernote (b)
2014 £m
2013* £m
310
273
583
(58)
86
28
* The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis – see note 1.
Notes
(a)
(b)
Short-term fl uctuations in investment returns for shareholder-backed annuity business comprise:
– Gains/(losses) on surplus assets compared to the expected long-term rate of return refl ecting reductions/(increases) in corporate bond and gilt yields;
– The diff erence between actual and expected default experience; and
– The eff ect of mismatching for assets and liabilities of diff erent durations and other short-term fl uctuations in investment returns.
The short-term fl uctuations in investment returns for with-profi ts, unit-linked and other business primarily arise from the excess of actual over expected
returns for with-profi ts business, refl ecting a total pre-tax return on the fund (including unallocated surplus) in 2014 of 9.5 per cent compared to an assumed rate
of return of 5.0 per cent (2013: 8.0 per cent total return compared to assumed rate of 6.0 per cent). In addition, the amount includes the eff ect of a partial hedge
of future shareholder transfers expected to emerge from the UK’s with-profi ts sub-fund taken out during 2013. This hedge reduces the risks arising from equity
market declines.
(v) Other operations
Short-term fl uctuations in investment returns of other operations were negative £(93) million (2013: negative £(4) million) representing
unrealised value movements on investments and foreign exchange items.
6 Eff ect of changes in economic assumptions
The effects of changes in economic assumptions for in-force business included in profi t for the year, arise as follows:
(i) Group summary
Asia operationsnote (ii)
US operationsnote (iii)
UK insurance operationsnote (iv)
Total
2014 £m
2013* £m
(269)
(77)
(23)
(369)
255
242
132
629
* The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis – see note 1.
(ii) Asia operations
The effect of changes in economic assumptions for Asia operations comprises:
Hong Kong
Malaysia
Indonesia
Singapore
Taiwan
Other
Total Asia operations
2014 £m
2013* £m
(121)
11
25
(42)
(21)
(121)
(269)
289
(62)
(176)
90
92
22
255
* The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis – see note 1.
The negative effect of £(269) million in 2014 principally refl ected the overall impact of the reduction in fund earned rates for participating
business in Hong Kong, Singapore and Taiwan, driven by the decrease in long-term interest rates. A negative effect has been reported
on non-participating business in Korea (adverse £(38) million) and Thailand (adverse £(34) million) for similar reasons. These amounts
were partially offset by the positive effect of valuing future health and protection profi ts at lower discount rates in Indonesia and
Malaysia.
The positive impact in 2013 of £255 million refl ected the overall impact of an increase in fund earned rates for participating business,
principally arising in Hong Kong, Singapore and Taiwan, mainly due to the increase in long-term interest rates. There were partial offsets
arising in Indonesia and Malaysia, valuing the negative impact of future health and protection profi ts at a higher discount rate.
Prudential plc Annual Report 2014
287
(iii) US operations
The effect of changes in economic assumptions for US operations comprises:
Effect of changes in 10-year treasury rates:
Fixed annuity and other general account businessnote (a)
Variable annuity businessnote (b)
Decrease in additional allowance for credit risknote (c)
Totalnote (d)
2014 £m
2013* £m
151
(228)
–
(77)
(244)
382
104
242
* The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis – see note 1.
Notes
(a)
(b)
(c)
For fi xed annuity and other general account business, the credit of £151 million in 2014 principally arises from the eff ect on the future projected spread income
of applying a lower discount rate on the opening value of the in-force book, arising from the 90 basis points reduction in the 10-year treasury rates (2013: charge
of £(244) million refl ecting the 130 basis points increase).
In 2014, there was a 90 basis points decline in 10-year treasury rates. For variable annuity business the charge of £(228) million principally refl ects the net eff ect
of the consequent decrease in the assumed future rate of return on the underlying separate account assets, resulting in lower projected fee income and an
increase in projected benefi t costs, partially off set by the decrease in the risk discount rate. The credit of £382 million in 2013 refl ected an increase in the risk-free
rate of 130 basis points.
For 2013, the £104 million eff ect of the decrease in the additional allowance for credit risk within the risk discount rate refl ected the reduction in credit spreads
(50 basis points for spread business and 10 basis points for variable annuity business).
(d) The overall credit in 2013 of £242 million included a charge of £(13) million for the eff ect of a change in required capital on the EEV basis from 235 per cent to
250 per cent of risk-based capital.
(iv) UK insurance operations
The effect of changes in economic assumptions for UK insurance operations comprises the following:
Effect of changes in expected long-term rates of return, risk discount rates and other changes:
Shareholder-backed annuity businessnote (a)
With-profi ts and other businessnote (b)
Total
2014 £m
2013* £m
352
(375)
(23)
(56)
188
132
* The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis – see note 1.
Notes
(a)
(b)
For shareholder-backed annuity business, the overall positive eff ect refl ects the eff ect on the present value of projected spread income arising from the
reduction in expected long-term rates of return and risk discount rates, following the swap rate decline in 2014.
For with-profi ts and other business, the total charge in 2014 of £(375) million (2013: credit of £188 million) includes the net eff ect of the reduction in fund earned
rates and risk discount rates (as shown in note 17(iii)), arising from the 130 basis points decrease (2013: increase of 120 basis points) in the 15-year government
bond rate and portfolio changes.
7 Sale of PruHealth and PruProtect businesses
On 10 November 2014, the Prudential Assurance Company Limited announced an agreement to sell its 25 per cent equity stake
in the PruHealth and PruProtect businesses to Discovery Group Europe Limited. The sale was completed on 14 November 2014.
This transaction gave rise to a gain on disposal of £44 million.
8 Held for sale Japan life business
On 5 February 2015, the Group announced that it had completed the sale of its closed book life insurance business in Japan, PCA Life
Insurance Company Limited to SBI Holdings, Inc. following regulatory approvals. The loss of Japan life business in the 2013 results
includes the reduction in EEV carrying value to refl ect the completion of sale.
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288
Prudential plc Annual Report 2014 Financial statements Notes on the EEV basis results
Notes on the EEV basis results continued
9 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. The 2014 EEV basis results includes opening adjustments arising 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 as follows:
Adjustment to shareholders’ equity at 1 January 2014
Free surplus
2014 £m
Required
capital
Total
net worth
Asia operations
UK insurance operations
Opening adjustment
(104)
69
(35)
104
(69)
35
–
–
–
Value of
in-force
business
Total
long-term
business
operations
(40)
29
(11)
(40)
29
(11)
The net EEV basis effect of £(11) million represents the cost of holding higher required capital levels in the stand-alone Hong Kong
shareholder-backed long-term insurance business. The post-tax costs incurred to enable the domestication in 2014 were £4 million
(2013: £28 million).
10 Net core structural borrowings of shareholder-fi nanced operations
31 Dec 2014 £m
Mark to
market
value
adjustment
–
579
579
–
42
621
IFRS
basis
(1,480)
3,869
2,389
275
160
2,824
EEV
basis at
market
value
(1,480)
4,448
2,968
275
202
IFRS
basis
(2,230)
4,211
1,981
275
150
3,445
2,406
31 Dec 2013 £m
Mark to
market
value
adjustment
–
392
392
–
38
430
EEV
basis at
market
value
(2,230)
4,603
2,373
275
188
2,836
Holding company cash and short-term
investments*
Core structural borrowings – central funds
Holding company net borrowings
Core structural borrowings – Prudential Capital
Core structural borrowings – Jackson
Net core structural borrowings of shareholder-
fi nanced operations
* Including central fi nance subsidiaries.
Prudential plc Annual Report 2014
289
11 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.
(i) Underlying free surplus generated
The 2013 comparative results are shown below on both actual exchange rates (AER) and constant exchange rates (CER) bases.
The 2013 CER comparative results are translated at 2014 average exchange rates.
Asia operations
Underlying free surplus generated from in-force life business
Investment in new businessnotes (ii)(a), (ii)(g)
Long-term business
Eastspring Investmentsnote (ii)(b)
Total
US operations
Underlying free surplus generated from in-force life business
Investment in new businessnote (ii)(a)
Long-term business
Broker-dealer and asset managementnote (ii)(b)
Total
UK insurance operations
Underlying free surplus generated from in-force life business
Investment in new businessnote (ii)(a)
Long-term business
General insurance commissionnote (ii)(b)
Total
M&G (including Prudential Capital)note (ii)(b)
Underlying free surplus generated
Representing:
Long-term business:
2014 £m
2013 £m
% change
AER
CER
AER
CER
860
(346)
514
78
592
1,191
(187)
1,004
6
1,010
645
(73)
572
19
591
386
819
(310)
509
64
573
742
(285)
457
59
516
1,129
(298)
1,072
(283)
831
39
870
680
(29)
651
22
673
346
789
37
826
680
(29)
651
22
673
346
2,579
2,462
2,361
5%
(12)%
1%
22%
3%
5%
37%
21%
(85)%
16%
(5)%
(152)%
(12)%
(14)%
(12)%
12%
5%
16%
(21)%
12%
32%
15%
11%
34%
27%
(84)%
22%
(5)%
(152)%
(12)%
(14)%
(12)%
12%
9%
Expected in-force cash fl ows (including expected return on
net assets)
2,382
2,150
2,037
11%
17%
Effects of changes in operating assumptions, operating
experience variances and other operating items
Underlying free surplus generated from in-force life business
Investment in new businessnotes (ii)(a), (ii)(g)
Total long-term business
Asset managementnote (ii)(b)
Underlying free surplus generated
314
2,696
(606)
2,090
489
2,579
478
2,628
(637)
1,991
471
2,462
457
2,494
(597)
1,897
464
2,361
(34)%
(31)%
3%
5%
5%
4%
5%
8%
(2)%
10%
5%
9%
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290
Prudential plc Annual Report 2014 Financial statements Notes on the EEV basis results
Notes on the EEV basis results continued
11 Analysis of movement in free surplus continued
(ii) Movement in free surplus
Underlying movement:
Investment in new businessnotes (a), (g)
Business in force:
Expected in-force cash fl ows (including expected return on net assets)
Effects of changes in operating assumptions, operating experience
variances and other operating items
Increase in EEV assumed level of required capital
Loss attaching to held for sale Japan life businessnote 8
Gain on sale of PruHealth and PruProtectnotes 7, 13
Other non-operating itemsnote (c)
Net cash fl ows to parent companynote (d)
Bancassurance agreement and purchase of Thanachart Life
Exchange movements, timing differences and other itemsnote (e)
Net movement in free surplus
Balance at 1 January:
As previously reported
Effect of domestication of Hong Kong branch on 1 January 2014note 9
Balance at 31 December note (g)
Representing:
Asia operations
US operations
UK operations
Balance at 1 January:
Asia operations
US operations
UK operations
2014 £m
2013 £m
Asset
management
and UK general
insurance
commission
note (b)
Long-term
business
note 13
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
(606)
2,382
314
2,090
–
–
130
(252)
1,968
(1,170)
–
210
1,008
3,220
(35)
3,185
4,193
1,347
1,416
1,430
4,193
1,185
956
1,079
3,220
–
(606)
(637)
489
–
489
–
–
–
(14)
475
(312)
–
(80)
83
783
–
783
866
213
141
512
866
194
118
471
783
2,871
2,621
314
2,579
–
–
130
(266)
2,443
(1,482)
–
130
1,091
4,003
(35)
3,968
5,059
1,560
1,557
1,942
5,059
1,379
1,074
1,550
4,003
478
2,462
(58)
(40)
–
(722)
1,642
(1,341)
365
(352)
314
3,689
–
3,689
4,003
1,379
1,074
1,550
4,003
1,181
1,319
1,189
3,689
Notes
(a)
(b)
Free surplus invested in new business represents amounts set aside for required capital and acquisition costs.
For the purposes of this analysis, free surplus for asset management operations and the UK general insurance commission is taken to be IFRS basis post-tax
earnings and shareholders’ equity.
Non-operating items are principally short-term fl uctuations in investment returns and the eff ect of changes in economic assumptions for long-term business operations.
(c)
(d) Net cash fl ows to parent company for long-term business operations refl ect the fl ows as included in the holding company cash fl ow at transaction rates.
(e)
Exchange movements, timing diff erences and other items represent:
2014 £m
Exchange movementsnote 13
Mark to market value movements on Jackson assets backing surplus and required capitalnote 12
Shareholders' share of actuarial and other gains and losses on defi ned benefi t pension schemes
Othernote (f)
Asset
management
and UK general
insurance
commission
Long-term
business
134
77
(17)
16
210
11
–
(1)
(90)
(80)
Total
145
77
(18)
(74)
130
(f)
(g)
Other primarily refl ects the eff ect of intra-group loans, contingent loan funding as shown in note 13(i), timing diff erences and other non-cash items.
Investment in new business includes the annual amortisation charge of amounts incurred to secure exclusive distribution rights through our bancassurance
partners at a rate that refl ects the pattern in which the future economic benefi ts are expected to be consumed by reference to new business levels. Included
within the overall free surplus balance of the Asia life entities is £304 million representing unamortised amounts incurred to secure exclusive distribution
rights through bancassurance partners. These amounts exclude £883 million of Asia distribution rights intangibles that are fi nanced by loan arrangements
from central companies, the costs of which are allocated to the Asia life segment as the amortisation cost is incurred.
Prudential plc Annual Report 2014
291
12 Reconciliation of movement in shareholders’ equity
Long-term business operations
2014 £m
US
operations
UK
insurance
operations
Total
long-term
business
operations
Asia
operations
note (i)
Other
operations
note (i)
Group
Total
1,162
739
1,901
–
(1)
1,900
170
2,070
375
(410)
3
–
9
–
2,047
10,305
694
834
1,528
–
–
1,528
(245)
1,283
483
(413)
–
–
(17)
77
1,413
6,966
270
476
746
–
(20)
726
600
1,326
2,126
2,049
4,175
–
(21)
4,154
525
4,679
–
–
–
470
(528)
(58)
(278)
(336)
–
858
(121)
(200)
–
–
(64)
–
1,062
(1,023)
3
–
(72)
77
4,522
1,023
(3)
(895)
126
–
(206)
2,126
2,049
4,175
470
(549)
4,096
247
4,343
737
–
–
(895)
54
77
4,316
7,342
24,613
243
24,856
Post-tax operating profi t (based on longer-term
investment returns)
Long-term business:
New businessnote 3
Business in forcenote 4
Asset management
Other results
Post-tax operating profi t based on longer-term
investment returns
Total post-tax non-operating profi t
Profi t for the year
Other items taken directly to equity
Exchange movements on foreign operations and
net investment hedges
Intra-group dividends (including statutory
transfers)note (ii)
Investment in operationsnote (iii)
External dividends
Other movementsnote (iv)
Mark to market value movements on Jackson
assets backing surplus and required capital
Net increase in shareholders’ equity
Shareholders' equity at 1 January:
As previously reported
Effect of domestication of Hong Kong branch
on 1 January 2014note 9
(40)
–
29
(11)
Shareholders’ equity at 31 December note (i)
12,312
8,379
8,433
29,124
–
37
(11)
29,161
Representing:
Statutory IFRS basis shareholders’ equity:
Net assets
Goodwill
Total IFRS basis shareholders’ equity
Additional retained profi t (loss) on an EEV
basisnote (v)
EEV basis shareholders’ equity
Balance at 31 December 2013
Representing:
Statutory IFRS basis shareholders’ equity:
Net assets
Goodwill
Total IFRS basis shareholders’ equity
Additional retained profi t (loss) on an EEV
basisnote (v)
EEV basis shareholders’ equity
3,315
–
3,315
8,997
12,312
2,564
–
2,564
7,741
10,305
4,067
–
4,067
4,312
8,379
3,446
–
3,446
3,520
6,966
3,785
–
3,785
4,648
8,433
2,976
–
2,976
4,366
7,342
11,167
–
11,167
17,957
29,124
8,986
–
8,986
15,627
24,613
(819)
1,463
644
(607)
37
(797)
1,461
664
(421)
243
10,348
1,463
11,811
17,350
29,161
8,189
1,461
9,650
15,206
24,856
Notes
(i)
(ii)
(iii)
(iv)
(v)
For the purposes of the table above, goodwill of £233 million (2013: £231 million) 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 11 for these items are as per the holding company cash fl ow at transaction rates. The diff erence primarily relates to
intra-group loans, timing diff erences arising on statutory transfers, and other non-cash items.
Investment in operations refl ects increases in share capital.
Included in other movements was a charge of £(11) million (2013: £(53) million) for the shareholders’ share of actuarial and other gains and losses on the defi ned
benefi t schemes.
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 £(579) million (2013: £(392) million), as shown in note 10.
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292
Prudential plc Annual Report 2014 Financial statements Notes on the EEV basis results
Notes on the EEV basis results continued
13 Reconciliation of movement in net worth and value of in-force for long-term business
Group
Shareholders’ equity at 1 January:
As previously reported
Effect of domestication of Hong Kong branch on
1 January 2014note 9
New business contributionnotes (ii) and 3
Existing business – transfer to net worth
Expected return on existing businessnote 4
Changes in operating assumptions and experience variancesnote 4
Development expenses, Solvency II and restructuring costs
Post-tax operating profi t based on longer-term
investment returns
Gain on sale of PruHealth and PruProtectnote 7
Other non-operating items
Post-tax profi t from long-term business
Exchange movements on foreign operations and net
investment hedges
Intra-group dividends (including statutory transfers)
and investment in operationsnote (i)
Other movements
Shareholders’ equity at 31 December
Representing:
Asia operations
Shareholders’ equity at 1 January:
As previously reported
Effect of domestication of Hong Kong branch
on 1 January 2014note 9
New business contributionnotes (ii) and 3
Existing business – transfer to net worth
Expected return on existing businessnote 4
Changes in operating assumptions and experience variancesnote 4
Development expenses
Post-tax operating profi t based on longer-term
investment returns
Other non-operating items
Post-tax profi t from long-term business
Exchange movements on foreign operations and net
investment hedges
Intra-group dividends and investment in operations
Other movements
2014 £m
Free
surplus
note 11
Required
capital
Total net
worth
Value of
in-force
business
note (iii)
Total
long-term
business
operations
3,220
3,954
7,174
17,439
24,613
(35)
3,185
(606)
2,276
106
335
(21)
2,090
130
(252)
1,968
134
(1,099)
5
4,193
1,185
(104)
1,081
(346)
828
62
(29)
(1)
514
118
632
56
(407)
(15)
35
3,989
453
(316)
81
36
–
254
(32)
220
442
125
–
–
4,556
977
104
1,081
130
(23)
–
44
–
151
70
221
25
–
–
–
7,174
(153)
1,960
187
371
(21)
2,344
98
(32)
2,410
259
(1,099)
5
8,749
(11)
17,428
2,279
(1,960)
1,253
238
–
1,810
(54)
513
2,269
599
79
–
(11)
24,602
2,126
–
1,440
609
(21)
4,154
44
481
4,679
858
(1,020)
5
20,375
29,124
2,162
8,143
10,305
–
2,162
(216)
805
62
15
(1)
665
188
853
81
(407)
(15)
(40)
8,103
1,378
(805)
586
76
–
1,235
(18)
1,217
294
–
24
(40)
10,265
1,162
–
648
91
(1)
1,900
170
2,070
375
(407)
9
Shareholders’ equity at 31 December
1,347
1,327
2,674
9,638
12,312
Prudential plc Annual Report 2014
293
2014 £m
Required
capital
Total net
worth
1,607
216
(210)
48
4
58
(55)
3
100
–
–
2,563
29
673
78
282
1,062
(324)
738
178
(413)
60
Free
surplus
note 11
956
(187)
883
30
278
1,004
(269)
735
78
(413)
60
Value of
in-force
business
note (iii)
4,403
665
(673)
304
170
466
79
545
305
–
–
Total
long-term
business
operations
6,966
694
–
382
452
1,528
(245)
1,283
483
(413)
60
1,416
1,710
3,126
5,253
8,379
1,079
1,370
2,449
4,893
7,342
69
1,148
(73)
565
14
86
(20)
572
130
(101)
601
(279)
(40)
(69)
1,301
107
(83)
33
(12)
–
45
(32)
205
218
–
–
–
2,449
34
482
47
74
(20)
617
98
104
819
(279)
(40)
29
4,922
236
(482)
363
(8)
–
109
(54)
452
507
79
(24)
US operations
Shareholders’ equity at 1 January
New business contributionnotes (ii) and 3
Existing business – transfer to net worth
Expected return on existing businessnote 4
Changes in operating assumptions and experience variancesnote 4
Post-tax operating profi t based on longer-term
investment returns
Other non-operating items
Post-tax profi t from long-term business
Exchange movements on foreign operations and
net investment hedges
Intra-group dividends
Other movements
Shareholders’ equity at 31 December
UK insurance operations
Shareholders’ equity at 1 January
As previously reported
Effect of domestication of Hong Kong branch
on 1 January 2014note 9
New business contributionnotes (ii) and 3
Existing business – transfer to net worth
Expected return on existing businessnote 4
Changes in operating assumptions and experience variancesnote 4
Solvency II and restructuring costs
Post-tax operating profi t based on longer-term
investment returns
Gain on sale of PruHealth and PruProtectnote 7
Other non-operating items
Post-tax profi t from long-term business
Intra-group dividends (including statutory transfers)note (i)
Other movements
Shareholders’ equity at 31 December
1,430
1,519
2,949
5,484
29
7,371
270
–
410
66
(20)
726
44
556
1,326
(200)
(64)
8,433
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294
Prudential plc Annual Report 2014 Financial statements Notes on the EEV basis results
Notes on the EEV basis results continued
13 Reconciliation of movement in net worth and value of in-force for long-term business continued
Notes
(i)
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 the repayment of contingent loan funding. Contingent loan funding represents amounts whose repayment to the lender is contingent upon
future surpluses emerging from certain contracts specifi ed under the arrangement. If insuffi cient surplus emerges on those contracts, there is no recourse
to other assets of the Group and the liability is not payable to the degree of shortfall.
(ii) New business contribution per £1 million of free surplus invested:
2014 £m
2013 £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
Post-tax new business contributionnote 3
Free surplus invested in new business
1,162
(346)
694
(187)
270
(73)
2,126
(606)
1,139
(310)
706
(298)
237
(29)
2,082
(637)
Post-tax new business contribution per £1 million
of free surplus invested
3.4
3.7
3.7
3.5
3.7
2.4
8.2
3.3
(ii) The value of in-force business comprises the value of future margins from current in-force business less the cost of holding required capital as shown below:
31 Dec 2014 £m
31 Dec 2013 £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 guaranteesnote (iv)
10,168
(417)
(113)
5,914
(199)
(462)
5,756
(272)
–
21,838
(888)
(575)
Net value of in-force business
9,638
5,253
5,484
20,375
8,540
(347)
(50)
8,143
4,769
(220)
(146)
4,403
5,135
(242)
–
18,444
(809)
(196)
4,893
17,439
(iv) The increase in the cost of time value of guarantees for US operations from £(146) million at 2013 to £(462) million at 2014 primarily relates to variable annuity
business. It mainly arises from the decrease in the expected long-term separate account rate of return following the 90 basis points decline in the US 10-year
treasury bond rate and the impact from new business written in the year, partly off set by the level of equity performance.
14 Expected transfer of value of in-force business to free surplus
The discounted value of in-force business and required capital can be reconciled to the 2014 and 2013 totals in the tables below for the
emergence of free surplus as follows:
Required capitalnote 13
Value of in-force (VIF)note 13
Add back: deduction for cost of time value of guaranteesnote 13
Expected cash fl ow from sale of Japan life business
Other itemsnote
Total
2014 £m
2013 £m
4,556
20,375
575
(23)
(1,382)
24,101
3,954
17,439
196
(25)
(1,157)
20,407
Note
‘Other items’ represent amounts incorporated into VIF where there is no defi nitive timeframe for when the payments will be made or receipts received. In particular,
other items includes the deduction of the value of the shareholders’ interest in the estate, the value of which is derived by increasing fi nal bonus rates so as to exhaust
the estate over the lifetime of the in-force with-profi ts business. This is an assumption to give an appropriate valuation. To be conservative, this item is excluded from
the expected free surplus generation profi le opposite.
Prudential plc Annual Report 2014
295
Cash fl ows are projected on a deterministic basis and are discounted at the appropriate risk discount rate. The modelled cash fl ows use
the same methodology underpinning the Group’s embedded value reporting and so 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
Asia operations*
US operations
UK insurance operations
Total
Expected period of conversion of future post-tax distributable earnings and required capital fl ows
to free surplus
2014 £m
1-5 years
6-10 years
11-15 years
16-20 years
21-40 years
40+ years
3,660
3,867
2,111
9,638
40%
2,289
2,298
1,464
6,051
25%
1,553
873
973
3,399
14%
1,026
334
606
1,966
8%
1,874
99
604
2,577
11%
457
–
13
470
2%
Expected period of conversion of future post-tax distributable earnings and required capital fl ows
to free surplus
2013 £m
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%
2014 total as
shown above
10,859
7,471
5,771
24,101
100%
2013 total as
shown above
9,021
6,234
5,152
20,407
100%
* Following its reclassifi cation as held for sale, the Asia cash fl ows exclude any cash fl ows in respect of Japan.
15 Sensitivity of results to alternative assumptions
(a) Sensitivity analysis – economic assumptions
The tables below show the sensitivity of the embedded value as at 31 December 2014 (31 December 2013) and the post-tax new
business contribution after the effect of required capital for 2014 and 2013 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 fi xed 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.
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296
Prudential plc Annual Report 2014 Financial statements Notes on the EEV basis results
Notes on the EEV basis results continued
15 Sensitivity of results to alternative assumptions continued
New business contribution
2014 £m
2013* £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
Post-tax new business contributionnote 3
Discount rates – 1% increase
Interest rates – 1% increase
Interest rates – 1% decrease
Equity/property yields – 1% rise
Long-term expected defaults – 5bps increase
Liquidity premium – 10bps increase
1,162
(176)
13
(52)
46
–
–
694
(27)
61
(101)
73
–
–
270
2,126
1,139
706
237
2,082
(38)
(15)
19
12
(10)
20
(241)
59
(134)
131
(10)
20
(148)
23
(55)
45
–
–
(34)
47
(69)
63
–
–
(29)
(1)
–
10
(6)
12
(211)
69
(124)
118
(6)
12
* The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis – see note 1.
Embedded value of long-term business operations
2014 £m
2013 £m
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
Shareholders' equitynote 12
12,312
8,379
8,433
29,124
10,305
6,966
7,342
24,613
Discount rates – 1% increase
Interest rates – 1% increase
Interest rates – 1% decrease
Equity/property yields – 1% rise
Equity/property market values – 10% fall
Statutory minimum capital
Long-term expected defaults – 5bps increase
Liquidity premium – 10bps increase
(1,214)
(462)
211
435
(221)
129
–
–
(268)
(232)
16
365
(129)
139
–
–
(602)
(362)
452
282
(380)
4
(139)
278
(2,084)
(1,056)
679
1,082
(730)
272
(139)
278
(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
The sensitivities shown above are for the impact of instantaneous changes on the embedded value of long-term business operations
and include the combined effect on the value of in-force business and net assets at the balance sheet dates indicated. If the change in
assumption shown in the sensitivities were to occur, then the effect shown above would be recorded within two components of the profi t
analysis for the following year. These are for the effect of economic assumption changes and short-term fl uctuations in investment
returns. In addition to the sensitivity effects shown above, the other components of the profi t for the following year would be calculated
by reference to the altered assumptions, for example new business contribution and unwind of discount, together with the effect of other
changes such as altered corporate bond spreads. In addition, for Jackson, the fair value movements on assets backing surplus and
required capital which are taken directly to shareholders’ equity would also be affected by changes in interest rates.
(b) Sensitivity analysis – non-economic assumptions
The tables opposite show the sensitivity of the embedded value as at 31 December 2014 (31 December 2013) and the post-tax new
business contribution after the effect of required capital for 2014 and 2013 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).
Prudential plc Annual Report 2014
297
New business contribution
2014 £m
2013* £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
Post-tax new business
contributionnote 3
Maintenance expenses – 10% decrease
Lapse rates – 10% decrease
Mortality and morbidity – 5% decrease
Change representing effect on:
Life business
UK annuities
1,162
23
88
52
52
–
694
8
27
2
2
–
270
2,126
1,139
3
6
(20)
1
(21)
34
121
34
55
(21)
23
85
58
58
–
706
8
27
4
4
–
237
2,082
3
6
(6)
2
(9)
34
118
56
64
(9)
* The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis – see note 1.
Embedded value of long-term business operations
2014 £m
2013 £m
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
Shareholders' equitynote 12
12,312
8,379
8,433
29,124
10,305
6,966
7,342
24,613
Maintenance expenses – 10% decrease
Lapse rates – 10% decrease
Mortality and morbidity – 5% decrease
Change representing effect on:
Life business
UK annuities
136
422
433
433
–
71
354
163
163
–
56
67
(347)
9
(356)
263
843
249
605
(356)
126
352
377
377
–
59
294
154
154
–
58
79
(254)
20
(274)
243
725
277
551
(274)
16 Methodology and accounting presentation
(a) Methodology
Overview
The embedded value is the present value of the shareholders’ interest in the earnings distributable from assets allocated to covered
business after suffi cient allowance has been made for the aggregate risks in that business. The shareholders’ interest in the Group’s
long-term business comprises:
— The present value of future shareholder cash fl ows from in-force covered business (value of in-force business), less deductions for:
– The cost of locked-in required capital; and
– The time value of cost of options and guarantees;
— Locked-in required capital; and
— The 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 16(b)(iii)), no smoothing of market or account balance
values, unrealised gains or investment return is applied in determining the embedded value or profi t. Separately, the analysis of profi t is
delineated between operating profi t based on longer-term investment returns and other constituent items (as explained in note 16(b)(i)).
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298
Prudential plc Annual Report 2014 Financial statements Notes on the EEV basis results
Notes on the EEV basis results continued
16 Methodology and accounting presentation continued
(i) Covered business
The EEV results for the Group are prepared for ‘covered business’, as defi ned by the EEV Principles. Covered business represents the
Group’s long-term insurance business for which the value of new and in-force contracts is attributable to shareholders. The post-tax EEV
basis results for the Group’s covered business are then combined with the post-tax 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,
as described in note 16(a)(vii).
The defi nition of long-term business operations is consistent with previous practice and comprises those contracts falling under the
defi nition for regulatory purposes together with, for US operations, contracts that are in substance the same as guaranteed investment
contracts (GICs) but do not fall within the technical defi nition.
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; and
— The presentational treatment of the Group’s principal defi ned benefi t pension scheme, the Prudential Staff Pension Scheme (PSPS).
The partial recognition of the surplus for PSPS is recognised in ‘Other’ operations.
A small amount of UK Group pensions business is also not modelled for EEV reporting purposes.
(ii) 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 (as described in note 17). These assumptions are used to project future cash
fl ows. The present value of the future cash fl ows is then calculated using a discount rate which refl ects both the time value of money and
the non-diversifi able risks associated with the cash fl ows that are not otherwise allowed for.
New business
In determining the EEV basis value of new business, premiums are included in projected cash fl ows on the same basis of distinguishing
annual and single premium business as set out for statutory basis reporting.
New business premiums refl ect those premiums attaching to covered business, including premiums for contracts classifi ed as
investment products for IFRS basis reporting. New business premiums for regular premium products are shown on an annualised basis.
Internal vesting business is classifi ed as new business where the contracts include an open market option.
The post-tax contribution from new business represents profi ts determined by applying operating assumptions as at the end
of the year.
For UK immediate annuity business and single premium Universal Life products in Asia, primarily in Singapore, the new business
contribution is determined by applying economic assumptions refl ecting point-of-sale market conditions. This is consistent with how the
business is priced as crediting rates are linked to yields on specifi c assets and the yield is locked-in when the assets are purchased at the
point-of-sale of the policy. For other business within the Group, end-of-year economic assumptions are used.
New business profi tability is a key metric for the Group’s management of the development of the business. In addition, post-tax 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 profi t 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 profi t for the year and shareholders’ equity as they arise.
The results for any covered business conceptually refl ect the aggregate of the IFRS results and the movements on the additional
shareholders’ interest recognised on the EEV basis. Thus the start point for the calculation of the EEV results for Jackson, as for other
businesses, refl ects the market value movements recognised on the IFRS basis.
However, in determining the movements on the additional shareholders’ interest, the basis for calculating the Jackson EEV result
acknowledges that, for debt securities backing liabilities, the aggregate EEV results refl ect the fact that the value of in-force business
instead incorporates the discounted value of future spread earnings. This value is not affected generally by short-term market
movements on securities that broadly speaking, are held for the longer term.
Fixed income securities backing the free surplus and required capital for Jackson are accounted for at fair value. However, consistent
with the treatment applied under IFRS for Jackson securities classifi ed as available-for-sale, movements in unrealised appreciation on
these securities are accounted for in equity rather than in the income statement, as shown in the movement in shareholders’ equity.
Prudential plc Annual Report 2014
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(iii) 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 profi t and
generally a release in respect of the reduction in capital requirements for business in force as this runs off.
Where required capital is held within a with-profi ts long-term fund, the value placed on surplus assets in the fund is already
discounted to refl ect its release over time, and no further adjustment is necessary in respect of required capital.
(iv) Financial options and guarantees
Nature of fi nancial options and guarantees in Prudential’s long-term business
Asia operations
Subject to local market circumstances and regulatory requirements, the guarantee features described below in respect of UK business
broadly apply to similar types of participating contracts principally written in Hong Kong, Singapore and Malaysia. Participating products
have both guaranteed and non-guaranteed elements.
There are also various non-participating long-term products with guarantees. The principal guarantees are those for whole of life
contracts with fl oor levels of policyholder benefi ts that accrue at rates set at inception and do not vary subsequently with market
conditions.
US operations (Jackson)
The principal fi nancial options and guarantees in Jackson are associated with the fi xed annuity and variable annuity (VA) lines of
business.
Fixed annuities provide that, at Jackson’s discretion, it may reset the interest rate credited to policyholders’ accounts, subject to
a guaranteed minimum. The guaranteed minimum return varies from 1.0 per cent to 5.5 per cent for 2014 and 2013, depending on the
particular product, jurisdiction where issued, and date of issue. For 2014, 86 per cent (2013: 86 per cent) of the account values on fi xed
annuities are for policies with guarantees of 3 per cent or less. The average guarantee rate is 2.7 per cent (2013: 2.8 per cent).
Fixed annuities also present a risk that policyholders will exercise their option to surrender their contracts in periods of rapidly rising
interest rates, possibly requiring Jackson to liquidate assets at an inopportune time.
Jackson issues VA contracts where it contractually guarantees to the contract holder either: a) return of no less than total deposits
made to the contract adjusted for any partial withdrawals; b) total deposits made to the contract adjusted for any partial withdrawals plus
a minimum return; or c) the highest contract value on a specifi ed anniversary date adjusted for any withdrawals following the specifi ed
contract anniversary. These guarantees include benefi ts that are payable at specifi ed dates during the accumulation period (Guaranteed
Minimum Withdrawal Benefi t (GMWB)), as death benefi ts (Guaranteed Minimum Death Benefi ts (GMDB)) or as income benefi ts
(Guaranteed Minimum Income Benefi ts (GMIB)). These guarantees generally protect the policyholder’s value in the event of poor equity
market performance. Jackson hedges the GMDB and GMWB guarantees through the use of equity options and futures contracts, and
fully reinsures the GMIB guarantees.
Jackson also issues fi xed index annuities that enable policyholders to obtain a portion of an equity-linked return while providing
a guaranteed minimum return. The guaranteed minimum returns are of a similar nature to those described above for fi xed annuities.
UK insurance operations
For covered business, the only signifi cant fi nancial options and guarantees in the UK insurance operations arise in the with-profi ts fund.
With-profi ts products provide returns to policyholders through bonuses that are smoothed. There are two types of bonuses – annual
and fi nal. Annual bonuses are declared once a year and, once credited, are guaranteed in accordance with the terms of the particular
product. Unlike annual bonuses, fi nal bonuses are guaranteed only until the next bonus declaration. The with-profi ts fund also held
a provision on the Pillar I Peak 2 basis of £50 million at 31 December 2014 (31 December 2013: £36 million) to honour guarantees on
a small number of guaranteed annuity option products.
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 £549 million was held in SAIF at 31 December 2014 (31 December 2013: £328 million) to honour the guarantees.
As described in note 16(a)(i), the assets and liabilities are wholly attributable to the policyholders of the fund. Therefore the movement
in the provision has no direct impact on shareholders.
Time value
The value of fi nancial options and guarantees comprises two parts. One is given by a deterministic valuation on best estimate
assumptions (the intrinsic value). The other part arises from the variability of economic outcomes in the future (the time value).
Where appropriate, a full stochastic valuation has been undertaken to determine the time value of the fi nancial options and guarantees.
The economic assumptions used for the stochastic calculations are consistent with those used for the deterministic calculations.
Assumptions specifi c to the stochastic calculations refl ect local market conditions and are based on a combination of actual market data,
historic market data and an assessment of long-term economic conditions. Common principles have been adopted across the Group for
the stochastic asset models, for example, separate modelling of individual asset classes but with an allowance for correlation between
the various asset classes. Details of the key characteristics of each model are given in notes 17(iv),(v) and (vi).
In deriving the time value of fi nancial options and guarantees, management actions in response to emerging investment and fund
solvency conditions have been modelled. Management actions encompass, but are not confi ned to, investment allocation decisions,
levels of reversionary and terminal bonuses and credited rates. Bonus rates are projected from current levels and varied in accordance
with assumed management actions applying in the emerging investment and fund solvency conditions.
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Prudential plc Annual Report 2014 Financial statements Notes on the EEV basis results
Notes on the EEV basis results continued
16 Methodology and accounting presentation continued
In all instances, the modelled actions are in accordance with approved local practice and therefore refl ect the options actually available
to management. For the PAC with-profi ts fund, the actions assumed are consistent with those set out in the Principles and Practices
of Financial Management which explains how regular and fi nal bonus rates within the discretionary framework are determined, subject
to the general legislative requirements applicable.
(v) 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-profi ts business written in a segregated life fund, as is the case in Asia and the UK, the capital
available in the fund is suffi cient to meet the required capital requirements. For shareholder-backed business the following capital
requirements apply:
— 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 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.
(vi) With-profi ts business and the treatment of the estate
The proportion of surplus allocated to shareholders from the PAC with-profi ts fund has been based on the present level of 10 per cent.
The value attributed to the shareholders’ interest in the estate is derived by increasing fi nal bonus rates (and related shareholder
transfers) so as to exhaust the estate over the lifetime of the in-force with-profi ts business. In any scenarios where the total assets of the
life fund are insuffi cient to meet policyholder claims in full, the excess cost is fully attributed to shareholders. Similar principles apply,
where appropriate, for other with-profi ts funds of the Group’s Asia operations.
(vii) Internal asset management
The new business and in-force results from long-term business include the projected value of profi ts or losses from asset management
and service companies that support the Group’s covered insurance businesses. The results of the Group’s asset management operations
include the current year profi ts from the management of both internal and external funds. EEV basis shareholders’ other income and
expenditure is adjusted to deduct the unwind of the expected internal asset management profi t margin for the year. The deduction is on
a basis consistent with that used for projecting the results for covered insurance business. Group operating profi t accordingly includes
the variance between actual and expected profi t in respect of management of the covered business assets.
(viii) Allowance for risk and risk discount rates
Overview
Under the EEV Principles, discount rates used to determine the present value of future cash fl ows are set by reference to risk-free rates
plus a risk margin. The risk margin should refl ect any non-diversifi able risk associated with the emergence of distributable earnings that
is not allowed for elsewhere in the valuation. Prudential has selected a granular approach to better refl ect differences in market risk
inherent in each product group. The risk discount rate so derived does not refl ect an overall Group market beta, but instead refl ects the
expected volatility associated with the cash fl ows for each product category in the embedded value model.
Since fi nancial options and guarantees are explicitly valued under the EEV methodology, discount rates under EEV are set excluding
the effect of these product features.
The risk margin represents the aggregate of the allowance for market risk, additional allowance for credit risk where appropriate,
and allowance for non-diversifi able non-market risk. No allowance is required for non-market risks where these are assumed
to be fully diversifi able.
Market risk allowance
The allowance for market risk represents the beta multiplied by an equity risk premium. Except for UK shareholder-backed annuity
business (as explained opposite) such an approach has been used for all of the Group’s businesses.
The beta of a portfolio or product measures its relative market risk. The risk discount rates refl ect the market risk inherent in each
product group and hence the volatility of product cash fl ows. These are determined by considering how the profi ts from each product
are affected by changes in expected returns on various asset classes. By converting this into a relative rate of return, it is possible to derive
a product-specifi c beta.
Product level betas refl ect the most recent product mix to produce appropriate betas and risk discount rates for each major
product grouping.
Prudential plc Annual Report 2014
301
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 refl ect the volatility in downgrade and default levels); and
— Short-term downgrades and defaults.
These allowances are initially refl ected in determining best estimate returns and through the market risk allowance described above.
However, for those businesses largely backed by holdings of debt securities, these allowances in the projected returns and market risk
allowances may not be suffi cient, and an additional allowance may be appropriate.
The practical application of the allowance for credit risk varies depending upon the type of business as described below.
Asia operations
For Asia operations, the allowance for credit risk incorporated in the projected rates of return and the market risk allowance are suffi cient.
Accordingly no additional allowance for credit risk is required.
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.
US operations (Jackson)
For Jackson business, the allowance for long-term defaults is refl ected in the risk margin reserve (RMR) charge which is deducted
in determining the projected spread margin between the earned rate on the investments and the policyholder crediting rate.
The risk discount rate incorporates an additional allowance for credit risk premium and short-term downgrades and defaults as shown
in note 17(ii). In determining this allowance, a number of factors have been considered. These factors, in particular, include:
(a) How much of the credit spread on debt securities represents an increased credit risk not refl ected in the RMR long-term default
assumptions, and how much is liquidity premium (which is the premium required by investors to compensate for the risk of longer-
term investments which cannot be easily converted into cash, and converted at the fair market value). In assessing this effect,
consideration has been given to a number of approaches to estimating the liquidity premium by considering recent statistical
data; and
(b) Policyholder benefi ts for Jackson fi xed annuity business are not fi xed. It is possible, in adverse economic scenarios, to pass on
a component of credit losses to policyholders (subject to guarantee features) through lower investment return rates credited to
policyholders. Consequently, it is only necessary to allow for the balance of the credit risk in the risk discount rate.
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-fi fth of the non-variable
annuity business to refl ect 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 fl ows.
In the annuity MCEV calculations, as the assets are generally held to maturity to match long duration liabilities, the future cash fl ows
are discounted using the swap yield curve plus an allowance for liquidity premium based on Prudential’s assessment of the expected
return on the assets backing the annuity liabilities after allowing for:
(a) 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 defi nition of the credit rating assigned to each asset held is the second highest credit rating published by Moody’s,
Standard & Poor’s and Fitch;
(b) 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;
(c) An allowance for a 1-notch downgrade of the asset portfolio subject to credit risk; and
(d) An allowance for short-term downgrades and defaults.
For the purposes of presentation in the EEV results, the results on this basis are reconfi gured. Under this approach, the projected earned
rate of return on the debt securities held is determined after allowing for expected long-term defaults and, where necessary, an
additional allowance for an element of short-term downgrades and defaults to bring the allowance in the earned rate up to best estimate
levels. The allowances for credit risk premium, 1-notch downgrade and the remaining element of short-term downgrade and default
allowances are incorporated into the risk margin included in the discount rate, as shown in note 17(iii)(b).
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Prudential plc Annual Report 2014 Financial statements Notes on the EEV basis results
Notes on the EEV basis results continued
16 Methodology and accounting presentation continued
(2) With-profi ts fund non-profi t annuity business
For UK non-profi t annuity business including that attributable to the PAC with-profi ts fund, the basis for determining the aggregate
allowance for credit risk is consistent with that applied for UK shareholder-backed annuity business (as described previously).
The allowance for credit risk for this business is taken into account in determining the projected cash fl ows to the with-profi ts fund,
which are in turn discounted at the risk discount rate applicable to all of the projected cash fl ows of the fund.
(3) With-profi ts fund holdings of debt securities
The UK with-profi ts fund holds debt securities as part of its investment portfolio backing policyholder liabilities and unallocated surplus.
The assumed earned rate for with-profi t holdings of corporate bonds is defi ned as the risk-free rate plus an assessment of the long-term
spread over gilts, net of expected long-term defaults. This approach is similar to that applied for equities and properties for which the
projected earned rate is defi ned as the risk-free rate plus a long-term risk premium.
Allowance for non-diversifi able non-market risks
The majority of non-market and non-credit risks are considered to be diversifi able. Finance theory cannot be used to determine the
appropriate component of beta for non-diversifi able non-market risks since there is no observable risk premium associated with it that
is akin to the equity risk premium. Recognising this, a pragmatic approach has been applied.
A base level allowance of 50 basis points is applied to cover the non-diversifi able non-market risks associated with the Group’s
businesses. For the Group’s US business and UK business, other than shareholder-backed annuity, no additional allowance is necessary.
For UK shareholder-backed annuity business, a further allowance of 50 basis points is used to refl ect the longevity risk which is of
particular relevance. For the Group’s Asia operations in China, India, Indonesia, the Philippines, Taiwan, Thailand and Vietnam, additional
allowances are applied for emerging market risk ranging from 100 to 250 basis points.
(ix) Foreign currency translation
Foreign currency profi ts and losses have been translated at average exchange rates for the year. Foreign currency assets and liabilities
have been translated at year end rates of exchange. The principal exchange rates are shown in note A1 of the IFRS statements.
(x) Taxation
In determining the post-tax profi t for the year for covered business, 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 fl ows to determine the value of in-force business
are calculated using rates that have been announced and substantively enacted by the end of the reporting period.
(xi) Intercompany arrangements
The EEV results for covered business incorporate annuities established in the PAC non-profi t 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-profi t 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 refl ected
via the projected cash fl ows in the value of in-force and the related funding is refl ected in free surplus).
(b) Accounting presentation
(i) Analysis of post-tax profi t
To the extent applicable, the presentation of the EEV post-tax profi t for the year is consistent in the classifi cation between operating
and non-operating results with the basis that the Group applies for the analysis of IFRS basis results. Operating results refl ect
underlying results including longer-term investment returns (which are determined as described in note 16(b)(ii) opposite) and
incorporate the following:
— New business contribution, as defi ned in note 16(a)(ii);
— Unwind of discount on the value of in-force business and other expected returns, as described in note 16(b)(iii) opposite;
— The impact of routine changes of estimates relating to non-economic assumptions, as described in note 16(b)(iv) opposite; and
— Non-economic experience variances, as described in note 16(b)(v) opposite.
Non-operating results comprise the following:
— Short-term fl uctuations in investment returns;
— The mark to market value movements on core borrowings;
— The effect of changes in economic assumptions;
— The gain on sale of PruHealth and PruProtect businesses in 2014;
— The costs associated with the domestication of the Hong Kong branch which became effective on 1 January 2014; and
— The loss attaching to the held for sale Japan life business.
Total profi t attributable to shareholders and basic earnings per share include these items, together with actual investment returns.
The Company believes that operating profi t, as adjusted for these items, better refl ects underlying performance.
Prudential plc Annual Report 2014
303
(ii) Investment returns included in operating profi t
For the investment element of the assets covering the net worth of long-term insurance business, investment returns are recognised
in operating results at the expected long-term rate of return. These expected returns are calculated by reference to the asset mix
of the portfolio. For the purpose of calculating the longer-term investment return to be included in the operating result of the PAC
with-profi ts fund of UK operations, where assets backing the liabilities and unallocated surplus are subject to market volatility, asset
values at the beginning of the reporting period are adjusted to remove the effects of short-term market movements, as explained
in note 16(b)(iii) below.
For the purpose of determining the long-term returns for debt securities of US operations for fi xed annuity and other general account
business, a risk margin charge is included which refl ects the expected long-term rate of default based on the credit quality of the
portfolio. For Jackson, interest-related realised gains and losses are amortised to the operating results over the maturity period of the sold
bonds and for equity-related investments, a long-term rate of return is assumed, which refl ects the aggregation of end-of-period risk-free
rates and equity risk premium. For US variable annuity separate account business, operating profi t includes the unwind of discount on
the opening value of in-force adjusted to refl ect end-of-period projected rates of return with the excess or defi cit of the actual return
recognised within non-operating profi t, together with the related hedging activity.
For UK annuity business, rebalancing of the asset portfolio backing the liabilities to policyholders may, from time to time, take place
to align it more closely with the internal benchmark of credit quality that management applies. Such rebalancing will result in a change
in the projected yield on the asset portfolio and the allowance for default risk. The net effect of these changes is included in the result
for the year.
(iii) 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 profi t for the with-profi ts 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 fi nancial position, and for total profi t reporting, asset values
and investment returns are not smoothed. At 31 December 2014, the shareholders’ interest in the smoothed surplus assets used for
this purpose only, were £194 million lower (31 December 2013: £136 million lower) than the surplus assets carried in the statement
of fi nancial position.
(iv) Eff ect of changes in operating assumptions
Operating profi t includes the effect of changes to operating assumptions on the value of in-force at the end of the period.
For presentational purposes, the effect of change is delineated to show the effect on the opening value of in-force with the experience
variance being determined by reference to the end-of-period assumptions.
(v) Operating experience variances
Operating profi ts include the effect of experience variances on non-economic assumptions, which are calculated with reference to the
embedded value assumptions at the end of the reporting period, such as persistency, mortality and morbidity, expenses and other
factors.
(vi) Eff ect of changes in economic assumptions
Movements in the value of in-force business at the beginning of the period caused by changes in economic assumptions, net of the
related change in the time value of cost of options and guarantees, are recorded in non-operating results.
17 Assumptions
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 period end rates of return on government bonds. Expected
returns on equity and property asset classes and corporate bonds are derived by adding a risk premium, based on the Group’s long-term
view, to the risk-free rate.
The total profi t that emerges over the lifetime of an individual contract, as calculated using the embedded value basis, is the same as
that calculated under the IFRS basis. Since the embedded value basis refl ects discounted future cash fl ows, under this methodology the
profi t emergence is advanced, thus more closely aligning the timing of the recognition of profi ts with the efforts and risks of current
management actions, particularly with regard to business sold during the year.
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Prudential plc Annual Report 2014 Financial statements Notes on the EEV basis results
Notes on the EEV basis results continued
17 Assumptions continued
(i) Asia operationsnote (b)
China
Hong Kongnotes (b), (c)
India
Indonesia
Korea
Malaysianote (c)
Philippines
Singaporenote (c)
Taiwan
Thailand
Vietnam
Total weighted risk discount ratenote (a)
Risk discount rate %
New business
31 Dec
In force
31 Dec
2014
10.2
3.7
13.0
12.0
6.7
6.6
10.8
4.3
4.2
9.5
14.0
6.9
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
2014
10.2
3.7
13.0
12.0
6.5
6.6
10.8
5.0
4.1
9.5
14.0
6.6
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
10-year government
bond yield %
Expected
long-term infl ation %
31 Dec
31 Dec
2014
2013
2014
2013
3.7
2.2
8.0
7.9
2.6
4.1
4.0
2.3
1.6
2.7
7.2
4.7
3.1
9.0
8.6
3.6
4.2
3.8
2.6
1.7
3.9
9.0
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
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 2014
and 2013.
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
post-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 refl ect the
movements in government bond yields, together with the eff ects of movements in the allowance for market risk and changes in product mix.
For Hong Kong, the assumptions shown are for US dollar denominated business. For other territories, the assumptions are for local currency denominated
business.
The mean equity return assumptions for the most signifi cant equity holdings of the Asia operations were:
Hong Kong
Malaysia
Singapore
(ii) US operations
Assumed new business spread margins:*
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 spreadnote 16(a)(viii)
Risk discount rate:
Variable annuity:
Risk discount rate
Additional allowance for credit risk included in risk discount ratenote 16(a)(viii)
Non-variable annuity:
Risk discount rate
Additional allowance for credit risk included in risk discount ratenote 16(a) (viii)
Weighted average total:
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 infl ation
Equity risk premium
S&P equity return volatilitynote 17 (v)
31 Dec 2014 %
31 Dec 2013 %
6.2
10.1
8.3
7.1
10.1
8.6
31 Dec 2014 %
31 Dec 2013 %
1.5
1.5
2.0
2.0
0.7
0.25
6.9
0.2
3.9
1.0
6.7
6.2
2.2
6.2
2.8
4.0
18.0
1.2
1.75
1.45
2.0
0.75
0.25
7.6
0.2
4.8
1.0
7.4
6.9
3.1
7.1
2.6
4.0
19.0
* Including the proportion of variable annuity business invested in the general account and fi xed index annuity business, the assumed spread margin grades up
linearly by 25 basis points to a long-term assumption over fi ve years.
† Including the proportion of variable annuity business invested in the general account.
Prudential plc Annual Report 2014
305
(iii) UK insurance operations
Shareholder-backed annuity business:note (b)
Risk discount rate:
New business
In forcenote (a)
Pre-tax expected long-term nominal rate of return for shareholder-backed annuity business:
New business
In forcenote (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
Expected long-term rate of infl ation
Equity risk premium
31 Dec 2014 %
31 Dec 2013 %
6.5
6.9
4.1
3.2
5.3
5.9
6.8
8.3
4.2
4.3
6.1
6.8
6.2
6.2 to 9.0
4.9
2.2
3.8
3.0
4.0
7.5
7.1 to 9.2
6.2
3.5
5.1
3.4
4.0
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 refl ect the eff ect 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 16(a)(viii)) and the residual liquidity premium element of the bond spread over swap
rates are as follows:
Bond spread over swap rates
Total credit risk allowance
Liquidity premium
Individual annuity
new business bps
Total in-force
business bps
31 Dec 2014
31 Dec 2013
31 Dec 2014
31 Dec 2013
108
29
79
117
37
80
143
58
85
133
62
71
* 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 suffi cient to withstand a wide
range of extreme credit events over the expected lifetime of the annuity business.
Stochastic assumptions
Details are given below of the key characteristics of the models used to determine the time value of the fi nancial options and guarantees
as referred to in note 16(a)(iv).
(iv) Asia operations
— The stochastic cost of guarantees is primarily of signifi cance for the Hong Kong, Korea, Malaysia, Singapore and Taiwan operations;
— The principal asset classes are government and corporate bonds;
— The asset return models are similar to the models as described for UK insurance operations below; and
— The 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 and equity returns are projected using a log-normal generator refl ecting historical market data;
— Corporate bond returns are based on Treasury yields plus a spread that refl ects current market conditions; and
— The volatility of equity returns ranges from 18 per cent to 27 per cent (2013: 19 per cent to 32 per cent) and the standard deviation
of interest rates ranges from 2.2 per cent to 2.5 per cent for both years.
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306
Prudential plc Annual Report 2014 Financial statements Notes on the EEV basis results
Notes on the EEV basis results continued
17 Assumptions continued
(vi) UK insurance operations
— Interest rates are projected using a stochastic interest rate model calibrated to the current market yields;
— Equity returns are assumed to follow a log-normal distribution;
— The corporate bond return is calculated based on a risk-free bond return plus a mean-reverting spread;
— Property returns are also modelled on a risk-free bond return plus a risk premium with a stochastic process refl ecting total property
returns; and
— The standard deviation of equities and property ranges from 15 per cent to 20 per cent for both years.
Operating assumptions
Best estimate assumptions
Best estimate assumptions are used for the cash fl ow projections, where best estimate is defi ned as the mean of the distribution of future
possible outcomes. The assumptions are reviewed actively and changes are made when evidence exists that material changes in future
experience are reasonably certain.
Assumptions required in the calculation of the value of options and guarantees, for example relating to volatilities and correlations, or
dynamic algorithms linking liabilities to assets, have been set equal to the best estimates and, wherever material and practical, refl ect any
dynamic relationships between the assumptions and the stochastic variables.
Demographic assumptions
Persistency, mortality and morbidity assumptions are based on an analysis of recent experience, but also refl ect expected future
experience. Where relevant, when calculating the time value of fi nancial options and guarantees, policyholder withdrawal rates vary in
line with the emerging investment conditions according to management’s expectations.
Expense assumptions
Expense levels, including those of service companies that support the Group’s long-term business operations, are based on internal
expense analysis investigations and are appropriately allocated to acquisition of new business and renewal of in-force business.
Exceptional expenses are identifi ed and reported separately. For mature business, it is Prudential’s policy not to take credit for future
cost-reduction programmes until the savings have been delivered. For businesses which are currently sub-scale (China, Malaysia Takaful
and Taiwan), and India (where the business model is being adapted as the industry continues to adjust to regulatory changes), expense
overruns are reported where these are expected to be short-lived.
For Asia operations, the expenses comprise costs borne directly and recharged costs from the Asia regional head offi ce, that are
attributable to covered business. The assumed future expenses for these operations also include projections of these future recharges.
Development expenses are charged as incurred.
Corporate expenditure, which is included in other income and expenditure, comprises:
— Expenditure for Group head offi ce, to the extent not allocated to the PAC with-profi ts funds, together with Solvency II implementation
and restructuring costs, which are charged to the EEV basis results as incurred; and
— Expenditure of the Asia regional head offi ce 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.
Tax rates
The assumed long-term effective tax rates for operations refl ect the incidence of taxable profi ts and losses in the projected cash fl ows
as explained in note 16(a)(x).
The local standard corporate tax rates applicable for the most signifi cant operations for 2014 and 2013, are as follows:
Standard corporate tax rates
Asia operations:
Hong Kong
Indonesia
Malaysia
Singapore
US operations
UK operations
* 16.5 per cent on 5 per cent of premium income.
%
16.5*
25.0
2015: 25.0; From 2016: 24.0
17.0
35.0
20.0
Prudential plc Annual Report 2014
307
18 New business premiums and contributionsnote (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
Chinanote (ii)
Korea
Taiwan
Indianote (iii)
Single
Regular
Annual premium
and contribution
equivalents
(APE)
note 16(a)(ii)
Present value
of new business
premiums
(PVNBP)
note 16(a)(ii)
2014 £m 2013 £m 2014 £m 2013 £m 2014 £m 2013 £m 2014 £m 2013 £m
2,272
15,555
6,681
2,136
15,712
5,128
2,010
–
189
1,911
2
212
2,237
1,556
857
2,125
1,573
725
12,331
15,555
7,471
11,375
15,723
5,978
24,508
22,976
2,199
2,125
4,650
4,423
35,357
33,076
–
419
280
117
121
677
92
4
–
326
303
114
193
571
66
2
3
603
357
189
39
289
74
61
1
455
445
197
34
304
61
54
3
645
385
201
51
357
83
61
1
487
477
208
53
361
68
54
16
3,861
1,619
1,284
248
2,683
392
247
1,710
239
212
83
28
1,575
114
311
102
34
1,615
81
92
116
106
1,551
71
82
107
100
1,786
105
113
124
109
1,709
83
113
117
103
10,350
550
609
462
360
3
2,795
1,943
1,352
299
2,588
289
204
9,473
409
641
491
361
Total Asia insurance operations
2,272
2,136
2,010
1,911
2,237
2,125
12,331
11,375
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
10,899
3,108
527
370
–
651
10,795
2,585
555
907
1
869
15,555
15,712
162
139
764
1,065
92
2,318
1,496
1,710
284
488
1,305
2,077
120
1,754
901
276
Total UK and Europe insurance operations
6,681
5,128
–
–
–
–
–
–
–
–
–
–
–
138
–
51
–
189
–
–
–
–
2
–
2
–
–
–
–
161
–
51
–
212
1,090
311
53
37
–
65
1,079
259
55
91
2
87
10,899
3,108
527
370
–
651
10,795
2,585
555
907
12
869
1,556
1,573
15,555
15,723
16
14
76
106
147
232
201
171
857
28
49
131
208
173
176
140
28
725
162
139
764
1,065
592
2,321
1,783
1,710
284
488
1,305
2,077
686
1,756
1,183
276
7,471
5,978
Group total
24,508
22,976
2,199
2,125
4,650
4,423
35,357
33,076
Notes
(i)
The tables shown above are provided as an indicative volume measure of transactions undertaken in the reporting period that have the potential to generate
profi ts for shareholders. The amounts shown are not, and not intended to be, refl ective of premium income recorded in the IFRS income statement.
(ii) New business in China is included at Prudential’s 50 per cent interest in the China life operation.
(iii) New business in India is included at Prudential’s 26 per cent interest in the India life operation.
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308
Prudential plc Annual Report 2014 Financial statements Statement of directors’ responsibilities/Independent auditor’s report
Statement of directors’ responsibilities in respect of the
European Embedded Value (EEV) basis supplementary information
The directors have chosen to prepare
supplementary information in
accordance with the EEV Principles
issued in May 2004 by the European
CFO Forum as supplemented by the
Additional Guidance on EEV
Disclosures issued in October 2005.
When compliance with the EEV
Principles is stated, those principles require
the directors to prepare supplementary
information in accordance with the
Embedded Value Methodology (EVM)
contained in the EEV Principles and to
disclose and explain any non-compliance
with the EEV guidance included in the
EEV Principles.
In preparing the EEV supplementary
information, the directors have:
— Prepared the supplementary
information in accordance with the
EEV Principles;
— Identifi ed and described the business
covered by the EVM;
— Applied the EVM consistently to the
covered business;
— Determined assumptions on a realistic
basis, having regard to past, current and
expected future experience and to any
relevant external data, and then applied
them consistently;
— Made estimates that are reasonable and
consistent; and
— Described the basis on which business
that is not covered business has been
included in the supplementary
information, including any material
departures from the accounting
framework applicable to the Group’s
fi nancial statements.
309
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 LLP
Chartered Accountants
London
9 March 2015
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 2014 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
2014 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 308, 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.
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’
Prudential plc Annual Report 2014
310
Prudential plc Annual Report 2014
Prudential plc Annual Report 2014
311
Section 7
Additional information
312 Index to the additional unaudited fi nancial information
338 Risk factors
344 Glossary
348 Shareholder information
351 How to contact us
n7
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312
Prudential plc Annual Report 2014 Additional information Additional unaudited fi nancial information
Index to the additional unaudited fi nancial information
I.
313
IFRS profi t and loss information
a
Analysis of long-term insurance business pre-tax
IFRS operating profi t based on longer-term
investment returns by driver
Asia operations – analysis of IFRS operating profi t
by territory
Analysis of asset management operating profi t
based on longer-term investment returns
318
319
b
c
II.
320
321
322
328
332
332
335
337
Other information
a Holding company cash fl ow
b Funds under management
c Development of economic capital
d
Reconciliation of expected transfer of value of
in-force (VIF) and required capital business to
free surplus
e Foreign currency source of key metrics
f Option schemes
g
h Results of sold PruHealth and PruProtect businesses
Selected historical fi nancial information of Prudential
Additional unaudited fi nancial information
Prudential plc Annual Report 2014
313
I: IFRS profi t and loss information
a Analysis of long-term insurance business pre-tax IFRS operating profi t based on longer-term investment returns
by driver
This schedule classifi es the Group’s pre-tax operating earnings from long-term insurance operations into the underlying drivers of those
profi ts, using the following categories:
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.
Fee income represents profi ts driven by net investment performance, being asset management fees that vary with the size of the
underlying policyholder funds net of investment management expenses.
With-profi ts business represents the gross of tax shareholders’ transfer from the with-profi ts fund for the year.
Insurance margin primarily represents profi ts derived from the insurance risks of mortality and morbidity.
Margin on revenues primarily represents amounts deducted from premiums to cover acquisition costs and administration expenses.
Acquisition costs and administration expenses represent expenses incurred in the year attributable to shareholders. It excludes items
such as restructuring costs and Solvency II costs which are not included in the segment profi t for insurance as well as items that are more
appropriately included in other sources of earnings lines (eg investment expenses are netted against investment income as part of spread
income or fee income as appropriate).
DAC adjustments comprises DAC amortisation for the year, excluding amounts related to short-term fl uctuations in investment returns,
net of costs deferred in respect of new business.
Analysis of pre-tax IFRS operating profi t by source and Margin analysis of Group long-term insurance business
The following analysis expresses certain of the Group’s sources of operating profi t as a margin of policyholder liabilities or other suitable
driver. Details on the calculation of the Group’s average policyholder liability balances are given in note (iii).
Spread income
Fee income
With-profi ts
Insurance margin
Margin on revenues
Expenses:
Acquisition costsnote (i)
Administration expenses
DAC adjustmentsnote (vi)
Expected return on shareholder assets
Long-term business operating profi t
See notes at the end of this section.
Spread income
Fee income
With-profi ts
Insurance margin
Margin on revenues
Expenses:
Acquisition costsnote (i)
Administration expenses
DAC adjustmentsnote (vi)
Expected return on shareholder assets
Long-term business operating profi t
See notes at the end of this section.
2014 £m
US
UK
Total
734
1,402
–
670
–
(887)
(693)
191
14
1,431
272
61
255
96
176
(96)
(143)
(6)
137
752
1,131
1,618
298
1,441
1,721
(2,014)
(1,454)
277
215
3,233
2013 AER £m
US
UK
Total
730
1,172
–
588
(914)
(670)
313
24
1,243
228
65
251
89
187
(110)
(124)
(14)
134
706
1,073
1,391
298
1,356
1,749
(2,039)
(1,428)
334
216
2,950
Asia
note (v)
125
155
43
675
1,545
(1,031)
(618)
92
64
1,050
Asia
note (v)
115
154
47
679
1,562
(1,015)
(634)
35
58
1,001
Average
liability
note (iv)
67,252
110,955
101,290
Total
bps
note(ii)
168
146
29
4,650
186,049
(43)%
(78)
Average
liability
note (iv)
64,312
96,337
97,393
Total
bps
note(ii)
167
144
31
4,423
169,158
(46)%
(84)
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314
Prudential plc Annual Report 2014 Additional information Additional unaudited fi nancial information
Additional unaudited fi nancial information continued
I: IFRS profi t and loss information continued
2013 CER £m
note (iii)
US
UK
Total
694
1,113
–
559
–
(868)
(636)
297
22
1,181
228
65
251
89
187
(110)
(124)
(14)
134
706
1,029
1,318
295
1,264
1,600
(1,899)
(1,338)
315
208
2,792
Asia
note (v)
107
140
44
616
1,413
(921)
(578)
32
52
905
Average
liability
note (iv)
62,909
93,339
97,374
Total
bps
note (ii)
164
141
30
4,165
164,362
(46)%
(81)
Spread income
Fee income
With-profi ts
Insurance margin
Margin on revenues
Expenses:
Acquisition costsnote (i)
Administration expenses
DAC adjustmentsnote (vi)
Expected return on shareholder assets
Long-term business operating profi t
See notes at the end of this section.
Margin analysis of long-term insurance business – Asia
2014
Average
liability
note (iv)
£m
9,183
14,987
14,823
Margin
note (ii)
bps
136
103
29
Profi t
£m
125
155
43
675
1,545
Profi t
£m
115
154
47
679
1,562
Asia
note (v)
2013 AER
Average
liability
note (iv)
£m
7,446
13,714
13,263
Margin
note (ii)
bps
154
112
35
Long-term business
Spread income
Fee income
With-profi ts
Insurance margin
Margin on revenues
Expenses:
Acquisition costsnote (i)
Administration expenses
DAC adjustmentsnote (vi)
Expected return on shareholder assets
Operating profi t
(1,031)
2,237
(618) 24,170
92
64
1,050
(256)
(46)% (1,015)
(634)
35
58
1,001
2,125
21,160
(48)%
(300)
See notes at the end of this section.
2013 CER
note (iii)
Average
liability
note (iv)
£m
7,419
13,317
13,244
Margin
note (ii)
bps
144
105
33
1,946
20,736
(47)%
(279)
Profi t
£m
107
140
44
616
1,413
(921)
(578)
32
52
905
Analysis of Asia operating profi t drivers
— Spread income has increased by 17 per cent at constant exchange rate (AER 9 per cent) to £125 million in 2014, predominantly
refl ecting the growth of the Asia non-linked policyholder liabilities;
— Fee income has increased by 11 per cent at constant exchange rates (AER 1 per cent) from £140 million in 2013 to £155 million in 2014,
broadly in line with the increase in movement in average unit-linked liabilities;
— Insurance margin has increased by £59 million at constant exchange rates to £675 million in 2014, predominantly refl ecting the
continued growth of the in-force book, which contains a relatively high proportion of risk-based products. 2014 insurance margin
includes non-recurring items of £27 million (2013: £52 million at AER; £48 million on CER);
— Excluding the adverse impact of currency fl uctuations, margin on revenues has increased by £132 million from £1,413 million in 2013
to £1,545 million in 2014, primarily refl ecting higher premium income recognised in the period;
— Acquisition costs have increased by 12 per cent at constant exchange rates (AER 2 per cent) to £1,031 million in 2014, compared to the
15 per cent increase in sales (AER 5 per cent increase), resulting in a modest decrease in the acquisition costs ratio. The analysis above
uses shareholder acquisition costs as a proportion of total APE. If with-profi ts sales were excluded from the denominator the
acquisition cost ratio would become 66 per cent (2013: 65 per cent at CER), broadly consistent with the prior year;
— Administration expenses have increased by 7 per cent at constant exchange rates (AER 3 per cent decrease) to £618 million in 2014 as
the business continues to expand. On constant exchange rates, the administration expense ratio has reduced from 279 basis points in
2013 to 256 basis points in 2014; and
— Expected return on shareholder assets has increased from £52 million in 2013 to £64 million in 2014, primarily due to higher income
from increased shareholder assets.
Prudential plc Annual Report 2014
315
Margin analysis of long-term insurance business – US
Long-term business
Spread income
Fee income
Insurance margin
Expenses
2014
Average
liability
note (iv)
£m
28,650
72,492
Profi t
£m
734
1,402
670
Acquisition costs note (i)
Administration expenses
DAC adjustments
Expected return on shareholder assets
Operating profi t
(887)
1,556
(693) 108,984
191
14
1,431
See notes at the end of this section.
US
2013 AER
Average
liability
note (iv)
£m
29,648
59,699
Margin
note (ii)
bps
246
196
1,573
97,856
(58)%
(68)
2013 CER
note (iii)
Average
liability
note (iv)
£m
28,272
57,098
Margin
note (ii)
bps
246
195
1,494
93,484
(58)%
(68)
Profi t
£m
694
1,113
559
(868)
(636)
297
22
1,181
Margin
note (ii)
bps
256
193
(57)%
(64)
Profi t
£m
730
1,172
588
(914)
(670)
313
24
1,243
Analysis of US operating profi t drivers
— Spread income has increased by 6 per cent at constant exchange rates (AER increased by 1 per cent) to £734 million during 2014. The
reported spread margin increased to 256 basis points from 246 basis points in 2013. Spread income benefi ted from swap transactions
previously entered into to more closely match the asset and liability duration. Excluding this effect, the spread margin would have
been 182 basis points (2013 CER: 183 basis points);
— Fee income has increased by 26 per cent at constant exchange rates (AER 20 per cent) to £1,402 million during 2014, primarily due to
higher average separate account balances resulting from positive net cash fl ows from variable annuity business and overall market
appreciation. Fee income margin has remained broadly consistent with the prior year at 193 basis points (2013 CER: 195 basis points
and AER:196 basis points), with the decrease primarily attributable to a change in the mix of business;
— Insurance margin represents operating profi ts from insurance risks, including variable annuity guarantees and other sundry items.
Positive net fl ows from variable annuity business with life contingent and other guarantee fees, coupled with a benefi t from repricing
actions and an increased contribution from REALIC, have increased the insurance margin by 20 per cent at constant exchange rates
(AER 14 per cent) to £670 million during 2014;
— Acquisition costs, which are commissions and expenses incurred to acquire new business, including those that are not deferrable,
have decreased slightly in absolute terms and as a percentage of APE compared to 2013. As a percentage of APE, acquisition costs
have remained relatively fl at in comparison to 2013;
— Administration expenses increased to £693 million during 2014 compared to £636 million for 2013 at a constant exchange rate
(AER £670 million), primarily as a result of higher asset-based commissions paid on the larger 2014 separate account balance subject
to these trail commissions. These are paid upon policy anniversary dates and are treated as an administration expense in this analysis.
Excluding these trail commissions, the resulting administration expense ratio would be lower at 36 basis points (2013: CER 44 basis
points and AER 44 basis points), refl ecting the benefi ts of operational leverage; and
— DAC adjustments decreased to £191 million during 2014 compared to £297 million at a constant exchange rate (AER £313 million)
during 2013, with 2013 benefi ting from a £78m (AER £82 million) deceleration in DAC amortisation due to strong equity market
returns in that year. This was not repeated in 2014, which experienced an accelerated DAC amortisation charge of £13 million.
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Total operating profi t
before acquisition
costs and DAC
adjustments
Less new business
strain
Other DAC
adjustments
– amortisation of
previously deferred
acquisition costs:
Normal
(Accelerated)/
Decelerated
316
Prudential plc Annual Report 2014 Additional information Additional unaudited fi nancial information
Additional unaudited fi nancial information continued
I: IFRS profi t and loss information continued
Analysis of pre-tax operating profi t before and aft er acquisition costs and DAC adjustments
2014 £m
2013 AER £m
Other
operating
profi ts
Acquisition costs
Incurred Deferred
Total
Other
operating
profi ts
Acquisition costs
Incurred Deferred
Total
Other
operating
profi ts
2013 CER £m
note (iii)
Acquisition costs
Incurred Deferred
Total
2,127
2,127
1,844
1,844
1,752
1,752
(887)
678
(209)
(914)
716
(198)
(868)
680
(188)
(474)
(474)
(13)
(13)
(485)
(485)
(461)
(461)
82
313
82
1,243
1,752
(868)
78
297
78
1,181
Total
2,127
(887)
191
1,431
1,844
(914)
See notes at the end of this section.
Margin analysis of long-term insurance business – UK
2014
Average
liability
note (iv)
£m
29,419
23,476
86,467
UK
Margin
note (ii)
bps
92
26
29
857
52,895
(11)%
(27)
Profi t
£m
272
61
255
96
176
(96)
(143)
(6)
137
752
2013
Average
liability
note (iv)
£m
27,218
22,924
84,130
Margin
note (ii)
bps
84
28
30
725
50,142
(15)%
(25)
Profi t
£m
228
65
251
89
187
(110)
(124)
(14)
134
706
Long-term business
Spread income
Fee income
With-profi ts
Insurance margin
Margin on revenues
Expenses:
Acquisition costsnote (i)
Administration expenses
DAC adjustments
Expected return on shareholders’ assets
Operating profi t
See notes at the end of this section.
Prudential plc Annual Report 2014
317
Analysis of UK operating profi t drivers:
— Spread income has increased from £228 million in 2013 to £272 million in 2014 following an increase in bulk annuity sales that
contributed £105 million (2013: £25 million) in the year partially offset by lower individual annuity sales;
— Fee income has reduced from £65 million in 2013 to £61 million in 2014 due to a change in product mix towards those with lower asset
management charges, partly offset by an increase in funds under management;
— Insurance margin has increased from £89 million for 2013 to £96 million for 2014, primarily due to improved profi ts from
protection business;
— Margin on revenues represents premium charges for expenses and other sundry net income received by the UK. 2014 income was
£176 million, £11 million lower than in 2013;
— Acquisition costs as a percentage of new business sales for 2014 decreased to 11 per cent from 2013 at 15 per cent, principally driven
by the effect on this percentage ratio of business mix. The ratio above expresses the percentage of shareholder acquisition costs as
a percentage of total APE sales. It is therefore impacted by the level of with-profi t sales in the year. Acquisition costs as a percentage
of shareholder-backed new business sales, excluding the bulk annuity transactions, were 36 per cent in 2014 (2013: 35 per cent); and
— Administration expenses have increased from £124 million in 2013 to £143 million in 2014 largely due to increased investment spend
to realign our business following the pension reforms announced in the UK Budget.
Notes
(i)
The ratio for acquisition costs is calculated as a percentage of APE sales including with-profi ts 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) The 2013 comparative information has been presented at AER and CER so as to eliminate the impact of exchange translation. CER results are calculated by
translating prior year results using the current year foreign exchange rates. All CER profi t fi gures have been translated at current year average rates. For Asia
CER average liability calculations the policyholder liabilities have been translated using current year opening and closing exchange rates. For the US CER
average liability calculations the policyholder liabilities have been translated at the current year month end closing exchange rates. See also note A1.
(iv) 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. Average liabilities
used to calculate the administrative expense margin exclude the REALIC liabilities reinsured to third parties prior to the acquisition by Jackson.
Average liabilities are adjusted for business acquisitions and disposals in the period.
The 2014 and 2013 analyses exclude the results of the held for sale life insurance business of Japan in both the individual profi t and average liability amounts
shown in the table above.
(v)
(vi) The DAC adjustment contains £11 million in respect of joint ventures in 2014 (2013: AER £1 million).
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Prudential plc Annual Report 2014 Additional information Additional unaudited fi nancial information
Additional unaudited fi nancial information continued
I: IFRS profi t and loss information continued
b Asia operations – analysis of IFRS operating profi t by territory
Operating profi t 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)
Total insurance operationsnote (i)
Development expenses
Total long-term business operating profi t
Eastspring Investments
Total Asia operations
2014 £m
AER
2013 £m
CER
2013 £m
2013 AER
vs 2014
2013 CER
vs 2014
109
309
118
28
214
53
72
903
13
49
32
15
(9)
49
1,052
(2)
1,050
90
1,140
101
291
137
18
219
53
54
873
10
51
17
12
(4)
44
1,003
(2)
1,001
74
1,075
96
244
125
16
205
48
51
785
10
47
17
11
(4)
41
907
(2)
905
68
973
8%
6%
(14)%
56%
(2)%
0%
33%
3%
30%
(4)%
88%
25%
(125)%
11%
5%
0%
5%
22%
6%
14%
27%
(6)%
75%
4%
10%
41%
15%
30%
4%
88%
36%
(125)%
20%
16%
0%
16%
32%
17%
Notes
(i)
Analysis of operating profi t between new and in-force business
The result for insurance operations comprises amounts in respect of new business and business in force as follows:
New business strain*
Business in force
Non-recurrent itemsnote (ii)
Total
2014 £m
2013 £m
(18)
1,021
49
1,052
AER
(15)
974
44
1,003
CER
(18)
884
41
907
* The IFRS new business strain corresponds to approximately 1 per cent of new business APE premiums for 2014 (2013: approximately 1 per cent of new business
APE).
The strain refl ects the aggregate of the pre-tax regulatory basis strain to net worth aft er IFRS adjustments for deferral of acquisition costs and deferred income
where appropriate.
(ii) Other non-recurrent items of £49 million in 2014 (2013: £44 million) represent a number of items, none of which are individually signifi cant that are not
anticipated to re-occur in future.
Prudential plc Annual Report 2014
319
c Analysis of asset management operating profi t based on longer-term investment returns
2014 £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 profi t
Operating profi t based on longer-term investment returns
Average funds under management
Margin based on operating income*
Cost/income ratio†
954
33
987
(554)
13
–
446
240
1
241
(140)
–
(11)
90
£250.0bn
38bps
58%
£68.8bn
35bps
59%
130
–
130
(88)
–
–
42
303
–
303
(291)
–
–
12
1,627
34
1,661
(1,073)
13
(11)
590
2013 £m
M&G
note (ii)
Eastspring
Investments
notes (ii), (iii)
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 profi t
Operating profi t 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
37bps
59%
£61.9bn
35bps
62%
121
–
121
(75)
–
–
46
362
–
362
(303)
–
–
59
1,561
26
1,587
(1,017)
12
(8)
574
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 fi nancial 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:
2014
2013
2014
2013
M&G
Operating income before performance-related fees
Margin
of FUM*
bps
Institutional‡
£m
84
89
361
313
Margin
of FUM*
bps
20
18
Eastspring Investments
Operating income before performance-related fees
Margin
of FUM*
bps
Institutional‡
£m
60
60
101
88
Margin
of FUM*
bps
22
22
Total
£m
954
863
Total
£m
240
215
Retail
£m
593
550
Retail
£m
139
127
Margin
of FUM*
bps
38
37
Margin
of FUM*
bps
35
35
* 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.
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320
Prudential plc Annual Report 2014 Additional information Additional unaudited fi nancial information
Additional unaudited fi nancial information continued
II: Other information
a Holding company cash fl ow
Net cash remitted by business units:
UK net remittances to the Group
UK Life fund paid to the Group
Shareholder-backed business:
Other UK paid to the Group
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 offi ce 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 outfl ows
Operating holding company cash fl ow before dividend*
Dividend paid
Operating holding company cash fl ow aft er dividend*
Non-operating net cash fl ow†
Total holding company cash fl ow
Cash and short-term investments at beginning of year
Foreign exchange movements
Cash and short-term investments at end of year
2014 £m
2013 £m
193
132
325
415
453
60
513
(3)
(110)
(113)
400
285
57
1,482
(335)
198
(193)
(23)
(353)
1,129
(895)
234
(978)
(744)
2,230
(6)
1,480
206
149
355
294
454
56
510
(9)
(101)
(110)
400
235
57
1,341
(300)
202
(185)
(32)
(315)
1,026
(781)
245
613
858
1,380
(8)
2,230
* Including central fi nance subsidiaries.
† Non-operating net cash fl ow is principally for corporate transactions for distribution rights and acquired subsidiaries and issue and repayment of subordinated debt.
Prudential plc Annual Report 2014
321
b Funds under management
(a) Summary note (i)
Business area:
Asia operations
US operations
UK operations
Prudential Group funds under managementnote (i)
External fundsnote (ii)
Total funds under management
Notes
(i)
Prudential Group funds under management of £341.6 billion (2013: £299.6 billion) comprise:
Total fi nancial investments per the consolidated statement of fi nancial position
Less: investments in joint ventures and associates accounted for using the equity method
Investment properties which are held for sale or occupied by the Group (included in other IFRS captions)
Internally managed funds held in joint ventures
Prudential Group funds under management
2014 £bn
2013 £bn
49.0
123.6
169.0
341.6
154.3
495.9
38.0
104.3
157.3
299.6
143.3
442.9
2014 £bn
2013 £bn
337.4
(1.0)
0.3
4.9
341.6
296.4
(0.8)
0.3
3.7
299.6
(ii)
External funds shown above as at 31 December 2014 of £154.3 billion (2013: £143.3 billion) comprise £167.2 billion (2013: £148.2 billion) of funds managed by M&G
and Eastspring Investments as shown in note (b) below less £12.9 billion (2013: £4.9 billion) that are classifi ed within Prudential Group’s funds. The £167.2 billion
(2013: £148.2 billion) investment products comprise £162.4 billion (2013: £143.9 billion) plus Asia Money Market Funds of £4.8 billion (2013: £4.3 billion).
(b) Investment products – external funds under management
1 January
Market gross infl ows
Redemptions
Market exchange translation and other
movements
31 December
2014 £m
M&G
Eastspring
Investments
note
2013 £m
Group
total
Eastspring
Investments
note
M&G
Group
total
22,222
82,440
(77,001)
125,989
38,017
(30,930)
148,211
120,457
(107,931)
2,472
3,971
6,443
30,133
137,047
167,180
21,634
74,206
(72,111)
(1,507)
22,222
111,868
40,832
(31,342)
133,502
115,038
(103,453)
4,631
3,124
125,989
148,211
(c) M&G and Eastspring Investments – total funds under management
External funds under management
Internal funds under management
Total funds under management
Eastspring Investments
M&G
2014 £bn
note
2013 £bn
note
2014 £bn
2013 £bn
30.1
47.2
77.3
22.2
37.7
59.9
137.0
127.0
264.0
126.0
118.0
244.0
Note
The external funds under management for Eastspring Investments include Asia Money Market Funds at 31 December 2014 of £4.8 billion (2013: £4.3 billion).
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Prudential plc Annual Report 2014 Additional information Additional unaudited fi nancial information
Additional unaudited fi nancial information continued
II: Other information continued
c Development of economic capital
Overview
Over the last decade regulatory bodies across the European Union have been working on the development of a more risk sensitive
solvency framework. Solvency II was developed with this objective in mind and following ratifi cation of the Omnibus II Directive on
16 April 2014, it is expected to come into force on 1 January 2016. It will apply to all European based insurers including Prudential.
Solvency II adopts the concept of market consistency as a valuation framework for both assets and liabilities as well as a one year value
at risk methodology (with certain modifi cations) for evaluating solvency. While the majority of assets held by insurers can be fair valued
based on market observable prices (albeit such market based valuations can be distorted at times of market stress), the same is not true
of insurance liabilities which are not traded in liquid markets. Solvency II seeks to create a proxy market value for insurance liabilities,
by valuing best-estimate cash fl ows at market levels of risk-free interest rates and allowing for an additional risk margin to ensure these
liabilities are suffi cient to cover the amount another insurance company would be prepared to pay for these liabilities.
There are signifi cant limitations with both (i) the notion that this market consistent approach to valuing assets and liabilities represents
at all times the underlying economic reality, and (ii) the emphasis that Solvency II places on the fl uctuation of these proxy market values
over a one year timeframe. The business typically undertaken by life insurers is long term in nature, with liability profi les that are matched
by maturity with similarly termed assets. This is why appropriately risk managed insurers can tolerate and withstand signifi cant
investment market volatility. What is critical in the assessment of the viability of insurers is their ability to meet claims when they fall due,
over many years, rather than whether they can meet a one-year test based on theoretical proxy market values.
Notwithstanding these limitations, Prudential has been working to implement the requirements of Solvency II in time for its adoption
in 2016. The section that follows provides an update on our progress towards implementation of Solvency II highlights ongoing areas of
uncertainty and draws attention to aspects where our current approach may differ to the one that will be ultimately agreed with the
Prudential Regulation Authority.
From our work to date and subject to these limitations, our estimated economic capital surplus, based on outputs from our Solvency II
internal model, is £9.7 billion, equivalent to an economic capital ratio of 218 per cent. Further explanation of the underlying economic
capital methodology and assumptions which underpin these results is set out in the sections below.
Economic capital positionnote
Available capital
Economic Capital Requirement
Surplus
Economic capital ratio
31 December
2014 £bn
31 December
2013 £bn
17.9
8.2
9.7
218%
18.5
7.2
11.3
257%
Note
1
Based on outputs from the Group’s Solvency II internal model which has not been reviewed or approved by the Prudential Regulation Authority.
In a number of areas Prudential’s Solvency II methodology and assumptions will need to evolve in response to policy development and
regulatory interpretations. A number of working assumptions have been adopted at this stage, which remain subject to policy
clarifi cations and continuing feedback from the Prudential Regulation Authority. The calibration of the matching adjustment for UK
annuity liabilities is one such example, as are a range of other calibration issues which will remain unclear until our internal model is
approved by the Prudential Regulation Authority. Other areas where supervisory judgement and approval will be required include the
proportion of Jackson’s excess capital that will be included in the total surplus (under the deduction and aggregation approach) and
the extent to which the economic capital surplus of our Asia operations will be recognised under the Solvency II fungibility tests.
Against this backdrop of uncertainty it is expected that the Solvency II outcome will result in a lower ratio than the economic capital
ratio above.
As an indication of the range of uncertainty, we have produced the following sensitivities to refl ect various possible Solvency II
outcomes. For example, relative to the £9.7 billion of economic capital surplus at 31 December 2014:
— 20 per cent haircut in the contribution recognised for Asia in the Group available capital, refl ecting Solvency II fungibility tests, would
reduce Group surplus by £1.9 billion (-23 percentage points of cover ratio);
— Transitional relief may be applied in relation to the UK business, which subject to regulatory approval is expected to bring overall UK
surplus in line with current Solvency I (Pillar II) levels. Applying this transitional relief for UK annuities is estimated to increase Group
surplus by £1.3 billion (+16 percentage points of cover ratio); and
— A 10 per cent increase in UK annuity credit and longevity capital requirements (refl ecting adverse matching adjustment outcomes or
calibration strengthening) is estimated to reduce Group surplus by £0.6 billion (-12 percentage points of cover ratio). However, in this
case the impact of transitional relief would be expected to increase as an offset to these changes.
These sensitivities are intended to provide examples and should not be considered indicative of the adjustments that the Prudential
Regulation Authority may ultimately require.
Alongside developing the above economic capital based on outputs from our Solvency II internal model, we have developed an
alternative ‘multi-term’ economic capital model, which seeks to evaluate our ability to meet obligations to customers as these fall due and
which in our view is the best way to assess our economic solvency. This ‘multi-term’ approach is designed to both overcome the artifi cial
one year timeframe of the Solvency II methodology and remove areas of known excessive prudence that for us do not refl ect economic
reality, such as the imposition of an additional risk margin that a theoretical buyer may demand to take over the liabilities in one year’s
time. Removing this risk margin alone would increase the estimated surplus referred to above to £13.6 billion, equivalent to an economic
capital ratio of 265 per cent. This confi rms the strong capital position of the Group and its ability to withstand severe market shocks, when
assessed through appropriately risk-sensitive measures.
Prudential plc Annual Report 2014
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Detail relating to the economic capital position – based on outputs from our Solvency II internal model
Our economic capital results are based on outputs from our Solvency II internal model. Although the Solvency II and Omnibus II
Directives, together with the Level 2 ‘Delegated Act’ published on 17 January 2015, provide a framework for the calculation of Solvency II
results, there remain material areas of policy uncertainty and the methodology and assumptions are subject to review and approval by
the Prudential Regulation Authority, the Group’s lead supervisor.
We remain on track to submit our internal model to the Prudential Regulation Authority for approval in 2015. However, given the
degree of uncertainty, these economic capital results should not be interpreted as representing the Pillar I output from an approved
Solvency II internal model and are not intended to provide a forecast of the eventual position.
At 31 December 2014, the Group had an economic capital surplus of £9.7 billion (2013: £11.3 billion) and an economic capital ratio
of 218 per cent before taking into account the 2014 fi nal dividend. A summary of the capital position on this basis is shown in the
table below:
Economic capital positionnote
Available capital
Economic capital requirement
Surplus
Economic capital ratio
31 December
2014 £bn
31 December
2013 £bn
17.9
8.2
9.7
218%
18.5
7.2
11.3
257%
Note
1
Based on outputs from the Group’s Solvency II internal model which has not been reviewed or approved by the Prudential Regulation Authority.
The economic capital results are based on outputs from our current Solvency II internal model with a number of working assumptions.
Further explanation of the underlying methodology and assumptions are set out in the sections below. Certain aspects of this
methodology and assumptions will differ from those which are applied in obtaining fi nal internal model approval. Consequently, the
position is expected to evolve to refl ect policy clarifi cations and feedback from the Prudential Regulation Authority on Prudential’s
approach to applying this new regime. Against this background of uncertainty, it is expected that the Solvency II ratio based on an
approved model will be lower than the position 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 arm’s 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-profi ts
shareholder transfers.
The best estimate liability is calculated by taking the average of future risk-adjusted best estimate cash fl ows, taking into account the
time value of money. An economic defi nition of contract boundaries has been applied in determining the cash fl ows to include in the best
estimate liability. The best estimate liability also allows for the value of options and guarantees embedded in existing contracts as well as
the value of future discretionary benefi ts 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 and with no diversifi cation between legal entities, 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 Solvency II. This allows for diversifi cation 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, refl ecting our view that in an economic capital assessment, haircuts for transferability restrictions are artifi cial.
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 Solvency II requirements under the ’deduction
and aggregation’ method, no diversifi cation benefi t is allowed for between US insurance entities and other parts of the Group.
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;
— Defi ned benefi t pension schemes are included using international accounting standards and, in addition, a capital requirement
is derived from stressing the accounting position; and
— Holding companies are measured on a Solvency II basis, as if they were insurance companies, in line with Solvency II rules.
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Prudential plc Annual Report 2014 Additional information Additional unaudited fi nancial information
Additional unaudited fi nancial information continued
II: Other information continued
In addition to the assumption of US equivalence, no transferability restrictions have been applied to the economic value of overseas
surplus. Other key elements of Prudential’s methodology relating to areas that are presently unclear for Solvency II Pillar I calculations,
relate to:
(i) The liability discount rate for UK annuities, which includes an initial estimate of the Solvency II ‘matching adjustment’ in addition to the
risk-free rate, but where there remains a range of possible outcomes pending further policy clarity;
(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 fi nal Solvency II capital position); and
(iii) Capital requirements for currency translation impacts, arising from overseas capital (supporting non-UK subsidiaries) being measured
in sterling at potentially stressed exchange rates. This impact is not currently allowed for, refl ecting our view that an economic capital
exposure only arises where funds need to be transferred between entities in order to cover a negative surplus position.
Further, Solvency II outcomes remain unclear in relation to the tiering of hybrid capital instruments, although tiering limits are not
currently expected to result in any restrictions.
The 2013 results were prepared using a liquidity premium methodology, before the matching adjustment had been included in our
internal model. Under this previous basis, credit reserves were set as a proportion of credit spreads. The 2013 results have not been
restated for the effect of adopting the matching adjustment methodology, with the difference between the two approaches being
recorded within the 2014 model changes.
Assumptions
The key assumptions required for the economic capital calibration are:
(i) Assumptions used to derive non-market related best estimate liability cash fl ows, which are based on EEV best estimate assumptions;
(ii) Assumptions used to derive market related best estimate liability cash fl ows, 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 suffi ciently 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 fl ows are discounted is based on market swap rates (with the exception of
Vietnam, India and Poland where no liquid swap market exists and government bond yields are therefore used), with a deduction of
between 10 and 35 basis points (depending on country) to allow for a ‘credit risk adjustment’ to swap rates. This treatment refl ects the
likely outcome under Solvency II. In addition, an estimated matching adjustment 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.
The matching adjustment is set equal to the yield on the backing-assets in each portfolio, less deductions for credit risk, cash fl ow
mismatch allowances and haircuts for assets assumed to be ineligible for the matching adjustment (currently around 10 per cent of
shareholder-backed annuity assets). Full allowance has been made for diversifi cation benefi ts between the matching adjustment
portfolio and other funds, refl ecting an economic treatment. These assumed deductions from the portfolio yield are summarised in the
table below. However, the fi nal Solvency II matching adjustment outcome remains subject to considerable uncertainties and may vary
signifi cantly from these assumptions.
Credit allowances deducted from asset yields
UK shareholder-backed annuities
Post 1-in
200 stress
undiversifi ed
bps
Base bps
71
172
Aside from UK annuities, no matching adjustment allowance or any other form of liquidity premium has been assumed for any other
lines of business.
Other business developments
On 5 February 2015 Prudential announced the completion of the sale of its closed book business in Japan. The contribution of Japan to
the Group surplus has been set equal to the ‘held for sale’ accounting value of £49 million. On 10 November 2014, Prudential announced
an agreement to sell its 25 per cent equity stake in the PruHealth and PruProtect businesses for £155 million, which is allowed for in these
results. On 1 July 2014 Prudential renewed its distribution agreement with Standard Chartered Bank to 2029. The amount of these
distribution fees is allowed for in these economic capital results and has had a negative impact on the Group solvency ratio of
-10 percentage points. The impact of the domestication of the Hong Kong branch, which became effective on 1 January 2014, is also
allowed for and is estimated to have had a negative impact on the Group solvency ratio of -4 percentage points, mainly due to a loss
of diversifi cation in the risk margin following separation of the Hong Kong business into a subsidiary.
Prudential plc Annual Report 2014
325
Analysis of movement in the economic capital surplus
The table below shows the movement during the fi nancial year in the Group’s economic capital surplus.
Analysis of movement in economic capital surplus1 from 1 January to 31 December
2014 £bn
2013 £bn
Economic capital surplus as at 1 January
Operating experience
Non-operating experience (including market movements)
Other capital movements
Disposals
Corporate restructuring
Distribution deals
Subordinated debt issuance/(redemption)
Foreign currency translation impacts
Dividends
Model changes
Economic capital surplus as at 31 December
11.3
1.8
(0.9)
0.1
(0.3)
(0.8)
(0.4)
0.1
(0.9)
(0.3)
9.7
8.8
2.1
0.9
(0.1)
–
(0.4)
1.1
(0.4)
(0.8)
0.1
11.3
Note
1
Based on outputs from the Group’s Solvency II internal model which has not been reviewed or approved by the Prudential Regulation Authority.
During 2014 the movement in the Group economic surplus is driven by:
— Operating experience: generated by in-force business, new business written in 2014, the impact of non-market assumption changes
and non-market experience variances over the year. The 2013 operating experience result additionally benefi ted from specifi c
de-risking actions which were not repeated given the Group’s overall economic capital strength;
— Non-operating experience: mainly arising from negative market experience during 2014, principally caused by the reduction in
long-term interest rates in the UK;
— Other capital movements: a reduction in surplus from the repayment of subordinated debt, renewal of the bancassurance partnership
agreement with Standard Chartered Bank, the negative capital effect of the domestication of the Hong Kong branch, an increase in
surplus from the sale of the PruHealth and PruProtect businesses, positive foreign currency translation effects, and a reduction in
surplus due to dividend payments in 2014; and
— Model changes: a negative impact to Group surplus for the estimated impact of evolving the liability discount rate for UK shareholder-
backed annuity business from one based on a liquidity premium to one based on the matching adjustment, and other internal model
refi nements.
Analysis of Group Economic Capital Requirements
The table below shows the split of the Group Economic Capital Requirement by risk type1.
Market
Equity
Credit
Yields (interest rates)
Other
Insurance
Mortality/morbidity
Lapse
Longevity
Operational/expense
31 December 2014
31 December 2013
% of
undiversifi ed
Economic
Capital
Requirement2
% of
diversifi ed
Economic
Capital
Requirement2
% of
undiversifi ed
Economic
Capital
Requirement2
% of
diversifi ed
Economic
Capital
Requirement2
57%
15%
26%
12%
4%
33%
6%
16%
11%
10%
66%
21%
39%
4%
2%
27%
3%
19%
5%
7%
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 per cent of the
US RBC Company Action Level.
Based on outputs from the Group’s Solvency II internal model which has not been reviewed or approved by the Prudential Regulation Authority.
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Prudential plc Annual Report 2014 Additional information Additional unaudited fi nancial information
Additional unaudited fi nancial information continued
II: Other information continued
The Group’s most material risk exposures are to fi nancial markets, in particular to equities and credit, which we hold to generate a higher
return on capital and a higher return for our policyholders 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 hedged;
— The Group also has signifi cant exposure to credit risk, mainly from the UK annuity portfolio and from Jackson’s fi xed 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-profi ts funds and variable annuities, falling interest rates also increase the value of future
insurance profi ts;
— 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.
Reconciliation of IFRS equity to economic available capital
To aid understanding, the amount representing the Group’s available capital under the economic capital basis is reconciled to the Group’s
IFRS shareholders’ equity in the table below:
Reconciliation of IFRS equity to economic available capital1
2014 £bn
2013 £bn
IFRS shareholders' equity at 31 December
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
Impact of risk margin
Add value of shareholder-transfers
Other liability valuation differences
Increase in value of net deferred tax liabilities (resulting from valuation differences above)
Other
Economic available capital at 31 December
11.8
(1.1)
(3.5)
3.7
(4.7)
4.0
9.0
(0.9)
(0.4)
17.9
9.7
(0.6)
(2.7)
3.8
(3.5)
4.1
9.3
(1.3)
(0.3)
18.5
Note
1
Based on outputs from the Group’s Solvency II internal model which has not been reviewed or approved by the Prudential Regulation Authority.
The key items of reconciliation are:
— £1.1 billion (2013: £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;
— £3.5 billion (2013: £2.7 billion) due to the removal of DAC, goodwill and intangibles from the IFRS balance sheet;
— £3.7 billion (2013: £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;
— £4.7 billion (2013: £3.5 billion) due to the inclusion of a risk margin which is not required under IFRS;
— £4.0 billion (2013: £4.1 billion) due to the inclusion of the value of future shareholder transfers from with-profi ts business on the
economic balance sheet in the UK and Asia, which is excluded from the determination of the Group’s IFRS shareholders’ funds;
— £9.0 billion (2013: £9.3 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; and
— £0.9 billion (2013: £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 2014
327
Sensitivity analysis
Stress testing this economic capital position gives the following results as at 31 December 2014:
— An instantaneous 20 per cent fall in equity markets would reduce surplus by £0.6 billion and reduce the economic solvency ratio
to 214 per cent;
— An instantaneous 40 per cent fall in equity markets would reduce surplus by £2.2 billion and reduce the economic solvency ratio
to 195 per cent;
— A 50 basis points reduction in interest rates (subject to a fl oor of zero) would reduce surplus by £1.4 billion and reduce the economic
solvency ratio to 195 per cent;
— A 100 basis points increase in interest rates would increase surplus by £1.8 billion and increase the economic solvency ratio to
254 per cent; and
— A 100 basis points increase in credit spreads with 15 per cent downgrades in the UK annuity portfolio1 would reduce surplus by
£2.1 billion and reduce the economic solvency ratio to 190 per cent.
These sensitivity results are shown before the impact of potential management actions to de-risk the exposures of shareholder funds.
Even before such management actions are allowed for, the results demonstrate the resilience of the economic capital position following
large falls in equity markets, sizeable reductions in yields (relative to very low starting yields) and a severe credit event.
The adverse impact of falling equity markets mainly results from a reduction in the value of with-profi ts 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.
The adverse impact of a fall in yields largely arises from a decrease in the value of future with-profi ts 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 profi ts and changes in the value of
hedging assets.
An increase in defaults and downgrades adversely impacts on the UK annuity credit book although the business is much less sensitive
to credit spreads under the matching adjustment framework. 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 refl ected 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
1
For UK annuity business, the matching adjustment is intended to signifi cantly reduce the sensitivity of surplus to credit spreads. The UK annuity credit
sensitivity is therefore applied as 15 per cent of the portfolio downgrading, combined with an increase in credit spread stress of 88 basis points (which in total is
commensurate with a 100 basis point credit spread stress). For Jackson, a 10x increase in expected defaults is applied in line with IGD sensitivities since credit
spreads do not directly aff ect the US RBC result.
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Prudential plc Annual Report 2014 Additional information Additional unaudited fi nancial information
Additional unaudited fi nancial information continued
II: Other information continued
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 fl ows emerging in the years shown in the tables is considered most meaningful. The modelled cash fl ows use
the same methodology underpinning the Group’s embedded value reporting, 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 2014, the tables also present the expected future free surplus to be generated from the investment made in new business
during 2014 over the same 40-year period.
Expected transfer of value of in-force business (VIF) and required capital to free surplus
Expected period of emergence
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035 to 2039
2040 to 2044
2045 to 2049
2050 to 2054
Undiscounted expected generation from
all in-force business at 31 December*
Undiscounted expected generation from
2014 long-term new business written*
2014 £m
Asia
953
920
883
846
819
796
795
790
780
751
739
744
735
719
695
668
654
637
621
607
2,921
2,542
2,161
1,801
US
1,054
902
844
792
866
801
774
744
662
540
464
392
335
290
248
204
186
196
113
104
19
–
–
–
UK
506
514
501
503
494
482
473
465
470
459
448
436
423
411
401
388
375
366
348
327
1,327
1,110
521
287
Total
2,513
2,336
2,228
2,141
2,179
2,079
2,042
1,999
1,912
1,750
1,651
1,572
1,493
1,420
1,344
1,260
1,215
1,199
1,082
1,038
4,267
3,652
2,682
2,088
Asia
124
144
149
119
118
104
107
108
103
111
96
105
93
95
103
92
92
90
88
96
434
387
335
289
US
241
108
118
29
114
96
86
131
113
97
83
71
63
56
49
40
35
30
24
24
(14)
–
–
–
UK
25
22
23
22
23
23
24
24
24
23
24
23
22
22
22
22
22
22
22
24
107
97
82
29
Total
390
274
290
170
255
223
217
263
240
231
203
199
178
173
174
154
149
142
134
144
527
484
417
318
Total free surplus expected to emerge
in the next 40 years
24,577
10,530
12,035
47,142
3,582
1,594
773
5,949
* The analysis excludes amounts incorporated into VIF at 31 December 2014 where there is no defi nitive timeframe for when the payments will be made or receipts
received. In particular, it excludes the value of the shareholders’ interest in the estate. It also excludes any free surplus emerging aft er 2054. Following their sale, the
cash fl ows exclude any cash fl ows in respect of Japan and PruHealth and PruProtect.
The above amounts can be reconciled to the new business amounts as follows:
New business
Undiscounted expected free surplus generation for years 2015 to 2054
Less: discount effect
Discounted expected free surplus generation for years 2015 to 2054
Discounted expected free surplus generation for years 2054+
PruHealth and PruProtect free surplus generation for new business not included above†
Less: Free surplus investment in new businessnote 13
Other items‡
Post-tax EEV new business profi tnote 13
2014 £m
Asia
US
UK
Total
3,582
(2,111)
1,471
91
–
(346)
(54)
1,162
1,594
(532)
1,062
–
–
(187)
(181)
694
773
(451)
5,949
(3,094)
322
2
19
(73)
–
270
2,855
93
19
(606)
(235)
2,126
† In November 2014, the Group disposed of its stake in the PruHealth and PruProtect businesses for an EEV profi t of £44 million. New business profi t for the year includes new
business written by the businesses prior to the disposed date. For the analysis above, such profi ts have been excluded as the Group has realised the cash through sale in 2014.
‡ Other items represent the impact of the time value of options and guarantees on new business, foreign exchange eff ects and other non-modelled items. Foreign
exchange eff ects arise as EEV new business profi t amounts are translated at average exchange rates and the expected free surplus generation uses year end closing rates.
Prudential plc Annual Report 2014
329
The undiscounted expected free surplus generation from all in-force business at 31 December 2014 shown below can be reconciled
to the amount that was expected to be generated as at 31 December 2013 as follows:
Group
2013 expected free surplus generation for years
2014 to 2053*
Less: Amounts expected to be realised in the
2014
£m
2015
£m
2016
£m
2017
£m
2018
£m
2019
£m
Other
£m
Total
£m
2,165
2,109
2,025
1,911
1,884
1,814
31,638
43,546
current year
(2,165)
–
–
–
–
–
–
(2,165)
Add: Expected free surplus to be generated in year
2054†
Foreign exchange differences
New business
Sale of PruHealth and PruProtect
Operating movements
Non-operating and other movements
2014 expected free surplus generation for years
2015 to 2054*
Asia
2013 expected free surplus generation for years
2014 to 2053*
Less: Amounts expected to be realised in the
–
–
–
–
–
–
–
77
390
(2)
9
(70)
–
73
274
(2)
(9)
(25)
–
67
290
(5)
18
(53)
–
65
170
(7)
47
(18)
–
63
255
(7)
58
(4)
367
850
4,570
(48)
367
1,195
5,949
(71)
(1,632)
(1,679)
–
2,513
2,336
2,228
2,141
2,179
35,745
47,142
2014
£m
2015
£m
2016
£m
2017
£m
2018
£m
2019
£m
Other
£m
Total
£m
801
821
798
735
705
682
17,471
22,013
current year
(801)
–
–
–
–
–
–
(801)
Add: Expected free surplus to be generated in year
2054†
Foreign exchange differences
New business
Operating movements
Non-operating and other movements
2014 expected free surplus generation for years
2015 to 2054*
–
–
–
–
–
–
–
25
124
–
(17)
–
26
144
(29)
(19)
–
23
149
(1)
(23)
–
22
119
7
(7)
–
21
118
13
(15)
324
548
2,928
324
665
3,582
(1,115)
(1,206)
953
920
883
846
819
20,156
24,577
US
2013 expected free surplus generation for years
2014 to 2053*
Less: Amounts expected to be realised in the
2014
£m
2015
£m
2016
£m
2017
£m
2018
£m
2019
£m
Other
£m
Total
£m
902
817
760
709
700
666
4,834
9,388
current year
(902)
–
–
–
Add: Expected free surplus to be generated in year
–
–
–
–
–
–
52
241
(10)
(46)
–
47
108
7
(20)
–
44
118
10
(37)
–
–
43
29
37
(17)
–
–
(902)
–
42
114
35
9
–
302
984
–
530
1,594
(48)
(80)
2054†
Foreign exchange differences
New business
Operating movements
Non-operating and other movements
2014 expected free surplus generation for years
2015 to 2054
* Includes the removal of Japan life business following the sale.
† Excluding 2014 new business.
–
1,054
902
844
792
866
6,072
10,530
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Prudential plc Annual Report 2014 Additional information Additional unaudited fi nancial information
Additional unaudited fi nancial information continued
II: Other information continued
UK
2013 expected free surplus generation for years
2014 to 2053
Less: Amounts expected to be realised in the
current year
Add: Expected free surplus to be generated in year
2054*
New business
Sale of PruHealth and PruProtect
Operating movements
Non-operating and other movements
2014 expected free surplus generation for years
2015 to 2054
* Excluding 2014 new business.
2014
£m
2015
£m
2016
£m
2017
£m
2018
£m
2019
£m
Other
£m
Total
£m
462
471
467
467
479
466
9,333
12,145
(462)
–
–
–
–
–
–
–
–
25
(2)
19
(7)
–
–
22
(2)
13
14
–
–
23
(5)
9
7
–
–
22
(7)
3
6
–
–
23
(7)
10
2
–
(462)
43
658
(48)
43
773
(71)
(469)
(393)
506
514
501
503
494
9,517
12,035
At 31 December 2014, the total free surplus expected to be generated over the next fi ve years (years 2015 to 2019 inclusive), using the
same assumptions and methodology as those underpinning our embedded value reporting was £11.4 billion, an increase of £1.7 billion
from the £9.7 billion expected over the same period at the end of 2013.
This increase primarily refl ects the new business written in 2014, which is expected to generate £1,379 million of free surplus over the
next fi ve years. Operating, non-operating and disposal of our share of PruHealth and PruProtect businesses and other items are expected
to decrease free surplus generation by £70 million over the next fi ve years, which is more than offset by the favourable foreign exchange
movements of £345 million.
At 31 December 2014, the total free surplus expected to be generated on an undiscounted basis in the next 40 years is £47.1 billion,
up from the £43.5 billion expected at end of 2013, refl ecting the effect of new business written across all three business operations and
a positive foreign exchange translation effect arising in the US and Asia operations of £1.2 billion. These positive effects have been
offset by a £(1.7) billion adverse effect refl ecting operating, market assumption changes and the disposal of our share of PruHealth and
PruProtect businesses and other items. These principally refl ect the impact of falling interest rates, particularly in Asia. The overall
growth in the undiscounted value of free surplus refl ects our ability to write both growing and profi table new business.
Actual underlying free surplus generated in 2014 from life business in force at the end of 2014 was £2.7 billion including £0.3 billion
of changes in operating assumptions and experience variances. This compares with the expected 2014 realisation at the end of 2013
of £2.2 billion. This can be analysed further as follows:
Transfer to free surplus in 2014
Expected return on free assets
Changes in operating assumptions and experience variances
Underlying free surplus generated from in-force life business in 2014
2014 free surplus expected to be generated at 31 December 2013
Asia
£m
828
62
(30)
860
801
US
£m
883
30
278
1,191
902
UK
£m
565
14
66
645
462
Total
£m
2,276
106
314
2,696
2,165
Prudential plc Annual Report 2014
331
The equivalent discounted amounts of the undiscounted totals shown previously are shown below:
Expected period of emergence
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035 to 2039
2040 to 2044
2045 to 2049
2050 to 2054
Discounted expected generation from
all in-force business at 31 December
Discounted expected generation from
long-term 2014 new business written
2014 £m
Asia
908
807
720
644
581
529
494
459
424
383
354
335
311
289
264
239
221
204
188
174
747
518
362
247
US
1,017
820
724
642
664
576
526
478
406
312
255
204
165
137
112
90
80
83
42
39
99
–
–
–
UK
471
457
419
397
367
337
312
289
274
252
231
212
193
176
161
146
133
122
109
96
321
195
63
25
Total
2,396
2,084
1,863
1,683
1,612
1,442
1,332
1,226
1,104
947
840
751
669
602
537
475
434
409
339
309
1,167
713
425
272
Asia
118
125
119
88
81
67
65
61
54
54
43
45
37
36
37
32
30
28
26
28
112
82
60
43
US
233
97
101
23
86
68
56
81
65
52
42
33
28
23
19
15
12
10
7
7
4
–
–
–
UK
23
20
19
18
18
16
16
15
14
13
12
11
10
10
9
8
8
7
7
7
27
18
12
4
Total
374
242
239
129
185
151
137
157
133
119
97
89
75
69
65
55
50
45
40
42
143
100
72
47
Total discounted free surplus
expected to emerge in the next
40 years
10,402
7,471
5,758
23,631
1,471
1,062
322
2,855
The above amounts can be reconciled to the Group’s fi nancial statements as follows:
Discounted expected generation from all in-force business for years 2015 to 2054
Discounted expected generation from all in-force business for years after 2054
Discounted expected generation from all in-force business (excluding Japan) at 31 December 2014note 14
Add: Free surplus of life operations held at 31 December 2014note 13
Less: Time value of guaranteesnote 14
Expected cash fl ow from the sale of Japan life business*
Other non-modelled items†note 14
Total EEV for life operations
Total
£m
23,631
470
24,101
4,193
(575)
23
1,382
29,124
* Upon completion of the sale of the Japan life business, £23 million of free surplus will be released. See note 8 and note 14 of the EEV basis results section for further details.
† These relate to items where there is no defi nitive timeframe for when the payments will be made or receipts received and are, consequently, excluded from the amounts
incorporated into the tables above showing the expected generation of free surplus from in-force business at 31 December 2014. In particular, it excludes the value of the
shareholders’ interest in the estate.
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Prudential plc Annual Report 2014 Additional information Additional unaudited fi nancial information
Additional unaudited fi nancial information continued
II: Other information continued
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 2014 results
US$ linkednote 1
Other Asia currencies
Total Asia
UK sterlingnotes 3,4
US$note 4
Total
EEV 2014 results
US$ linkednote 1
Other Asia currencies
Total Asia
UK sterlingnotes 3,4
US$note 4
Total
Underlying free
surplus
generated
%
14
9
23
38
39
Pre-tax
operating
profi t
notes 2, 3, 4
%
Shareholders’
funds
notes 2, 3, 4
%
17
18
35
20
45
14
18
32
46
22
100
100
100
Post-tax new
business profi ts
%
36
18
54
13
33
100
Post-tax
operating
profi t
notes 2, 3, 4
%
Shareholders’
funds
notes 2, 3, 4
%
35
13
48
14
38
100
29
15
44
33
23
100
Notes
1
2
3
4
US$ 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 profi t 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 profi ts include all interest payable
as sterling denominated, refl ecting interest rate currency swaps in place.
f Option schemes
The Group grants share options through four schemes, and exercises of the options are satisfi ed 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, while employees based
in Dublin are eligible to participate in the Prudential International Assurance sharesave plan. Executives based in Asia, and eligible
employees, can participate in the international savings-related share option scheme, while agents based in Hong Kong can participate
in the international savings-related share option scheme for non-employees. Further details of the schemes and accounting policies are
detailed in note B3.2 of the IFRS basis consolidated fi nancial statements.
All options were granted at £nil consideration. No options have been granted to substantial shareholders, suppliers of goods or
services (excluding options granted to agents under the non-employee savings-related share option scheme) or in excess of the
individual limit for the relevant scheme.
The option 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 2014 was £13.75 (2013: £11.14).
Particulars of options granted to directors are included in the directors’ remuneration report on page 93.
The closing price of the shares immediately before the date on which the options were granted during the current year was £14.14.
The following analyses show the movement in options for each of the option schemes for the year ended 31 December 2014.
Prudential plc Annual Report 2014
333
UK savings-related share option scheme
Exercise period
Number of options
Date of grant
Exercise
price £
28 Sep 06
26 Apr 07
27 Sep 07
25 Apr 08
25 Sep 08
25 Sep 08
27 Apr 09
27 Apr 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
23 Sep 14
23 Sep 14
4.75
5.72
5.52
5.51
4.38
4.38
2.88
2.88
4.25
4.61
4.61
4.66
4.66
6.29
6.29
9.01
9.01
11.55
11.55
Beginning
01 Dec 13
01 Jun 14
01 Dec 14
01 Jun 15
01 Dec 13
01 Dec 15
01 Jun 14
01 Jun 16
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
01 Dec 17
01 Dec 19
End
Beginning
of year
Granted
Exercised
Cancelled
Forfeited
Lapsed
End of
year
148
31 May 14
503
30 Nov 14
1,668
31 May 15
1,544
30 Nov 15
12,317
31 May 14
10,873
31 May 16
30 Nov 14 1,655,947
171,125
30 Nov 16
82,407
31 May 15
62,431
31 May 14
122,255
31 May 16
434,105
31 May 15
178,689
31 May 17
940,009
31 May 16
140,115
31 May 18
418,408
31 May 17
31 May 19
91,054
31 May 18
31 May 20
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– 990,881
– 499,168
(148)
(503)
(1,000)
(72)
(12,317)
(307)
(1,644,907)
(5,292)
(66,007)
(60,140)
(5,518)
(319,866)
(2,071)
(36,123)
(2,499)
(5,657)
(66)
–
–
–
–
–
–
–
–
(1,417)
(227)
(878)
–
–
(5,175)
(3,790)
(23,904)
(1,431)
(14,852)
(1,664)
(4,645)
(4,547)
–
–
–
–
–
–
(2,713)
–
–
–
(669)
(9,576)
(8,496)
(26,464)
–
(14,465)
(3,992)
(3,427)
(1,311)
–
–
(5)
(4)
–
(25)
(6,910)
–
–
663
1,468
–
10,541
–
(278) 165,328
14,408
(1,114)
(1,560)
731
(1,273) 114,795
(6,774)
92,714
(2,960) 161,372
(30,513) 823,005
(4,849) 131,336
(24,642) 358,792
83,235
– 982,809
– 493,310
(2,097)
4,323,598 1,490,049
(2,162,493)
(62,530)
(71,113)
(83,004) 3,434,507
The total number of securities available for issue under the scheme is 3,434,507 which represents 0.134 per cent of the issued share
capital at 31 December 2014.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the
current year was £14.08.
The weighted average fair value of options granted under the plan in the year was £11.55.
International savings-related share option scheme
Exercise period
Number of options
Date of grant
Exercise
price £
25 Apr 08
25 Sep 08
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
23 Sep 14
23 Sep 14
5.51
4.38
2.88
4.25
4.25
4.61
4.61
4.66
4.66
6.29
6.29
9.01
9.01
11.55
11.55
Beginning
01 Jun 13
01 Dec 13
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
01 Dec 17
01 Dec 19
End
30 Nov 13
31 May 14
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
31 May 18
31 May 20
Beginning
of year
1,453
3,503
75,573
5,349
2,682
29,097
6,130
322,112
25,739
629,331
26,114
690,823
55,409
–
–
Granted
Exercised
Cancelled
Forfeited
Lapsed
End of
year
–
–
–
–
–
–
–
–
–
–
–
–
–
1,558
1,311
(1,453)
(3,503)
(75,573)
(5,349)
–
(29,097)
–
(167,101)
–
(10,132)
(1,391)
–
–
–
–
–
–
–
–
–
–
–
(399)
–
–
–
(7,520)
–
–
–
–
–
–
–
–
–
–
(31,097)
–
(49,206)
(5,451)
(43,110)
(2,995)
–
–
–
–
–
–
–
–
–
–
–
2,682
–
–
6,130
–
– 123,515
–
25,739
– 569,993
–
19,272
– 640,193
52,414
–
1,558
–
1,311
–
1,873,315
2,869
(293,599)
(7,919) (131,859)
– 1,442,807
The total number of securities available for issue under the scheme is 1,442,807 which represents 0.056 per cent of the issued share
capital at 31 December 2014.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the
current year was £14.58.
The weighted average fair value of options granted under the plan in the year was £11.55.
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Additional unaudited fi nancial information continued
II: Other information continued
Prudential International Assurance sharesave plan
Exercise period
Number of options
Date of grant
Exercise
price £
Beginning
End
Beginning
of year
Granted
Exercised
Cancelled
Forfeited
Lapsed
27 Apr 09
2.88
01 Jun 14
30 Nov 14
6,567
6,567
–
–
(5,774)
(5,774)
–
–
–
–
(793)
(793)
End of
year
–
–
There are no securities available for issue under the scheme at 31 December 2014.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the
current year was £13.70.
Non-employee savings-related share option scheme
Exercise period
Number of options
Date of grant
Exercise
price £
25 Apr 08
25 Sep 08
27 Apr 09
27 Apr 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
23 Sep 14
23 Sep 14
5.51
4.38
2.88
2.88
4.25
4.61
4.61
4.66
4.66
6.29
6.29
9.01
9.01
11.55
11.55
Beginning
01 Jun 13
01 Dec 13
01 Jun 12
01 Jun 14
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
01 Dec 17
01 Dec 19
End
Beginning
of year
Granted
Exercised
Cancelled
Forfeited
Lapsed
End of
year
30 Nov 13
31 May 14
30 Nov 12
30 Nov 14
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
31 May 18
31 May 20
1,997
9,186
27,532
686,366
11,717
341,803
362,214
600,918
257,774
438,307
90,289
777,462
424,941
–
–
–
–
–
–
–
–
–
–
–
–
–
– 630,613
– 525,065
–
(4,798)
–
(686,366)
(11,717)
(341,803)
–
(335,839)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(3,400)
(954)
(5,409)
(2,994)
–
–
–
–
–
–
–
–
(391)
(8,049)
–
(572)
–
(2,798)
–
–
–
–
(1,997)
–
(4,388)
–
(27,532)
–
–
–
–
–
–
– 361,823
– 257,030
– 257,774
– 434,335
–
89,335
– 769,255
– 421,947
630,613
–
525,065
–
4,030,506 1,155,678
(1,380,523)
(12,757)
(11,810)
(33,917) 3,747,177
The total number of securities available for issue under the scheme is 3,747,177 which represents 0.146 per cent of the issued share
capital at 31 December 2014.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the
current year was £14.16.
The weighted average fair value of options granted under the plan in the year was £11.55.
Prudential plc Annual Report 2014
335
g Selected historical fi nancial information of Prudential
The following table sets forth Prudential’s selected consolidated fi nancial data for the periods indicated. Certain data is derived from
Prudential’s audited consolidated fi nancial statements prepared in accordance with International Financial Reporting Standards (IFRS)
as issued by the International Accounting Standards Board (IASB) and as adopted by the European Union (EU) and European
Embedded Value (EEV).
This table is only a summary and should be read in conjunction with Prudential’s consolidated fi nancial statements and the related
notes included elsewhere in this document.
Income statement data
IFRS basis results
Gross premium earned
Outward reinsurance premiums
Earned premiums, net of reinsurance
Investment return
Other income
Total revenue, net of reinsurance
Benefi ts and claims and movement in unallocated surplus of
with-profi ts funds, net of reinsurance
Acquisition costs and other expenditure
Finance costs: interest on core structural borrowings of
shareholder-fi nanced operations
Remeasurement of carrying value of Japan life business
classifi ed as held for sale
Total charges, net of reinsurance
Share of profi ts from joint ventures and associates, net of
related tax
Profi t before tax (being tax attributable to shareholders’ and
policyholders’ returns)note 1
Tax (charge) credit attributable to policyholders’ returns
Profi t before tax attributable to shareholders
Tax (charge) credit attributable to shareholders’ returns
Profi t for the year
Based on profi t 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
2014 £m
2013 £m
2012 £m
2011 £m
2010 £m
32,832
(799)
32,033
25,787
2,306
60,126
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
(50,169)
(6,752)
(43,154)
(6,861)
(45,144)
(6,032)
(28,706)
(4,717)
(39,687)
(4,692)
(341)
(13)
(305)
(120)
(280)
(286)
(257)
–
–
–
(57,275)
(50,440)
(51,456)
(33,709)
(44,636)
303
147
135
76
64
3,154
(540)
2,614
(398)
2,216
2,082
(447)
1,635
(289)
1,346
3,117
(370)
2,747
(584)
2,163
1,859
7
1,866
(415)
1,451
1,890
(607)
1,283
43
1,326
86.9p
86.8p
52.8p
52.7p
85.1p
85.0p
57.1p
57.0p
52.4p
52.3p
(in pence)
35.03p
30.52p
25.64p
25.19p
20.17p
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Prudential plc Annual Report 2014 Additional information Additional unaudited fi nancial information
Additional unaudited fi nancial information continued
II: Other information continued
Supplementary IFRS income statement data
Operating profi t based on longer-term investment returnsnote 2
Non-operating items
Profi t before tax attributable to shareholdersnote 2
Operating earnings per share (excluding 2010 exceptional tax
Year ended 31 December
2014 £m
2013 £m
2012 £m
2011 £m
2010 £m
3,186
(572)
2,614
2,954
(1,319)
1,635
2,520
227
2,747
2,017
(151)
1,866
1,823
(540)
1,283
credit) (in pence)
96.6p
90.9p
76.9p
62.7p
58.8p
Operating earnings per share (including 2010 exceptional tax
credit) (in pence)
96.6p
90.9p
76.9p
62.7p
65.1p
Supplementary EEV income statement data
Operating profi t based on longer-term investment returnsnote 2
Non-operating items
Profi t before tax attributable to shareholders
Operating earnings per share (excluding 2010 exceptional tax
Year ended 31 December
2014 £m
2013* £m
2012* £m
2011* £m
2010* £m
4,096
247
4,343
4,204
154
4,358
3,174
595
3,769
2,942
(751)
2,191
2,697
(111)
2,586
credit) (in pence)
160.7p
165.0p
124.9p
116.0p
107.4p
Operating earnings per share (including 2010 exceptional tax
credit) (in pence)
160.7p
165.0p
124.9p
116.0p
113.7p
* The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2010 to 2013 results are shown on a comparable basis.
New business datanote 3
New business excluding Japan
Annual premium equivalent (APE) sales
EEV new business profi t (NBP) (post-tax)*
NBP margin (% APE)
Year ended 31 December
2014 £m
2013 £m
2012 £m
2011 £m
2010 £m
4,650
2,126
46%
4,423
2,082
47%
4,195
1,791
43%
3,681
1,536
42%
3,485
1,433
41%
* The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2010 to 2013 results are shown on a comparable basis.
Statement of fi nancial position data
As of and for the year ended 31 December
2014 £m
2013 £m
2012 £m
2011 £m
2010 £m
Total assets
Total policyholder liabilities and unallocated surplus of
with-profi ts funds
Core structural borrowings of shareholder-fi nanced operations
Total liabilities
Total equity
369,204
325,932
307,644
270,018
256,330
321,989
4,304
357,392
11,812
286,014
4,636
316,281
9,651
268,263
3,554
297,280
10,364
233,538
3,611
261,411
8,607
221,895
3,676
248,765
7,565
Prudential plc Annual Report 2014
337
Other data
As of and for the year ended 31 December
2014 £bn
2013 £bn
2012 £bn
2011 £bn
2010 £bn
Funds under managementnote 4
EEV shareholders’ equity, excluding non-controlling interests
Insurance Groups Directive capital surplus before fi nal
dividendnote 5
496
29.2
4.7
443
24.9
5.1
406
22.4
5.1
352
19.6
4.0
340
18.2
4.3
Notes
1
2
3
4
5
This measure is the formal profi t (loss) before tax measure under IFRS, but is not the result attributable to shareholders.
Operating profi ts are determined on the basis of including longer-term investment returns. EEV and IFRS operating profi ts are stated aft er excluding the eff ect of
short-term fl uctuations in investment returns against long-term assumptions, gain on dilution of the Group’s holdings, the costs arising from the domestication
of the Hong Kong business, (loss) profi t 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 profi t also excludes amortisation of acquisition accounting adjustments. In addition, for EEV basis results,
operating profi t excludes the eff ect of changes in economic assumptions, the market value movement on core borrowings and, in 2012, the gain arising on the
acquisition of REALIC.
Comparative APE new business sales prior to 2011 exclude the Japanese insurance operations, which ceased writing new business from 15 February 2010.
Funds under management comprise funds of the Group held in the statement of fi nancial position and external funds that are managed by Prudential asset
management operations.
The 2014 surplus is estimated.
h Results of sold PruHealth and PruProtect businesses
The tables below show the results of the sold PruHealth and PruProtect businesses which were included in the Group’s results for full
year and half year 2014.
IFRS 2014 results
Pre-tax operating profi t
EEV 2014 post-tax results
APE sales
Operating profi t
New business contribution
Total operating profi t
APE and new business contribution
Full year 2014
Q3 2014
Half year 2014
Q1 2014
2014 £m
Full year
Half year
23
8
2014 £m
Full year
Half year
23
11
11
14
6
8
2014 £m
Post-tax new
business
contribution
11
9
6
3
APE
23
20
14
7
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Prudential plc Annual Report 2014 Additional information Risk factors
Risk factors
A number of risk factors affect Prudential’s
operating results and fi nancial condition
and, accordingly, the trading price of its
shares. The risk factors mentioned below
should not be regarded as a complete and
comprehensive statement of all potential
risks and uncertainties. The information
given is as of the date of this document,
and any forward-looking statements are
made subject to the reservations specifi ed
below under ‘Forward-looking statements’.
Prudential’s approaches to managing
risks are explained in the ‘Group Chief Risk
Offi cer’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 fl uctuations and
general economic conditions
Prudential’s businesses are inherently
subject to market fl uctuations and general
economic conditions. Uncertainty or
negative trends in international economic
and investment climates could adversely
affect Prudential’s business and profi tability.
Since 2008, Prudential has operated against
a challenging background of periods of
signifi cant volatility in global capital and
equity markets, interest rates (which in
some jurisdictions have become negative)
and liquidity, and widespread economic
uncertainty. For example, government
interest rates 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 profi tability.
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
fi nancial resources and may reduce
capital resources as valuations decline.
Global fi nancial markets are subject to
uncertainty and volatility created by a
variety of factors, including concerns over
sovereign debt, general slowing in world
growth, the timing and scale of quantitative
easing programmes of central banks and
socio-political events. Upheavals in the
fi nancial markets may affect general levels
of economic activity, employment and
customer behaviour. For example, insurers
may experience an elevated incidence of
claims, lapses, or surrenders of policies,
and some policyholders may choose to
defer or stop paying insurance premiums.
The demand for insurance products may
also be adversely affected. In addition,
there may be a higher incidence of
counterparty failures. 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
its balance sheet and profi tability.
For example, this could occur if the
recoverable value of intangible assets for
bancassurance agreements and deferred
acquisition costs are reduced. New
challenges related to market fl uctuations
and general economic conditions may
continue to emerge.
In the future, the adverse effects of such
For some non-unit-linked investment
factors would be felt principally through
the following items:
— Investment impairments or reduced
investment returns, which could reduce
Prudential’s capital and impair its ability
to write signifi cant volumes of new
business, increase the potential adverse
impact of product guarantees, or have a
negative impact on its assets under
management and profi t;
— Higher credit defaults and wider credit
and liquidity spreads resulting in
realised and unrealised credit losses;
— Failure of counterparties to transactions
with Prudential that could give rise to a
negative impact on Prudential’s fi nancial
position and on the accessibility or
recoverability of amounts due or, for
derivative transactions, adequate
collateral not being in place;
— Estimates of the value of fi nancial
instruments being diffi cult because,
in certain illiquid or closed markets,
determining the value at which fi nancial
products, in particular those written in
some of the Group’s Asia operations, it
may not be possible to hold assets which
will provide cash fl ows to match those
relating to policyholder liabilities. This is
particularly true in those countries where
bond markets are not developed and in
certain markets where regulated surrender
values are set with reference to the interest
rate environment prevailing at the time of
policy issue. This results in a mismatch due
to the duration and uncertainty of the
liability cash fl ows and the lack of suffi cient
assets of a suitable duration. While this
residual asset/liability mismatch risk can be
managed, it cannot be eliminated. Where
interest rates in these markets remain lower
than those used to calculate surrender
values over a sustained period, this could
have a material adverse effect on
Prudential’s reported profi t.
In the US, fl uctuations in prevailing
interest rates can affect results from
Jackson which has a signifi cant spread-
based business, with the majority of its
assets invested in fi xed income securities.
In particular, fi xed annuities and stable
value products written by Jackson expose
Prudential to the risk that changes in
interest rates, which are not fully refl ected
in the interest rates credited to customers,
will reduce spread. The spread is the
difference between the rate of return
Jackson is able to earn on the assets
backing the policyholders’ liabilities,
and the amounts that are credited to
policyholders in the form of benefi t
increases, subject to minimum crediting
rates. Declines in spread from these
products or other spread businesses that
Jackson conducts, and increases in
surrenders arising from interest rate rises,
could have a material impact on its
businesses or results of operations.
Jackson also writes a signifi cant amount
of variable annuities that offer capital or
income protection guarantees. The value
of these guarantees is affected by market
factors (such as interest rates, equity
values, bond spreads and realised volatility)
and policyholder behaviour. 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
signifi cant under IFRS reporting.
A signifi cant part of the profi t from
Prudential’s UK insurance operations is
related to bonuses for policyholders
declared on with-profi ts products, which
are broadly based on historical and current
rates of return on equity, real estate and
fi xed income securities, as well as
Prudential’s expectations of future
investment returns. This profi t could
be lower in a sustained low interest
rate environment.
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
Prudential plc Annual Report 2014
339
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
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 fl ow
situation, its relations with its central bank,
the extent of its foreign currency reserves,
the availability of suffi cient foreign
exchange on the date a payment is due, the
relative size of the debt service burden to
the economy as a whole, the sovereign
debtor’s policy toward local and
international lenders, and the political
constraints to which the sovereign debtor
may be subject.
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 fi nancial institutions may also
suffer losses or experience solvency or
other concerns, and Prudential might face
additional risks relating to any debt of such
fi nancial institutions held in its investment
portfolio. There is also risk that public
perceptions about the stability and
creditworthiness of fi nancial institutions
and the fi nancial sector generally might be
affected, as might counter party
relationships between fi nancial 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 fi nancial condition and results
of operations.
Prudential is subject to the risk of
exchange rate fl uctuations owing to
the geographical diversity of its
businesses
Due to the geographical diversity of
Prudential’s businesses, Prudential is
subject to the risk of exchange rate
fl uctuations. Prudential’s operations in the
US and Asia, which represent a signifi cant
proportion of operating profi t based on
longer-term investment returns and
shareholders’ funds, generally write
policies and invest in assets denominated
in local currencies. Although this practice
limits the effect of exchange rate
fl uctuations on local operating results, it
can lead to signifi cant fl uctuations in
Prudential’s consolidated fi nancial
statements upon translation of results into
pounds sterling. This exposure is not
currently separately managed. The
currency exposure relating to the
translation of reported earnings could
impact on fi nancial reporting ratios such as
dividend cover, which is calculated as
operating profi t after tax on an IFRS basis,
divided by the current year interim
dividend plus the proposed fi nal dividend.
The impact of gains or losses on currency
translations is recorded as a component of
shareholders’ funds within other
comprehensive income. Consequently,
this could impact on Prudential’s gearing
ratios (defi ned as debt over debt plus
shareholders’ funds). The Group’s surplus
capital position for regulatory reporting
purposes may also be affected by
fl uctuations in exchange rates with possible
consequences for the degree of fl exibility
the Prudential has in managing its business.
Prudential conducts its businesses
subject to regulation and associated
regulatory risks, including the eff ects
of changes in the laws, regulations,
policies and interpretations and any
accounting standards in the markets
in which it operates
Changes in government policy, legislation
(including tax) or regulatory interpretation
applying to companies in the fi nancial
services and insurance industries in any of
the markets in which Prudential operates,
which in some circumstances may be
applied retrospectively, may adversely
affect Prudential’s product range,
distribution channels, competitiveness,
profi tability, capital requirements and,
consequently, reported results and
fi nancing requirements. Also, regulators in
jurisdictions in which Prudential operates
may change the level of capital required
to be held by individual businesses, or
could introduce possible changes in
the regulatory framework for pension
arrangements and policies, the regulation
of selling practices and solvency
requirements. In addition, there could be
changes to the maximum level of non-
domestic ownership by foreign companies
in certain jurisdictions. Furthermore, as
a result of interventions by governments
in response to recent fi nancial and global
economic conditions, it is widely expected
that there will continue to be a substantial
increase in government regulation and
supervision of the fi nancial services
industry, including the possibility of higher
capital requirements, restrictions on
certain types of transactions and enhanced
supervisory powers.
Current EU directives, including the
EU Insurance Groups Directive (IGD)
require EU fi nancial services groups to
demonstrate net aggregate surplus capital
in excess of solvency requirements at the
Group level in respect of shareholder-
owned entities. The test is a continuous
requirement, so that Prudential needs to
maintain a higher amount of regulatory
capital at the Group level than otherwise
necessary in respect of some of its
individual businesses to accommodate, for
example, short-term movements in global
foreign exchange rates, interest rates,
deterioration in credit quality and equity
markets. The EU is also developing a new
prudential regulatory framework for
insurance companies, referred to as
‘Solvency II’.
The Solvency II Directive covers
valuation, the treatment of insurance
groups, the defi nition of capital and the
overall level of capital requirements. A key
aspect of Solvency II is that the assessment
of risks and capital requirements are
intended to be aligned more closely with
economic capital methodologies, and may
allow Prudential to make use of its internal
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, and
the Omnibus II Directive, which amended
certain aspects of the Solvency II Directive,
was adopted by the Council of the
European Union in April 2014. As such,
Solvency II is 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 and guidelines
that will supplement the high-level rules
and principles of the Solvency II and
Omnibus II Directives, including the
Delegated Acts relating to third-country
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Prudential plc Annual Report 2014 Additional information Risk factors
Risk factors continued
equivalents. These detailed rules and
guidelines are not currently expected to be
fi nalised until mid to late 2015. Further, the
effective application of a number of key
measures incorporated in the Omnibus II
Directive, including the provisions for
third-country equivalents, is subject to
supervisory judgement and approval.
As a result, there is a risk that the effect
of the measures fi nally adopted could
be adverse for Prudential, including
potentially a signifi cant increase in the
capital required to support its business,
and that Prudential may be placed at a
competitive disadvantage to other
European and non-European fi nancial
services groups.
Currently there are also a number of
other global regulatory developments
which could impact the way in which
Prudential is supervised in its many
jurisdictions. These include the Dodd-
Frank Wall Street Reform and Consumer
Protection Act (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 fi nancial
services industry within the United States
that, among other reforms to fi nancial
services entities, products and markets,
may subject fi nancial institutions designated
as systemically important to heightened
prudential and other requirements intended
to prevent or mitigate the impact of future
disruptions in the US fi nancial system.
The full impact of the Dodd-Frank Act on
Prudential’s businesses is not currently clear,
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 of which
Prudential was one. Designation as a G-SII
has led to additional policy measures being
applied to the designated group. Based on
the policy framework released by the IAIS,
and subsequent guidance papers, these
additional policy measures include
enhanced Group-wide supervision,
effective resolution measures of the Group
in the event of failure, loss absorption, and
higher loss absorption capacity. Prudential
is monitoring the development, and
potential impact, of the framework of
policy measures and is continuing to
engage with the PRA on the implications
of the policy measures and Prudential’s
designation as a G-SII. The G-SII regime
also introduces two types of capital
requirements; the fi rst, a Basic Capital
Requirement (BCR), designed to act as
a minimum Group capital requirement;
and the second, a Higher Loss Absorption
(HLA) requirement that should refl ect the
drivers of the assessment of G-SII
designation. G-SIIs will be required to
report on their BCR to Group-wide
supervisors on a confi dential basis from
2015. The HLA requirement will apply
from January 2019 to the insurance groups
identifi ed 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 outline a set of common global
principles and standards for Group
supervision, and may increase the focus
of regulators in some jurisdictions. One of
the framework’s key components is an
Insurance Capital Standard (ICS) which
would be expected to form the Group
solvency capital standard under
ComFrame. This new framework 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 fi rst
Exposure Draft for its Phase II on insurance
accounting, which would introduce
signifi cant changes to the statutory
reporting of insurance entities that prepare
accounts according to IFRS. A revised
Exposure Draft was issued in June 2013.
The IASB is currently re-deliberating the
Exposure Draft proposals in light of
comments by the insurance industry and
other respondents. The timing of the fi nal
proposals taking effect is uncertain but not
expected to be before 2019.
Any changes or modifi cation of IFRS
accounting policies may require a change
in the future results or a retrospective
adjustment of reported results.
The resolution of several issues
aff ecting the fi nancial services
industry could have a negative
impact on Prudential’s reported
results or on its relations with
current and potential customers
Prudential is, and in the future may be,
subject to legal and regulatory actions in
the ordinary course of its business, both in
the UK and internationally. These actions
could involve a review of 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’ interest may include the
approach that product providers use to
select third-party distributors and to
monitor the appropriateness of sales made
by them. In some cases, product providers
can be held responsible for the defi ciencies
of third-party distributors.
In the US, there has been signifi cant
attention on the different regulatory
standards applied to investment advice
delivered to retail customers by different
sectors of the industry. As a result of
reports relating to perceptions of industry
abuses, there have been numerous
regulatory inquiries and proposals for
legislative and regulatory reforms. This
includes focus on the suitability of sales of
certain products, alternative investments
and the widening of the circumstances
under which a person or entity providing
investment advice, with respect to certain
employee benefi t and pension plans,
would be considered a fi duciary – and
would subject the person or entity to
certain regulatory requirements. There is a
risk that new regulations introduced may
have a material adverse effect on the sales
of the products by Prudential and increase
Prudential’s exposure to legal risks.
In Asia, regulatory regimes are developing
at different speeds, driven by a combination
of global factors and local considerations.
There is a risk that new requirements are
introduced that challenge current practices,
or are retrospectively applied to sales made
prior to their introduction.
Litigation, disputes and regulatory
investigations may adversely aff ect
Prudential’s profi tability and
fi nancial condition
Prudential is, and may be in the future,
subject to legal actions, disputes and
regulatory investigations in various
contexts, including in the ordinary course
of its insurance, investment management
and other business operations. These legal
Prudential plc Annual Report 2014
341
actions, disputes and investigations may
relate to aspects of Prudential’s businesses
and operations that are specifi c to
Prudential, or that are common to
companies that operate in Prudential’s
markets. Legal actions and disputes may
arise under contracts, regulations (including
tax) or from a course of conduct taken by
Prudential, and may be class actions.
Although Prudential believes that it has
adequately provided in all material aspects
for the costs of litigation and regulatory
matters, no assurance can be provided that
such provisions are suffi cient. Given the
large or indeterminate amounts of damages
sometimes sought, other sanctions that
might be applicable, and the inherent
unpredictability of litigation and disputes,
it is possible that an adverse outcome could,
from time to time, have an adverse effect on
Prudential’s reputation, results of operations
or cash fl ows.
Prudential’s businesses are
conducted in highly competitive
environments with developing
demographic trends, and continued
profi tability depends upon
management’s ability to respond
to these pressures and trends
The markets for fi nancial services in the
UK, US and Asia are highly competitive,
with several factors affecting Prudential’s
ability to sell its products and continued
profi tability, including price and yields
offered, fi nancial strength and ratings,
range of product lines and product quality,
brand strength and name recognition,
investment management performance,
historical bonus levels, developing
demographic trends and customer appetite
for certain savings products. In some of its
markets, Prudential faces competitors that
are larger, have greater fi nancial resources
or a greater market share, offer a broader
range of products or have higher bonus
rates. Further, heightened competition for
talented and skilled employees and agents
with local experience, particularly in Asia,
may limit Prudential’s potential to grow its
business as quickly as planned.
In Asia, the Group’s principal
competitors in the region are international
fi nancial companies, including 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 signifi cant market presence.
Within the UK, Prudential’s principal
competitors include many of the major
retail fi nancial 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 fi nancial services
companies such as AIG, AXA Financial Inc,
Allianz, Prudential Financial, Lincoln
National, MetLife and Aegon.
Prudential believes competition will
intensify across all regions in response to
consumer demand, technological advances,
the impact of consolidation, regulatory
actions and other factors. Prudential’s ability
to generate an appropriate return depends
signifi cantly upon its capacity to anticipate
and respond appropriately to these
competitive pressures.
Downgrades in Prudential’s fi nancial
strength and credit ratings could
signifi cantly impact its competitive
position and damage its
relationships with creditors or
trading counterparties
Prudential’s fi nancial strength and credit
ratings, which are used by the market to
measure its ability to meet policyholder
obligations, are an important factor
affecting public confi dence in Prudential’s
products and, as a result, its competitiveness.
Downgrades in Prudential’s ratings, as
a result of, for example, decreased
profi tability, increased costs, increased
indebtedness or other concerns, could
have an adverse effect on its ability to
market products, retain current
policyholders, and on the Group’s fi nancial
fl exibility. In addition, the interest rates
Prudential pays on its borrowings are
affected by its credit ratings, which are in
place to measure the Group’s ability to
meet its contractual obligations.
Prudential plc’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 plc’s short-term debt
is rated as P-1 by Moody’s, A-1 by
Standard & Poor’s and F1 by Fitch.
The Prudential Assurance Company
Limited’s fi nancial strength is rated Aa2
(negative outlook) by Moody’s, AA (stable
outlook) by Standard & Poor’s and AA
(stable outlook) by Fitch.
Jackson’s fi nancial 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.
Prudential Assurance Co Singapore
(Pte) Ltd’s fi nancial strength is rated AA
(stable outlook) by Standard & Poor’s.
In addition, changes in methodologies
and criteria used by rating agencies could
result in downgrades that do not refl ect
changes in the general economic conditions
or Prudential’s fi nancial condition.
Adverse experience in the operational
risks inherent in Prudential’s
business, including failure in
information technology and cyber-
security, could disrupt its business
functions and 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
signifi cant periods.
These factors, among others, result
in signifi cant reliance on, and require
signifi cant investment in, information
technology (IT), compliance and other
operational systems, personnel and
processes. In addition, Prudential
outsources several operations, including
a signifi cant part of its UK back offi ce and
customer-facing functions as well as a
number of IT functions, resulting in reliance
upon the operational processing
performance of its outsourcing partners.
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. Due to human error, among
other reasons, operational incidents do
happen periodically and no system or
process can entirely prevent them –
although there have not been any material
such events to date. For example, although
Prudential has not identifi ed 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.
Being part of the fi nancial services
sector, Prudential and its business partners
are increasingly exposed to the risk that
third parties may attempt to disrupt the
availability, confi dentiality and integrity
of its IT systems. This could result in loss
of trust from Prudential’s customers,
reputational damage and fi nancial loss.
The cyber-security threat continues to
evolve globally in sophistication and
potential signifi cance as Prudential
increasingly moves to digitalise its business
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Prudential plc Annual Report 2014 Additional information Risk factors
Risk factors continued
and provide on-line business operations for
its customers. While a focus of Prudential is
on being proactive to the exposure faced
from emerging threats through continually
reviewing and enhancing its IT environment
to remain robust and secure, together with
increasing its ability to detect system
compromise, and recover should such an
incident occur, there can be no assurance
that such events will not take place with
adverse consequential effects on
Prudential’s business and fi nancial position.
Such events could, among other things,
harm Prudential’s ability to perform
necessary business functions, result in the
loss of confi dential 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
administration systems (such as those
relating to policyholder records or meeting
regulatory requirements) or actuarial
reserving processes could have a material
adverse effect on its results of operations
during the effective period.
Adverse experience relative to the
assumptions used in pricing products
and reporting business results could
signifi cantly aff ect Prudential’s results
of operations
In common with other life insurers, the
profi tability of the Group’s businesses
depends on a mix of factors including
mortality and morbidity levels and trends,
policy surrenders and take-up rates on
guarantee features of products, investment
performance and impairments, unit cost
of administration and new business
acquisition expense.
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. Assumptions about future
expected levels of mortality are similarly
relevant to the Guaranteed Minimum
Withdrawal Benefi t (GMWB) of Jackson’s
variable annuity business. If mortality
improvement rates signifi cantly exceed the
improvement assumed, Prudential’s results
of operations could be adversely affected.
A further example is the assumption
that Prudential makes about future
expected levels of the rates of early
termination of products by its customers
(persistency). This is particularly relevant
to its lines of business other than its UK
annuity business, especially Jackson’s
portfolio of traditional and variable
annuities. Prudential’s persistency
assumptions refl ect recent past experience
for each relevant line of business.
Any expected change in future persistency
is also refl ected in the assumption. If actual
levels of future persistency are signifi cantly
different than assumed, the Group’s results
of operations could be adversely affected.
Furthermore, Jackson’s variable annuity
products are sensitive to other types of
policyholder behaviour, such as the
take-up of its GMWB product features.
Another example is the impact of
epidemics and other effects that cause
a large number of deaths. Signifi cant
infl uenza epidemics have occurred three
times in the last century, but the likelihood,
timing, or the severity of future epidemics
cannot be predicted. The effectiveness of
external parties, including governmental
and non-governmental organisations, in
combating the spread and severity of any
epidemics could have a material impact on
the Group’s loss experience.
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 remittances. In some circumstances,
this could limit Prudential’s ability to pay
dividends to shareholders or to make
available funds held in certain subsidiaries
to cover operating expenses of other
members of the Group.
Prudential operates in a number
of markets through joint ventures
and other arrangements with third
parties (including in China and
India), involving certain risks that
Prudential does not face with respect
to its consolidated subsidiaries
Prudential operates, and in certain markets
is required by local regulation to operate,
through joint ventures (including in China
and India). For the Group’s joint venture
operations, management control is
exercised jointly with the venture
participants. The level of control exercisable
by the Group depends on the terms of the
joint venture agreements, in particular, the
allocation of control among, and continued
cooperation between, the joint venture
participants. Prudential may face fi nancial,
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 fi nancial diffi culty, or fails to
comply with local or international regulation
and standards such as those pertaining to
the prevention of fi nancial crime. In addition,
a signifi cant proportion of the Group’s
product distribution is carried out through
arrangements with third parties not
controlled by Prudential, and is dependent
upon continuation of these relationships.
A temporary or permanent disruption to
these distribution arrangements, such as
through signifi cant deterioration in the
reputation, fi nancial position or other
circumstances of the third party or material
failure in controls (such as those pertaining
to the prevention of fi nancial crime) could
adversely affect the results of operations
of Prudential.
Prudential’s Articles of Association
contain an exclusive jurisdiction
provision
Under Prudential’s Articles of Association,
certain legal proceedings may only be
brought in the courts of England and Wales.
This applies to legal proceedings by
a shareholder (in its capacity as such) against
Prudential and/or its directors and/or its
professional service providers. It also applies
to legal proceedings between Prudential
and its directors and/or Prudential and
Prudential’s professional service providers
that arise in connection with legal
proceedings between the shareholder and
such professional service provider. This
provision could make it diffi cult for US and
other non-UK shareholders to enforce their
shareholder rights.
Prudential plc Annual Report 2014
343
Changes in tax legislation may result
in adverse tax consequences
Tax rules, including those relating to the
insurance industry, and their interpretation,
may change, possibly with retrospective
effect, in any of the jurisdictions in which
Prudential operates. Signifi cant tax
disputes with tax authorities, and any
change in the tax status of any member
of the Group or in taxation legislation
or its scope or interpretation could affect
Prudential’s fi nancial condition and results
of operations.
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Prudential plc Annual Report 2014 Additional information Glossary
Glossary
AER
Actual Exchange Rates are actual historical
exchange rates for the specifi c accounting
period, being the average rates over the
period for the income statement and the
closing rates for the balance sheet at the
balance sheet date.
Bulk annuity
A bulk annuity, sometimes referred to as
a bulk purchase annuity, is a contract
between a defi ned benefi t 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 policyholder on the surrender of, or
withdrawal from, a life insurance policy
or annuity contract.
CER
Constant Exchange Rate – Prudential plc
reports its results at both actual exchange
rates (AER) to refl ect actual results, and
also constant exchange rates (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
fl ows, 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 specifi ed
pool of underlying assets. The pool of
assets is typically a group of small and
illiquid assets that are unable to be
sold individually.
Available for sale (AFS)
Securities that have been acquired neither
for short-term sale nor to be held to
maturity. AFS securities are measured at
fair value on the statement of fi nancial
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
benefi t added to participating life insurance
policies and are the way in which
policyholders receive their share of the
profi ts of the policies. There are normally
two types of bonus;
— 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 fi nal bonus
may not be paid. Final bonuses may
vary and are not guaranteed.
Deferred acquisition costs or DAC
Acquisition costs are expenses of an
insurer which are incurred in connection
with the acquisition of new insurance
contracts or the renewal of existing
insurance policies. They include
commissions and other variable sales
inducements and the direct costs
of issuing the policy, such as underwriting
and other policy issue expenses. Typically,
under IFRS, an element of acquisition
costs are deferred, ie, not expensed
in the year incurred, and instead amortised
in the income statement in line with
the emergence of surpluses on the
related contracts.
Deferred annuities
Annuities or pensions due to be paid from
a future date or when the policyholder
reaches a specifi ed age.
Discretionary participation features
or DPF
A contractual right to receive, as a
supplement to guaranteed benefi ts,
additional benefi ts:
— That are likely to be a signifi cant portion
of the total contractual benefi ts;
— 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
profi t after tax on an IFRS basis, divided by
the current year interim dividend plus the
proposed fi nal dividend.
Endowment product
An ordinary individual life insurance
product that provides the insured party
with various guaranteed benefi ts if it
survives specifi c maturity dates or periods
stated in the policy. Upon the death of the
insured party within the coverage period,
a designated benefi ciary receives the face
value of the policy.
European Embedded Value or EEV
Financial results 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
Offi cers 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.
Prudential plc Annual Report 2014
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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 fl exible
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 indexed annuities
These are similar to fi xed annuities in that
the contract holder pays the insurer a
premium, which is credited to the contract
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 fi nancial 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. Specifi cally,
it includes amounts maturing from the
in-force operations during the period,
less the investment in new business, the
effect of market movements and other
one-off items.
Guaranteed annuities
Policies that pay out a fi xed amount of
benefi t for a defi ned period.
Guaranteed investment contract
(GIC) (US)
An investment contract between an
insurance company and an institutional
investor, which provides a stated rate of
return on deposits over a specifi ed period
of time. They typically provide for partial or
total withdrawals at book value if needed
for certain liquidity needs of the plan.
Guaranteed minimum accumulation
benefi t (GMAB) (US)
A guarantee that ensures that the contract
value of a variable annuity contract will be
at least equal to a certain minimum amount
after a specifi ed number of years.
Guaranteed minimum death benefi t
(GMDB) (US)
The basic death benefi t offered under
variable annuity contracts, which specifi es
that if the owner dies before annuity
income payments begin, the benefi ciary
will receive a payment equal to the greater
of the contract value or purchase payments
less withdrawals.
Guaranteed minimum income
benefi t (GMIB) (US)
A guarantee that ensures, under certain
conditions, that the owner may annuitise
the variable annuity contract based on the
greater of (a) the actual account value
or (b) a 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
benefi t (GMWB) (US)
A guarantee in a variable annuity that
promises that the owner may make annual
withdrawals of a defi ned amount for the life
of the owner or until the total guaranteed
amount is recovered, regardless of market
performance or the actual account balance.
Health and protection
These comprise health and personal
accident insurance products, which provide
morbidity or sickness benefi ts and include
health, disability, critical illness and accident
coverage. Health and protection products
are sold both as standalone policies and as
riders that can be attached to life insurance
products. Health and protection riders are
presented together with ordinary individual
life insurance products for purposes of
disclosure of fi nancial information.
IGD surplus
The Prudential Group’s solvency surplus
measured in accordance with the EU
Insurance Groups Directive.
Immediate annuity
An annuity in which payments to the
annuitant or benefi ciary start at once upon
establishment of the annuity plan or scheme.
Such annuities are almost always purchased
with a single (lump sum) payment.
In-force
An insurance policy or contract refl ected
on records that has not expired, matured or
otherwise been surrendered or terminated.
Inherited estate
For life insurance proprietary companies,
surplus capital available on top of what
is necessary to cover policyholders’
reasonable expectations. An inherited
(orphan) estate is effectively surplus capital
on a realistic basis built over time, and not
allocated to policyholders or shareholders.
Internal rate of return (IRR)
The IRR is equivalent to the discount rate
at which the present EEV value of the
post-tax cash fl ows expected to be earned
over the lifetime of the business written
in shareholder-backed life funds is equal
to the total invested capital to support
the writing of the business. The capital
included in the calculation of the IRR
is equal to the amount required to pay
acquisition costs and set up reserves, less
premiums received, plus encumbered
capital. The impact of the time value of
options and guarantees is included in
the calculation.
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
fi nancial 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 fl uctuations
in the value of underlying investment or
indices. Investment risk associated with
the product is usually borne by the
policyholder. Insurance coverage,
investment and administration services
are provided for which the charges are
deducted from the investment fund assets.
Benefi ts payable will depend on the price
of the units prevailing at the time of
surrender, death or the maturity of the
product, subject to surrender charges.
These are also referred to as unit-linked
products or unit-linked contracts.
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Prudential plc Annual Report 2014 Additional information Glossary
Glossary continued
Liquidity coverage ratio
Prudential calculates this as assets and
available resources that are readily
convertible to cash to cover corporate
obligations in a prescribed stress scenario.
This ratio is calculated 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-profi ts bonds when policyholders
surrender in adverse market conditions.
Money Market Fund (MMF)
An MMF is an open-ended mutual fund
that invests in short-term debt securities
such as US treasury bills and commercial
paper. The purpose of an MMF is to
provide investors with a safe place
to invest easily accessible cash-equivalent
assets characterised as a low-risk,
low-return investment.
Mortality rate
Rate of death, varying by such parameters
as age, gender, and health, used in pricing
and computing liabilities for future
policyholders of life and annuity products,
which contain mortality risks.
Net premiums
Life insurance premiums, net of reinsurance
ceded to third-party reinsurers.
Net worth
Net assets for EEV reporting purposes that
refl ect 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 profi t
The profi ts, calculated in accordance with
European Embedded Value Principles,
from business sold in the fi nancial reporting
period under consideration.
Non-participating business
A life insurance policy where the
policyholder is not entitled to a share
of the Company’s profi ts and surplus,
but receives certain guaranteed benefi ts.
Also known as non-profi t in the UK.
Examples include pure risk policies (eg,
fi xed annuities, term insurance, critical
illness) and unit-linked insurance contracts.
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.
Open-ended investment company
(OEIC )
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 benefi ts
based on factors such as the performance
of a pool of assets held within the fund, as
a supplement to any guaranteed benefi ts.
The insurer may either have discretion as
to the timing of the allocation of those
benefi ts to participating policyholders or
may have discretion as to the timing and
the amount of the additional benefi ts. For
Prudential, the most signifi cant participating
funds are with-profi ts funds for businesses
written in the UK, Hong Kong, Malaysia
and Singapore.
Participating policies or participating
business
Contracts of insurance where the
policyholders have a contractual right to
receive, at the discretion of the insurer,
additional benefi ts based on factors
such as investment performance,
as a supplement to any guaranteed
benefi ts. This is also referred to
as with-profi ts business.
Payback period
Payback period is the time in which the
initial ‘cash’ outfl ow of investment is
expected to be recovered from the ‘cash’
infl ows generated by the investment. We
measure cash outfl ow 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 fi rms.
Regular premium product
A life insurance product with regular
periodic premium payments.
Rider
A supplemental plan that can be attached
to a basic insurance policy, with payment
of additional premium.
Risk margin reserve (RMR) charge
An RMR is included within operating profi t
based on longer-term investment returns
and represents a charge for long-term
expected defaults of debt securities,
determined by reference to the credit
quality of the portfolio.
Scottish Amicable Insurance Fund
(SAIF)
SAIF is a ring-fenced sub-fund of the
Prudential Assurance Company’s
long-term fund following the acquisition of
the mutually owned Scottish Amicable Life
Assurance Society in 1997. The fund is
solely for the benefi t of policyholders of
SAIF. Shareholders of Prudential plc have
no interest in the profi ts of this fund
although they are entitled to asset
management fees on this business.
Separate account
A separate account is a pool of investments
held by an insurance company not in or
‘separate’ from its general account.
The returns from the separate account
generally accrue to the policyholder.
A separate account allows an investor to
choose an investment category according
to the individual’s 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.
Unit-linked products or unit-linked
contracts
See ‘investment-linked products or
contracts’ above.
Universal life
An insurance product where the customer
pays fl exible premiums, subject to specifi ed
limits, which are accumulated in an account
and are credited with interest (at a rate
either set by the insurer or refl ecting
returns on a pool of matching assets).
The customer may vary the death benefi t
and the contract may permit the customer
to withdraw the account balance,
typically subject to a surrender charge.
Variable annuity (VA) (US)
An annuity whose value is determined by
the performance of underlying investment
options that frequently includes securities.
A variable annuity’s value is not guaranteed
and will fl uctuate, depending on the value
of its underlying investments. The holder
of a variable annuity assumes the
investment risk and the funds backing
a variable annuity are held in the insurance
company’s separate account. VAs are
similar to unit-linked annuities in the UK.
Whole of life
A type of life insurance policy that provides
lifetime protection; premiums must usually
be paid for life. The sum assured is paid out
whenever death occurs. Commonly used
for estate-planning purposes.
With-profi ts funds
See ‘participating funds’ above.
Yield
A measure of the income received from
an investment compared to the price paid
for the investment. Normally expressed
as a percentage.
Stochastic techniques
Stochastic techniques incorporate results
from repeated simulations using key
fi nancial parameters which are subject to
random variations and are projected into
the future.
Subordinated debt
A fi xed interest issue or debt that ranks
below other debt in order of priority for
repayment if the issuer is liquidated.
Holders are compensated for the added
risk through higher rates of interest.
Under EU insurance regulation,
subordinated debt is not treated as a
liability and counts towards the coverage
of the required minimum margin of
solvency, with limitations.
Surrender
The termination of a life insurance policy
or annuity contract at the request of the
policyholder after which the policyholder
receives the cash surrender value, if any,
of the contract.
Surrender charge or surrender fee
The fee charged to a policyholder when
a life insurance policy or annuity contract
is surrendered for its cash surrender
value prior to the end of the surrender
charge period.
Takaful
Insurance that is compliant with
Islamic principles.
Time value of options and
guarantees
The value of fi nancial options and
guarantees comprises two parts: the
intrinsic value and the time value. The
intrinsic value is given by a deterministic
valuation on best estimate assumptions.
The time value is the additional value
arising from the variability of economic
outcomes in the future.
Total shareholder return (TSR)
TSR represents the growth in the value
of a share plus the value of dividends
paid, assuming that the dividends are
reinvested in the Company’s shares on
the ex-dividend date.
Unallocated surplus
Unallocated surplus is recorded wholly as a
liability and represents the excess of assets
over policyholder liabilities for Prudential’s
with-profi ts funds. The balance retained in
the unallocated surplus represents
cumulative income arising on the with-
profi ts business that has not been allocated
to policyholders or shareholders.
Prudential plc Annual Report 2014
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Prudential plc Annual Report 2014 Additional information Shareholder information
Shareholder information
Communication with shareholders
Being a major institutional investor,
Prudential is very aware of the importance
of maintaining a good relationship with its
shareholders. A programme of regular
meetings with major shareholders took
place over the course of the year and the
Chairman provided feedback to the Board
on topics raised with him by major
shareholders. In addition, analysts’ and
brokers’ reports were circulated to Board
members where requested.
Prudential regularly holds a conference
for investors in order to provide topical
information on selected areas of the
business. In December 2014, the
conference was held in Singapore and
Jakarta in Indonesia, focusing on
Prudential’s large and rapidly growing
Asia business. Additional updates
on the Group’s strategy and performance
were provided.
The Group maintains a corporate
website containing a wide range of
information relevant for private and
institutional investors, including the
Group’s fi nancial calendar.
Annual General Meeting
The 2015 Annual General Meeting (‘AGM’)
will be held in the Churchill Auditorium at
The Queen Elizabeth II Conference Centre,
Broad Sanctuary, Westminster, London
SW1P 3EE on 14 May 2015 at 11.00am.
Prudential will continue its practice of
calling a poll on all resolutions, and the
voting results, including all proxies lodged
prior to the meeting, will be displayed at
the meeting and subsequently published
on the Company’s website.
Details of the 2014 AGM, including the
major items discussed at the meeting and
the results of the voting, can be found on
the Company’s website.
In accordance with relevant legislation,
shareholders holding fi ve 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 offi ce.
Documents on display
The terms and conditions of all directors’
appointments are available for inspection
at the Company’s registered offi ce during
normal business hours and at the Annual
General Meeting.
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 9 March 2015, Trustees held
0.43 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 Remuneration
policy on the Company’s website.
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 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 minimum number of shares under
guidelines approved by the Board, which
they would also be expected to retain as
described on pages 100 and 112 of the
Directors’ Remuneration report.
Major shareholders
The following notifi cations have been
disclosed under the FCA’s Disclosure and
Transparency Rules in respect of notifi able
interests exceeding three per cent in the
voting rights of the issued share capital.
As at 31 December 2014
% of total
voting rights
Capital Group
Companies, Inc
BlackRock, Inc
Norges Bank
10.12
5.08
4.03
On 18 February 2015, the Capital Group
Companies, Inc notifi ed that their holding
had reduced to 9.96 per cent of the issued
share capital.
Company constitution
Prudential is governed by the Companies
Act 2006, other applicable legislation and
regulations, 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 2014.
The Memorandum and Articles
of Association are available on the
Company’s website.
Share capital
Issued share capital
The issued share capital as at 31 December
2014 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. Further information
can be found in note C10 on page 246.
Issued share
capital
2,567,779,950
2,560,381,736
Number of
accounts on
the register
55,760
57,013
2014
2013
Prudential also maintains secondary
listings on the Singapore Stock Exchange,
and the New York Stock Exchange in the
form of American Depositary Receipts
which are referenced to ordinary shares
on the main UK register.
Prudential has maintained a suffi ciency
of public fl oat throughout the reporting
period as required by the Hong Kong
Listing Rules.
A number of dividend waivers are in
place, and these relate to shares issued but
not allocated under the Group’s employee
share plans. These shares are held by the
Trustees and will, in due course, be used
to satisfy requirements under the Group’s
employee share plans.
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 benefi cial owners of
the shares but not the registered owners,
Prudential plc Annual Report 2014
349
not been used since it was last granted
at the Annual General Meeting in 2014.
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 14 May 2015.
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 fi rst 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 fi ve per cent of its issued
share capital without offering them to
existing shareholders, in line with
relevant regulations and best practice.
Dis-application 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
Dividend information
authorities respectively will be put to
shareholders at the Annual General
Meeting on 14 May 2015.
Details of shares issued during 2014 and
2013 are given in note C10 on page 246.
In accordance with the terms of a waiver
granted by the Hong Kong Stock
Exchange, Prudential confi rms that it
complies with the applicable law and
regulation in the UK in relation to the
holding of shares in treasury, and with the
conditions of the waiver in connection with
the purchase of own shares and any
treasury shares it may hold.
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
2014 fi nal dividend
Ex-dividend date
Record date
Payment date
Analysis of shareholder accounts as at 31 December 2014
Shareholders
registered on
the UK register
and Hong Kong
and Irish
branch registers
Holders of
US American
Depository
Receipts
Shareholders
with ordinary
shares standing
to the credit of
their CDP
securities
accounts
26 March 2015 26 March 2015 25 March 2015
27 March 2015 27 March 2015 27 March 2015
21 May 2015
On or about
29 May 2015
On or about
28 May 2015
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
Number of
shareholder
accounts
% of total
number of
shareholder
accounts
277
154
469
1,676
2,174
13,783
37,227
55,760
Number of
shares
2,247,693,681
109,320,566
107,780,043
46,895,009
15,048,329
30,413,084
10,629,238
0.50
0.28
0.84
3.00
3.90
24.72
66.76
100
2,567,779,950
% of total
number of
shares
87.53
4.26
4.20
1.83
0.59
1.18
0.41
100
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Shareholder information continued
Shareholder enquiries
For enquiries about shareholdings, including dividends and lost share certifi cates, please contact the Company’s registrars:
Register
Principal UK register
Irish branch register
Hong Kong branch register
Singapore registers
By post
By telephone
Tel: 0871 384 2035
Fax: 0871 384 2100
Textel: 0871 384 2255 (for hard of hearing)
Tel: + 353 1 553 0050
Tel: +852 2862 8555
Tel:+65 6535 7511
Equiniti Limited, Aspect House, Spencer Road,
Lancing, West Sussex BN99 6DA*
Calls to 0871 numbers are charged at 8p per
minute from a BT landline. Lines are open from
8.30am to 5.30pm (UK), Monday to Friday. Other
telephone providers’ costs may vary. International
shareholders tel: +44 (0) 121 415 7026.
Capita Asset Services Shareholder Solutions
(Ireland), PO Box 7117, Dublin 2, Ireland.
Computershare Hong Kong Investor Services
Limited, 17M Floor, Hopewell Centre,
183 Queen’s Road East, Wan Chai, Hong Kong.
Shareholders who have shares standing to the
credit of their securities accounts with CDP
in Singapore may refer queries to the CDP
at 9 North Buona Vista Drive, #01-19/20,
The Metropolis, Singapore 138588. Enquiries
regarding shares held in Depository Agent
Sub-accounts should be directed to your
Depository Agent or broker.
ADRs
J.P. Morgan, the authorised depositary bank, at
JPMorgan Chase & Co, PO Box 64504, St. Paul,
MN 55164-0504, USA.
Tel: +1 800 990 1135
or from outside the US +1 651 453 2128
or log on to www.adr.com
Dividend mandates
Shareholders may have their dividends
paid directly to their bank or building
society account. If you wish to take
advantage of this facility, please call
Equiniti and request a Cash Dividend
Mandate form. Alternatively, shareholders
may download the form from
www.prudential.co.uk/prudential-plc/
investors/shareholder_services/forms
Cash dividend alternative
The Company operates a Dividend
Re-investment Plan (DRIP). Shareholders
who have elected for the DRIP will
automatically receive shares for all future
dividends in respect of which a DRIP
alternative is offered. The election may be
cancelled at any time by the shareholder.
Further details of the DRIP and the
timetable are available on the Company’s
website at www.prudential.co.uk/
prudential-plc/investors
Electronic communications
Shareholders are encouraged to elect to
receive shareholder documents
electronically by registering with
Shareview at www.shareview.co.uk
This will save on printing and distribution
costs, and create environmental benefi ts.
Shareholders who have registered will be
sent an email notifi cation whenever
shareholder documents are available on
the Company’s website, and a link will be
provided to that information. When
registering, shareholders will need their
shareholder reference number which can
be found on their share certifi cate or proxy
form. The option to receive shareholder
documents electronically is not available to
shareholders holding shares through The
Central Depository (Pte) Limited (CDP).
Please contact Equiniti if you require any
assistance or further information.
Share dealing services
The Company’s Registrars, Equiniti, offer a
postal dealing facility for buying and selling
Prudential plc ordinary shares; please see
the Equiniti address 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
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.
Prudential plc Annual Report 2014
351
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 Depository Receipts
Holder enquiries
Tel +1 651 453 2128
The Central Depository (Pte) Limited
Shareholder enquiries
Tel +65 6535 7511
Media enquiries
Tel +44 (0)20 7548 3559
E-mail: media.relations@prudential.co.uk
How to contact us
Prudential plc
Laurence Pountney Hill
London EC4R 0HH
Tel +44 (0)20 7220 7588
www.prudential.co.uk
Paul Manduca
Chairman
Tidjane Thiam
Group Chief Executive
Nic Nicandrou
Chief Financial Offi cer
Pierre-Olivier Bouée
Group Chief Risk Offi cer
Julian Adams
Group Regulatory Director
Margaret Coltman
Group General Counsel
John Foley
Group Investment Director
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
John Murray
Group Communications Director
Barry Stowe
Chief Executive
Tim Rolfe
Group Human Resources Director
Alan Porter
Group Company Secretary
Jackson National Life Insurance
Company
1 Corporate Way
Lansing
Michigan 48951
USA
Tel +1 517 381 5500
www.jackson.com
Mike Wells
President and Chief Executive Offi cer
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Prudential plc Annual Report 2014 Additional information How to contact us
How to contact us continued
Prudential public limited company
Incorporated and registered in England
and Wales
Registered offi ce
Laurence Pountney Hill
London EC4R 0HH
Registered number 1397169
www.prudential.co.uk
Prudential plc is a holding company,
subsidiaries of which are authorised
and regulated by the Prudential
Regulation Authority and the
Financial Conduct Authority
relevant regulatory frameworks, and tax
and other legislation and regulations in the
jurisdictions in which Prudential and its
affi liates operate; and the impact of legal
actions and disputes.
These and other important factors may,
for example, result in changes to
assumptions used for determining results
of operations or re-estimations of reserves
for future policy benefi ts.
Further discussion of these and other
important factors that could cause
Prudential’s actual future fi nancial
condition or performance or other
indicated results to differ, possibly
materially, from those anticipated in
Prudential’s forward-looking statements
can be found under the ‘Risk factors’
heading in this Annual Report and the ‘Risk
factors’ heading of Prudential’s most recent
annual report on Form 20-F fi led with the
US Securities and Exchange Commission,
as well as under the ‘Risk factors’ heading
of any subsequent Prudential Half Year
Report. Prudential’s most recent Annual
Report, Form 20-F and any subsequent
Half Year Report will be available on its
website at www.prudential.co.uk
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.
Forward-looking statements
This document may contain ‘forward-
looking statements’ with respect to certain
of Prudential’s plans and its goals and
expectations relating to its future fi nancial
condition, performance, results, strategy
and objectives. Statements that are not
historical facts, including statements about
Prudential’s beliefs and expectations, and
including, without limitation, statements
containing the words ‘may’, ‘will’, ‘should’,
‘continue’, ‘aims’, ‘estimates’, ‘projects’,
‘believes’, ‘intends’, ‘expects’, ‘plans’,
‘seeks’ and ‘anticipates’, and words of
similar meaning, are forward-looking
statements. These statements are based
on plans, estimates and projections as at
the time they are made, and therefore
undue reliance should not be placed on
them. By their nature, all forward-looking
statements involve risk and uncertainty.
A number of important factors could
cause Prudential’s actual future fi nancial
condition or performance or other
indicated results to differ materially from
those indicated in any forward-looking
statement. Such factors include, but are
not limited to, future market conditions,
including fl uctuations in interest rates and
exchange rates and the potential for
a sustained low-interest rate environment,
and the performance of fi nancial markets
generally; the policies and actions of
regulatory authorities, including, for
example, new government initiatives
related to the fi nancial crisis and the effect
of the European Union’s ‘Solvency II’
requirements on Prudential’s capital
maintenance requirements; the impact
of continuing designation as a Global
Systemically Important Insurer or ‘G-SII’;
the impact of competition, economic
growth, infl ation, and defl ation; experience
in particular with regard to mortality and
morbidity trends, lapse rates and policy
renewal rates; the timing, impact and other
uncertainties of future acquisitions or
combinations within relevant industries;
the impact of changes in capital, solvency
standards, accounting standards or
This report is printed on Amadeus 75 Matt, a paper
made from 75 per cent recycled post-consumer
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All material used in this report has been
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Prudential public limited company
Incorporated and registered in
England and Wales
Registered offi ce
Laurence Pountney Hill
London EC4R 0HH
Registered number 1397169
www.prudential.co.uk
Prudential plc is a holding company, subsidiaries
of which are authorised and regulated, as applicable,
by the Prudential Regulation Authority and the
Financial Conduct Authority.