Prudential plc Annual Report 2015
Long-term thinking for life
HK Stock Code: 2378
Prudential at a glance
Making life better
We provide protection and savings opportunities to our customers, social and
economic benefits to the communities in which we operate, jobs and opportunities
to our employees, and long‑term value for our investors.
Our asset management
businesses
We generate valuable
returns for our customers
through good investment
performance.
We generate value for
shareholders through fee
income from managing
customers’ investments.
24m
life customers
worldwide
We focus on customers’ protection
and savings needs, providing
products that give them financial
security
Our life insurance
businesses
We invest customers’ savings in
a way that reflects their personal
needs and risk tolerance, and
provide financial protection to
customers for adverse events.
We generate value for
shareholders through fee and
other income for managing
customers’ savings, and through
insurance underwriting profits
on financial protection products.
Front cover, clockwise from top left:
Prudential customers Shane from the
Philippines; Mike from the UK; Fung Yee
from Hong Kong and Wie from Indonesia.
These pages, left to right:
Prudential customers Kimlay from
Cambodia; Mike from the UK; Charlie and
Joanne from the US; Deniese from Malaysia;
and Ian from the UK. Prudential staff
volunteers in Indonesia and participants
in Prudential RideLondon.
Read more about our customers
on pages 23 to 34
£509bn
assets under management
Our investors, employees
and societies
187%
total shareholder return1 achieved since 2010
We create financial benefits for
our investors, and deliver
economic and social benefits for
our customers, employees and the
societies in which we operate
7,000
employees volunteer
through Chairman’s Challenge
Our trusted brands and effective
distribution channels help us
understand customers’ needs, attract
new monies and retain existing assets
23,507
employees worldwide
£4.8bn
total investment2
in the economy
Utilising our capabilities,
footprints and scale we design
innovative products that align
with customer needs
Notes
1 Total shareholder return represents the growth in the value of a share plus the value of dividends paid, assuming that the dividends are reinvested
in the Company’s shares on the ex‑dividend date.
Includes investment in business and infrastructure of £1.8 billion, total tax payments of £3.0 billion and total community investment of £21.7 million.
2
Prudential plc Annual Report 2015
Long-term thinking for life
Our business
We provide protection
and savings opportunities
to our customers, social
and economic benefits
to the communities in
which we operate, jobs
and opportunities to our
employees and long‑term
value for our investors.
Our strategy
Our clear and consistent
strategy utilises our
capabilities, footprint
and scale to serve the
global savings and Asian
protection needs of an
increasingly self‑reliant
middle class to create
long‑term value for
our customers and
our shareholders.
Our performance
To create sustainable
economic value for our
shareholders we focus on
delivering growth and
cash, while maintaining
appropriate capital.
Find out more on page 15
Find out more on page 14
Find out more on page 16
www.prudential.co.uk
Find out more about
our business
Delivering growth
and generating cash
Prudential has delivered a strong performance in 2015.
We continue to grow across our key metrics despite the
macroeconomic uncertainty and the challenges presented
by low long-term interest rates.
The fundamentals of the Group remain compelling, our
opportunities are intact and we are in an enviable position
to benefit from the attractive structural and demographic
opportunities in Asia, the US and the UK. The disciplined
execution of our strategy, underpinned by the cash generating
nature of our business, positions us well to be able to continue
to deliver high-quality products and services to our 24 million
customers and long-term profitable growth to our shareholders.
Contents
01 Group overview
02–10
Chairman’s statement
Group Chief Executive’s report
02
04
02 Strategic report
11–68
12
14
15
16
18
36
49
57
Our world
Our strategy
How our business works
Measuring our performance
Our businesses and their
performance
Chief Financial Officer’s report
on our 2015 financial
performance
Group Chief Risk Officer’s report
on the risks facing our business
and how these are managed
Corporate responsibility review
03 Governance
69–100
70
71
76
82
84
Chairman’s introduction
Board of Directors
How we operate
Further information on Directors
Risk management and internal
control
Committees
Statutory and regulatory
disclosures
Compliance with corporate
governance codes
Additional information
99
100 Index to principal Directors’
86
98
99
Report Disclosures
04 Directors’ remuneration report
101–130
102 Annual statement from the
Chairman of the Remuneration
Committee
104 Our executive remuneration
at a glance
106 Summary of Directors’
remuneration policy
109 Annual report on remuneration
126 Supplementary information
05 Financial statements
131–296
06
European Embedded Value
(EEV) basis results
297–330
07 Additional information
331–372
333 Additional unaudited
financial information
358 Risk factors
364 Glossary
368 Shareholder information
371 How to contact us
The Directors’ Report of Prudential plc for
the year ended 31 December 2015 is set out
on pages 2 to 10, 69 to 100 and 333 to 372, and
includes the sections of the Annual Report
referred to in these pages.
01
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc
Chairman’s statement
Impressive results,
driven by high-quality
products and services
I am pleased to introduce
Prudential’s 2015 Annual Report.
The Company has again
produced an impressive set of
results, which are all the more
striking given recent economic
conditions. As ever, our
performance is rooted in the
quality of the products and
services which our first-rate
staff and agents provide to our
customers. It is this which
ultimately drives the returns
we provide to our shareholders
and underpins the role we play
in our communities.
Global headwinds to macroeconomic
growth are nothing new for Prudential.
We have charted choppy waters many
times throughout our 167-year history.
No doubt we will do so again in the decades
to come. We remain well positioned across
our markets and product ranges.
While there are uncertainties in the global
economy – and around Britain’s place in
Europe – an area of increased clarity is
around regulation, specifically with regard
to Solvency II. This has been a project in
which the entire European insurance sector
has invested considerable resource and
focus across more than a decade. We are
pleased to have reached an outcome that
underlines the strength and resilience of
our company. We will continue to engage
with policy makers as Solvency II is
reviewed in the years ahead. Our capital
position enables us to make our wider
social and economic contribution.
At the heart of that contribution is the
financial peace of mind that we help to
provide to our customers across our
insurance and fund management
businesses. This peace of mind remains the
focus of Prudential’s purpose as a business
and is a vital pre-condition for us to meet
our other aims and obligations. Our history
is a long one because the customer has
always been at its centre.
We continue to make progress in achieving
the 2017 objectives for the Group. These
are not easy. Nor should they be. We
are, however, pleased with the headway
made so far.
The Board has decided to increase the
full-year ordinary dividend by 5 per cent
to 38.78 pence per share, reflecting the
continued strong financial performance
of the Group in 2015. In line with this, the
directors have approved a second interim
ordinary dividend of 26.47 pence per share
(2014: final dividend of 25.74 pence) which
brings the total ordinary dividend for the
year to 38.78 pence (2014: 36.93 pence).
In addition, the Board has decided to award
a special dividend of 10 pence per share,
reflecting the additional contribution to
earnings from the specific management
actions taken to position the balance
sheet more efficiently under the new
Solvency II regime.
The last year has been a time of change in
the management at Prudential. Succession
planning is one of the most important duties
for any Chairman and Board. I have stated
before the importance I place on continuing
to develop and strengthen the Prudential
Board and I am delighted to be able to
report that we have continued that process.
In Mike Wells we have an outstanding
Group Chief Executive who has already
made strong progress. I was also pleased
to welcome Penny James and John Foley to
the Executive team on the Board as Group
Chief Risk Officer and Chief Executive of
Prudential UK & Europe, respectively.
In addition, Tony Wilkey has become Chief
Executive of Prudential Corporation Asia,
succeeding Barry Stowe, who now leads
Jackson. That these have all been internal
appointments emphasises the pipeline
of talent that has been developed at
Prudential. We have long prided ourselves
on the bench strength at our company. It
will continue to be a focus for the business.
‘As ever, our performance is
rooted in the quality of the
products and services which
our first-rate staff and agents
provide to our customers.’
Paul Manduca
Chairman
02
Prudential plc Annual Report 2015 www.prudential.co.uk Equally, we continue to attract the best
talent from across the industry, as shown in
Anne Richards’ forthcoming arrival as the
new Chief Executive of M&G. I would like
to take this opportunity to thank Michael
McLintock for his 19 years of exceptional
service and to wish him well for his
retirement from the Group.
Alongside the changes in the Executive,
I have also been pleased to welcome
David Law and Adair Turner to the Board
as independent Non-executive Directors.
They bring with them a depth of
experience in business and regulation that
I know will be a tremendous asset to our
work. Alongside these changes, we are
adjusting our subsidiary Board structure to
include a number of independent directors.
Finally, Alistair Johnston has announced
that he will retire from the Board at the
AGM to focus on the arts and his charitable
activities. I want to thank him for his
significant contribution to the Board
over the last four and a half years.
The quality of a company’s corporate
governance is a strong indicator of how
well placed it is to succeed. There can be
no sustainable commercial success without
it. It will continue to be a focus for us.
A well governed company engages
regularly and effectively with its
shareholders. We have an active
programme of engagement. It is important
to us that we hear the views of our investors
and we find it useful to have an open and
constructive dialogue with them. I know
that I have found this very helpful.
Another vital relationship is with our
regulators. Prudential engages with many
regulators and supervisors here in the
UK and around the world. We place great
importance on having an effective and
positive relationship with those who
supervise us and our markets. Such
relationships are the bedrock of a
productive exchange that, we believe,
ultimately allows us to serve our
customers’ needs.
Prudential’s day-to-day business
activities provide enormous value to
the communities of which we are a part.
We help provide security in retirement,
contribute to financial peace of mind, invest
in infrastructure and assist in growing
economies and creating jobs. We do all this
with an eye to the long term, because that
is the very nature of our business.
Alongside these activities, we also carry
out wide-ranging and highly impactful
corporate responsibility programmes.
We have continued to build on our work in
this area. In partnership with charities and
non-governmental organisations we have
sought to make a real difference to lives in
the markets where we operate. These
programmes mean a great deal to the many
thousands of staff who volunteer for them
– something I have seen first-hand.
Our award-winning Cha-Ching series of
financial education cartoons continues to
be an enormous success in Asia and is now
being rolled out elsewhere. The Safe Steps
disaster preparedness public service
broadcasts created by the Prudence
Foundation in collaboration with National
Geographic have been highly effective,
and we are examining how we can best
build on that success.
In the UK, we were pleased to be able
to renew our support for Prudential
RideLondon. In the three years since
we began our relationship, this festival
of cycling has raised more than £29 million
for charity. We hope to be able to improve
on this figure in the years ahead.
The 2015 Chairman’s Challenge
programme – which allows colleagues
from around the Group to give their time
and skills to support our charity partners
– broke previous records. Over 7,000
volunteers gave up their time to benefit
more than 174,000 people, working with
charities including Plan International, Help
Age International and Junior Achievement.
I would like to conclude by recognising
the contribution made by our employees
around the world. It is their commitment
and endeavour that makes possible the
delivery of Prudential’s strategy. With their
continued commitment to delivering for
our customers, I am certain that we can
look to the future with confidence.
Paul Manduca
Chairman
Our strategy page 14
03
full-year ordinary dividend
38.78p
5%
10p
increase on 2014
special dividend
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Group Chief Executive’s report
Delivering long-term value to
customers and shareholders
I am pleased to report a strong
performance in 2015.
Our strategy continues to serve
us well, focusing on the three
long-term opportunities across
our geographic markets –
(i) serving the protection
and investment needs of the
growing middle class in Asia;
(ii) providing asset accumulation
and retirement income products
to US baby boomers and
(iii) meeting the savings and
retirement needs of an ageing
British population.
The strength of the Group’s execution
capabilities, combined with our leading
market positions, growing in-force book
and excellent diversification by geography,
currency, product and distribution enable
us to create value for our customers while
generating sustainable earnings and cash
for our shareholders.
Group performance1
We continue to comment on our
international business performance in local
currency terms (expressed on a constant
exchange rate basis) to show the underlying
business trends in a period of currency
volatility. We have used this basis in
discussions below for our Asian and US
businesses to maintain comparability.
Our Group IFRS operating profit based on
longer-term investment returns increased
by 22 per cent in 2015 to £4,007 million. On
an actual exchange rate basis, the Group’s
IFRS operating profit grew by 26 per cent.
— Asia life and asset management
operating profit of £1,324 million grew
by 17 per cent, reflecting the growing
recurring income from our life in-force
book (up 14 per cent to £7.2 billion2) and
higher assets under management in
Eastspring Investments. The recurring
premium focus underpins our earnings
growth in the region and is key to the
resilience of our financial performance
across the cycle.
— US life IFRS operating profit of
£1,691 million was up 10 per cent,
driven by growth in fee income earned
on separate account assets that have
continued to benefit from robust net
inflows.
— UK life IFRS operating profit of
£1,167 million grew by 60 per cent4,
and included £339 million arising in
the second half of 2015 from specific
management actions taken to position
the balance sheet more efficiently
under the new Solvency II regime.
— M&G delivered operating profit of
£442 million, broadly in line with 2014.
Funds under management (including
internal funds) were 7 per cent lower at
£246.1 billion, reflecting retail outflows
during 2015.
The Group is focused on delivering strong
cash generation, which underpins both our
strategic and financial flexibility. Underlying
free surplus generation3, a key indicator
of cash generation from our life and asset
management businesses, was 15 per cent
higher at £3,050 million after reinvestment
in new business. In total, our businesses
remitted cash to the corporate centre of
£1,625 million, up 10 per cent on an actual
exchange rate basis. Cash remittances of
£467 million from Asia were 17 per cent
higher while those from the US increased
by 13 per cent to £470 million, both on
an actual exchange rate basis. In the UK,
our life operation remitted £331 million
in line with last year and M&G delivered
a 6 per cent increase in remittances
to £302 million.
New business profit was up 20 per cent4
to £2,617 million, primarily reflecting
higher overall volumes in Asia and the UK.
All three of our life businesses contributed
significantly to the total, with £1,490 million
(up 28 per cent) of new business profit from
‘The strength of the Group’s
execution capabilities, combined
with our leading market positions,
growing in-force book and
excellent diversification enable
us to create value for our
customers while generating
sustainable earnings and cash
for our shareholders.’
Mike Wells
Group Chief Executive
04
Prudential plc Annual Report 2015 www.prudential.co.uk IFRS operating profit
£4,007m
22%
increase on 2014
EEV new business profit
£2,617m
20%
increase on 2014
Measuring our performance page 16
Our strategy
Our clear and consistent strategy
utilises our capabilities, footprint
and scale to serve the global savings
and Asian protection needs of
an increasingly self-reliant
middle class to create long-term
value for our customers and our
shareholders.
Our strategy page 14
Asia, £809 million (up 8 per cent) from the
US and £318 million (up 23 per cent4) from
the UK.
APE sales5 increased by 17 per cent4 to
£5,607 million led by Asia where APE sales
were 26 per cent higher at £2,853 million.
In the US, APE sales were 3 per cent higher
at £1,729 million as demand for our sales
of variable annuities remained strong.
In 2015, Jackson continued to proactively
manage sales of variable annuities with
living benefits while diversifying sales mix.
In the UK, APE sales grew by 23 per cent4
to £1,025 million, based on our attractive
with-profits product propositions sold
through an expanding range of wrappers
including income drawdown, individual
pensions, ISAs and investment bonds.
M&G experienced net outflows of
£7.0 billion (2014: net inflows of £7.1 billion)
driven by retail net outflows of
£10.9 billion, due to redemptions from
bond funds reflecting softer consumer
sentiment on fixed income assets.
Eastspring Investments, our Asia asset
management business, delivered a strong
performance in 2015, with third party net
inflows of £6.0 billion (2014: net inflows
of £5.4 billion).
Our balance sheet continues to be
defensively positioned and our Solvency II
outcome, following approval by the
Prudential Regulation Authority of our
internal model in December 2015,
underscores the strength and resilience
of the Group’s capital position.
We are continuing to make good progress
towards our 2017 objectives announced in
December 2013.
Chief Financial Officer’s report on our
2015 performance page 36
Our operating performance
by business unit
Asia
Asia has delivered strong financial results
in 2015 across all of our key metrics,
demonstrating the resilient performance of
our well diversified and increasingly large
in-force business portfolio. IFRS operating
profit of £1,324 million was up 17 per cent
(16 per cent on an actual exchange rate
basis), free surplus generation grew by
16 per cent to £673 million (14 per cent on
actual exchange rate basis) and net cash
remittances of £467 million were up
17 per cent.
Our life business strategy is centred on
Asia’s rapidly growing life insurance
markets with a focus on regular premium,
protection-orientated policies distributed
primarily through high-quality agency and
bank partners. We have over 14 million
customers across the region, one of the
largest and most productive agency sales
forces, a well established bancassurance
franchise and leadership positions in nine
out of 12 markets. Despite our strong
progress over the last decade, insurance
penetration in the markets in which we
operate remains low and the demand for
savings, health and protection products
from a growing middle class continues to
be high. Our scale and scope in the region,
combined with proven operational
expertise, enables us to execute on
strategic growth opportunities, invest in
building the business through the
economic cycle and remain flexible to resist
market pressure for products we consider
to be less attractive. This approach will,
from time to time, lead to fluctuations in
APE sales at a country level but allows us to
conserve value without compromising the
overall regional delivery.
vin g s, h
a
S
e
a l t h and pro
t
e
c
t
i
o
n
Asia
Significant protection
gap and investment
needs of the middle class
s
g
n
i
v
a
S
US
Transition of
baby boomers
into retirement
Self-reliant
global
middle
class
UK
Savings gap and
ageing population in need
of returns and income
S
a
v
i
n
g
s
05
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Group Chief Executive’s report continued
2017 objectives*
Asia objectives
1. Asia IFRS operating profit
Asia life and asset management pre-tax IFRS operating profit
to grow at a compound annual rate of at least 15 per cent over
the period 2012–2017 (2012: £924 million6)
2. Asia underlying free surplus
Asia underlying free surplus generation3 of £0.9 billion to
£1.1 billion in 2017 (2012: £484 million)
+18%
17%
19%
£1,075m
£1,260m
£901m
17%
£1,468m
>£1,858m
£924m
£1,140m £1,324m
2012
2013
2014
2015
2016
2017
objective
16%
£662m
22%
£573m
£471m
16%
£765m
£1.1bn
£0.9bn
£484m
£592m
£673m
2012
2013
2014
2015
2016
2017
objective
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
£5.6bn
2014-2017 objective
Key
Expressed at December 2013 foreign exchange rates
Comparative results on reported currency basis
2017 objective
Note
* 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.
In 2015 new business APE sales increased
by 26 per cent, driven by 30 per cent
growth in regular premium new business
(which contributes 93 per cent of our APE
sales), offsetting the 8 per cent reduction in
single premiums, which are more
susceptible to softer economic conditions.
Our sales performance continues to benefit
from our broad-based multi-channel
distribution platform, new product
launches and continued actions to improve
both distribution scale and productivity.
Agency APE sales were 29 per cent higher
across the region, reflecting continued
investment in agency manpower and an
improvement in average agent productivity
of 25 per cent. Our core bank partnerships
continue to make good progress, led by
Standard Chartered Bank, where APE sales
rose by 16 per cent. New business profit
was up 28 per cent at £1,490 million and
outpaced the APE sales growth of
26 per cent.
In Hong Kong, APE sales grew 74 per cent,
driven by increases in agency headcount
and productivity and also from our
successful inroads into Hong Kong’s broker
network. During 2015, we have also seen
acceleration in demand from Mainland
China-based customers, with around
70 per cent of this business having an
annual premium below US$5,000. We
remain well placed to satisfy the growing
demand for savings and protection
products from both domestic and
Mainland China customers.
Our joint venture with CITIC in China
continues to perform well, with APE sales
growth of 28 per cent and operations now
in 64 cities. The second half of the year was
marked by significantly higher levels of
volatility in investment markets, which
impacted single premium business through
the bancassurance channel. However,
regular premium sales remain strong, with
growth of 34 per cent in the fourth quarter
and 29 per cent for the year. Furthermore,
sales of health and protection business
nearly doubled during the year,
contributing over 42 per cent of our APE
sales in China. We are well prepared for the
implementation in 2016 of China’s Risk
Oriented Solvency System (C-ROSS) and
we do not expect this to cause any issues
for our business.
In Singapore, we continue to lead the
market for regular premium products
with a market share of 23 per cent7 and
the largest agency force in the industry.
During 2015, we have focused on
growing regular premium agency-sourced
protection sales, which has enhanced
the mix of business and contributed to a
7 per cent increase in new business profit
through this channel. Reflecting our
proactive de-emphasis of universal life
sales, and the effect of cessation of
06
Prudential plc Annual Report 2015 www.prudential.co.uk distribution relationships with Maybank
and Singpost, total APE sales were
13 per cent lower in 2015.
Indonesia continues to generate material
levels of new business value for our Asia
business, and the recurring regular
premium nature of our in-force portfolio
has driven a 21 per cent increase in IFRS
operating profit. Our sales performance
reflects both softer market conditions and
the impact of deliberate, proactive actions
to further improve the quality of our
distribution. While this might affect
shorter-term sales progression, it
conserves value and positions us well to
capitalise on the eventual upturn. Market
conditions for new business sales remain
challenging, with suppressed consumer
sentiment making it harder to close sales,
reflected in APE sales 11 per cent lower at
£326 million. However, average agency
case sizes increased by 9 per cent in 2015.
We remain confident about our long-term
prospects in Indonesia given the low
insurance penetration levels and we are
continuing to invest in building our agency
force nationwide.
In Malaysia, we have seen continued
success from our strategy to increase our
penetration of the Bumi sector, where we
are the largest provider with a 43 per cent
share of the Takaful market. In addition to
growing the agency force by 13 per cent,
we have increased our activity in
bancassurance with APE sales from this
channel up 68 per cent. Overall APE sales
increased by 17 per cent in the year.
All our other markets have delivered
good-quality growth. In the Philippines,
we have continued to focus on the agency
channel, with increased manpower and
higher average case sizes driving APE sales
growth of 20 per cent in this channel.
Overall APE sales were up 9 per cent,
reflecting our decision to be selective in how
we participate in bancassurance. Thailand’s
APE sales were up 12 per cent, driven by
strong growth from our main bancassurance
partners, United Overseas Bank and
Thanachart. Vietnam had an excellent year,
with APE sales growing 32 per cent on
higher levels of agency activity. Our
greenfield operations in Cambodia
continue to move ahead well, with APE sales
up 167 per cent. While our larger, more
established markets are progressing well,
our ability to execute across the spectrum,
covering markets at different stages of
development, is key to driving long-term,
profitable growth in the region.
Our joint venture with ICICI Bank in India
remains the leader in the private sector
with a market share of 12 per cent and APE
sales growth of 21 per cent. In Taiwan and
Korea, we remain selective in our
participation and as a result we are content
to tolerate fluctuations in new business
volumes. Both businesses have generated
a higher level of IFRS operating profit.
Despite significant volatility in capital
markets, Eastspring Investments, our Asia
asset management business, delivered
strong results in 2015, with record
third-party net inflows of £6.0 billion,
up 11 per cent on 2014. The businesses
benefited from robust inflows into equity
funds, including Asian equity funds in
Japan, good investment performance in
Korea and India driving excellent domestic
flows and healthy net inflows into bond
funds from our joint ventures in China and
India. Total funds under management at
31 December 2015 were a record
£89.1 billion, up 16 per cent on the prior
year as a result of net inflows from both our
third-party and our life businesses.
The fundamentals of our Asian business
remain compelling and we have the
capabilities and market positions to be able
to deliver long-term, profitable growth.
Our businesses and their performance –
Asia page 18
US
Our US business delivered a strong
performance in 2015, with total IFRS
operating profit of £1,702 million, up
9 per cent (18 per cent on an actual
exchange rate basis). Jackson’s life IFRS
operating profit grew 10 per cent
(18 per cent on an actual exchange rate
basis) to £1,691 million, driven by increased
fee income from higher levels of separate
account assets. The growth in operating
profit underpinned significant levels of
capital generation in the year, enabling
Jackson to remit a record £470 million of
cash to the Group (2014: £415 million),
while maintaining a healthy balance sheet.
Jackson’s risk-based capital ratio at the end
of 2015 was 481 per cent, compared to
456 per cent at the end of 2014.
The US economy experienced uneven
performance during 2015, with a
noticeable deceleration in consumer
spending and a contraction in business
investment in the fourth quarter.
Employment data was more positive, with
non-farm payrolls in the last two months
of the year exceeding expectations. This
contributed to the Federal Reserve
decision to increase the Federal Funds’
target rate by 25 basis points in December.
The S&P 500 Index ended the year roughly
in line with year-end 2014 levels and the
10-year treasury rate rose 10 basis points
to 2.28 per cent at the end of 2015.
Overall, in 2015 the US competitive
landscape remained relatively stable,
although the industry continued to adjust
its products and benefits in reaction to
regulatory developments and economic
conditions. Within variable annuities,
providers are mainly choosing to modify
their product offerings through reductions
in fund availability and increased fees. With
a final fiduciary rule expected from the US
Department of Labor in the first half of
2016, we are working on contingency plans
with the expectation of some changes to
the rule, but the basic framework of the
original proposal is presumed to remain
intact. Given Jackson’s proven record of
product innovation, best-in-class
infrastructure, access to competitive
intelligence and integration of product
design with distribution, we believe we are
well positioned to respond, adapt and take
advantage of any market disruptions.
Jackson achieved total retail APE sales of
£1,606 million in 2015, broadly consistent
with the levels in 2014. Including
institutional sales, total APE sales increased
3 per cent to £1,729 million, driving an
8 per cent growth in new business profit
to £809 million.
Total variable annuity APE sales of
£1,512 million in 2015 remained flat
compared to 2014, reflecting Jackson’s
continued focus on proactively managing
sales of products with living benefits to
maintain an appropriate balance of revenue
streams and match our annual risk appetite.
The proportion of variable annuity sales
without living benefits remains significant
at 33 per cent of total variable annuity APE
sales, broadly in line with last year. Elite
Access continues to be the undisputed
leader in the investment-only variable
annuity market with APE sales of
£314 million (2014: £335 million), with the
proportion of business from non-qualified
accounts representing 69 per cent of the
total (up from 66 per cent in 2014). With
£9.6 billion in assets since its launch in
March 2012, Elite Access not only reflects
Jackson’s strength in commercialising a
low-cost, no-guarantee product but also
in navigating a demand shift from qualified
to non-qualified accounts. In relation to
variable annuities with living benefit
guarantees, during 2015 we introduced a
broader range of living benefit features to
policyholders, creating additional product
capacity to meet the underlying customer
demand. Overall, Jackson’s statutory
separate account assets increased by
5 per cent, from £86.5 billion in 2014 to
£91.0 billion in 2015 (up 11 per cent on
an actual exchange rate basis), reflecting
positive business flows.
Jackson’s strategy is unchanged, serving
the 75 million US baby boomers as they
enter retirement. We continue to price new
business on a conservative basis, targeting
value over volume, and the economics of
our business remain very attractive. Our
hedging remains focused on optimising the
economics of our exposures over time
while maintaining a strong balance sheet.
Our hedging programme continued to
perform well throughout 2015 and under
the recent volatility experienced in the
markets. Our credit book is in good shape
and we have continued to take actions to
improve further its quality, increasing our
treasury position and reducing our
high-yield energy exposure. With this
strategy, Jackson has been able to deliver
07
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Group Chief Executive’s report continued
significant profitable growth across the
cycle, and since 1 January 2008, has
remitted nearly US$3.3 billion of cash to
the Group. Our performance continues to
demonstrate that Jackson’s approach has
successfully translated into value for
customers and into profits and cash for
shareholders.
Our businesses and their performance –
United States page 24
UK and Europe
Our UK business delivered strong growth
in IFRS operating profit, new business
profit and free surplus generation. We
continue to execute successfully our UK
strategy, focusing on our core strength of
investment-based retail offerings, selective
participation in the wholesale business
segment and active management of our
in-force book. Life IFRS operating profit
was 60 per cent4 higher at £1,167 million
and includes £339 million from the positive
impact of specific management actions
undertaken in the second half to position
the balance sheet more efficiently under
the new Solvency II regime, which are not
expected to recur going forward. Cash
remitted to the Group increased to
£331 million (2014: £325 million).
In 2015, APE sales grew 23 per cent4
to £1,025 million, with a consequent
23 per cent4 increase in new business profit
to £318 million. These results demonstrate
the strength of our customer propositions
in retail risk-managed investment products,
combined with our diversified distribution
capability. In 2015 we continued to
participate in the pensions de-risking
market in a disciplined manner, and
delivered a robust performance from
this sector.
Our retail business achieved APE sales
growth of 32 per cent to £874 million (2014:
£663 million4) driven by a growing demand
for our savings and retirement products
underlying free surplus generation
£3,050m
15%
increase on 2014
08
and specifically the distinctive PruFund
range, with momentum increasing through
the year as additional products and
services came online including PruFund
ISA, Flexible Income Drawdown and our
simplified non-advised drawdown Pension
Choices Plan. Our capabilities in multi-
asset investing, the strength of our brand
and diversified distribution, collectively
position us well to meet evolving customer
needs in a post-pension freedoms
retirement market. Retail new business
profit increased by 31 per cent4, benefiting
from increased sales volumes partially
offset by a lower contribution from
individual annuity sales. APE sales of
individual annuities decreased by
46 per cent from 2014 levels to £57 million
and now represent 7 per cent of retail sales.
Demand for our PruFund multi-asset funds
among our target customer base remains
strong as customers continue to be
attracted by both the performance track
record and the benefits of a smoothed
return in managing market volatility and
reducing customer investment risk. Our
successful launch in February 2015 of the
PruFund range of investment funds within
an ISA wrapper generated APE sales of
£73 million, with assets under management
totalling £674 million at the end of
December 2015. In total across all
products, PruFund APE sales of
£574 million increased by 82 per cent, with
total assets under management having
increased 42 per cent since the start of the
year to £16.5 billion.
Onshore bonds APE sales of £258 million
increased by 11 per cent and offshore
bonds APE sales of £75 million rose by
21 per cent over the previous year.
Reflecting increased demand for our wider
range of retirement solutions post-pension
reforms, income drawdown APE sales
have almost trebled to £102 million and
individual pensions APE sales have more
than doubled to £150 million compared to
2014. We continue to diversify our product
portfolio in response to the expanding
market for flexible retirement income and
pensions products.
Corporate pensions APE sales of
£152 million were 3 per cent higher than
in 2014. We remain the largest provider
of additional voluntary contribution plans
within the public sector, where we provide
schemes for 73 of the 101 public sector
authorities in the UK (2014: 72 of the 99).
Our bulk annuity business concluded four
deals, generating APE sales of £151 million
(2014: £171 million, seven deals), new
business profit of £117 million (2014:
£105 million) and IFRS operating profit of
£89 million (2014: £105 million). In 2015,
our approach to bulk transactions in the
UK continued to be one of disciplined
participation, focusing on those
opportunities where we can bring both
significant value to our customers and
meet our shareholder return requirements.
The implementation of Solvency II has
increased significantly the capital intensity
of annuity business and this will
significantly reduce our appetite to transact
bulk business going forward.
In Poland, our life business continues to
grow steadily. The business now has 18
branches across the country and 597
financial planning consultants. Its success
demonstrates our ability to build a new
business franchise by transferring our
existing product and distribution strengths
to new markets.
Our strategy in the UK and Europe remains
to leverage our investment expertise,
distribution scale and well established
brand in order to deliver capital-light
profitable growth in retail investment
products, while managing our in-force
business to generate long-term earnings
and cash.
Our businesses and their performance –
United Kingdom – Insurance and investments
page 28
Africa
During 2015, we continued to develop
our businesses in Sub-Sahara Africa.
We entered the Uganda insurance market
through the acquisition of Goldstar Life
Assurance in June 2015 and established
bank distribution agreements with Societe
Generale and Fidelity Bank in Ghana,
and with Standard Chartered in Kenya.
In January 2016, we announced entry into
Zambia via our acquisition of Professional
Life Assurance. Once regulatory approval
is received for the Zambia acquisition, our
footprint in Africa will have expanded to
four countries with access to nearly 1,300
agents and 200 bank branches.
M&G
M&G’s focus on producing superior
long-term investment returns, coupled with
well established distribution in the UK and
across Europe, underpins its financial
results. IFRS operating profit of £442 million
was broadly in line with 2014, with cash
remittances to Group of £302 million, up
6 per cent. At the end of 2015 M&G’s total
funds under management were 7 per cent
lower at £246.1 billion (2014: £264 billion),
with external funds under management of
£126.4 billion accounting for 51 per cent
of the total, compared with 45 per cent
five years ago. Despite outflows in 2015,
M&G’s total funds under management
have grown from £198.3 billion at the end
Prudential plc Annual Report 2015 www.prudential.co.uk Mike Wells with Prudential’s Group Executive Committee
Standing, left to right: Alan Porter, Jonathan Oliver, John Foley, Michael McLintock, Al-Noor Ramji, Julian Adams, Tim Rolfe.
Seated, left to right: Barry Stowe, Penny James, Mike Wells, Nic Nicandrou, Tony Wilkey. Further details on page 371.
of 2010 to £246.1 billion at the end of 2015,
reflecting M&G’s continued focus towards
innovation and asset class diversification.
Gross retail and institutional inflows
amounted to £33.6 billion (2014:
£38.0 billion). Redemptions in the retail
business, however, resulted in overall net
outflows of £7.0 billion in 2015. Retail net
outflows of £10.9 billion (2014: net inflows
of £6.7 billion) were partially offset by
institutional net inflows of £3.9 billion
(2014: £0.4 billion).
In the fourth quarter of 2015, M&G
experienced net retail outflows of
£3.5 billion, including £2.4 billion from
Europe. This reflected the continuation of a
market-wide change in investor sentiment
away from fixed income, against a
backdrop of high levels of volatility and
macroeconomic uncertainties, conditions
that have continued into the early part of
2016. Our strategy of diversification by
asset class has helped attract good net
inflows into several M&G multi-asset funds
(totalling £2.0 billion) and into our retail
property fund (£0.5 billion) in 2015.
At the end of 2015, retail funds under
management were 18 per cent lower at
£60.8 billion (2014: £74.3 billion). Retail
funds under management from
Continental Europe represent 39 per cent
of total retail assets.
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.
Net institutional inflows were £3.9 billion,
compared with £0.4 billion in 2014. The
M&G Alpha Opportunities Fund has been
particularly popular with institutional
investors, attracting £2.0 billion of net
inflows during 2015.
M&G had a multi-billion-pound pipeline of
institutional commitments at the end of
2015 across a diverse range of fixed
income, real estate and alternative
investment strategies that have yet to be
invested. External institutional funds under
management increased 5 per cent in 2015
to £65.6 billion (2014: £62.8 billion).
M&G’s disciplined approach to cost
management is reflected in a small
improvement in the cost-income ratio to
57 per cent (2014: 58 per cent), despite the
impact of lower revenues from reductions
in the level of average assets managed.
On 1 February 2016, Michael McLintock
announced that he is retiring as Chief
Executive of M&G Investments after
19 years in the role. I would like to thank
Michael for his exceptional contribution to
M&G over the last two decades. Under his
leadership M&G has grown to become one
of Europe’s largest fund managers by
offering innovative investment solutions
to meet the needs of our customers and
clients. I wish him all the very best for the
future. He will be succeeded later this year
by Anne Richards, whose prior role was
Chief Investment Officer and Head of
EMEA at Aberdeen Asset Management.
Anne joins the Board in June 2016.
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 –
United Kingdom – Asset management page 32
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 more efficiently for the Group.
Our Solvency II outcome, following
approval by the Prudential Regulation
Authority of our internal model in
December 2015, underscores the strength
and resilience of the Group’s capital
position. At 31 December 2015, Group
Solvency II capital surplus8,9 was estimated
at £9.7 billion, which is equivalent to a
Group Solvency II capital ratio of
193 per cent.
Based on the Insurance Groups Directive
solvency measure, our surplus position9
at 31 December 2015 was estimated at
£5.5 billion (31 December 2014:
£4.7 billion10), equivalent to a cover of
2.5 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, a
classification that was reaffirmed in
November 2015. Prudential is monitoring
the development and potential impact of
the related framework of policy measures
and is engaging closely with the Prudential
Regulation Authority on the implications of
this designation.
Dividend
The Board has decided to increase the
full-year ordinary dividend by 5 per cent
to 38.78 pence per share, reflecting the
continued strong financial performance of
the Group in 2015. In line with this, the
directors have approved a second interim
ordinary dividend of 26.47 pence per share
(2014: final dividend of 25.74 pence),
which brings the total ordinary dividend for
the year to 38.78 pence (2014:
36.93 pence). In addition, the Board has
decided to award a special dividend of
10 pence per share reflecting the additional
contribution to earnings from the specific
management actions taken to position the
balance sheet more efficiently under the
new Solvency II regime.
Although the Board has been able to
approve a special dividend of 10 pence per
09
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Group Chief Executive’s report continued
share in 2015, the Group’s dividend policy
remains unchanged. The Board will
maintain its focus on delivering a growing
ordinary dividend, 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 pence per share
Special
dividend
36.93
10.00
38.78
29.19
25.19
33.57
2011
2012
2013
2014
2015
+5%
over 2014 full-year ordinary dividend
Outlook
The strength of our 2015 results
demonstrates the successful execution of
our strategy and our distinctive ability to
deliver profitable growth across the cycle.
Asia remains at the heart of the Group and
our progress this year is underlined by the
strong growth that we have delivered
across sales, earnings and cash from the
region. This has been well complemented
by our disciplined progress in our more
mature markets of the US and the UK.
The current significant macroeconomic
uncertainty and market instability is
resulting in a more unpredictable near-term
Group Solvency II capital surplus
£9.7bn
193%
Group Solvency II capital ratio
10
outlook for global growth prospects. While
this creates a headwind for our fee-based
businesses, our progress continues to
remain underpinned by the structural
demand for regular premium savings and
protection products in Asia. Through
proactive management of our product mix
and balance sheet and the growing scale of
stable, recurring income from our in-force
portfolio, the Group has the flexibility and
resilience to adapt to changes in the market
and deliver robust earnings and
shareholder value.
The Group’s strategy remains centred on
the long-term opportunity of servicing an
increasingly self-reliant middle class
through the provision of savings globally
and health and protection in Asia. We have
premium franchises in our chosen markets
of Asia, the US and the UK, with significant
structural competitive advantages to
deliver effectively conservative products
to protect our consumers’ health and
wealth and provide absolute and good
relative returns to our shareholders.
In Asia, the growing savings and protection
needs of a rapidly emerging and
increasingly wealthy population underpin
our long-term, structural growth prospects
in the region. The high-quality, recurring
nature of our income and the scale and
diversity of our pan-regional platform
position us well to smooth out the
inevitable country-level fluctuations to
deliver value across the cycle.
In the US, our business is focused on the
provision of products for the savings and
income needs of the baby boomers
entering retirement. While the proposed
Department of Labor regulations are likely
to reduce the access to valuable retirement
products and services to the American
middle class, our competitive advantages
of superior product performance, low costs
and strong commercialisation skills align
the business well to meet these growing
needs in the new landscape. We are in the
advanced stages of executing our
contingency plans, which are designed to
underpin our future prospects for both
earnings and cash.
In the UK, our life business is proving adept
at navigating the significant changes
brought about by pension reforms and is
successfully extending its product offering
to meet evolving consumer needs. In asset
management, M&G is currently
experiencing headwinds but benefits from
its scale and the diversity of its asset base.
Our well regarded brands, investment
performance track record and strong
market positioning are key attributes that
support our execution in this market.
We remain well capitalised with a
defensive, high-quality balance sheet.
The disciplined execution of our strategy,
underpinned by the recurring income and
cash-generating nature of our business,
positions us well to continue to deliver
sustainable, long-term profitable value to
both our customers and shareholders.
Mike Wells
Group Chief Executive
Notes
1 The comparative results referenced above and
elsewhere in this document 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 2015 financial performance.
2 Recurring income from Asia in-force book
represents external renewal gross earned
premiums (including joint ventures).
3 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.
4 Following the disposal of the Group’s 25 per cent
interest in PruHealth and PruProtect in
November 2014, the 2014 comparative results of
UK insurance operations have been adjusted to
exclude results of those businesses.
5 Annual premium equivalent (APE) sales
comprise regular premium sales plus one-tenth
of single premium insurance sales.
6 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.
Source: based on Life Insurance Association,
Singapore data as at December 2015.
7
8 The methodology and assumptions used in
calculating the Group Solvency II capital results
are set out in note II (c) of Additional unaudited
financial information. The Group Solvency II
capital ratio is based on outputs from the
Group’s Solvency II internal model, approved
by the Prudential Regulation Authority in
December 2015.
9 Before allowing for second interim ordinary
and special dividends.
10 Before allowing for 2014 final dividend.
Prudential plc Annual Report 2015 www.prudential.co.uk 12
14
15
16
18
Strategic report
Our world
Our strategy
How our business works
Measuring our performance
Our businesses and their performance
Corporate responsibility review 2
18 Asia
24 United States
28 United Kingdom – Insurance and investments
32 United Kingdom – Asset management
Chief Financial Officer’s report on our
2015 financial performance
Group Chief Risk Officer’s report on the risks facing
our business and how these are managed
36
49
57
Prudential RideLondon
In 2015 Prudential RideLondon,
the world’s biggest festival of cycling,
was a great success, raising more
than £12 million for charity. Find out
more on page 64.
Our communities
11
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc
Our world
Prudential plc is an international financial services group serving around 24 million
insurance customers and with £509 billion of assets under management. We are
listed on stock exchanges in London, Hong Kong, Singapore and New York.
life customers worldwide
24m
£509bn
assets under management
stock exchange listings
4
167 years
of providing financial security
Premium franchises, best-in-class capabilities
United States
United Kingdom
Jackson
Founded over 50 years ago, Jackson is one of the largest life
insurance companies in the US, providing retirement savings
and income solutions aimed at the 75 million baby boomers.
Jackson’s pursuit of excellence in product innovation and
distinctive distribution capabilities have helped it forge a solid
reputation for meeting customer needs. Jackson has a long and
successful record of providing advisers with the products, tools
and support to design effective retirement solutions for their clients.
Prudential UK & Europe
Founded in the UK in 1848, 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-profits and retirement
are underpinned by our expertise in areas such as longevity,
risk management and multi-asset investment, together with our
financial strength and widely recognised brand. These attributes
position Prudential UK well to meet customer needs in the UK’s
evolving marketplace.
Premier retirement income player
Well recognised brand with strong track record
market share variable annuities1
18%
US$199bn+
of statutory admitted assets2
funds under management in with-profits funds3
£104bn
£16bn+
PruFund funds under management2
Our businesses and their performance –
United States page 24
Our businesses and their performance –
UK – Insurance and investments page 28
12
Prudential plc Annual Report 2015 www.prudential.co.uk United Kingdom
Asia
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
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 it invests.
Prudential Corporation Asia
Prudential Corporation Asia has leading insurance and asset
management operations across 14 markets in Asia and serves
the emerging middle class families of the region’s outperforming
economies. Prudential has been operating in Asia for over
90 years and has built high performing businesses with effective
multichannel distribution, a product portfolio centred on regular
savings and protection, award-winning customer services and
a widely recognised brand.
Eastspring Investments is a leading asset manager in Asia and
provides investment solutions across a broad range of asset classes.
Well recognised brand with strong track record
Leading pan-regional franchise
largest retail fund manager in the UK4
2nd
£246bn+
funds under management2
position in nine out of 12 life markets
Top 3
£89bn+
funds under management2
Our businesses and their performance –
UK – Asset management page 32
Our businesses and their performance –
Asia page 18
Notes
1
2 As of 31 December 2015.
Source: Morningstar Annuity Research Center. 3Q2015.
3 Excluding Scottish Amicable Insurance Fund.
4 By total UK Assets under management.
13
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Our strategy
Our clear and consistent strategy utilises our capabilities, footprint and scale to
serve the global savings and Asian protection needs of an increasingly self-reliant
middle class to create long-term value for our customers and our shareholders.
We focus on three markets, Asia, the US and the UK, where we see continued
growing demand for our products.
The US baby boomer generation is the
wealthiest demographic in the global
economy. Over the next 20 years they will
be retiring at a rate of 10,000 per day,
creating significant demand for solutions
to best help retirees with their retirement
challenges.
In Asia there is a growing and increasingly
affluent middle class which by 2020 is
forecast to become 1.9 billion people and
represent over half of the global middle
class. This group is increasingly wealthy
but largely uninsured and has significant
and growing savings, accumulation, health
and protection needs.
The UK has an ageing population which
remains under-saved for the long term.
This will drive increasing demand for
savings products and retirement income
solutions which will provide opportunities
for both life insurers and asset
management.
vin g s, h
a
S
e
a l t h and pro
t
e
c
t
i
o
n
A si a
Significant protection
gap and investment
needs of the middle class
s
g
n
i
v
a
S
US
Transition of
baby boomers
into retirement
Self-reliant
global
middle
class
UK
Savings gap and
ageing population in need
of returns and income
S
a
v
i
n
g
s
To capture these opportunities we:
Leverage strength and scale,
and proactively manage risk
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. In spite of the
challenging macroeconomic
environment we continue to
strengthen our capital position
through generation of organic
earnings and specific management
actions, which since 2010 include:
— Controlling sales of US variable
annuities in a manner that
appropriately balances value,
volume, capital generation and
balance sheet risk; and
— Longevity reinsurance and asset
portfolio optimisation in our UK
life businesses.
Allocate capital with
discipline, focusing on
long-term returns
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 significant impact on our
capital generative growing in-force
portfolio and, in turn, has transformed
the capital dynamics of our Group. For
example, the free capital generated
from our in-force operations reached
£3.8 billion in 2015 compared to
£2.4 billion five years ago (on an actual
exchange rate basis). This
transformation enabled our business
operations to remit £1,625 million to
the Group in 2015, compared to
£1,105 million in 2011.
Provide balanced metrics
and disclosures
We aim to have clarity and consistency
internally and externally in the
performance indicators that drive our
businesses. Alongside this we develop
our financial disclosures to enable our
stakeholders to fairly assess our
long-term performance. We have
three main objectives:
— To demonstrate how we generate
profits under the different
accounting regimes;
— To show how we think about
capital allocation via measures
that highlight the returns we
generate on capital invested in
new business; and
— To highlight the cash generation
of our business, which over time
is the ultimate measure
of performance.
Focus on customers
and distribution
Our customers are at the heart of the
decisions we make. We focus on
understanding our customers’ needs
and requirements in each of our
chosen markets as we believe that in
order to do well for our shareholders
we must first serve our customers.
We consistently develop our product
portfolio, designing it around our
customers’ needs and providing them
with peace of mind, whether that be in
relation to saving for retirement or
insuring against the risks of illness,
death or critical life events. Satisfied
customers 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 helps
ensure that we fully capitalise on the
opportunities available to us in each of
our regions.
14
Prudential plc Annual Report 2015 www.prudential.co.uk How our business works
We provide protection and savings opportunities to our customers, social and
economic benefits to the communities in which we operate, jobs and opportunities
to our employees and long-term value for our investors. By offering security, pooling
savings and making investments, we help to drive the cycle of growth.
t i o n
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ds and distri b
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els help us understa n
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existing ass ets
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Strong capabilitie
product innovatio
attract/retain tale
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a
, c
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v
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r
m
n
nt a
d ris
Customers
We focus on customers’
protection and savings
needs, providing products
that give them financial
security
m
s
r
a
o
e
a
r
n
n
k
e
t
a
e
g
t
e
n
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e
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,
Asset management
d
e
sig
Utilising our capabilities, foo t p r i n t
Produc t s
n innovative products that a l i g n w i
n
s a
t h c
ale w e
e r n e e ds
c
d s
m
s t o
u
Generate valuable returns
for our customers through
good investment
performance
Shareholders
Generate value for
shareholders through fee
income from managing
customers’ investments
Life insurance
Invest customers’ savings
in a way that reflects their
personal needs and risk
tolerance. Provide financial
protection to customers for
adverse events
Generate value for shareholders
through fee and other income for
managing customers’ savings and
through insurance underwriting
profits on financial protection products
Delivering for our stakeholders
We create financial benefits for our investors and deliver economic and social benefits for our customers, our employees and the
societies in which we operate
Customers
Providing financial security
and wealth creation
Investors
Growing dividends and share
price performance enhances
shareholder value
24m
life customers
187%
total shareholder return1
achieved since 2010
Employees
Providing an environment with
equal opportunities, career
potential and rewards enabling
us to attract and retain
high-quality individuals to
deliver our strategy
Societies
Supporting societies where we
operate, through investment
in business and infrastructure,
tax revenues and community
support activities
23,507
employees worldwide
£4.8bn
total investment2 in the economy
Notes
1
Total shareholder return represents the growth in the value of a share plus the value of dividends paid, assuming that the dividends are reinvested in the
Company’s shares on the ex-dividend date.
Includes investment in business and infrastructure of £1.8 billion, total tax payments of £3.0 billion and total community investment of £21.7 million.
2
15
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc
Measuring our performance
To create sustainable economic value for our shareholders we focus on delivering
growth and cash while maintaining appropriate capital
Profit, cash and capital
Prudential takes a balanced approach to performance management across IFRS, EEV and cash. We aim to demonstrate how we generate
profits under different accounting bases, reflecting the returns we generate on capital invested, and highlight the cash generation of
our business.
What we measure and why
Performance1
IFRS operating profit2 £m
IFRS operating profit is our primary
measure of profitability. This measure of
profitability provides an underlying
operating result based on longer-term
investment returns and excludes non-
operating items.
EEV new business profit3 £m
Life insurance products are, by their nature,
long term and generate profit over a
significant number of years. Embedded
value reporting provides investors with a
measure of the future profits streams of the
Group. EEV new business profit reflects the
value of future profit streams which are not
fully captured in the year of sale under IFRS
reporting.
EEV operating profit3 £m
EEV operating profit is provided as an
additional measure of profitability. This
measure includes EEV new business profit,
the change in the value of the Group’s
long-term in-force business, and profit
from our asset management and other
businesses. As with IFRS, EEV operating
profit reflects the underlying results based
on longer-term investment returns.
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 profit for the period.
2,954
3,186
2,520
2,017
CAGR
+20%
4,007
— Group IFRS operating profit in 2015
increased by 22 per cent on a constant
exchange rate basis (26 per cent on an
actual exchange rate basis), compared
to 2014, reflecting strong growth in our
life businesses, with Asia up 16 per cent,
the US up 10 per cent and the UK up
60 per cent, on a constant exchange
rate basis.
2011
2012
2013
2014
2015
CAGR
+16%
2,617
— EEV new business profit in 2015
increased by 20 per cent on a constant
exchange rate basis (24 per cent on an
actual exchange rate basis), compared
to 2014, driven by higher volumes.
2,115
1,791
1,433
1,536
2011
2012
2013
2014
2015
CAGR
+14%
4,881
4,096
— Group EEV operating profit in 2015
increased by 16 per cent on a constant
exchange rate basis (19 per cent on an
actual exchange rate basis), compared
to 2014, reflecting higher new business
profits and higher contributions from
the in-force business.
2,868
2,937
3,174
2011
2012
2013
2014
2015
2,462
2,579
1,982
2,080
CAGR
+11%
3,050
— Underlying free surplus in 2015
increased by 15 per cent, on a constant
exchange rate basis (18 per cent on an
actual exchange rate basis), compared
to 2014, driven by growth of the
in-force portfolio, and continued
discipline in the investment made to
support new business growth.
2011
2012
2013
2014
2015
16
Prudential plc Annual Report 2015 www.prudential.co.uk What we measure and why
Performance1
Business unit remittances £m
Remittances measure the cash transferred
from business units to the Group. Cash flows
across the Group reflect our aim of achieving
a balance between ensuring sufficient net
remittances from business units to cover
the dividend (after corporate costs) and the
use of cash for reinvestment in profitable
opportunities available to the Group.
IGD capital surplus5 £bn
During 2015, Prudential was subject to
the capital adequacy requirements of the
European Union Insurance Groups
Directive (IGD) as implemented by the
Prudential Regulation Authority in the UK.
The IGD capital surplus represents the
aggregated surplus capital (on a Prudential
Regulation Authority consistent basis) of
the Group’s regulated subsidiaries less the
Group’s borrowings6. No diversification
benefit is recognised.
Group Solvency II capital surplus5,7 £bn
Replacing the IGD capital regime, from
1 January 2016 Prudential will be subject
to the risk-sensitive solvency framework
required under European Solvency II
Directives (Solvency II) as implemented by
Prudential Regulation Authority in the UK.
The Solvency II surplus represents the
aggregated capital (own funds) held by the
Group less solvency capital requirements.
CAGR
+9%
1,625
— Business unit remittances increased by
10 per cent in 2015, compared to 2014,
with significant contributions from each
of our four major business units.
1,482
1,341
1,105
1,200
2011
2012
2013
2014
2015
5.1
5.1
4.7
5.5
4.0
2011
2012
2013
2014
2015
— Our estimated IGD capital surplus at
the end of 2015 before allowing for
dividends5 covered the capital
requirements 2.5 times.
Solvency ratio
193%
— The Group has a strong Solvency II
capital position, with an estimated
Group Solvency II capital surplus of
£9.7 billion5 and a solvency coverage
ratio of 193 per cent.
20.1
Surplus
£9.7bn
10.4
Own
funds
Solvency
capital
requirement
Chief Financial Officer’s report on our 2015 financial performance page 36
2017 objectives8
We are making good progress towards the objectives we announced in December 2013:
2012 £m11
2013 £m
2014 £m
2015 £m
CAGR
(since 2012) %
2017
Objectives8
Asia objectives
Asia life and asset management IFRS operating profit
Reported actuals
Constant exchange rate9
Constant exchange rate change % (year-on-year)
Asia underlying free surplus generation4,10
Reported actuals
Constant exchange rate9
Constant exchange rate change % (year-on-year)
924
901
484
471
1,075
1,075
19
1,140
1,260
17
1,324
1,468
17
573
573
22
592
662
16
673
765
16
Group objective for cumulative period 1 January 2014 to 31 December 2017
Cumulative Group underlying free surplus generation from 2014 onwards
>£1,858 million
>15% CAGR
18
£0.9 – £1.1 billion
Actual
1 Jan 2014
to 31 Dec 2015
Objective
1 Jan 2014 to
31 Dec 2017
£5.6bn
> £10bn
Notes
1 The comparative results shown above have been prepared using actual
exchange rate (AER) basis except where otherwise stated. Comparative
results on a constant exchange rate (CER) basis are also shown in financial
tables in the Chief Financial Officers’ report on our 2015 financial
performance. CAGR is Compound Annual Growth Rate.
2 The basis of IFRS operating profit based on longer-term investment returns is
discussed in note B1.3 of the IFRS financial statements. The IFRS profit before
tax attributable to shareholders have been prepared in accordance with the
accounting policies discussed in note A of the IFRS financial statements.
3 The EEV basis results have been prepared in accordance with the EEV
principles discussed in note 1 of EEV basis supplementary information.
4 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.
5 Estimated before allowing for second interim ordinary and special
dividends. IGD Capital Surplus for 2014 and comparative years estimated
before allowing for final dividend.
6 Excludes subordinated debt issues that qualify as capital.
7 Excludes surplus in ring-fenced policyholder funds. The methodology and
assumptions used in calculating the Group Solvency II capital results are set out
in note II (c) of Additional unaudited financial information. The Group
Solvency II capital ratio is based on outputs from the Group’s Solvency II internal
model, approved by Prudential Regulation Authority in December 2015.
8 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.
9 Constant exchange rate results translated using exchange rates as at
December 2013.
10 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.
11 Asia 2012 IFRS operating profit of £924 million is based on the retrospective
application of new and amended accounting standards, and excludes the
one-off gain of £51 million from the sale of the Group’s holdings in China Life
Insurance Company in Taiwan.
17
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc
Our businesses and their performance
Asia
Serving the savings, health and protection needs of the
growing and increasingly affluent Asian middle class
Performance highlights
— Performance is on track to deliver the
New business profit1 £m
Total IFRS operating profit £m
2017 financial objectives
— Continued delivery across key value
creation metrics. On a constant
exchange rate basis, new business profit
up 28 per cent, total IFRS operating
profits up 17 per cent and free surplus
generation up 16 per cent
— Agency headcount up 13 per cent;
APE per active agent up 25 per cent
— Strong growth from major
bancassurance partners
— More than 25 per cent of APE sales
comes from products launched in
past 24 months
— Record third party net in-flows in
Eastspring Investments
18
1,139
1,162
982
811
1,490
1,324
51*
924
1,075
1,140
774
2011
2012
2013
2014
2015
2011
2012
2013
2014
2015
*
Gain on sale of China Life Insurance Company
in Taiwan
Net cash remittances £m
Eastspring Investments
funds under management £bn
400
400
341
467
89
77
58
60
50
206
2011
2012
2013
2014
2015
2011
2012
2013
2014
2015
Prudential plc Annual Report 2015 www.prudential.co.uk
GDP growth in Prudential
Corporation Asia’s markets US$trn
+US$7trn
24.1
17.1
2014
2020
Growing middle class bn
+700m people
1.9
1.2
2010
2020
Source: Based on IMF and includes China,
Cambodia, Hong Kong, India, Indonesia, Korea,
Malaysia, Philippines, Singapore, Taiwan,
Thailand and Vietnam.
Market overview
Asia’s economic transformation continues
to generate material increases in personal
wealth and drives significant demand for
solutions to individuals’ financial planning
needs. During 2015, macroeconomic and
geopolitical turbulence continued to create
some challenges but the long-term
potential remains compelling.
The degree of state-sponsored financial
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 and the regulators have tasked
the industry with improving levels of
financial 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 operating in the
markets. However, barriers to entry remain
high in terms of the availability of new
licences, the need for significant capital
investment and the challenges 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.
Favourable demographic and
economic trends
Asia (excluding Japan) is leading the world
in terms of GDP growth. In the period
2014 to 2020, it is expected to generate
around US$7.0 trillion2 of new GDP, more
than the US and the other advanced
economies combined.
vin g s, h
a
S
e
a l t h and pro
t
e
c
t
i
o
n
As ia
Significant protection
gap and investment
needs of the middle class
‘Asian families have very clear
financial protection gaps and
savings needs but these are
significantly underserved by
the industry.
We have a responsibility to do a
much better job of reaching these
people and providing them with
appropriate products and advice.’
Tony Wilkey
Chief Executive,
Prudential Corporation Asia
Our strategy
Prudential has built a well
diversified Asian platform that
matches our distribution and
product strengths to each market’s
long-term opportunities in the life
sector, and maximises our asset-
gathering capabilities in the region’s
investment management industry.
Our strategy page 14
s
g
n
i
v
a
S
US
Transition of
baby boomers
into retirement
Self-reliant
global
middle
class
UK
Savings gap and
ageing population in need
of returns and income
S
a
v
i
n
g
s
www.prudentialcorporation-asia.com
19
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Prudential Corporation Asia is a powerful franchise with
a wide footprint in the right markets, established go-to
market capabilities and superior brand strength.
A platform for growth
Asia population
3,302m
Prudential customers
14m
Prudential agents
500,000+
Prudential bancassurance branches
10,000
A trusted brand and market leader in Asia
Distribution
Product
Other 11%
Linke
d 2
3
Vietnam
Market ranking5
Population
Penetration6
1st
92m
0.7%
Long-term industry leader
— Strong presence in major cities and all
63 provinces
— 97 per cent brand recognition
— 1.3 million customers
— Circa 100,000 agents, one third of
industry
%
9
5
y
c
n
e
g
A
Customers
B
a
n
c
a
3
0
%
%
1
5
s
g
n
i
v
a
S
Customers
%
UAE8
Population
9.3m
P
r
ote
ction 26%
— Proven multichannel model
— Over 500,000 agents
— Selling through over
10,000 bank branches
— All season product solutions
— >25% APE from new products3
— Pioneering service proposition
Platform
— We’ve been working in Asia since 1923
— Top 3 position in nine out of the
Asset management
— Strong presence in Asia
— Circa £90 billion funds under
12 life markets
management
— Top decile brand awareness4
— Operating in 10 major Asian markets5
Thailand
Market ranking5
Population
Penetration6
9th
69m
3.6%
Excellent bancassurance platform
— APE has grown 2.7 times since
acquisition of Thanachart Life in 2013
— Access to 800 branches nationwide
with partners – Standard Chartered
Bank, United Overseas Bank and
Thanachart Bank
20
Cambodia
Market ranking5
Population
Penetration6
1st
16m
0%
Prudential plc Annual Report 2015 www.prudential.co.ukOur businesses and their performance continued
India
China
Korea
Market ranking5
1st
Market ranking5
3rd
Market ranking5
Population
1,276m
Population
1,375m
Penetration6
2.6%
Penetration6
1.7%
Population
Penetration6
17th
51m
7.2%
Successful joint venture
— Operating in 64 cities
— 50 per cent increase in
number of active agents
during 2015
— Broad range of bank
partners – regional,
national, international
Taiwan
Market ranking5
Population
Penetration6
16th
23m
15.6%
Malaysia
Market ranking5
Population
Penetration6
Singapore
Market ranking5
Population
Penetration6
1st
31m
3.1%
2nd
6m
5%
Well positioned to capture emerging
opportunity in Bumi segment
— Largest agency in the industry
— Most productive bancassurance
relationships
— Pioneer in linked policies with riders
for flexible savings and protection
— 43 per cent7 market share of Takaful
(Sharia compliant) life business.
Professional agency complemented
by a distinctive range of bank partners
— Market-leading PruShield product
drives customer acquisition
— Number one for regular premium new
business
— Focus on ‘value over volume’; agency
new business profit up 7 per cent over
prior year
Hong Kong
Market ranking5
Population
Penetration6
2nd
7m
12.7%
Resilient distribution platform
— Leading insurer with scale in agency
and bank distribution
— 2015 saw a 39 per cent increase in
active manpower and a 27 per cent
increase in productivity
— Successful partnership with Standard
Chartered Bank now in 18th year
— Product innovations drive new
customer acquisition and repeat sales
Japan8
Population
127m
Philippines
Market ranking5
Population
Penetration6
2nd
101m
1.6%
Rapidly scaling up distribution
— Almost tripled agency size in less than
three years
— Expanding across country
— Improving efficiency – 80 per cent of
policies now processed ‘straight
through’
— Market leader in linked-with-
protection policies
Indonesia
Market ranking5
Population
Penetration6
1st
255m
1.1%
Unmatched platform with scale
and geographic reach
— Over 400 agency offices across
country
— Largest agency force
— High-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
21
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc More mortality cover US$trn
Mortality
Protection Gap
Income to
maintain living
standards
Life Insurance
Savings
US$50trn
Mortality protection gap
More health cover US$bn
Total future
healthcare
costs
Health
Protection Gap
Projected
expenditure to
cover future
healthcare
US$161bn
Gap in healthcare protection by 2020
Better use of savings
11%
28%
61%
19%
50%
31%
North
America
Asia
ex Japan
Bonds
Equities
Cash
2x
proportion of savings in cash
higher than the US
Source: Based on Swiss Re report and includes
Hong Kong, India, Indonesia, Korea, Malaysia,
Philippines, Singapore, Taiwan, Thailand and
Vietnam; BCG wealth 2015.
22
Strong demand for savings
and protection products
As people move into the middle class, their
increased wealth and higher income give
them the opportunity to make financial
plans for the first time. Typically the priority
is to provide protection for their families
and establish a regular savings plan
through a life insurance policy.
Social welfare provisions vary by market in
Asia 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 financial solutions to
significantly improve an individual’s
experience through access to private
medical services. Therefore, critical illness
and medical riders are popular additions to
life insurance policies.
Traditionally, Asians would have relied on
their children to provide for them in their
retirement but with family sizes decreasing
people are increasingly making their own
financial provisions and life insurance
policies are a popular part of a retirement
plan.
Once the savings and protection solutions
are in place there is the opportunity to
invest. Single premium insurance policies
are also important in more developed
markets and it is likely that customers will
increasingly seek access to different asset
classes through mutual funds as their
wealth grows and their financial needs
become more sophisticated.
Evolving regulatory environment
Each Asian market has evolved its own
regulatory regime depending on the
heritage of the industry, experiences and
developmental priorities.
Regulators across the region are generally
keen to promote the growth of the life
insurance industry as they appreciate the
social utility of providing financial security
to individuals, and the way insurers can
channel unproductive cash savings into
long-term investments in the economy.
However, they are imposing higher
standards on the industry and monitoring
compliance more actively, with increasing
focus on the quality of advice distributors
provide and the suitability of the products
offered. Although assessments of solvency
can vary considerably market by market,
there is increasing convergence on
risk-based calculations.
What we do and how we do it
Although Prudential has been operating in
Asia for over 90 years, we began building
our regional business in earnest in 1994
with the establishment of Prudential
Corporation Asia. Since then, Prudential
Corporation Asia has entered new markets,
added considerable agency scale and
launched bank distribution, developed
product capabilities – particularly
unit-linked with protection – and built a
customer-centric brand anchored on the
tag line ‘Always Listening, Always
Understanding’.
Today, Prudential Corporation Asia is
focused on leveraging this platform to grow
in a disciplined way for the benefit of our
customers, shareholders and communities.
Success is defined by metrics that ensure
we deliver volume, value and good service.
Market participation
Each market is unique and our overarching
regional strategy is very specifically
tailored to the opportunities that reflect the
many differences in each country,
including its stage of economic
development, cultural preferences,
regulation, the competitive landscape and
our own risk appetite.
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
financial plan.
Prudential plc Annual Report 2015 www.prudential.co.ukOur businesses and their performance continued Shane from the Philippines has
been a Prudential customer for five
years, and holds a PRULink Exact
Protector policy, with the additional
optional riders Life Care Benefit,
Personal Accident, Hospitalisation
Income and Waiver of Total and
Permanent Disability.
‘Last year, my father got hospitalised.
We were devastated, not only
emotionally but also financially, that my
siblings and I had to chip in to make ends
meet. To make things worse, I also
needed money for my son’s tuition fee as
the start of classes was fast approaching.
We would have been in deep financial
trouble if not for PRULink Exact Protector
(PEP) 10, my life insurance with Pru Life.
I was hesitant to get one at first, but these
kinds of unforeseen events prove life
insurance to be a vital investment for
everyone – through the withdrawals
PEP 10 allowed me to make, my father’s
hospitalisation and my son’s tuition fee
were both covered. Now, my dad is
happily recovering, my son is enjoying
learning at school, and I’m incredibly
grateful to have gotten claims when I
needed them the most.’
Launched in 2011, PRULink Exact
Protector is an investment-linked life
insurance plan that offers both insurance
protection and savings, providing
customers with peace of mind.
An investment-linked plan, it allows
customers to align their premium
payments with their investment strategy
and provides a choice of funds.9
Eastspring Investments
funds under management £bn
89.1
52.8
36.3
77.3
47.2
30.1
58.1
36.5
59.9
37.7
21.6
22.2
2012
2013
2014
2015
50.3
31.1
19.2
2011
Internal*
External
*Invested by Prudential’s insurance funds
Corporate social responsibility
activities
Prudential is a committed member of the
communities where we operate, and
through the Prudence Foundation we drive
social responsibility activities, with a focus
on providing disaster relief, promoting
financial literacy and children’s education.
During 2015, Prudential extended its
highly successful children’s financial
literacy programme, ‘Cha-Ching’ and
launched the second stage of the
SafeSteps programme, focusing on road
safety with ambassador Michele Yeoh.
For more information on these and other
initiatives, see the Corporate responsibility
review on page 57.
Customers
Prudential Corporation Asia has over
14 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 2015 more than 38 per cent of APE sales
were from existing customers), reflecting
the success of our advice-driven approach
and 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
(up 35 per cent in 2015) 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.
The asset mix is well balanced with
50 per cent equities, 43 per cent fixed
income and 7 per cent money market.
Around 54 per cent of funds have
outperformed their benchmarks over a
three-year period. Eastspring Investments
has been building expertise in
infrastructure, negotiated credit and
quantitative investment capabilities.
Our customers in focus
Notes
1 Agency excluding India.
2 Prudential estimates based on IMF data
– October 2013.
3 Based on products launched over the past
24 months.
4 Top decile in five of seven countries in
South-east Asia and Hong Kong.
5 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.
6 Market penetration sourced from Swiss Re –
based on insurance premiums as a percentage
of GDP in 2014 (estimated).
Source: based on Insurance Services Malaysia
Berhad data as at 31 December 2015.
7
8 Asset management operations.
9 Any investors should note that the value of
investments, and the income from them, will
fluctuate, which will cause fund prices to fall as
well as rise and they may not get back the
original amount they invested. The customers’
circumstances and views are specific to them
and should not be taken as a recommendation,
advice or forecast.
23
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Our businesses and their performance continued
United States
Providing US baby boomers with solutions for a stable retirement
Performance highlights
— Cash remittance increased by
13 per cent to a record level of
£470 million
— Total IFRS operating profit of
£1,702 million, up 9 per cent from
year-end 2014
— Continued strong returns on
shareholder capital across all key
financial metrics
— Successfully managed sales of variable
annuities with guarantees in line with
risk appetite
— Awarded ‘World Class Certification’ by
Service Quality Measurement Group,
Inc. and ‘Highest Customer Satisfaction
by Industry’ award – the tenth
consecutive year of recognition for
customer service performance in these
two categories
24
New business profit1 £m
IFRS operating profit £m
530
568
706
694
809
1,702
1,443
1,302
1,003
675
2011
2012
2013
2014
2015
2011
2012
2013
2014
2015
Net cash remittances £m
Growth in statutory admitted assets
US$bn
470
415
One-off*
}
294
249
107.6
122
220
190.0
199.1
170.9
142.8
2011
2012
2013
2014
2015
2011
2012
2013
2014
2015
*
One-off release of excess surplus
Prudential plc Annual Report 2015 www.prudential.co.uk
Market overview
Providing solutions to retirement
challenges
The US is the world’s largest retirement
savings market with total assets in the
annuity sector of over US$2.6 trillion2.
Each year, approximately four million baby
boomers reach retirement age.
The number of retirees entering this stage
of their life are triggering a shift from
savings accumulation to retirement income
generation of more than US$10 trillion3.
However, as a group, baby boomers are
under-saved and, in addition, their life
expectancies continue to rise. They are in
need of insurance products that offer the
opportunity to grow their assets and to
provide with guaranteed lifetime income
to support them through these challenges.
The US retirement market continues to
offer significant opportunities for profitable
growth by providing solutions to
the millions of baby boomers and to the
future generations that will follow.
US economic environment
Despite a noticeable deceleration in
consumer spending and a contraction in
business investment in the fourth quarter,
the US economy continued its trend of
modest annual growth. While some sectors
were disappointing, notably manufacturing,
the US economy created 2.7 million new
jobs4, pushed unemployment down to
5.0 per cent and showed continued
improvement in the housing market.
In December, the Federal Reserve raised
the Federal Funds rate by 25 basis points,
their first increase in almost 10 years. The
S&P 500 returned approximately negative
1 per cent in 2015, after much stronger
returns in 2013 and 2014, while the
benchmark 10-year US Treasury note yield
rose from 2.18 per cent at the end of 2014
to 2.28 per cent at 31 December 2015.
Regulatory landscape
In addition to the uneven economic
conditions in 2015, the insurance industry
continues to deal with an evolving regulatory
landscape and a multitude of initiatives.
Many of these initiatives began in response
to the financial crisis over eight years ago
and were focused on the broader financial
services industry. Within the insurance
industry, we continue to see changes in
supervisory structures, new global group
supervision and capital standards and a
focus on the reduction of ‘systemic risk’.
More recently, with the release of a US
Department of Labor (DOL) proposal to
introduce new fiduciary obligations for
distributors of investment products to
holders of regulated accounts, the industry
is now dealing with a regulatory initiative
that will significantly impact the delivery of
advice to our customers. The rules related
to this proposal are not yet final, but as a
leader in the industry, we have spent many
hours with a wide variety of stakeholders
to highlight the issues and to ensure that
lawmakers and regulators understand the
impact of what is proposed and the
consequences it will have on various
segments of the retirement market.
Jackson has a good track record of
navigating and, at times, benefiting from
changes in the regulatory environment.
This remains our mindset as we work to
meet the needs of all of our stakeholders.
Competitive landscape
We continue to see significant changes
across the competitive landscape as well.
Sales in the annuity industry were down
approximately 2 per cent5 comparing third
quarter year-to-date 2015 (latest available
data) against third quarter year-to-date and
total industry variable annuity sales were
down approximately 4 per cent5. These
results partially reflect the headwinds the
industry faced in 2015, including market
volatility and unknown regulatory outcomes.
vin g s, h
a
S
e
a l t h and pro
t
e
c
t
i
o
n
As ia
Significant protection
gap and investment
needs of the middle class
s
g
n
i
v
a
S
US
Transition of
baby boomers
into retirement
Self-reliant
global
middle
class
UK
Savings gap and
ageing population in need
of returns and income
S
a
v
i
n
g
s
25
‘Jackson continues its long-term
disciplined approach to our
business, with a sharp focus
on aligning the needs of our
stakeholders. This disciplined
approach has enabled us to
manage successfully volatile
macroeconomic conditions,
and drive consistently positive
outcomes even in the midst
of unsteady financial markets.
Jackson’s mission is important.
We provide financial security
to our customers with products
and services designed to support
them into and through retirement.
Our strategy remains focused on
providing a strong proposition to
our customers and value creation
for our shareholders.’
Barry Stowe
Chairman and Chief Executive Officer,
North America Business Unit
Our strategy
Prudential’s strategy in the US is
well established and continues to
focus on:
— Capitalising on baby boomer
retirement opportunities;
— Maintaining a balanced product suite
throughout the economic cycle;
— Streamlining operating platforms,
driving further operational
efficiencies; and
— Conservative, economic based
approach to pricing and risk
management.
Our strategy page 14
www.jackson.com
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Competitors continued to make product
changes across many segments and we
noted competitors evolving across product
categories. In 2015, we saw more
competitors join the fixed-index annuities
space. In many cases they offered living
benefits on their products in an attempt to
compete with variable annuities. In
addition, some insurers have made
changes to the fund platforms within their
variable annuity products, requiring
managed volatility funds with a living
benefit guarantee which purportedly
protect annuity customers from downside
market risks. There are now 17 Investment
Only Variable Annuity (IOVA) products
that compete directly with Elite Access, our
variable annuity product with no guarantee
benefits. The majority of those competitors
have added guaranteed benefits to the
IOVA products. Elite Access still commands
a significant market share with sales of
£3.1 billion in 2015.
Despite positive demographic trends and
the needs of retirees, these competitive
activities, market volatility and regulatory
headwinds have impacted the industry,
and further market share adjustments have
resulted as customers and distributors seek
insurers like Jackson that offer consistency,
stability and financial strength.
What we do and how we do it
Long-term perspective
Jackson’s long-term strategy is focused on
profitable growth opportunities created by
the demand for retirement income and
accumulation products in the world’s
largest retirement market.
We take a disciplined approach by
leveraging our distinctive distribution
capabilities and asset liability management
expertise to offer prudently priced annuity
products aligned with our risk appetite.
There continues to be strong consumer
demand for our products. We continue
to respond to this demand with product
innovation and distribution strategies
that meet the needs of a growing
retirement population while generating
shareholder value.
With a long-term focus on balancing the
needs of multiple stakeholders, Jackson
has forged a solid reputation and built
strong relationships based upon its
financial stability, innovative and
creative products and market-leading
adviser support.
Our relentless pursuit of excellence has
earned us a leading position in the industry.
Creative product development
Jackson develops and distributes products
that address the retirement needs of our
customers through various market cycles.
These products include variable annuities,
fixed annuities and fixed index annuities.
Among the main attractions 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
benefit of tax deferral on the investment
growth within the product. The breadth of
our product offering, strength of our
distribution relationships and our ability to
maintain financial stability through the
crisis and remain as a consistent presence
within the market, has resulted in Jackson
being the number one5 writer of variable
annuities in the US.
Additionally, Jackson’s success with the
development, launch and execution of Elite
Access demonstrates the depth and
strength of our creative and distribution
capabilities in the industry. We now
command a leading position in a market we
were not operating in prior to 2012. Elite
Access is the third best-selling variable
annuity product in the US6. As of third
quarter of 2015, Jackson offers three of the
top 10 best-selling variable annuity
products across the industry6.
The strength of our product development
capabilities continues to support the
diversification of our product mix, with the
sale of variable annuities with living benefit
guarantees remaining in line with our risk
appetite in 2015. As expected, in the
current historically low interest rate
environment, variable annuities continue
to outsell fixed rate products. While sales
of fixed annuities have been lower in recent
years, fixed index annuities increased
15 per cent from 2014. These products still
make up a significant portion of our balance
sheet and earnings.
Jackson stopped selling traditional life
insurance products in 2012; however, we
continue to look for opportunistic ‘bolt-on’
acquisitions to further diversify our
earnings and balance sheet risks. In the
past, these disciplined acquisitions have
shaped Jackson’s earnings while helping to
diversify Jackson’s overall risk profile.
We continue to balance proactively value,
volume, capital and balance sheet strength
across our suite of product offerings, which
allows us to compete effectively
throughout the economic cycle.
Our customers in focus
Grandparents Joanne and Charlie
(68 and 69) are both semi-retired,
and live in the Dallas-Fort Worth
area. They own a Jackson annuity
contract.
‘After weathering the storm in 2000 and
watching our portfolio take another hit
during the crisis in 2008, Charlie and
I decided that we couldn’t go through
that agony for a third time. After listening
to our story, our wonderful financial
professional, being the excellent teacher
that he is, introduced us to annuities,
explaining that these products offered
guaranteed income for life, the
opportunity for growth over our lifetime,
and that our children could even benefit
from the products as our heirs. It’s very
clear that our financial professional cares
about us, so we took his advice, and
honestly we could not be happier. Our
annuity has worked exactly as he
described it, and Charlie and I agree that
it’s the very best product for us.’
Jackson is a leading provider of retirement
solutions for industry professionals and
their clients. The Company offers a diverse
range of products including variable, fixed
and fixed index annuities designed for
tax-efficient accumulation and distribution
of retirement income for retail customers,
and fixed income products for institutional
investors.8
26
Prudential plc Annual Report 2015 www.prudential.co.ukOur businesses and their performance continued High-quality information technology
systems are critical for providing award-
winning customer service. We leverage
technology to enhance processing quality
and reduce the time required to process
new business and commissions. The
flexibility of our information technology
systems contributes to our ability to
manufacture, distribute and service an
unbundled product design unique to the
industry. The focus on our operational
platforms, and the efficiencies achieved as
a result, has provided us with among the
lowest general and administration expense
to asset ratio relative to competitors.
Disciplined risk management
Jackson operates within a well-defined risk
framework aligned with the overall
Prudential Group risk appetite. The type
and number of products we sell remains
balanced. Our conservative and disciplined
economic approach to pricing is designed
to achieve both adequate returns on our
products and sufficient resources to
support our hedging programme.
Our hedge philosophy has not changed in
2015. Jackson is able to aggregate financial
risks across the Company, obtain a unified
view of our risk positions, and actively
manage net risks through an economically
based hedging programme. A key element
of our core strategy is to protect the
Company from severe economic scenarios
while maintaining adequate regulatory
capital. We benefit from the fact that the
competitive environment continues to
favour companies with robust financial
strength and a demonstrated track record
of financial discipline, both key elements of
our long-term strategy.
Strength of distribution
Our distribution teams set us apart from
our competitors. Jackson’s wholesaling
force is the largest in the industry,
supporting thousands of advisers
across multiple channels and
distribution outlets.
Our wholesalers provide extensive
training to these advisers. In 2015, we
led the industry with the highest level
of sales efficiency, with gross sales per
wholesaler 32 per cent higher than the
nearest competitor.
National Planning Holdings, an affiliate of
Jackson, is the sixth7 largest independent
broker-dealer network in the US.
Leveraging the collective strength of the
four broker-dealers within the network,
National Planning Holdings is able to meet
the specific needs of three key distribution
channels: independent representatives,
financial institutions, and tax and
accounting professionals. We offer
registered representatives and investment
advisers access to industry-leading mutual
fund/asset management companies,
insurance carriers, and to thousands of
brokerage products. National Planning
Holdings provides significant benefits for
Jackson by offering Jackson products and
providing market intelligence.
The strength and flexibility of this network
will give us distinct advantages as we
continue to manage through the pending
US Department of Labor fiduciary proposal
which, as it is drafted today, will have a
direct impact on the distribution of
annuities in the future.
Efficient operations
We support our industry-leading product
development and distribution teams with
award-winning customer service. Jackson
was awarded by Service Quality
Measurement Group, Inc. World Class
Certification in customer satisfaction and
received the Highest Customer Satisfaction
by Industry award, achieving the top rating
for the financial industry for the tenth
consecutive year.
Notes
1 The 2015 EEV results of the Group are presented
on a post-tax basis and, accordingly, prior years’
results are shown on a comparable basis.
2 LIMRA, Annuity US Individual Annuities Survey
Participant’s Report (Q3 2015).
3 US Census Bureau.
4 Bureau of Labor Statistics, US Department
of Labor.
5 LIMRA/Secure Retirement Institute, US
Individual Annuities Sales Survey (Q3 2015).
Jackson is ranked first in total Variable Annuities
sales out of 44 participating companies in
LIMRA’s quarterly survey as of 3Q YTD 2015.
6 ©2015 Morningstar Inc. All Rights Reserved. The
information contained herein: (1) is proprietary
to Morningstar and/or its content providers;
(2) may not be copied or distributed; and (3) is not
warranted to be accurate, complete or timely.
Neither Morningstar nor its content providers
are responsible for any damages or losses
arising from any use of this information. Past
performance is no guarantee of future results.
Morningstar Annuity Research Center 3QYTD15
variable annuity sales by contract.
7 Paikert, C. (2015). New Paths to Scale. Financial
Planning. June 2015.
8 Any investors should note that the value of
investments, and the income from them, will
fluctuate, which will cause fund prices to fall as
well as rise and they may not get back the
original amount they invested. The customers’
circumstances and views are specific to them
and should not be taken as a recommendation,
advice or forecast.
27
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Our businesses and their performance continued
United Kingdom
Insurance and investments
Serving the savings and retirement needs of the ageing population in the UK
Performance highlights
— Robust sales performance in
challenging ‘pension freedom’
environment
— Named Company of the Year for
excellence in service2
— Retained two Five Star ratings for
excellent service2, achieved for fifth
consecutive year
— Best Investment Service and Best
Investment Bond Provider 20153
— Diversified distribution model focusing
on intermediaries, Prudential Financial
Planning (our direct advice service) and
individual customers via mail, email
and telephone
New business profit1 £m
IFRS operating profit £m
241
30
211
237
24
213
195
19
176
318
117
201
259*
105
154*
1,195
89
1,106
723
23
700
736
31
705
735
25
710
753*
105
648*
2011
2012
Wholesale
Retail
2013
2014
2015
2011
2012
Wholesale
Retail
2013
2014
2015
*Adjusted to exclude results of PruHealth
and PruProtect
*Adjusted to exclude results of PruHealth
and PruProtect
Net cash remittances £m
Inherited estate £bn
— Significant investment to develop digital
297
313
distribution capabilities
355
325
331
7.0
6.1
8.0
7.2
7.6*
— Launch of PruFund range within ISA
wrapper drives further strong
performance of with-profits offering
— Implementation of ‘pension freedom’
drives product innovation to meet
changing face of UK retirement market
28
2011
2012
2013
2014
2015
2011
2012
2013
2014
2015
* Representing Solvency II own funds of the UK
with-profits funds
Prudential plc Annual Report 2015 www.prudential.co.uk
Prudential is well placed in this evolving
marketplace. This is evident in our new
business profile relative to a few years ago.
Where once bonds and annuities were the
dominant components of new business,
since the emergence of greater post-pension
freedoms we have been writing more
bond, ISA, pension saving and income
drawdown business, and a significantly
lower volume of annuity business, giving a
better balance to our business portfolio.
What we do and how we do it
Valuable customer franchise
For over 167 years Prudential has been
providing financial security to generations
of UK customers through an unwavering
focus on long-term value as evidenced by
our longevity experience, multi-asset
investment capabilities and our financial
strength. Such attributes are highly sought
after today by customers adjusting to
pension freedoms and by financial advisers
who require a brand they can trust to help
secure dependable incomes in retirement
for their clients. Our inherent brand
strength, in combination with our range of
market-leading with-profits and retirement
income products, resonate more strongly
than ever with customers and distributors.
This is driving significant demand for our
differentiated and market-leading
retirement solutions.
Market overview
A period of fundamental change
and opportunity
The UK is the world’s fifth largest retail
investment market. Wealth is concentrated
in the 50+ age group, with the younger
generation of savers being typically less
well-funded. In our target over-50
demographic, the population growth rate is
almost double the growth rate of the UK
population as a whole, and while the
introduction of pension freedom reforms in
April 2015 has fundamentally changed the
way in which individuals can access their
savings to help fund their income in
retirement, the need to accumulate savings
remains unchanged. These radical
changes, when combined with our trusted
brand and product capabilities, provide
new and significant opportunities for the
profitable and capital efficient growth of
our business in the UK.
The new regulatory rule book
When compared to 2012, the UK pensions
industry today is almost unrecognisable.
Three years of unprecedented regulatory
change has resulted in a structural
marketplace shift in how customers view
retirement, with consumers being given
greater flexibility to access their pension
savings in retirement. Customers are
engaging more frequently with their
providers and the demand for financial
advice and guidance is increasing. Those
companies that are well known, financially
strong and create products and services to
match the pension freedom needs and
expectations of customers will prosper.
vin g s, h
a
S
e
a l t h and pro
t
e
c
t
i
o
n
As ia
Significant protection
gap and investment
needs of the middle class
s
g
n
i
v
a
S
US
Transition of
baby boomers
into retirement
Self-reliant
global
middle
class
UK
Savings gap and
ageing population in need
of returns and income
S
a
v
i
n
g
s
29
‘The regulatory and government
interventions we continued to
witness in 2015 will benefit the
well known, financially strong
firms, such as Prudential, as more
transparency and competition
comes to the sector.
This changing environment
creates opportunities that play to
our strengths – great investment
performance, access to a true
multi-asset fund and a customer
return less impacted by market
fluctuations.’
John Foley
Chief Executive
Prudential UK & Europe
Our strategy
Prudential UK & Europe is a
well established provider of
retirement income and investment
solutions with a focus on helping
customers achieve their long-term
investment goals.
Its distinct competitive advantage in
with-profits and longevity management
continues to provide market-leading
returns to customers over the long term.
Using this core capability it is attracting
new customers with a range of new
products designed to meet their
retirement income and savings needs in a
post-pension freedom market.
By optimising its in-force business and
focusing on the areas of the market where
it has a distinct competitive advantage,
Prudential continues to deliver
sustainable cash flows for the Group and
its shareholders.
Our strategy page 14
www.pru.co.uk
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc We continue to focus on meeting customer
needs through the following actions:
Financial Planning partners, or by
telephone and increasingly online;
— Providing products and retirement
solutions perfectly tailored to help
customers take advantage of the new
pension freedoms;
— Broadening the ways in which
customers can do business with us
through financial adviser intermediaries,
providing advice to customers in their
homes through our 250 Prudential
— Investing in technology that enables
customers to engage more flexibly with
us online;
— Enhancing access to our market-leading
PruFund investment range through an
ISA wrapper;
— Introducing income drawdown
specifically designed for the pension
freedoms market; and
Focused participation in two distinct segments
— Consistently committing to customer
service improvement, which was
recognised at the 2015 Financial
Adviser Service Awards where we
received the accolade of Company of
the Year for the first time, while also
retaining our two Five Star ratings in the
Life & Pensions and Investment
categories for the fifth consecutive year.
Retail growth
Grow differentiated proposition and distribution
Cash and in-force optimisation
Improve, re-shape, optimise
Segment
features
— Mutual value creation for customers
and shareholders
— Diversification of product base using
core capabilities
— Long-term savings and retirement focus
— Significant ongoing value to be managed
— Opportunity to improve customer service
and retention
— Optimise costs
Pru competitive
capabilities
— Investment record; asset side scale
— Complementary intermediary and owned
— Strength of customer base; direct capability
— Long track record of managing longevity
distribution; retail brand
Aims
‘UK’s leading provider of investment
solutions’
‘Well-managed back book underpinning
future profit delivery’
Capital-lite, profitable growth
Customer outcome delivery
Long-term cash generation
PruFund investment performance*
80%
60%
40%
20%
0%
PruFund growth
+83%
ABI fund comparator
+37%
-20%
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
PruFund growth
ABI fund comparator
* ABI Mixed Investment 20%-60% Shares TR; performance from 31 December 2005 to 31 December 2015
Strong investment track record,
product capabilities and
customer outcomes
Prudential is a leader in its chosen markets,
benefiting from a strong investment track
record, a financially strong with-profits
fund and a recognised reputation for
developing innovative products.
Over the long term our with-profits fund
has continued to perform strongly. Over a
period spanning nearly 20 years, our asset
share fund has outperformed the median
investment return of our peer group by
an average of just over 100 basis points
per annum.
Our with-profits, or PruFund, platform gives
us the ability to create products perfectly
tailored for the customers of the pension
freedoms world. In the past year we have
made two significant enhancements
that have broadened access to our
proposition: making PruFund available
through an ISA wrapper and through
a drawdown product.
30
Prudential plc Annual Report 2015 www.prudential.co.ukOur businesses and their performance continued heaven”, the monies in the fund will pass on
to my wife and then on to our children.’
Prudential UK’s PruFund4 offers customers
the potential for growth alongside a degree
of security against losing money. With its
market-leading multi-asset fund offering,
Prudential UK provides access to our fund
management expertise. Our innovative
funds spread risk through investing in many
different assets, employ a smoothing
process that offers potential growth in the
value of the funds while helping to manage
short-term volatility, and provide a range of
guarantee options to tie in with customers’
future needs.
our most significant route to market in the
UK with sales growth of 52 per cent over
the same period in 2014 being achieved by
our intermediary sales teams. Sales
generated by Prudential Financial Planning
increased by 77 per cent. The expertise
and capability within our Retail Voice
telephony team is ideally suited to supporting
developments of our direct to consumer
franchise and is complementary to the
services of Prudential Financial Planning.
Our business in Poland has established a
strong customer franchise, growing
steadily since launching in 2013.
Headquartered in Warsaw, the business
now has 18 branches across the country
and 597 financial planning consultants. Its
success demonstrates our ability to build a
new business franchise by applying our
existing product and distribution expertise
to a new market.
Prudential UK & Europe has well
established franchise in its chosen markets
which continues to drive strong growth
and ongoing product demand among
customers. The business is focused on
delivering retail growth and the
optimisation of in-force business. It will
continue to develop retirement solutions
based on the market-leading and
differentiated PruFund range.
Developments will be underpinned by the
latest technology including the
introduction of a new policy administration
system to support the launch of a
retirement account specifically designed
for the post-pension freedom marketplace.
Mike retired in 2014, and was
introduced to the Prudential
Flexible Retirement and Flexible
Drawdown Plan by Prudential
Financial Planning.
‘The PruFund range has allowed me to
look forward to my retirement with total
confidence. I was introduced to the
Prudential Flexible Retirement and
Flexible Drawdown Plan, and discovered
that this gave me much more control over
my financial planning over the coming
years; I was able to consolidate all my
pensions into one “pot” and the fund
should grow modestly while still allowing
a comfortable lifestyle. I am able to adjust
my pension up or down depending on my
circumstances, and also take a lump sum
if needed. And the real bonus is that
when I do head up the ”stairway to
Our competitive strength in these areas
combined with our product suite continues
to attract new customers seeking protection
from the impact of volatile market conditions.
Importantly for customers, our PruFund
range provides smoothing in a volatile and
uncertain investment environment. The
strength of the proposition is reflected in
the consistent growth we have
experienced, both in terms of the number
of customers invested and the assets under
management.
PruFund comprises a range of different
funds, with or without explicit guarantees,
and a range of ‘risk-rated’ fund options. We
meet a wide range of customer needs by
providing access to PruFund through a
variety of tax or product wrappers, namely
ISAs, bonds, pensions and drawdown.
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 73 of
the 101 public sector authorities in the UK.
Our approach to bulk annuity transactions
in the UK continues to be one of disciplined
participation, focusing on those
opportunities where we can bring both
significant value to our customers and meet
our shareholder return requirements. In
2015 we completed four transactions at the
higher end of the market, generating sales
in excess of £1.5 billion.
Broad distribution
Our diversified distribution model, focused
on both third-party financial advisers and
the individual customer through a direct
non-advised channel and our own financial
planning arm Prudential Financial Planning,
has been central to the increase in retail
business written in 2015. Distribution
through financial advisers continues to be
Our customers in focus
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 Financial Adviser Services Awards.
3 Moneyfacts Life and Pensions Awards 2015.
4 Any investors should note that the value of
investments, and the income from them, will
fluctuate, which will cause fund prices to fall as
well as rise and they may not get back the
original amount they invested. The customers’
circumstances and views are specific to them
and should not be taken as a recommendation,
advice or forecast.
31
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Our businesses and their performance continued
United Kingdom
Asset management
Serving both retail and institutional investors’ needs through a conviction-led and
long-term approach to investing
Performance highlights
— Retail external funds under
management of £60.8 billion
— 5 per cent growth in institutional
business to £65 billion under
management
— 2015 profits of £442 million
— Recognised for its investment expertise
with awards across nearly all its asset
categories in 2015, including
Investment Manager of the Year at the
European Pension Awards
M&G external net flows £bn
M&G external funds under
management £bn
16.9
9.0*
7.9
4.4
0.5
3.9
9.5
2.1
7.4
7.1
0.4
6.7
2011
2012
2013
2014
Institutional
Retail
*
Including £7.6 billion single mandate
137
63
74
126
59
67
126
65
61
112
57
55
92
48
44
2011
2012
2013
2014
2015
Institutional
Retail
3.9
(10.9)
(7.0)
2015
Net cash remittances £m
IFRS operating profit1 £m
213
206
235
301
320
285
302
446
442
395
32
2011
2012
2013
2014
2015
2011
2012
2013
2014
2015
Prudential plc Annual Report 2015 www.prudential.co.uk
Market overview
The European asset management market
is the second largest in the world with net
assets of ¤12.6 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 returns and a high level of client
service are in a good position to attract
flows of new money.
The UK asset management industry,
M&G’s core market, is the second largest
national market in the world with
£870.7 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.
M&G manages money on behalf of retail
and institutional investors, and
Prudential UK’s funds.
Market backdrop over the past year
The global economy in 2015 was
dominated by three factors: fears of an
economic slowdown in China, which led to
the Chinese stock market crash in August;
the continued decline in global commodity
prices; and a strong US dollar. While
commodity-exporting emerging markets
and currencies suffered during 2015, the
US dollar strengthened in anticipation of
a rise in the federal funds rate, further
bolstered by investors seeking a safe haven
during heightened geopolitical tensions.
Despite signs of economic recovery in
developed countries, 2015 saw heightened
market volatility across most asset classes
and regions.
In Europe, investors shifted away from
fixed income and equities towards mixed
asset funds and cash, accompanied by a
significant increase in funds flowing to
exchange traded funds. Net sales of
UK-domiciled mutual funds were
£17.0 billion3 during 2015, with annual
net outflows of £4.7 billion3 from the fixed
income asset class by itself, although
property and money market funds
held up well.
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 believe our active approach
to investment – selecting investments on
a conviction basis rather than following a
market index – produces superior returns
for our customers over the longer term.
We offer our customers the ability to
invest in a diverse range of assets; not only
equities and fixed income but also unlisted
investments such as property, direct
lending, infrastructure and private equity.
M&G is one of the UK’s largest real estate
investors, with a property portfolio of
£23.4 billion at 31 December 2015, and
is the third largest private debt lender
in the world.
M&G operates a range of UK-domiciled
retail funds which are now distributed
in 15 markets across Europe and Asia.
At the end of 2015 clients outside the UK
account for 41 per cent of our 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 institutional investors match liabilities
and achieve growth targets. Some of these
strategies were developed originally for
Prudential’s insurance funds.
vin g s, h
a
S
e
a l t h and pro
t
e
c
t
i
o
n
As ia
Significant protection
gap and investment
needs of the middle class
s
g
n
i
v
a
S
US
Transition of
baby boomers
into retirement
Self-reliant
global
middle
class
UK
Savings gap and
ageing population in need
of returns and income
S
a
v
i
n
g
s
33
‘After a period of exceptional
growth M&G had a more
challenging year, with retail
redemptions due in part to
continuation of a market-wide
change in investor sentiment
away from fixed-income. Our
track record of innovation in
institutional business combined
with asset class diversification
helped deliver capital efficient
profits and cash generation for
the Group.’
Michael McLintock
Chief Executive Officer, M&G
Our strategy
M&G manages the investments of
individuals, institutions and the UK
policyholders of Prudential funds.
Its aim is to help these customers to
meet their financial goals through
long-term active investment
management across a diversified
range of asset classes.
Innovation and independence of thought
are prized at M&G in the belief that
these are the factors that lead to superior,
sustainable returns for its clients over
the longer term. A record of strong
investment returns attracts clients and
assets, and the resulting management
fees continue to generate strong cash
flows for Prudential’s shareholders.
Our strategy page 14
www.mandg.co.uk
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc M&G’s retail market position
Retail fund markets are highly fragmented,
with no single company dominating. This
reflects the competitive nature of the
business and the multiplicity of providers.
Retail clients favour pooled funds such as
open-ended investment companies which
they buy directly from M&G or more
typically through an intermediary such as
an independent financial adviser or
discretionary fund manager. By total UK
assets under management, M&G is the
second largest retail fund manager with
£35.7 billion of assets under management,
equivalent to a market share of
6.8 per cent3. In Europe, where M&G has
distributed funds since 2002, it has over
£23.5 billion of assets under management
and a market share of 0.4 per cent4.
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 finances
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 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 fixed income clients
include some of the UK’s largest pension
M&G funds under management £bn
228
116
57
55
244
118
59
67
201
109
48
44
264
127
63
74
246
120
65
61
2011
2012
2013
2014
2015
Internal*
Institutional
Retail
*Invested by Prudential’s insurance funds
funds, 51 UK local authority pension
schemes and a number of 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 2,000 people operating
from offices across Europe, Asia and in
southern Africa. We take pride in
attracting, developing and retaining people
of the highest calibre. In return, they are
committed to working with us to meet the
long-term needs of our customers.
Our investment teams are primarily based
in our headquarters in London, where they
benefit from the provision of high quality
support staff and investment
infrastructure: from analysts and dealers to
operations, risk and compliance. Reflecting
the need for local expertise in real estate,
we also have specialist real estate teams
in Paris, Frankfurt, Luxembourg,
Singapore, Seoul and Tokyo in addition
to those in London.
Meeting customers’ needs
A committed focus on long-term
investment returns means that the interests
of M&G and its customers are 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 of our clients.
Investment expertise
M&G’s investment expertise spans all the
principal asset classes – equities, fixed
income, multi-asset 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 fixed income investors. Our fund
managers benefit from one of the region’s
largest and most experienced in-house
credit research teams, whose knowledge
covers the full range of fixed income
investment, from the management of
Our customers in focus
lifestyle throughout retirement. To spread
his risk across geographies, asset classes
and fund strategies, Ian holds shares in the
M&G Property Portfolio (which mainly
invests in commercial properties in the UK)
and in a broad mix of equity funds invested
in the UK, Europe, North America and Asia6.
Ian retired at 55, and now has more
time to spend doing what matters
to him and his wife Sue, which
includes managing their money.
‘My job now is to get the best possible
return on our savings and investments
and I like to keep up to date with the latest
financial developments and look for good
investment opportunities. Diversification
is key to my investment strategy and the
wide range of funds available from M&G
allows me to achieve this.’
Like many M&G direct customers, Ian
prefers to invest in ‘income’ shares of
M&G mutual funds, which pay out
income regularly to help support his
34
Prudential plc Annual Report 2015 www.prudential.co.ukOur businesses and their performance continued
Diversification
M&G has pursued business diversification
across:
— Asset class: expertise across equities,
fixed income, real estate and
multi-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, 14 of
which have funds under management
of over £1 billion, up from 13 in 2014.
Institutional clients benefit from a
wide-range of pooled and/or
segregated fixed income, equity and
real estate strategies; and
— Countries.
sovereign debt and public corporate bond
portfolios through to private debt such as
leveraged finance, real estate finance,
direct lending and infrastructure. In a
ranking of global private debt managers for
2015, M&G ranked third, with a book of
over £20.7 billion5.
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 sectors. We
actively manage our assets, drawing on our
long heritage of expertise and knowledge
and our extensive network of contacts.
This approach enables the business to
identify and capitalise on attractive
investment opportunities. We also have a
track record of identifying and exploiting
real estate development opportunities and
for the successful delivery of projects.
M&G concluded 2015 with £4.2 billion of
global property transactions. This included
£2.6 billion of acquisitions with an average
deal size of £56 million.
A history of innovation
Since launching the UK’s first open-ended
fund in 1931, we have brought a succession
of new investment strategies to the retail
and institutional markets. In combination
with this tradition of innovative investment
thinking, M&G has a proven ability to
convert ideas into products that meet our
clients’ needs and attract significant fund
flows. It is these two qualities in
combination that make M&G distinctive.
M&G saw healthy inflows to its ranges of
retail multi-asset funds in 2015, as investors
sought flexibility and stability in times of
low yields and economic and political
uncertainty. During the year, M&G
launched a third fund in its popular
European multi-asset range, the M&G
Prudent Allocation Fund.
In the institutional market, pension funds,
sovereign wealth funds and other large
clients require stable, long-term cash flows
that help meet their liabilities. Our
reputation for innovation in the institutional
market continues to grow, with M&G at the
forefront of a number of specialist fixed
income markets, including leveraged
finance and infrastructure investment. The
consistency of our institutional investment
returns helped earn M&G the prestigious
2015 Financial News Institutional Asset
Management Awards for Infrastructure
Manager of the Year for our infrastructure
investment arm, Infracapital.
Notes
1 Excludes Prudential Capital.
2 Based on data as at Q4 2015. European Fund &
Asset Management Association (published on
22 February 2016).
Source: Investment Association, 31 December
2015.
3
4 Lipper FMI FundFile, 31 December 2015, based
on Europe ex. UK and International region. M&G
data sourced internally.
5 Private Debt Investor figures based on amount
of capital raised over the last five years for
discrete private debt strategies.
6 Any investors should note that the value of
investments, and the income from them, will
fluctuate, which will cause fund prices to fall as
well as rise and they may not get back the
original amount they invested. The customers’
circumstances and views are specific to them
and should not be taken as a recommendation,
advice or forecast.
35
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Chief Financial Officer’s report on our 2015 financial performance
Delivering a strong financial
performance across our
‘growth and cash’ metrics
Performance highlights
IFRS operating profit £m
EEV operating profit £m
CAGR
+20%
4,007
2,954
3,186
2,520
2,017
2,868
2,937
3,174
CAGR
+14%
4,881
4,096
2011
2012
2013
2014
2015
2011
2012
2013
2014
2015
Group free surplus generation £m
Business unit remittances £m
CAGR
+11%
3,050
CAGR
+9%
1,625
1,482
1,341
1,105
1,200
2,462
2,579
1,982
2,080
2011
2012
2013
2014
2015
2011
2012
2013
2014
2015
Measuring our performance page 16
Cash
p l u s
t i o n
r
u
e r a
Fre e s
ge n
In-forc
e
E
a
r
n
i
n
g
s
s
e
c
n
a
t
t
i
m
e
r
s
t
i
n
u
s
s
e
n
i
s
u
h
s
B
a
c
Long-term
sustainable value
N
e
w
b
u
s
i
n
e
s
s
Fin
a
n
ancing
d liquidity
n c y
p it al
S o l v
c
e
a
Capital
‘The Group’s financial performance
and its resilience increasingly
benefits from ongoing improvement
in the quality of our income
delivered through stronger growth
in non-interest sensitive sources
and from the balance of profit and
cash across different geographies,
currencies, products and
distribution channels.’
Nic Nicandrou
Chief Financial Officer
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.
36
Prudential plc Annual Report 2015 www.prudential.co.uk
IFRS operating profit
£4,007m
22%
increase on 2014
During 2015, investment markets have
remained volatile, reflecting growing
concerns on the outlook for global growth,
the consequences of monetary policy
actions and unease caused by the steep
decline in commodities prices. The fourth
quarter in particular saw weakening equity
markets and widening credit spreads
across most of the major global economies.
Although we have taken steps to reduce
the investment market sensitivity of our
earnings and balance sheet in recent years,
we remain significant long-term holders
of financial assets. Short-term fluctuations
in the value of these assets are reported
outside the operating result, which
is based on longer-term investment
return assumptions.
Currency values in the countries in which
we operate have also fluctuated in the
course of 2015. As a significant proportion
of our earnings and capital are US dollar
denominated, the weaker sterling benefited
our reported results, shareholders’ equity
and solvency. However, for the purposes
of evaluating the financial performance
of our businesses outside the UK, unless
otherwise stated, we continue to present
growth rates before the impact of currency
movements, as this gives a more
meaningful assessment of underlying
performance trends.
2015 has been another year
of progress, delivering a strong
financial performance across
our ‘growth and cash’ metrics
of new business profit, IFRS
operating profit and operating
free surplus generation.
This performance was broad-based with
strong contributions from our principal
business operations. The Group’s financial
performance and its resilience increasingly
benefits from ongoing improvement in the
quality of our income delivered through
stronger growth in non-interest-sensitive
sources and from the balance of profit
and cash across different geographies,
currencies, products and distribution
channels. Prudential’s balance sheet
remains conservatively positioned, our
Group solvency under the Insurance
Groups Directive (IGD) is robust and our
Solvency II outcome, following approval
by the Prudential Regulation Authority
of our internal model in December 2015,
underscores the strength and resilience
of the Group’s capital position.
The key financial highlights of 2015 (on
a constant exchange rate basis) were:
— Group IFRS operating profit was
22 per cent higher at £4,007 million.
— Group profit before tax attributable
to shareholders on an IFRS basis
increased 19 per cent to £3,148 million,
including the financial impact of
short-term movements in investment
values and other items reported outside
the operating result.
— Underlying free surplus generation1
(net of investment in new business) rose
by 15 per cent to £3,050 million.
— On the European Embedded Value
(EEV) basis of reporting performance,
new business profit increased
20 per cent2 to £2,617 million,
contributing to EEV operating profit
of £4,881 million, up 16 per cent.
— EEV basis shareholders’ funds at
31 December 2015 increased to
£32.4 billion, 11 per cent higher than
the previous year end on an actual
exchange rate basis.
EEV new business profit
£2,617m
20%
increase on 2014
Measuring our performance page 16
37
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc IFRS profit
Operating profit before tax
Long-term business:
Asia
US
UK2
Long-term business operating profit2
UK general insurance commission
Asset management business:
M&G
Prudential Capital
Eastspring Investments
US
Other income and expenditure3
Results of the sold PruHealth and PruProtect business
Total operating profit based on longer-term investment
returns
Short-term fluctuations in investment returns:
Insurance operations
Other operations
Other non-operating items3
Profit before tax attributable to shareholders
Tax charge attributable to shareholders’ returns
Profit for the year attributable to shareholders
IFRS earnings per share
Actual exchange rate
Constant exchange rate
2015 £m
2014 £m
Change %
2014 £m
Change %
1,209
1,691
1,167
4,067
28
442
19
115
11
(675)
–
1,050
1,431
729
3,210
24
446
42
90
12
(661)
23
15
18
60
27
17
(1)
(55)
28
(8)
(2)
(100)
1,040
1,543
729
3,312
24
446
42
91
13
(661)
23
4,007
3,186
26
3,290
(663)
(74)
(737)
(122)
3,148
(569)
2,579
(461)
(113)
(574)
2
2,614
(398)
2,216
(44)
35
(28)
n/a
20
(43)
16
(537)
(113)
(650)
(4)
2,636
(396)
2,240
16
10
60
23
17
(1)
(55)
26
(15)
(2)
(100)
22
(23)
35
(13)
n/a
19
(44)
15
Basic earnings per share based on operating profit after tax
Basic earnings per share based on total profit after tax
125.8
101.0
96.6
86.9
30
16
99.5
87.9
26
15
Actual exchange rate
Constant exchange rate
2015 pence
2014 pence
Change %
2014 pence
Change %
Note B1: Analysis of performance by segment page 155 and Note B6: Earnings per share page 177
IFRS operating profit
Total IFRS operating profit increased by
22 per cent to £4,007 million in 2015,
driven by improved performance in our life
operations in Asia, the US and the UK.
— Asia total operating profit of
£1,324 million was 17 per cent higher
than the previous year (16 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 profit at
£1,702 million increased by 9 per cent
(18 per cent on an actual exchange rate
basis), driven by higher fee income from
growth in Jackson’s separate account
asset base.
— UK total operating profit was
59 per cent2 higher at £1,195 million,
driven by our focused approach on
active management of our in-force
portfolio and the positive impact of
specific management actions taken
to position the balance sheet more
efficiently under the new Solvency II
regime.
— M&G operating profit (excluding
Prudential Capital) at £442 million was
in line with 2014, with action on costs
mitigating the impact of lower revenues
following a 7 per cent reduction in funds
managed at end 2015.
Life insurance operations: taken together,
IFRS operating profit from our life insurance
operations in Asia, the US and the UK
increased 23 per cent2 to £4,067 million.
This increase reflects the growth in the
scale of these operations, driven primarily
by positive business inflows. 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 financial
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 profit potential, in that it
reflects, 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 compensated.
38
Prudential plc Annual Report 2015 www.prudential.co.ukChief Financial Officer’s report on our 2015 financial performance continued Shareholder-backed policyholder liabilities and net liability flows4
2015 £m
Actual exchange rate
Net liability
flows5
Market and
other
movements
1,867
8,476
(2,694)
(433)
3,691
509
At 31
December
2015
27,844
138,913
52,824
At 1
January
2014
21,931
107,411
50,779
7,649
3,767
219,581
180,121
2014 £m
Actual exchange rate
Net liability
flows5
Market and
other
movements
At 31
December
2014
1,937
8,263
(610)
9,590
2,542
11,072
4,840
26,410
126,746
55,009
18,454
208,165
At 1
January
2015
26,410
126,746
55,009
208,165
Asia
US
UK
Total Group
Note C4: Policyholder liabilities and unallocated surplus of with-profits funds page 219
Focusing on the business supported by
shareholder capital, which generates the
majority of the life profit, in the course of
2015 policyholder liabilities increased
from £208.2 billion at the start of the year
to £219.6 billion at 31 December 2015.
The consistent addition of high-quality
profitable new business and proactive
management of the existing in-force
portfolio underpins this increase, resulting
in positive net flows4,5 into policyholder
liabilities of £7.6 billion in 2015 driven by
our US and Asia businesses. Net flows into
our US business were £8.5 billion in 2015,
reflecting continued success in attracting
new variable annuity business. The
consistency of our net flows into Asia is
underpinned by our focus on recurring
premium new business and strong
customer retention. Across this business
net liability flows continue to be positive
at £1.9 billion. Net outflows in the UK are
partly due to the impact of large investment
only corporate pension schemes transfers
combined with annuity payments that are
no longer offset by new business inflows
following the reduction in retail annuity
sales. Positive foreign currency translation
effects together with favourable
investment market and other movements
have contributed a further £3.8 billion to
the increase in policyholder liabilities since
the start of the year.
Analysis of long-term insurance business pre-tax IFRS operating profit based
on longer-term investment returns by driver6
Actual exchange rate
Constant exchange rate
2015 £m
2014 £m
2014 £m
Spread income
Fee income
With-profits
Insurance margin
Margin on revenues
Expenses:
Acquisition costs*
Administration expenses
DAC adjustments
Expected return on shareholder assets
Impact of specific management actions
in second half of the year, ahead
of Solvency II
Operating profit based on longer-term
investment returns
Operating
profit
Average
liability
1,157 73,511
1,896 125,380
314 106,749
1,759
1,911
(2,186)
5,607
(1,688) 206,423
340
225
3,728
339
4,067
Margin
bps
157
151
29
Operating2
profit
Average
liability
1,131
67,252
1,618 110,955
298 101,290
1,418
1,721
Margin
bps
168
146
29
Operating2
profit
Average
liability
1,189
69,628
1,726 116,507
299 101,653
1,464
1,708
(39)% (2,014)
4,627
(1,454) 186,049
(82)
(44)% (2,077)
4,778
(1,505) 194,588
(78)
Margin
bps
171
148
29
(43)%
(77)
277
215
3,210
–
3,210
292
216
3,312
–
3,312
* The ratio of acquisition costs is calculated as a percentage of APE sales including with-profits sales. Acquisition costs include only those relating to shareholder-
backed business.
Note 1a: Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment returns by driver page 333
In 2015, we maintained our preference
for higher-quality sources of income
such as insurance margin and fee income.
We favour insurance margin because it
is relatively insensitive to the equity and
interest rate cycle and prefer fee income
to spread income because it is more
capital-efficient. Insurance margin was
up 20 per cent (24 per cent on an actual
exchange rate basis) reflecting our strategic
emphasis on growing our offering of risk
products such as health and protection
in Asia. Fee income was up 10 per cent
(17 per cent on an actual exchange rate
basis) primarily reflecting the growth in the
level of assets that we manage on behalf
of our customers, primarily in the US.
In contrast, the contribution to our profits
from spread income decreased by
3 per cent (increase 2 per cent on an actual
exchange rate basis), primarily due to the
effect of lower achieved yields in the US
and a declining contribution from UK
annuities. The fact that insurance margin
and fee income generated a higher and
growing proportion of our income
represents a healthy evolution in the
39
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc
quality, resilience and balance of our
earnings. Our share of returns from
with-profits operations was up 5 per cent,
providing a stable and reliable source
of income for both shareholders and
customers invested in these funds.
The total costs we have incurred in writing
new business and administering the
in-force life business also increased but
at a more modest rate than total income,
highlighting the advantages of increased
scale as we build our business, while
maintaining control of costs.
In the second half of 2015 and ahead of
securing Solvency II internal model
approval, a number of specific management
actions were taken by our UK life business
to position the balance sheet more
efficiently under the new regime. These
actions included extending the reinsurance
of longevity risk to cover £8.7 billion of
annuity liabilities by the end of 2015 (end
2014: programme covered £2.3 billion of
liabilities). It also included repositioning of
the fixed income asset portfolio, increasing
to 95 per cent the proportion that would
benefit from the matching adjustment
under Solvency II. The combined effect
of these and other actions generated a
£339 million IFRS operating profit in the
second half of 2015 and is not expected
to recur going forward.
IFRS operating profit from our portfolio
of life insurance operations in Asia was
up 16 per cent to £1,209 million, driven by
a 14 per cent increase in the contribution
from the in-force business, reflecting both
its larger scale and our regular premium
health and protection-oriented product
focus. Indonesia IFRS operating profit, our
largest market on this measure, increased
21 per cent to £356 million, reflecting the
addition of new savings and protection
sales in the year to an already sizeable
recurring premium in-force business.
Hong Kong IFRS operating profit was
27 per cent higher at £150 million, mainly
due to the increasing profit contribution
from a growing customer base purchasing
health and protection cover. Malaysia
IFRS operating profit grew by 12 per cent
to £120 million, reflecting a growing
contribution from the in-force business.
IFRS operating profit in Singapore declined
4 per cent to £204 million, the result of our
deliberate decision to discontinue universal
life sales as the returns of these products
in the current interest rate environment
are unattractive. We are also encouraged
to see further progress among our fast-
growing businesses in China, Thailand, the
Philippines and Vietnam which collectively
generated £220 million of Asia’s IFRS
operating profit, up 28 per cent compared
to the prior year, and now account for
18 per cent of the total life result compared
to just 7 per cent only three years ago.
In the US, life IFRS operating profit
increased by 10 per cent to £1,691 million,
primarily as a result of an 11 per cent
increase in fee income, which is now
Jackson’s main income source, and
efficient management of costs. The uplift in
fee income reflects the growth in average
separate account assets from £78.1 billion
in 2014 to £86.9 billion in 2015, equating
to an increase of 11 per cent on a constant
exchange rate basis (20 per cent on an
actual exchange rate basis), driven by
sizeable variable annuity net premium
inflows. Contribution from insurance
margin also increased by 10 per cent.
Lower yields impacted the spread income
which decreased by 6 per cent on a
constant exchange rate basis.
UK life IFRS operating profit was
60 per cent higher than 2014 at
£1,167 million (2014: £729 million).
New annuity business contributed
£123 million (2014: £162 million) including
£89 million (2014: £105 million) from the
four bulk transactions completed in 2015.
The balance of £1,044 million (2014:
£567 million), reflects a robust level of profit
from our core annuity in-force and
with-profits business and includes a
£339 million benefit from specific
management actions taken in the second
half of the year to position the balance sheet
more efficiently under the new Solvency II
regime. Of this amount, £170 million related
to profit on longevity reinsurance
transactions executed in the second half of
the year, with a further £169 million
reflecting the effect of repositioning the
fixed income asset portfolio and other
actions. The non-recurring nature of these
actions and our reduced appetite for
annuities post-Solvency II will mean that,
going forward, IFRS earnings from our UK
life business will be predominantly driven
by the contribution from core annuity
in-force and with-profits business.
Asset management net inflows and external funds under management7
M&G
Retail
Institutional
M&G
Eastspring Investments8
Total asset management
Total asset management
(including MMF)
External net inflows
External funds under management
Actual exchange rate
Constant exchange rate
Actual exchange rate
2015 £m
2014 £m
Change %
2014 £m
Change %
2015 £m
2014 £m
Change %
(10,858)
3,850
(7,008)
5,971
6,686
401
7,087
5,430
(1,037)
12,517
(262)
860
(199)
10
(108)
6,686
401
7,087
5,380
(262)
860
60,801
65,604
(199) 126,405
30,281
11
74,289
62,758
137,047
25,333
12,467
(108) 156,686
162,380
28
12,526
(100)
12,481
(100) 162,692
167,180
(18)
5
(8)
20
(4)
(3)
Note 1c: Analysis of asset management operating profit based on longer-term investment returns page 339
40
Prudential plc Annual Report 2015 www.prudential.co.ukChief Financial Officer’s report on our 2015 financial performance continued Asset management: in 2015, our asset
management businesses in the UK
and Asia collectively increased their
contribution to IFRS operating profit
compared to the previous year. Similar to
the trend observed in our life operations,
asset management operating profit
primarily reflects the scale of these
businesses, as measured by funds
managed on behalf of external institutional
and retail customers and our internal life
insurance operations.
M&G delivered a broadly unchanged
IFRS operating profit of £442 million (2014:
£446 million), reflecting a 2 per cent rise in
underlying profit to £406 million (2014:
£400 million), lower performance-related
fees of £22 million (2014: £33 million) and
a similar level of earnings from associates
of £14 million (2014: £13 million). While
underlying revenues in the first half of 2015
benefited from higher levels of funds under
management, the large net outflows from
retail funds since May contributed to a
2 per cent decrease in underlying revenues
for the year overall. Actions on costs
mitigated the effect of lower overall
revenues to deliver a modest increase
in underlying profit compared to 2014.
However, the lower level of assets under
management at the end of 2015 will impact
the revenue prospects for 2016 absent a
meaningful recovery in M&G’s overall third
party net flows or a significant uplift in the
market value of assets.
Our Asia asset management business,
Eastspring Investments, has benefited
from significant growth in funds under
management during 2015, with IFRS
operating profit higher by 26 per cent at
£115 million. An 11 per cent increase in
third-party net inflows to £6.0 billion saw
external funds managed rise by 20 per cent
on an actual exchange rate basis to
£30.3 billion at end 2015. Average total
funds under management, including funds
managed on behalf of Prudential’s life
operations, increased by 25 per cent
to £85.1 billion compared with 2014.
Eastspring Investments’ growth in fee
revenue outpaced the increase in operating
costs, resulting in a modestly improved
cost-income ratio of 58 per cent (59 per cent
on an actual exchange rate basis).
In the US, our non-insurance businesses
collectively generated IFRS operating profit
of £11 million (2014: £13 million). In July,
Jackson announced that Curian would no
longer accept new business effective from
31 July 2015. Curian continues to actively
manage existing accounts into 2016 to
allow for the transition of accounts, but is
expected to exit the business around the
end of the first quarter of 2016. Total IFRS
operating losses in Curian in 2015 were
£16 million and included £13 million
of cost related to exiting the business.
Prudential Capital produced IFRS
operating profit of £19 million in 2015
(2014: £42 million). During 2015, we
started to refocus activity away from
revenue generation towards internal
treasury services and this reprioritisation
will continue into 2016.
IFRS short-term fluctuations
IFRS operating profit is based on longer-
term investment return assumptions.
The difference between actual investment
returns recorded in the income statement
and the assumed longer-term returns is
reported within short-term fluctuations
in investment returns. In 2015 the total
short-term fluctuations in investment
returns relating to the life operations were
negative £663 million, comprising negative
£119 million for Asia, negative £424 million
in the US and negative £120 million in
the UK.
In Asia, the negative short-term fluctuations
of £119 million reflected net unrealised
losses on fixed income securities, primarily
due to rises in bond yields.
Short-term fluctuations in the US mainly
reflect 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.
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. The negative
short-term fluctuations of £424 million
in 2015 were primarily attributable to
the net value movement in the year of
the hedge instruments held to manage
market exposures.
Negative short-term fluctuations of
£120 million in the UK reflected net
unrealised losses on fixed income assets
supporting the excess capital held
within the shareholder-backed annuity
business following a rise in interest rates
during the year.
IFRS effective tax rates
In 2015, the effective tax rate on IFRS
operating profit based on longer-term
investment returns was 20 per cent (2014:
23 per cent). The reduction is due to lower
corporate tax rates in certain jurisdictions
and a higher benefit from non-recurring tax
credits, specifically in Jackson.
The 2015 effective tax rate on the total
IFRS profit was 18 per cent (2014:
15 per cent), reflecting a larger overall
contribution to the total profit from Jackson
which attracts a higher rate of tax.
Total tax contribution
The Group continues to make significant
tax contributions in the countries in which
it operates, with £3,004 million remitted
to tax authorities in 2015. This was
higher than the equivalent amount of
£2,237 million in 2014, principally due to
higher corporation tax payments. In the
US, a change of basis for taxing derivatives
which affects the timing but not the
quantum of tax payable, has accelerated
future tax payable into 2015. Tax payments
in the UK in 2015, which relate to both the
current and prior year, reflect positive
investment returns in 2014.
Taxes paid in:
Asia
US
UK
Other
Total tax paid
2015 £m
2014 £m
Corporation
taxes
Other
taxes
Taxes
collected
Total
remitted
Corporation
taxes
Other
taxes
Taxes
collected
Total
remitted
258
556
521
5
1,340
77
51
184
20
332
111
433
786
2
1,332
446
1,040
1,491
27
3,004
199
205
314
3
721
52
35
202
4
293
87
375
759
2
1,223
338
615
1,275
9
2,237
41
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Corporation taxes include amounts paid on
taxable profits 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 financial
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 profit for the year. In 2015 underlying
free surplus generation, after investment
in new business, increased by 15 per cent
to £3,050 million.
Free surplus generation
Free surplus generation1
Asia
US
UK2
M&G
Prudential Capital
Underlying free surplus generated from in-force life business
and asset management2
Investment in new business2
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 8: Analysis of movement in free surplus page 310
Actual exchange rate
Constant exchange rate
2015 £m
2014 £m
Change %
2014 £m
Change %
16
20
37
1
(45)
19
(25)
18
930
1,291
656
353
33
3,263
(618)
2,645
17
11
37
1
(45)
16
(21)
15
1,086
1,433
900
358
18
3,795
(745)
3,050
282
(1,625)
1,707
5,059
–
6,766
938
1,197
656
353
33
3,177
(598)
2,579
(6)
(1,482)
1,091
4,003
(35)
5,059
The increase in free surplus generated by
our life insurance businesses reflects 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 profiles 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, the
closing value of free surplus in our life and
asset management operations increased to
£6,766 million at 31 December 2015
(31 December 2014: £5,059 million, on an
actual exchange rate basis), after financing
reinvestment in new business and funding
cash remittances from the business units
to Group.
In Asia, growth in the in-force life portfolio,
and a 28 per cent increase in post-tax profit
from Eastspring Investments, contributed
to free surplus generation of £1,086 million,
up 17 per cent. In the US, free surplus
generation before new business increased
by 11 per cent, also reflecting business
growth. In the UK, the 37 per cent increase
to £900 million reflects a higher underlying
contribution from the in-force business and
a contribution of £223 million for the specific
management actions taken in the second
half of the year to position the balance
sheet more efficiently under the new
Solvency II regime.
underlying free surplus generation
£3,050m
15%
increase on 2014
Measuring our performance page 16
42
Prudential plc Annual Report 2015 www.prudential.co.ukChief Financial Officer’s report on our 2015 financial performance continued We invested £745 million of the free
surplus generated during the year in
writing new business (2014: £618 million
on a constant exchange rate basis)
equivalent to a reinvestment rate9 of
20 per cent, which is in line with recent
periods. Asia remained the primary
destination of our new business investment,
17 per cent higher at £413 million, lower
than the 26 per cent increase in APE sales
reflecting changes to product mix. In the
US, new business investment increased
to £267 million, mainly due to an increase
in the proportion of variable annuity
premiums that customers directed towards
the fixed account option. At just under
2 per cent of new single premiums, Jackson’s
overall strain remains low, supporting the
generation of significant returns on capital.
New business investment in the UK
remains at £65 million (2014: £65 million),
despite higher new business volumes,
reflecting capital-efficient growth in
with-profits business and lower strain on
bulk annuities (measured under the
solvency regime applicable in 2015).
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
period10 for business written in 2015 was
three years for Asia, one year for the US
and three years for the UK.
We continue to manage cash flows across
the Group with a view to achieving a balance
between ensuring sufficient 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.
Actual exchange rate
2015 £m
2014 £m
Change %
467
470
331
302
55
400
415
325
285
57
1,625
1,482
2,173
1,480
17
13
2
6
(4)
10
Holding company cash11
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 IIa: Holding company cash flow page 341
Cash remitted by the business units to
the corporate centre in 2015 increased
by 10 per cent to £1,625 million with
significant contributions from each of our
four major business operations. Asia’s
remittances increased to £467 million
and included the proceeds from the sale
of the Japan life business of £42 million.
The higher remittances from the US of
£470 million reflect Jackson’s disciplined
approach to growing this business and its
effective risk management. The remittances
from the UK are in line with 2014 and we
continue to invest in upgrading our UK
pre- and post- retirement customers
propositions. M&G’s remittances of
£302 million reflected the level of post-tax
earnings delivered in the year.
Cash remitted to the Group in 2015 was
used to meet central costs of £354 million
(2014: £353 million), pay the dividends
and finance the second of three up-front
payments for the renewal of the distribution
agreement with Standard Chartered Bank.
The issue of hybrid debt in June 2015 raised
£590 million. Reflecting these movements
in the year, total holding company cash at
the end of 2015 was £2,173 million compared
to £1,480 million at the end of 2014.
£1,625m
net cash remittances from
business units
10%
increase on 2014
Measuring our performance page 16
43
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc EEV profit
Post-tax operating profit
Long-term business:
Asia
US
UK2
Long-term business operating profit2
UK general insurance commission
Asset management business:
M&G
Prudential Capital
Eastspring Investments
US
Other income and expenditure12
Results of the sold PruHealth and PruProtect businesses
Post-tax operating profit based on longer-term investment
returns
Short-term fluctuations in investment returns:
Insurance operations
Other operations
Effect of changes in economic assumptions
Other non-operating items12
Profit attributable to shareholders
Earnings per share
Actual exchange rate
Constant exchange rate
2015 £m
2014 £m
Change %
2014 £m
Change %
2,321
1,808
863
4,992
22
358
18
101
7
(617)
–
1,900
1,528
735
4,163
19
353
33
78
6
(567)
11
22
18
17
20
16
1
(45)
29
17
(9)
(100)
1,903
1,647
735
4,285
19
353
33
79
7
(567)
11
4,881
4,096
19
4,220
(1,153)
(55)
(1,208)
57
221
3,951
856
(93)
763
(369)
(147)
4,343
(235)
41
(258)
115
250
(9)
864
(93)
771
(389)
(147)
4,455
22
10
17
16
16
1
(45)
28
–
(9)
(100)
16
(233)
41
(257)
115
250
(11)
Basic earnings per share based on post-tax operating profit
Basic earnings per share based on post-tax total profit
191.2
154.8
160.7
170.4
19
(9)
165.6
174.8
15
(11)
Actual exchange rate
Constant exchange rate
2015 pence
2014 pence
Change %
2014 pence
Change %
Note 2: Results analysis by business area page 302
EEV operating profit
On an EEV basis, Group post-tax operating
profit based on longer-term investment
returns was 16 per cent higher (19 per cent
on an actual exchange rate basis) at
£4,881 million in 2015. The increase is
primarily due to higher new business profit
from the Group’s life businesses, which
increased by 20 per cent (24 per cent on an
actual exchange rate) to £2,617 million and
profit from the in-force life business, which
increased by 13 per cent (16 per cent on an
actual exchange rate basis) to £2,375 million.
This reflects on-going business growth
and higher profits from the better than
expected management of the in-force
business, with positive experience and
assumptions changes of £666 million
(2014: £648 million).
In Asia, EEV life operating profit was
22 per cent higher at £2,321 million,
with in-force profit up 13 per cent to
£831 million, benefiting from increased
scale across all our operations. Asia new
business profit was 28 per cent higher at
£1,490 million, reflecting volume growth
44
from the continued build-out of our
distribution platform.
Jackson’s EEV life operating profit
increased by 10 per cent to £1,808 million,
driven by growth in the scale of our
in-force book and higher new business
profit. In-force profit increased by
11 per cent to £999 million (20 per cent on
an actual exchange rate basis), primarily
reflecting higher unwind from the larger
book of existing business. US new business
profit was up 8 per cent to £809 million
(17 per cent on an actual exchange rate
basis), due to the 3 per cent (11 per cent on
an actual exchange rate basis) increase in
sales volume and a beneficial shift in
business mix.
In the UK, EEV life operating profit
increased by 17 per cent2 to £863 million
(2014: £735 million). New business profit
was 23 per cent2 higher at £318 million
(2014: £259 million) and includes a
contribution of £117 million (2014:
£105 million) from four bulk annuity
transactions in 2015. Retail new business
profit was up 31 per cent2 at £201 million
(2014: £154 million), due to the positive
effect of the 32 per cent increase in retail
sales volumes offset by business mix
effects. In-force profit was 14 per cent
higher at £545 million (2014: £476 million)
and includes a net charge of £13 million
from the specific management actions
taken in the second half of the year to
position the balance sheet more efficiently
under the new Solvency II regime.
EEV non-operating results
EEV operating profit 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
profit which reduced the 2015 results
by a net £930 million (2014: net increase
of £247 million on an actual exchange
rate basis).
EEV short-term fluctuations
Short-term fluctuations in investment
returns reflect the element of non-
operating profit which relates to the effect
Prudential plc Annual Report 2015 www.prudential.co.ukChief Financial Officer’s report on our 2015 financial performance continued on EEV of the difference between the
actual investment returns achieved and
those assumed in arriving at the reported
operating profit.
Short-term fluctuations in investment
returns for life operations of negative
£1,153 million include negative £206 million
for Asia, negative £753 million for our
US operations and negative £194 million
in the UK.
In Asia and the UK, negative short-term
fluctuations principally reflect unrealised
movements on bond holdings in the year.
They also reflect the effect on the
embedded value of flat to negative equity
market returns. In the US, the variance
represents the impact of modestly negative
market-related movements on separate
account values in the year, and on the
value movements on derivatives held to
manage the Group’s equity and interest
rates exposure.
Effect of changes in economic
assumptions
The small overall interest rate rises in the
UK and US have had a beneficial impact
on the level of future assumed earnings
that we expect to generate from our
existing book of business. This is partly
offset by the effect of interest rate rises
in Asia, which impact EEV negatively,
as the present value future Asia health
and protection profits are discounted
at higher rates.
Capital position,
financing and liquidity
Capital position
We continue to operate with a strong
solvency position, while maintaining high
levels of liquidity and capital generation.
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.
The estimated Group Solvency II capital
surplus13,14 at 31 December 2015 is £9.7 billion,
equivalent to a ratio of 193 per cent.
The table below shows the impact of
moving from our previously reported
economic capital basis to the Solvency
II-approved internal model basis and the
capital generation in 2015.
£32.4bn
EEV shareholders’ funds
equivalent to
1,258p
per share
Analysis of movement in Group capital surplus
Economic capital surplus as at 1 January
Operating experience
Non-operating experience (including market movements)
Other capital movements
Subordinated debt issuance
Foreign currency translation impacts
Final 2014 and 2015 first interim dividend paid
Methodology and calibration changes
Changes to own funds (net of transitionals) and solvency capital Requirement calibration strengthening
Effect of partial derecognition of Asia Solvency II surplus
Estimated Solvency II surplus as at 31 December
Note IIc: Solvency II capital position at 31 December 2015 page 343
£ billion
9.7
2.4
(0.6)
0.6
0.2
(1.0)
(0.2)
(1.4)
9.7
The movement in the Group Solvency II
capital surplus in 2015 was driven by:
— Operating experience of £2.4 billion:
generated by in-force business and new
business written in 2015 and included
£0.4 billion of benefit from the specific
management actions taken in the
second half of the year to position the
balance sheet more efficiently under
the new Solvency II regime;
— Non-operating experience of £0.6 billion:
mainly arising from negative market
experience during the year; and
— Other capital movements: comprising
an increase in capital from subordinated
debt issuance, positive foreign currency
translation effects offset by a reduction
in surplus from payment of the 2014
final and 2015 first interim dividend.
The methodology and calibration changes
arose as part of the internal model approval
process and related to:
— A £0.2 billion reduction in surplus due
to an increase in the Solvency capital
requirement from strengthening of
internal model calibrations, mainly
relating to longevity risk, operational
risk, credit risk and correlations, and
a corresponding increase in the risk
margin, which is partially offset by
UK transitionals; and
— A £1.4 billion reduction in surplus due
to the negative impact of Solvency II
rules for ‘contract boundaries’ and a
reduction in the capital surplus of the
Group’s Asian life operations, as agreed
with the Prudential Regulation Authority.
Solvency II as a measure of regulatory
capital is more volatile than under
the previous Solvency I regime. At
31 December 2015, the estimated
sensitivity of the Group Solvency II capital
surplus to significant changes in market
conditions is as set out below:
— An instantaneous 20 per cent fall in
equity markets would reduce surplus
by £1.0 billion and reduce the solvency
ratio to 186 per cent;
— 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
surplus by £1.8 billion and reduce the
solvency ratio to 179 per cent;
45
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc — A 50 basis points reduction in interest
rates (subject to a floor of zero and
allowing for transitional recalculation)
would reduce surplus by £1.1 billion
and reduce the solvency ratio to
179 per cent;
— A 100 basis points increase in interest
rates (allowing for transitional
recalculation) would increase surplus
by £1.1 billion and increase the solvency
ratio to 210 per cent; and
— A 100 basis points increase in credit
spreads (with credit defaults of 10 times
the expected level in Jackson) would
reduce surplus by £1.2 billion and
reduce the solvency ratio to
187 per cent.
At 31 December 2015 our Insurance
Groups Directive surplus is estimated at
£5.5 billion14, equivalent to a solvency
cover of 2.5 times.
Group Solvency II capital surplus
Solvency ratio
193%
20.1
Surplus
£9.7bn
10.4
Own
funds
Solvency
capital
requirement
Local statutory capital
All our subsidiaries continue to hold
appropriate capital positions on a local
regulatory basis. Jackson’s risk-based
capital ratio at the end of 2015 was
481 per cent, having remitted £470 million
to Group earlier in the year. The Prudential
Assurance Company Limited, our main UK
operation, has an estimated Solvency II
surplus of £3.3 billion in respect of its
shareholder business, equivalent to a
ratio of 146 per cent. Separately, the
UK with-profits funds remained well
capitalised with an estate value of
£7.6 billion15, covering its solvency capital
requirements approximately 1.75 times.
Debt portfolio
The Group continues to maintain a
high-quality defensively positioned debt
portfolio. Shareholders’ exposure to
credit is concentrated in the UK annuity
portfolio and the US general account,
mainly attributable to Jackson’s fixed
annuity portfolio. The credit exposure
is well diversified and 98 per cent of
our UK portfolio and 96 per cent of our
US portfolio are investment grade.
We experienced no default losses and
reported impairments of £26 million
(2014: £7 million) across these two fixed
income securities portfolios.
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
2015 £m
Mark to
market
value
353
–
55
408
IFRS
basis
4,567
275
169
5,011
EEV
basis
4,920
275
224
5,419
IFRS
basis
3,869
275
160
4,304
investments
(2,173)
–
(2,173)
(1,480)
Net core structural borrowings of shareholder-
financed operations
2,838
408
3,246
2,824
Note C6.1: Core structural borrowings of shareholder-financed operations page 241
2014 £m
Mark to
market
value
579
–
42
621
–
621
EEV
basis
4,448
275
202
4,925
(1,480)
3,445
Our financing and liquidity position
remained strong throughout the year.
Our central cash resources amounted
to £2.2 billion at 31 December 2015,
compared with £1.5 billion at the end
of 2014, 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
2015 were £5,011 million (31 December
2014: £4,304 million on an actual exchange
rate basis) and comprised £4,567 million
(31 December 2014: £3,869 million on an
actual exchange rate basis) of debt held
by the holding company, and £444 million
(31 December 2014: £435 million on an
actual exchange rate basis) of debt held by
the Group’s subsidiaries, Prudential Capital
and Jackson. In June 2015, Prudential
issued £600 million 5.0 per cent tier 2
subordinated notes, increasing funds
available for general corporate purposes.
In addition to its net core structural
borrowings of shareholder-financed
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 2015, we had issued
commercial paper under this programme,
totalling £138 million and US$1,428 million,
to finance 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 2020. Apart from small
drawdowns to test the process, these
46
Prudential plc Annual Report 2015 www.prudential.co.ukChief Financial Officer’s report on our 2015 financial performance continued facilities have never been drawn, and
there were no amounts outstanding at
31 December 2015. 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 flexible funding capacity.
Prudential manages the Group’s core debt
within a target level consistent with its
current debt ratings. At 31 December
2015, the gearing ratio (debt, net of cash
Shareholders’ funds
and short-term investments, as a
proportion of IFRS shareholders’ funds
plus net debt) was 18 per cent, compared
to 19 per cent at 31 December 2014.
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.
The Prudential Assurance Company
Limited was downgraded by Moody’s
in September 2015 from Aa2 to Aa3.
All ratings on Prudential and its subsidiaries
are on stable outlook.
The financial strength of the Prudential
Assurance Company Limited is rated AA
by Standard & Poor’s, Aa3 by Moody’s and
AA by Fitch.
Jackson National Life Insurance Company’s
financial strength is rated AA by Standard
& Poor’s, A1 by Moody’s and AA by Fitch.
Prudential Assurance Co Singapore (Pte)
Ltd’s (Prudential Singapore) financial
strength is rated AA by Standard & Poor’s.
Profit after tax for the year
Exchange movements, net of related tax
Unrealised gains and losses on Jackson fixed income securities classified
as available for sale16
Dividends
Other
Net increase 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
2015 £m
2014 £m
2015 £m
2014 £m
2,579
118
(629)
(974)
50
1,144
11,811
–
12,955
504p
27%
2,216
220
565
(895)
55
2,161
9,650
–
11,811
460p
26%
3,951
244
–
(974)
(23)
3,198
29,161
–
32,359
1,258p
17%
4,343
737
–
(895)
131
4,316
24,856
(11)
29,161
1,136p
16%
IFRS consolidated statement of changes in equity page 135 and Note 9: reconciliation of movements in shareholders’ equity page 313
In a period of currency volatility, UK
sterling weakened relative to non-sterling
currencies, in particular the US dollar. With
approximately 54 per cent of the Group’s
IFRS net assets (68 per cent of EEV net
assets) denominated in non-sterling
currencies, this generated a positive
foreign exchange movement on net assets
in the year. In addition, the increase in
US 10-year treasury rate and higher
spreads produced unrealised losses on
fixed income securities held by Jackson
that are accounted for as available-for-sale
under IFRS.
Taking these non-operating movements
into account, the Group’s IFRS
shareholders’ funds at 31 December 2015
increased by 10 per cent to £13.0 billion
(31 December 2014: £11.8 billion on an
actual exchange rate basis).
The Group’s EEV shareholders’ funds also
increased by 11 per cent to £32.4 billion
(31 December 2014: £29.2 billion on an
actual exchange rate basis). On a per share
basis the Group’s embedded value at
31 December 2015 stood at 1,258 pence,
up from 1,136 pence at 31 December 2014.
Corporate transactions
Entrance into Uganda life
insurance market
In June 2015 we completed the acquisition
of Ugandan company Goldstar Life
Assurance and signed a long-term
cooperation agreement with Crane Bank
of Uganda. In January 2016 we announced
entry into Zambia via our acquisition of
Professional Life Assurance, which is
subject to regulatory approval.
47
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Reporting considerations
As announced at our investor conference
in January 2016, we plan to discontinue
publication of our first- and third-quarter
interim management statements with
immediate effect.
Dividend
The Board has decided to increase the
full-year ordinary dividend by 5 per cent
to 38.78 pence per share, reflecting the
continued strong financial performance
of the Group in 2015. In line with this, the
directors have approved a second interim
ordinary dividend of 26.47 pence per share
(2014: final dividend of 25.74 pence) which
brings the total ordinary dividend for the
year to 38.78 pence (2014: 36.93 pence).
In addition, the Board has decided to award
a special dividend of 10 pence per share,
reflecting the additional contribution to
earnings from the specific management
actions taken to position the balance
sheet more efficiently under the new
Solvency II regime.
Although the Board has been able to
approve a special dividend of 10 pence
per share in 2015, the Group’s dividend
policy remains unchanged. The Board will
maintain its focus on delivering a growing
ordinary dividend, 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.
48
Notes
1 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.
2 Following the disposal of the Group’s 25 per cent
interest in PruHealth and PruProtect in
November 2014, the 2014 comparative results of
UK insurance operations have been adjusted to
exclude results of those businesses.
3 Refer to note B1.1 in IFRS financial statements for
the breakdown of other income and expenditure,
and other non-operating items.
Includes Group’s proportionate share of the
liabilities and associated flows of the insurance
joint ventures in Asia.
4
5 Defined as movements in shareholder-backed
policyholder liabilities arising from premiums
(net of charges), surrenders/withdrawals,
maturities and deaths.
6 For basis of preparation see note I (a) of Additional
7
unaudited IFRS financial information.
Includes Group’s proportionate share in PPM
South Africa and the Asia asset management
joint ventures.
8 Net inflows exclude Asia Money Market Fund
(MMF) inflows of £1,065 million (2014: net inflows
£9 million). External funds under management
exclude Asia MMF balances of £6,006 million
(2014: £4,800 million).
Investment in new business as a percentage of
underlying free surplus generated from in-force
life business and asset management.
9
10 Payback period, measured on an undiscounted
basis, is the time in which the initial ‘cash’
outflow of investment is expected to be
recovered from the ‘cash’ inflows generated by
the investment. The ‘cash’ outflow 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.
11 The full holding company cash flow is disclosed
in note II (a) of Additional unaudited IFRS
financial information.
12 Refer to the EEV basis supplementary
information – Post-tax operating profit 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.
13 The methodology and assumptions used in
calculating the Solvency II capital results are
set out in note II (c) of Additional unaudited
financial information. The Group Solvency II
capital ratio is based on outputs from the
Group’s Solvency II internal model, approved
by Prudential Regulation Authority in
December 2015.
14 Before allowing for second interim ordinary
and special dividends.
15 Representing Solvency II own funds of the
UK with-profits funds.
16 Net of related charges to deferred acquisition
costs and tax.
17 Operating profit after tax and non-controlling
interests as percentage of opening
shareholders’ funds.
Prudential plc Annual Report 2015 www.prudential.co.ukChief Financial Officer’s report on our 2015 financial performance continued Group Chief Risk Officer’s report of the risks facing our business and how these are managed
Generating value while
maintaining an appropriate
risk profile
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 deliver
real value. We recognise that
we are implicitly committing to
customers that we will maintain
a healthy company, and are
there to meet our long-term
commitments to them.
From the shareholders’ perspective,
we generate value by selectively taking
exposures to risks that are adequately
rewarded and that can be appropriately
quantified and managed. The Group’s
approach is to retain risks where doing so
contributes to value creation, the Group
is able to withstand the impact of an adverse
outcome, and has the necessary capabilities,
expertise, processes and controls to manage
appropriately the risk.
In my report, I seek to explain the main risks
inherent in our business and how we manage
those risks, with the aim of ensuring we
maintain an appropriate risk profile.
Principles and objective
Prudential defines ‘risk’ 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. As such, material risks will be
retained only where this is consistent with
the Group’s risk appetite framework and its
philosophy towards risk-taking.
Risk governance
The organisational structures, reporting
relationships, delegation of authority, and
roles and responsibilities that Group Head
Office and the business units establish to
make decisions and control their activities
on risk-related matters form the foundation
of Prudential’s risk governance. Effective
risk governance encompasses individuals,
Group-wide functions and committees
involved in the management of risk.
Risk framework
The Group’s risk framework has been
developed to monitor and manage the risk
of the business at all levels and is owned by
the Board. The aggregate Group exposure
to market, credit, insurance, liquidity and
operational risks is monitored and
managed by the Group Risk function
whose responsibility it is to seek to
ensure the maintenance of an adequate
risk exposure and solvency position from
the Group economic, regulatory and
ratings perspectives.
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 and is based on the concept of the
‘three lines of defence’. These comprise
risk-taking and management, risk control
and oversight, and independent assurance.
‘We seek to retain only those risks
consistent with our risk appetite
with the aim of ensuring we deliver
on our long-term commitments to
our customers and shareholders.’
Penny James
Group Chief Risk Officer
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Group
risk profile
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Insur a n c e
Risks fro m o u r
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L iq uidit
The key risks inherent in the insurance and capital management operations of Prudential’s business:
Risks from our investments
Risks from our products
Risks from our business operations
Uncertainty around investment returns
can arise through credit risk via the
potential of defaults, and market risks
resulting from the volatility of asset values
as a result of fluctuations in equity prices,
interest rates, foreign exchange and
property prices. Liquidity risk is also a
key area of focus. Regular stress testing
is undertaken to ensure the Group is
able to generate sufficient cash resources
to meet financial obligations as they
fall due in business as usual and in
stress scenarios.
Insurance risk
The processes of determining the price of
our products and reporting the results of
our long-term business operations require
us to make a number of assumptions.
In common with other life insurers, the
profitability of our businesses depends on
a mix of factors including mortality and
morbidity levels and trends, persistency,
and claim inflation.
Operational risk
As a group, we are dependent on the
successful processing of a large number
of transactions, utilising various IT systems
and platforms across numerous and
diverse products.
We also operate under the ever-evolving
requirements set out by different
regulatory and legal regimes (including
tax), as well as utilising a significant number
of third parties to distribute products and
to support business operations; all of which
add to the complexity of the operating
model if not properly managed.
49
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc
Group Chief Risk Officer’s report of the risks facing our business and how these are managed continued
Risk mitigation and hedging
We manage our risk profile according to our desired acceptance of risk. To do this, Group Head Office and the business units maintain
risk registers that include details of the risks identified and of the controls and mitigating actions used in managing them. Our identified
keys risks are set out in the table below.
Key risks
Risk type
Risk definition
Risk management and mitigation
Market risk
Equity
Investment risk
Interest rates
Foreign exchange
Credit risk
Counterparty
Invested credit
Insurance risk
Mortality/longevity
Morbidity/health
Persistency
Medical expense
inflation risk
The risk of loss for our business, or
of adverse change in the financial
situation, resulting, directly or
indirectly, from fluctuations in the
level or volatility of market prices
of assets and liabilities.
The risk of loss for our business,
or of adverse change in the financial
situation, resulting from fluctuations
in the credit standing of issuers of
securities, counterparties and any
debtors in the form of default or other
significant credit event (eg downgrade
or spread widening).
The risk of loss for our 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 claim inflation.
Liquidity risk
The risk of the Group being unable
to generate sufficient cash resources
to meet financial obligations as they
fall due in business as usual and
stress scenarios.
— Market risk policy
— Risk appetite statements, limits and triggers in place
— Monitoring and oversight of market risks through the reporting
of regular management information
— Asset Liability Management programmes in place
— Use of derivative programmes
— Currency hedging of expected business unit remittances
— Credit risk policy
— Risk appetite statements and limits defined on an issuer/
counterparty/average credit quality of the portfolio basis
— Collateral arrangements in place for derivative transactions
— Group Credit Risk Committee oversight of credit and
counterparty credit risk and sector and/or name-specific reviews
— Close monitoring/restricting of investments that may be of concern
— Insurance and Underwriting risk policies
— Risk appetite statements, limits and triggers in place
— Longevity, morbidity and persistency assumptions reflect recent
experience and expectation of future trends; industry data and
expert judgement are used, where appropriate
— Reinsurance is used to mitigate longevity and morbidity risks
— Morbidity mitigated by appropriate underwriting when policies
are issued and claims received
— Persistency mitigated through improving quality of sales
processes and customer retention initiatives
— Medical expense inflation risk mitigated through regular
product re-pricing
— Liquidity risk policy
— Risk appetite statements, limits and triggers in place
— Monitoring of liquidity risk through regular management information
— Regular stress testing
— Liquidity contingency plans established and sources identified
— Ability to access the money and debt capital markets
— Access to external sources of finance through committed
credit facilities
Operational risk
Regulatory and
legislative compliance
Third-party
management
IT and information
(including
cyber security)
Business continuity
Business
environment risk
Strategic risk
50
The risk of loss (or unintended gain/
profit) arising from inadequate or
failed internal processes, or from
personnel and systems, or from
external events (other than those
external events covered under
Business Environment Risk).
— Operational risk and Outsourcing and Third-Party supply policies
— Corporate insurance programmes to limit the impact of
operational risks
— Scenario analysis for operational risk capital requirements,
which focus on extreme, yet plausible, events
— Internal and external review of cyber security capability
— Regular testing of elements of the disaster-recovery plan
Exposure to forces in the external
environment that could significantly
change the fundamentals that drive
the business’s overall strategy.
Ineffective, inefficient or inadequate
senior management processes for
the development and implementation
of business strategy in relation to
the business environment and the
Group’s capabilities.
— A Risk and Capital Plan that includes considerations
of current strategies
— Business environment and strategic risks closely monitored and
assessed for consideration in the business plans where appropriate
— Board strategy sessions consider risk themes
— Systemic Risk Management Plan which details the Group’s strategy
and risk management framework
— Recovery Plan which covers the Group’s corporate and risk
governance for managing a distressed environment, a range of
credible recovery options, and scenarios to assess the effectiveness
of these recovery options
Prudential plc Annual Report 2015 www.prudential.co.uk The drivers of each of the key risks vary by
business unit, and depend primarily on the
value of locally-held products.
Market risk
Investment risk
(Audited)
In Prudential UK, investment risk arising out
of the assets in the with-profits 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 the fund. The fund’s large inherited
estate – estimated at £7.6 billion1 as at
31 December 2015 on a Solvency II basis
– can absorb market fluctuations and
protect the fund’s solvency. The inherited
estate is partially protected against falls in
equity markets through an active hedging
programme within the fund.
In Asia, our shareholder exposure to
equities arises from unit-linked products
where revenue is linked to funds under
management and on its with-profits
businesses where bonuses declared are
broadly based on historical and current
rates of return on equity.
In Jackson, investment risk arises in relation
to the assets backing the policies. In the
case of ‘spread business’, including fixed
annuities, these assets are generally bonds
and our shareholder exposure comes from
the minimum asset return required to be
generated to meet the guaranteed rates
of return offered to policyholders. 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 the guarantees on
return on investments embedded in variable
annuity products. Shareholders’ exposure
to these guarantees is mitigated through a
hedging programme, as well as reinsurance.
Further measures have been undertaken
including re-pricing initiatives and the
introduction of variable annuities without
guarantees. Furthermore, it is our philosophy
not to compete on price; rather, we seek
to sell at a price sufficient to fund the cost
incurred to hedge or reinsure the risks and
to achieve an acceptable return.
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 significant under IFRS
reporting. The Jackson IFRS shareholders’
equity and US statutory capital are also
sensitive to the effects of policyholder
behaviour on the valuation of guarantees.
Interest rate risk
(Audited)
Long-term rates remain close to historic
lows. Products that we offer are sensitive
to movements in interest rates. We have
already taken a number of actions to de-risk
the in-force business as well as re-price
and restructure new business offerings
in response to historically low interest
rates. However, this remains an area of
sensitivity and persistently low rates may
impact policyholders’ savings patterns
and behaviour.
Interest rate risk arises in our UK business
from the need to match cash flows for
annuity payments with those from
investments; movements in interest
rates may have an impact on profits
where durations are not perfectly matched.
As a result, we aim to match the duration
of assets and liabilities as closely as
possible and the position is monitored
regularly. Under the European Union’s
Solvency II Directive, additional interest
rate exposure is created due to the nature
of the construction of this balance sheet,
such as the inclusion of the risk margin.
The UK business continually assesses
the need for any derivative overlays in
managing this sensitivity. The with-profits
business is exposed to interest rate risk
as a result of underlying guarantees. Such
risk is largely borne by the with-profits
fund, but shareholder support may be
required in extremis.
In Asia, exposure to interest rate risk arises
from the guarantees of some non-unit-
linked investment products. This exposure
arises because it may not be possible to
hold assets which will provide cash flows to
match exactly those relating to policyholder
liabilities. While this residual asset/liability
mismatch risk can be managed, it cannot
be eliminated.
Jackson is exposed to interest rate risk in
its fixed, fixed index and variable annuity
books. Movements in interest rates can
influence the cost of guarantees in such
products, in particular the cost of
guarantees may increase when interest
rates fall.
Interest rate risk across the entire business
is managed through the use of interest rate
swaps, interest rate options and hybrid
options (options protecting against
simultaneous decreases in equity values
and interest rates).
Foreign exchange risk
(Audited)
We principally operate in Asia, the US and
the UK. The geographical diversity of our
businesses means that we are inevitably
subject to the risk of exchange rate
fluctuations. Our operations in the US
and Asia, which represent a significant
proportion of our operating profit and
shareholders’ funds, generally write
policies and invest in assets denominated
in local currencies. Although this practice
limits the effect of exchange rate
fluctuations on local operating results, it
can lead to significant fluctuations in our
consolidated financial statements when
results are expressed in UK sterling.
We retain revenues locally to support
the growth of our business and capital is
held in the local currency of the business
to meet local regulatory and market
requirements, accepting the accounting
balance sheet translation risks this can
produce. However, in cases where a
surplus arising in an overseas operation
supports Group capital or where a
significant cash remittance is due from
an overseas subsidiary to the Group, this
exposure is hedged where we believe it is
economically optimal to do so. We do not
have appetite for significant shareholder
exposure to foreign exchange risks in
currencies outside the local territory.
Where this arises, currency borrowings,
swaps and other derivatives are used to
manage exposures.
Credit risk
(Audited)
We invest in fixed income assets in order
to match policyholder liabilities and enter
into reinsurance and derivative contracts
to mitigate various types of risk. As a result,
we are exposed to credit and counterparty
credit risk across our business. We employ
a number of risk management tools to
manage credit risk, including limits defined
on an issuer/counterparty basis as well as
on average credit quality to seek to ensure
the diversification of the portfolio and
have in place collateral arrangements in
derivative transactions. The Group Credit
Risk Committee oversees credit and
counterparty credit risk across the Group
and conducts sector and/or name-specific
reviews as required. In particular, in 2015,
it has conducted sector reviews in the
banking, commodities and energy sectors.
Debt and loan portfolio
(Audited)
Our UK business is primarily exposed to
credit risk in the shareholder-backed
portfolio, with fixed income assets of
£32.1 billion. Credit risk arising from a
further £44.5 billion of fixed income assets
is largely borne by the with-profits fund,
although, in extremis, shareholder support
may be required should the with-profits
fund become unable to meet its liabilities.
The debt portfolio of our Asia business
totalled £28.3 billion at 31 December 2015.
Of this, approximately 68 per cent was in
unit-linked and with-profits funds with
minimal shareholder risk. The remaining
32 per cent is shareholder exposure.
Credit risk arises in the general account
of our US business, where £34.1 billion
of fixed income assets back shareholder
liabilities including those arising from
fixed annuities, fixed index annuities
and life insurance.
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The shareholder-owned debt and loan
portfolio of the Group’s asset management
operations of £2.2 billion as at
31 December 2015 is principally related to
Prudential Capital operations. Prudential
Capital generates revenue by providing
bridging finance, managing investments
and operating a securities-lending and
cash-management business for the
Prudential Group and our clients.
Certain sectors have seen specific pressure
during 2015 and into early 2016. The
Group’s credit exposure to the oil and gas
sector represents approximately 4 per cent
or £3.1 billion of the shareholder credit
portfolio. Prolonged, depressed oil prices
are expected to exert downward rating
pressure within the sector, which is being
monitored closely through Group risk
processes and the Group Credit Risk
Committee. The Group’s credit exposure
to the metal and mining sector represents
1 per cent of the total shareholder debt
portfolio (£78 billion). Similarly, this 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 financial
statements.
Group sovereign debt
(Audited)
Sovereign debt represented 17 per cent or
£12.8 billion of the debt portfolio backing
shareholder business at 31 December 2015
(31 December 2014: 15 per cent or
£11.0 billion). 44 per cent of this was
rated AAA and 94 per cent investment
grade (31 December 2014: 43 per cent
AAA, 95 per cent investment grade).
At 31 December 2015, the Group’s
shareholder-backed business’s holding
in Eurozone sovereign debt2 was
£546 million. 75 per cent of this was AAA
rated (31 December 2014: 82 per cent
AAA rated). We do not have any sovereign
debt exposure to Greece.
Bank debt exposure
and counterparty credit risk
(Audited)
Our bank exposure is a function of our
core investment business, as well as of the
hedging and other activities undertaken to
manage our various financial risks. Given
the importance of our relationship with our
banks, exposure to the banking sector is
a key focus of management information
provided to the Group’s risk committees
and the Board.
The exposures held by the shareholder-
backed business and with-profits
funds in sovereign debt and bank debt
52
securities at 31 December 2015 are
given in note C3.3(f) of the Group’s IFRS
financial statements.
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. At 31 December
2015, shareholder exposure to corporate
debt by rating and sector is shown below:
— 95 per cent of the shareholder portfolio
is investment grade rated. In particular,
67 per cent of the portfolio is rated A-
and above3.
— The Group’s shareholder portfolio is
well diversified: no individual sector
makes up more than 10 per cent of the
total portfolio (excluding the financial
and utilities sectors).
Insurance risk
(Audited)
Insurance risk constitutes a sizeable
proportion of the Group’s exposure; the
profitability of our businesses depends
on a mix of factors including mortality
and morbidity levels and trends,
persistency, investment performance
and claim inflation.
Longevity risk (people’s propensity to live
longer) is a significant contributor to our
insurance risk exposure and is also capital
intensive under the Solvency II regime.
One tool used to manage this risk is
reinsurance. During 2015, we completed
deals on a number of tranches of bulk and
retail annuity liabilities when terms were
sufficiently attractive and aligned with our
risk management framework. The recently
enhanced pensions freedoms in the UK
have greatly reduced the demand for retail
annuities and further liberalisation is
anticipated. However, given our significant
UK annuity portfolio, the assumptions that
we make about future rates of mortality
improvement will remain key to the
measurement of insurance liabilities and
to the assessment of any subsequent
reinsurance transactions.
We continue to conduct research into
longevity risk using both experience from
our annuity portfolio and industry data.
Although the general consensus in recent
years is that people are living longer, there
remains considerable volatility in year-on-
year longevity experience, which is why
we need expert judgement in setting our
longevity assumptions.
Shareholder exposure to corporate
debt by rating
5%
11%
27%
24%
33%
AAA
AA
A
BBB
BB or below, or non-rated assets
Shareholder exposure by sector
12%
21%
5%
9%
8%
2%
3%
5%
5%
4%
8%
18%
Financial
Mortgage securities
Utilities
Government
Consumer, non-cyclical
Communications
Industrial
Energy
Consumer, cyclical
Asset-backed securities
Real estate
Others
Morbidity risk is mitigated by appropriate
underwriting when policies are issued
and claims are received. Our morbidity
assumptions reflect our recent experience
and expectation of future trends for each
relevant line of business.
In Asia, a key assumption is the rate of
medical inflation, typically in excess of
general price inflation. This is the risk that
the expenses of medical treatment increase
more than expected, so that the medical
claim cost passed on to Prudential is much
higher. Medical expense inflation risk is
Prudential plc Annual Report 2015 www.prudential.co.uk best mitigated through retaining the right
to re-price our products each year and by
having suitable overall claim limits within
our policies, either limits per type of claim
or in aggregate across policies.
Our persistency assumptions similarly
reflect recent experience for each relevant
line of business, and future expectations.
Persistency risk is mitigated by appropriate
training and sales processes and managed
locally post-sale through regular experience
monitoring and the identification 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. Modelling this ‘dynamic’ policyholder
behaviour is particularly important when
assessing the likely take-up rate of options
embedded within product features.
Liquidity risk
(Audited)
The Group has significant internal sources of
liquidity which are sufficient to meet all of its
expected requirements, for a period of at
least 12 months from the date the financial
statements are approved, without having to
make use of external funding. In aggregate,
the Group currently has £2.6 billion of
undrawn committed facilities, expiring in
2020. 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 are assessed to be sufficient.
Operational risk
(Unaudited)
The Group does not actively seek to
take operational risk to generate returns.
Instead, it accepts a level of risk whereby
the controls in place should prevent material
losses, but should also not excessively
restrict business activities. Direct and/or
indirect financial losses are likely to arise
if there is a failure to develop, implement
and monitor appropriate controls.
For each business unit, accountabilities for
operational risk management and oversight
are based on the principles of the ‘three
lines of defence’ model of risk-taking and
management, risk control and oversight,
and independent assurance. The approach
adopted is proportional to the size, nature
and complexity of the business unit and
the risks it manages.
We have an operational risk management
framework in place that facilitates both
the qualitative and quantitative analysis of
operational risk exposures. The output of
this framework, in particular management
information on key operational risk and
control assessments, scenario analysis,
internal incidents and external incidents,
is reported by the business units and
presented to the Group Operational
Risk Committee.
This information also supports business
decision-making and lessons-learned
activities, the ongoing improvement of the
control environment, and determination
of the adequacy of our corporate
insurance programme.
Top operational risks
Key areas of focus within the operational
risk framework are:
— The risk of non-compliance due to the
momentum of regulatory change in both
our developed and developing markets,
as well as recognising that Prudential’s
designation as a Global Systemically
Important Insurer which requires the
Group to comply with additional policy
measures including enhanced
Group-wide supervision;
— The risk of improper, or mis-selling of
Prudential products and the resulting risk
of censure from local regulators;
— The risk of regulatory censure due to
poor conduct or weaknesses in systems
and controls;
— The risk of censure for money laundering,
sanctions or anti-bribery and corruption
failures;
— The risk that reliance on IT infrastructures
which support core activities/processes
of the business, could fail or otherwise
negatively impact business continuity and
scalability needed to support the growth
and changing needs of the business;
— The risk of a significant failure of a
third-party provider impacting critical
services;
— The risk of trading, transacting or
modelling errors having a material cost
across Group;
— The risk of the Group failing to attract
and retain quality senior managers and
other key employees;
— The risk that key people, processes and
systems are unable to operate (thus
impacting the on-going operation of the
business) due to a significant unexpected
external event occurring (eg a pandemic,
terrorist attack, natural disaster, political
unrest); and
— The risk of losses resulting from damage
to the firm’s reputation. This can be either
real or perceived reputational damage
but which could nevertheless diminish
the standing of the organisation in the
eyes of key stakeholders (eg customers,
shareholders), destroy shareholder value,
adversely impact revenues or result in
significant costs to rectify.
Cyber security
Cyber security is an increasingly important
risk facing the Group. The risk is that a
member of the Group could be the target
of a cyber-related attack which could result
in disruption to the key operations, make it
difficult to recover critical services, damage
assets, and compromise data (both corporate
and customer). This is a global issue which
is rising in prominence across the financial
services industry. As a result of Prudential’s
increasing market profile, the growing
interest by customers to interact with their
insurance provider and asset manager
through the internet and social media,
improved brand awareness and the
classification of Prudential as a Global
Systemically Important Insurer, there is
an increased likelihood of Prudential being
considered a target by cyber criminals.
A number of industry, company-wide and
local business unit-specific initiatives are
underway in response to this risk.
Business environment
and strategic risks
(Unaudited)
Global regulatory and political risk
There are a number of ongoing policy
initiatives and regulatory developments that
are having, and will continue to have, an
impact on the way Prudential is supervised.
These include addressing Financial
Conduct Authority reviews, on-going
engagement with the Prudential Regulation
Authority and includes the work of the
Financial Stability Board and standard-
setting institutions such as the International
Association of Insurance Supervisors.
The International Association of Insurance
Supervisors has various initiatives. On
18 July 2013, it published a methodology
for identifying Global Systemically Important
Insurers, and a set of policy measures that
will apply to them, which the Financial
Stability Board endorsed. Groups designated
as a Global Systemically Important Insurer are
subject to additional regulatory requirements,
including enhanced group-wide supervision,
effective resolution planning, development
of a Systemic Risk Management Plan,
a Recovery Plan and a Liquidity Risk
Management Plan. Prudential’s designation
as a Global Systemically Important Insurer
was reaffirmed on 3 November 2015.
Prudential is monitoring the development
and potential impact of the 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 Global
Systemically Important Insurer.
The Global Systemically Important Insurer
regime also introduces two types of capital
requirements. The first, a Basic Capital
Requirement, is designed to act as a
minimum group capital requirement; and
the second, a Higher Loss Absorption
requirement reflects the drivers of the
assessment of Global Systemically Important
Insurer designation. The International
Association of Insurance Supervisors
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intends for these requirements to take
effect from January 2019, but Global
Systemically Important Insurers will be
expected to report privately to their
group-wide supervisors in the interim.
The International Association of Insurance
Supervisors is also developing a Common
Framework (ComFrame) which is focused
on the supervision of large and complex
Internationally Active Insurance Groups.
ComFrame will establish a set of common
principles and standards designed to assist
regulators in addressing risks that arise
from insurance groups with operations in
multiple jurisdictions. As part of this, work
is underway to develop a global Insurance
Capital Standard that would apply to
Internationally Active Insurance Groups.
Once the development of the Insurance
Capital Standard has been concluded, it is
intended to replace the Basic Capital
Requirement as the minimum group capital
requirement for Global Systemically
Important Insurers. Further consultations
on the Insurance Capital Standard are
expected over the coming years and a
version of the Insurance Capital Standard
is expected to be adopted as part of
ComFrame in late 2019.
The International Association of Insurance
Supervisors’ Insurance Core Principles,
which provide a globally accepted
framework for the supervision of the
insurance sector and ComFrame evolution,
are expected to create continued
development in both prudential and
conduct regulations over the next two to
three years, particularly in the emerging
markets of Asia.
The European Union’s Solvency II Directive
came into effect on 1 January 2016. The
European Commission will review elements
of the Solvency II legislation from 2016
onwards including a review of the Long Term
Guarantee measures by 1 January 2021.
Similar national and regional efforts to curb
systemic risk and promote financial stability
are also underway in certain jurisdictions
in which Prudential operates, including
the Dodd-Frank Wall Street Reform and
Consumer Protection Act in the US, and
other European Union legislation related
to the financial services industry.
The UK government has committed to
holding a ‘remain/leave’ referendum on EU
membership which will be held on 23 June
2016. The possible withdrawal of the UK
from the EU would have political, legal and
economic ramifications for both the UK
and the EU, although these are expected to
be more pronounced on the UK.
In the US, the implementation of the
Department of Labor proposal to introduce
new fiduciary obligations for distributors
of investment products to holders of
regulated accounts would dramatically
reshape the distribution of retirement
products. If approved, the final rule could
be in place in 2016. Jackson’s strong
relationships with distributors, history of
product innovation and efficient operations
should help mitigate any impacts.
Emerging risks
(Unaudited)
Generally, emerging risks are qualitative in
nature and are not amenable to modelling
using statistical techniques. The emerging
risk identification process at Prudential seeks
to leverage the expertise of the organisation
through a combination of top-down and
bottom-up assessments of risks. Following
two years of development, the emerging risk
identification process is now well-embedded
across the Group.
The use of ‘brainstorming’ sessions at various
levels of the organisation is used as a central
pillar of the emerging risk identification
process to identify, develop and challenge
potential emerging risks. Input is also
taken from external speakers, forums
and databases.
The Group has also sought to maintain
contacts with industry experts and peers
to benchmark and refine the emerging
risk-management process. For example,
Prudential has been a member of the
Emerging Risk Initiative at the CRO Forum for
two years, and chaired this initiative for 2015.
Risk factors
(Unaudited)
Our disclosures covering risk factors can
be found at the end of this document.
Risk management
cycle and governance
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.
Group risk framework page 84
Risk management cycle and governance
Risk identification covers Group-wide:
— Top-down risk identification
— Bottom-up risk identification
— Emerging risk identification
n
Risk identifi c a ti o
Risk reports are provided to the Group
Executive Risk Committee, Group
Risk Committee and Board which include
updates on exposure against Board-
approved risk appetite statements and limits.
Risk reports also provide updates on the
Group top risks.
Risk
management
cycle
M
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54
Risk m
and a
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a
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Risks are assessed in terms of materiality.
Material risks which are modelled are
included in capital models, including
E-Cap.
Risks which cannot be quantified are
assessed qualitatively.
Risk processes that support the
management and controlling of risk
exposures include:
— Risk appetite and limits
— Financial Incidents Procedures
— Large Risk Approval Process
— Global Counterparty Limit Framework
— Own Risk and Solvency Assessment
— Reverse Stress Testing
Prudential plc Annual Report 2015 www.prudential.co.uk Risk identification
(Unaudited)
The Group’s risk profile is a robust
assessment of the principal risks facing the
Group, including those that would threaten
its business model, future performance,
solvency or liquidity. The risk profile is a
key output from the risk identification and
risk measurement processes, and is used
as a basis for setting Group-wide limits,
management information, assessment
of solvency needs, and determining
appropriate stress and scenario testing.
An annual ‘top-down’ identification of our
key risks assesses the risks that have the
greatest potential to impact the Group’s
operating results and financial condition.
The bottom-up approach of risk identification
is more granular and refers to the processes
by which the business units identify, assess
and document risks, with the appropriate
coordination and challenge from the
risk functions.
The Group Own Risk and Solvency
Assessment Report pulls together the
analysis performed by a number of risk and
capital management processes, which are
embedded across the Group, and provides
quantitative and qualitative assessments of
the Group’s risk profile, risk management
and solvency needs on a forward-looking
basis. The scope of the Group Own Risk
and Solvency Assessment Report covers
the full known risk universe of the Group.
In accordance with provision C.2.1 of
the UK Corporate Governance Code,
the directors have performed robust
assessment of the principal risks facing the
Company, through the Group Own Risk
and Solvency Assessment Report and the
risk assessments completed as part of
the business planning review including
how they are managed and mitigated
given in this Chief Risk Officer’s report.
Insurers are also required to undertake
Reverse Stress Testing, which requires firms
to work backwards from an assumed point
of business model failure, to identify the
stress scenarios that could result in such
adverse outcomes. Each firm must then
consider whether the likelihood of these
scenarios, taking into account likely
management actions, is consistent with its
risk appetite and, if not, must initiate actions
to address any inconsistencies. The actions
considered form a part of our Recovery Plan.
Risk measurement and assessment
(Unaudited)
All identified risks are assessed based on
an appropriate methodology for that risk.
All quantifiable risks which are material and
mitigated by holding capital are modelled
in the Group’s Internal Model, which is
used to determine capital requirements
under the Solvency II Pillar 1 and economic
capital bases. Governance arrangements
are in place to support the internal model.
This includes independent validation and
process and controls around model
changes and limitations.
Manage and control
(Unaudited)
The control procedures and systems
established within the Group are designed
to manage the risk of failing to meet
business objectives. This can of course
only provide reasonable and not absolute
assurance against material misstatement
or loss. They focus on aligning the levels
of risk-taking with the achievement of
business objectives.
The management and control of risks are
set out in the Group risk policies. These risk
policies define:
— The Group’s risk appetite in respect of
material risks, and the framework under
which the Group’s exposure to those
risks is limited;
— The processes to enable Group senior
management to effect the measurement
and management of the Group material
risk profile in a consistent and coherent
way; and
— The flows of management information
required to support the measurement
and management of the Group material
risk profile and to meet the needs of
external stakeholders.
Monitoring and reporting
(Unaudited)
The management information received by
the Group Risk Committees and the Board
is tailored around the risks identified in the
annual ‘top-down’ process, and also covers
ongoing developments in other key and
emerging risks.
Risk appetite and limits
(Unaudited)
The extent to which the Group is willing to
take risk in the pursuit of its objective to
create shareholder value is defined by a
number of risk appetite statements,
operationalised through measures such as
limits, triggers and indicators.
Risk appetite has been set at a Group
aggregate level and by risk type, and
covers all risks to shareholders, including
those from participating and third-party
business. The qualitative statements are
operationalised down to the local business
units through measures such as limits,
triggers and indicators, and cover the
most significant exposures to the Group,
particularly those that could impact the
Group’s aggregate risk appetite metrics.
The Group Risk function is responsible for
reviewing the scope and operation of these
measures at least annually, to determine that
they remain relevant. On the recommendation
of the Group Risk Committee, the Board
approves all changes made to the Group’s
risk appetite framework.
We define and monitor aggregate risk
limits based on financial and non-financial
stresses for our earnings volatility, liquidity
and capital requirements as follows:
Earnings volatility:
The objectives of the aggregate risk limits
seek to manage that:
— The volatility of earnings is consistent
with the expectations of stakeholders;
— The Group has adequate earnings (and
cash flows) to service debt, expected
dividends and to withstand unexpected
shocks; and
— Earnings (and cash flows) are managed
properly across geographies and are
consistent with funding strategies.
The two measures used to monitor the
volatility of earnings are IFRS operating
profit and EEV operating profit, although
IFRS and EEV total profits are also
considered.
Liquidity:
The objective is to monitor that the Group
is able to generate sufficient cash resources
to meet financial obligations as they fall due
in business as usual and stressed scenarios.
Capital requirements:
The limits aim to manage that:
— The Group meets its internal economic
capital requirements;
— The Group achieves its desired target
rating to meet its business objectives;
and
— Supervisory intervention is avoided.
The two measures used to define the limits
are Solvency II capital requirements and
internal economic capital requirements.
In addition, outside the UK, capital
requirements are monitored on local
statutory bases.
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 diversification benefits. This
assessment provides valuable insights
into our risk profile and for continuing
to maintain a strong capital position.
With the introduction of Solvency II, the
existing European Union Insurance Group
Directive’s risk appetite statement has
been replaced with a Solvency II Pillar 1 risk
appetite. As part of our annual business
planning cycle the risk appetite framework
plays an integral role. 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 from
our local business units to calculate the
Group’s aggregated position (allowing
for diversification effects between local
business units) relative to the aggregate
risk limits.
55
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Group Chief Risk Officer’s report of the risks facing our business and how these are managed continued
Risk policies
(Unaudited)
Risk policies set out specific requirements
for the management of, and articulate
the risk appetite for, key risk types. There
are core risk policies for credit, market,
insurance, liquidity and operational risks
and a number of internal control policies
covering, internal model risk, underwriting,
dealing controls and tax risk management.
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 maintain in line
with the UK Corporate Governance Code
and the Hong Kong Code on Corporate
Governance Practices.
Risk culture
(Unaudited)
The increasing regulatory focus on market
participants instilling corporate cultures
that support prudent management and
outcomes for consumers is indelibly
linked to what we do and how we do it.
The ‘risk culture’ (as a subset of the broader
business culture) is reflected in the values
and behaviours the Group displays when
managing risk. It therefore permeates
throughout the Group’s Risk Framework
and governance processes.
The Group promotes a responsible risk
culture in three main ways:
— By the leadership and behaviours
demonstrated by management;
— By building skills and capabilities to
support risk management; and
— By including risk management (through
the balance of risk with profitability and
growth) in the performance evaluation
of individuals.
Senior management leadership
Senior management promote a responsible
culture of risk management by emphasising
the importance of balancing risk with
profitability and growth in decision making,
while seeking to ensure compliance with
regulatory requirements and internal
policies. As part of this, they encourage all
employees to be risk-aware and to take
personal responsibility for identifying and
helping to address risk issues.
Building skills and capabilities
The Group works to build skills and
capabilities in risk management, which are
needed by both senior management and
risk management specialists, while attempting
to allocate scarce resources appropriately.
Performance management
The Group includes risk management
measures that balance risk taken with
profitability and growth achieved in the
performance evaluation of key individuals,
including both senior management and
those directly responsible for risk
management (objectives may be
quantitative or qualitative as appropriate).
The remuneration strategy at Prudential
is designed to be consistent with its risk
appetite, and the Group Chief Risk Officer
advises the Group Remuneration
Committee on adherence to our risk
framework and appetite.
Viability statement
In accordance with provision C.2.2 of the
UK code, the directors have assessed the
prospects of the Company and the Group
by reference to the three-year planning
period to December 2018. The Group
prepares a business plan annually covering
a three-year period on a rolling basis. This
plan covers projected performance with
regards to profitability, cash generation,
the capital position of the Group and
the parent company’s liquidity over this
three-year period. The Group’s risk
appetite framework forms an integral part
of the annual business plan. The financial
performance, capital, and liquidity
positions over the plan period are tested
against the Group’s risk appetite statements
which are set by the Board to ensure the
ongoing viability of the Group. They are
also subjected to other stress scenarios,
such as substantial declines to interest
rates and equity markets based on a
macroeconomic assessment for each
period, so as to evaluate the Group’s
resilience to significant deteriorations in
market conditions and other shock events.
The impact on the business of known
areas of regulatory change whose financial
implications can be reasonably quantified
is also considered as part of the plan.
In making the assessment, the directors
have taken into account the Group’s
current position and the potential impact
of the principal risks faced by the Group.
The Group’s business activities and the
factors likely to affect its future development,
successful performance and position in
the current economic climate are set out
on pages 4 to 35. The risks facing the
Group’s capital and liquidity positions
and their sensitivities are referred to on
pages 45 to 54.
56
Based on this assessment, the directors
have a reasonable expectation that the
Company and the Group will be able to
continue in operation and meet their
liabilities as they fall due over the three-
year plan period to December 2018.
In addition to these considerations, the
directors regularly consider strategic
matters that may affect the longer-term
prospects of the Group. Further, the Group
as a whole, and each of its life assurance
operations, are subject to extensive
regulation and supervision, which are
designed primarily to reinforce the
Company’s management of its long-term
solvency, liquidity and viability to ensure
that it can continue to meet obligations
to policyholders.
In particular, the Group and UK insurance
subsidiaries are subject to the capital
adequacy requirements of the European
Union Solvency II regulatory basis as
implemented by the Prudential Regulation
Authority in the UK. Capital requirements
for the Group’s other subsidiaries are also
monitored on their local regulatory bases.
In addition to these external capital
metrics, the Group uses an internal
economic capital assessment to monitor
its capital requirements across the Group.
Further details on the capital strength
of the Group are provided on pages 45
and 46.
Notes
1 Representing Solvency II own funds of the UK
with-profits funds.
2 Excludes Group’s proportionate share in joint
ventures and unit-linked assets and holdings
of consolidated unit trust and similar funds.
In the ‘Shareholder exposure by rating’,
75 per cent of non-rated assets are internally
rated, privately held loans.
3
Prudential plc Annual Report 2015 www.prudential.co.uk Corporate responsibility review
Helping build
strong communities
Performance highlights
total community investment
£21.7m
51,979 hours
volunteered by employees
across the Prudential Group
‘Our businesses provide social and
economic benefits to communities
around the world. Through our
corporate responsibility activities
and using our resources and the
skill and energy of our employees,
we provide benefits to customers,
communities and the environment.’
Paul Manduca
Chairman
Our corporate responsibility strategy
Our Group approach to corporate
responsibility is underpinned by
four global principles:
— Serving our customers;
— Valuing our people;
£519,826
donated by employees through
payroll giving across the Group
We aim to provide fair
and transparent products that
meet our customers’ needs
— Supporting local communities; and
Page 58
— Protecting the environment.
u r
e r s
Servin g o
custo m
V
a
l
u
p
i
n
e
o
g o
p
le
ur
Prudential provides solutions
that address the biggest
financial dilemmas people
face. Whether it’s the need for
income in old age, support for
children’s education or
for protection in case the main
household earner becomes ill,
we offer solutions targeting
each of these potentially life-
changing events, based on
our long-term approach to our
customers and our business.
This purpose, and this long-term approach,
is reinforced by our Group-wide corporate
responsibility strategy. Through our
corporate responsibility programmes around
the world we help to build stronger and more
sustainable communities, and in the process
provide benefits to our customers, our
colleagues and the environment.
We seek to make a positive
contribution to our communities
through long-term partnerships
with charitable organisations
that make a real difference
Su
co
p
p
m
o
r
ti
m
n
u
n
g
l
o
i
t
i
c
e
a
s
l
Page 61
Long-term
sustainable
value
r
P
e
o te cting th
v iro n m ent
n
e
We aspire to retain and develop
highly engaged employees
We take responsibility for the
environment in which we operate
Page 59
Page 64
57
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Our Group approach to corporate
responsibility is underpinned by four
global 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 principles provide a framework
within which our businesses shape their
own individual corporate responsibility
goals – our strong belief is that corporate
responsibility is best managed and
delivered by those closest to the
customer and local stakeholders.
This review gives an overview of our
activities and progress in 2015. More
detailed information is available online at
www.prudential.co.uk/corporate-
responsibility
Serving our customers
Prudential has been meeting people’s
needs for more than 167 years and today
we serve 24 million insurance customers
across four continents.
We offer solutions for customers as they
face the biggest financial challenges of
their lives. Those issues vary in different
parts of the world, and in each of our
businesses we are focused on providing for
a distinct set of customers’ needs. Those
are: the significant and growing demand
for saving and protection of the middle
class in Asia, the retirement income needs
of baby boomers in the US, the financial
requirements of the UK’s ageing population,
which needs both to save more and to
access secure income in retirement, and
the growing needs of customers in our
new markets in Africa.
We want our customers to stay with us
for the long term. This means we must
proactively listen to them to understand
and respond to their changing needs,
and maintain their trust in us with fair,
transparent products and service.
We achieve this by not only delivering
consistent performance from all our
businesses, year in and year out, but
also by ensuring that performance is
sustained over the long term.
58
Asia
In Asia, we focus our efforts on helping
our customers build better futures for
themselves and their families, by helping
to fill the savings and protection gap that
exists in many countries in the region.
The extent of this gap is clear. In terms
of protection, in Asia overall 42 per cent
of healthcare spend is out-of-pocket, with
this figure reaching 56 per cent in some
markets, compared with 12 per cent in
the US and 9 per cent in the UK.
While in Asia savings represent 44 per cent
of GDP, compared with 18 per cent in the
US and 13 per cent in the UK, 60 per cent
of assets in Asia are held in cash, compared
with 31 per cent in the US and 26 per cent
in the UK. These figures illustrate the
shortfall in both protection and savings
opportunities in the region, and our
products and services are designed to
help make up that shortfall.
Before launching any initiative, we always
listen to and understand our customers’
needs. This allows us to propose financial
solutions customised for different groups,
whether that is young parents or middle-
aged people providing for their extended
family, for example. Prudential Corporation
Asia introduced a number of tailored
products and services to meet our
customers’ changing needs in 2015.
With cancer survival rates increasing in
Hong Kong and the region, PRUhealth
cancer multi-care was launched to address
anxieties about the financial impacts of
multiple cancer strikes. This plan serves
customers with the right support exactly
when they need it most.
Prudential Singapore’s PRUCover Total
Refund is designed to provide much-needed
security and reassurance for customers
during times of crisis. In the event of critical
illness, customers can focus on improving
their health while being assured that they
have the financial support to see them
through this stressful time. The affected
customer will receive a lump sum payout
as well as a waiver of future premiums,
while also continuing to receive coverage
for death and terminal illness. In the event
of accidental death, family members of the
policyholder will receive a payout of three
times the sum assured. PRUCover Total
Refund also rewards those who have
remained in good health. If customers
do not have claims on the Critical Illness
Benefit, they will receive a refund on the
total premiums paid at the end of the
policy term.
Prudential Thailand introduced a new
series of unit-linked plans that allow
customers to accumulate wealth through
regular premium contributions. Varying
unit allocation and life protection coverage
is available depending on the customers’
needs. This series allows customers who
have protection needs to enjoy life
protection coverage as high as 30 times the
annual premium and still be able to benefit
from the asset appreciation. To further
strengthen the unit-linked platform, the
fund choices have been expanded by
offering foreign investment funds in order
to better meet different customers’ needs
and risk appetite.
Meanwhile, Prudential Hong Kong’s
Customer Day puts customers’ needs at
the forefront. During the event, a facilitator
asks customers about their experiences
with Prudential, with customers sharing
many insightful comments. Around 200
managers and senior management
attended the inaugural Customer Day,
interacting with customers to answer
questions and gain further insight into
what customers think and how they feel.
US
Prudential’s US operation develops and
distributes products that seek to address
the retirement needs of its more than
four million contract-holders and provide
them with security through the ups and
downs of financial market cycles. Jackson
offers a diverse range of variable, fixed and
fixed-index annuity products, designed
with a variety of custom options to fit
different financial goals.
Many Americans are approaching
retirement with inadequate resources.
Private defined-benefit pension plans are
disappearing, government defined-benefit
plans are underfunded, and social security,
whose long-term status is in question, was
never intended to be the primary
retirement plan. At the same time,
increasing life expectancy and the
difficulty for individual investors in
capturing market returns have added to the
pressure on retirement resources. The low
interest-rate environment presents extra
challenges, hindering the growth of
savings and the ability to generate income
from savings.
Retirees need access to equity market
growth, protection of their principal, a
way of converting savings into retirement
income and a degree of certainty. The
variable annuities that Jackson offers can
provide both guaranteed income and
access to market growth. They are a way
for investors to access guaranteed income
for life, making them in effect a defined-
benefit plan for the 21st century.
Prudential plc Annual Report 2015 www.prudential.co.ukCorporate responsibility review continued Jackson’s Elite Access is a variable annuity
that enhances traditional investing through
diverse investment options, access to
portfolios previously unavailable to retail
investors, and tax advantages that 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 to their
investment risk appetite.
Jackson has launched a new tool to support
Elite Access, the Elite Access 1:1 Video
Presenter. This is an interactive and
personalised multi-media experience
created to enable Jackson wholesalers to
engage key audiences and help advisers
grow their business. The tool features
adviser-facing and client-facing versions.
From the moment an adviser or investor
engages with the video, they are met with
a user experience that is focused entirely
on them, which is what makes this tool
unique. It is centred on meeting the
needs of the audience and providing an
experience that is led by the individual.
The business is proactively strengthening
relationships and creating a distinctive
presence in the market.
Jackson has a long history of providing
premier service to the producers and
clients who interact with the Company
every day. As part of the Company’s
ongoing commitment to exceeding best
practices and delivering top-quality
service, Jackson introduced the new
Beyond World Class Service eLearning
training module in 2015. The module poses
everyday service scenarios to prepare
and educate operations associates how
to best answer producer and client service
requests. The training has been designed
to help employees better understand how
and why the business measures the quality
of performance through the eyes of
external customers. It focuses on the
impact of poorly-handled service issues
and allows employees to practise
identifying and reporting service
experiences through real case studies.
The module presents an actor-driven,
service-recovery scenario from the
perspective of the producer, employee,
customer service support and distribution
teams. The two-part module showcases
how service experiences impact Jackson’s
business through real-life re-enactment,
showing the employee how the service
call has gone wrong, followed by practice
scenarios. Scenarios are pulled directly
from trending reports to help associates
identify the issue, select an appropriate
resolution and flag the experience to
complete the exercise. This will ensure
employees are trained in how best to meet
producer and client expectations and
understand how to handle an experience
if they are dissatisfied.
UK and Europe
The UK’s pension and retirement income
system underwent significant reform
during 2015. Known as pension freedoms,
the reforms give consumers greater
flexibility to access their pension savings
in retirement. Prudential reacted quickly
when the reforms were announced in the
March 2014 Budget, committing significant
resources to ensure that our processes
facilitated the new regime when it launched
just over a year later in April 2015.
In the past year the business made two
significant enhancements that have
broadened access to products. The Flexible
Retirement Plan was enhanced to include
the introduction of a Flexible Drawdown
option in advance of April’s pension
reforms. Further developments were
introduced in September 2015, when a
non-advised flexible drawdown plan, the
Pension Choices Plan, was introduced
for those clients who choose not to be
advised. PruFund, the business’s flagship
multi-asset investment range, was made
available through an ISA wrapper for the
first time in February 2015.
As part of Prudential UK & Europe’s
commitment to placing the customer at
the heart of everything they do, Prudential
also began the rollout of the new MyPru
online service, which allows UK customers
to take greater control of their products
online without having to make direct contact.
The drive to continually improve customer
service quality has, once again, been
reflected in Prudential UK & Europe’s
continued success in the Financial Adviser
Service Awards, which are voted on by
financial advisers. In 2015, Prudential
secured the Company of the Year Award
for the first time, while retaining its coveted
Five Star ratings in the Life and Pensions
and Investments categories for the fifth
consecutive year.
Asset management
M&G, Prudential’s UK and European
asset management business, is a long-term,
active investor that takes seriously its
responsibilities as a steward of clients’
assets, often working closely with the
management of the companies in which
we invest. M&G’s investment teams
incorporate environmental, social and
governance (ESG) factors into investment
analysis and decision-making processes,
wherever they have a meaningful impact
on risk or return. Active voting is an integral
part of the investment approach, both
adding value and protecting our interests
as shareholders. The M&G website
provides an overview of voting history:
www.mandg.com/corporate/about-mg/
investment-philosophy/corporate-
governance/voting-history/
Reflecting this approach, M&G is a signatory
to the UN Principles for Responsible
Investment (UNPRI), an international
network of investors working together to
promote responsible investment practices.
M&G provides market insights to clients,
intermediaries and others through a
number of channels, including a
programme of roadshows and events.
The M&G Client Council, launched in
2014, offers customers who invest directly
with M&G an opportunity to help shape
our products and services, in line with their
needs. These investors give feedback
through online surveys and interviews
throughout the year, and members are kept
informed about the results with regular
emails and updates on a dedicated website.
Valuing our people
We foster an environment in which our
people find 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. Given the diverse nature
of our business and our stakeholders, we
are committed to making diversity and
inclusion a competitive advantage for our
organisation. By continuing to ensure
diversity among senior leadership teams
and pipelines, as well as across the entire
employee population, we aim to further
increase the positive impact of diversity
on our commercial success and ability
to successfully compete in an
increasingly complex and dynamic
business environment.
We believe in respecting human rights,
acting responsibly and with integrity.
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.
In particular, our Group-wide Diversity and
Inclusion policy acts to ensure that each of
our businesses takes appropriate measures
to prevent discrimination in the workplace,
and provides equality of opportunity both
for our employees and for candidates that
wish to join our Group regardless of their
sex, race, age, ethnic origin, marital status,
pregnancy and maternity, caring
responsibilities, civil partnership status,
any gender re-assignment, sexual
orientation, religion or belief, disability
59
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc or part-time/fixed-term work. As such,
we give full and fair consideration and
encouragement to all applicants with
suitable aptitude and abilities. For those
employees and applicants with disabilities,
we make appropriate disability adjustments
as required, and ensure that we can
provide training and career development
opportunities for all.
We monitor the diversity of our leadership
and our leadership pipeline, with diversity
and inclusion KPIs reported to the
Board annually.
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 managerial and
non-managerial staff, supporting flexible
working arrangements, and engaging with
recruitment firms to mitigate unconscious
bias and diversify the pool of potential
candidates. In Prudential Corporation Asia,
since 2009 a Financial Literacy for Women
programme has shared tips and training on
financial planning and management with
more than 19,000 female entrepreneurs.
Our North American business is involved
in the Women of Color STEM Conference,
which recognises outstanding women
in the science, technology, engineering
and mathematics fields; and M&G
has introduced the Women in Fund
Management Roundtable, an internal
network of senior women investors to
support a shift in the gender balance
within investment functions. Many of our
businesses also run apprenticeship schemes.
In 2015 we further nurtured two affinity
networks: M&G Pride for LGBT employees
and allies and the London-based Prudential
Women’s Professional Network, each of
which held several well-attended events.
A third 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
confidence, capabilities and contacts.
60
Gender diversity across Prudential as of 31 December 2015 is shown below.
Headcount
Total
Male
Female
Chairman and independent Non-executive Directors
Executive Directors1
Group Executive Committee (GEC) (includes Executive
Directors1)
Senior managers (excludes the Chairman, all directors
and GEC members)
10
6
11
65
8
5
10
52
2
1
1
13
Whole Company2 (includes the Chairman, all directors
23,507
10,879
12,628
and GEC members)
1 Does not include announcements made after 31 December 2015: John Foley’s appointment to Executive
Director and Anne Richards to replace Michael McLintock later in 2016.
2 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 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 2015 more than 180 senior
high-potential individuals participated in
our Group-wide leadership development
programmes Impact, Agility and in our
new programme for emerging talent, Next
Generation. These programmes have been
developed in partnership and co-delivered
with world-leading academic institutions
such as Duke Corporate Education, the
Oxford Saïd Business School, and the
London School of Economics.
Within our businesses there are many
examples of our continuing commitment
to talent development. Prudential
Corporation Asia develops CEOs with
targeted high-touch programmes, such as
cross-company experience and industry
expectations, for them to stay relevant and
gain new insights. In the US, Jackson
University provides a highly customisable
approach for associates’ personal
development and professional learning;
and Prudential UK provides a fully
differentiated management development
offering, distinguishing the requirements
of aspiring managers and experienced
leaders. M&G Real Estate supports career
development through a fund manager job
shadowing programme; and Group Head
Office provides innovative programmes
(designed in partnership with top academic
institutions such as the London Business
School and Cambridge Judge), which
offer leadership development and the
opportunity to gain valuable experience
through relevant business projects.
Employee engagement
An array of initiatives are in place within
our different businesses to drive employee
engagement. Depending on the business
this engagement can start as soon as a
new employee joins us, with an induction
programme to learn about the history
and strategy of the Group. Throughout the
employee’s career, additional opportunities
may include being offered a number of
high-impact training sessions as well as
workshops on resilience, managing energy
and enhancing productivity.
Each of our businesses manages its own
intranet, providing all employees with
access to regular updates, articles and
internal and external news items relevant
to the business and its geographical
location. Each intranet also gets updated
with material news from across the Group.
Some of our businesses hold regular
employee open forums with senior
management, conduct yearly engagement
surveys or organise awaydays to discuss
the business, our performance and internal
management. Any highlighted issues are
then used to improve the way in which
we work. In addition, there are informal
opportunities to meet senior managers and
facilities to network with both peers and
Prudential plc Annual Report 2015 www.prudential.co.ukCorporate responsibility review continued senior leaders across functions; and
well-being programmes to support
sustainable high performance. We also
have policies to encourage and support
volunteering for charitable causes.
The success of our efforts has again
been recognised internally and externally.
In 2015, engagement surveys in various
business units showed excellent results.
We have also received prestigious awards.
For example, M&G was the highest-
ranking asset manager in the Glassdoor
survey of Best Places to Work in Consulting
and Finance, and seventh in the Rate-My-
Apprenticeship Top 60 Employers 2014-15.
The ranking is based on anonymous
reviews of current and former staff.
Supporting local communities
Our community programmes are grouped
around the broad theme of ‘Strong
Foundations’. This reflects 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
In addition, our businesses in the UK
have a longstanding relationship with
the union Unite.
We encourage volunteering, through
which our employees can support our
communities and acquire new skills.
Strengthening numeracy, financial literacy
and employment training
Disaster readiness and relief
Providing long-term support to help prevent
disasters and deal with their impact
Further details page 63
Wellbeing and protection
Performance and reward
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 recognition initiatives running
across our businesses, such as the
Prudential Stars awards at Group Head
Office, which 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
benefit from the Group’s success through
share ownership, and operate employee
share plans across the UK and Asia.
This includes PruSharePlus which first
launched in 2014 and is open to all employees
of Prudential in Asia. PruSharePlus enables
Prudential’s employees to share in the
longer-term success of the business, and
actively encourages share ownership
and engagement with the business by
providing a market-competitive share-
matching plan. We were delighted that
PruSharePlus recently received an award
from the Global Equity Organization in
recognition of its innovative and creative
plan design.
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 in
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 financial education,
support to improve social mobility and
employee volunteering.
Education and life skills
In Asia, Prudence Foundation – the
charitable arm of Prudential Corporation
Asia – aims to maximise the impact of
our community investment efforts in the
countries where we have a presence. Its
mission is to make a lasting contribution to
societies across Asia through sustainable
initiatives focused on three pillars:
Children, Education, and Disaster
Preparedness and Recovery.
The First Read programme was launched in
2013 in partnership with Save the Children
in Cambodia and the Philippines. It works
closely with parents of pre-school children
to promote home-based early childhood
care and development (ECCD) and address
the issue of literacy. The programme
enables parents to help develop their
children’s early literacy skills and overall
well-being so they can benefit from future
schooling and prevent repetition of grades
and dropping out of school, which is a
significant issue in both countries. First
Read also supports and collaborates
closely with local book publishers, helping
to develop and create new books written
in local languages. Since inception, the
programme has benefited almost 190,000
adults and children up to the age of six.
In addition, First Read has indirectly benefited
over 440,000 community members
through the sharing of knowledge
and resources.
Prudence Foundation launched Cha-Ching,
a multi-media programme built around a
series of three-minute animated music
videos, in 2011 to help parents instill
‘money-smart skills’ in children aged seven
to 12. This was developed with Cartoon
Network and Dr Alice Wilder, an award-
winning children’s education specialist, to
help children learn the fundamental money
management concepts of earn, save, spend
and donate. The programme has gained
international recognition for promoting
financial 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.
Today Cha-Ching is available in 10 languages
in Asia, reaching 51 million households
a day across Asia through the Cartoon
Network. The Cha-Ching website has
more than 73 million page views, and
YouTube music videos have two million
views. The Cha-Ching School Contact
Programme, which brings Cha-Ching
directly to schoolchildren across Asia,
continues to develop and expand. To date
it has reached more than 200,000 school
children in nine countries. The Foundation
has also started to work with Junior
Achievement to develop a standardised
school curriculum for Cha-Ching, which
will be launched in 2016. This will further
help meet the need for stronger financial
literacy capabilities in students across Asia.
In the US, Jackson has pledged to support
a new Teen Center at the Boys & Girls Club
of Lansing, Michigan. The commitment
is from the business and individual
employees who will contribute toward the
total investment needed to complete the
project. The new Jackson Teen Zone will be
added onto the existing Boys & Girls Club
facility and will provide a much-needed
quiet space for homework, college prep
and Money Matters, a financial literacy
curriculum designed by Boys & Girls Club
of America. Every day more than 250
young people go to the Boys & Girls Club
of Lansing.
As one of the most respected brands in the
UK – according to Opinion Leader Brand
Tracking we are the second most trusted
insurance company in the UK – Prudential
is taking a major role in helping to shape
future job prospects for young people.
Over the past two years the business has
recruited 130 young people to join the
61
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Our communities in focus
Every Saturday for six weeks,
volunteers from Prudential worked
with Prestasi Junior Indonesia to
regenerate vacant wasteland and
promote healthy living in a low-
income, densely populated area
of South Jakarta.
The project involved clearing rubbish
and educating residents on appropriate
waste management.
Volunteers helped transform the area
into a cleaner, safer environment and
facilitated local health clinics and
financial education sessions.
volunteered
325 employees
1,625 hours
2,996
volunteered
beneficiaries
highly regarded apprenticeship
programme, gaining important work and
life skills as well as achieving recognised
vocational and professional qualifications.
As a National Champion of Business in the
Community’s Business Class programme,
Prudential UK & Europe works to set and
promote the direction of the nationwide
programme. It also partners with three
schools, in London, Reading and Stirling,
with over 320 employees having supported
more than 3,400 children since 2013,
including with pupils’ interview and
presentation skills and building public
speaking confidence.
In India, Prudential UK & Europe works
in partnership with the NGO, Magic Bus,
which provides children from marginalised
communities with opportunities for
learning and developing work-readiness
skills. This is achieved via a sport-focused
activity curriculum, mentorship and
employability programmes. We have
specifically supported a personal
development programme for 500 children
and an employability skills workshop for
150 children.
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 whose
reading age is significantly below their
national average reading age.
In our new markets in Africa we have
committed to provide support for
academically able but financially
disadvantaged high school students, and
to help build capacity for training in actuarial
sciences at local universities. Working with
Plan International, the Prudential Scholarship
62
scheme, started in Ghana, has now been
extended to Kenya and the two schemes
will help more than 700 students to
complete their secondary school
education. Throughout 2016 we will work
with Plan Uganda to build new classrooms
and latrines and provide up-to-date
learning equipment as well as financial
support for vulnerable students. The
potential reach will be 5,267 girls and
boys in six secondary schools in northern
Uganda. In addition we have established
the Prudential Actuarial Support System
awards for actuarial science in universities
in Ghana and Kenya to support the top
10 graduating students for three years.
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-Pacific 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 better prepare
for such disasters before they strike.
The Foundation has a strategic approach to
its efforts in disaster preparedness, focusing
on three key areas: mass education and
awareness, capacity building and advocacy.
In each area we have programmes that
serve a vital need to help communities in
the region become more disaster-resilient.
As part of a mass education initiative, the
Foundation launched Safe Steps in May 2014,
in partnership with National Geographic
Channel and endorsed by the International
Federation of the Red Cross and Red
Crescent Societies. Safe Steps is a
first-of-its-kind pan-Asian public-service
initiative to enhance disaster preparedness
and awareness through the dissemination
of educational survival tips for natural
disasters. It is a multi-platform programme
including on-air video messages, an
informative website and educational
collateral that can be shared among
communities. Core to the programme is
a series of 60-second educational videos
which advise individuals and households
what they should do when disasters strike.
Together with on-air television distribution
and through our partnerships with
governments, NGOs and the private
sector, Safe Steps has the potential to
reach over 100 million people every day.
For capacity building, we partner with
Plan International and Save the Children
to implement the Safe Schools programme
in Indonesia, the Philippines, Thailand and
Vietnam. Safe Schools focuses on placing
schools at the heart of building a culture of
disaster preparedness within communities.
This is performed by training students and
their teachers in key disaster management
skills, and supporting the organisation of
disaster simulations and evacuation drills
for students and their community. Since we
began in 2013, over 36,000 students have
participated, together with more than
11,000 teachers.
As a form of advocacy, Prudence Foundation
partners with CSR Asia to host an annual
Disaster Preparedness Forum in one
selected city in Asia. We firmly believe
the private sector has an important role to
play in strengthening community disaster
resilience, and this Forum provides a
unique platform for dialogue and exchange
of ideas between government, NGO,
humanitarian and private-sector participants.
We have held three forums to date, in
Prudential plc Annual Report 2015 www.prudential.co.ukCorporate responsibility review continued Jakarta in 2013, Manila in 2014 and most
recently in Hanoi in 2015, with close
to 500 participants representing the
various stakeholders.
As part of our focus on disaster relief and
recovery, Prudence Foundation provided
financial donations for emergency relief
efforts in Malaysia following the severe
floods in January 2015, in Nepal after the
devastating earthquake in April 2015,
and in Myanmar after the floods in August
2015. In Malaysia we were also able to
provide support for long-term rehousing
efforts, partnering with Epic Homes, a local
NGO, to fund and build 14 new houses
for a remote village in Kelantan state.
Similar to our efforts in Bantayan Island,
the Philippines, Prudence Foundation
sponsored a month-long 500-volunteer
effort to complete construction of the
houses, which also included 100 Prudential
volunteers from across Asia.
As a Group, Prudential has been a partner
of Save the Children’s Emergency Fund for
a number of years and has committed in
2016 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. Save
the Children has been able to use the
Children’s Emergency Fund to respond to
124 disasters across 49 countries in 2015,
which demonstrates the scale of the need
and the power of the emergency fund as
a resource for their response work.
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. We work with local
communities to develop strong, sustainable
projects that meet local needs. For example,
Jackson employees are actively engaged in
our commitment to communities by taking
part in programmes such as the Jackson
National Community Fund Advisory
Committee and the employee-nominated
matching programme. The Jackson National
Community Fund supports charities that
help the elderly and children through
quarterly grants in communities where
Jackson’s four largest offices 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 significant impact.
Jackson has played a key role in building
Beacon Field, Lansing’s only drop-in youth
soccer field, which opened in September
2015. Use of the field is free and open to
anyone. It includes synthetic turf and
features two goals, kick boards and solar
lights. The charitable priorities of the
business are to serve children and senior
citizens, and Jackson was keen to
collaborate with other businesses to be
part of a project to build a safe place for
young children to play soccer in the heart
of downtown Lansing. The project has
enhanced a run-down part of Lansing and
brought community, corporations and local
businesses together to maximise benefits
for the local community.
Prudential UK & Europe employee
volunteers have continued to be involved
in Call in Time, an Age UK telephone
befriending programme that matches each
volunteer with an older person who they
speak to weekly. This year, 42 lonely and
isolated older people have been supported
by Prudential volunteers, with some
volunteers having now been involved in
the programme for more than six years.
In 2015, M&G Investments continued
to provide support to some of the most
deprived and disadvantaged communities
located near its offices. A total of 228
charities and community organisations
The programme offers the opportunity to
increase the charitable involvement of
Jackson while also developing professional
leadership skills for employees, which not
only provide valuable contributions to the
boards they serve on but also benefit their
careers and personal lives. At the
conclusion of each Jackson Board Corps
class, Jackson’s CSR team helps pair each
employee with a charitable organisation
in line with their area of interest.
The Jackson Board Corps
programme is changing the
way employees volunteer with
charitable organisations. Since
its launch in 2014, 40 Jackson
employees have been trained
to serve in leadership positions
for non-profit organisations.
The Board Corps programme consists
of a series of classes and group work
led by philanthropy experts, along with
non-profit site visits. The classes and
group work allow employees to further
develop their leadership skills, while the
site visits help participants explore what
type of charity and mission resonate with
them personally.
received donations, enabling positive and
lasting changes to be made in the lives of
thousands of people. Projects across a
range of sectors gained benefits as a result.
Academic achievement was encouraged
through support given to schools and
educational establishments. A number
of social, welfare, children and youth
programmes were funded – many of
which addressed issues of social cohesion,
feelings of isolation and lack of inclusion in
community life. Medical facilities such as
hospitals and hospices were also recipients
of funding, as were projects related to the
arts and environmental conservation.
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.
In 2015, employees across the Group
volunteered in their communities on a
range of projects, providing a total of
51,979 hours of volunteering. We recognise
that employee volunteering brings benefit
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 7,000 employees volunteered
through Prudential’s flagship 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 financial
support. Prudential donates £150 to our
charity partners for every employee who
Our communities in focus
63
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc 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 defined in the Political
Parties, Elections and Referendums Act 2000.
The Group did not make any such donations
or incur any such expenditure in 2015.
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
environmental performance of our
global operations; 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 2015, and our performance
rating from D to B.
We are also a member of ClimateWise,
which is a voluntary leadership group
driving an insurance industry response
to the transition to a low-carbon,
climate-resilient economy. As part of
our membership we report, and are
independently measured, against six core
principles. During 2015 we were able to
increase our score and ranked within the
top 10 members. For more information the
latest ClimateWise report can be found at:
www.cisl.cam.ac.uk/publications/
sustainable-finance-publications/
a-climate-of-change
Our environment in focus
registers for the 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 huge
range of other charitable projects, from
providing relief following disasters to
mentoring schoolchildren, supporting
the elderly and skills-sharing.
Prudential RideLondon
The 2015 Prudential RideLondon, the
world’s biggest festival of cycling, was
a great success. This was the third
RideLondon sponsored by Prudential and
raised more than £12 million for charity,
promoting health and providing a
memorable occasion for participants and
spectators and an opportunity for
Prudential staff from around the world
to take part. Around 70,000 people took
to the streets of London on 1 August to
enjoy cycling on traffic-free roads in the
Prudential RideLondon FreeCycle. The
following day, 25,000 people took on
the challenge of cycling 100 miles through
London and the hilly country to the south-
west in the Prudential RideLondon-Surrey
100, with more than 180 cyclists from
across the Group, including colleagues
from Group Head Office, Prudential UK
& Europe, M&G, Jackson and Prudential
Corporation Asia.
In addition, 160 colleagues were on duty
as volunteers to help make the event a
success. The programme also featured
two professional races involving some
of the world’s best riders – the Prudential
RideLondon Grand Prix women’s race
around St James’s Park on the Saturday and
the Prudential RideLondon Classic men’s
professional race on the Sunday, which
followed the same course as the amateur
riders earlier in the day. All the weekend’s
events featured prominently on national
TV and radio and in the press.
In its first three years, Prudential RideLondon
participants have raised more than
£29 million for good causes throughout
the UK. We have renewed our sponsorship
for a further three years to 2018 and will
focus on maximising funds raised for
charity by the organisers and through
the development of new and existing
Prudential charitable partnerships.
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 2015, the Group spent £21.7 million
supporting community activities, an
increase of 10.7 per cent on 2014.
The direct cash donations to charitable
organisations amounted to £18.8 million,
of which approximately £5.8 million came
from our UK and EU operations, which
are principally our UK insurance operation
and M&G. The remaining £13 million
was contributed to charitable organisations
by Jackson National Life Insurance
Company, Prudential Corporation Asia
and Prudential Africa.
The cash contribution to charitable
organisations from our UK and EU
operations is broken down as follows:
education £2,401,000; social, welfare
and environment £3,097,000; cultural
£227,000 and staff volunteering £109,000.
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.
Jackson opened its new,
environmentally responsible
building in Lansing which provides
capacity for more than 1,200
state-of-the-art workspaces, as well
as conference facilities and other
amenities.
The new building has been built to
minimise long-term environmental
impact and is connected to Jackson’s
existing office through a glass-enclosed
walkway, providing employees with a
feeling of being in the midst of the natural
landscape. The conference centre
features a living-grass roof which reduces
energy consumption while blending in with
the surrounding landscape. The building is
expected to qualify for an Energy Star
rating that places it in the top 20 per cent of
the most energy-efficient buildings in the
US. This focus on integrating its buildings
with the natural beauty of its corporate
campus, along with an energy-efficient
design, allows Jackson to operate on a very
cost-efficient basis while providing an
environmentally-conscious and healthy
working environment for employees.
64
Prudential plc Annual Report 2015 www.prudential.co.ukCorporate responsibility review continued As a financial services business we
recognise that one of the most significant
direct impacts on the environment results
from the operation of the properties we
occupy and invest in.
Reducing our direct impact:
occupied properties
We monitor and publish Group
performance data for our CO2e emissions,
water and energy use in over 400 sites
across 24 countries.
We have strategies in place to reduce
energy, waste generated, water
consumption and paper use. In the past
year, Prudential sourced 27 per cent of
electricity from renewable or non-fossil
fuel sources.
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. It also helps M&G
Real Estate to protect and enhance fund
and asset performance for its clients.
Responsible property investment is
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 significant results. In the past year,
M&G Real Estate has:
— Reduced global energy consumption
and carbon emissions by 3 per cent at
properties held consistently for
two years;
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 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 2015 report these
Scope 3 emissions include: water (new
metric for 2015), waste generated in
operations in the UK and US, 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.
Assessment parameters
Baseline year: 1 October 2014 - 30 September 2015
Assurance: Deloitte LLP has provided limited
assurance over selected environmental metrics in
accordance with the International Auditing and
Assurance Standards Board’s (ISAE3000 (Revised))
international standard. Please refer to the 2015
Prudential corporate responsibility report for
further detail.
Consolidation approach
Operational control
Boundary summary
Consistency with the
financial statements
All entities and all facilities under operational control
(including those owned) were included
This period does not correspond with the Directors’
report period (January 2015 to December 2015).
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 financial 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 2015 – obtained from
www.ukconversionfactorscarbonsmart.co.uk
Assessment methodology
The Greenhouse Gas Protocol Revised ‘A Corporate
Accounting and Reporting Standard (Revised
Edition)’ 2004
— Achieved four Green Stars in the 2015
Materiality threshold
5 per cent
Intensity ratio
Tonnes of Carbon Dioxide Equivalent per metre
squared (Net Lettable Area)
Global Real Estate Sustainability
Benchmark survey in recognition of its
market-leading performance; and
— Ensured that more than 640,000 m2 of
floor space has environmental
certification, providing independent
verification of its performance.
M&G Real Estate’s progress can be
found in its annual responsible property
investment report at www.mandg.co.uk/
institutions/realestate/responsible-
investing/
65
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Greenhouse gas emissions source
Emissions source
Scope 1
Combustion of fuel and operation of facilities
Occupied Estate
(Tonnes CO2-e)
Investments
Scope 2
Electricity, heat, steam and cooling purchased for
Occupied Estate
own use (Tonnes CO2-e)
Investments
Scope 1 and Scope 2 Emissions (Tonnes CO2-e)
Occupied Estate
Investments
2015
8,409
8,845
62,695
28,691
71,104
37,536
2014
8,486
10,044
61,550
39,573
70,036
49,617
2013
6,019
13,062
65,730
42,079
71,749
55,141
Total Scope 1 and 2 (Tonnes CO2-e)
108,640
119,653
126,890
Normalised
emissions
Normalised Scope 1 and 2 (kg CO2-e/m2)
Occupied Estate
Investments
Total Scope 1 and 2 (kg CO2-e/m2)
Scope 3
Waste generated (UK and US) (Tonnes CO2-e)
Occupied Estate
Water consumption (Tonnes CO2-e)
Investments
Occupied Estate
Investments
132
10
25
77
244
80
174
135
13
28
201
387
–
–
139
15
31
166
840
–
–
Air travel (Booked from UK only) (Tonnes CO2-e)
Occupied Estate
13,451
9,818
9,398
Other business travel (rail and vehicle)
Occupied Estate
(Tonnes CO2-e)
Investments
Investments
n/a
56
n/a
Total Scope 3 Emissions (Tonnes CO2-e)
Occupied Estate
13,664
Investments
418
n/a
50
n/a
10,069
387
n/a
19
n/a
9,583
840
Total Scope 3 (Tonnes CO2-e)
14,082
10,456
10,423
84,768
37,954
80,105
50,004
81,332
55,981
122,722
130,109
137,313
157
10
28
154
13
30
157
16
33
Scope 1, 2 and 3
Total Scope 1, 2 and 3 Emissions (Tonnes CO2-e) Occupied Estate
Total Scope 1, 2 and 3 (Tonnes CO2-e)
Investments
Normalised
emissions
Normalised Scope 1, 2 and 3 (kg CO2-e/m2)
Occupied Estate
Investments
Total Scope 1, 2 and 3 (kg CO2-e/m2)
Following a detailed review of the Group’s
approach to reporting emissions resulting
from investments, investment data has
been restated. 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 increased
1.53 per cent from 2014, and decreased
0.9 per cent from the 2013 baseline.
66
Prudential plc Annual Report 2015 www.prudential.co.ukCorporate responsibility review continued
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 49.
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
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 11 to 67 is approved by
the Board of Directors.
Signed on behalf of the Board
of Directors
Mike Wells
Group Chief Executive
8 March 2016
67
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc 68
Prudential plc Annual Report 2015 www.prudential.co.uk Governance
100 Index to principal Directors’ report disclosures 3
70 Chairman’s introduction
71 Board of Directors
76 How we operate
76 Board roles
77 Board decision making
79 Board balance and effectiveness
81 Shareholder engagement
82 Further information on Directors
84 Risk management and internal control
86 Committees
98 Statutory and regulatory disclosures
99 Compliance with corporate governance codes
99 Additional information
Volunteering in South Jakarta
Volunteers from Prudential worked
to regenerate vacant wasteland
and promote healthy living in a
low-income, densely populated
area of South Jakarta. Find out
more on page 62.
Our communities
69
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Chairman’s introduction
Strong, effective and
transparent governance
Dear Shareholder
As Chairman of the Board,
I am pleased to report on our
governance and stewardship
throughout the year.
Succession was understandably a key
focus in 2015, but there were many other
areas that commanded attention.
Alongside the ongoing items of strategy
and business performance, the Board and
its committees also spent time on
Solvency II and preparations for the
G-SII regime.
Good corporate governance makes an
indispensable contribution to the growth
and long-term success of any business.
Providing appropriate support, focused
oversight and constructive challenge are
critical elements of a well-functioning
board. This means ensuring that our own
processes, mechanisms and structures
are best matched to the business and
its strategy.
Alongside this, there is also the important
role of the Board in establishing and
promoting the culture and values of the
Company. Prudential has a proud heritage
which shapes how we conduct our
business. Our role as custodians of that
legacy is one that we take seriously.
To achieve all these aims means that
managing the development of the Board is
vital, and as Chairman that duty falls to me.
I have sought to cast the Board so that its
composition and balance best supports the
business in delivering sustainable
long-term value. This means ensuring that
we have the right skill sets and experience,
and ensuring that succession planning is
supported by a strong bench with a depth
of talent.
We adhere to the relevant principles and
codes and also work to remain abreast of
trends and developments in corporate
governance. This is an ever-evolving field,
which rightly attracts close scrutiny.
I have an ongoing programme of
engagement with our major investors
and meet retail shareholders at the
Annual General Meeting. I have been
pleased with the feedback we have
received on our progress.
Our stakeholders not only expect
high-quality governance, they also expect
to be able to see that it is being delivered.
As such, we remain committed to clarity
and transparency in our reporting.
Paul Manduca
Chairman
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Prudential plc Annual Report 2015 www.prudential.co.uk Board of Directors
Paul Manduca, Chairman
Appointment: October 2010
Chairman: July 2012
Committee: Nomination (Chair)
Age: 64
Michael Wells, Group Chief Executive
Appointment: January 2011
Group Chief Executive: June 2015
Age: 55
Paul is the Chairman of the Board. He
initially joined the Board as the Senior
Independent Director and member of the
Audit and Remuneration Committees, and
latterly, the Nomination Committee.
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 first 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 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.
Other appointments
Paul is a member of the Securities
Institute and Chairman of Henderson
Diversified Income Limited. In 2015, Paul
became Chairman of TheCityUK’s
Advisory Council and Chairman of the
Templeton Emerging Markets Investment
Trust (TEMIT).
Mike is Group Chief Executive, a position
he has held since June 2015.
Relevant skills and experience
Mike joined Jackson National Life
Insurance Company (Jackson), the North
American unit of Prudential, in 1995, and
became Chief Operating Officer and
Vice-Chairman in 2003. In 2011, he was
appointed President and Chief Executive
Officer of Jackson, and joined the Board of
Prudential.
Mike began his career at the brokerage
house Dean Witter going on to become a
managing director at Smith Barney
Shearson. At Jackson, Mike was
responsible for the establishment of the
broker-dealer network National Planning
Holdings and the development of Jackson’s
market-leading range of variable annuities.
He was also part of the Jackson teams that
purchased and successfully integrated a
savings institute, three broker dealers and
two life companies.
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Executive Directors
Nicolaos Nicandrou ACA
Chief Financial Officer
Appointment: October 2009
Age: 50
Nic is Chief Financial Officer,
a position he has held since
October 2009.
Penelope James ACA
Group Chief Risk Officer
Appointment: September 2015
Age: 46
Penny is the Group Chief Risk
Officer, a position she has held
since September 2015.
John Foley
Executive Director
Appointment: January 2016
Age: 59
John is Chief Executive of
Prudential UK & Europe, a position
he has held since January 2016.
Relevant skills and experience
Before joining Prudential, Nic
worked at Aviva, where he held a
number of senior finance roles,
including Norwich Union Life
Finance Director and Board
Member, Aviva Group Financial
Control Director, Aviva Group
Financial Management and
Reporting Director and CGNU
Group Financial Reporting
Director. Nic started his career at
PricewaterhouseCoopers where
he worked in both London and
Paris.
Relevant skills and experience
Penny joined Prudential in 2011 as
the Director of Group Finance, a
position she held until her
appointment to the Board. Before
joining Prudential, Penny was
Group Chief Financial Officer of
Omega Insurance Holdings, a
company formerly listed on the
Main Market of the London Stock
Exchange. She previously held a
number of senior finance positions
during her 12 years with Zurich
Financial Services, most recently
serving as Chief Financial Officer of
the UK General Insurance Division.
Relevant skills and experience
John joined Prudential as Deputy
Group Treasurer in 2000, before
being appointed Managing
Director, Prudential Capital, and
Group Treasurer in 2001. He was
appointed Chief Executive,
Prudential Capital, and to the
Group Executive Committee in
2007. John was appointed Group
Chief Risk Officer and joined the
Prudential plc Board in 2011. In
2013, he was appointed to the new
role of Group Investment Director,
leaving the Board but remaining a
member of the Group Executive
Committee. He was appointed
In December 2014, Nic was
appointed Chairman of the
European Insurance CFO Forum.
Penny qualified as a chartered
accountant with Coopers &
Lybrand Deloitte (now part of
PwC) prior to joining Zurich.
Other appointments
In January 2015, Penny was
appointed as a non-executive
director of Admiral Group plc and
is a member of Admiral’s audit
committee.
as Interim Chief Executive of
Prudential UK & Europe in
October 2015. Before joining
Prudential, he spent three years
with National Australia Bank as
General Manager, Global Capital
Markets. John began his career at
Hill Samuel & Co. Limited where,
over a 20-year period, he worked
in every division of the bank,
culminating in senior roles in risk,
capital markets and treasury of
the combined TSB and Hill
Samuel Bank.
Michael McLintock
Executive Director
Appointment: September 2000
Age: 54
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.
He has been a member of the
Finance Committee of the MCC
since October 2005. Michael was
appointed to the Takeover
Appeal Board on 1 March 2016.
Michael is the Chief Executive of
M&G, a position he held at the time
of M&G’s acquisition by Prudential
in 1999.
Other appointments
Michael has been a Trustee of the
Grosvenor Estate since October
2008 and was appointed as a
non-executive director of
Grosvenor Group Limited in March
2012.
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Prudential plc Annual Report 2015 www.prudential.co.uk Other appointments
Barry is a member of the Board
of Directors of the International
Insurance Society.
Barry Stowe
Executive Director
Appointment: November 2006
Age: 58
Barry is Chairman and Chief
Executive Officer of the North
American Business Unit, a position
he has held since June 2015. The
North American Business Unit
comprises Jackson, Curian
Capital, Jackson National Asset
Management, PPM America
and National Planning Holdings.
Relevant skills and experience
Barry was the Chief Executive of
Prudential Corporation Asia from
October 2006 to June 2015. Before
joining Prudential, Barry was
President, Accident & Health
Worldwide for AIG Life
Companies. He joined AIG in 1995
after having held senior positions
at Pan-American Life and Willis
in the United States.
Tony Wilkey
Executive Director
Appointment: June 2015
Age: 56
Tony is Chief Executive of
Prudential Corporation Asia,
a position he has held since
June 2015.
Relevant skills and experience
Tony joined Prudential in 2006 as
Chief Executive of Prudential
Corporation Asia’s network of life
insurance operations in Asia across
12 markets, a position he held until
his appointment to the Board.
Under Tony’s leadership,
Prudential’s life insurance
operations grew into significant
market-leading positions.
Before he joined Prudential,
Tony served as Chief Operating
Officer of American International
Assurance (AIA), based in Hong
Kong, overseeing AIA’s life
companies in South-east Asia.
Further information relating to Directors can be found on pages 82 and 83
73
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Non-executive Directors
The Hon. Philip Remnant
CBE FCA
Senior Independent Director
Appointment: January 2013
Age: 61
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 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.
Other 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).
and a member of the International
Advisory Board of the China
Banking Regulatory Commission.
Sir Howard Davies
Non-executive Director
Appointment: October 2010
Age: 65
Committees: Risk (Chair), Audit
and Nomination
Relevant skills and experience
Sir Howard has a wealth of
experience in the financial services
industry, across civil service,
consultancy, asset management,
regulatory and academia.
Sir Howard was previously
Chairman of the Phoenix Group
and an independent director of
Morgan Stanley Inc.
Other appointments
Sir Howard is Chairman of the
Royal Bank of Scotland and a
Professor at Institut d’Études
Politiques (Sciences Po). He is
Chairman of the International
Advisory Board of the China
Securities Regulatory Commission
Ann Godbehere FCPA FCGA
Non-executive Director
Appointment: August 2007
Age: 60
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
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 Officer of the
Swiss Re Group. From its
nationalisation in 2008 until January
2009, Ann was Interim Chief
Financial Officer and Executive
Director of Northern Rock. 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).
Other 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.
Alexander (Alistair) Johnston
CMG FCA
Non-executive Director
Appointment: January 2012
Age: 63
Committees: Audit
Alistair will retire from the Board
with effect from the close of the
Company’s 2016 Annual General
Meeting on 19 May 2016.
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,
International Managing Partner
– Global Markets and UK Vice
Chairman. Latterly he served as a
Global Vice Chairman of KPMG
from 2007 to 2010.
Alistair acted as a non-executive
director of the Foreign &
Commonwealth Office from
2005 to 2010 and chaired the
audit committee until 2009.
Other 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.
David Law ACA
Non-executive Director
Appointment: September 2015
Age: 55
Committees: Audit
Relevant skills and experience
David began his career at PwC,
where he worked in a variety of
roles in the United Kingdom,
Switzerland and Hong Kong. He
was the Global Leader of PwC’s
insurance practice, a Partner in
PwC’s UK firm and worked as the
Lead Audit Partner for multinational
insurance companies until his
retirement on 30 June 2015. David
has also been responsible for PwC’s
insurance and investment
management assurance practice in
London and the firm’s Scottish
assurance division.
Other appointments
David is a Director of L&F
Holdings Limited and Chief
Executive of L&F Indemnity
Limited, the professional
indemnity captive insurance
group that serves the
PricewaterhouseCoopers
network and its member firms.
74
Prudential plc Annual Report 2015 www.prudential.co.uk Kaikhushru Nargolwala FCA
Non-executive Director
Appointment: January 2012
Age: 65
Committees: Remuneration and Risk
Relevant skills and experience
Kai was a non-executive director
of Singapore Telecommunications
Limited until July 2015. He was also
non-executive Chairman of Credit
Suisse Asia Pacific until December
2011, having joined Credit Suisse in
2008 as a member of the Executive
Board and CEO of the Asia Pacific
Anthony Nightingale
CMG SBS JP
Non-executive Director
Appointment: June 2013
Age: 68
Committees: Remuneration (Chair)
and Nomination
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.
Alice Schroeder
Non-executive Director
Appointment: June 2013
Age: 59
Committees: Audit
Relevant skills and experience
Alice began her career as a qualified
accountant at Ernst & Young
in 1980 where she worked for
11 years before leaving to join the
Financial Accounting Standards
Board as a manager.
Lord Turner
Non-executive Director
Appointment: September 2015
Age: 60
Committees: Risk
Relevant skills and experience
Lord Turner began his career with
McKinsey & Co, where he advised
companies across a range of
industries. He has served as
Director-General of the
Confederation of British Industry,
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 Pacific
Board.
Other appointments
Kai is a member of the Board of
Other appointments
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 and a non-executive
director of Schindler Holding
Limited, Vitasoy International
Holdings Limited and Shui On Land
Limited. He is a Hong Kong
representative to the APEC
Business Advisory Council and
Chairman of The Hong Kong -APEC
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
Vice-Chairman of Merrill Lynch
Europe, Chairman of the Pensions
Commission and as a non-
executive director of Standard
Chartered Bank. Lord Turner was
Chairman of the UK’s Financial
Services Authority (FSA), a
member of the international
Financial Stability Board and a
non-executive director of the
Bank of England between 2008
and 2013.
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. Kai is also
Chairman of Prudential
Corporation Asia Limited, a
subsidiary of the Company.
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
and a non-official member of the
Commission on Strategic
Development in Hong Kong.
Cetera Financial Group until April
2014. She is author of the official
biography of Warren Buffett.
Other appointments
Alice is a non-executive director
of Bank of America Merrill Lynch
International, CEO and Chairman
of WebTuner Corp. and a member
of WomenCorporateDirectors.
Other appointments
Lord Turner has been a
crossbench member of the
House of Lords since 2005. He
is also a non-executive director
of OakNorth Bank, Chairman of
the Institute for New Economic
Thinking, a Visiting Professor
at both the London School of
Economics and the Cass
Business School, and a Visiting
Fellow at Nuffield College,
Oxford University.
Further information relating to Directors can be found on pages 82 and 83
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Board roles
Chairman
Paul Manduca
The Chairman has overall responsibility for leadership of the Board and ensuring its overall effectiveness. He sets the Board’s agendas
to ensure the Board has adequate time for discussion of all agenda items, in particular strategic issues. The Chairman promotes a
culture of openness and debate, and fosters constructive relations between Executive and Non-executive Directors. The Chairman
ensures directors receive relevant information in a timely fashion. Externally, the Chairman is a key contact for shareholders to discuss
governance and strategy.
Group Chief Executive
Senior Independent Director
Committee Chairs
Philip Remnant
The Senior Independent Director acts as a
sounding board for the Chairman and is
available to shareholders to address any
concerns or issues not resolved through
normal channels.
Paul Manduca, Howard Davies,
Ann Godbehere, Anthony Nightingale
The committee chairs are responsible for
the leadership and governance of the
Board’s principal committees and report
matters of significance to the Board.
The Senior Independent Director leads
the Non-executive Directors in conducting
the Chairman’s annual evaluation.
The Board has terms of reference which
specifically 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 authority from the
Board to carry out actions exceeding
pre-determined limits.
The Board has delegated authority to a
number of Board Committees which assist
the Board in delivering its responsibilities
and ensuring that there is appropriate
independent oversight of internal control
and risk management.
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
responsibility for the management of that
business unit.
Mike Wells
The Group Chief Executive is responsible
for the operational management of the
Group on behalf of the Board and for
ensuring the implementation of the
Board’s decisions. The Group Chief
Executive leads the Executive Directors
and other senior executives in the
management of all aspects of the day to
day business of the Group. The Group
Chief Executive ensures that the Chairman
is kept informed of all key issues.
The Board is collectively responsible for
the long-term success of the Group and for
providing leadership within a framework
of effective controls. The control
environment enables the Board to identify
significant risks and apply appropriate
measures to manage and mitigate them.
The Board is responsible for approving the
Group 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 Non-executive Directors are
responsible for constructively challenging,
and helping to develop, proposals on
Group strategy, offering input based on
individual and collective experience. They
scrutinise the performance of management
in meeting agreed goals and objectives and
take on specific duties as members of the
Board’s principal Committees.
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Prudential plc Annual Report 2015 www.prudential.co.uk
Changes to Board roles and membership
During 2015, and in the year to date, Board roles and membership changed as follows:
Board changes
Role changes
— Tidjane Thiam stepped down as Group Chief Executive and
— Anthony Nightingale took on the role of the Chair of the
Executive Director (May 2015).
— Lord Turnbull stepped down as Chairman of the
Remuneration Committee, member of the Nomination
Committee and Non-executive Director (May 2015).
— Pierre-Olivier Bouée stepped down as Executive Director
(May 2015) and as Group Chief Risk Officer (June 2015).
Remuneration Committee and was appointed as a member
of the Nomination Committee, continuing in his role as
Non-executive Director (May 2015).
— Mike Wells, previously President and Chief Executive Officer
of Jackson National Life Insurance Company, became Group
Chief Executive, continuing in his role as Executive Director
(June 2015).
— Tony Wilkey, previously Chief Executive of Prudential
Corporation Asia’s network of life insurance operations,
was appointed as Executive Director of Prudential plc and
Chief Executive, Prudential Corporation Asia (June 2015).
— Barry Stowe, previously Chief Executive of Prudential
Corporation Asia, became Chairman and Chief Executive
Officer of the North American Business Unit, continuing in
his role as Executive Director (June 2015).
— Penny James, previously Director of Group Finance, was
appointed as Executive Director and Group Chief Risk Officer
(September 2015).
— David Law and Lord Turner were appointed as Non-executive
Directors (September 2015).
— Jackie Hunt’s departure as Chief Executive, Prudential UK &
Europe was announced (October 2015) and Ms Hunt
resigned as Executive Director (November 2015).
— John Foley, previously Group Investment Director, was
appointed as Executive Director and Chief Executive of
Prudential UK & Europe (January 2016).
The current Directors’ biographies, including the skills and experience they bring to the Board, can be found on pages 71 to 76.
Mr McLintock has indicated his intention to retire from the Board in 2016. We have announced that Mr McLintock will be succeeded by
Anne Richards, who will join Prudential from Aberdeen Asset Management PLC, where she held the position of Chief Investment Officer
and was responsible for operations in Europe, the Middle East and Africa. She has held senior roles at JP Morgan Investment
Management, Mercury Asset Management and Edinburgh Fund Managers.
Mr Johnston will retire at the end of the 2016 Annual General Meeting.
Board decision making
The Board has established a number of committees comprising Non-executive Directors in line with corporate governance guidelines,
to ensure independent oversight and challenge and to assist the Board in operating effectively. The responsibilities of the principal
committees are key components of the Group’s governance framework.
Nomination Committee
Audit Committee
Risk Committee
Remuneration Committee
Paul Manduca
The Nomination Committee
ensures that the Board retains
an appropriate balance of skills
to support the strategic
objectives of the Group and
that an effective framework for
senior succession planning is
in place.
Ann Godbehere
The Audit Committee monitors
the integrity of the Group’s
financial reporting, including the
effectiveness of internal control
and risk management systems
and the effectiveness of
internal and external auditors.
Howard Davies
The Risk Committee oversees
the Group’s overall risk appetite
and risk tolerance, as well as
the Group’s investment and
risk management frameworks.
Anthony Nightingale
The Remuneration Committee
determines the overall
remuneration policy for the
Group, including the individual
remuneration packages of the
Chairman and Executive
Directors, and oversees the
remuneration arrangements
of senior management.
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How we operate continued
Key areas of focus –
how the Board spent its time
19%
23%
35%
23%
Group strategy
Business unit reviews
Business performance, financial
reporting, operations projects and
transactions
Risk, compliance and governance
Powers of the Board
The Board may exercise all powers
conferred on it by the Company’s Articles
of Association (the Articles) 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) and to give a guarantee, security
or indemnity in respect of a debt or other
obligation of the Company.
Meetings
The Board met on 10 occasions during
the year, which included two overseas
meetings held at the Group’s operations
in the US and Hong Kong. The Board also
held a separate strategy event during the
year. Individual Directors’ attendance at
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 five occasions.
In the ordinary course, Board and
Committee papers are provided one week
in advance of each meeting and, where a
Director was unable to attend a meeting,
their views were canvassed in advance by
the Chairman of that meeting.
Board and committee meeting attendance during 2015
Number of meetings held
Chairman
Paul Manduca
Executive Directors
Tidjane Thiam1
Mike Wells2
Nic Nicandrou
Pierre-Olivier Bouée3
Jackie Hunt4
Penny James5
Michael McLintock
Barry Stowe
Tony Wilkey6
Non-executive Directors
Philip Remnant
Howard Davies
Ann Godbehere
Alistair Johnston
David Law7
Kai Nargolwala
Anthony Nightingale8
Alice Schroeder
Lord Turner7
Lord Turnbull9
Board
10
Audit
Committee
10
Nomination
Committee
5
Remuneration
Committee
7
Risk
Committee
6
General
Meeting
1
10
4/4
10
10
4/4
8/8
3/3
10
10
5/6
10
10
10
10
3/3
10
10
10
3/3
4/4
–
–
–
–
–
–
–
–
–
–
10
10
10
10
3/3
–
–
10
–
–
5
–
–
–
–
–
–
–
–
–
4/5
4/5
5
–
–
–
4/4
–
–
0/1
–
–
–
–
–
–
–
–
–
–
7
–
–
–
–
7
7
–
–
3/3
–
–
–
–
–
–
–
–
–
–
–
6
6
–
–
6
–
–
2/2
3/3
1
1
1
1
1
1
n/a
1
1
n/a
1
1
1
1
n/a
1
1
1
n/a
1
Jackie Hunt resigned as an Executive Director on 3 November 2015.
Notes:
1 Tidjane Thiam stepped down as an Executive Director and Group Chief Executive on 31 May 2015.
2 Mike Wells was appointed as Group Chief Executive on 1 June 2015.
3 Pierre-Olivier Bouée stepped down as an Executive Director on 31 May 2015.
4
5 Penny James was appointed as an Executive Director on 1 September 2015.
6 Tony Wilkey was appointed as an Executive Director on 1 June 2015.
7 David Law and Lord Turner were appointed as Non-executive Directors on 15 September 2015.
8 Anthony Nightingale was appointed as a member of the Nomination Committee on 14 May 2015.
9 Lord Turnbull stepped down as a Non-executive Director on 14 May 2015.
10 The Audit and Risk Committees held two meetings jointly during the year in addition to those listed above, which were attended by all members
from both Committees.
78
Prudential plc Annual Report 2015 www.prudential.co.uk Board balance and effectiveness
Succession planning
The Board continues to be 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. The Board carries
out its succession planning primarily
through the Nomination Committee,
as described more fully on page 87. The
Board is kept fully apprised of the review
process applied across all businesses
which covers both executive director
and senior management succession and
development. 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. The Board confirms
that Egon Zehnder supported the
succession planning process, undertook
external searches for candidates and
evaluated internal candidates for both
Board and non-Board roles. Aside from
these activities, Egon Zehnder did not
undertake any other significant work
for Prudential.
Diversity
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
committed to recruiting the best available
talent and appointing the most appropriate
candidate for each role. This approach,
including due consideration of gender,
is followed as part of the Nomination
Committee’s ongoing activities carried
out during 2015 in respect of succession
planning for Executive and
Non-executive Directors.
The Board does not endorse quotas,
but continues to commit to having an
increasing representation of women
in senior positions in the Group and
on the Board.
Directors’ ongoing development
Prudential offers each Director an induction programme on joining the Board and provides opportunities for ongoing development.
Induction
Ongoing development
The Chairman is responsible for ensuring that induction
programmes are provided for all new directors. These are
tailored to reflect the experience of each director and their
position as either Executive or Non-executive Directors.
On appointment, Non-executive 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 principal Committees, the Group’s
key risks and the risk management framework, as well as the
compliance environment in which the Group operates.
The programme also includes detailed briefings on the Group’s
business units, its product range, the markets in which it operates
and the overall competitive environment.
Both Mr Law and Lord Turner started their induction programme
in 2015, which included sessions with key management in the
Group’s businesses.
Executive Directors receive an induction tailored to their skills
and experience.
The Chairman is also responsible for ensuring that all Directors
continually update their skills, knowledge and familiarity with
the Group. Directors regularly receive reports on the Group’s
businesses and the regulatory and industry-specific
environments in which it operates.
In 2015, the Board took time for particular focus on the Group’s
US and Asian businesses. During visits to the US and Asia, the
Board received updates on key products and distribution in
the US and in the Asian businesses, including an investor’s
perspective. The Board’s overseas visits have allowed the
directors to meet with the local senior management teams.
Throughout the year, the Board focused on regulatory
developments, particularly Solvency II, and the introduction
of a new regulatory responsibility framework for the industry,
applicable to Senior Insurance Managers. A separate session was
held updating the Board on risk and capital models. In addition,
Directors were provided with updates at each Board meeting on
other legal and regulatory changes and developments that could
impact the industry and the Group.
Committee members received updates at Committee meetings
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 2015, the Audit
Committee and Risk Committee held two joint sessions in which
they were provided with an update on Solvency II and related
disclosures.
Directors may request individual in-depth briefings from time to
time, which is valuable to Non-executive Directors wishing to
improve their knowledge of particular developments affecting
the Group or particular parts of the business.
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Performance evaluation
2014
The table below sets out the actions taken by the Board in 2015 in response to themes arising from the 2014 externally-facilitated evaluation.
Theme
Action
Outcome
Board composition
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.
Relationship with senior
management
Selection processes
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.
This is an ongoing focus of the work of the Nomination
Committee on succession planning and is one of the key criteria
included when identifying and recommending individuals for
Board succession.
The appointment of Penny James as Group Chief Risk Officer
and Executive Director, effective 1 September 2015, maintains
gender balance at Board level.
The appointment of two further Non-executive Directors to the
Board ensures the composition of the Board remains balanced
between Executive and Non-executive Directors.
In addition, the appointment of David Law to the Board and
Audit Committee provides detailed expertise around the audit
processes of global insurance groups, and the appointment of
Lord Turner to the Board and Risk Committee adds extensive
high-level experience of international regulation and financial
services.
Both the Audit and Risk Committees widened the pool of
attendees at their meetings during 2015, including senior
management from business units presenting updates where
relevant.
As during previous overseas meetings, the Board met various
senior management at Jackson and Prudential Corporation Asia
as part of the overseas Board visits. These additional visits
provided in-depth information and an opportunity for questions
to be put directly to local management.
The Chairman continued to ensure that the Board was updated
as early as possible on potential candidates.
As part of the selection process leading to the appointment of
David Law and Lord Turner, individual meetings with a number
of Directors took place and the Board was kept updated on the
appointment process throughout.
Board papers
Continue to review and
streamline Board and
committee papers.
Board papers remained subject to continuous improvement
throughout the year to provide relevant, high-quality information
and strike the right balance between detail and overview.
2015
The performance evaluation of the Board
and its principal Committees for 2015 was
conducted internally at the end of 2015.
The assessment was carried out by the
Chairman and Group General Counsel
and Company Secretary through a
questionnaire. The findings were
presented to the Board in February 2016
and an action plan agreed to address areas
of focus identified by the evaluation.
The performance of the Non-executive
Directors and the Group Chief Executive
was evaluated by the Chairman in
individual meetings. Philip Remnant, the
Senior Independent Director, led the
Non-executive Directors in a performance
evaluation of the Chairman.
The review confirmed that the Board
continued to operate effectively during
the year and no major areas requiring
improvement were highlighted. Progress
has been made on the actions identified
in 2014 and addressed in 2015, as
reported above.
Executive Directors are subject to regular
review and the Group Chief Executive
individually appraised the performance of
each of the Executive Directors as part of
the annual Group-wide performance
evaluation of all staff.
80
Prudential plc Annual Report 2015 www.prudential.co.uk The following themes were identified as
areas for focus in 2016:
Governance of subsidiary boards
The Board evaluation recognised that,
following agreement with the PRA to
appoint independent non-executive
directors to certain of the Group’s larger
subsidiaries, more formal oversight of the
governance arrangements for their boards
would be required. In addition, a process
for appointing the subsidiary independent
directors and the relationship between
them and the Chairman and chairs of the
Group Audit and Risk Committees would
need to be implemented.
Post action reviews
The evaluation noted that the Board should
continue to analyse past decisions closely,
testing assumptions and projections made
in the past.
Board papers
On Board processes, the feedback
highlighted progress made during the year,
in particular improvements in clarity of
papers. This is another area we will
continue to focus on during 2016 to ensure
that the right balance is struck regarding
the level of detail provided in papers,
especially for technically complex matters.
This will continue to assist the Board in
managing a growing agenda and keeping
regulatory and strategic issues balanced
appropriately.
Products and customers
The Board intends to continue holding
in-depth focus sessions on products and
customers of the Group, including using
Board visits to the business units in the UK,
Asia and the US as a key opportunity to
do this.
The Board will track its progress in
addressing these themes at its meetings
throughout the course of 2016 and report
on actions taken in its next Annual Report.
Shareholder engagement
As a major institutional investor, the Board
recognises the importance of maintaining a
high level of two-way communication with
shareholders. The Company holds an
ongoing programme of regular contact
with major shareholders, conducted by the
Chairman, Group Chief Executive, Chief
Financial Officer and the Director of
Strategy and Capital Market Relations.
Shareholder feedback from these meetings
and general market views, for example
from analyst research reports, are
communicated to the Board.
The Senior Independent Director and
other Non-executive Directors are
available to meet with major shareholders
on request.
The Group maintains a corporate website
containing a wide range of relevant
information for private and institutional
investors, including the Group’s financial
calendar. The Company’s Registrar,
Equiniti, operates an internet access
facility for registered shareholders,
providing details of their shareholdings
at www.shareview.co.uk
A full programme of engagement with
shareholders, potential investors and
analysts, in the UK and overseas, is led
each year by the Director of Strategy and
Capital Market Relations. In addition, a
conference for investors and analysts has
been held on a regular basis since 2010,
with in-depth business presentations and
opportunities for attendees to meet with
members of the Board and senior
management through the course of the
event. Most recently, the Group held a
conference for investors in January 2016.
The Group Chief Executive, Chief Financial
Officer and investor relations team also
attend major financial services conferences
to present to, and meet with, the
Company’s shareholders. In 2015, as part
of the investor relations programme,
over 440 meetings were held with
approximately 700 individual institutional
investors across the UK, in continental
Europe, US and Asia.
The Chairman and Senior Independent
Director also held individual meetings with
major shareholders, primarily to discuss
governance and strategy.
The Annual General Meeting is an
opportunity for further shareholder
engagement, for the Chairman to explain
the Company’s progress and along with
other members of the Board, to answer any
questions. All Directors then in office
attended the 2015 Annual General Meeting.
Details of the 2016 Annual General
Meeting are available on
www.prudential.co.uk under ‘Investors’.
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01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Further information on Directors
Information on a number of regulations and processes relevant to directors and how these are addressed by Prudential is given below.
Prudential’s approach
Area
Non-executive Directors
Executive Directors
Rules governing
appointment
and removal
Terms of
appointment
— The Board, or members in a general meeting, may appoint a maximum of 20 directors as set out in the
Company’s Articles.
— Their appointment and removal is also governed by other provisions in the Articles, the UK Corporate
Governance Code (the UK Code), the Hong Kong Corporate Governance Code (HK Code) as appended to
the Hong Kong Listing Rules (HK Listing Rules), and the Companies Act 2006.
— Non-executive Directors are appointed for an initial
— The Directors’ remuneration report sets out the
terms of Executive Directors’ service contracts on
page 122.
term of three years.
— Subject to review by the Nomination Committee
and re-election by shareholders, it would be
expected that they serve a second term of
three years.
— After six years, Non-executive Directors may be
appointed for a further year, up to a maximum of
three years in total, subject to rigorous review and
re-election by shareholders.
— The Directors’ remuneration report sets out the
terms of the Non-executive Directors’ letters of
appointment on page 123.
Independence of the Non-executive Directors
— 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.
— The independence of the Non-executive Directors is determined by reference to the UK Code and HK Listing
Rules. Prudential is required to affirm annually the independence of all Non-executive Directors under the
HK Listing Rules and the independence of its Audit Committee members under Sarbanes-Oxley legislation.
— For the purposes of the UK Code, throughout the year, all Non-executive Directors were considered by the
Board to be independent in character and judgement, and to have met the criteria for independence as set
out in the UK Code.
— For the HK Listing Rules purposes, the Company will consider Mr Law independent from 1 July 2016, the
date one year after his retirement from PwC. The Company has received confirmation of independence from
each of the other Non-executive Directors as required by the HK Listing Rules.
— The Board does not consider that Mr Law’s previous position at PwC affects his status as an independent
Director for the purposes of the UK Code (or in relation to his membership of the Audit Committee, under
applicable Sarbanes-Oxley legislation). Mr Law does not retain any ongoing involvement with PwC other
than his pension entitlements and his current position as CEO of L&F Indemnity, the captive insurance group
that serves the PricewaterhouseCoopers network (this group of companies has no involvement in the
operation of PwC).
— There were no other material factors which were deemed to affect the Non-executive Directors’
independence.
82
Prudential’s approach
Area
Non-executive Directors
Executive Directors
External
appointments
— Directors may hold directorships or other significant interests in companies outside the Group which may
have business relationships with the Group.
— Non-executive Directors may 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 conflicts of
interest or possible issues arising out of the time
commitments required by the new role can be
identified and addressed appropriately.
— The major commitments of the Non-executive
Directors are detailed in their biographies on pages
74 and 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 the appointments do not lead to any
conflicts of interest.
— In line with the UK Code, we would not expect our
Executive Directors to hold more than one
Non-executive Directorship in another FTSE 100
company nor chair such a company.
— Details of any fees retained from such
appointments are included in the Directors’
remuneration report on page 101.
Conflicts
of interest
— Directors have a statutory duty to avoid conflicts of interest with the Company. The Company’s Articles allow
its Directors to authorise conflicts of interest, and the Board has adopted a policy and effective procedures to
manage and, where appropriate, approve conflicts or potential conflicts of interest.
— Under these procedures, Directors are required to notify all directorships in companies which are not part of
the Group, along with other positions which could result in a conflict or could give rise to a potential conflict,
before they take on their additional positions.
— The Chairman and the Group General Counsel and Company Secretary assess new appointments which
Board members are considering, in order to identify any conflicts or potential conflicts. Where a conflict or
potential conflict is identified, the Nomination Committee, or the Board where appropriate, considers, and if
thought fit, approves each such situation individually.
— Authorisations of conflicts are reviewed annually prior to the publication of the Annual Report.
Election and
re-election
— Proposals for election and re-election are supported by the annual performance evaluation of each Director,
which concluded that each Director continues to make an effective contribution.
— All Directors will retire from the Board at the 2016 Annual General Meeting.
— John Foley, Penny James, David Law, Lord Turner and Tony Wilkey will seek election for the first time.
— All other Directors, except Alistair Johnston, wish to seek re-election.
Indemnities and
protections
— The Company’s Articles permit the Directors and Officers of the Company to be indemnified in respect of
liabilities incurred as a result of their office.
— Suitable insurance cover is in place in respect of legal action against directors and senior managers of
companies within the Group.
— This includes qualifying third-party indemnity provisions for the benefit of the Directors of the Company and
other such persons in their capacity as Directors of other companies within the Group.
— These indemnities were in force during 2015 and remain so.
Independent
legal advice
Share dealing and
inside information
— 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.
— Prudential has adopted share dealing rules relating to securities transactions by Directors on terms no less
exacting than required by Appendix 10 to the HK Listing Rules and by the UK Model Code. 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.
Compensation
for loss of office
— The Company’s policy on loss-of-office payments for Directors forms part of the Directors’ remuneration
policy which was approved by shareholders at the 2014 Annual General Meeting. A copy of the policy is
available on the Company’s corporate website www.prudential.co.uk
Significant
contracts
— At no time during the year did any Director hold a material interest in any contract of significance with the
Company or any subsidiary undertaking.
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01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Risk management and internal control
The Board is responsible for ensuring that
an appropriate and effective system of
internal control and risk management is
in place across the Group. The framework
of internal control and risk management
centres on clear delegated authorities
to ensure Board oversight and control
of important decisions. The framework
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.
Internal control
The Group Governance Manual sets out
the delegated authorities and establishes
the requirements for subsidiaries to seek
approvals from or report to Group Head
Office. Group-wide standards are
established through policies and other
governance arrangements which are also
included in the Group Governance Manual.
Internal controls and processes, based on
the provisions established in the Group
Governance Manual, are in place across
the Group. These include controls for the
preparation of financial reporting. The
operation of these controls and processes
facilitates the preparation of reliable
financial reporting and the preparation of
local and consolidated financial statements
in accordance with the applicable
accounting standards and requirements
of the Sarbanes-Oxley Act. These controls
include certifications by the Chief Executive
and Chief Financial Officer of each business
unit regarding the accuracy of information
provided for use in preparation of the
Group’s consolidated financial reporting
and the assurance work carried out in
respect of US reporting requirements.
The Board has delegated authority to the
Audit Committee to review the framework
and effectiveness of the Group’s systems
of internal control. The Audit Committee
is supported in this responsibility by the
assurance work carried out by Group-wide
Internal Audit and the work of the business
unit audit committees, which oversee the
effectiveness of controls in each respective
business unit. Details of how the Audit
Committee oversees the framework of
controls and their effectiveness on an
ongoing basis, is set out more fully in the
report on pages 89 to 94.
Risk management
A key component of the Group
Governance Manual is the Group Risk
Framework, which requires all business
units to establish processes for identifying,
evaluating and managing the risks facing
the business.
The Board determines the nature and
extent of the principal risks it is willing to
take in achieving its strategic objectives.
It has delegated authority to the Risk
Committee to review the Group Risk
Framework and to approve the risk policies,
standards and limits within the overall
Board approved risk appetite. The Risk
Committee monitors the effectiveness of
the Group Risk Framework and ongoing
compliance with it through its regular
activities detailed in the report on pages
95 to 97.
The Group’s risk governance
arrangements, which support the Board,
the Risk Committee and the Audit
Committee, are based on the principles
of the ‘three lines of defence’ model:
risk-taking and management, risk control
and oversight, and independent assurance.
First line of defence
(risk-taking and management)
— Takes and manages risk exposures
in accordance with the risk appetite,
mandate and limits set by the Board;
— Identifies and reports the risks that
the Group is exposed to, and those
that are emerging;
— Promptly escalates any limit breaches
or any violations of risk-management
policies, mandates or instructions;
— Identifies and promptly escalates
significant emerging risk issues; and
— Manages the business to ensure
full compliance with the Group risk
management framework as set out
in the Group Governance Manual,
which includes the Group risk
framework and risk policies as well
as approvals requirements, among
other requirements.
Second line of defence
(risk control and oversight)
— Assists the Board to formulate and then
implements the approved risk appetite
and limit framework, risk-management
plans, risk policies, risk reporting and
risk identification processes; and
— Reviews and assesses the risk-taking
activities of the first line of defence
and where appropriate, challenges
the actions being taken to manage
and control risks, and approves any
significant changes to the controls
in place.
Third line of defence
(independent assurance)
— Provides independent assurance
on the design, effectiveness and
implementation of the overall system
of internal control, including risk
management and compliance.
84
The three lines of defence model is adopted at the Group level as follows:
Board
Nomination Committee
Remuneration Committee
Risk Committee
Audit Committee
1st line of defence
2nd line of defence
3rd line of defence
Executives
Group CEO
CEC
GEC
BSCMC
Management
GERC
Group CFO
Group Regulatory
Director
Group CRO
TAC
GCRC
GORC
GwIRC GAB-
CSC
STOC
Group Finance
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
Chief Executive’s Committee
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
CEC
GEC
BSCMC
GERC
TAC
GCRC
GORC
GwIRC
GABCSC Group Anti-Bribery and Corruption Steering Committee
STOC
Solvency II Technical Oversight Committee
Formal review of controls
A formal evaluation of the systems of
internal control and risk management is
carried out at least annually. The report is
considered by the Audit Committee and
Risk Committee prior to the Board reaching
a conclusion on the effectiveness of the
systems in place. This evaluation takes
place prior to the publication of the
Annual Report.
As part of the evaluation, the Chief
Executive and Chief Financial Officer of
each business unit, including Group Head
Office, certify compliance with the Group’s
governance policies and the internal
control and risk management
requirements. The Group Risk function
facilitates a review of the matters identified
by this certification process. This includes
the assessment of any risk and control
issues reported during the year, risk and
control matters identified and reported by
the other Group oversight functions and
the findings from the reviews undertaken
by Group-wide Internal Audit, which
carries out risk-based audit plans across the
Group. Issues arising from any external
regulatory engagement are also taken
into account.
The system of internal control complies
with the UK Code and the HK Code, as
required by the Group’s primary listings
in London and Hong Kong, 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 2014
FRC Guidance on Risk Management,
Internal Control and Related Financial
and Business Reporting. In line with this
guidance, the certification provided above
does not apply to certain material joint
ventures where the Group does not
exercise full management control. In these
cases, the Group satisfies itself that suitable
governance and risk management
arrangements are in place to protect the
Group’s interests. However, the relevant
Group company which is party to the joint
venture must, in respect of any services it
provides in support of the joint venture,
comply with the requirements of the
Group’s internal governance framework.
Effectiveness of controls
In accordance with provision C.2.3 of the
UK Code and provision C.2.1 of the HK
Code, the Board has reviewed the
effectiveness and performance of the
system of risk management and internal
control during 2015. This review covered
all material controls, including financial,
operational and compliance controls,
risk-management systems and the
adequacy of the resources, qualifications
and experience of staff of the Group’s
accounting and financial reporting function.
The Board confirms that there is an ongoing
process for identifying, evaluating and
managing the significant risks faced by the
Group, which has been in place throughout
the period and up to the date of this report
and confirms that the system remains
effective.
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01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Committees
The principal Committees of the Board are the Nomination, Audit, Risk and
Remuneration Committees. These Committees form a key element of the
Group governance framework, facilitating effective independent oversight
of the Group’s activities by the Non-executive Directors.
Each Committee Chairman provides an update to the Board of each
Committee meeting, supported by a short written summary of the
Committee business considered.
Nomination Committee report
As Chairman of the Nomination Committee,
I am pleased to report on the Committee’s
activities and focus during 2015.
The Nomination Committee ensures that
the Group has appropriate diversity and
balance of skills and experience on the
Board and its committees and that suitable
succession planning is in place.
During 2015, the Committee carried out
a robust process in selecting and
recommending a number of key executives
and non-executives for appointment or
role change, namely Mike Wells as Group
Chief Executive, Penny James as Group
Chief Risk Officer, Barry Stowe and Tony
Wilkey as business unit Chief Executives
and Lord Turner and David Law as
Non-executive Directors.
These appointments demonstrate the
quality of the Committee’s succession
planning. The Committee ensured that the
Board was able to appoint high-calibre
candidates, keeping it well positioned to
develop and implement our strategy of
delivering long-term value.
The Committee continues to refresh its
succession planning on an ongoing basis.
At the request of the Board, and as agreed
with the PRA, the Committee undertook
preparatory work during 2015 in order to
put in place independent chairs and
directors on certain of the Group’s
subsidiary boards. From February 2016,
the duties of the Committee were
extended to reflect new responsibilities in
relation to the governance arrangements
for such subsidiary boards and the
independent chairs and directors.
The Committee has been re-named the
Nomination & Governance Committee to
reflect these new duties.
Key committee details
Committee members
— Paul Manduca (Chairman)
— Howard Davies
— Ann Godbehere
— Anthony Nightingale (from May 2015)
— Philip Remnant
— Lord Turnbull (until May 2015)
Regular attendees
— Group Chief Executive
— Group Human Resources Director
— Group General Counsel and Company
Secretary
Number of meetings in 2015: five
Key responsibilities
— Keeping under review the leadership
needs of the Group and ensuring
suitable Board successions plans
are in place;
— Reviewing the size, structure and
composition of the Board including
knowledge, experience, diversity, and
making recommendations to the Board
with regard to any changes;
— Identifying and nominating candidates,
based on merit and against objective
criteria, for approval by the Board to fill
any Board vacancies;
— Regularly reviewing the independence
of the Non-executive Directors;
— Reviewing the time required from a
Non-executive Director to fulfil the
obligations of the position;
— Recommending to the Board the
re-appointment of any Non-executive
Director at the conclusion of their
specified term of office and making
recommendations as to their re-election
by shareholders;
— Considering and authorising any actual or
potential situational conflicts arising from
either new or existing appointments.
Paul Manduca
Chairman of the Nomination
Committee
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How the Committee discharged its responsibilities during 2015
Matter considered
How the Committee addressed the matter
Succession planning
— Appointments
– Non-executive Directors
– Executive Directors
The Committee kept succession plans for executive and non-executive Board roles under
continuous review.
During 2015, the Committee led a search for additional candidates to be appointed to the Board as
Non-executive Directors, in order to ensure Board composition was progressively refreshed,
assisted by Egon Zehnder as the search consultant.
An initial list of candidates was provided to the Committee and comments fed back to the Chairman.
A shortlist was prepared and the Committee agreed that the Chairman would continue the search
process. The Chairman coordinated the continued search, keeping the other Committee members
closely involved in the process. This included conversations with potential candidates, who met the
Chairman, the Group Chief Executive and other members of the Committee, including the Senior
Independent Director and key management. The Board was kept regularly updated on progress.
Mr Law and Lord Turner were identified through this process. Mr Law has excellent knowledge and
in-depth experience of the issues in the financial services industry gained throughout his lengthy
career at PwC which included five years as Global Leader of their insurance practice. He also has
extensive experience working with clients in an industry regulated by the Prudential Regulation
Authority (PRA) and the Financial Conduct Authority (FCA).
Lord Turner has held a number of non-executive positions since 2000, which provided him with
extensive involvement in audit, risk and remuneration committees across a range of industries. He
has in-depth knowledge of financial services gained during his appointment as Chairman of the FSA
(2008-2013) and as non-executive director of the Bank of England.
The Committee recommended the appointment of Mr Law and Lord Turner to the Board for approval.
The Committee also led searches for the executive Board vacancies which arose during the year.
During 2015, the appointments of the Group Chief Executive, the Group Chief Risk Officer and the
Chief Executives of the Northern American, Asian and UK & Europe businesses were recommended
by the Committee.
Egon Zehnder were again appointed as the search consultant to review the external market and,
where required, to provide support in the assessment of internal candidates.
Initial longlists of potential internal and external candidates were considered. After a review of the
longlists, shortlisted candidates met the Chairman, the Group Chief Executive and other members
of the Committee, including the Senior Independent Director and key management where
appropriate. Additionally, candidates were assessed by Egon Zehnder against the role specification
requirements. The outcomes of these searches are set out below.
Mr Wells was selected for the role of Group Chief Executive. Mr Wells has served on the Board since
January 2011 as President and Chief Executive of Jackson. He has extensive experience of life
insurance, retirement services and asset management, having worked in the sector for 29 years,
with 20 of those years spent in senior and strategic positions at Jackson.
Mr Stowe was selected as Chairman and Chief Executive of the North American business unit. He
had served on the Board since November 2006 as Chief Executive of Prudential Corporation Asia
and altogether has 35 years of experience of leading life insurance organisations in the US and Asia.
Mr Wilkey was selected as Chief Executive, Prudential Corporation Asia. He has 28 years of
experience in life insurance. Prior to joining Prudential in 2006 as Chief Executive, Insurance, at
Prudential Corporation Asia, Mr Wilkey was Deputy President and Chief Operating Officer of
American International Assurance (AIA), responsible for AIA’s life companies in South East Asia.
Ms James was selected as Group Chief Risk Officer. She previously served as Director of Group
Finance, responsible for the delivery of the Group’s financial results, business planning and
performance monitoring. In that role, she also led Prudential’s Solvency II programme and was a
member of the Group Executive Risk Committee.
Mr Foley was selected as Chief Executive, UK & Europe in January 2016. He has more than 35 years’
experience and an in-depth knowledge of Prudential UK & Europe. Mr Foley acted as Interim Chief
Executive of the UK & Europe business from October 2015 in addition to his duties as Group
Investment Director. Between 2011 and 2013, he served on the Company’s Board as Group Chief
Risk Officer.
Ms Richards will join Prudential as successor to Mr McLintock as Chief Executive of M&G
Investments. Mr McLintock announced in February 2016 his intention to retire from the Board. Ms
Richards joins from Aberdeen Asset Management PLC, where she held the position of Chief
Investment Officer and was responsible for operations in Europe, the Middle East and Africa. She
has held senior roles at JP Morgan Investment Management, Mercury Asset Management and
Edinburgh Fund Managers.
The Board was kept informed throughout the process and the Committee recommended the
appointment of Mr Wells, Mr Stowe, Mr Foley, Mr Wilkey, Ms James and Ms Richards to the Board
for approval.
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How the Committee discharged its responsibilities during 2015 continued
Matter considered
How the Committee addressed the matter
— Re-election of directors
As part of its ongoing work on Board succession planning, the Committee considered the terms
of appointment for the Chairman, Committee Chairmen and Non-executive Directors taking into
account time commitment and the general balance of skills, experience and knowledge on the
Board and assessing length of service in their roles. Having reviewed the performance of relevant
Non-executive Directors in office at the time, the Committee recommended to the Board that
those Non-executive Directors should stand for re-election at the 2015 Annual General Meeting.
The Chairman was appointed by the Board in July 2012 for an initial three-year term, which expired
in 2015. The performance of the Chairman is reviewed annually through a process led by the Senior
Independent Director. Following review in 2015, the Committee, led by the Senior Independent
Director, recommended to the Board that the Chairman be appointed for a further term of three
years expiring in 2018, subject to re-election by shareholders.
The Committee further considered the term of appointment of Ann Godbehere, who has been a
Non-executive Director since 2007 and Chairman of the Audit Committee from 2010. In line with
corporate governance guidelines, any reviews of Non-executive Director terms beyond six years
are particularly rigorous. The Committee invited Ann to serve an additional year expiring at the
conclusion of the 2016 Annual General Meeting.
Alistair Johnston and Kai Nargolwala completed their first term of three years following their initial
appointment by shareholders at the 2012 Annual General Meeting. Following performance
evaluation by the Committee and re-election by shareholders in 2015, both were invited to serve
a further term of three years, expiring at the conclusion of the 2018 Annual General Meeting.
Independence
The Committee considered the independence of the Non-executive Directors against relevant
requirements as outlined on page 82.
Conflicts of interest
Governance
— Committee effectiveness
— Group subsidiaries
— Terms of reference
The Board has delegated authority to the Committee to consider, and authorise where necessary,
any actual or potential conflicts of interest in accordance with relevant legislation, the provisions in
the Company’s Articles and the procedures approved by the Board.
In February 2016, the Committee considered the external appointments of all Directors and
reviewed existing conflict authorisations, reaffirming or updating any terms or conditions attached
to authorisations where required.
New positions were reviewed during the year as they arose and conflicts authorised as relevant.
The effectiveness of the Committee was assessed as part of the overall performance evaluation of
the Board. This assessment confirmed that the Committee continued to operate effectively during
the year. More information on the Board evaluation can be found on page 80.
At the request of the Board, and as agreed with the PRA, the Committee undertook preparatory
work during 2015 in order to put in place independent chairs and directors on certain of the Group’s
subsidiary boards. From February 2016, the duties of the Committee were extended to reflect the
new responsibilities in relation to the governance arrangements for such subsidiary boards and the
independent chairs and directors.
The Committee has been re-named the Nomination & Governance Committee to reflect these
new duties.
The Committee considered and made recommendations to the Board regarding its terms of
reference during the year. The terms of reference, which are reviewed annually, can be found
on the Company’s website www.prudential.co.uk These recommendations included provisions
setting out the Committee’s new duties in respect of independent directors of certain of the
Group’s subsidiaries.
88
Ann Godbehere
Chairman of the Audit Committee
Audit Committee report
As Chairman of the Audit Committee,
I am pleased to report on the Committee’s
activities and areas of focus during 2015.
The Audit Committee plays a vital role
in Prudential’s governance, one that is
becoming increasingly important as the
Group continues to grow in size and
complexity. The Committee’s responsibility
for overseeing financial reporting,
supervising the effectiveness of internal
control systems and monitoring the
independence of the auditor, places it at
the centre of our ongoing drive to ensure
that the Group’s governance is as rigorous,
transparent and effective as possible.
During 2015, the Committee continued to
focus closely on its core responsibilities
around financial reporting, internal controls
and oversight of assurance work, including
Sarbanes-Oxley certifications. At the same
time, we addressed the implications for
the Group of emerging regulatory
requirements, among them the
implementation of the Solvency II regime,
the new guidance affecting going concern
and the requirement for a statement on
longer-term viability as well as the
forthcoming new rules governing audit
rotation and tender.
The Committee has continued to ensure
that the Group’s financial reporting remains
clear, accurate and informative. We have
worked closely with the Risk Committee
to provide an integrated approach to risk
assurance and management.
As part of our business as usual activities,
we have met regularly with the Group-wide
Internal Audit Director and the External
Audit Partner.
During the year, we welcomed
David Law as an additional member
of the Audit Committee.
Key committee details
Committee members
— Ann Godbehere (Chairman)
— Howard Davies
— Alistair Johnston
— David Law (from September 2015)
— Philip Remnant
— Alice Schroeder
Regular attendees
— Chairman of the Board
— Group Chief Executive
— Chief Financial Officer
— Group Chief Risk Officer
— Group Regulatory and Government
Affairs Director
— Group General Counsel and Company
Secretary
— Director of Group Compliance
— Director of Group-wide Internal Audit
— External Audit Partner
Number of meetings in 2015: 10
In addition two joint meetings were held
with the Risk Committee.
Key responsibilities
— Monitoring the integrity of the Group’s
Annual Report and Accounts and any
other periodic financial reporting,
reviewing the accounting policies
adopted, decisions taken regarding
major areas of judgement and the going
concern assumption;
— Reviewing and providing advice to the
Board as to whether the Group’s Annual
Report and Accounts are fair, balanced
and understandable;
— Keeping under review the framework
and effectiveness of the Group’s
systems of internal control and
approving the statements to be
included in financial reports concerning
their effectiveness;
— Assessing the performance,
independence and objectivity of the
external auditor, making
recommendations to the Board
regarding their appointment and
approving their terms of engagement;
— Reviewing the effectiveness and
performance of the service provided
by the internal audit function and
approving the internal audit
programme;
— Considering the effectiveness of
compliance arrangements across the
Group and approving the annual
compliance plan;
— Reviewing procedures for managing
allegations from whistleblowers and
arrangements for employees to raise
any concerns about possible financial
reporting improprieties;
— Reviewing the effectiveness of the
Group Governance framework and any
material approvals for deviations from
the Group’s governance policies;
— Approving the standard terms of
reference for the Business Unit audit
committees and annually reviewing
their effectiveness.
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How the Committee discharged its responsibilities during 2015
Matter considered
How the Committee addressed the matter
Financial reporting
— Overview
— Key assumptions and
judgements
The Committee assessed whether appropriate 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 financial results. There were no new or
altered accounting standards in 2015 that had a material effect on the Group’s financial statements.
The Committee also focused on the accounting for material transactions, clarity of disclosures in
financial reports, the going concern assumptions, and compliance with accounting standards and
obligations under applicable laws, regulations and governance codes. As part of this focus, it
reviewed the changes to the UK Corporate Governance Code with particular attention given to the
Group’s planned disclosures on the required new statement discussing the longer-term viability of
the Group. The Committee further considered the fair, balanced and understandable requirement
under the UK Code, providing advice to the Board in respect of this requirement.
The Committee reviewed the key assumptions and judgements made in valuing the Group’s
investments, insurance liabilities and deferred acquisition costs under IFRS, together with reports
on the operation of internal controls to derive these amounts. It also reviewed the assumptions
underpinning the Group’s European Embedded Value (EEV) metrics. The Committee considered
information, including peer comparisons if relevant and available, on the following key assumptions:
— Persistency, mortality, morbidity and expense assumptions within the Asia life businesses;
— Economic and policyholder behaviour assumptions affecting the measurement of Jackson
guarantee liabilities and amortisation of deferred acquisition costs; and
— Mortality and credit risk for UK annuity business.
The Committee also received information on the nature of goodwill and intangible asset values
and the carrying value of investments in the Group’s balance sheet. In relation to investments,
this included the results of independent valuations by the external auditor.
No significant issues arose in respect of these items.
— Other financial reporting
matters
The Audit Committee also considered the nature of non-recurrent items and judgemental matters
regarding provisions for certain open tax items. The Committee was satisfied that management’s
approach was reasonable in these areas.
The Committee considered various analyses from management regarding Group and subsidiary
capital and liquidity prior to recommending to the Board that it could conclude that the financial
statements should continue to be prepared on the going concern basis and the disclosures on the
Group’s longer-term viability were both reasonable and appropriate.
As part of its assessment of the description of performance within the Annual Report and Accounts,
the Committee considered judgemental aspects of the Group’s reporting across the Group’s IFRS
and EEV metrics. This assessment included a review to ensure that the allocation of items between
operating and non-operating profit was in accordance with the Group’s accounting policy. The
Committee considered the impact of equity and interest rate movements on the IFRS results of the
Group’s US business and, after discussion, the Committee was satisfied that the presentation and
disclosure of such impacts was appropriate and consistent with prior periods.
In addition, in relation to the Group’s supplementary reporting on the 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. It also reviewed the impact of changes to the Group’s EEV as a
result of changes to the UK corporation tax rate enacted in the last quarter of 2015. The Committee
was satisfied that the assumptions adopted by the Group were appropriate.
In relation to the Group’s Solvency II disclosures, the Committee considered management’s planned
approach to disclosures in advance of formal implementation of Solvency II at 1 January 2016 in
conjunction with the Group Risk Committee. It considered detailed papers in advance of the
December announcement of internal model approval by the PRA and the Investor Day presentation
in January 2016. It also 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 and Accounts. The Committee concluded the disclosure was reasonable.
90
Matter considered
How the Committee addressed the matter
— Other financial reporting
matters continued
Internal control
External audit
— External audit
effectiveness
— Auditor independence
and objectivity
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 fluctuations in investment return was an area of focus.
No significant issues arose in respect of these items.
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 of financial reporting developments,
including updates on discussions by the International Accounting Standards Board on the
development of the Phase II Insurance Standard and proposed ‘Overlay’ and ‘Temporary Exemption’
options to permit altered presentation of the profit and loss account or deferral of IFRS 9 by insurers.
In conjunction with the Risk Committee, the Committee considered the outcome of the annual
review of the systems of internal control and risk management. The report considered all material
controls, including financial, operational and compliance controls and reflected changes in the UK
Code which became effective for financial years commencing on or after 1 October 2014.
Having considered the review, the Committee made recommendations to the Board regarding the
effectiveness of the internal control and risk management systems in place. The Board’s statement
regarding effectiveness of these systems can be found on page 84.
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 for the
statutory audit, and approved fees for both audit and non-audit services in accordance with the
Group’s policy.
To assess the effectiveness of the auditor, the Committee reviewed the audit approach and strategy
and received an internal report on their performance. They also considered findings contained in a
report issued following inspection of KPMG’s audit by the Financial Reporting Council’s Audit
Quality Review team.
The Committee discussed the findings of this external report and the actions undertaken by KPMG
to address the matters raised as part of the 2015 audit. It agreed that the audit was effective overall
and that any identified areas for further improvement had been addressed or had appropriate action
plans in place.
The internal evaluation was conducted using a questionnaire which was circulated to the
Committee, the Chief Financial Officer and the Group’s senior financial leadership for completion.
In total, 80 people provided input on the performance of the auditor.
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.
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 findings
in the report.
On completion of the activities outlined above, the Committee concluded that the audit had been
effective and the challenge appropriately robust across all parts of the Group.
The Committee has responsibility for monitoring auditor independence and objectivity and is
supported in doing so by the Group’s Auditor Independence Policy (the Policy). The Policy is
updated annually and approved by the Committee. It 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 firm’s work;
— Make management decisions for the Group;
— Have a mutuality of financial interest with the Group; or
— Be put in the role of advocate for the Group.
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How the Committee discharged its responsibilities during 2015 continued
Matter considered
How the Committee addressed the matter
The Policy has two permissible service types: those that require specific approval by the Committee
on an engagement basis and those that are pre-approved by the Committee with an annual
monetary limit. In accordance with the Policy, the Committee approved these permissible services,
classified 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 confirmed as permissible for the external auditor to undertake under the provisions of the
Sarbanes-Oxley Act.
During the year, the Committee considered updates to the policy required to reflect proposed
changes to permissible non-audit services issued for consultation by the Financial Reporting
Council, in connection with the implementation of broader EU reforms to the audit market. This will
include adopting the schedule of prohibited non-audit services specified in the EU directive. The
proposed changes will begin to be implemented during the 2016 reporting period in preparation
for the required full implementation for 2017.
In keeping with professional ethical standards, KPMG also confirmed 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 financial results.
The fees paid to KPMG for the year ended 31 December 2015 amounted to £16.6 million
(2014: £16.6 million) of which £4.3 million (2014: £5.1 million) was payable in respect of non-audit
services. Non-audit services accounted for 26 per cent of total fees payable (2014: 31 per cent).
A breakdown of the fees paid to KPMG can be found in Note B3.4 to the financial statements
on page 171.
Of the £4.3 million of non-audit services, the principal types of non-audit engagements approved for
2015 were tax compliance services of £0.7 million, other assurance services of £2.2 million (mainly in
connection with Solvency II reporting and disclosures), corporate finance services of £0.2 million
and other non-audit services of £1.2 million (which mainly consist of risk management services and
Solvency II internal model validation work). Total Solvency II assurance and validation fees payable
for the year to KPMG were £1.9 million (2014: £1.4 million). The Committee considered that the
Solvency II assurance work is most appropriately completed by the auditor as it builds on the
expertise gained from KPMG’s core audit work from their insight into the Group’s systems,
processes and controls, driving significant synergies.
As explained above, following the introduction of the EU reforms and the adoption of these in the
Company’s 2016 Auditor Independence Policy we do not expect significant use of KPMG for tax
services from 2016.
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 2016 Annual General Meeting.
The external audit was last put out to competitive re-tender in 1999 when the present auditor,
KPMG, 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 2016, concluding that there was
nothing in the performance of the auditor which required such a tender.
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 EU rules, the Company will be required to change
auditor no later than for the 2023 financial year end. The Committee also recognises that the
industry is in a period of unprecedented change with the introduction of Solvency II from this
January and the IASB expecting to issue a new insurance accounting standard for implementation
not before 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 is appointed every five years. A new lead audit partner was appointed in respect of the
2012 financial year who will be replaced post 2016 reporting.
— Auditor independence
and objectivity continued
— Fees paid to the auditor
— Re-appointment
— Audit tender
92
Matter considered
How the Committee addressed the matter
Internal audit
— Regular reporting
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 received
regular updates on audits conducted and management’s progress in addressing audit findings.
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.
— Annual plan and focus for
2016
The Committee approved the half-year update of the 2015 plan. It also considered and approved the
Internal Audit plan, resource and budget for 2016.
— Internal audit
effectiveness
— BU audit committee
effectiveness
— BU model terms of
reference
Group compliance
— Regular reporting
At the half year, the Committee considered recommendations to refresh the Audit plan in response
to changes in the Business Unit operating environments and an update to the Group’s top risks.
The 2016 Plan was formulated based on a bottom-up risk assessment of audit needs mapped to the
Group Risk Framework. It also considered a top-down challenge by GwIA Leadership Team of the
extent of coverage of key themes, ensuring extensive coverage of Group Tier 1 and Tier 2 top risks
as identified by the Group Risk Committee and delivering audit coverage of other key areas of risk
within a tiered cycle of coverage (ie two- three- and four-year cycles).
In addition to the periodic external effectiveness review required every five years (last conducted
in 2012), the Committee annually assesses the performance and effectiveness of the internal audit
function. A 2015 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 continues to comply with the requirements of internal audit policies, procedures and
practices, and standards in all material respects relating to audit planning and execution, and
continued to be aligned with its mandated objectives and maintained general conformance with
the CIIA guidance for Effective Internal Audit in the Financial Services Sector.
Having considered the findings of the 2015 internal effectiveness review, the Committee concluded
that Group-wide Internal Audit had continued to operate in compliance with the requirements of
Group-wide Internal Audit policies, procedures and practice standards in all material respects and
remained aligned to mandated objectives during 2015.
The Committee is supported by the work carried out by the business unit audit committees and
annually reviews the effectiveness of these committees. These committees provide oversight of the
respective business units. During the year, membership comprised senior management who were
independent of the Business Unit and in some cases included independent Non-executive
Directors. The minutes of these committees were provided to the Committee and their meetings
were attended by the external auditor as well as senior management from the business unit
(including the Business Unit Chief Executive, heads of Finance, Risk, Compliance and Group-wide
Internal Audit).
The Committee’s assessment of the Business Unit audit committees was carried out by local teams
from Group-wide Internal Audit and considered whether each of the committees fulfilled the
responsibilities 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 Committee approved the Group’s standard terms of reference for business unit audit
committees, which were updated to reflect changes in the Committee’s own responsibilities to align
them with best practice. These were adopted by the business unit audit committees with minor
variations to address local regulations or the particular requirements of the business.
Regular updates were provided to the Committee by the Group Regulatory and Government Affairs
Director and the Director of Group Compliance. The reports kept the Committee apprised of
communications with the principal UK regulators, international regulatory developments and
compliance with the Group’s Compliance policies. The introduction of the new Senior Insurance
Managers Regime (SIMR), the PRA’s workplan for Prudential and the US Department of Labor’s
consultation on fiduciary duties were areas of focus for the Committee. Group Compliance led the
development of the Group’s framework for the implementation of the new SIMR regime and kept
the Committee updated on developments in this area.
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Committees continued
How the Committee discharged its responsibilities during 2015 continued
Matter considered
How the Committee addressed the matter
— Compliance plan and
focus for 2016
Financial crime
Whistleblowing
Group Governance
Framework
The Committee considered and approved the 2016 Group Compliance Plan. Areas of focus
included strengthening the compliance framework, a focus on key risk drivers which have caused
compliance issues across the industry, including: conflicts of interest; culture, values and the fair
treatment of customers; the articulation of compliance risk appetite; and the assessment and
mitigation of key risks, including anti-money laundering and sanctions, continued proactive
engagement with the PRA and FCA and a number of Business Unit-specific risk areas, which were
cascaded down to the Business Units for implementation and oversight by the respective Business
Unit audit committees.
In 2016, Group Compliance intends to take forward the policy initiatives developed in 2015
and to review and refresh the Group Compliance Policy standards against which Business Units
are assessed.
The Committee received the Money Laundering Prevention Officer’s report which assessed the
operation and effectiveness of the Group’s systems and controls in relation to managing money
laundering and sanctions risk. The Committee noted the regulatory developments relating to the
strengthening of the regimes in Asia ahead of various Financial Action Task Force reviews and the
drive for transparency of beneficial ownership, led by the G20 and UK regulators.
Regular updates were provided to the Committee on matters raised through the Group’s
Confidential Reporting Lines and the actions taken in response to these. The role of the
whistleblowing champion for the purpose of SIMR will be carried out by the Chair of the UK
business unit risk committee. At Group level, the Chair of the Group Audit Committee remains
responsible for oversight of whistleblowing activities across the whole of the Group.
The Group Governance Framework links together internal controls, authorisation requirements,
Business Unit reporting and escalation, as well as the policies adopted by the Group. The
Framework comprises a central repository of information, the Group Governance Manual, which
contains these controls, plus a number of processes to ensure polices remain accurate and up to
date. The Group Governance Manual is also used to promote awareness and educate colleagues
across the Group about their obligations. Procedures to assess to what extent all Business Units in
the Group meet these obligations are in place and the outcome is monitored by the Committee.
The Committee reviewed the outcomes of the Governance Quality Assurance reviews undertaken
during 2015, the update on the annual Group Governance Manual content review and results of the
year-end certification of compliance with the Group Governance Manual requirements for the
period ended 31 December 2015.
Governance
— Committee effectiveness
The Committee reviewed compliance with various applicable regulations and codes of conduct.
The results of this assessment were presented to the meeting in February 2016.
— Private meetings
— Terms of reference
The effectiveness of the Committee was assessed as part of the overall performance evaluation of
the Board. This assessment confirmed that the Committee continued to operate effectively during
the year. More information on the Board evaluation can be found on page 80.
Periodically during the year, the Committee met with each of the external and internal auditors
and with Group Security without the presence of management.
The Committee considered and made recommendations to the Board regarding its terms of
reference during the year. The terms of reference, which are reviewed annually, can be found on the
Company’s website www.prudential.co.uk These recommendations reflected the Committee’s new
responsibilities regarding the longer-term viability statement and auditor rotation.
94
Howard Davies
Chairman of the Risk Committee
Key committee details
Committee members
— Howard Davies (Chairman)
— Ann Godbehere
— Kai Nargolwala
— Lord Turner (from September 2015)
— Lord Turnbull (until May 2015)
Regular attendees
— Chairman of the Board
— Group Chief Executive
— Chief Financial Officer
— Group Chief Risk Officer
— Group Regulatory and Government
Affairs Director
— Group General Counsel and Company
Secretary
— Group Investment Director
— Director of Group-wide Internal Audit
Number of meetings in 2015: Six
In addition two joint meetings were held
with the Audit Committee.
Key responsibilities
— Recommending the Group’s overall risk
appetite to the Board for approval;
— Reviewing the Group’s risk and
investment frameworks and approving
the policies forming part of the
frameworks;
— Reviewing the Group’s material risk
exposures against the risk
methodologies and management’s
actions to monitor and control such
exposures;
— Reviewing the Group’s stress testing;
— Reviewing the overall effectiveness of
the Internal Model used for the
purposes of the Solvency II regime and
making recommendations to the Board
as required in respect of changes to the
Model;
— Advising the Board on the risks inherent
in strategic acquisitions and the
business plan;
— Advising the Remuneration Committee
on risk weightings to be applied to
performance objectives for Executive
remuneration;
— Monitoring the effectiveness of the
Group Chief Risk Officer.
Risk Committee report
As Chairman of the Risk Committee,
I am pleased to report on the Committee’s
activities and focus during 2015.
The Committee’s work has contributed
to the Board’s understanding of the risks
facing the business and shaping our risk
appetite. During the year, the Committee
oversaw a number of initiatives to
strengthen further the Group’s processes
and capabilities around reporting and
managing risk.
Alongside regular monitoring of the
application of, and compliance with, the
Group Risk Framework, we ensured that
the Group was fully prepared for the
introduction of Solvency II. This included
reviewing the methodology and calibration
of the internal model, receiving reports on
the independent validation of the model,
monitoring progress towards the
Prudential Regulation Authority’s approval
of the model, reviewing the Group’s Own
Risk and Solvency Assessment, progress
towards wider Solvency II compliance and
the governance framework for approving
disclosures.
We have worked closely with the Audit
Committee to provide risk oversight
throughout the Group to ensure an
integrated approach.
The Committee also oversaw the work
required as a result of the Group’s
designation as a Global Systemically
Important Insurer, including the
development of the Systemic Risk
Management Plan, the Liquidity Risk
Management Plan and the Recovery Plan.
As part of our regular work schedule, we
conducted an assessment of our stress-
testing processes, again working closely
with the Audit Committee on any areas of
overlap. We monitored the operation of the
three lines of defence system operating
throughout the Group and received regular
reports from the chief risk officers of the
business units who attended our meetings,
following up those reports as appropriate
with detailed reviews of areas where
concerns were reported.
During the year, we welcomed Lord Turner
as a Committee member and Penny James
as our Group Chief Risk Officer.
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How the Committee discharged its responsibilities during 2015
Matter considered
How the Committee addressed the matter
Risk appetite
The Committee considered the Group’s risk appetite including conducting a benchmarking exercise
undertaken against comparator businesses considered relevant in terms of size, complexity,
geography and business lines. Having reviewed the report and taking account of the Group’s
business environment, the Committee concluded that the current risk metrics continued to be
appropriate. The Committee considered the effect of the introduction of Solvency II, and
recommended alterations to the Group’s risk appetite to the Board, reflecting the introduction
of the new capital metric.
Risk management
The Committee received deep dive reports on areas of interest from across the Group and carried
out post-transaction reviews of certain of the Group’s transactions.
Group top risks
Solvency II and Pillar 3
reporting
The Group Risk Development Plan for the year was considered and approved by the Committee.
The Plan underpins the ongoing enhancement of the Group Risk Framework and drives the
development of the Group Risk function’s capability across the Group. The Plan included
recommendations aimed at further embedding the Economic Capital model in risk processes and
decision making, enhancing the understanding and interpretation of the Group Risk Framework
and the review of the appropriateness of the limit framework, the development of the risk appetite
to reflect the introduction of Solvency II and certain enhancements to the limit framework.
The Committee was provided with regular updates from the Group Treasury function as part of its
oversight of liquidity management. It also received reports from Group-wide Internal Audit, minutes
from the Group Executive Risk Committee and matters escalated by other Group-level risk
management committees.
The Committee evaluated the Group’s top risks, considering recommendations for promoting
additional risks, expanding the scope of existing risks and removing those risks no longer requiring
particular focus from the Committee. The Committee received regular reporting on these risks and
mitigating actions.
The Group Chief Risk Officer regularly provided the Committee with updates on market conditions
likely to have an impact on Group and policyholder investments, such as the implications of a
sustained low-interest-rate environment and falling oil prices.
The Group Chief Risk Officer regularly reported to the Committee on compliance with the Group
Risk Framework and the composition of the Group’s ‘Watch Lists’ of credit counterparties.
The Group Chief Risk Officer’s reports also provided the Committee with regulatory updates,
particularly regarding Solvency II and submission of the Group’s Internal Model to the PRA,
development of the Group’s global capital standards and the deliverables required as a result of the
Group’s designation as a Global Systemically Important Insurer.
The Committee considered the Own Risk and Solvency Assessment report based on the outcomes
of the Group’s 2015-17 Business Plan and the FY14 risk and solvency positions prior to its approval
by the Board. The report was also considered in light of the results of the Group’s regular stress
testing. The 2015 Own Risk and Solvency Assessment report enhanced the 2014 report through
improved alignment with business planning and strategy processes and better linkage with the
Group’s risk profile.
The Committee continued to oversee the submission of the Group’s Internal Model Approval
Process application, including reviewing the methodology and assumptions in the model and
receiving input from the independent model validation team and made recommendations to the
Board in respect of its submission to the PRA. The Committee also considered and provided
feedback on the overall governance process and the approach to the disclosures of the internal
model outcome. This activity was undertaken working closely with the Audit Committee.
Global Systemically
Important Insurer
In light of its designation as a Global Systemically Important Insurer, the Company is required to
annually agree a number of deliverables with its Crisis Management Group consisting of the Group’s
principal regulators. The Committee played a key part in considering and approving a number of
these including the Group’s Liquidity Risk Management Plan, Systemic Risk Management Plan and
Recovery Plan.
96
Matter considered
How the Committee addressed the matter
Reverse Stress Testing
The Reverse Stress Test exercise was carried out to confirm the Group’s position as being
significantly resilient to certain business failure scenarios. The report related to the Group’s
year-end 2015 position and was submitted to the PRA.
Internal control and risk
management
In conjunction with the Audit Committee, the Committee reviewed the outcome of the annual
review of the Group’s systems of internal control and risk management.
Governance
— Committee effectiveness
The effectiveness of the Committee was assessed as part of the overall performance evaluation of
the Board. This assessment confirmed that the Committee continued to operate effectively during
the year. More information on the Board evaluation can be found on page 80.
— Terms of reference
The Committee considered and made recommendations to the Board regarding its terms of
reference during the year. The terms of reference, which are reviewed annually, can be found on
the Company’s website www.prudential.co.uk These recommendations incorporated changes to
reflect the Committee’s role in assessing the effectiveness of the Group’s Internal Model and making
recommendations to the Board regarding proposed changes to the Group’s Internal Model.
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Financial reporting
Going concern
In accordance with the requirements of the
guidance issued by the Financial Reporting
Council in September 2014 ‘Guidance on
Risk Management, Internal Control and
Related Financial and Business Reporting’,
after making sufficient enquiries, the
Directors have a reasonable expectation
that the Company and the Group have
adequate resources to continue their
operations for a period of at least 12
months from the date that the financial
statements are approved. 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 pages 4 to
35. The risks facing the Group’s capital and
liquidity positions and their sensitivities are
referred to in the Strategic report on pages
45 to 54. Specifically, the Group’s
borrowings are detailed in note C6 on
pages 241 and 242; the market risk and
liquidity analysis associated with the
Group’s assets and liabilities can be found
in note C3.5(a) on pages 213 to 215;
policyholder liability maturity profile by
business units in notes C4.1(b), (c) and (d)
on pages 222, 224 and 225 respectively;
cash flow details in the consolidated
statement of cash flows; and provisions
and contingencies in notes C12 and D2.
The Directors therefore consider it
appropriate to continue to adopt the going
concern basis of accounting in preparing
the financial statements for the year ended
31 December 2015.
The Directors have a duty to report to
shareholders on the performance and
financial position of the Group and are
responsible for preparing the financial
statements on pages 132 to 291 and the
supplementary information on pages 298
to 328. It is the responsibility of the auditor
to form independent opinions, based on its
audit of the financial statements and its
audit of the EEV basis supplementary
information, and to report its opinions to
the Company’s shareholders and to the
Company. Its opinions are given on pages
293 to 296 and page 330.
Company law requires the Directors to
prepare financial statements for each
financial year which give a true and fair
view of the financial affairs of the Company
and of the Group. The criteria applied in
the preparation of the financial statements
are set out in the statement of Directors’
responsibilities on page 292 and page 329.
Company law also requires the Board to
approve the Strategic report. In addition,
the UK Code requires the Directors’
statement to state that they consider the
Annual Report and financial statements,
taken as a whole is fair, balanced and
understandable and provides the
information necessary for shareholders
to assess the Company’s position and
performance, business model and strategy.
The Directors are further required to
confirm that the Strategic report includes
a fair review of the development and
performance of the business, with a
description of the principal risks and
uncertainties. Such confirmation is
included in the statement of Directors’
responsibilities on page 292 and page 329.
The Strategic report provides, on pages 45
to 47, a description of the Group’s capital
position, financing and liquidity. The risks
facing the Group’s business and how these
are managed are discussed in the audited
sections of the Group Chief Risk Officer’s
report on pages 49 to 56.
The Directors who held office at the date of
approval of this Directors’ report confirm
that, so far as they are each aware, there is
no relevant audit information of which the
Company’s auditor is unaware; each
Director has taken all the steps that he or
she ought to have taken as a Director to
make himself or herself aware of any
relevant audit information and to establish
that the Company’s auditor is aware of that
information. This confirmation is given, and
should be interpreted in accordance with,
the provisions of Section 418 of the
Companies Act 2006.
98
Compliance with corporate governance codes
In line with its primary listings on the
London and Hong Kong Stock Exchanges,
the Company has applied the main
principles and all relevant provisions of the
UK and HK Codes throughout the 2015
financial year as set out in the Governance
report on pages 70 to 100 and also in the
Directors’ remuneration report, which can
be found on pages 102 to 129.
The Board confirms 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 the
Non-executive Directors.
In line with the principles of the UK Code,
fees for the Non-executive Directors are
determined by the Board. The UK Code,
issued in 2012, and revised in 2014, can be
viewed on the FRC’s website, with the HK
Code available on the website of the HK
Stock Exchange.
Additional information
US regulation and legislation
Change of control
Customers
The five largest customers of the Group
constituted in aggregate less than
30 per cent of its total sales for each of 2015
and 2014.
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 Section 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
Officer and comprising members of senior
management. The work of the Disclosure
Committee supports the Group Chief
Executive and Chief Financial Officer in
making the certifications regarding the
effectiveness of the Group’s disclosure
procedures.
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.
99
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71 to 75
67
59 to 61
65
64
101
121
83
83
78
82
99
10
272
368
Section in Annual Report
Page number(s)
Index to principal Directors’ report disclosures
Information required to be disclosed in the Directors’ report may be found in the following sections:
Information
Disclosure of information to auditor
Directors in office during the year
Additional disclosures
Board of Directors
Corporate responsibility governance
Corporate responsibility review
Employment policies and employee involvement
Corporate responsibility review
Greenhouse gas emissions
Political donations and expenditure
Remuneration Committee report
Directors’ interests in shares
Agreements for compensation for loss of office
or employment on takeover
Corporate responsibility review
Corporate responsibility review
Directors’ remuneration report
Directors’ remuneration report
Governance report
Details of qualifying third-party indemnity provisions
Governance report
Powers of directors
Rules governing appointments of directors
Significant agreements impacted by a change
of control
Governance report
Governance report
Governance report
Future developments of the business of the Company Group Chief Executive’s report
Post-balance sheet events
Rules governing changes to the Articles of
Association
Structure of share capital, including changes during
the year and restrictions on the transfer of securities,
voting rights and significant shareholders
Business review
Changes in borrowings
Dividend details
Financial instruments – risk management objectives
and policies
Note D3 of the Notes on the Group financial
statements
Shareholder information
Shareholder information and Note C10 of the Notes on
the Group financial statements
368 and 261
Strategic report
Strategic report and Note C6 of the Notes on the
Group financial statements.
Strategic report
Strategic report
11
46 and 241
48
49
In addition, the risk factors set out on pages 358 to 363 and the additional unaudited financial information set out on pages 332 to 357,
are incorporated by reference into this report.
Signed on behalf of the Board of Directors
Alan F Porter
Group General Counsel and Company Secretary
8 March 2016
100
Directors’
remuneration
report
102 Annual statement from the Chairman
of the Remuneration Committee
104 Our executive remuneration at a glance
106 Summary of Directors’ remuneration policy
109 Annual report on remuneration
126 Supplementary information
This report has been prepared to comply with Schedule 8 of the Large
and Medium-sized Companies and Groups (Accounts and Reports)
(Amendment) Regulations 2013, as well as the Companies Act 2006
and other related regulations.
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 2015; Pension entitlements; table
of 2015 and 2014 Executive Director total remuneration ‘The Single Figure’ and
related notes; Long-term incentives awarded in 2015; Non-executive Director
remuneration in 2015; Statement of Directors’ shareholdings; Outstanding
share options; Recruitment arrangements; and Payments to past directors
and payments for loss of office.
Chairman's Challenge
More than 7,000 employees
volunteered through Prudential’s
flagship international programme,
the Chairman’s Challenge. Find out
more on page 63.
Our communities
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Annual statement from
the Chairman of the
Remuneration Committee
Dear shareholder,
I am pleased to present the
Remuneration Committee’s
report for the year to
31 December 2015.
This is my first report as Chairman of the
Remuneration Committee since I took on
the role in May 2015. I would like to thank
my predecessor Andrew Turnbull, who
served as a member of the Committee
for nine years, acting as Chairman for four
of those years, for his contribution and
leadership of the Committee during
this period.
The Committee’s report is presented
in the following sections:
— An ‘at a glance’ summary of the Group’s
remuneration arrangements on pages
104 and 105;
— Our Directors’ remuneration policy
on pages 106 to 108 which describes
how we pay directors. This policy
was approved by shareholders at the
2014 AGM;
— Our annual report on remuneration on
pages 109 to 125 which describes how
the Committee applied the
remuneration policy in 2015 and the
decisions it has made in respect of 2016;
and
— Supplementary information on pages
126 to 129.
By way of preface, I would like to share
the context for the key decisions the
Committee took during 2015, in particular
the remuneration arrangements for those
joining and stepping down from the Board,
how we rewarded the performance
achieved in 2015 and the decisions relating
to remuneration arrangements for 2016.
Rewarding long-term performance
external challenges faced by the Group
during this time. The Group delivered total
IFRS operating profits of £10,147 million
in the 2013, 2014 and 2015 financial years,
exceeding the stretching targets
established by the Committee.
I am pleased to say that this impressive
financial performance has translated into
significant returns to the Company’s
shareholders, with £100 invested in
Prudential on 1 January 2013 being worth
£189 on 31 December 2015 through the
combined effect of dividends paid and
increases in the share price.
Based on this level of total shareholder
return and strong cumulative IFRS
operating profit performance over the
same period, the Committee determined
that the performance conditions attached
to Prudential Long Term Incentive Plan
(‘PLTIP’) awards made to Executive
Directors in 2013 achieved between
97.5 per cent and 100 per cent vesting
depending on business unit. These awards
will be released to participants in May 2016.
Our Executive Directors are also Prudential
shareholders, with a significant proportion
of their remuneration delivered in the
Company’s shares through both the annual
and long-term incentive plans we operate.
This alignment between the executive
team and other shareholders is
demonstrated by the fact that many of the
Executive Directors have shareholdings
well in excess of the guidelines that they
are asked to meet. For instance, on
31 December 2015, Mike Wells had a
beneficial interest in shares with a value
of over 650 per cent of his salary, which
is significantly higher than his share
ownership guideline of 350 per cent
of salary.
Prudential’s 2016 Executive Directors’
remuneration
As set out overleaf, the strong performance
of the Group has been sustained over a
number of years, notwithstanding the
No changes to Prudential’s remuneration
architecture are proposed for 2016. We
will continue to operate all elements of
Anthony Nightingale, CMG SBS JP
Chairman of the Remuneration
Committee
102
Prudential plc Annual Report 2015 www.prudential.co.uk remuneration in line with the Directors’
remuneration policy approved by
shareholders at the 2014 AGM, and
accordingly do not intend to ask
shareholders to vote on the policy at
the 2016 AGM. An enhancement to the
policy since it was adopted in 2014 has
been the inclusion of a recovery provision
(clawback) in Executive Directors’ incentive
arrangements from 2015, which was
described in the 2014 Directors’
remuneration report. This provision
allows incentives to be recovered after
they are paid in certain circumstances.
In determining remuneration packages for
2016, the Remuneration Committee was
mindful of the need to maintain restraint
on base salary increases. The Executive
Directors will receive an increase in base
salary of 1 per cent with effect from
1 January 2016, which is below the salary
increase budget for other employees.
There have been no changes to incentive
opportunities for 2016.
Rewarding 2015 performance
Enhanced bonus disclosure
The Committee has enhanced the Annual
Incentive Plan (‘AIP’) reporting this year,
a development which I trust you will find
welcome. In addition to the information on
bonus disclosure familiar to shareholders
from last year’s report, which provides an
illustrative view of 2015 performance
against Group and business unit targets, we
have also given more detailed information
on the Group financial performance range
(threshold and maximum) and the results
achieved for the 2014 performance year.
These disclosures can be found in the
annual report on remuneration.
This more detailed disclosure complements
the retrospective reporting of the three-year
IFRS operating profit targets applied to
awards made under the PLTIP. The
performance period for 2013 PLTIP awards
ended on 31 December 2015 and the
Group IFRS operating profit target (and the
result achieved) for this period is disclosed
in the annual report on remuneration.
As set out in the business review section earlier in this Annual Report, the Group’s financial
performance in 2015 was very strong:
Strategic priority
Group performance £m
2015 bonus
achievement
IFRS operating
profit
Prudential’s primary
measure of
profitability and a
key driver of
shareholder value
EEV new
business profit
A measure of the
future profitability of
the new business
sold during the year
and indicates the
profitable growth of
the Group
Business unit
remittances
Cash flows across
the Group balance
these net remittances
(which support
dividend payments)
with the retention
of cash for profitable
reinvestment
Above stretch level
IFRS operating profit
accounted for
35 per cent of Group
financial bonus targets
CAGR
+20%
4,007
2,954
3,186
2,520
2,017
2011
2012
2013
2014
2015
2014-2015 growth 26%
CAGR
+16%
2,617
Above stretch level
EEV new business
profit accounted for
5 per cent of Group
financial bonus targets
2,115
1,791
1,433
1,536
2011
2012
2013
2014
2015
2014-2015 growth 23%
1,482
1,341
1,105
1,200
CAGR
+9%
1,625
Above stretch level
A cash flow measure
was used to determine
10 per cent of the
Group financial bonus
targets
2011
2012
2013
2014
2015
2014-2015 growth 10%
Performance against these key metrics exceeded the stretching targets established by the
Board. The Group achieved these results 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 2015 appropriately reflect this
excellent performance.
The Committee believes these enhanced
disclosures will provide shareholders with
additional clarity.
Changes to the executive team
As you will be aware, there have been
a number of changes to Prudential’s
executive team during 2015, including the
appointment of Mike Wells as Group Chief
Executive. The remuneration decisions
arising from these changes were disclosed
in stock exchange and website
announcements when they took place.
Further information can be found in the
‘Recruitment arrangements’ and ‘Payments
to past directors’ sections of this report.
In making decisions about the remuneration
arrangements for those joining and stepping
down from the Board, the Committee
worked within the Directors’ remuneration
policy approved by shareholders and was
mindful of:
— The skills, knowledge and experience
that each new Executive Director
brought to the Board;
— The need to support the relocation
of executives where this is necessary
to enable them to assume their roles;
— Its commitment to honour legacy
arrangements; and
— In relation to executives leaving the
Board, the particular circumstances
of the departure and the contribution
the individual made to the Group.
In conclusion
During the year, I wrote to our major
shareholders, and the shareholder
representative bodies, ISS and the
Investment Association, seeking their views
on the decisions which the Committee took
in 2015 and its proposals for 2016. We had
a number of useful meetings where
shareholders expressed their views and
I am grateful for this feedback. On behalf
of the Committee, I would like to thank
shareholders for their engagement.
We are firmly committed to continuing
the Committee’s policy of engaging with
our shareholders and we look forward to
your continued support for the Company’s
remuneration arrangements.
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 2015.
Anthony Nightingale, CMG SBS JP
Chairman of the Remuneration
Committee
8 March 2016
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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
To reward executives for delivering our business plans
and generating sustainable growth and returns for
shareholders
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.
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
profit ranges set
with reference
to business plans
approved by the
Board.
TSR vesting
schedule relative
to insurance
peers.
Key features of the policy
How we implemented the policy
6
1
0
2
7
1
0
2
8
1
0
2
9
1
0
2
0
2
0
2
Broadly aligned with pay review
budgets for other employees.
— Salary increases of 3% in 20152;
and
— Salary increases of 1% in 2016.
The maximum opportunity is
up to 200% of salary.
A significant proportion, currently
40%, of bonus is deferred into shares
for three years.
Award is subject to malus and
clawback provisions.
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 profit; or
— Business unit IFRS profit.
Measured over the three financial
years from year of award.
The Group Chief Executive has a
maximum AIP opportunity of 200%
of salary. For other executives the
maximum is 180% or less.
2015 bonuses were paid based on
performance measures related to
profit, cash flow and capital
adequacy, as well as personal
objectives. Clawback provisions
allow amounts to be recouped.4
Awards in 2015 were, and awards
in 2016 will be, below plan limits:
— Group Chief Executive: 400%
of salary;
— CEO JNL: 460% of salary; and
— Other PLTIP awards were 250%
of salary.
For business unit CEOs, awards vest
based on TSR and business unit
IFRS profit. For other executives,
awards are subject to TSR and
Group IFRS profit targets.
The Committee keeps the
performance conditions under
review to ensure that future awards
remain aligned with strategy. 4
Share
ownership
guidelines
We have significant 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
104
Notes
1 CEO, JNL also shares in the JNL bonus pool; and CEO, M&G retains separate arrangements.
2 The Chief Executive Officer, Prudential Corporation Asia received an increase of 5 per cent.
3 Progress against the share ownership guidelines is detailed in the 'Statement of directors’ shareholdings'
section of the annual report on remuneration.
4 More detail on how we implemented the policy is set out in the annual report on remuneration.
Prudential plc Annual Report 2015 www.prudential.co.uk What this performance means for Executive Directors’ pay
At Prudential, remuneration packages are designed to ensure a strong alignment between pay and performance. As you can see from
the charts on page 103, sustained growth across all our key performance metrics has delivered substantial value to our shareholders. This
has been reflected in both the annual bonuses paid and the release of long-term incentive awards, as set out in the annual report
on remuneration.
In particular, the long-term incentives awarded to Executive Directors in 2013 had stretching performance conditions attached to vesting
and were denominated in shares or ADRs. The value generated for shareholders through share price growth and dividends paid over the
last three years is therefore reflected in the value of the 2015 long-term incentive plan (‘LTIP’) releases.
The value of these performance-related elements of remuneration are added to the fixed packages provided to Executive Directors to
calculate the 2015 ‘single figure’ of total remuneration. The values for the current Executive Directors who were directors during the year
are outlined in the table below:
Fixed pay
Performance related
Executive Director
Role
2015
Salary
Pension and
benefits
2015
Bonus
LTIP
vesting
2015
‘Single figure’
2014
‘Single Figure’
Group Chief Risk Officer
Penny James1
Michael McLintock Chief Executive, M&G
Chief Financial Officer
Nic Nicandrou
Chairman & CEO, NABU3
Barry Stowe
Group Chief Executive
Mike Wells
Tony Wilkey2
Chief Executive, PCA4
£200,000
£394,000
£703,000
£729,000
£942,000
£433,000
£71,000
£169,000
£553,000
£746,000
£1,439,000
£511,000
£318,000
£2,128,000
£1,224,000
£3,281,000
£3,223,000
£748,000
–
£999,000
£410,000
£5,729,000
£5,442,000
£2,751,000
£5,623,000
£4,476,000
£1,996,000
£2,072,000
£5,984,000
£6,828,000
£4,427,000 £10,031,000 £12,393,000
–
£3,432,000
£1,740,000
Penny James was appointed to the Board on 1 September 2015. The remuneration above was paid in respect of her service as an Executive Director.
Notes
1
2 Tony Wilkey was appointed to the Board on 1 June 2015. The remuneration above was paid in respect of his service as an Executive Director.
3 NABU is an abbreviation of North American Business Unit.
4 PCA is an abbreviation of Prudential Corporation Asia.
Aligning 2016 pay to performance
The Remuneration Committee awarded salary increases to Executive Directors for 2016 of 1 per cent which was below the salary
increase budget for the wider workforce. No other changes have been made as we believe remuneration packages remain strongly
aligned with performance over both the short and the long term.
The resultant remuneration packages for 2016 are set out in detail in the annual report on remuneration and summarised in the
table below:
Executive Director
Role
Chief Executive, UK & Europe
Group Chief Risk Officer
John Foley
Penny James
Michael McLintock1 Chief Executive, M&G
Chief Financial Officer
Nic Nicandrou
Barry Stowe2
Chairman & CEO, NABU
Group Chief Executive
Mike Wells
Chief Executive, PCA
Tony Wilkey
2016 Salary
£750,000
£606,000
£398,000
£711,000
US$1,111,000
£1,081,000
HK$8,890,000
Maximum AIP (% salary)
Maximum
bonus
Bonus
deferred
LTI award
(% salary)
180%
160%
600%
175%
160%
200%
180%
40%
40%
40%
40%
40%
40%
40%
250%
250%
450%
250%
460%
400%
250%
Notes
1 The bonus opportunity for the Chief Executive, M&G remains the lower of 0.75 per cent of M&G’s IFRS profit 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.
2 The Chairman & CEO, NABU will also continue to have a 10 per cent share of the Jackson Senior Management Bonus Pool. 40 per cent of this is deferred in shares.
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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
Benefits
Operation
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 financial performance;
— Internal relativities; and
— Economic factors such as inflation.
Market data is also reviewed so that salaries remain a competitive
range relative to each Executive Director’s local market.
Executive Directors are offered benefits which reflect their
individual circumstances and are competitive within their local
market, including:
— Health and wellness benefits;
— Protection and security benefits;
— Transport benefits;
— Family and education benefits;
— All-employee share plans and savings plans; and
— Relocation and expatriate benefits.
Opportunity
Annual salary increases for Executive
Directors will normally be in line with the
increases for other employees across our
business units. However, there is no
prescribed maximum annual increase.
The maximum paid will be the cost to the
Company of providing benefits. The cost
of benefits may vary from year to year but
the Committee is mindful of achieving the
best value from providers.
Provision for
an income
in retirement
Current executives have the option to:
— Receive payments into a defined contribution scheme; and/or
— Take a cash supplement in lieu of contributions.
Jackson’s Defined Contribution Retirement Plan has a guaranteed
element (6 per cent of pensionable salary) and additional
contributions (up to a further 6 per cent of pensionable salary)
based on the profitability of JNL.
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.
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Prudential plc Annual Report 2015 www.prudential.co.uk Variable pay
Element
Operation
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 financial and personal objectives. Business unit
chief executives either have measures of their business unit’s
financial performance in the AIP or they may participate in a
business unit-specific bonus plan. For example, the President and
CEO, JNL currently participates in the Jackson Senior Management
Bonus Pool as well as in the AIP.
The financial measures used for the annual bonus will typically
include profit, cash and capital adequacy. Jackson’s profitability
and other key financial measures determine the value of the
Jackson Senior Management Bonus Pool.
In specific circumstances, the Committee also has the power to
recover all (or part of) bonuses for a period after they are awarded
to executives. These clawback powers apply to the cash and
deferred elements of 2015 and subsequent bonuses made in
respect of performance in 2015 and subsequent years.
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 specific
circumstances. From 2015 and future awards, the Committee
also has the power to recover all, or a portion of, amounts
already paid in specific circumstances and within a defined
timeframe (clawback).
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:
— Relative TSR (50 per cent of award); and
— Group IFRS profit (50 per cent of award); or
— Business unit IFRS profit (50 per cent of award).
The performance 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 profit 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 specific circumstances.
For 2015 and future awards, the Committee also has the power
to recover all, or a portion of, amounts already paid in specific
circumstances and within a defined 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 profitability, with profit
and investment performance adjustments, 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 specific circumstances.
For 2015 and future awards, the Committee also has the power
to recover all, or a portion of, amounts already paid in specific
circumstances and within a defined timeframe (clawback).
Deferred bonus
shares
Prudential
Long Term
Incentive Plan
M&G Executive
LTIP
Opportunity
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
profit. 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.
The value of shares awarded under
the PLTIP (in any given financial year)
may not exceed 550 per cent of the
executive’s annual basic salary.
Awards made in a particular year are
usually significantly below this limit 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.
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Share ownership guidelines
The guidelines for share ownership are as follows:
— 350 per cent of salary for the Group Chief Executive; and
— 200 per cent of salary for other Executive Directors.
Executives have five years from the implementation of 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
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
Fees
The Chairman receives an annual fee
for the performance of the role. On
appointment, the fee may be fixed for
a specified 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.
Benefits
Share ownership guidelines
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.
Share ownership guidelines
The Chairman has a share ownership
guideline of one times his annual fee and
is expected to attain this level of share
ownership within five years of the date
of his appointment.
Benefits
The Chairman may be offered benefits
including:
— Health and wellness benefits;
— Protection and security benefits;
— Transport benefits; and
— Relocation and expatriate benefits
(where appropriate).
The 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 the Group
Across the Group, remuneration is reviewed regularly with the intention that all employees are paid appropriately in the context of their
local market and given their individual skills, experience and performance. Each business unit’s salary increase budget is set with
reference to local market conditions. The Remuneration Committee considers salary increase budgets in each business unit when
determining the salaries of Executive Directors.
Prudential does not consult with employees when setting the Directors’ remuneration policy. Prudential is a global organisation with
employees, and agents in multiple business units and geographies. As such, there are practical challenges associated with consulting
with employees directly on this matter. As many employees are also shareholders, they are able to participate in binding votes on the
Directors’ remuneration policy and annual votes on the annual report on remuneration.
Shareholder views
The Remuneration Committee and the Company undertake regular consultation with key institutional investors on the remuneration
policy and its 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 and takes this into account
when determining executive remuneration.
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Prudential plc Annual Report 2015 www.prudential.co.uk Annual report on remuneration
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 Remuneration Committee
Members
Anthony Nightingale (Chairman from 14 May 2015, member since 1 June 2013)
Kai Nargolwala
Philip Remnant
Lord Turnbull (Chairman and member until 14 May 2015)
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, implementation and operation 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 other staff
within its purview.
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 fees of the Chairman and other independent chairs
of the Group’s material subsidiaries;
— Reviewing and approving 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;
— 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; and
— Overseeing the implementation of the Group remuneration policy for those roles within scope of the specific arrangements referred
to in Article 275 of Solvency II.
The effectiveness of the Committee was assessed as part of the overall performance evaluation of the Board. This assessment confirmed
that the Committee continued to operate effectively during the year. More information on the Board evaluation can be found on page 80.
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In 2015, the Committee met seven times. Key activities at each meeting are shown in the table below:
Meeting
Key activities
February 2015
Approve the 2014 Directors’ remuneration report; consider 2014 bonus awards for Executive Directors;
consider vesting of the long-term incentive awards with a performance period ending on 31 December 2014;
approve 2015 long-term incentive awards, performance measures and plan documentation; and approve the
introduction of clawback provisions.
March 2015
Confirm 2014 annual bonuses and the vesting of long-term incentive awards with a performance period ending
on 31 December 2014, in light of audited financial results.
May 2015
Approve separation arrangements for executives who were stepping down from the Board.
June 2015
Consider performance for outstanding long-term incentive awards, based on the half-year 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; review the application of the loss-of-office policy; and consider and
review progress towards share ownership guidelines by the Chairman, Executive Directors and Group
Executive Committee members.
September 2015
Review the dilution levels resulting from the Company’s share plans; review total proposed 2016 remuneration
of Executive Directors ahead of consultation with shareholders; and review the Remuneration Committee’s
terms of reference.
December 2015
(two meetings)
Review the level of participation in the Company’s all-employee share plans; consider feedback received
from shareholders about executive remuneration in 2016; approve new and existing Executive Directors’ 2016
salaries and incentive opportunities; consider the annual bonus and long-term incentive measures and targets
to be used in 2016 (including Ecap surplus and Solvency II surplus metrics and targets to be used for 2016 bonuses);
review an initial draft of the 2015 Directors’ remuneration report; approve the implementation of the remuneration
requirements of Solvency II; and approve the Committee’s 2016 work plan.
Additionally, a number of resolutions in writing were approved by the Committee between these meetings relating to new and promoted
Executive Directors’ remuneration arrangements and separation arrangements for those Executive Directors who stepped down from
the Board.
The Chairman and the Group Chief Executive attend meetings by invitation. The Committee also had the benefit of advice from:
— Group Chief Risk Officer;
— Chief Financial Officer;
— Group Human Resources Director; and
— Director of Group Reward and Employee Relations.
Individuals are never present when their own remuneration is discussed and the Committee is always careful to manage potential
conflicts of interest when receiving views from Executive Directors or senior management about executive remuneration proposals.
During 2015, Deloitte LLP was the independent adviser to the Committee. Deloitte was appointed by the Committee in 2011 following
a competitive tender process. As part of this process, the Committee considered the services that Deloitte provided to Prudential and its
competitors as well as other potential conflicts of interests. Deloitte is a member of the Remuneration Consultants’ Group and voluntarily
operate under their code of conduct when providing advice on executive remuneration in the UK. Deloitte regularly meet with the
Chairman of the Committee without management present. The Committee is comfortable that the Deloitte engagement partner and
team 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 2015 were £77,700 charged on a
time and materials basis. During 2015, Deloitte also gave Prudential management advice on remuneration, as well as providing guidance
on Solvency II, taxation, internal audit, real estate and other financial, 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 regarding
directors’ remuneration.
110
Prudential plc Annual Report 2015 www.prudential.co.uk Remuneration in respect of performance in 2015
Base salary
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;
— 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, reflecting local market conditions; in 2015 salary budgets
increased between 2.5 per cent and 5 per cent for the wider workforce.
To provide context for this review, information was also drawn from the following market reference points:
Executive
Role
Benchmark(s) used to assess remuneration
Pierre-Olivier Bouée
Group Chief Risk Officer
FTSE 40
Jackie Hunt
Chief Executive, UK & Europe
Michael McLintock
Chief Executive, M&G
Nic Nicandrou
Chief Financial Officer
FTSE 40
International Insurance Companies
McLagan UK Investment Management Survey
International Insurance Companies
FTSE 40
International Insurance Companies
Barry Stowe
Chief Executive, PCA
Towers Watson Asian Insurance Survey
Tidjane Thiam
Group Chief Executive
Mike Wells
President & CEO, JNL
FTSE 40
International Insurance Companies
Towers Watson US Financial Services Survey
LOMA US Insurance Survey
As reported in last year’s report, after careful consideration the Committee decided to increase salaries by 3 per cent for all Executive
Directors, other than the Chief Executive, Prudential Corporation Asia, whose salary was increased by 5 per cent to reflect the
inflationary environment in Asia.
The Committee also approved changes to 2015 incentive opportunities for two Executive Directors: the Chief Executive, Prudential
Corporation Asia’s maximum AIP and LTIP awards were increased to 180 per cent and 250 per cent of salary, respectively. This reflects
the importance of Prudential Corporation Asia’s strategic initiatives which are crucial to the achievement of Group-wide objectives.
The Chief Executive, Prudential UK & Europe’s maximum AIP and LTIP awards were increased to 175 per cent and 250 per cent of salary,
respectively. This reflects the fact that the scope of the incumbent’s role had increased due to the Group’s expansion into Africa.
Additionally, this reflects the ambition of the UK & Europe business as it relates to the Group’s growth and cash ambitions.
Executive
Pierre-Olivier Bouée
Jackie Hunt
Michael McLintock
Nic Nicandrou
Barry Stowe1
Tidjane Thiam
Mike Wells2
2014 salary
£630,000
£644,000
£382,000
£682,000
2015 salary
£649,000
£664,000
£394,000
£703,000
HK$8,490,000
HK$8,920,000
£1,061,000
£1,093,000
US$1,114,000
US$1,148,000
Notes
1
2 Mike Wells was appointed Group Chief Executive on 1 June 2015. The annualised 2015 salary above was paid in respect of his service as President & CEO, JNL.
Barry Stowe was appointed Chairman & CEO, NABU on 1 June 2015. The annualised 2015 salary above was paid in respect of his service as Chief Executive, PCA.
Penny James was appointed to the Board as Group Chief Risk Officer on 1 September 2015 with a salary of £600,000 and Tony Wilkey
was appointed to the Board as Chief Executive, Prudential Corporation Asia on 1 June 2015 with a salary of HK$8,800,000. On his
promotion to Group Chief Executive on 1 June 2015, Mike Wells’s salary was £1,070,000 and on appointment as Chairman & CEO,
NABU, on 1 June 2015, Barry Stowe’s salary was US$1,100,000.
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Annual bonus
2015 annual bonus opportunities
Executive Directors’ bonus opportunities, the weighting of performance measures for 2015 and the proportion of annual bonuses
deferred are set out below:
Executive
Pierre-Olivier Bouée1
Jackie Hunt2
Penny James3
Michael McLintock4
Nic Nicandrou
Barry Stowe5
Tidjane Thiam6
Mike Wells7
Tony Wilkey8
Maximum
AIP opportunity
Weighting of measures
Financial measures
(% of salary) Deferral requirement
Group
Business unit
160% 40% of total bonus
175% 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
200% 40% of total bonus
180% 40% of total bonus
50%
20%
50%
20%
80%
80%
80%
80%
20%
–
60%
–
60%
–
–
–
–
60%
Personal
objectives
50%
20%
50%
20%
20%
20%
20%
20%
20%
Notes
1
2
Pierre-Olivier Bouée stepped down from the Board on 31 May 2015. The maximum bonus opportunity shown represents his annual opportunity as an Executive
Director but no bonus was paid.
Jackie Hunt stepped down from the Board on 3 November 2015. The maximum bonus opportunity shown represents her annual opportunity as an Executive
Director.
3 Penny James was appointed to the Board on 1 September 2015. The maximum bonus opportunity shown represents her annual opportunity as an Executive
Director – this was pro-rated for the portion of the year for which she was an Executive Director.
4 Michael McLintock’s annual bonus opportunity in 2015 was the lower of 0.75 per cent of M&G’s IFRS profit and six times annual salary. M&G’s IFRS profit in 2015
was £473.2 million.
5 Barry Stowe was Chief Executive, PCA until 31 May 2015 and was appointed Chairman & CEO, NABU on 1 June 2015. The maximum opportunity shown represents
his annual opportunity in his current role – this was pro-rated for the portion of the year he was in this role and he also receives a pro-rated AIP in respect of the
portion of the year he was Chief Executive, PCA. In addition to the AIP, he receives 10 per cent share of the Jackson Senior Management Bonus Pool pro-rated for
the period he was in his current role. This is determined by the financial performance of Jackson.
6 Tidjane Thiam stepped down from the Board on 31 May 2015. 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.
7 Mike Wells was President & CEO, Jackson until 31 May 2015 and was appointed Group Chief Executive on 1 June 2015. The maximum opportunity shown
represents his annual opportunity in his current role – this was pro-rated for the portion of the year he was in this role and he also receives a pro-rated AIP in
respect of the portion of the year he was President & CEO, Jackson. In addition to the AIP, he received 10 per cent share of the Jackson Senior Management Bonus
Pool pro-rated for the period he was in that role. This is determined by the financial performance of Jackson.
8 Tony Wilkey was appointed to the Board on 1 June 2015. 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.
2015 AIP performance measures and achievement
Financial performance
The financial performance measures set for 2015 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 business plan targets. The Committee reviewed performance
against these ranges at its meeting in February 2016; in all of our bonus performance metrics, other than the new measure of ECap
surplus, the Group’s 2015 results exceeded its stretch plan targets.
The Committee also considered a report from the Group Chief Risk Officer which confirmed that these results were achieved within
the Group’s and business units’ risk appetite and framework. The Group Chief Risk Officer also considered the effectiveness of risk
management and internal controls, and specific actions taken to mitigate risks, particularly where these may be at the expense of profits
or sales. The Group Chief Risk Officer’s recommendations were taken into account by the Committee when determining AIP outcomes
for Executive Directors.
The performance measures, their weightings and the achievement compared to the performance range, is illustrated below. The
performance range (the levels of performance required for threshold and maximum bonuses to be paid) for the 2015 Group financial
measures will be disclosed in the 2016 report.
Measure
Cash flow
Operating free surplus
IGD surplus
ECap surplus
NBP EEV profit
In-force EEV profit
IFRS profit
Weighting
Threshold
0% vesting
Midpoint
50% vesting
Maximum
100% vesting
Above maximum
100% vesting
10%
25%
10%
5%
5%
10%
35%
Group
Prudential Corporation Asia
UK & Europe
M&G
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Prudential plc Annual Report 2015 www.prudential.co.uk Personal performance
As set out in the Directors' remuneration policy, a proportion of the annual bonus for each Executive Director is based on the achievement
of personal objectives. These objectives include the executive’s contribution to Group strategy as a member of the Board and specific
goals related to their functional and/or business unit role. Performance against these objectives was assessed by the Committee at its
meeting in February 2016.
2015 Annual Incentive Plan payments
On the basis of the strong performance of the Group and its business units, and the Committee’s assessment of each executive’s personal
performance, the Committee determined the following 2015 AIP payments:
Executive
Role
Pierre-Olivier Bouée1
Jackie Hunt2
Penny James
Michael McLintock
Nic Nicandrou
Barry Stowe
Tidjane Thiam3
Mike Wells
Tony Wilkey
Group Chief Risk Officer
Chief Executive, UK & Europe
Group Chief Risk Officer
Chief Executive, M&G
Chief Financial Officer
Chairman & CEO, NABU
Chief Executive, PCA
Group Chief Executive
Group Chief Executive
President & CEO, JNL
Chief Executive, PCA
2015 salary*
£649,000
£664,000
£600,000
£394,000
£703,000
US$1,100,000
HK$8,920,000
£1,093,000
£1,070,000
US$1,148,000
HK$8,800,000
* At 31 December 2015 or stepping down from the Board if earlier.
Maximum
2015 AIP
2015 AIP payment
(percentage
of maximum)
160%
175%
160%
600%
175%
160%
180%
200%
200%
160%
180%
0%
89.4%
99.3%
90.0%
99.5%
99.5%
95.9%
77.3%
99.7%
99.7%
95.9%
2015 AIP
payment
£nil
£1,039,160
£317,740
£2,127,600
£1,223,782
US$1,021,277
HK$6,413,852
£703,857
£1,244,214
US$762,846
HK$8,858,593
Notes
1
2
Pierre-Olivier Bouée stepped down from the Board on 31 May 2015 and no bonus was paid.
Jackie Hunt stepped down from the Board on 3 November 2015. The bonus shown above was paid in respect of her service as an Executive Director. Please see
the ‘Payments to past directors’ section for details.
3 Tidjane Thiam stepped down from the Board on 31 May 2015. The bonus shown above was paid in respect of his service as an Executive Director. Please see
the ‘Payments to past directors’ section for details.
4 Where individuals joined the Board during the year, or their roles changed during the year, the bonus paid reflected the time they spent as Executive Directors
in their respective roles.
2015 Jackson bonus pool
In 2015, the Jackson bonus pool was determined by Jackson’s profitability, capital adequacy, remittances to Group, in-force experience,
ECap solvency ratio and credit rating. Across all of these measures Jackson delivered strong performance and exceeded prior year
performance. As a result of this performance the Committee determined that Mike Wells’s share of the bonus pool would be US$2,261,250
and Barry Stowe’s share of the bonus pool would be US$3,165,750.
Disclosure of targets and achievement for the 2014 Annual Incentive Plan
The Group’s financial performance range and the results achieved in respect of the 2014 Annual Incentive Plan are disclosed below.
The Board believe that, due to the commercial sensitivity of the business unit targets, disclosing further details of these targets may
damage the competitive position of the Group.
Targets and achievement for the 2014 Annual Incentive Plan
Measure
Weighting
Threshold
Maximum
Achievement
Group cash flow
Operating free surplus
Group IGD surplus
15%
20%
15%
Post-tax NBP EEV profit
5%
Post-tax In-force EEV profit
10%
Group IFRS profit
35%
Overall Group bonus score
100%
0
2,108
3,508
1,769
1,244
2,619
128
2,448
4,508
2,044
1,519
2,969
2,579
4,715
2,126
3,186
1,970
234
Payout as %
of maximum
100%
100%
100%
100%
100%
100%
113
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Remuneration in respect of performance in 2015
Long-term incentive plans with performance periods ending on 31 December 2015
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 financial results against these performance targets. The
Committee also reviewed underlying Company performance to ensure vesting levels were appropriate. The Directors' remuneration
policy contains further details of the design of Prudential’s long-term incentive plans.
Prudential Long-Term Incentive Plan (PLTIP) and Group Performance Share Plan (GPSP)
In 2013, all Executive Directors were made awards under the PLTIP or GPSP. The awards were subject to challenging targets. The
weightings of these measures are detailed in the table below:
Executive
Michael McLintock
Jackie Hunt
Barry Stowe
Mike Wells
All other Executive Directors
Weighting of measures
Group TSR1
IFRS profit
(Group or business unit)2
100%
50%
50%
50%
50%
–
50% (business unit target)
50% (business unit target)
50% (business unit target)
50% (Group)
Notes
1 Group TSR is measured on a ranked basis over three years relative to peers.
2
IFRS profit is measured on a cumulative basis over three years.
Under the Group TSR measure, 25 per cent of the award vests for TSR at the median of the peer group increasing to full vesting for
performance within the upper quartile. The peer group for the awards is:
Aegon
Allianz
Legal & General
Old Mutual
Swiss Re
Aflac
Aviva
Manulife
Prudential Financial
Zurich Insurance Group
AIA
AXA
MetLife
Standard Life
AIG
Generali
Munich Re
Sun Life Financial
Prudential’s TSR performance during the performance period (1 January 2013 to 31 December 2015) was in the upper quartile of the
peer group above (ranked 5). The portion of the awards related to TSR therefore vested in full.
Under the IFRS measure, 25 per cent of the award vests for meeting the threshold IFRS profit set at the start of the performance period
increasing to full vesting for performance at or above the stretch level. The table below illustrates the cumulative performance achieved
over 2013 to 2015 compared to the Group targets set in 2013:
Group
IFRS operating profit
Cumulative
target
(2013-15)
Cumulative
achievement
(2013-15)
£8,329 million
£10,147 million
Overall
vesting
100%
The Committee determined that the cumulative IFRS operating profit target established for the PLTIP should be expressed using exchange
rates consistent with our reported disclosures. All the individual business units exceeded their stretch performance target and achieved
100 per cent vesting, other than Asia which exceeded plan performance, but not stretch performance, and therefore vested at 95 per cent.
The individual business unit IFRS targets have not been disclosed as the Committee considers that these are commercially sensitive and
disclosure of targets at such a granular level would put the Company at a disadvantage compared to its competitors. The Committee will
keep this disclosure policy under review based on whether, in its view, disclosure would compromise the Company’s competitive position.
M&G Executive Long-Term Incentive Plan
The phantom share price at vesting for the 2013 M&G Executive Long-Term Incentive Plan award is determined by the increase or
decrease in M&G’s profitability over the three-year performance period with adjustments for the investment performance of its funds.
M&G performance and the resulting phantom share price for Michael McLintock are shown below:
Award
2013 M&G Executive LTIP
3-year profit
growth of M&G
3-year investment
performance
2015 phantom
share price
Value of
awards vesting
36%
2nd quartile
£1.79
£1,991,196
114
Prudential plc Annual Report 2015 www.prudential.co.uk Prudential Corporation Asia Long-Term Incentive Plan
Tony Wilkey received awards under the Prudential Corporation Asia Long-Term Incentive Plan before he was appointed to the Board,
which vested during 2015. The Prudential Corporation Asia Long-Term Incentive Plan does not have performance conditions.
2015 LTIP vesting
On the basis of the performance of the Group and its business units, and the Committee’s assessment that the awards should vest,
the vesting of each executive’s LTIP awards are set out below.
Executive
Pierre-Olivier Bouée2
Jackie Hunt2
Penny James
Michael McLintock3
Nic Nicandrou
Barry Stowe
Tidjane Thiam2
Mike Wells
Tony Wilkey4
Maximum value of
award at full vesting1
Percentage of the
LTIP award vesting
Number of
shares vesting5
Value of
shares vesting1
£500,638
£1,922,024
£409,994
£760,158
£1,995,522
£2,124,954
£5,552,986
£4,426,975
£1,750,647
69.4%
100%
100%
100%
100%
97.5%
66.7%
100%
97.5%/100%
22,993
127,118
27,116
50,275
131,979
68,952
244,840
147,335
118,132
£347,654
£1,922,024
£409,994
£760,158
£1,995,522
£2,071,801
£3,701,981
£4,426,975
£1,740,350
Notes
1 Other than for Tony Wilkey’s award which vested on 14 September 2015, the share price used to calculate the value of the LTIP awards which vest in 2016 was the
average share price/ADR price for the three months up to 31 December 2015, being £15.12/£30.05.
2 Pierre-Olivier Bouée, Jackie Hunt and Tidjane Thiam left the Board during 2015. For details of arrangements in respect of their long-term incentive awards, please
see the ‘Payments to Past Directors’ section.
3 This does not include the vesting of Michael McLintock’s M&G Executive Long-Term Incentive Plan award.
4 Tony Wilkey’s awards include an award which vested on 14 September 2015 (the share price on that date was £13.85) in addition to the awards which vest in 2016.
5 The number of shares vesting include accrued dividend shares.
Malus and clawback policy
During the year the Committee adopted a clawback policy that applies to Executive Directors and members of the GEC.
A summary of both this policy and the malus policy is set out below.
Malus (applies in respect of any annual bonus or long-term
incentive award).
Allows unvested shares awarded under deferred bonus and
LTIP plans to be forfeited in certain circumstances.
Clawback (applies in respect of any annual bonuses paid in
respect of performance in 2015 and subsequent years, and
the deferred portions of these bonuses. Also applies to
long-term incentive awards made on or after 1 January 2015).
Allows cash and share awards to be recovered before or after
release in certain circumstances.
Circumstances when the Committee may exercise its
discretion to apply malus or clawback to an award
Where a business decision taken during the performance period by
the participant’s business unit at the time of the decision has resulted
in a material breach of any law, regulation, code of practice or other
instrument which applies to companies or individuals within the
business unit.
There is a materially adverse restatement of the accounts for any
year during the performance period of (i) the business unit in which
the participant worked at any time in that year; and/or (ii) any
member of the Group which is attributable to incorrect information
about the affairs of that business unit.
Any matter arises which the Committee believes affects or may
affect the reputation of the Company or any member of the Group.
Where at any time before the fifth anniversary of the start of
the performance period, either (i) there is a materially adverse
restatement of the Company’s published accounts in respect of
any financial year which (in whole or part) comprised part of the
performance period; or (ii) it becomes apparent that a material
breach of a law or regulation took place during the performance
period which resulted in significant harm to the Company or
its reputation.
And the Committee considers it appropriate, taking account of the
extent of the participants’ responsibility for the relevant restatement
or breach, that clawback be applied to the relevant participant.
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Pension entitlements
Pension provisions in 2015 were:
Executive
Barry Stowe
Tony Wilkey
Mike Wells
All other UK-based
executives
2015 pension arrangement
As Chief Executive, PCA: pension supplement in lieu of pension of
25 per cent of salary and a HK$15,000 payment to the Hong Kong
Mandatory Provident Fund.
As Chairman & CEO, NABU: pension supplement of 25 per cent of
salary, part of which is paid as a contribution to an approved US
retirement plan.
Life assurance provision
As Chief Executive, PCA,
four times salary.
As Chairman & CEO, NABU,
two times salary.
Pension supplement in lieu of pension of 25 per cent of salary and a
HK$10,500 payment to the Hong Kong Mandatory Provident Fund.
Four times salary.
Mike Wells did not qualify for matching contributions when he was
Chairman & Chief Executive, Jackson, as he was not in that role for
the qualifying period during 2015.
As Group Chief Executive,
four times salary plus a
dependants’ pension.
As Group Chief Executive: pension supplement in lieu of pension
of 25 per cent of salary.
Pension supplement in lieu of pension of 25 per cent of salary.
Up to four times salary plus
a dependants’ pension.
Michael McLintock previously participated in a contributory defined benefit scheme which was open at the time he joined the Company.
The scheme provided a target pension of two thirds of final pensionable earnings on retirement for an employee with 30 years or more
potential service who 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 benefits payable should Mr McLintock retire early.
At the end of 2015 the transfer value of this entitlement was £1,462,621. This equates to an annual pension of £59,686 which will increase
broadly in line with inflation in the period before Mr McLintock’s retirement.
116
Prudential plc Annual Report 2015 www.prudential.co.uk Table of 2015 Executive Director total remuneration ‘The Single Figure’
£000s
Pierre-Olivier Bouée1
Jackie Hunt2
Penny James3
Michael McLintock
Nic Nicandrou4
Barry Stowe5
Tidjane Thiam6
Mike Wells7
Tony Wilkey8
Total
2015
salary
2015
taxable
benefits*
270
557
200
394
703
729
455
942
433
38
76
21
71
377
558
44
1,283
402
2015
total
bonus
–
1,039
318
2,128
1,224
3,281
704
3,223
748
Of which:
Amount
deferred
into
Prudential
shares†
–
416
127
851
490
1,312
282
1,289
299
Amount
paid in
cash
–
623
191
1,277
734
1,969
422
1,934
449
2015
LTIP
releases‡
2015
pension
benefits§
Total 2015
remuneration
‘The Single
Figure’¶
348
1,922
410
2,751
1,996
2,072
3,702
4,427
1,740
68
139
50
98
176
188
114
156
109
724
3,733
999
5,442
4,476
6,828
5,019
10,031
3,432
4,683
2,870
12,665
7,599
5,066
19,368
1,098
40,684
* Benefits include (where provided) the cost of providing the use of a car and driver, medical insurance, security arrangements and relocation/expatriate benefits.
† The deferred part of the bonus is subject to malus and clawback in accordance with the Malus and Clawback policies.
‡ In line with the regulations, the estimated value of LTIP releases in 2016 has been calculated based on the average share/ADR price over the last three months of 2015
(£15.12/£30.05). The actual value of LTIPs, based on the share price on the date awards are released, will be shown in the 2016 report.
§ 2015 pension benefits 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 figures. Total remuneration is calculated using the
methodology prescribed by Schedule 8 of the Companies Act.
Notes
Pierre-Olivier Bouée stepped down from the Board on 31 May 2015. The remuneration above was paid in respect of his service as an Executive Director.
1
2
Jackie Hunt stepped down from the Board on 3 November 2015. The remuneration shown above was paid in respect of her service as an Executive Director.
3 Penny James was appointed to the Board on 1 September 2015. The remuneration above was paid in respect of her service as an Executive Director, other than
the LTIP releases which related to her previous role.
4 Nic Nicandrou’s 2015 benefits relate primarily to a legacy relocation clause in his contract agreed on his appointment and disclosed in the 2009 Annual Report.
The figure includes costs of £243,750 to cover stamp duty.
5 Barry Stowe’s 2015 benefits relate primarily to his expatriate status while he was located in Hong Kong in his previous role as Chief Executive, PCA, including costs of
£139,405 for housing, £62,586 home leave and a £152,978 Executive Director Location Allowance. In addition, to facilitate his move back to the US, his benefits include
relocation support including costs of £110,101 for relocation, shipping and tax return preparation. His bonus figure excludes a contribution of £10,404 from a profit
sharing plan which has been made into a 401(k) retirement plan in respect of his role as Chairman & CEO, NABU. This is included under 2015 pension benefits.
6 Tidjane Thiam stepped down from the Board on 31 May 2015. The remuneration shown above was paid in respect of his service as an Executive Director.
7 To facilitate his move to the UK, Mike Wells’s benefits include relocation support including an allowance of £200,000 for relocation and shipping, £177,890 for
temporary accommodation, £513,750 to cover stamp duty and £56,604 to cover mortgage interest.
8 Tony Wilkey was appointed to the Board on 1 June 2015. The remuneration above was paid in respect of his service as an Executive Director, other than the LTIP
releases which related to his previous role. Tony Wilkey’s 2015 benefits include costs of £140,134 for housing and a £214,169 Executive Director Location Allowance.
Table of 2014 Executive Director total remuneration ‘The Single Figure’
Of which:
£000s
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
benefits*
75
24
163
94
96
710
132
58
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
benefits§
Total 2014
remuneration
‘The Single
Figure’¶
886
3,740
1,687
2,865
3,488
3,394
9,838
7,292
118
41
161
96
171
169
265
19
2,304
4,222
3,671
5,729
5,623
5,984
13,418
12,393
53,344
5,206
33,190
1,040
* Benefits include (where provided) the cost of providing the use of a car and driver, medical insurance, security arrangements and relocation/expatriate benefits.
† The deferred part of the bonus is subject to malus in accordance with the Malus and Clawback policies.
‡ In line with the regulations, the value of the LTIP releases has been recalculated based on the closing share/ADR price on the date awards were released, 30 March 2015
(£16.97/£33.09). The value also includes the cash payment relating to the final dividend declared in March 2015, approved at the AGM and paid after the vesting date.
§ 2014 pension benefits include cash supplements for pension purposes and contributions into DC schemes.
¶ Each remuneration element is rounded to the nearest £1,000 and totals are the sum of these rounded figures. Total remuneration is calculated using the
methodology prescribed by Schedule 8 of the Companies Act.
Notes
1
2
3 Barry Stowe’s 2014 benefits relate primarily to his expatriate status, including costs of £217,393 for housing, £18,272 for children’s education, £76,319 for home leave
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.
and a £340,473 Executive Director Location Allowance.
4 Mike Wells’s bonus figure excludes a contribution of £9,469 from a profit sharing plan which has been made into a 401(k) retirement plan. This is included under
2014 pension benefits.
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Performance graph and table
The chart below illustrates the TSR performance of Prudential, the FTSE 100 and the peer group of international insurers used to
benchmark the Company’s performance for the purposes of the PLTIP.
Prudential TSR v FTSE 100 and peer group averages – total return, per cent over seven years to 31 December 2015
£600
£500
£400
£300
£200
£547
£242
£191
£100
Dec 2008
Dec 2009
Dec 2010
Dec 2011
Dec 2012
Dec 2013
Dec 2014
Dec 2015
Prudential
FTSE 100
Peer group average
Note
The peer group average represents the average TSR performance of the peer group currently used for PLTIP awards (excluding companies not listed at the start
of the period).
The information in the table below shows the total remuneration for the Group Chief Executive over the same period:
£000
2009
2009
2010
2011
2012
2013
2014
2015
2015
Group Chief Executive
Salary, pension and benefits
Annual bonus payment
(As % of maximum)
LTIP vesting
(As % of maximum)
Other payments
M Tucker
1,013
841
(92%)
1,575
(100%)
308
T Thiam
286
354
(90%)
–
–
–
T Thiam
1,189
1,570
(97%)
2,534
(100%)
–
T Thiam
1,241
1,570
(97%)
2,528
(100%)
–
T Thiam
1,373
2,000
(100%)
6,160
(100%)
–
T Thiam
1,411
2,056
(99.8%)
5,235
(100%)
–
T Thiam
1,458
2,122
(100%)
9,838
(100%)
–
T Thiam M Wells
1,992
1,244
(99.7%)
4,427
(100%)
–
613
704
(77.3%)
3,702
(100%)
–
Group Chief Executive
Single Figure of total
remuneration
3,737
640
5,293
5,339
9,533
8,702
13,418
5,019
7,663
Notes
1 Mark Tucker left the Company on 30 September 2009. Tidjane Thiam became Group Chief Executive on 1 October 2009. The figures shown for Tidjane Thiam’s
remuneration in 2009 relate only to his service as Group Chief Executive.
2 Tidjane Thiam left the Company on 31 May 2015. Mike Wells became Group Chief Executive on 1 June 2015. The figures shown for Mike Wells’s remuneration in
2015 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 2014 and 2015 compared to a wider
employee comparator group:
Group Chief Executive
All UK employees
Salary
1.75%
3.3%
Benefits
824.6%
17.1%
Bonus
(8.2)%
10%
The employee comparator group used for the purpose of this analysis is all UK employees. This includes employees in the UK Insurance
Operations business, M&G and Group Head Office, and reflects the average change in pay for employees employed in both 2014 and 2015.
The salary increase includes uplifts made through the annual salary review as well as any additional changes in the year, for example to
reflect promotions or role changes. The UK workforce has been chosen as the most appropriate comparator group as it reflects the economic
environment for the location in which the Group Chief Executive is employed.
The Group Chief Executive’s salary, benefits and bonus percentage change has been calculated by taking the amounts received by
both Tidjane Thiam and Mike Wells in this role in 2015 and calculating the percentage increase or decrease from the amount received
by Tidjane Thiam in 2014. Mike Wells was required to relocate to London to assume the Group Chief Executive role and the increase
in benefits received by the Group Chief Executive role reflects this relocation support.
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Prudential plc Annual Report 2015 www.prudential.co.uk Relative importance of spend on pay
The table below sets out the amounts payable in respect of 2014 and 2015 on all employee pay and dividends:
All-employee pay (£m) note
Dividends (£m)
Note
All-employee pay as taken from note B3.1 to the financial statements.
Long-term incentives awarded in 2015
2014
1,543
945
2015
1,475
1,253
Percentage
change
(4.4)%
32.6%
2015 share-based long-term incentive awards
The table below shows the awards made to Executive Directors in 2015 under share-based long-term incentive plans and the performance
conditions attached to these awards:
Executive
Role
Pierre-Olivier Bouée Group Chief Risk Officer
Penny James1
Group Chief Risk Officer
Chief Executive,
Jackie Hunt
UK & Europe
Michael McLintock2 Chief Executive, M&G
Chief Financial Officer
Nic Nicandrou
Barry Stowe3
Chief Executive, PCA
Chairman & CEO, NABU
Chief Executive,
Tony Wilkey3,4
Mike Wells3
Insurance, Asia
Chief Executive, PCA
President & CEO, JNL
Group Chief Executive
Number of
shares or
ADRs
subject to
award*
Percentage
of awards
released for
achieving
threshold
targets‡
Face value
of award†
96,119
24,348
98,341
£1,622,489
£410,994
£1,659,996
35,011
104,117
56,970
25,334
21,091
42,183
29,008
104,611
15,066
£590,986
£1,757,495
£1,881,728
£833,637
£712,049
£356,016
£473,701
£3,455,319
£495,759
25%
25%
25%
25%
25%
25%
25%
25%
n/a
25%
25%
25%
Weighting of performance conditions
IFRS profit
End of
performance
period
31 Dec 17
31 Dec 17
31 Dec 17
31 Dec 17
31 Dec 17
31 Dec 17
31 Dec 17
31 Dec 17
n/a
31 Dec 17
31 Dec 17
31 Dec 17
Group
TSR
50%
50%
50%
100%
50%
50%
50%
50%
50%
50%
50%
Group Asia
US
UK
50%
50%
50%
50%
50%
50%
50%
50%
50%
50%
* Awards over shares were awarded to all Executive Directors other than Barry Stowe and Mike Wells whose awards were over ADRs.
† Awards for Executive Directors are calculated based on the average share price over the three dealing days prior to the grant date. Annual awards were granted on
31 March 2015 (using a share price of £16.88 and an ADR price of £33.03) and additional awards were granted on 1 June 2015 (using a share price of £16.33 and an ADR
price of £32.91).
‡ The percentage of award released for achieving maximum targets is 100 per cent.
Notes
1
2 PLTIP awards made to the Chief Executive, M&G are subject only to the TSR performance condition. The IFRS profit of M&G is a performance condition under
Penny James’ award was made before she was appointed to the Board.
the M&G Executive LTIP.
3 Barry Stowe, Tony Wilkey and Mike Wells received additional awards following the changes to their roles. These awards were based on a pro-rated total 2015
award in line with their revised salaries using the average share price over the three dealing days prior to the grant date.
4 Tony Wilkey's first two 2015 awards were made before he was appointed to the Board. One award was made under the Prudential LTIP and the other under
the PCA LTIP. The latter has no performance conditions. All future awards will be made under the Prudential LTIP.
Group total shareholder return (TSR) performance will be measured on a ranked basis. 25 per cent of the award will vest for TSR
performance at the median of the peer group, increasing to full vesting for performance at the upper quartile. The peer group for 2015
awards is the same for 2013 awards as detailed on page 114.
Performance ranges for IFRS operating profit measured on a cumulative basis over three years are set at the start of the performance
period. Due to commercial sensitivities these are not published in advance but Group targets will be disclosed when awards vest.
2015 cash long-term incentive awards
In addition to his PLTIP award, Michael McLintock receives an annual cash-settled award under the M&G Executive LTIP. In 2015,
he received the following award:
Executive
Role
Face value
of award
(% of
salary)
Face value
of award
Percentage
of award
released for
achieving
threshold
target
End of
performance
period
Michael McLintock
Chief Executive, M&G
300% £1,182,000
See note
31 Dec 17
Note
The value of the award on vesting will be based on the profitability and investment performance of M&G over the performance period as described in the Directors’
remuneration policy.
119
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Non-executive Director remuneration in 2015
Chairman’s fees
As reported in last year's report, the annual fee paid to the Chairman, Paul Manduca, was increased 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 around 1.5 per cent was made to the basic Non-executive Director fee with effect from 1 July 2015. As the fees for
membership of the Audit, Remuneration and Risk Committees had remained unchanged since 2011, an increase of 10 per cent was made
to the membership fee for these Committees. There have been no changes to the Committee Chair or Senior Independent Director fees.
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 2014
(£)
From
1 July 2015
(£)
92,500
94,000
70,000
25,000
60,000
25,000
65,000
25,000
10,000
50,000
70,000
27,500
60,000
27,500
65,000
27,500
10,000
50,000
Note
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-executive Directors are:
£000s
Chairman
Paul Manduca
Non-executive Directors
Howard Davies
Ann Godbehere
Alistair Johnston
David Law1
Kai Nargolwala
Anthony Nightingale
Philip Remnant
Alice Schroeder
Lord Turnbull2
Lord Turner3
Total
2015 fees
2014 fees
2015 taxable
benefits*
2014 taxable
benefits*
Total 2015
remuneration:
‘The Single
Figure’†
Total 2014
remuneration:
‘The Single
Figure’ †
650
195
200
120
36
146
147
206
120
70
36
600
191
196
116
–
141
116
201
116
186
–
78
114
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
728
195
200
120
36
146
147
206
120
70
36
714
191
196
116
–
141
116
201
116
186
–
1,926
1,863
78
114
2,004
1,977
* Benefits 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 figures. Total remuneration is calculated using the
methodology prescribed by Schedule 8 of the Companies Act. The Chairman and Non-executive Directors are not entitled to participate in annual bonus plans
or long-term incentive plans.
Notes
1 David Law was appointed to the Board on 15 September 2015.
2 Lord Turnbull retired from the Board on 14 May 2015.
3 Lord Turner was appointed to the Board on 15 September 2015.
120
Prudential plc Annual Report 2015 www.prudential.co.uk Statement of directors’ shareholdings
The interests of directors in ordinary shares of the Company are set out below. ‘Beneficial 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.
01/01/2015
(or on date of
appointment)
During 2015
31/12/2015 (or on date of retirement)
Share ownership guideline
Total
beneficial
interest
(number
of shares)
Number
of shares
acquired
Number
of shares
disposed
Number
of shares
subject to
performance
conditions†
Total
beneficial
interest*
(number
of shares)
Total
interest
in shares
Share
ownership
guideline‡
(% of
salary/fee)
Beneficial
interest as a
percentage
of basic
salary/
basic fees§
42,500
–
–
42,500
–
42,500
100%
93%
81,630
86,788
14,373
443,744
289,809
284,288
690,867
445,580
152,471
8,521
15,914
10,000
–
50,000
30,000
5,816
2,500
16,624
–
74,690
123,458
127
109,687
232,623
231,744
641,139
554,975
37,121
62,747
99,082
–
342,547
257,213
269,376
679,460
535,270
–
209
–
–
3,327
–
–
–
6,000
–
2,000
–
–
–
–
–
–
–
–
–
–
93,573
111,164
14,500
210,884
265,219
246,656
652,546
465,285
189,592
8,730
15,914
10,000
3,327
50,000
30,000
5,816
8,500
16,624
2,000
343,031
249,458
440,045
328,881
94,308
79,808
337,069
126,185
624,265
359,046
410,698
657,354
675,334 1,327,880
751,778 1,217,063
547,616
358,024
–
–
–
–
–
–
–
–
–
–
8,730
15,914
10,000
3,327
50,000
30,000
5,816
8,500
16,624
2,000
n/a
n/a
200%
200%
200%
200%
n/a
350%
200%
100%
100%
100%
100%
100%
100%
100%
100%
n/a
100%
n/a
n/a
37%
819%
578%
525%
n/a
666%
391%
142%
259%
163%
54%
814%
489%
95%
138%
n/a
33%
Chairman
Paul Manduca
Executive Directors
Pierre-Olivier Bouée1
Jackie Hunt2
Penny James3
Michael McLintock
Nic Nicandrou
Barry Stowe4
Tidjane Thiam5
Mike Wells6
Tony Wilkey7
Non-executive Directors
Howard Davies
Ann Godbehere
Alistair Johnston
David Law8
Kaikhushru Nargolwala
Anthony Nightingale
Philip Remnant
Alice Schroeder9
Lord Turnbull10
Lord Turner11
* There were no changes of Executive Directors’ interests in ordinary shares between 31 December 2015 and 7 March 2016 with the exception of the UK-based
Executive Directors due to their participation in the monthly Share Incentive Plan (SIP). Michael McLintock acquired a further 29 shares in the SIP, Nic Nicandrou
acquired a further 29 shares in the SIP and Mike Wells acquired a further 30 shares in the SIP during this period.
† Further information on share awards subject to performance conditions are detailed in the ‘share-based long-term incentive awards’ section of the Supplementary
information.
‡ 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 effect from January 2013. Executive Directors have five years from this date (or date of joining or role change, 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 their date of
joining to reach the guideline.
§ Based on the closing price on 31 December 2015 (£15.31). Where applicable, all directors are in compliance with the share ownership guideline.
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 file with the Hong Kong Stock Exchange any disclosure of interests
notified to it in the United Kingdom.
Notes
Pierre-Olivier Bouée stepped down from the Board on 31 May 2015. Total interests in shares are shown as at this date.
1
Jackie Hunt stepped down from the Board on 3 November 2015. Total interests in shares are shown as at this date.
2
3 Penny James was appointed to the Board on 1 September 2015. Total interests in shares are shown from this date.
4 For the 1 January 2015 figure Barry Stowe’s beneficial interest in shares is made up of 142,144 ADRs (representing 284,288 ordinary shares), (8,513.73 of these ADRs
are held within an investment account which secures premium financing for a life assurance policy). For the 31 December 2015 figure the beneficial interest in
shares is made up of 123,328 ADRs (representing 246,656 ordinary shares).
5 Tidjane Thiam stepped down from the Board on 31 May 2015. Total interests in shares are shown as at this date.
6 For the 1 January 2015 figure Mike Wells’ beneficial interest in shares is made up of 222,790 ADRs (representing 445,580 ordinary shares). For the 31 December 2015
figure his beneficial interest in shares is made up of 232,594 ADRs (representing 465,188 ordinary shares) and 97 ordinary shares.
7 Tony Wilkey was appointed to the Board on 1 June 2015. Total interests in shares are shown from this date.
8 David Law was appointed to the Board on 15 September 2015. Total interests in shares are shown from this date.
9 For the 1 January 2015 figure Alice Schroeder’s beneficial interest in shares is made up of 1,250 ADRs (representing 2,500 ordinary shares). For the 31 December 2015
figure her beneficial interest in shares is made up of 4,250 ADRs (representing 8,500 ordinary shares).
10 Lord Turnbull stepped down from the Board on 14 May 2015. Total interests in shares are shown as at this date.
11 Lord Turner was appointed to the Board on 15 September 2015.
121
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Annual report on remuneration continued
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.
Date
of grant
Exercise
price
(pence)
Market
price at
31 Dec
2015
(pence)
Exercise period
Number of options
Beginning
End
of period Granted Exercised Cancelled Forfeited Lapsed
Beginning
End of
period
Pierre-Olivier Bouée 23 Sep 14
23 Sep 14
Jackie Hunt
21 Sep 12
Penny James
22 Sep 15
Penny James
Michael McLintock 23 Sep 14
16 Sep 11
Nic Nicandrou
23 Sep 14
Nic Nicandrou
16 Sep 11
Tidjane Thiam
20 Sep 13
Tidjane Thiam
23 Sep 14
Tidjane Thiam
22 Sep 15
Mike Wells
1,155 1,531 01 Dec 17 31 May 18
1,155 1,531 01 Dec 17 31 May 18
629 1,531 01 Dec 15 31 May 16
1,111 1,531 01 Dec 18 31 May 19
1,155 1,531 01 Dec 19 31 May 20
466 1,531 01 Dec 16 31 May 17
1,155 1,531 01 Dec 19 31 May 20
466 1,531 01 Dec 14 29 May 15
901 1,531 01 Dec 16 31 May 17
1,155 1,531 01 Dec 17 31 May 18
1,111 1,531 01 Dec 18 31 May 19
1,558
1,558
858
2,622
3,268
1,311
965
499
1,168
–
–
–
– 1,620
–
–
–
–
–
–
– 1,620
–
–
–
–
–
–
–
965
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– 1,558
– 1,558
–
–
858
–
– 1,620
–
– 2,622
–
– 3,268
–
– 1,311
–
–
–
–
–
499
–
– 1,168
–
– 1,620
–
Notes
1 A gain of £11,880.43 was made by directors in 2015 on the exercise of SAYE options.
2 No price was paid for the award of any option.
3 The highest and lowest closing share prices during 2015 were 1,752 pence and 1,330.5 pence respectively.
4 All exercise prices are shown to the nearest pence.
5 Pierre-Olivier Bouée and Tidjane Thiam participated in the plan during their time as Executive Directors and their options lapsed following the cessation of their
employment.
Jackie Hunt participated in the plan during her time as an Executive Director.
6
Directors’ terms of employment and external appointments
The Directors' remuneration policy contains further details of the terms included in Executive Director service contracts. Details of the
service contracts of each Executive Director are outlined in the table below.
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.
Service contracts
External appointment
Date of contract
Notice period
to the Company
Notice period
from the Company
External
appointment
during 2015
Fee received in the
period the Executive
Director was a
Group director
6 August 2013
25 April 2013
13 August 2015
21 November 2001
26 April 2009
18 October 2006
20 September 2007
21 May 2015
1 June 2015
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
12 months
12 months
–
Yes
Yes
Yes
–
–
Yes
–
–
–
£25,833
£22,333
£70,000
–
–
£71,700
–
–
Executive Directors
Pierre-Olivier Bouée1
Jackie Hunt2
Penny James3
Michael McLintock
Nic Nicandrou
Barry Stowe
Tidjane Thiam4
Mike Wells
Tony Wilkey3
Other directors served on the boards of educational, charitable and cultural organisations without receiving a fee for these services.
Pierre-Olivier Bouée stepped down from the Board on 31 May 2015.
Jackie Hunt stepped down from the Board on 3 November 2015.
Notes
1
2
3 Penny James and Tony Wilkey were appointed to the Board on 1 September 2015 and 1 June 2015 respectively.
4 Tidjane Thiam stepped down from the Board on 31 May 2015.
122
Prudential plc Annual Report 2015 www.prudential.co.uk Letters of appointment of the Chairman and Non-executive Directors
The Directors' remuneration policy contains further details on Non-executive Directors’ letters of appointment. Details of their individual
appointments are outlined below:
Chairman/Non-executive Director
Chairman
Paul Manduca1
Non-executive Directors
Philip Remnant
Howard Davies
Ann Godbehere2
Alistair Johnston3
David Law
Kai Nargolwala
Anthony Nightingale
Alice Schroeder
Lord Turner
Appointment
by the Board
Initial election
by shareholders
at the AGM
Notice period
Expiration of the
current term of
appointment
15 October 2010
AGM 2011
12 months
AGM 2018
1 January 2013
15 October 2010
2 August 2007
1 January 2012
15 September 2015
1 January 2012
1 June 2013
10 June 2013
15 September 2015
AGM 2013
AGM 2011
AGM 2008
AGM 2012
AGM 2016
AGM 2012
AGM 2014
AGM 2014
AGM 2016
6 months
6 months
6 months
6 months
6 months
6 months
6 months
6 months
6 months
AGM 2016
AGM 2017
AGM 2016
AGM 2018
AGM 2019
AGM 2018
AGM 2017
AGM 2017
AGM 2019
Paul Manduca was appointed as Chairman on 2 July 2012.
Notes
1
2 Ann Godbehere was reappointed in 2015 for one year.
3 Alistair Johnston will retire from the Board at the Annual General Meeting on 19 May 2016.
Recruitment arrangements
In making decisions about the remuneration arrangements for those joining the Board, the Committee worked within the Directors’
remuneration policy approved by shareholders and was mindful of:
— The skills, knowledge and experience that each new Executive Director brought to the Board;
— The need to support the relocation of executives to enable them to assume their roles; and
— Its commitment to honour legacy arrangements.
Appointing high-calibre executives to the Board and to different roles on the Board is necessary to ensure the Company is well positioned
to develop and implement its strategy and deliver long-term value. As the Company operates in an international marketplace for talent,
the best internal and external candidates are sometimes asked to move location to assume their new roles. Where this happens, the
Company will offer relocation support. The support offered will depend on the circumstances of each move but may include shipping
services, the provision of temporary accommodation and other housing benefits. Executives may receive support with the preparation
of tax returns, but no current Executive Director is tax equalised.
Barry Stowe and Mike Wells changed Board roles during the year. As both these changes resulted in those Executive Directors relocating
to enable them to assume their roles, relocation support in line with the approved Directors’ remuneration policy was provided. Details of
this support are included in the notes to the 2015 Single Figure table.
During the year, a relocation payment was made to Nic Nicandrou in line with a commitment made to him when he joined the Company
in 2009 (and disclosed in the 2009 annual report on remuneration). Details of this payment are included in the notes to the 2015 Single
Figure table.
Penny James and Tony Wilkey were promoted to the Board during the year. Their outstanding share awards under deferred bonus plans
and long-term incentives awarded before their appointment to the Board will continue to vest on the normal timescale and subject to the
original conditions.
In addition, each of Barry Stowe, Mike Wells and Tony Wilkey received an additional LTIP award following the changes to their roles as
detailed in the ‘Long-term incentives awarded in 2015’ table.
Payments to past directors and payments for loss of office
During the year, the Committee considered the application of the Company's payments on loss-of-office policy. The objective was to ensure
that the application of the policy was aligned to individual circumstances and ensure there was no reward for failure. The Committee's
approach when exercising its discretion under the policy is to be mindful of the particular circumstance of the departure and the
contribution the individual had made to the Group.
123
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Annual report on remuneration continued
Pierre-Olivier Bouée
Pierre-Olivier Bouée stepped down from the Board on 31 May 2015. Pierre-Olivier did not receive a loss-of-office payment. His remuneration
arrangements were in line with the approved Directors' remuneration policy and disclosed in stock exchange announcements and the
remuneration he received in respect of his services as an Executive Director is set out in the 2015 Single Figure table.
Following his retirement from the Board, Pierre-Olivier received £72,850 in respect of salary, benefits and pension for the period from the
date he ceased to be a director to his termination date on 30 June 2015 in accordance with his contract of employment. His deferred
bonus awards will be released in accordance with the plan rules and remain subject to malus provisions. Pierre-Olivier did not receive a
2015 bonus. In line with market practice, the Group paid the professional legal fees incurred by him in respect of finalising his termination
arrangements, which amounted to £7,551. In addition, in consideration of agreeing to a confidentiality clause, Pierre-Olivier received £1,000.
The Committee also exercised its discretion in accordance with the approved Directors’ remuneration policy and determined that
Pierre-Olivier should be allowed to retain his unvested PLTIP awards granted in 2013 and 2014, but his PLTIP awards granted in 2015
should lapse. The 2013 and 2014 awards will vest in accordance with the original timetable, remain subject to malus provisions and were
pro-rated for service.
Jackie Hunt
Jackie Hunt stepped down from the Board on 3 November 2015. Jackie did not receive a loss-of-office payment. Her remuneration
arrangements were in line with the approved Directors' remuneration policy and disclosed in stock exchange announcements and the
remuneration she received in respect of her services as an Executive Director is set out in the 2015 Single Figure table.
Following her retirement from the Board, Jackie received £133,924 in respect of salary, benefits and pension for the period from the date
she ceased to be a director to the end of the year in accordance with her contract of employment. Her deferred bonus awards will be
released in accordance with the plan rules and remain subject to malus provisions. In line with market practice, the Group paid the
professional legal fees incurred by her in respect of finalising her termination arrangements, which amounted to £17,400.
In addition, recognising her contribution to the Company's success, the Committee determined that Jackie should be awarded a bonus
in respect of the 2015 performance year which was calculated in the usual way. Sixty per cent of this bonus will be paid in 2016 and
40 per cent will be deferred in shares for three years, subject to malus and clawback provisions.
The Committee also exercised its discretion in accordance with the approved Directors’ remuneration policy and determined that Jackie
should be allowed to retain her unvested GPSP and PLTIP awards granted in 2013 and 2014, but her PLTIP awards granted in 2015 should
lapse. The 2013 and 2014 awards will vest in accordance with the original timetable, remain subject to malus and were pro-rated for service.
Tidjane Thiam
Tidjane Thiam stepped down from the Board on 31 May 2015. Tidjane did not receive a loss-of-office payment. His remuneration
arrangements were in line with the approved Directors' remuneration policy and disclosed in stock exchange announcements and the
remuneration he received in respect of his services as an Executive Director is set out in the 2015 Single Figure table.
Tidjane's deferred bonus awards will be released in accordance with the plan rules and remain subject to malus provisions. In line with
market practice, the Group paid the professional legal fees incurred by him in respect of finalising his termination arrangements, which
amounted to £14,121. In addition, in consideration of agreeing to a confidentiality clause, Tidjane received £1,000.
In addition, recognising his contribution to the Company's success, the Committee determined that Tidjane should be awarded a bonus
in respect of the 2015 performance year which was calculated in the usual way and pro-rated for service to 31 May 2015. Sixty per cent
of this bonus will be paid in 2016 and 40 per cent will be deferred in shares for three years, subject to malus and clawback provisions.
The Committee also exercised its discretion in accordance with the approved Directors’ remuneration policy and determined that
Tidjane should be allowed to retain his unvested PLTIP awards granted in 2013 and 2014. The 2013 and 2014 awards will vest in
accordance with the original timetable, remain subject to malus provisions and were pro-rated for service. Tidjane did not receive
a 2015 long-term incentive award.
Rob Devey
Rob Devey’s employment with the Group ended on 31 October 2013. The 2013 Directors’ remuneration report provided details of the
remuneration arrangements that would apply to Rob after his resignation. As set out in the section ‘Remuneration in respect of performance
in 2015’ the performance conditions attached to Rob’s 2013 PLTIP awards were met in full and 100 per cent of these awards will be released
in 2016. These awards were pro-rated for service (10 of 36 months) and the details of the release are set out below. This represents the
last long-term incentive award which Rob had outstanding under the Company’s remuneration plans.
Number of shares vesting1
34,914
Value of share vesting2
£527,900
Notes
1 The number of shares vesting include accrued dividend shares.
2 The share price used to calculate the value was the average share price for the three months up to 31 December 2015, being £15.12.
124
Prudential plc Annual Report 2015 www.prudential.co.uk Other directors
A number of former directors receive retiree medical benefits for themselves and their partner (where applicable). This is consistent
with other senior members of staff employed at the same time. A de minimis threshold of £10,000 has been set by the Committee;
any payments or benefits provided to a past director under this amount will not be reported.
Statement of voting at general meeting
At the 2015 Annual General Meeting, shareholders were asked to vote on the 2014 Directors’ remuneration report.
This resolution received a significant vote in favour by shareholders and 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 report
1,711,107,495
93.81 112,901,645
6.19 1,824,009,140 124,526,722
Statement of implementation in 2016
Executive Directors
Executive Directors’ remuneration packages were reviewed in 2015, with changes effective from 1 January 2016. When the Committee took
these decisions, it considered the salary increases awarded to other employees in 2015 and the expected increases in 2016. The external
market reference points used to provide context to the Committee were identical to those used for 2015 salaries.
All Executive Directors received a salary increase of 1 per cent. The 2016 salary increase budgets for other employees across our
business units were between 3 per cent and 6.5 per cent. No changes have been made to executives’ maximum opportunities under
either the annual incentive or the long-term incentive plans.
As part of the implementation of Solvency II, part of Executive Directors’ 2016 bonuses will be determined by the achievement of Solvency II
surplus targets. This metric will replace the IGD capital surplus measure (part of the Solvency I framework). The Solvency II measure will
operate alongside the economic capital targets introduced in 2015. Otherwise no changes are proposed to the performance measures
for the 2016 annual incentive plan nor for the 2016 long-term incentive awards.
Also, as part of the implementation of Solvency II, the weightings of Penny James’s AIP performance targets (with effect from 2016) have
been changed so that 50 per cent relate to financial targets, 30 per cent relate to functional targets and 20 per cent relate to personal
targets.
John Foley was appointed Chief Executive of Prudential UK & Europe and Executive Director of Prudential plc with effect from
19 January 2016. His basic salary for 2016 will be £750,000. He will have a maximum AIP opportunity of 180 per cent of base salary, with
40 per cent of any bonus deferred into the Company’s shares. Long-term incentive awards will be 250 per cent of base salary. John’s
service contract contains a notice provision under which either party may terminate upon 12 months’ notice.
Michael McLintock will retire as Chief Executive of M&G Investments and as an Executive Director of Prudential plc later this year.
He will be succeeded by Anne Richards. Anne’s basic salary will be £400,000. She will have a maximum AIP opportunity of the lower of
0.75 per cent of M&G’s IFRS profit or 600 per cent of base salary. Forty per cent of any bonus will be deferred into the Company’s shares.
Long-term incentive awards will be 150 per cent of base salary under the PLTIP and 300 per cent of salary under the M&G Executive Long
Term Incentive Plan. Any unvested share awards that Anne forfeits as a consequence of joining the Group will be replaced on a like-for-like
basis, with replacement awards released in accordance with the original vesting timeframe attached to the forfeited awards. Anne’s service
contract contains a notice provision under which either party may terminate upon 12 months’ notice.
Non-executive Directors
Non-executive Directors' fees were reviewed in 2015 with changes effective from 1 July 2015 as set out in the ‘Non-executive fee’ section.
The next review will be effective 1 July 2016.
As set out in the report of the Nomination Committee, the appointment of chairmen of the boards of M&G Limited and Prudential Corporation
Asia Limited has been proposed. The Remuneration Committee has approved a fee of £250,000 per annum for each of these roles, fixed
for a period of two years from the date of the appointment. The fee for the chair of Prudential Corporation Asia Limited will be payable
in Hong Kong dollars using an exchange rate fixed on the date of appointment.
Signed on behalf of the Board of Directors
Anthony Nightingale, CMG SBS JP
Chairman of the Remuneration Committee
8 March 2016
Paul Manduca
Chairman
8 March 2016
125
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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 2015
Conditional
awards
in 2015
Market
price at
date of
award
Rights
exercised
in 2015
Rights
lapsed
in 2015
Conditional
share awards
outstanding at
31 Dec 2015
Date of
end of
performance
period
Dividend
equivalents on
vested shares
(note 2)
(Number
of shares
released)
3,351
37,925
3,351
37,925
4,163
47,079
4,163
47,079
16,399 185,374
(Number
of shares)
(Number
of shares)
37,925
25,181
30,279
24,348
93,385
24,348
47,079
46,687
44,487
35,011
138,253
35,011
185,374
122,554
132,375
104,117
(pence)
678
1,203
1,317
1,672
678
1,203
1,317
1,672
678
1,203
1,317
1,672
(Number
of shares)
– 31 Dec 14
25,181 31 Dec 15
30,279 31 Dec 16
24,348 31 Dec 17
79,808
– 31 Dec 14
46,687 31 Dec 15
44,487 31 Dec 16
35,011 31 Dec 17
126,185
– 31 Dec 14
122,554 31 Dec 15
132,375 31 Dec 16
104,117 31 Dec 17
440,303
104,117
16,399 185,374
359,046
95,642
95,642
131,266
114,824
113,940
50,668
437,374
164,608
199,256
199,256
273,470
238,954
209,222
30,132
910,936
239,354
33,272
66,008
35,926
25,244
55,705
47,182
22,935
45,870
68,806
21,091
42,183
29,008
678
678
1,203
1,317
1,672
1,611.5
678
678
1,203
1,317
1,672
1,611.5
663.5
663.5
854
1,203
1,203
1,178
1,317
1,317
1,317
1,672
1,672
1,611.5
8,516
8,000
95,642
89,864 5,778
– 31 Dec 14
– 31 Dec 14
131,266 31 Dec 15
114,824 31 Dec 16
113,940 31 Dec 17
50,668 31 Dec 17
16,516 185,506 5,778
410,698
17,742 199,256
17,742 199,256
– 31 Dec 14
– 31 Dec 14
273,470 31 Dec 15
238,954 31 Dec 16
209,222 31 Dec 17
30,132 31 Dec 17
35,484 398,512
751,778
2,940
33,272
66,008
35,926
– 31 Dec 14
– 31 Dec 14
– 31 Dec 14
25,244 31 Dec 15
55,705 31 Dec 15
47,182 31 Dec 15
22,935 31 Dec 16
45,870 31 Dec 16
68,806 31 Dec 17
21,091 31 Dec 17
42,183 31 Dec 17
29,008 31 Dec 17
Penny James
GPSP
PLTIP
PLTIP
PLTIP
Michael McLintock GPSP
PLTIP
PLTIP
PLTIP
Nic Nicandrou
Barry Stowe1
Mike Wells1
Tony Wilkey3
GPSP
PLTIP
PLTIP
PLTIP
GPSP
BUPP
PLTIP
PLTIP
PLTIP
PLTIP
GPSP
BUPP
PLTIP
PLTIP
PLTIP
PLTIP
GPSP
PCA LTIP
PCA LTIP
PLTIP
PCA LTIP
PCA LTIP
PLTIP
PCA LTIP
PCA LTIP
PLTIP
PCA LTIP
PLTIP
2012
2013
2014
2015
2012
2013
2014
2015
2012
2013
2014
2015
2012
2012
2013
2014
2015
2015
2012
2012
2013
2014
2015
2015
2012
2012
2012
2013
2013
2013
2014
2014
2014
2015
2015
2015
400,948
92,282
2,940 135,206
358,024
Notes
1 The awards for Barry Stowe and Mike Wells were made in ADRs (1 ADR = 2 ordinary shares). The figures in the table are represented in terms of ordinary shares.
2 A DRIP dividend equivalent was accumulated on these awards.
3 The PCA LTIP is an arrangement for executives and senior management of PCA. Tony Wilkey was a participant of this plan until his appointment to the Board
on 1 June 2015 and will no longer be eligible to new awards from this date.
126
Prudential plc Annual Report 2015 www.prudential.co.uk
Business-specific cash-based long-term incentive plans
Michael McLintock
M&G Executive LTIP
M&G Executive LTIP
M&G Executive LTIP
M&G Executive LTIP
Total payments made in 2015
Year of
initial award
Face value
of conditional
share awards
outstanding at
1 January 2015
£000
Conditionally
awarded
in 2015
£000
Payments
made
in 2015
£000
Face value
of conditional
share awards
outstanding at
31 December
2015
£000
Date of end of
performance
period
2012
2013
2014
2015
953
1,112
1,146
1,182
1,973
1,973
–
1,112
1,146
1,182
31 Dec 14
31 Dec 15
31 Dec 16
31 Dec 17
Note
Under the M&G Executive LTIP, the value of each unit at award is £1. The value of units changes based on M&G’s profit growth and investment performance over
the performance period. For the 2012 award of 952,960 units, the unit price at the end of the performance period was £2.07, which resulted in a payment of £1,972,627
to Michael McLintock in 2015. For the 2013 award of 1,112,400 units, the unit price at the end of the performance period was £1.79, which will result in a payment of
£1,991,196 to Michael McLintock in 2016.
Other share awards
The table below sets out Executive Directors’ deferred bonus share
Conditional
share awards
outstanding
at 1 Jan 2015
Conditionally
awarded
in 2015
Year of
grant
(Number
of shares)
(Number
of shares)
Dividends
accumulated
in 2015
(note 2 and 3)
(Number
of shares)
Shares
released
in 2015
(Number
of shares)
Conditional
share awards
outstanding at
31 December
2015
(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)
Penny James
Deferred 2011 Group
deferred bonus
plan award
Deferred 2012 Group
deferred bonus
plan award
Deferred 2013 Group
deferred bonus
plan award
Deferred 2014 Group
deferred bonus
plan award
Michael McLintock
Deferred 2011 annual
incentive award
Deferred 2012 annual
incentive award
Deferred 2013 annual
incentive award
Deferred 2014 annual
incentive award
2012
7,069
7,069
– 31 Dec 14 30 Mar 15
783
1,697
2013
5,542
2014
4,764
2015
2012
2013
2014
2015
3,850
3,850
17,375
39,191
37,741
70,801
147,733
54,312
54,312
135
116
93
344
923
1,732
1,329
3,984
5,677 31 Dec 15
4,880 31 Dec 16
3,943 31 Dec 17
1,083
1,317
1,672
7,069
14,500
39,191
– 31 Dec 14 30 Mar 15
750
1,697
38,664 31 Dec 15
72,533 31 Dec 16
55,641 31 Dec 17
1,055
1,317
1,672
39,191
166,838
127
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Supplementary information continued
Conditional
share awards
outstanding
at 1 Jan 2015
Conditionally
awarded
in 2015
Year of
grant
(Number
of shares)
(Number
of shares)
Dividends
accumulated
in 2015
(note 2 and 3)
(Number
of shares)
Shares
released
in 2015
(Number
of shares)
Conditional
share awards
outstanding at
31 December
2015
(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)
Nic Nicandrou
Deferred 2011 annual
incentive award
Deferred 2012 annual
incentive award
Deferred 2013 annual
incentive award
Deferred 2014 annual
incentive award
Barry Stowe (note 1)
Deferred 2011 annual
incentive award
Deferred 2012 annual
incentive award
Deferred 2013 annual
incentive award
Deferred 2014 annual
incentive award
2012
2013
2014
2015
2012
2013
2014
2015
47,365
40,823
35,765
123,953
28,112
28,112
55,154
39,674
30,996
125,824
27,324
27,324
47,365
– 31 Dec 14
750
1,697
998
874
687
41,821 31 Dec 15
36,639 31 Dec 16
28,799 31 Dec 17
1,055
1,317
1,672
2,559
47,365
107,259
55,154
– 31 Dec 14 30 Mar 15
750
1,697
972
758
668
40,646 31 Dec 15
31,754 31 Dec 16
27,992 31 Dec 17
1,055
1,317
1,672
2,398
55,154
100,392
Mike Wells (note 1)
Deferred 2011 annual
incentive award
Deferred 2012 annual
incentive award
Deferred 2013 annual
incentive award
Deferred 2014 annual
incentive award
Tony Wilkey
Deferred 2012 PCA
deferred bonus
plan award
Deferred 2013 PCA
deferred bonus
plan award
Deferred 2014 PCA
deferred bonus
plan award
2012
101,314
2013
84,514
2014
102,130
101,314
– 31 Dec 14 30 Mar 15
750
1,697
2,072
2,506
86,586 31 Dec 15
104,636 31 Dec 16
1,055
1,317
1,672
2015
113,518
2,786
116,304 31 Dec 17
287,958
113,518
7,364 101,314
307,526
2013
80,570
80,570
– 31 Dec 15 30 Mar 15 1,083
1,697
2014
69,571
2015
150,141
80,833
80,833
1,260
1,457
2,717
70,831 31 Dec 16
82,290 31 Dec 17
1,317
1,672
80,570
153,121
Notes
1 The deferred share awards for Barry Stowe and Mike Wells were made in ADRs (1 ADR = 2 ordinary shares). The figures in the table are represented in terms
of ordinary shares.
2 The number of shares 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 2014 annual incentives, made in 2015, the average share price was 1,688 pence.
3 A DRIP dividend equivalent was accumulated on these awards.
128
Prudential plc Annual Report 2015 www.prudential.co.uk All-employee share plans
It is important that all employees are offered the opportunity to own shares in Prudential, connecting them both to the success of the
Company and to the interests of other shareholders. Executive Directors are invited to participate in these plans on the same basis as
other staff in their location.
Save As You Earn (SAYE) schemes
UK-based Executive Directors are eligible to participate in the HM Revenue and Customs (HMRC) approved Prudential Savings-Related
Share Option Scheme. This scheme allows 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 five years. At the end of
this term, participants may exercise their options within six months and purchase shares. If an option is not exercised within six months,
participants are entitled to a refund of their cash savings plus interest if applicable under the rules. Shares are issued to satisfy those
options which are exercised. No options may be granted under the schemes if the grant would cause the number of shares which have
been issued, or which remain issuable pursuant to options granted in the preceding 10 years under the scheme and any other option
schemes operated by the Company, or which have been issued under any other share incentive scheme of the Company, to exceed
10 per cent of the Company’s ordinary share capital at the proposed date of grant.
Details of Executive Directors’ rights under the SAYE scheme are set out in the ‘Statement of directors’ shareholdings’.
Share Incentive Plan (SIP)
UK-based Executive Directors are also eligible to participate in the Company’s 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.
Michael McLintock
Nic Nicandrou
Mike Wells
Year of
initial grant
Share Incentive
Plan awards
held in trust
at 1 Jan 2015
(Number
of shares)
Partnership
shares
accumulated
in 2015
(Number
of shares)
Matching
shares
accumulated
in 2015
(Number
of shares)
Dividend
shares
accumulated
in 2015
(Number
of shares)
Share Incentive
Plan awards
held in trust
at 31 Dec 2015
(Number
of shares)
2014
2010
2015
106
1,246
–
116
117
78
29
29
19
4
33
–
255
1,425
97
Prudential Corporation Asia All Employee Share Purchase Plan (PruSharePlus)
From August 2014, all Asia-based employees were able to purchase Prudential plc shares up to a value of £5,000 per year from their
gross salary through the PruSharePlus. For every two shares bought by the employee, one 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 PruSharePlus together with Matching Shares (awarded on
a 1:2 basis) and dividend shares.
Year of
initial grant
PruSharePlus
awards held
in trust at
1 Jan 2015
(Number
of shares)
Purchased
shares
accumulated
in 2015
(Number
of shares)
Matching
shares
accumulated
in 2015
(Number
of shares)
Dividend
shares
accumulated
in 2015
(Number
of shares)
PruSharePlus
awards held
in trust at
31 December
2015
(Number
of shares)
Tony Wilkey*
2014
140
266
133
6
545
* Following his appointment to the Board, Tony Wilkey is no longer eligible to participate in the PSP with effect from the anniversary of his joining the plan.
Dilution
Releases from the Prudential Long Term Incentive Plan and GPSP are satisfied using new issue shares rather than by purchasing shares in
the open market. Shares relating to options granted under all-employee share plans are also satisfied by new issue shares. The combined
dilution from all outstanding shares and options at 31 December 2015 was 0.1 per cent of the total share capital at the time. Deferred shares
will continue to be satisfied by the purchase of shares in the open market.
Five highest paid individuals
Of the five individuals with the highest emoluments in 2015, two were directors whose emoluments are disclosed in this report.
The aggregate of the emoluments of the other three individuals for 2015 were as follows:
Base salaries, allowances and benefits in kind
Pension contributions
Performance-related pay
Total
2015
£000
1,378
270
20,793
22,441
Their emoluments were within the following bands:
£5,600,001-£5,700,000
£8,000,001-£8,100,000
£8,700,001-£8,800,000
Number of five highest
paid employees 2015
1
1
1
129
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130
Prudential plc Annual Report 2015 www.prudential.co.uk Financial
statements
132 Index to Group IFRS financial statements
282 Parent company financial statements
284 Notes on the parent company financial statements
292 Statement of directors’ responsibilities in respect of
the Annual Report and of the financial statements
293 Independent auditor’s report to the members of
Prudential plc only
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Find out more on page 61.
Our communities
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www.prudential.co.ukAnnualReport2015 Prudential plc01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information5 Index to Group IFRS financial statements
Primary statements
133
134
135
137
139
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated statement of changes in equity: 2015
2014
Consolidated statement of financial position
Consolidated statement of cash flows
Notes to Primary statements
A1
A2
A3
Section A: Background and accounting policies
140
140
Basis of preparation and exchange rates
Adoption of new accounting pronouncements in 2015
Accounting policies
A3.1
A3.2
Accounting policies and use of estimates and judgements
New accounting pronouncements not yet effective
141
153
Section B: Earnings performance
B1
B2
B3
B4
B5
B6
B7
155
156
158
162
165
167
168
169
171
171
172
173
177
178
B1.3
Analysis of performance by segment
B1.1
B1.2
Segment results – profit before tax
Short-term fluctuations in investment returns on
shareholder-backed business
Determining operating segments and performance
measure of operating segments
Segmental income statement
Revenue
Staff and employment costs
Share-based payment
Key management remuneration
Fees payable to the auditor
B1.4
B1.5
Profit before tax – asset management operations
Acquisition costs and other expenditure
B3.1
B3.2
B3.3
B3.4
Effect of changes and other accounting features on insurance
assets and liabilities
Tax charge
Earnings per share
Dividends
Section C: Balance sheet notes
Analysis of Group position by segment and business type
Group statement of financial position – analysis by
C1.1
segment
Group statement of financial position – analysis by
business type
C1.2
Asia insurance operations
Group assets and liabilities – classification
Group assets and liabilities – measurement
Analysis of segment position by business type
C2.1
C2.2 US insurance operations
C2.3 UK insurance operations
C2.4 Asset management operations
Assets and liabilities – classification and measurement
C3.1
C3.2
C3.3 Debt securities
Loans portfolio
C3.4
C3.5
Financial instruments – additional information
C3.5(a) Market risk
C3.5(b) Derivatives and hedging
C3.5(c) Derecognition, collateral and offsetting
C3.5(d) Impairment of financial assets
C1
C2
C3
179
184
186
187
189
191
192
196
204
211
213
213
215
216
217
132
C4
C5
C6
C7
C8
C9
C10
C11
Policyholder liabilities and unallocated surplus
of with-profits funds
C4.1 Movement and duration of liabilities
C4.1(a) Group overview
C4.1(b) Asia insurance operations
C4.1(c) US insurance operations
C4.1(d) UK insurance operations
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-profits funds
C5.2
Borrowings
C6.1
Group overview
US insurance operations
UK insurance operations
Asset management and other operations
Core structural borrowings of shareholder–financed
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
Defined benefit 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
219
219
222
224
225
227
227
228
232
236
236
237
240
241
241
242
242
244
246
251
253
254
255
255
261
262
267
267
268
269
Section D: Other notes
270
270
272
272
272
272
D1
D2
D3
D4
D5
D6
Sale of Japan life business
Contingencies and related obligations
Post balance sheet events
Related party transactions
Commitments
Investments in subsidiary undertakings, joint ventures
and associates
Prudential plc Annual Report 2015 www.prudential.co.uk
Consolidated income statement
Year ended 31 December
Gross premiums earned
Outward reinsurance premiums
Earned premiums, net of reinsurance
Investment return
Other income
Total revenue, net of reinsurance
Benefits and claims
Outward reinsurers’ share of benefits and claims
Movement in unallocated surplus of with-profits funds
Benefits and claims and movement in unallocated surplus of with-profits funds,
net of reinsurance
Acquisition costs and other expenditure
Finance costs: interest on core structural borrowings of shareholder-financed operations
Disposal of Japan life business:
Cumulative exchange loss recycled from other comprehensive income
Remeasurement adjustments
Total charges, net of reinsurance
Share of profits from joint ventures and associates, net of related tax
Profit before tax (being tax attributable to shareholders’ and policyholders’ returns)*
Less tax charge attributable to policyholders’ returns
Profit before tax attributable to shareholders
Total tax charge attributable to policyholders and shareholders
Adjustment to remove tax charge attributable to policyholders’ returns
Tax charge attributable to shareholders’ returns
Profit for the year attributable to equity holders of the Company
Earnings per share (in pence)
Based on profit attributable to the equity holders of the Company:
Basic
Diluted
Note
2015 £m
2014 £m
B1.5
B1.5
B1.5
B1.4
B3
D1
D1
B1.4
D6
B1.1
B5
B5
B6
36,663
(1,157)
35,506
3,304
2,495
41,305
(30,547)
1,389
(498)
(29,656)
(8,208)
(312)
(46)
–
32,832
(799)
32,033
25,787
2,306
60,126
(50,736)
631
(64)
(50,169)
(6,752)
(341)
–
(13)
(38,222)
(57,275)
238
3,321
(173)
3,148
(742)
173
(569)
2,579
303
3,154
(540)
2,614
(938)
540
(398)
2,216
2015
2014
101.0p
100.9p
86.9p
86.8p
* This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders. This is principally because the corporate taxes
of the Group include those on the income of consolidated with-profits and unit-linked funds that, through adjustments to benefits, are borne by policyholders.
These amounts are required to be included in the tax charge of the Company under IAS 12. Consequently, the profit before all taxes measure (which is determined
after deducting the cost of policyholder benefits and movements in the liability for unallocated surplus of the PAC with-profits fund after adjusting for taxes borne
by policyholders) is not representative of pre-tax profits attributable to shareholders.
133
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Year ended 31 December
Profit for the year
Note
2015 £m
2014 £m
2,579
2,216
Other comprehensive income:
Items that may be reclassified subsequently to profit or loss
Exchange movements on foreign operations and net investment hedges:
Exchange movements arising during the year
Cumulative exchange loss of Japan life business recycled through profit or loss
Related tax
Net unrealised valuation movements on securities of US insurance operations classified
as available-for-sale:
Net unrealised holding (losses) gains arising during the year
Less: net gains included in the income statement on disposal and impairment
Total
Related change in amortisation of deferred acquisition costs
Related tax
Total
Items that will not be reclassified to profit or loss
Shareholders’ share of actuarial gains and losses on defined benefit pension schemes:
Gross
Related tax
A1
C3.3(b)
C5.1(b)
68
46
4
118
(1,256)
(49)
(1,305)
337
339
(629)
(511)
27
(5)
22
215
–
5
220
1,039
(83)
956
(87)
(304)
565
785
(12)
2
(10)
Other comprehensive (loss) income for the year, net of related tax
(489)
775
Total comprehensive income for the year attributable to the equity holders of the Company
2,090
2,991
134
Prudential plc Annual Report 2015 www.prudential.co.uk Consolidated statement of changes in equity
Year ended 31 December 2015 £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
Reserves
Profit for the year
Other comprehensive income:
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
gains and losses on defined
benefit pension schemes,
net of tax
Total other comprehensive income (loss)
Total comprehensive income for the year
Dividends
Reserve movements in respect
of share-based payments
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
–
–
–
–
–
–
–
–
–
–
–
–
128
128
–
2,579
–
–
2,579
–
2,579
–
–
–
–
–
–
–
7
–
–
7
1,908
–
–
22
22
2,601
(974)
39
–
(38)
20
1,648
8,788
1,915
10,436
118
–
118
–
118
–
–
118
118
–
–
–
–
–
(629)
(629)
–
22
(629)
(489)
(629)
2,090
–
–
–
–
–
(974)
39
7
(38)
20
118
31
149
(629)
956
1,144
11,811
327
12,955
–
–
–
–
–
–
–
–
–
–
1
1
(629)
22
(489)
2,090
(974)
39
7
(38)
20
1,144
11,812
12,956
135
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Year ended 31 December 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
220
–
220
–
220
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(895)
106
(48)
(6)
1,363
7,425
8,788
13
–
–
565
565
(10)
(10)
–
220
–
565
(10)
775
2,206
220
565
2,991
–
–
–
–
–
–
–
–
–
–
(895)
106
13
(48)
(6)
220
(189)
31
565
391
956
2,161
9,650
11,811
–
128
128
13
1,895
1,908
–
–
–
–
–
–
–
–
–
–
1
1
565
(10)
775
2,991
(895)
106
13
(48)
(6)
2,161
9,651
11,812
Reserves
Profit for the year
Other comprehensive income:
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
gains and losses on defined
benefit 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
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
136
Prudential plc Annual Report 2015 www.prudential.co.uk Consolidated statement of financial position
Assets
31 December
Intangible assets attributable to shareholders:
Goodwill
Deferred acquisition costs and other intangible assets
Total
Intangible assets attributable to with-profits funds:
Goodwill in respect of acquired subsidiaries for venture fund and other
investment purposes
Deferred acquisition costs and other intangible assets
Total
Total intangible assets
Other non-investment and non-cash assets:
Property, plant and equipment
Reinsurers’ share of insurance contract liabilities
Deferred tax assets
Current tax recoverable
Accrued investment income
Other debtors
Total
Investments of long-term business and other operations:
Investment properties
Investment in joint ventures and associates accounted for using the equity method
Financial investments:*
Loans
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments
Deposits
Total
Assets held for sale
Cash and cash equivalents
Total assets
* Included within financial investments are £5,995 million (2014: £4,578 million) of lent securities.
Note
2015 £m
2014 £m
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
8,422
9,885
185
50
235
1,463
7,261
8,724
186
61
247
10,120
8,971
1,197
7,903
2,819
477
2,751
1,955
978
7,167
2,765
117
2,667
1,852
17,102
15,546
13,422
1,034
12,958
157,453
147,671
7,353
12,088
351,979
12,764
1,017
12,841
144,862
145,251
7,623
13,096
337,454
D1
2
7,782
824
6,409
C1,C3.1
386,985
369,204
137
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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
2015 £m
2014 £m
12,955
1
12,956
11,811
1
11,812
260,753
42,959
18,806
13,096
335,614
250,038
39,277
20,224
12,450
321,989
4,018
993
5,011
1,960
1,332
3,765
7,873
4,010
325
952
4,876
604
3,119
4,588
3,320
984
4,304
2,263
1,093
2,347
7,357
4,291
617
947
4,262
724
2,323
4,105
30,112
–
374,029
386,985
26,973
770
357,392
369,204
C4.1(a)
C6.1
C6.2(a)
C6.2(b)
C8.1
C12
C3.5(b)
D1
C1,C3.1
The consolidated financial statements on pages 133 to 281 were approved by the Board of Directors on 8 March 2016.
They were signed on its behalf:
Paul Manduca
Chairman
Mike Wells
Group Chief Executive
Nic Nicandrou
Chief Financial Officer
138
Prudential plc Annual Report 2015 www.prudential.co.uk Consolidated statement of cash flows
Year ended 31 December
Note
2015 £m
2014 £m
Cash flows from operating activities
Profit before tax (being tax attributable to shareholders’ and policyholders’ returns) note (i)
Non-cash movements in operating assets and liabilities reflected in profit before tax:
Investments
Other non-investment and non-cash assets
Policyholder liabilities (including unallocated surplus)
Other liabilities (including operational borrowings)
Interest income and expense and dividend income included in result before tax
Other non-cash items note (ii)
Operating cash items:
Interest receipts
Dividend receipts
Tax paid
Net cash flows from operating activities
Cash flows from investing activities
Purchases of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Acquisition of subsidiaries and intangibles
Sale of businesses
Net cash flows from investing activities
Cash flows from financing activities
Structural borrowings of the Group:
Shareholder-financed operations: note (iii)
Issue of subordinated debt, net of costs
Redemption of subordinated debt
Interest paid
With-profits operations: note (iv)
Interest paid
Equity capital:
Issues of ordinary share capital
Dividends paid
Net cash flows from financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of exchange rate changes on cash and cash equivalents
Cash and cash equivalents at end of year
3,321
3,154
(6,814)
(1,063)
6,067
1,761
(8,726)
234
7,316
1,777
(1,340)
2,533
(256)
30
(286)
43
(469)
590
–
(288)
(9)
7
(974)
(674)
1,390
6,409
(17)
7,782
(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
C13
C6.1
C6.2
This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders.
Notes
(i)
(ii) Other non-cash items consist of the adjustment of non-cash items to profit before tax.
(iii) Structural borrowings of shareholder-financed operations exclude borrowings to support short-term fixed income securities programmes, non-recourse
(iv)
borrowings of investment subsidiaries of shareholder-financed operations and other borrowings of shareholder-financed operations. Cash flows in respect
of these borrowings are included within cash flows from operating activities.
Interest paid on structural borrowings of with-profits operations relate solely to the £100 million 8.5 per cent undated subordinated guaranteed bonds, which
contribute to the solvency base of the Scottish Amicable Insurance Fund (SAIF), a ring-fenced sub-fund of the PAC with-profits fund. Cash flows in respect
of other borrowings of with-profits funds, which principally relate to consolidated investment funds, are included within cash flows from operating activities.
139
www.prudential.co.ukAnnualReport2015 Prudential plc01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information A1: Basis of preparation and exchange rates
Prudential plc (the Company) together with its subsidiaries (collectively, the Group or Prudential) is an international financial services
group with its principal operations in Asia, the US and the UK. Prudential offers a wide range of retail financial products and services
and asset management services throughout these territories. The retail financial products and services principally include life insurance,
pensions and annuities as well as collective investment schemes.
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 2015, there were no
unendorsed standards effective for the two years ended 31 December 2015 affecting the consolidated financial information of the Group
and there were no differences between IFRS endorsed by the EU and IFRS issued by the IASB in terms of their application to the Group.
The parent company statement of financial position prepared in accordance with the UK Generally Accepted Accounting Practice
(including Financial Reporting Standard 101 Reduced Disclosure Framework) is presented on page 282.
Except for the adoption of the new and amended accounting standards for Group IFRS reporting as described in note A2, the
accounting policies applied by the Group in determining the IFRS basis results in this report are the same as those previously applied
in the Group’s consolidated financial statements for the year ended 31 December 2014.
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
China
India
Vietnam
Thailand
US
Closing
rate at
31 Dec 2015
Average rate
for
2015
Closing
rate at
31 Dec 2014
Average rate
for
2014
11.42
20,317.71
6.33
2.09
9.57
97.51
33,140.64
53.04
1.47
11.85
20,476.93
5.97
2.10
9.61
98.08
33,509.21
52.38
1.53
12.09
19,311.31
5.45
2.07
9.67
98.42
33,348.46
51.30
1.56
12.78
19,538.56
5.39
2.09
10.15
100.53
34,924.62
53.51
1.65
Certain notes to the financial statements present 2014 comparative information at Constant Exchange Rates (CER), in addition to the
reporting at Actual Exchange Rates (AER) used throughout the consolidated financial statements. AER are actual historical exchange
rates for the specific accounting period, being the average rates over the period for the income statement and the closing rates for the
balance sheet at the balance sheet date. 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 2015 recognised in other comprehensive income is:
Asia operations*
US operations
Unallocated to a segment (central funds)†
2015 £m
2014 £m
(5)
238
(119)
114
109
243
(137)
215
* Includes cumulative exchange loss of Japan life business of £46 million.
† The exchange rate movement unallocated to a segment mainly reflects the translation of currency borrowings which have been designated as a net investment
hedge against the currency risk of the investment in Jackson.
A2: Adoption of new accounting pronouncements in 2015
The Group has adopted the annual improvements to the IFRS’s 2011-2013 cycle which were effective in 2015.
Except for a change to the presentation of the Prudential Capital business as a separate reporting segment, as described in note B1.3,
consideration of these improvements has had no impact on the financial statements of the Group.
140
Prudential plc Annual Report 2015 www.prudential.co.ukA: Background and accounting policies 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 financial 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
Classification of insurance and investment contracts
Measurement of policyholder liabilities and unallocated surplus of with-profits fund
Measurement and presentation of derivatives and debt securities of US insurance operations
Presentation of results before tax
Segmental analysis of results and earnings distributable to shareholders
Accounting
policy reference
A3.1(c)
A3.1(d)
A3.1(j)(v)
A3.1(k)
A3.1(m)
The preparation of these financial statements requires Prudential to make estimates and judgements 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
Classification of insurance and investment contracts
Measurement of policyholder liabilities
Measurement of deferred acquisition costs
Determination of fair value of financial investments
Determining impairment relating to financial assets
Accounting
policy reference
A3.1(c)
A3.1(d)
A3.1(f)
A3.1(j)(ii)
A3.1(j)(iii)
b Basis of consolidation
The Group consolidates those investees it is deemed to control. The Group has control over an investee if all three of the following
are met: (1) it has power over an investee; (2) it is exposed to, or has rights to, variable returns from its involvement with the investee;
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 financial investments depends on the terms of each partnership agreement and the shareholdings in the general
partners. In the context of direct investment in limited partnerships, the following circumstances may indicate a relationship in which,
in substance, the Group controls and consequently consolidates a limited partnership:
— The Group has existing rights that give it the current ability to direct the relevant activities of the limited partnership, ie activities that
significantly affect the generation of economic returns from the limited partnership’s operation;
— The Group has the power to obtain the significant benefits of the activities of the limited partnerships. Generally, it is presumed that
the Group has significant benefits if its participation in the limited partnership is greater than 20 per cent; and
— The Group has the current ability to join together with other partners to direct the activities of the partnership.
The Group performs a reassessment of consolidation whenever there is a change in the substance of the relationship between the Group
and a limited partnership. Where the Group is deemed to control a limited partnership, it is treated as a subsidiary and its results, assets
and liabilities are consolidated. Where the Group holds a minority share in a limited partnership, with no control over their associated
general partners, the investments are carried at fair value through profit or loss within financial investments in the consolidated statement
of financial position.
The limited partnerships consolidated by the Group include Qualifying Partnerships as defined 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 financial statements requirements under regulations 4 to 6, on the basis that these limited partnerships
are dealt with on a consolidated basis in these financial statements.
141
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A3.1 Accounting policies and use of estimates and judgements 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 significant influence, but it does not control. Generally it is presumed that the Group
has significant influence if it holds between 20 per cent and 50 per cent voting rights of the entity.
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 profit or loss of its joint ventures and associates is recognised in the income statement
and its share of movements in other comprehensive income is recognised in other comprehensive income. 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 profit 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, collateralised 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 fluctuate 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 significant investment in the entity; and
— Where the entity is managed by an asset manager 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 an 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 the Group’s holding is greater than
50 per cent and is deemed to have no significant influence over an entity for holdings 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 fees earned by the Group’s asset manager)
from the entity is higher than the Group’s interest.
Where the Group is deemed to control these entities they are treated as a subsidiary and are consolidated, with the interests of investors
other than the Group being classified as liabilities and appear as net asset value attributable to unit holders of consolidated unit trusts and
similar funds.
Where the Group does not control these entities (as it is deemed to be acting as an agent) and they do not meet the definition
of associates, they are carried at fair value through profit or loss within financial investments in the consolidated statement of
financial position.
Where the Group’s asset manager sets 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. For these open-ended investment companies and unit trusts, the Group is not deemed to control
the entities but to be acting as an agent.
The Group generates returns and retains the ownership risks in investment vehicles commensurate to its participation and does not
have any further exposure to the residual risks of these investment vehicles.
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Jackson offers variable contracts that invest contract holders’ premiums, at the contract holders’ direction, in investment vehicles
(‘Separate Accounts’) that invest in equity, fixed income, bonds and money market mutual funds. The contract holder retains the
underlying returns and the ownership risks related to the separate accounts and its underlying investments. The shareholders’ 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 affiliated entity.
The independent members represent contract holders’ interest and are responsible for any decision making that impacts contract
holders’ interest and governs the operational activities of the entities’ advisers, including asset managers managing the investment
vehicles. Accordingly, the Group does not control these vehicles. These investments are carried at fair value through profit or loss within
financial investments in the consolidated statement of financial position.
Other structured entities
The Group holds investments in mortgage-backed securities, collateralised 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 vehicles’ activities. The Group generates returns and retains the ownership risks commensurate to its holding and its
exposure to the investments. Accordingly the Group does not have power over the relevant activities of such vehicles and all are carried
at fair value through profit or loss within financial investments in the consolidated statement of financial position.
The table below provides aggregate carrying amounts of the investments in unconsolidated structured entities reported in the
Group’s statement of financial position:
Statement of financial position line items
Equity securities and portfolio holdings in
unit trusts
Debt securities
Total
2015 £m
2014 £m
OEICs/UTs
Separate
account
assets
Other
structured
entities
OEICs/UTs
Separate
account
assets
Other
structured
entities
12,945
–
12,945
91,022
–
91,022
–
11,735
11,735
12,690
–
12,690
81,741
–
81,741
–
12,715
12,715
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 2015, the Group does not have an agreement, contractual or otherwise, or intention to provide financial support
to structured entities that could expose the Group to a loss.
c Classification of insurance and investment contracts
IFRS 4 requires contracts written by insurers to be classified as either ‘insurance contracts’ or ‘investment contracts’ depending on the
level of insurance risk transferred. Insurance risk is a pre-existing risk, other than financial risk, transferred from the contract holder to the
contract issuer. If significant insurance risk is transferred to the Group then it is classified as an insurance contract. Contracts that transfer
financial risk to the Group but not significant insurance risk are termed investment contracts. Furthermore, some contracts, both
insurance and investment, contain discretionary participating features representing the contractual right to receive additional benefits
as a supplement to guaranteed benefits:
a That are likely to be a significant portion of the total contract benefits;
b Whose amount or timing is contractually at the discretion of the insurer; and
c That are contractually based on asset or fund performance, as discussed in IFRS 4.
Business units
Asia
US
UK
Insurance contracts and investment contracts
with discretionary participation features
Investment contracts without discretionary
participation features
— With-profits contracts
— Non-participating term contracts
— Whole life contracts
— Unit-linked policies
— Accident and health policies
— Variable annuity contracts
— Fixed annuity contracts
— Life insurance contracts
— Minor amounts for a number of small
categories of business
— Guaranteed investment contracts (GICs)
— Minor amounts of ‘annuity certain’ contracts
— With-profits contracts
— Bulk and individual annuity business
— Non-participating term contracts
— Certain unit-linked savings and similar
contracts
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d Measurement of policyholder liabilities and unallocated surplus of with-profits funds
The measurement basis of policyholder liabilities is dependent upon the classification of the contracts under IFRS 4 described in note
A3.1(c) above.
IFRS 4 permits the continued usage of previously applied Generally Accepted Accounting Practices (GAAP) for insurance contracts
and investment contracts with discretionary participating features. Accordingly, except for UK regulated with-profits funds which were
measured under FRS 27 as discussed below, the modified statutory basis of reporting as set in the Statement of Recommended Practice
issued by Association of British Insurers (ABI SORP) was adopted by the Group on first time adoption of IFRS in 2005. FRS 27 and the
ABI SORP were withdrawn in the UK for the accounting periods beginning in or after 2015. As used in these consolidated financial
statements, the terms ‘FRS 27’ and the ‘ABI SORP’ refer to the requirements of these pronouncements prior to their withdrawal.
For investment contracts that do not contain discretionary participating features, IAS 39 is applied and, where the contract includes
an investment management element, IAS 18, ‘Revenue’, applies.
For with-profits funds, as the shareholders’ participation in the cost of bonuses arises only on distribution, the Group has elected
to account for the unallocated surplus of UK regulated with-profits funds as a liability with no allocation to equity.
The policy of measuring contract liabilities at business unit level is noted below. Additional details are discussed in note C4.2.
i Insurance contracts
Asia insurance operations
The policyholder liabilities for businesses in Asia are determined in accordance with methods prescribed by local GAAP adjusted to
comply, where necessary, with the modified statutory basis. Refinements to the local reserving methodology are generally treated as
changes in estimates, dependent on their nature.
For the operations in India, Taiwan and, up until 2015, Japan, the local GAAP is not appropriate as a starting point in the context of the
modified 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 benefit provisions for non-participating
linked business are determined using the net level premium method, with an allowance for surrenders, maintenance and claim expenses.
Rates of interest used in establishing the policyholder benefit provisions vary by operation depending on the circumstances attaching
to each block of business. Where appropriate, liabilities for participating business for these operations include provisions for the
policyholders’ interest in investment gains and other surpluses that have yet to be declared as bonuses.
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 modified statutory basis for UK operations with the same features.
US insurance operations
In accordance with the modified 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 other 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-profits funds are accounted for by the voluntary application of the UK accounting standard FRS 27 ‘Life
Assurance’ that requires liabilities to be calculated as the realistic basis liabilities. The realistic basis liabilities are measured by reference
to the PRA’s Peak 2 basis of reporting. This Peak 2 basis requires the value of liabilities to be calculated as:
— A with-profits benefits reserve; plus
— Future policy related liabilities; plus
— The realistic current liabilities of the fund.
The with-profits benefits reserve is primarily based on the retrospective calculation of accumulated asset shares but is adjusted to reflect
future policyholder benefits and other outgoings. Asset shares broadly reflect the policyholders’ share of the with-profits fund assets
attributable to their policies.
The future policy-related liabilities must include a market consistent valuation of costs of guarantees, options and smoothing, less any
related charges, and this amount is determined using either a stochastic approach, hedging costs or a series of deterministic projections
with attributed probabilities.
The Peak 2 basis realistic liabilities for with-profits business currently include the element for the shareholders’ share of the future
cost of bonuses consistent with the contract asset shares. For accounting purposes under FRS 27, this latter item is not shown as part
of contract liabilities. This is because, consistent with the current basis of financial reporting, shareholder transfers are recognised only
on declaration. Instead, the shareholders’ share of future costs of bonuses is included within the liabilities for unallocated surplus.
Other UK insurance contracts that contain significant insurance risk include unit-linked, annuity and other non-profit business.
For the purposes of local regulations, segregated accounts are established for linked business for which policyholder benefits are wholly
or partly determined by reference to specific investments or to an investment-related index. The interest rates used in establishing
policyholder benefit provisions for pension annuities in the course of payment are adjusted each year. Mortality rates used in establishing
policyholder benefits are based on published mortality tables adjusted to reflect actual experience.
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ii Investment contracts with discretionary participation features
For investment contracts with discretionary participation features, the accounting basis is consistent with the accounting for similar
with-profits insurance contracts.
iii Investment contracts without discretionary participation features
The measurement of investment contracts without discretionary participation features is carried out in accordance with IAS 39 to reflect
the deposit nature of the arrangement, with premiums and claims reflected as deposits and withdrawals and taken directly to the
statement of financial position as movements in the financial liability balance.
Under IFRS, investment contracts (excluding those with discretionary participation features) accounted for as financial liabilities
in accordance with IAS 39 which also offer investment management services, require the application of IAS 18 for the revenue attached
to these services. Incremental, directly attributable acquisition costs relating to the investment management element of these contracts
are capitalised and amortised in line with the related revenue. If the contracts involve up-front charges, this income is also deferred
and amortised through the income statement in line with contractual service provision.
For those investment contracts in the US with fixed and guaranteed terms, the Group uses the amortised cost model to measure the
liability.
Those investment contracts without fixed and guaranteed terms are designated as fair value through profit 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.
iv Unallocated surplus of with-profits funds
Unallocated surplus represents the excess of assets over policyholder liabilities for the Group’s with-profits funds that have yet to be
appropriated between policyholders and shareholders. As allowed under IFRS 4, the Group has opted to continue to record unallocated
surplus of with-profits funds wholly as a liability with no allocation to equity. The annual excess (shortfall) of income over expenditure
of the with-profits funds, after declaration and attribution of the cost of bonuses to policyholders and shareholders, is transferred to
(from) the unallocated surplus each year through a charge (credit) to the income statement. The balance retained in the unallocated
surplus represents cumulative income arising on the with-profits business that has not been allocated to policyholders or shareholders.
The balance of the unallocated surplus is determined after full provision for deferred tax on unrealised appreciation on investments.
e Reinsurance
The measurement of reinsurance assets is consistent with the measurement of the underlying direct insurance contracts.
The treatment of any gains or losses arising on the purchase of reinsurance contracts is dependent on the underlying accounting basis
of the entity concerned.
f Deferred acquisition costs for insurance contracts
Except for acquisition costs of with-profits contracts of the UK regulated with-profits funds, which are accounted for under the realistic
PRA regime, costs of acquiring new insurance business are accounted for in a way that is consistent with the principles of the ABI SORP
with deferral and amortisation against margins in future revenues on the related insurance policies. Costs of acquiring new insurance
business, principally commissions, marketing and advertising and certain other costs associated with policy insurance and underwriting
that are not reimbursed by policy charges, are specifically identified and capitalised as part of deferred acquisition costs. In general, this
deferral is presentationally shown by an explicit carrying value 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 are 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.
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A3.1 Accounting policies and use of estimates and judgements continued
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 applies FAS ASU 2010-26 on ‘Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts’ 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 profits on the relevant contracts. For fixed and fixed
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. In addition, expected gross profits depend on
mortality assumptions, assumed unit costs and terminations other than deaths (including the related charges), all of which are based
on a combination of Jackson’s actual industry experience and future expectations. A detailed analysis of actual mortality, lapse and
expenses experience is performed using internally developed experience studies.
For US variable annuity business, a key assumption is the long-term investment return from the separate accounts, which is
determined using a mean reversion methodology. Under the mean reversion methodology, projected returns over the next five years
are flexed (subject to capping) so that, combined with the actual rates of return for the current and the previous two years the assumed
long-term level of returns from the separate accounts is maintained. The projected rates of return are capped at no more than 15 per cent
for each of the next five years. These returns affect the level of future expected profits through their effects on the fee income with
consequential impact on the amortisation of deferred acquisition costs. The level of acquisition costs carried in the statement of financial
position is also sensitive to unrealised valuation movements on debt securities held to back the liabilities and solvency capital.
Further details are discussed in note C5.1(b).
As permitted by IFRS 4, Jackson uses shadow accounting to make adjustments to the deferred acquisition costs which are recognised
directly in other comprehensive income. Jackson accounts for the majority of its investment portfolio on an available-for-sale basis
whereby unrealised gains and losses are recognised in other comprehensive income. To the extent that recognition of unrealised gains
or losses on available-for-sale securities causes adjustments to the carrying value and amortisation patterns of deferred acquisition costs
and deferred income, these adjustments are recognised in other comprehensive income to be consistent with the treatment of the gains
or losses on the securities. More precisely, shadow deferred acquisition costs adjustments reflect the change in deferred acquisition
costs that would have arisen if the assets held in the statement of financial position had been sold, crystallising unrealised gains or losses,
and the proceeds reinvested at the yields currently available in the market.
UK insurance operations
For UK regulated with-profits funds where the Prudential Regulation Authority (PRA) realistic 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 deferral of acquisition
costs is negligible.
g Liability adequacy test
The Group performs adequacy testing on its insurance liabilities to ensure that the carrying amounts (net of related deferred acquisition
costs) and, where relevant, present value of acquired in-force business is sufficient to cover current estimates of future cash flows.
Any deficiency is immediately charged to the income statement.
h Earned premiums, policy fees and claims paid
Premium and annuity considerations for conventional with-profits policies and other protection type insurance policies are recognised
as revenue when due. Premiums and annuity considerations for linked policies, unitised with-profits and other investment type policies
are recognised as revenue when received or, in the case of unitised or unit-linked policies, when units are issued. These amounts exclude
premium taxes and similar duties where Prudential collects and settles taxes borne by the customer.
Policy fees charged on linked and unitised with-profits policies for mortality, asset management and policy administration are
recognised as revenue when related services are provided.
Claims paid include maturities, annuities, surrenders and deaths. Maturity claims are recorded as charges on the policy maturity date.
Annuity claims are recorded when each annuity instalment becomes due for payment. Surrenders are charged to the income statement
when paid and death claims are recorded when notified.
i Investment return
Investment return included in the income statement principally comprises interest income, dividends, investment appreciation/
depreciation (realised and unrealised gains and losses) on investments designated as fair value through profit or loss, and realised gains
and losses (including impairment losses) on items held at amortised cost and 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.
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i Investment classification
The Group holds financial investments in accordance with IAS 39, whereby subject to specific criteria, financial instruments are required
to be accounted for under one of the following categories:
— Financial assets and liabilities at fair value through profit or loss – this comprises assets and liabilities designated by management
as fair value through profit 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 financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset;
— Available-for-sale assets are subsequently measured at fair value. Interest income is recognised on an effective interest basis in the
income statement. Except for foreign exchange gains and losses on debt securities, not in functional currency, which are included
in the income statement, unrealised gains and losses are recognised in other comprehensive income. Upon disposal or impairment,
accumulated unrealised gains and losses are transferred from other comprehensive income to the income statement as realised gains
or losses; and
— Loans and receivables – except for those designated as at fair value through profit or loss or available-for-sale, these instruments
comprise non-quoted investments that have fixed or determinable payments. These instruments include loans collateralised by
mortgages, deposits, loans to policyholders and other unsecured loans and receivables. These investments are initially recognised
at fair value plus transaction costs. Subsequently, these instruments are carried at amortised cost using the effective interest method.
The Group uses the trade date method to account for regular purchases and sales of financial assets.
ii Use of fair value
The Group uses current bid prices to value its investments with quoted prices. Actively traded investments without quoted prices are
valued using prices provided by third parties 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 flow technique.
Determining the fair value of financial investments when the markets are not active
The Group holds certain financial investments for which the markets are not active. These can include financial investments which are
not quoted on active markets and financial investments for which markets are no longer active as a result of market conditions eg market
illiquidity. When the markets are not active, there is generally no or limited observable market data to account for financial investments
at fair value. The determination of whether an active market exists for a financial investment requires management’s judgement.
If the market for a financial investment of the Group is not active, the fair value is determined by using valuation techniques.
The Group establishes fair value for these financial investments by using quotations from independent third parties, such as brokers or
pricing services, or by using internally developed pricing models. Priority is given to publicly available prices from independent sources
when available, but overall the source of pricing and/or the valuation technique is chosen with the objective of arriving at a fair value
measurement which reflects the price at which an orderly transaction would take place between market participants on the
measurement date. The valuation techniques include the use of recent arm’s-length transactions, reference to other instruments
that are substantially the same, discounted cash flow analysis, option-adjusted spread models and, if applicable, enterprise valuation
and may include a number of assumptions relating to variables such as credit risk and interest rates. Changes in assumptions relating
to these variables could positively or negatively impact the reported fair value of these financial investments.
Financial investments measured at fair value are classified into a three level hierarchy as described in note C3.2(b).
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A3.1 Accounting policies and use of estimates and judgements continued
iii Determining impairment in relation to financial 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
financial investment’s fair value
is substantial
The impact of the duration of the
security on the calculation of the
revised estimated cash flows
A substantial decline in fair value might be indicative of a credit loss event that would lead to
a measurable decrease in the estimated future cash flows.
The duration of a security to maturity helps to inform whether assessments of estimated future
cash flows that are higher than market value are reasonable.
The duration and extent to which
the amortised cost exceeds fair
value
This factor provides an indication of how the contractual cash flows and effective interest rate of a
financial asset compares with the implicit market estimate of cash flows and the risk attaching to a ‘fair
value’ measurement. The length of time for which that level of difference has been in place may also
provide further evidence as to whether the market assessment implies an impairment loss has arisen.
The financial condition and
prospects of the issuer
These factors and other observable conditions may indicate that an investment is impaired.
If a loss event that will have a detrimental effect on cash flows is identified, an impairment loss is recognised in the income statement.
The loss recognised is determined as the difference between the book cost and the fair value of the relevant impaired securities.
This loss comprises the effect of the expected loss of contractual cash flows and any additional market-price-driven temporary
reductions in values.
For Jackson’s residential mortgage-backed and other asset-backed securities, all of which are classified as available-for-sale, the
model used to analyse cash flows begins with the current delinquency experience of the underlying collateral pool for the structure,
by applying assumptions about how much of the currently delinquent loans will eventually default, and multiplying this by an assumed
loss severity. Additional factors are applied to anticipate ageing effects. After applying a cash flow simulation an indication is obtained
as to whether or not the security has suffered, or is anticipated to suffer, contractual principal or interest payment shortfalls. If a shortfall
applies an impairment charge is recorded. The difference between the fair value and book cost for unimpaired securities designated
as available-for-sale is accounted for as unrealised gains or losses, with the movements unless impaired in the accounting period being
included in other comprehensive income.
The Group’s review of fair value involves several criteria, including economic conditions, credit loss experience, other issuer-specific
developments and future cash flows. These assessments are based on the best available information at the time. Factors such as market
liquidity, the widening of bid/ask spreads and a change in cash flow assumptions can contribute to future price volatility. If actual
experience differs negatively from the assumptions and other considerations used in the consolidated financial statements, unrealised
losses currently in equity may be recognised in the income statement in future periods. Additional details on the impairments of the
available-for-sale securities of Jackson are described in note C3.5(d).
Assets held at amortised cost
Financial assets classified as loans and receivables under IAS 39 are carried at amortised cost using the effective interest rate method.
The loans and receivables include loans collateralised by mortgages, deposits and loans to policyholders. In estimating future cash flows,
the Group looks at the expected cash flows of the assets and applies historical loss experience of assets with similar credit risks that has
been adjusted for conditions in the historical loss experience which no longer exist, or for conditions that are expected to arise. The
estimated future cash flows are discounted using the financial asset’s original or variable effective interest rate and exclude credit losses
that have not yet been incurred.
The risks inherent in reviewing the impairment of any investment include: the risk that market results may differ from expectations;
facts and circumstances may change in the future and differ from estimates and assumptions; or the Group may later decide to sell the
asset as a result of changed circumstances.
Certain mortgage loans of the UK insurance operations and, consequent upon the purchase of REALIC in 2012 by Jackson, policy
loans held to back funds withheld under reinsurance arrangements have been designated at fair value through profit 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.
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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 financial instruments are used to reduce or manage investment, interest rate and currency exposures, to facilitate efficient
portfolio management and for investment purposes.
The Group may designate certain derivatives as hedges.
For hedges of net investments in foreign operations, the effective portion of any change in fair value of derivatives or other financial
instruments designated as net investment hedges is recognised in other comprehensive income. The ineffective portion of changes
in the fair value of the hedging instrument is recorded in the income statement. The gain or loss on the hedging instrument is recognised
directly within the other comprehensive income of the foreign operation.
The Group does not regularly seek to apply fair value or cash flow hedging treatment under IAS 39. The Group has no fair value and
cash flows hedges under IAS 39 at 31 December 2015 and 2014.
All derivatives that are not designated as hedging instruments are carried at fair value with movements in fair value being recorded
in the income statement.
The primary areas of the Group’s continuing operations where derivative instruments are held are the UK with-profits funds and
annuity business, and Jackson.
For UK with-profits funds the derivative programme is used for the purposes of efficient portfolio management or reduction
in investment risk.
For shareholder-backed UK annuity business the derivatives are held to contribute to the matching as far as practical, of asset returns
and duration with those of liabilities to policyholders. The carrying value of these liabilities is sensitive to the return on the matching
financial assets including derivatives held.
For Jackson, an extensive derivative programme is maintained. Value movements on the derivatives held can be very significant
in their effect on shareholder results. Further details on this aspect of the Group’s financial reporting are described in note B1.2.
v Measurement and presentation of derivatives and debt securities of US insurance operations
The policies for these items are significant factors in contributing to the volatility of the income statement result and shareholders’ equity.
Under IAS 39, derivatives are required to be carried at fair value. Unless net investment hedge accounting is applied, value movements
on derivatives are recognised in the income statement.
For derivative instruments of Jackson that are entered into to mitigate economic exposures, the Group has considered whether
it is appropriate to undertake the necessary operational changes to qualify for hedge accounting so as to achieve matching of value
movements in hedging instruments and hedged items in the performance statements. In reaching the decision a number of factors
were particularly relevant. These were:
— IAS 39 hedging criteria have been designed primarily in the context of hedging and hedging instruments that are assessable as
financial instruments that are either stand-alone or separable from host contracts, rather than, for example, duration characteristics
of insurance contracts;
— The high hurdle levels under IAS 39 of ensuring hedge effectiveness at the level of individual hedge transactions;
— The difficulties in applying the macro hedge provisions under IAS 39 (which are more suited to banking arrangements) to Jackson’s
derivative book;
— The complexity of asset and liability matching of US life insurers such as those with Jackson’s product range; and finally
— Whether it is possible or desirable, without an unacceptable level of costs and constraint on commercial activity, to achieve the
accounting hedge effectiveness required under IAS 39.
Taking account of these considerations, the Group has decided that, except for occasional circumstances, it is not appropriate to seek
to achieve hedge accounting under IAS 39. As a result of this decision, the total income statement results are more volatile as the
movements in the value of Jackson’s derivatives are reflected within it. This volatility is reflected in the level of short-term fluctuations
in investment returns, as shown in notes B1.1 and B1.2.
Under IAS 39, unless carried at amortised cost (subject to impairment provisions where appropriate) under the held-to-maturity
category, debt securities are also carried at fair value. The Group has chosen not to classify any financial assets as held-to-maturity.
Debt securities of Jackson are designated as available-for-sale with value movements, unless impaired, being recorded as movements
within other comprehensive income. Impairments are recorded in the income statement.
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A3.1 Accounting policies and use of estimates and judgements continued
vi Embedded derivatives
Embedded derivatives are present in host contracts issued by various Group companies, in particular Jackson. They are embedded
within other non-derivative host financial instruments and insurance contracts to create hybrid instruments. Embedded derivatives
meeting the definition of an insurance contract are accounted for under IFRS 4. Where economic characteristics and risks of the
embedded derivatives are not closely related to the economic characteristics and risks of the host instrument, and where the hybrid
instrument is not measured at fair value with the changes in fair value recognised in the income statement, the embedded derivative is
bifurcated and carried at fair value as a derivative in accordance with IAS 39. For Jackson’s ‘not for life’ Guaranteed Minimum Withdrawal
Benefit and Fixed Index Annuity reserves the determination of fair value requires assumptions regarding future mix of Separate Account
assets, equity volatility levels, and policyholder behaviour.
In addition, the Group applies the option under IFRS 4 to not separate and fair value surrender options embedded in host contracts
and with-profits investment contracts whose strike price is either a fixed amount or a fixed amount plus interest. Further details on the
valuation basis for embedded derivatives attaching to Jackson’s life assurance contracts are provided in note C4.2.
vii Securities lending and reverse repurchase agreements
The Group is party to various securities lending agreements (including repurchase agreements) under which securities are loaned
to third parties on a short-term basis. The loaned securities are not derecognised; rather, they continue to be recognised within the
appropriate investment classification. The Group’s policy is that collateral in excess of 100 per cent of the fair value of securities loaned
is required from all securities’ borrowers and typically consists of cash, debt securities, equity securities or letters of credit.
In cases where the Group takes possession of the collateral under its securities lending programme, the collateral, and corresponding
obligation to return such collateral, are recognised in the consolidated statement of financial position.
The Group is also party to various reverse repurchase agreements under which securities are purchased from third parties with
an obligation to resell the securities. The securities are not recognised as investments in the statement of financial position.
viii Derecognition of financial assets and liabilities
The Group’s policy is to derecognise financial assets when it is deemed that substantially all the risks and rewards of ownership have
been transferred.
The Group derecognises financial liabilities only when the obligation specified in the contract is discharged, cancelled or has expired.
ix Financial liabilities designated at fair value through profit 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 classification certain financial liabilities at fair value through profit 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 reflects tax that, in addition to relating to shareholders’ profits, is also attributable to policyholders and
unallocated surplus of with-profits funds and unit-linked policies. This is explained in more detail in note B5. Reported profit before the
total tax charge is not representative of pre-tax profits attributable to shareholders. Accordingly, in order to provide a measure of pre-tax
profits attributable to shareholders the Group has chosen to adopt an income statement presentation of the tax charge and pre-tax
results that distinguishes between policyholder and shareholder components.
l Segments
Under IFRS 8 ‘Operating Segments’, the Group determines and presents operating segments based on the information that is internally
provided to the Group Executive Committee which is the Group’s chief operating decision maker.
The operating segments identified by the Group reflect the Group’s organisational structure, which is by both geography (Asia, US
and UK) and by product line (insurance operations and asset management).
The products of the insurance operations contain both significant and insignificant levels of insurance risk. The products are managed
together and there is no distinction between these two categories other than for accounting purposes. This segment also includes the
commission earned on general insurance business and investment subsidiaries held to support the Group’s insurance operations.
Asset management comprises both internal and third-party asset management services, inclusive of portfolio and mutual fund
management, where the Group acts as an 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.
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Prudential plc Annual Report 2015 www.prudential.co.ukA: Background and accounting policies continued m Segmental analysis of results and earnings attributable to shareholders
The Group uses operating profit based on longer-term investment returns as the segmental measure of its results. The basis of calculation
is disclosed in note B1.3.
For shareholder-backed business, with the exception of debt securities held by Jackson and assets classified as loans and receivables
at amortised cost, all financial investments and investment property are designated as assets at fair value through profit or loss.
The short-term fluctuations affect the result for the year and the Group provides additional analysis of results before and after the effects
of short-term fluctuations in investment returns, together with other items that are of a short-term, volatile or one-off nature. The effects
of short-term fluctuations include asymmetric impacts where the measurement bases of the liabilities and associated derivatives used
to manage the Jackson annuity business differ as described in note B1.2.
Short-term fluctuations in investment returns on assets held by with-profits fund, do not affect directly reported shareholder results.
This is because (i) the unallocated surplus of with-profits funds is accounted for as a liability and (ii) excess or deficits of income and
expenditure of the funds over the required surplus for distribution are transferred to or from unallocated surplus.
n Borrowings
Although initially recognised at fair value, net of transaction costs, borrowings, excluding liabilities of consolidated collateralised debt
obligations, are subsequently accounted for on an amortised cost basis using the effective interest method. Under the effective interest
method, the difference between the redemption value of the borrowing and the initial proceeds (net of related issue costs) is amortised
through the income statement to the date of maturity or for hybrid debt, over the expected life of the instrument.
o Investment properties
Investments in leasehold and freehold properties not for occupation by the Group, including properties under development for future
use as investment properties, are carried at fair value, with changes in fair value included in the income statement. Properties are valued
annually either by the Group’s qualified surveyors or by taking into consideration the advice of professional external valuers using the
Royal Institution of Chartered Surveyors valuation standards. Each property is externally valued at least once every three years.
Leases of investment property where the Group has substantially all the risks and rewards of ownership are classified as finance leases
(leasehold property). Finance leases are capitalised at the lease’s inception at the lower of the fair value of the leased property and the
present value of the minimum lease payments.
p Pension schemes
For the Group’s defined benefit schemes, if the present value of the defined benefit obligation exceeds the fair value of the scheme
assets, then a liability is recorded in the Group’s statement of financial position. By contrast, if the fair value of the assets exceeds the
present value of the defined benefit obligation then the surplus will only be recognised if the nature of the arrangements under the trust
deed, and funding arrangements between the Trustee and the Company, support the availability of refunds or recoverability through
agreed reductions in future contributions. In addition, if there is a constructive obligation for the Company to pay deficit funding, this
is also recognised such that the financial position recorded for the scheme reflects the higher of any underlying IAS 19 deficit and the
obligation for deficit funding.
The Group utilises the projected unit credit method to calculate the defined benefit obligation. This method sees each period
of service as giving rise to an additional unit of benefit entitlement and measures each unit separately to build up the final obligation.
Estimated future cash flows are then discounted at a high-quality corporate bond rate, adjusted to allow for the difference in duration
between the bond index and the pension liabilities where appropriate, to determine its present value. These calculations are performed
by independent actuaries.
The plan assets of the Group’s pension schemes include several insurance contracts that have been issued by the Group.
These assets are excluded from plan assets in determining the pension surplus or deficit recognised in the consolidated statement
of financial position.
The aggregate of the actuarially determined service costs of the currently employed personnel and the net interest on the net defined
benefit liability (asset) at the start of the period, is charged to the income statement. Actuarial and other gains and losses as a result
of changes in assumptions or experience variances are recognised as other comprehensive income.
Contributions to the Group’s defined contribution schemes are expensed when due.
q Share-based payments and related movements in own shares
The Group offers share award and option plans for certain key employees and a Save As You Earn plan for all UK and certain overseas
employees. Shares held in trust relating to these plans are conditionally gifted to employees.
The compensation expense charged to the income statement is primarily based upon the fair value of the options granted, the vesting
period and the vesting conditions.
The Company has established trusts to facilitate the delivery of Prudential plc shares under employee incentive plans and
savings-related share option schemes. The cost to the Company of acquiring these treasury shares held in trusts is shown as a deduction
from shareholders’ equity.
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A3: Accounting policies continued
A3.1 Accounting policies and use of estimates and judgements continued
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 and adjustments made in relation to prior years. Prudential is subject to tax in numerous jurisdictions and the calculation
of the total tax charge inherently involves a degree of estimation and judgement. The positions taken in tax returns where applicable
tax regulation is subject to interpretation are recognised in full in the determination of the tax charge in the financial statements if the
Group considers that it is probable that the taxation authority will accept those positions. Otherwise, provisions are established based
on management’s estimate and judgement of the likely amount of the liability, or recovery.
The total tax charge includes tax expense attributable to both policyholders and shareholders. The tax expense attributable to
policyholders comprises the tax on the income of the consolidated with-profits and unit-linked funds. In certain jurisdictions, such as the
UK, life insurance companies are taxed on both their shareholders’ profits and on their policyholders’ insurance and investment returns
on certain insurance and investment products. 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 consolidated income statement to provide the most relevant information about
tax that the Group pays on its profits.
Deferred taxes are provided under the liability method for all relevant temporary differences. IAS 12 ‘Income Taxes’ does not require
all temporary differences to be provided for, in particular, the Group does not provide for deferred tax on undistributed earnings of
subsidiaries where the Group is able to control the timing of the distribution and the temporary difference created is not expected to
reverse in the foreseeable future. Deferred tax assets are only recognised when it is more likely than not that future taxable profits will
be available against which these losses can be utilised.
Deferred tax is measured at the tax rates that are expected to apply to the period when the asset is realised or the liability settled,
based on tax rates (and laws) that have been enacted or are substantively enacted at the end of the reporting period.
s Business acquisitions and disposals
Business acquisitions are accounted for by applying the purchase method of accounting, which adjusts the net assets of the acquired
company to fair value at the date of purchase. The excess of the acquisition consideration over the fair value of the assets and liabilities
of the acquired entity is recorded as goodwill. Expenses related to acquiring new subsidiaries are expensed in the period in which they
are incurred. Income and expenses of acquired entities are included in the income statement from the date of acquisition.
Income and expenses of entities sold during the period are included in the income statement up to the date of disposal. The gain or
loss on disposal is calculated as the difference between sale proceeds net of selling costs, less the net assets of the entity at the date of
disposal adjusted for foreign exchange movements attaching to the sold entity that are required to be recycled to the income statement
under IAS 21.
t Goodwill
Goodwill arising on acquisitions of subsidiaries and businesses is capitalised and carried on the Group statement of financial position
as an intangible asset at initial value less any accumulated impairment losses. Goodwill impairment testing is conducted annually and
when there is an indication of impairment. For the purposes of impairment testing, goodwill is allocated to cash-generating units.
u Intangible assets
Intangible assets acquired on the purchase of a subsidiary or portfolio of contracts are 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 reflect the pattern in
which the future economic benefits are expected to be consumed by reference to new business production 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
consolidated 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 days maturity from the date of acquisition.
w Shareholders’ dividends
Interim dividends are recorded in the period in which they are paid. Final dividends are recorded in the period in which they are approved
by shareholders.
x Share capital
Where there is no obligation to transfer assets, shares are classified as equity. The difference between the proceeds received on issue
of the shares, net of share issue costs, and the nominal value of the shares issued, is credited to share premium. Where the Company
purchases shares for the purposes of employee incentive plans, the consideration paid, net of issue costs, is deducted from retained
earnings. Upon issue or sale any consideration received is credited to retained earnings net of related costs.
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Prudential plc Annual Report 2015 www.prudential.co.ukA: Background and accounting policies continued y Foreign exchange
The Group’s consolidated financial statements are presented in pounds sterling, the Group’s presentation currency. Accordingly, the
results and financial position of foreign subsidiaries must be translated into the presentation currency of the Group from their functional
currencies, ie the currency of the primary economic environment in which the entity operates. All assets and liabilities of foreign
subsidiaries are converted at year end exchange rates 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.
A3.2 New accounting pronouncements not yet effective
The following standards, interpretations and amendments have been issued but are not yet effective in 2015, including those which have
not yet been adopted in the EU. This is not intended to be a complete list as only those standards, interpretations and amendments that
could have an impact upon the Group’s financial statements are discussed.
Accounting pronouncements endorsed by the EU but not yet effective
Clarification 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 has assessed the impact of the amendments and determined that they are not likely
to have a significant impact on the Group’s financial statements.
Annual improvements to IFRSs – 2012-2014 Cycle
The annual improvements 2012-2014 Cycle include minor changes to four IFRSs, and is effective for annual periods beginning on or after
1 January 2016. The Group is assessing the impact of these amendments but they are not expected to have a significant impact on the
Group’s financial statements.
Accounting pronouncements not yet endorsed by the EU
Amendments to IAS 1 Disclosure Initiative
In December 2014, the IASB published ‘Disclosure Initiative (Amendments to IAS 1)’. The amendments aim at clarifying, rather than
significantly changing, IAS 1 to address perceived impediments to preparers exercising their judgement in presenting their financial
reports. The amendments are effective for annual periods beginning on or after 1 January 2016 and clarify materiality requirements,
aggregation of specific line items in the financial statements and ordering of the notes. We have reviewed the amendments and do not
envisage any significant change.
IFRS 15 ‘Revenue from Contracts with Customers’
This standard effective for annual periods beginning on or after 1 January 2018, provides a single framework to recognise revenue from
contracts with different characteristics and overrides the framework provided for such contracts in other standards. The contracts
excluded from the scope of this standard include:
— Lease contracts within the scope of IAS 17 ’Leases’;
— Insurance contracts within the scope of IFRS 4 ‘Insurance Contracts’; and
— Financial instruments within the scope of IAS 39 ‘Financial Instruments’.
As a result of the scope exclusion above, this standard is of particular relevance only to the revenue recognition of the Group’s asset
management contracts and the measurement of the Group’s investment contracts that do not contain discretionary participating features
where the contracts include an investment management element. The Group is assessing the impact of this standard but it is not
expected to have a significant impact on the Group’s financial statements.
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A3.2 New accounting pronouncements not yet effective continued
IFRS 16 ‘Leases’
In January 2016, the IASB published a new standard, IFRS 16 ‘Leases’. The new standard brings most leases on-balance sheet for lessees
under a single model, eliminating the distinction between operating and finance leases. Lessor accounting however remains largely
unchanged and the distinction between operating and finance leases is retained. IFRS 16 is effective for periods beginning on or after
1 January 2019, with earlier adoption permitted if IFRS 15 ‘Revenue from Contracts with Customers’ has also been applied. The Group
is assessing the impact of this standard.
IFRS 9 ‘Financial instruments: Classification 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. In December 2015, the IASB published for consultation an exposure draft of proposed amendments to IFRS 4 to address the
temporary consequences of the different effective dates of IFRS 9 and the new insurance contracts standard. The proposals in the
exposure draft includes an optional temporary exemption from applying IFRS 9 that would be available to companies whose predominant
activity is to issue insurance contracts. Such a deferral would be available until the new Insurance Contracts Standard comes into effect
(but it could not be used after 1 January 2021). The comment period closed on 8 February 2016.
This standard replaces the existing IAS 39 ‘Financial Instruments – Recognition and Measurement’, and will affect:
— The classification and the measurement of financial assets and liabilities.
Under IFRS 9, financial assets are classified under one of the following categories: amortised cost, fair value through other
comprehensive income (FVOCI) and fair value through profit or loss (FVTPL) based on their contractual cash flow characteristics
and/or the business model in which they are held. The existing amortised cost measurement for financial liabilities is largely
maintained under IFRS 9 but for financial 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 financial 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 final standard. The adoption of the requirements of IFRS 9 may result in reclassification of certain
of the Group’s financial assets and hence lead to a change in the measurement of these instruments or the performance reporting of
value movements. In addition, for any investments classified as FVOCI, as noted above, the impairment provisioning approach is altered
from the current IAS 39 approach. 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.
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Prudential plc Annual Report 2015 www.prudential.co.ukA: Background and accounting policies continued
B1: Analysis of performance by segment
B1.1 Segment results – profit before tax
Asia operations
Asia insurance operations
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 commission note (i)
Total UK insurance operations
M&G
Prudential Capital
Total UK operations
Total segment profit
Other income and expenditure
Investment return and other income
Interest payable on core structural borrowings
Corporate expenditure note (ii)
Total
Solvency II implementation costs
Restructuring costs note (iii)
Results of the sold PruHealth and PruProtect businesses*
Operating profit based on longer-term investment returns
Short-term fluctuations in investment returns on shareholder-
backed business
Amortisation of acquisition accounting adjustments note (iv)
Gain on sale of PruHealth and PruProtect businesses note (v)
Cumulative exchange loss on the sold Japan life business
recycled from other comprehensive income
Costs of domestication of Hong Kong branch note (vi)
Profit before tax attributable to shareholders
Basic earnings per share (in pence)
2015 £m
2014 £m
%
Note
AER
note (vii)
CER
note (vii)
2015 vs
2014 AER
note (vii)
2015 vs
2014 CER
note (vii)
1,209
115
1,324
1,691
11
1,702
1,167
28
1,195
442
19
1,656
4,682
1,050
90
1,140
1,431
12
1,443
729
24
753
446
42
1,040
91
1,131
1,543
13
1,556
729
24
753
446
42
1,241
3,824
1,241
3,928
14
(312)
(319)
(617)
(43)
(15)
–
15
(341)
(293)
(619)
(28)
(14)
23
15
(341)
(293)
(619)
(28)
(14)
23
4,007
3,186
3,290
(737)
(76)
–
(46)
–
(574)
(79)
86
–
(5)
(650)
(85)
86
–
(5)
3,148
2,614
2,636
15%
28%
16%
18%
(8)%
18%
60%
17%
59%
(1)%
(55)%
33%
22%
(7)%
9%
(9)%
0%
(54)%
(7)%
n/a
26%
(28)%
4%
n/a
n/a
n/a
20%
16%
26%
17%
10%
(15)%
9%
60%
17%
59%
(1)%
(55)%
33%
19%
(7)%
9%
(9)%
0%
(54)%
(7)%
n/a
22%
(13)%
11%
n/a
n/a
n/a
19%
2015
2014
%
AER
note (vii)
CER
note (vii)
2015 vs
2014 AER
note (vii)
2015 vs
2014 CER
note (vii)
B4(b)
B1.2
D2
B6
Based on operating profit based on longer-term investment returns
Based on profit for the year
125.8p
101.0p
96.6p
86.9p
99.5p
87.9p
30%
16%
26%
15%
* In order to show the UK long-term business on a comparable basis, the 2014 comparative results exclude the contribution from the sold PruHealth and PruProtect businesses.
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.
(ii)
Corporate expenditure as shown above is for Group Head Office and Asia Regional Head Office.
(iii) Restructuring costs are incurred in the UK and represent one-off business development expenses.
(iv) Amortisation of acquisition accounting adjustments principally relate to the acquired REALIC business of Jackson.
(v)
(vi) On 1 January 2014, the Hong Kong branch of the Prudential Assurance Company Limited was transferred to separate subsidiaries established in Hong Kong.
(vii) For definitions of AER and CER refer to note A1.
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.
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B1.2 Short-term fluctuations in investment returns on shareholder-backed business
Insurance operations:
Asia note (i)
US note (ii)
UK note (iii)
Other operations note (iv)
Total
2015 £m
2014 £m
(119)
(424)
(120)
(74)
(737)
178
(1,103)
464
(113)
(574)
Notes
(i)
Asia insurance operations
In Asia, the negative short-term fluctuations of £(119) million (2014: positive £178 million) primarily reflect net unrealised movements on bond holdings following
rises in bond yields across the region during the year.
(ii) US insurance operations
The short-term fluctuations in investment returns for US insurance operations are reported net of related credit for amortisation of deferred acquisition costs,
of £93 million as shown in note C5.1(b) (2014: £653 million) and comprise amounts in respect of the following items:
Net equity hedge result note (a)
Other than equity-related derivatives note (b)
Debt securities note (c)
Equity-type investments: actual less longer-term return
Other items
Total
Notes
(a) Net equity hedge result
2015 £m
2014 £m
(504)
29
1
19
31
(424)
(1,574)
391
47
16
17
(1,103)
The purpose of the inclusion of this item in short-term fluctuations in investment returns is to segregate the amount included in pre-tax profit that relates to
the accounting effect of market movements on both the measured value of guarantees in Jackson’s variable annuity and fixed index annuity products and
on the related derivatives used to manage the exposures inherent in these guarantees. As the Group applies US GAAP for the measured value of the product
guarantees this item also includes asymmetric impacts where the measurement bases of the liabilities and associated derivatives used to manage the
Jackson annuity business differ as described below.
The result comprises the net effect of:
– The accounting value movements on the variable and fixed index annuity guarantee liabilities;
– Adjustments in respect of fee assessments and claim payments;
– Fair value movements on free standing equity derivatives; and
– Related changes to DAC amortisation in accordance with the policy that DAC is amortised in line with emergence of margins.
Movements in the accounting values of the variable annuity guarantee liabilities include those for:
– The Guaranteed Minimum Death Benefit (GMDB), and the ‘for life’ portion of Guaranteed Minimum Withdrawal Benefit (GMWB) guarantees which are
valued under the US GAAP insurance measurement basis applied for IFRS in a way that is substantially less sensitive to the effect of equity market and
interest rate changes. These represent the majority of the guarantees offered by Jackson; and
– The ‘not for life’ portion of GMWB embedded derivative liabilities which are required to be fair valued. Fair value movements on these liabilities include
the effects 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 guarantees and fixed index annuity embedded options.
The net equity hedge result therefore includes significant accounting mismatches and other factors that detract from the presentation of an economic
result. These other factors include:
– The variable annuity guarantees and fixed index annuity embedded options 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 differently in the accounting frameworks such as future
fees and assumed volatility levels.
(b) Other than equity-related derivatives
The fluctuations for this item comprise the net effect of:
– Fair value movements on free standing, other than equity-related derivatives;
– Accounting effects of the Guaranteed Minimum Income Benefit (GMIB) reinsurance; and
– Related amortisation of DAC.
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 guarantees and fixed index annuity embedded options described in note (a) above.
The direct Guaranteed Minimum Income Benefit (GMIB) liability is valued using the US GAAP measurement basis applied for IFRS reporting in a way
that substantially does not recognise the effects 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 fluctuations for this item therefore include significant 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 fixed index annuity business, as well as the fixed annuity business guarantees and durations within the general account;
– Fair value movements on Jackson’s debt securities of the general account which are recorded 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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Prudential plc Annual Report 2015 www.prudential.co.ukB: Earnings performance continued
(c) Short-term fluctuations related to debt securities
Short-term fluctuations relating to debt securities
Credits (charges) in the year:
Losses on sales of impaired and deteriorating bonds
Bond write downs
Recoveries/reversals
Total charges (credits) in the year
Less: Risk margin allowance deducted from operating profit based on longer-term investment returns note
Interest-related realised gains:
Arising in the year
Less: Amortisation of gains and losses arising in current and prior years to operating profit based on longer-term
investment returns
Related amortisation of deferred acquisition costs
Total short-term fluctuations related to debt securities
2015 £m
2014 £m
(54)
(37)
18
(73)
83
10
102
(108)
(6)
(3)
1
(5)
(4)
19
10
78
88
63
(87)
(24)
(17)
47
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 profit with variations from year to year included in the short-term fluctuations category. The risk margin reserve
charge for longer-term credit-related losses included in operating profit based on longer-term investment returns of Jackson for 2015 is based on an average
annual risk margin reserve of 23 basis points (2014: 24 basis points) on average book values of US$54.6 billion (2014: US$54.5 billion) as shown below:
Moody’s rating category (or equivalent under
NAIC ratings of mortgage-backed securities)
A3 or higher
Baa1, 2 or 3
Ba1, 2 or 3
B1, 2 or 3
Below B3
Total
2015
2014
Average
book
value
US$m
28,185
24,768
1,257
388
35
54,633
RMR
Annual
expected loss
%
US$m
0.13
0.25
1.17
3.08
3.70
0.23
(37)
(62)
(15)
(12)
(1)
(127)
Average
book
value
US$m
27,912
24,714
1,390
385
92
54,493
£m
(24)
(40)
(10)
(8)
(1)
(83)
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)
Related amortisation of deferred acquisition costs
(see below)
Risk margin reserve charge to operating profit for
longer-term credit related losses
24
16
25
15
(103)
(67)
(104)
(63)
Consistent with the basis of measurement of insurance assets and liabilities for Jackson’s IFRS results, the charges and credits to operating profits based
on longer-term investment returns are partially offset by related amortisation of deferred acquisition costs.
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 charge for unrealised losses on debt securities classified as available-for-sale net of related change in
amortisation of deferred acquisition costs of £(968) million (2014: net unrealised gains of £869 million). Temporary market value movements do not reflect
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 negative short-term fluctuations in investment returns for UK insurance operations of £(120) million (2014: positive £464 million) include net unrealised
movements on fixed income assets supporting the capital of the shareholder-backed annuity business, reflecting the rise in bond yields since the end of 2014.
(iv) Other
The negative short-term fluctuations in investment returns for other operations of £(74) million (2014: negative £(113) million) include 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 2015 or 2014.
157
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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
— M&G
— Prudential Capital
The Group’s operating segments are also its reportable segments for the purposes of internal management reporting. Prior to 2015,
the Group incorporated Prudential Capital into the M&G operating segment for the purposes of segment reporting. To better reflect
the economic characteristics of the two businesses, the Group has in 2015 made a change to present Prudential Capital as a separate
reportable segment rather than aggregating this segment within M&G.
Performance measure
The performance measure of operating segments utilised by the Company is IFRS operating profit attributable to shareholders based
on longer-term investment returns, as described below. This measurement basis distinguishes operating profit based on long-term
investment returns from other constituents of the total profit as follows:
— Short-term fluctuations in investment returns on shareholder-backed business*;
— Gain on the sale of the Group’s stake in the PruHealth and PruProtect businesses in 2014;
— 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;
— The recycling of the cumulative exchange translation loss on the sold Japan life business from other comprehensive income to the
income statement in 2015. 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 Office and the Asia Regional
Head Office.
* Including the impact of short-term market effects on the carrying value of Jackson’s guarantee liabilities and related derivatives as explained below.
Determination of operating profit based on longer-term investment return for investment and liability movements:
a General principles
(i) UK style with-profits business
The operating profit based on longer-term returns reflects the statutory transfer gross of attributable tax. Value movements in the
underlying assets of the with-profits funds do not affect directly the determination of operating profit.
(ii) Unit-linked business
The policyholder unit liabilities are directly reflective of the underlying asset value movements. Accordingly, the operating results based
on longer-term investment returns reflect the current period value movements in both the unit liabilities and the backing assets.
(iii) US variable annuity and fixed 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 profit and short-term fluctuations 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 profit based on longer-term
investments returns is not distorted. In these circumstances, there is no need for the movement in the liability to be bifurcated between
the elements that relate to longer-term market conditions and short-term effects.
However, some types of business movements in liabilities do require bifurcation to ensure that at the net level (ie after allocated
investment return and charge for policyholder benefits) the operating result reflects 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.
158
Prudential plc Annual Report 2015 www.prudential.co.ukB: Earnings performance continued (v) Other shareholder-financed business
The measurement of operating profit based on longer-term investment returns reflects the particular features of long-term insurance
business where assets and liabilities are held for the long-term and for which the accounting basis for insurance liabilities under current
IFRS is not generally conducive to demonstrating trends in underlying performance of life businesses exclusive of the effects of short-
term fluctuations in market conditions. In determining the profit on this basis, the following key elements are applied to the results of the
Group’s shareholder-financed operations.
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 profit based on longer-term investment returns for shareholder-financed 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 reflected in short-term fluctuations in investment returns; and
— The amortisation of interest-related realised gains and losses to operating results based on longer-term investment returns to the date
when sold bonds would have otherwise matured.
At 31 December 2015, the level of unamortised interest-related realised gains and losses related to previously sold bonds for the Group
was a net gain of £567 million (2014: £467 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-financed
operations other than the UK annuity business, unit-linked and US variable annuity are of significance for the US and Asia insurance
operations. Different rates apply to different categories of equity-type securities.
Derivative value movements
Generally, derivative value movements are excluded from operating results based on longer-term investment returns (unless those
derivative value movements broadly offset changes in the accounting value of other assets and liabilities included in operating profit).
The principal example of non-equity based derivatives (for example interest rate swaps and swaptions) whose value movements are
excluded from operating profit arises in Jackson, 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 reflecting asset shares over the contract term. For these products, the charge for policyholder
benefits in the operating results should reflect the asset share feature rather than volatile movements that would otherwise be reflected
if the local regulatory basis (also applied for IFRS basis) was used.
For 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-financed 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.
159
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B1.3 Determining operating segments and performance measure of operating segments continued
Equity-type securities
For Asia insurance operations, investments in equity securities held for non-linked shareholder-financed operations amounted to
£840 million as at 31 December 2015 (2014: £932 million). The rates of return applied in the years 2015 and 2014 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 inflation. These rates are
broadly stable from period to period but may be different between countries reflecting, for example, differing expectations of inflation
in each territory. The assumptions are for returns expected to apply in equilibrium conditions. The assumed rates of return do not reflect
any cyclical variability in economic performance and are not set by reference to prevailing asset valuations.
The longer-term investment returns for the Asia insurance joint ventures accounted for 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 reflective of the asset value movements. Accordingly, the operating results
based on longer-term investment returns reflect the current period value movements in unit liabilities and the backing assets.
(ii) US variable and fixed index annuity business
The following value movements for Jackson’s variable and fixed index annuity business are excluded from operating profit based
on longer-term investment returns. See note B1.2 note (ii):
— Fair value movements for equity-based derivatives;
— Fair value movements for embedded derivatives for the ‘not for life’ portion of Guaranteed Minimum Withdrawal Benefit and fixed
index annuity business, and Guaranteed Minimum Income Benefit reinsurance (see below);
— Movements in the accounts carrying value of Guaranteed Minimum Death Benefit and the ‘for life’ portion of Guaranteed Minimum
Withdrawal Benefits and Guaranteed Minimum Income Benefit 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;
— A portion of the fee assessments as well as 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 minimum income benefit
The Guaranteed Minimum Income Benefit liability, which is essentially fully reinsured, subject to a deductible and annual claim limits,
is accounted for in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Subtopic
944-80 Financial Services – Insurance – Separate Accounts (formerly SOP 03-1) under IFRS using ‘grandfathered’ US GAAP. As the
corresponding reinsurance asset is net settled, it is considered to be a derivative under IAS 39, ‘Financial Instruments: Recognition and
Measurement’, and the asset is therefore recognised at fair value. As the Guaranteed Minimum Income Benefit is economically reinsured,
the mark to market element of the reinsurance asset is included as a component of short-term fluctuations in investment returns.
(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 profit, arises in Jackson. Non-equity based derivatives are primarily held by Jackson as part of a broadly-based
hedging programme for features of Jackson’s bond portfolio (for which value movements are booked in the statement of comprehensive
income rather than the income statement), product liabilities (for which US GAAP accounting as ‘grandfathered’ under IFRS 4 does not
fully reflect the economic features being hedged), and the interest rate exposure attaching to equity-based embedded derivatives.
(iv) Other US shareholder-financed 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 significant extent. Jackson has used the ratings by Nationally Recognised Statistical Ratings
Organisations (NRSRO) or ratings resulting from the regulatory ratings detail issued by the National Association of Insurance
Commissioners (NAIC) developed by external third parties such as 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.
160
Prudential plc Annual Report 2015 www.prudential.co.ukB: Earnings performance continued Equity-type securities
As at 31 December 2015, the equity-type securities for US insurance non-separate account operations amounted to £1,004 million
(2014: £1,094 million). For these operations, the longer-term rates of return for income and capital applied in 2015 and 2014, which
reflect 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
5.7% to 6.4%
7.7% to 8.4%
6.2% to 6.7%
8.2% to 8.7%
2015
2014
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 fluctuations in investment returns.
The operating result based on longer-term investment returns reflects the impact of value movements on policyholder liabilities for
annuity business in PRIL and the PAC non-profit sub-fund after adjustments to allocate the following elements of the movement to the
category of ‘short-term fluctuations in investment returns’:
— The impact on credit risk provisioning of actual upgrades and downgrades during the period;
— Credit experience compared to assumptions; and
— Short-term value movements on assets backing the capital of the business.
Credit experience reflects the impact of defaults and other similar experience, such as asset exchanges arising from debt restructuring
by issuers that include effectively an element of permanent impairment of the security held. Positive or negative experience compared
to assumptions is included within short-term fluctuations 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-financed business
For debt securities backing non-linked shareholder-financed 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 fluctuations.
In some instances it may also be appropriate to amortise realised gains and losses on derivatives and other financial instruments to
operating results over a time period that reflects the underlying economic substance of the arrangements.
161
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B1.4 Segmental income statement
Insurance operations
Asset management
2015 £m
Asia
US
UK
M&G
Prudential
Capital
10,814
16,887
8,962
(364)
(320)
(473)
–
–
10,450
(299)
64
16,567
(782)
–
8,489
4,372
374
–
10
1,227
10,215
15,785
13,235
1,237
(6,580) (13,345) (10,610)
367
316
694
(330)
–
(168)
(6,543) (13,029) (10,084)
–
–
–
–
–
–
–
35
19
54
–
–
–
–
Eastspring
Invest-
ments
–
–
US
–
–
Total
segment
36,663
(1,157)
Unallo-
cated
to a
segment
(central
operations)
note (iii)
Group
total
–
–
36,663
(1,157)
–
(7)
850
–
3
349
35,506
3,332
2,883
–
(28)
(388)
35,506
3,304
2,495
843
352
41,721
(416) 41,305
–
–
–
–
– (30,535)
(12) (30,547)
–
–
1,377
12
1,389
(498)
–
(498)
– (29,656)
– (29,656)
(2,651)
(1,544)
(2,025)
(810)
(82)
(832)
(278)
(8,222)
14
(8,208)
–
(13)
(46)
–
–
–
–
–
(17)
–
–
–
–
–
(30)
(282)
(312)
(46)
–
(46)
(9,240) (14,586) (12,109)
(810)
(99)
(832)
(278) (37,954)
(268) (38,222)
130
–
53
14
–
–
41
238
–
238
1,105
1,199
1,179
441
(45)
(69)
–
(104)
–
–
11
–
115
4,005
(684)
3,321
–
(173)
–
(173)
1,036
1,199
1,075
441
(45)
11
115
3,832
(684)
3,148
Gross premiums earned
Outward reinsurance
premiums
Earned premiums, net
of reinsurance
Investment return note (ii)
Other income
Total revenue, net of
reinsurance
Benefits and claims
Outward reinsurers’ share
of benefits and claims
Movement in unallocated
surplus of with-profits
funds
Benefits and claims and
movements in unallocated
surplus of with-profits
funds, net of reinsurance
Acquisition costs and other
operating expenditure B3
Finance costs: interest on core
structural borrowings of
shareholder-financed
operations
Disposal of Japan life business:
Cumulative loss exchange
loss recycled from other
comprehensive income
Total charges, net of
reinsurance
Share of profit from joint
ventures and associates,
net of related tax
Profit (loss) before tax
(being tax attributable
to shareholders’ and
policyholders’ returns) note (i)
Tax charge attributable to
policyholders’ returns
Profit (loss) before tax
attributable to
shareholders
162
Prudential plc Annual Report 2015 www.prudential.co.ukB: Earnings performance continued The segmental analysis of profit (loss) before tax attributable to shareholders as represented in note B1.1 is analysed below:
Insurance operations
Asset management
2015 £m
Asia
US
UK
M&G
Prudential
Capital
Eastspring
Invest-
ments
US
Total
segment
Unallo-
cated
to a
segment
(central
operations)
Group
total
1,209
1,691
1,195
442
19
11
115
4,682
(675)
4,007
(119)
(424)
(120)
(1)
(64)
(8)
(68)
(46)
–
–
–
–
–
–
–
–
–
–
–
–
–
(728)
(9)
(737)
(76)
(46)
–
–
(76)
(46)
1,036
1,199
1,075
441
(45)
11
115
3,832
(684)
3,148
Operating profit (loss) based
on longer-term investment
returns
Short-term fluctuations in
investment returns on
shareholder-backed
business
Amortisation of acquisition
accounting adjustments
Cumulative exchange loss on
the sold Japan life business
Profit (loss) before tax
attributable to
shareholders
163
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B1.4 Segmental income statement continued
Insurance operations
Asset management
2014 £m
Asia
US
UK*
M&G
Prudential
Capital
11,193
15,654
7,358
(311)
(265)
(1,596)
–
–
10,882
3,888
49
15,389
5,438
(2)
5,762
16,447
240
–
5
1,279
–
–
–
99
12
Unallo-
cated
to a
segment
(central
operations)
Group
total
Eastspring
Invest-
ments
Total
segment
note (iii)
–
–
34,205
(1,373)
32,832
(2,172)
1,373
(799)
US
–
–
–
(2)
808
–
3
307
32,033
25,878
2,693
–
(91)
(387)
32,033
25,787
2,306
14,819
20,825
22,449
1,284
111
806
310
60,604
(478)
60,126
(11,521)
(19,788)
(20,880)
254
27
1,803
20
–
(84)
(11,247)
(19,761)
(19,161)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(52,189)
1,453
(50,736)
2,084
(1,453)
631
(64)
–
(64)
–
(50,169)
–
(50,169)
(2,367)
(795)
(1,660)
(843)
(77)
(794)
(249)
(6,785)
33
(6,752)
–
(12)
(13)
–
–
–
–
–
(17)
–
–
–
–
–
(29)
(312)
(341)
(13)
–
(13)
(13,627)
(20,568)
(20,821)
(843)
(94)
(794)
(249)
(56,996)
(279)
(57,275)
133
–
128
13
–
–
29
303
–
303
1,325
257
1,756
454
(105)
–
(435)
–
1,220
257
1,321
454
17
–
17
12
–
12
90
–
3,911
(757)
3,154
(540)
–
(540)
90
3,371
(757)
2,614
Gross premiums earned
Outward reinsurance
premiums
Earned premiums, net
of reinsurance
Investment return note (ii)
Other income
Total revenue, net of
reinsurance
Benefits and claims
Outward reinsurers’ share
of benefits and claims
Movement in unallocated
surplus of with-profits
funds
Benefits and claims and
movements in unallocated
surplus of with-profits
funds, net of reinsurance
Acquisition costs and other
operating expenditure B3
Finance costs: interest on core
structural borrowings of
shareholder-financed
operations
Remeasurement of carrying
value of Japan life business
classified as held for sale
Total charges, net of
reinsurance
Share of profit from joint
ventures and associates,
net of related tax
Profit (loss) before tax
(being tax attributable
to shareholders’ and
policyholders’ returns) note (i)
Tax charge attributable to
policyholders’ returns
Profit (loss) before tax
attributable to
shareholders
164
Prudential plc Annual Report 2015 www.prudential.co.ukB: Earnings performance continued The segmental analysis of profit (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
Prudential
Capital
Eastspring
Invest-
ments
US
Total
segment
Unallo-
cated
to a
segment
(central
operations)
Group
total
1,050
1,431
776
446
42
12
90
3,847
(661)
3,186
178
(1,103)
464
(8)
(71)
–
–
–
–
–
86
(5)
8
–
–
–
(25)
–
–
–
–
–
–
–
–
–
–
–
(478)
(96)
(574)
(79)
86
(5)
–
–
–
(79)
86
(5)
1,220
257
1,321
454
17
12
90
3,371
(757)
2,614
Operating profit based on
longer-term investment
returns
Short-term fluctuations in
investment returns on
shareholder-backed
business
Amortisation of acquisition
accounting adjustments
Gain on sale of PruHealth
and PruProtect
Costs of domestication
of Hong Kong branch
Profit (loss) before tax
attributable to
shareholders
* Includes the results of the sold PruHealth and PruProtect businesses.
Notes
(i)
(ii)
This measure is the formal profit (loss) before tax measure under IFRS but is not the result attributable to shareholders.
Investment return principally comprises:
– Interest and dividends;
– Realised and unrealised gains and losses on securities and derivatives classified as fair value through profit or loss under IAS 39; and
– Realised gains and losses, including impairment losses, on securities classified as available-for-sale under IAS 39.
(iii)
In addition to the results of the central operations, unallocated to a segment includes intra-group eliminations. This column includes the elimination
of the intra-group reinsurance contract between the UK with-profits and Asia with-profits operations.
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 reinsurance note (iv)
Investment return
Realised and unrealised (losses) and gains on securities at fair value through profit or loss
Realised and unrealised (losses) and gains on derivatives at fair value through profit or loss
Realised gains on available-for-sale securities, previously recognised in other comprehensive income*
Realised losses on loans
Interest notes (i),(ii)
Dividends
Other investment return
Investment return
Fee income from investment contract business and asset management notes (iii),(iv)
Total revenue
* Including impairment.
2015 £m
2014 £m
33,618
2,839
206
(1,157)
35,506
(4,572)
(1,701)
49
(50)
7,018
1,791
769
3,304
2,495
41,305
29,973
2,637
222
(799)
32,033
16,532
142
84
(61)
6,802
1,559
729
25,787
2,306
60,126
165
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc B1: Analysis of performance by segment continued
B1.5 Revenue continued
Notes
(i)
The segmental analysis of interest income is as follows:
Insurance operations
Asset management operations
£m
2015
2014
Asia
743
777
US
1,921
1,857
UK
M&G
Prudential
Capital
4,240
4,053
18
–
107
101
US
–
–
Unallo-
cated to a
segment
(central
operations)
Eastspring
Invest-
ments
2
2
(13)
12
Total
7,018
6,802
Interest income includes £3 million (2014: £3 million) accrued in respect of impaired securities.
(ii)
(iii) Fee income includes £19 million (2014: £23 million) relating to financial instruments that are not held at fair value through profit 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:
2015 £m
2014 £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
10,514
349
–
(178)
16,567
850
–
(90)
8,863
1,246
99
(219)
–
(487)
–
487
35,944
1,958
99
–
9,558
307
–
(146)
15,387
808
–
(84)
7,375
1,291
62
(219)
–
(449)
–
449
32,320
1,957
62
–
customers
10,685
17,327
9,989
–
38,001
9,719
16,111
8,509
–
34,339
* 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
2015 £m
2014 £m
35,506
2,495
38,001
32,033
2,306
34,339
The asset management operations, M&G, Prudential Capital, Eastspring Investments and US asset management provide services
to the Group insurance operations. Intra-group fees included within asset management revenue were earned by the following asset
management segments:
Intra-group revenue generated by:
M&G
PruCap
US broker-dealer and asset management
Eastspring Investments
Total intra-group fees included within asset management segment
2015 £m
2014 £m
194
25
90
178
487
208
11
84
146
449
Revenue from external customers of Asia, US and UK insurance operations shown above are net of outwards reinsurance premiums of
£364 million, £320 million, and £473 million respectively (2014: £311 million, £265 million and £223 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 £3,836 million (2014: Hong Kong £2,554 million).
Due to the nature of the business of the Group, there is no reliance on any major customers.
166
Prudential plc Annual Report 2015 www.prudential.co.ukB: Earnings performance continued
B2: Profit before tax – asset management operations
The profit included in the income statement in respect of asset management operations for the year is as follows:
Revenue (excluding NPH broker-dealer fees)
NPH broker-dealer fees note (i)
Gross revenue
Charges (excluding NPH broker-dealer fees)
NPH broker-dealer fees note (i)
Gross charges
Share of profit from joint ventures and associates,
net of related tax
Profit before tax
Comprising:
Operating profit based on longer-term
investment returns note (ii)
Short-term fluctuations in investment returns
Profit before tax
M&G
1,237
–
1,237
(810)
–
(810)
14
441
442
(1)
441
Prudential
Capital
54
–
54
(99)
–
(99)
–
(45)
19
(64)
(45)
2015 £m
US
321
522
843
(310)
(522)
(832)
–
11
11
–
11
Eastspring
Investments
352
–
352
(278)
–
(278)
41
115
115
–
115
2014 £m
Total
2,008
503
2,511
(1,477)
(503)
(1,980)
42
573
590
(17)
573
Total
1,964
522
2,486
(1,497)
(522)
(2,019)
55
522
587
(65)
522
Notes
(i)
The segment revenue of the Group’s asset management operations includes:
NPH broker-dealer fees which represent commissions received that are then paid on to the writing brokers on sales of investment products. To reflect their
commercial nature the amounts are also wholly reflected as charges within the income statement. After allowing for these charges, there is no effect on profit
from this item. The presentation in the table above shows separately the amounts attributable to this item so that the underlying revenue and charges can
be seen.
(ii) M&G operating profit based on longer-term investment returns:
Asset management fee income
Other income
Staff costs
Other costs
Underlying profit before performance-related fees
Share of associate results
Performance-related fees
Total M&G operating profit based on longer-term investment returns
2015 £m
2014 £m
934
5
(293)
(240)
406
14
22
442
953
1
(351)
(203)
400
13
33
446
The revenue for M&G of £961 million (2014: £987 million), comprising the amounts for asset management fee income, other income and performance-related
fees shown above, is different to the amount of £1,237 million shown in the main table of this note. This is because the £961 million (2014: £987 million) is after
deducting commissions which would have been included as charges in the main table. The difference in the presentation of commission is aligned with how
management reviews the business.
167
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc
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
2015 £m
2014 £m
(3,275)
431
(4,746)
(618)
(8,208)
(2,668)
916
(4,486)
(514)
(6,752)
Total acquisition costs and other expenditure includes:
(a) Total depreciation and amortisation expense of £(755) million (2014: £(159) 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 £(2,845) million
(2014: £(1,752) million). These amounts comprise £(2,818) million and £(27) million for insurance and investment contracts
respectively (2014: £(1,714) million and £(38) million respectively).
(c) Interest expense, excluding interest on core structural borrowings of shareholder-financed operations, amounted to £(147) million
(2014: £(128) million) and is included as part of administrative costs and other expenditure. The segmental interest expense is
analysed below.
(d) Finance costs which are represented by interest on core structural borrowings of £(312) million (2014: £(341) million) comprises
£(282) million (2014: £(312) million) interest on core debt of the parent company, £(13) million (2014: £(12) million) of interest on the
surplus notes of US insurance operations, and £(17) million (2014: £(17) million) on Prudential Capital’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 £(599) million (2014: £(258) million) for UK insurance operations and a charge of £(19) million
(2014: £(256) million) for Asia insurance operations.
(f) Analysis of depreciation and amortisation expense, and interest expense:
Insurance operations
Asset management operations
£m
Asia
US
UK
M&G
Prudential
Capital
Eastspring
Investments
US
Total
segment
Unallo-
cated to a
segment
(central
operations)
Total
(175)
(206)
(453)
140
–
–
(19)
(13)
(93)
(64)
(93)
(81)
(8)
(10)
–
–
–
–
(22)
(26)
(3)
(2)
–
–
(2)
(2)
(734)
(144)
(21)
(15)
(755)
(159)
–
–
(134)
(120)
(13)
(8)
(147)
(128)
Depreciation and
amortisation expense
2015
2014
Interest expense
2015
2014
(g) There were no fee expenses relating to financial liabilities held at amortised cost included in acquisition costs in 2015 and 2014.
B3.1 Staff and employment costs
The average number of staff employed by the Group during the year was:
2015
2014
15,030
4,562
5,920
25,512
13,957
4,494
5,464
23,915
Business operations:
Asia operations
US operations
UK operations
Total
168
Prudential plc Annual Report 2015 www.prudential.co.ukB: Earnings performance continued The costs of employment were:
Business operations:
Wages and salaries
Social security costs
Pension costs:
Defined benefit schemes*
Defined contribution schemes
Total
2015 £m
2014 £m
1,370
101
(63)
67
1,323
100
66
54
1,475
1,543
* The (credit) charge incorporates the effect of actuarial gains and losses.
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), Annual Incentive Plan (AIP), Group Performance
Share Plan (GPSP), Jackson Long-Term Incentive Plan (Jackson LTIP), 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
Prudential Corporation Asia
Long-Term Incentive Plan
(PCA LTIP)
The PCA LTIP provides eligible employees with conditional awards. Awards are discretionary and
on a year-by-year basis determined by Prudential’s full year financial results and the employee’s
contribution to the business. Awards vests 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 certain regions
of Asia can participate in the non-employee savings-related share option scheme.
Share purchase plans
Deferred bonus plans
Jackson Long-Term
Incentive Plan
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.
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 Depositary Receipts which are tradable on the New York Stock Exchange.
The final awards under this arrangement were made in 2012.
169
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B3.2 Share-based payment continued
b Outstanding options and awards
The following table shows movement in outstanding options and awards under the Group’s share-based compensation plans
at 31 December 2015 and 2014:
Options outstanding
under SAYE schemes
Awards outstanding under
incentive plans including
conditional options
2015
2014
2015
2014
Number
of options
millions
8.6
2.2
(1.6)
(0.2)
(0.2)
–
8.8
1.1
Weighted
average
exercise
price
£
8.29
11.11
5.72
8.14
10.15
7.47
9.44
5.71
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 awards
millions
Number
of awards
millions
28.8
9.9
(7.9)
(2.3)
–
(0.1)
28.4
27.1
10.9
(8.5)
(0.7)
–
–
28.8
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 2015 was £15.49 compared to £13.75 for the
year ended 31 December 2014.
The following table provides a summary of the range of exercise prices for Prudential plc options outstanding at 31 December.
Outstanding
Exercisable
Number
outstanding
millions
Weighted
average remaining
contractual life
years
Weighted average
exercise
prices
£
Number
exercisable
millions
Weighted average
exercise
prices
£
2015
2014
2015
2014
2015
2014
2015
2014
2015
0.2
0.8
–
1.0
2.2
4.6
8.8
0.2
1.4
–
2.1
2.3
2.6
8.6
0.9
0.9
–
0.9
1.9
3.6
2.6
1.9
1.4
0.8
1.6
2.9
4.2
2.7
2.88
4.64
–
6.29
9.01
11.34
2.88
4.64
5.51
6.29
9.01
11.55
–
0.4
–
0.7
–
–
9.44
8.29
1.1
–
0.5
–
–
–
–
0.5
–
4.61
–
6.29
–
–
5.71
2014
–
4.65
5.52
–
–
–
4.65
Between £2 and £3
Between £4 and £5
Between £5 and £6
Between £6 and £7
Between £9 and £10
Between £11 and £12
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 adopting the following assumptions:
Prudential
LTIP (TSR)
–
21.48
0.88
–
–
16.67
7.97
2015
SAYE
options
2.35
22.73
1.02
3.79
11.11
13.52
2.95
Other
awards
–
–
–
–
–
–
16.28
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
Other
awards
–
–
–
–
–
–
12.84
Dividend yield (%)
Expected volatility (%)
Risk-free interest rate (%)
Expected option life (years)
Weighted average exercise price (£)
Weighted average share price (£)
Weighted average fair value (£)
170
Prudential plc Annual Report 2015 www.prudential.co.ukB: Earnings performance continued 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
specific at-the-money implied volatilities are adjusted to allow for the different terms and discounted exercise price on SAYE options
by using information on the volatility surface of the FTSE 100.
Risk-free interest rates are taken from government bond spot rates with projections for two-year, three-year and five-year terms to
match corresponding vesting periods. Dividend yield is determined as the average yield over a period of 12 months up to and including
the date of grant. For the Prudential LTIP (TSR), volatility and correlation between Prudential and a basket of 18 competitor companies
is required. For grants in 2015, the average volatility for the basket of competitors was 20.66 per cent. Correlations for the basket are
calculated for each pairing from the log of daily TSR returns for the three years prior to 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.
d Share-based payment expense charged to the income statement
Total expense recognised in the year in the consolidated financial statements relating 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
2015 £m
2014 £m
111
110
6
6
99
93
16
9
B3.3 Key management remuneration
Key management constitutes the directors of Prudential plc as they have authority and responsibility for planning, directing and
controlling the activities of the Group.
Total key management remuneration is analysed in the following table:
Salaries and short-term benefits
Post-employment benefits
Share-based payments
2015 £m
2014 £m
17.1
1.1
15.5
33.7
15.9
1.0
16.2
33.1
The share-based payments charge comprises £10.4 million (2014: £11.0 million), which is determined in accordance with IFRS 2,
‘Share-based Payment’ (see note B3.2) and £5.1 million (2014: £5.2 million) of deferred share awards.
Total key management remuneration includes total directors’ remuneration of £42.7 million (2014: £50.5 million) less LTIP releases
of £19.4 million (2014: £28.4 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 finance transactions
All other services
Total fees paid to the auditor
In addition, there were fees incurred of £0.1 million (2014: £0.1 million) for the audit of pension schemes.
2015 £m
2014 £m
2.0
7.2
3.1
0.7
2.2
0.2
1.2
2.0
6.6
2.9
0.7
1.9
0.1
2.4
16.6
16.6
171
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc B4: Effect of changes and other accounting features on insurance assets and liabilities
The following features are of relevance to the determination of the 2015 results:
a Asia insurance operations
In 2015, the IFRS operating profit based on longer-term investment returns for Asia insurance operations included a profit of £62 million
(2014: £49 million) representing a number of non-recurring items, none of which are individually significant.
b UK insurance operations
Annuity business
Allowance for credit risk
For IFRS reporting, the results for UK shareholder-backed annuity business are particularly sensitive to the allowances made for credit
risk. The allowance is reflected in the deduction from the valuation rate of interest for discounting projected future annuity payments
to policyholders that would have otherwise applied. Credit risk allowance comprises (i) an amount for long-term best estimate defaults,
and (ii) additional provisions for credit risk premium, downgrade resilience and short-term defaults.
The weighted components of the bond spread over swap rates for shareholder-backed fixed and linked annuity business for PRIL,
the principal company which writes the UK’s shareholder-backed business, based on the asset mix at these dates are shown below.
Bond spread over swap rates note (i)
Credit risk allowance:
Long-term expected defaults note (ii)
Additional provisions note (iii)
Total credit risk allowance
Liquidity premium
31 Dec 2015 bps
31 Dec 2014 bps
Pillar 1
regulatory
basis
Adjustment
171
13
42
55
116
–
–
(12)
(12)
12
Pillar 1
regulatory
basis
143
14
44
58
85
Adjustment
–
–
(12)
(12)
12
IFRS
171
13
30
43
128
IFRS
143
14
32
46
97
Notes
(i)
(ii)
Bond spread over swap rates reflect market observed data.
Long-term expected defaults are derived by applying Moody’s data from 1970 to 2009 and the definition of the credit rating used is the second highest credit
rating published by Moody’s, Standard & Poor’s and Fitch.
(iii) Additional provisions comprise credit risk premium, which is derived from Moody’s data from 1970 to 2009, an allowance for a one-notch downgrade of the
portfolio subject to credit risk and an additional allowance for short-term defaults.
The prudent Pillar 1 regulatory basis reflects the overriding objective of maintaining sufficient provisions and capital to ensure payments to policyholders
can be made. The approach for IFRS aims to establish liabilities that are closer to ‘best estimate’.
Movement in the credit risk allowance for PRIL
The movement during 2015 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 2014
Credit rating changes
Asset trading
Other effects (including for new business)
Total allowance for credit risk at 31 December 2015
Pillar 1
regulatory
basis
Total
bps
58
2
(2)
(3)
55
IFRS
Total
bps
46
1
(2)
(2)
43
Overall, the movement has led to the credit allowance for Pillar 1 purposes to be 32 per cent (2014: 41 per cent) of the bond spread
over swap rates. For IFRS purposes it represents 25 per cent (2014: 32 per cent) of the bond spread over swap rates.
172
Prudential plc Annual Report 2015 www.prudential.co.ukB: Earnings performance continued
The reserves for credit risk allowance at 31 December 2015 for the UK shareholder annuity fund were as follows:
PRIL
PAC non-profit sub-fund
Total 31 December 2015
Total 31 December 2014
Pillar 1
regulatory
basis
Total
£bn
1.9
0.2
2.1
2.2
IFRS
Total
£bn
1.5
0.1
1.6
1.7
Other assumption changes
For the shareholder-backed business, in addition to the movement in the credit risk allowance discussed above, the net effect of routine
changes to assumptions in 2015, was a credit of £31 million (2014: £28 million).
Other one-off transactions
During 2015 the UK insurance operations entered into additional longevity reinsurance transactions to extend total coverage from
£2.3 billion of annuity liabilities at the start of the year to £8.7 billion at the end of 2015 (on a Pillar 1 basis). Overall these transactions
generated profit of £231 million (2014: £30 million). Of the £231 million, £170 million relates to transactions undertaken in the second half
of 2015 covering £4.8 billion of annuity liabilities (on a Pillar 1 basis). These transactions, together with other specific management actions
undertaken to position the balance sheet more efficiently under the new Solvency II regime, gave rise to IFRS operating profit in the
second half of 2015 of £339 million in total, which is not expected to recur in future periods.
B5: Tax charge
a Total tax charge by nature of expense
The total tax charge in the income statement is as follows:
Tax charge
UK tax
Overseas tax
Total tax (charge) 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 (charge) credit
Total tax charge
2015 £m
2014 £m
Current
tax
Deferred
tax
(218)
(516)
(734)
69
(77)
(8)
Total
(149)
(593)
(742)
Total
(578)
(360)
(938)
2015 £m
2014 £m
(782)
48
(734)
4
(22)
10
(8)
(742)
(1,102)
(6)
(1,108)
163
1
6
170
(938)
173
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc B5: Tax charge continued
a Total tax charge by nature of expense continued
The current tax charge of £734 million includes £35 million (2014: £37 million) in respect of the tax charge for the Hong Kong operation.
The Hong Kong current tax charge is calculated as 16.5 per cent for all periods on either (i) 5 per cent of the net insurance premium or
(ii) the estimated assessable profits, depending on the nature of the business written.
The total tax charge comprises tax attributable to policyholders and unallocated surplus of with-profits funds, unit-linked policies
and shareholders as shown below:
Tax charge
Tax (charge) credit to policyholders’ returns
Tax charge attributable to shareholders
Total tax charge
2015 £m
2014 £m
Current
tax
Deferred
tax
(188)
(546)
(734)
15
(23)
(8)
Total
(173)
(569)
(742)
Total
(540)
(398)
(938)
The principal reason for the decrease in the tax charge attributable to policyholders’ returns is a reduction in the current tax owing
to a significant decrease on investment returns in the second half of the year in the with-profits life fund in the UK insurance operations.
The main elements of the deferred tax charge shown in the table below are a credit of £272 million relating to unrealised gains and losses
on investments reflecting a decrease in unrealised gains on investments in the Group’s insurance operations and a charge of £200 million
relating to short-term temporary differences reflecting future tax relief arising on decreases in policy reserves in the US insurance
operations balances.
The total deferred tax (charge) credit 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 (charge) credit
2015 £m
2014 £m
272
(55)
(200)
1
(26)
(8)
(127)
(43)
309
(4)
35
170
In 2015, a deferred tax credit of £333 million (2014: charge of £(295) million) has been taken through other comprehensive income.
b Reconciliation of effective tax rate
For the purposes of explaining the relationship between tax expense and accounting profit, it is appropriate to consider the sources
of profit and tax by reference to those that are attributable to shareholders and policyholders. A reconciliation of the tax charge on profit
attributable to shareholders is provided below.
Overview of reconciliation of effective tax rate
Profit before tax
Taxation charge:
Expected tax rate
Expected tax charge
Variance from expected tax charge
Actual tax charge
Average effective tax rate
2015 £m
2014 £m
Attributable to
shareholders
Attributable to
policyholders*
3,148
173
27%
(852)
283
(569)
18%
100%
(173)
–
(173)
100%
Total
3,321
31%
(1,025)
283
(742)
22%
Attributable to
shareholders
Attributable to
policyholders*
2,614
23%
(594)
196
(398)
15%
540
100%
(540)
–
(540)
100%
Total
3,154
36%
(1,134)
196
(938)
30%
* For the column entitled ‘Attributable to policyholders’, the profit before tax represents income, before tax attributable to policyholders and unallocated surplus of
with-profits funds and unit-linked policies. This income is after deduction of charges for policyholder benefits and movements on unallocated surplus which are
determined net of tax. Accordingly, the apparent 100 per cent effective tax rate shown above reflects the basis of accounting for unallocated surplus coupled with the
IFRS requirements in respect of presentation of all pre-tax profits and all tax charges irrespective of policyholder and shareholder economic interest.
174
Prudential plc Annual Report 2015 www.prudential.co.ukB: Earnings performance continued Reconciliation of tax charge on profit attributable to shareholders
Operating profit based on longer-term investment returns
Non-operating loss
Profit (loss) before tax attributable to shareholders
Expected tax rate*
Tax at the expected rate
Effects of recurring tax reconciliation items:
Income not taxable or taxable at concessionary rates
Deductions not allowable for tax purposes
Items related to taxation of life insurance businesses
Deferred tax adjustments
Effect of results of joint ventures and associates
Irrecoverable withholding taxes
Other
Total
Effects of non-recurring tax reconciliation items:
Adjustments to tax charge in relation to prior years
Movements in provisions for open tax matters
Impact of changes in local statutory tax rates
Total
Total actual tax charge/(credit)
Analysed into:
Tax on operating profit based on longer-term
investment returns
Tax on non-operating profit
Actual tax rate:
Operating profit based on longer-term investment returns
Including non-recurring tax reconciling items
Excluding non-recurring tax reconciling items
Total profit
Asia
insurance
operations
US
insurance
operations
1,209
(173)
1,036
24%
249
(42)
15
(20)
10
(37)
–
(4)
(78)
5
(6)
(5)
(6)
165
180
(15)
15%
15%
16%
1,691
(492)
1,199
35%
420
(10)
5
(113)
–
–
–
(1)
(119)
(65)
–
–
(65)
236
408
(172)
24%
28%
20%
2015 £m
UK
insurance
operations
1,195
(120)
1,075
20%
215
Other
operations
(88)
(74)
(162)
20%
(32)
(2)
7
–
–
–
–
6
11
(7)
–
(16)
(23)
203
227
(24)
19%
21%
19%
(9)
6
–
(11)
(13)
28
2
3
–
(5)
(1)
(6)
(35)
(19)
(16)
22%
15%
22%
Total
4,007
(859)
3,148
27%
852
(63)
33
(133)
(1)
(50)
28
3
(183)
(67)
(11)
(22)
(100)
569
796
(227)
20%
22%
18%
* The expected tax rates (rounded to the nearest whole percentage) reflect the corporation tax rates generally applied to taxable profit of the relevant country
jurisdictions. For Asia operations the expected tax rates reflect the corporation tax rates weighted by reference to the source of profit of operations contributing
to the aggregate business result. The expected tax rate for Other operations reflects the mix of business between UK and overseas non-insurance operations,
which are taxed at a variety of rates. The rates will fluctuate from year to year dependent on the mix of profit.
175
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc B5: Tax charge continued
b Reconciliation of effective tax rate continued
Operating profit based on longer-term investment returns
Non-operating profit/(loss)
Profit (loss) before tax attributable to shareholders
Expected tax rate*
Tax at the expected rate
Effects of recurring tax reconciliation items:
Income not taxable or taxable at concessionary rates
Deductions not allowable for tax purposes
Items related to taxation of life insurance businesses
Deferred tax adjustments
Effect of results of joint ventures and associates
Irrecoverable withholding taxes
Other
Total
Effects of non-recurring tax reconciliation items:
Adjustments to tax charge in relation to prior years
Movements in provisions for open tax matters
Impact of changes in local statutory tax rates
Total
Total actual tax charge/(credit)
Analysed into:
Tax on operating profit based on longer-term
investment returns
Tax on non-operating profit
Actual tax rate:
Operating profit based on longer-term investment returns
Including non-recurring tax reconciling items
Excluding non-recurring tax reconciling items
Total profit
Asia
insurance
operations
US
insurance
operations
1,050
170
1,220
22%
268
(17)
13
(44)
(8)
(40)
–
(4)
(100)
(2)
7
(1)
4
172
171
1
16%
16%
14%
1,431
(1,174)
257
35%
90
(6)
–
(76)
–
–
–
1
(81)
(1)
–
–
(1)
8
419
(411)
29%
29%
3%
2014 £m
UK
insurance
operations†
753
545
1,298
21%
273
–
7
–
(7)
(8)
–
(4)
(12)
3
–
2
5
266
163
103
22%
21%
21%
Other
operations†
(48)
(113)
(161)
22%
(35)
(2)
9
–
(11)
(10)
27
7
20
(7)
(26)
–
(33)
(48)
(29)
(19)
60%
(8)%
30%
Total
3,186
(572)
2,614
23%
596
(25)
29
(120)
(26)
(58)
27
–
(173)
(7)
(19)
1
(25)
398
724
(326)
23%
24%
15%
* The expected tax rates (rounded to the nearest whole percentage) reflect the corporation tax rates generally applied to taxable profit of the relevant country
jurisdictions. For Asia operations the expected tax rates reflect the corporation tax rates weighted by reference to the source of profit of operations contributing
to the aggregate business result. The expected tax rate for Other operations reflects the mix of business between UK and overseas non-insurance operations,
which are taxed at a variety of rates. The rates will fluctuate from year to year dependent on the mix of profit.
† In order to show the UK insurance business on a comparable basis, the full year 2014 comparatives exclude the contribution from the sold PruHealth and PruProtect
businesses from the UK insurance operations and show it in the column for Other operations.
176
Prudential plc Annual Report 2015 www.prudential.co.ukB: Earnings performance continued B6: Earnings per share
Based on operating profit based on longer-term
investment returns
Short-term fluctuations in investment returns
on shareholder-backed business
Cumulative exchange loss on the sold Japan
life business recycled from other
comprehensive income
Amortisation of acquisition accounting
adjustments
Based on profit for the year
Based on operating profit based on longer-term
investment returns
Short-term fluctuations in investment returns
on shareholder-backed business
Gain on sale of PruHealth and PruProtect
Amortisation of acquisition accounting
adjustments
Costs of domestication of Hong Kong branch
Note
B1.2
D1
Note
B1.2
Before
tax
note B1.1
£m
Tax
note B5
£m
2015
Net of tax
Basic
earnings
per share
Diluted
earnings
per share
£m
Pence
Pence
4,007
(796)
3,211
125.8p
125.6p
(737)
202
(535)
(21.0)p
(20.9)p
(46)
(76)
–
25
(46)
(51)
3,148
(569)
2,579
(1.8)p
(1.8)p
(2.0)p
101.0p
(2.0)p
100.9p
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)
(10.8)p
3.4p
(2.1)p
(0.2)p
86.9p
(10.8)p
3.4p
(2.1)p
(0.2)p
86.8p
Based on profit for the year
2,614
(398)
2,216
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, which excludes those held in employee share trusts and
consolidated unit trusts and OEICs, is set out as below:
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
2015
millions
2014
millions
2,553
9
(6)
2,556
2,549
9
(6)
2,552
177
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc
B7: Dividends
Dividends relating to reporting year:
Interim dividend
Second interim dividend/Final dividend
Special dividend
Total
Dividends declared and paid in reporting year:
Current year interim dividend
Final dividend for prior year
Total
2015
Pence
per share
12.31p
26.47p
10.00p
48.78p
12.31p
25.74p
38.05p
2014
Pence
per share
11.19p
25.74p
£m
315
681
257
1,253
36.93p
315
659
974
11.19p
23.84p
35.03p
£m
287
658
945
285
610
895
Dividend per share
Interim and special dividends are recorded in the period in which they are paid. Final dividends are recorded in the period in which they
are approved by shareholders. The final dividend for the year ended 31 December 2014 of 25.74 pence per ordinary share was paid to
eligible shareholders on 21 May 2015 and the 2015 interim dividend of 12.31 pence per ordinary share was paid to eligible shareholders
on 25 September 2015. From 2016, Prudential will make twice-yearly interim dividend payments to replace final/interim dividend.
The second interim ordinary and special dividend for the year ended 31 December 2015 of 26.47 pence and 10.00 pence per ordinary
share respectively, will be paid on 20 May 2016 in sterling to shareholders on the principal register and the Irish branch register at 6.00pm
BST on 29 March 2016 (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 27 May 2016. The second interim ordinary and special dividend will be paid on or about 27 May 2016 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 8 March 2016. 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.
178
Prudential plc Annual Report 2015 www.prudential.co.ukB: Earnings performance continued C: Balance sheet notes
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 financial position by operating segment and type of business.
C1.1 Group statement of financial position – analysis by segment
a Position as at 31 December 2015
2015 £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
By operating segment
Assets
Intangible assets attributable
to shareholders:
Goodwill
Deferred acquisition costs and other
intangible assets
Total
Intangible assets attributable to
with-profits funds:
Goodwill in respect of acquired
subsidiaries for venture fund and
other investment purposes
Deferred acquisition costs and other
intangible assets
C5.2(a)
C5.2(b)
Total
Total
Deferred tax assets
Other non-investment and non-cash
assets note (i)
Investments of long-term business and
other operations:
Investment properties
Investments in joint ventures and
associates accounted for using the
equity method
Loans
Equity securities and portfolio
holdings in unit trusts
Debt securities
Other investments
Deposits
Total investments
Assets held for sale
Cash and cash equivalents note (ii)
C5.1(a)
233
–
C5.1(b)
2,103
2,336
6,168
6,168
–
83
83
233
1,230
8,354
8,587
21
1,251
–
42
42
–
–
–
2,378
66
6,168
2,448
C8.1
185
8
193
276
132
185
50
235
–
–
–
8,822
2,646
1,251
140
5
5
13,412
13,422
–
D6
C3.4
C3.3
475
1,084
–
7,418
434
3,571
909
12,073
18,532
28,292
57
773
91,216
34,071
1,715
–
47,593 157,341
83,101 145,464
7,258
11,999
5,486
11,226
49,218 134,425 164,823 348,466
–
2,064
–
1,405
2
2,880
2
6,349
125
885
85
2,204
94
89
3,482
–
1,054
7,431
Total assets
C3.1
57,347 151,651 175,322 384,320
3,621
7,205
7,209
18,035
1,504
4,886 (10,142) 14,283
Group
Total
1,463
8,422
9,885
185
50
235
10,120
2,819
–
47
47
–
–
–
47
33
–
–
–
–
–
–
–
–
–
–
–
27
3
1
–
31
–
379
–
13,422
–
–
1,034
12,958
– 157,453
– 147,671
7,353
–
12,088
–
– 351,979
–
–
2
7,782
5,376 (10,142) 386,985
179
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc C1: Analysis of Group position by segment and business type continued
C1.1 Group statement of financial position – analysis by segment continued
By operating segment
Equity and liabilities
Equity
Shareholders’ equity
Non-controlling interests
Total equity
Liabilities
Policyholder liabilities and unallocated
surplus of with-profits funds:
Insurance contract liabilities
Investment contract liabilities with
discretionary participation features
Investment contract liabilities without
discretionary participation features
Unallocated surplus of with-profits
funds
Total policyholder liabilities and
unallocated surplus of with-profits
funds
Core structural borrowings of
shareholder-financed operations:
Subordinated debt
Other
Total
Operational borrowings attributable to
shareholder-financed operations
Borrowings attributable to with-profits
operations
Other non-insurance liabilities:
Obligations under funding, securities
lending and sale and repurchase
agreements
Net asset value attributable to unit
holders of consolidated unit trusts
and similar funds
Deferred tax liabilities
Current tax liabilities
Accruals and deferred income
Other creditors
Provisions
Derivative liabilities
Other liabilities note (iii)
Total
Liabilities held for sale
Total liabilities
2015 £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
Group
Total
3,956
1
3,957
4,154
–
4,154
5,140
–
13,250
1
2,332
–
(2,627)
–
5,140
13,251
2,332
(2,627)
–
–
–
12,955
1
12,956
42,084 136,129
83,801 262,014
251
–
42,708
42,959
181
2,784
15,841
18,806
2,553
–
10,543
13,096
C4.1(a)
45,069 138,913 152,893 336,875
–
–
–
–
–
–
–
–
–
(1,261) 260,753
–
–
–
42,959
18,806
13,096
–
(1,261) 335,614
C6.1
C6.2
C6.2
C8.1
C8.2
C12
C3.5(b)
–
–
–
–
–
–
169
169
–
–
–
–
169
169
–
275
275
4,018
549
4,567
66
179
245
10
1,705
–
1,332
1,332
–
–
1,914
1,651
3,565
200
–
–
–
–
–
4,018
993
5,011
1,960
1,332
–
3,765
–
–
2,802
734
50
136
3,266
119
140
1,074
8,321
–
22
2,086
3
–
1,022
6
249
3,047
5,049
1,162
203
447
4,591
158
2,125
392
7,873
3,982
256
583
8,879
283
2,514
4,513
8,349
15,778
32,448
–
–
–
–
17
50
300
3,695
244
283
25
4,814
–
5,099
7,431
–
11
19
69
1,183
77
322
50
–
–
–
–
(8,881)
–
–
–
7,873
4,010
325
952
4,876
604
3,119
4,588
1,731
(8,881) 30,112
–
–
–
8,003 (10,142) 374,029
5,376 (10,142) 386,985
C3.1
53,390 147,497 170,182 371,069
Total equity and liabilities
57,347 151,651 175,322 384,320
180
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued subsidiaries for venture fund and
other investment purposes
Deferred acquisition costs and other
intangible assets
C5.2(a)
C5.2(b)
–
54
54
–
–
–
2,198
84
5,197
2,343
C8.1
186
7
193
279
132
186
61
247
–
–
–
7,674
2,559
1,251
141
b Position as at 31 December 2014
By operating segment
Assets
Intangible assets attributable
to shareholders:
Goodwill
Deferred acquisition costs and other
intangible assets
Total
Intangible assets attributable to
with-profits funds:
Goodwill in respect of acquired
Total
Total
Deferred tax assets
Other non-investment and non-cash
assets note (i)
Investments of long-term business and
other operations:
Investment properties
Investments in joint ventures and
associates accounted for using the
equity method
Financial investments:
Loans
Equity securities and portfolio
holdings in unit trusts
Debt securities
Other investments
Deposits
Total investments
Assets held for sale
Cash and cash equivalents note (ii)
Total assets
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
–
C5.1(b)
1,911
2,144
5,197
5,197
–
86
86
233
1,230
7,194
7,427
21
1,251
Group
Total
1,463
7,261
8,724
186
61
247
8,971
2,765
–
46
46
–
–
–
46
65
–
–
–
–
–
–
–
–
3,111
6,617
6,826
16,554
1,464
5,058
(10,295)
12,781
–
28
12,736
12,764
–
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
5,782
13,022
12,253
45,034 123,478 165,378 333,890
D1
819
1,684
–
904
5
2,457
824
5,045
C3.1
52,930 138,539 175,077 366,546
107
854
79
2,293
121
74
3,528
–
1,044
7,428
–
–
–
34
–
2
–
36
–
320
–
–
–
12,764
1,017
12,841
– 144,862
– 145,251
7,623
–
13,096
–
– 337,454
–
–
824
6,409
5,525
(10,295) 369,204
181
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C1.1 Group statement of financial position – analysis by segment 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
Group
Total
3,548
1
3,549
4,067
–
4,067
3,804
–
11,419
1
3,804
11,420
2,077
–
2,077
(1,685)
–
(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
C4.1(a)
42,170 126,746 154,436 323,352
–
–
–
–
–
–
–
–
–
(1,363) 250,038
–
–
–
39,277
20,224
12,450
–
(1,363) 321,989
C6.1
C6.2(a)
C6.2(b)
C8.1
C8.2
C12
C3.5(b)
D1
C3.1
–
–
–
–
160
160
–
275
275
–
160
160
179
–
–
–
–
–
74
253
–
1,093
1,093
–
1,156
1,191
2,347
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
7,387
15,670
29,498
–
–
770
49,381 134,472 171,273 355,126
52,930 138,539 175,077 366,546
3,320
549
3,869
2,004
–
–
–
14
71
55
771
72
315
39
–
–
–
–
–
3,320
984
4,304
2,263
1,093
–
2,347
–
–
–
–
(8,932)
–
–
–
7,357
4,291
617
947
4,262
724
2,323
4,105
1,337
(8,932)
26,973
–
–
770
7,210
(10,295) 357,392
5,525
(10,295) 369,204
6
–
–
–
22
66
328
4,054
335
233
32
5,070
–
5,351
7,428
By operating segment
Equity and liabilities
Equity
Shareholders’ equity
Non-controlling interests
Total equity
Liabilities
Policyholder liabilities and unallocated
surplus of with-profits funds:
Insurance contract liabilities
Investment contract liabilities with
discretionary participation features
Investment contract liabilities without
discretionary participation features
Unallocated surplus of with-profits
funds
Total policyholder liabilities and
unallocated surplus of with-profits
funds
Core structural borrowings of
shareholder-financed operations:
Subordinated debt
Other
Total
Operational borrowings attributable to
shareholder-financed operations
Borrowings attributable to with-profits
operations
Other non-insurance liabilities:
Obligations under funding, securities
lending and sale and repurchase
agreements
Net asset value attributable to unit
holders of consolidated unit trusts
and similar funds
Deferred tax liabilities
Current tax liabilities
Accruals and deferred income
Other creditors
Provisions
Derivative liabilities
Other liabilities note (iii)
Total
Liabilities held for sale
Total liabilities
Total equity and liabilities
182
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued Notes
(i)
Included within other non-investment and non-cash assets are accrued investment income of £2,751 million (2014: £2,667 million) and other debtors
of £1,955 million (2014: £1,852 million).
Accrued investment income and other debtors
2015 £m
2014 £m
Interest receivable
Other
Total accrued investment income
Other debtors comprises:
Amounts due from
Policyholders
Intermediaries
Reinsurers
Other
Total other debtors
Total accrued investment income and other debtors
1,895
856
2,751
332
14
82
1,527
1,955
4,706
1,932
735
2,667
335
20
61
1,436
1,852
4,519
Of the £4,706 million (2014: £4,519 million) of accrued investment income and other debtors, £433 million (2014: £381 million) is expected to be settled after
one year or more.
(ii)
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
2015 £m
2014 £m
5,030
2,752
7,782
5,166
1,243
6,409
Of the total cash and cash equivalents, £365 million (2014: £304 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 benefit of policyholders.
(iii) Other liabilities comprise:
Creditors arising from direct insurance and reinsurance operations
Interest payable
Other items*
Total
2015 £m
2014 £m
1,828
70
2,690
4,588
1,431
59
2,615
4,105
* Of the £2,690 million (2014: £2,615 million) other items as at 31 December 2015, £2,347 million (2014: £2,201 million) related to liabilities for funds withheld under
reinsurance arrangement of the REALIC business.
183
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C1: Analysis of Group position by segment and business type continued
C1.2 Group statement of financial position – analysis by business type
2015 £m
2014 £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-
ations
of Intra-
group
debtors
and
creditors
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-profits funds:
In respect of acquired subsidiaries
for venture fund and other
investment purposes
Deferred acquisition costs and
other intangible assets
Total
Total
Deferred tax assets
Other non-investment and non-cash
C8.1
–
–
–
185
50
235
235
83
–
–
–
–
–
–
–
1
233
1,230
8,354
8,587
21
1,251
–
–
–
–
–
–
8,587
2,562
1,251
140
–
47
47
–
–
–
47
33
–
–
–
–
–
–
–
–
Group
Total
Group
Total
1,463
1,463
8,422
9,885
7,261
8,724
185
50
235
186
61
247
10,120
2,819
8,971
2,765
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
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
3,649
578
11,174
1,504
4,886
(7,508) 14,283
12,781
11,115
705
1,602
–
434
C3.4
2,599
–
–
475
9,474
C3.3
39,195 117,067
9,290
60,870
29
5,045
1,049
8,970
1,079
75,304
2,184
1,980
128,228 128,140
92,098
2
2,623
–
829
–
2,897
134,820 129,548 117,318
125
885
85
2,204
94
89
3,482
–
1,054
7,431
–
–
–
27
3
1
–
31
–
379
–
13,422
12,764
–
–
1,034
1,017
12,958
12,841
– 157,453 144,862
– 147,671 145,251
7,623
–
13,096
–
7,353
12,088
– 351,979 337,454
–
–
2
7,782
824
6,409
5,376
(7,508) 386,985 369,204
184
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued
Equity and liabilities
Equity
Shareholders’ equity
Non-controlling interests
Total equity
Liabilities
Policyholder liabilities and unallocated
surplus of with-profits funds:
Contract liabilities (including
amounts in respect of contracts
classified as investment
contracts under IFRS 4)
Unallocated surplus of with-profits
funds
Total policyholder liabilities and
unallocated surplus of
with-profits funds
Core structural borrowings of
shareholder-financed operations:
Subordinated debt
Other
Total
Operational borrowings attributable
to shareholder-financed
operations
Borrowings attributable to
with-profits operations
Deferred tax liabilities
Other non-insurance liabilities
Liabilities held for sale
Total liabilities
Total equity and liabilities
C6.1
C6.2(a)
C6.2(b)
C8.1
D1
2015 £m
2014 £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-
ations
of Intra-
group
debtors
and
creditors
Group
Total
Group
Total
–
–
–
–
–
–
13,250
1
13,251
2,332
–
2,332
(2,627)
–
(2,627)
–
–
–
12,955
1
11,811
1
12,956
11,812
107,907 125,819
88,792
13,096
–
–
C4.1(a)
121,003 125,819
88,792
–
–
–
–
–
–
–
–
–
–
–
–
–
4
–
169
169
–
275
275
4,018
549
4,567
241
10
1,705
– 322,518 309,539
–
13,096
12,450
– 335,614 321,989
–
–
–
–
4,018
993
5,011
3,320
984
4,304
1,960
2,263
1,332
1,326
11,159
–
–
27
3,698
–
–
2,629
12,236
–
134,820 129,548 104,067
134,820 129,548 117,318
–
17
4,797
–
5,099
7,431
–
11
1,720
–
–
–
1,332
4,010
(7,508) 26,102
–
–
1,093
4,291
22,682
770
8,003
(7,508) 374,029 357,392
5,376
(7,508) 386,985 369,204
185
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C2: Analysis of segment position by business type
To show the statement of financial position by reference to the differing degrees of policyholder and shareholder economic interest
of the different types of business, the analysis below is structured to show the assets and liabilities of each segment by business type.
C2.1 Asia insurance operations
2015 £m
2014 £m
With-profits
business
note
Note
Unit-linked
assets and
liabilities
Other
business
31 Dec
Total
31 Dec
Total
Assets
Intangible assets attributable to shareholders:
Goodwill
Deferred acquisition costs and other
intangible assets
Total
Intangible assets attributable to with-profits
funds:
Deferred acquisition costs and other
intangible assets
Deferred tax assets
Other non-investment and non-cash assets
Investments of long-term business and other
operations:
Investment properties
Investments in joint ventures and associates
accounted for using the equity method
Financial investments:
Loans
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
Equity and liabilities
Equity
Shareholders’ equity
Non-controlling interests
Total equity
Liabilities
Policyholder liabilities and unallocated surplus
of with-profits funds:
Contract liabilities (including amounts
in respect of contracts classified as
investment contracts under IFRS 4)
Unallocated surplus of with-profits funds
Total
Deferred tax liabilities
Other non-insurance liabilities
Liabilities held for sale
Total liabilities
Total equity and liabilities
–
–
–
42
–
1,981
–
–
540
6,861
16,335
28
188
23,952
–
863
–
–
–
–
1
207
–
–
–
10,831
2,809
16
214
13,870
–
363
233
2,103
2,336
–
65
1,433
5
475
544
840
9,148
13
371
11,396
–
838
C3.4
C3.3
233
2,103
2,336
42
66
3,621
5
475
233
1,911
2,144
54
84
3,111
–
374
1,084
1,014
18,532
28,292
57
773
49,218
–
2,064
26,838
14,441
16,068
57,347
–
–
–
–
–
–
3,956
1
3,957
3,956
1
3,957
C4.1(b)
19,642
2,553
22,195
474
4,169
–
26,838
26,838
13,355
–
13,355
27
1,059
–
14,441
14,441
9,519
–
9,519
233
2,359
–
12,111
16,068
42,516
2,553
45,069
734
7,587
–
53,390
57,347
19,200
23,629
48
769
45,034
819
1,684
52,930
3,548
1
3,549
40,068
2,102
42,170
719
5,722
770
49,381
52,930
Note
The statement of financial position for with-profits business comprises the with-profits assets and liabilities of the Hong Kong, Malaysia and Singapore operations.
Assets and liabilities of other participating business are included in the column for ‘Other business’.
186
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued
C2.2 US insurance operations
2015 £m
2014 £m
Variable
annuity
separate
account
assets and
liabilities
note (i)
Fixed annuity,
GIC and other
business
note (i)
Note
31 Dec
Total
31 Dec
Total
Assets
Intangible assets attributable to shareholders:
Deferred acquisition costs and other intangibles note (vi)
Total
Deferred tax assets
Other non-investment and non-cash assets note (ii)
Investments of long-term business and other operations:
Investment properties
Financial investments:
Loans
Equity securities and portfolio holdings in unit trusts note (iii)
Debt securities
Other investments note (iv)
C3.4
C3.3
Total investments
Cash and cash equivalents
Total assets
Equity and liabilities
Equity
Shareholders’ equity note (vii)
Total equity
Liabilities
Policyholder liabilities: note (vi)
–
–
–
–
–
–
91,022
–
–
91,022
–
6,168
6,168
2,448
7,205
5
7,418
194
34,071
1,715
43,403
1,405
6,168
6,168
2,448
7,205
5
7,418
91,216
34,071
1,715
5,197
5,197
2,343
6,617
28
6,719
82,081
32,980
1,670
134,425
123,478
1,405
904
91,022
60,629
151,651
138,539
–
–
4,154
4,154
4,154
4,154
4,067
4,067
Contract liabilities (including amounts in respect of contracts
classified as investment contracts under IFRS 4) note (v)
Total
Core structural borrowings of shareholder-financed operations
Operational borrowings attributable to shareholder-financed
operations
Deferred tax liabilities
Other non-insurance liabilities note (v)
Total liabilities
Total equity and liabilities
91,022
91,022
C4.1(c)
–
–
–
–
91,022
91,022
47,891
47,891
169
66
2,086
6,263
56,475
60,629
138,913
138,913
126,746
126,746
169
66
2,086
6,263
160
179
2,308
5,079
147,497
151,651
134,472
138,539
187
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C2: Analysis of segment position by business type continued
C2.2 US insurance operations continued
Notes
(i)
(ii)
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.
Included within other non-investment and non-cash assets of £7,205 million (2014: £6,617 million) were balances of £6,211 million (2014: £5,979 million)
for reinsurers’ share of insurance contract liabilities. Of the £6,211 million as at 31 December 2015, £5,388 million related to the reinsurance ceded by the
REALIC business (2014: £5,174 million). Jackson holds collateral for certain of these reinsurance arrangements with a corresponding funds withheld liability.
As of 31 December 2015, the funds withheld liability of £2,347 million (2014: £2,201 million) was recorded within other non-insurance liabilities.
(iii) Equity securities and portfolio holdings in unit trusts include investments in mutual funds, the majority of which are equity-based.
(iv) Other investments comprise:
Derivative assets*
Partnerships in investment pools and other†
2015 £m
2014 £m
905
810
1,715
916
754
1,670
* After taking account of the derivative liabilities of £249 million (2014: £251 million), which are included in other non-insurance liabilities, the derivative position
for US operations is a net asset of £656 million (2014: £665 million).
† Partnerships in investment pools and other comprise primarily investments in limited partnerships. These include interests in the PPM America Private Equity
Fund and diversified investments in 162 (2014: 164) other partnerships by independent money managers that generally invest in various equities and fixed
income loans and securities.
(v)
In addition to the policyholder liabilities above, Jackson has entered into a programme of funding arrangements under contracts, which, in substance are
almost identical to GICs. The liabilities under these funding agreements totalled £1,725 million (2014: £844 million) and are included in other non-insurance
liabilities in the statement of financial position above.
(vi) Under IFRS 4, adequacy testing of liabilities, net of deferred acquisition costs is required. The practical application for Jackson is in the context of the deferred
acquisition cost asset and the liabilities for Jackson’s insurance contracts being determined in accordance with US GAAP. The liabilities include those in respect
of the separate accounts (which naturally reflect separate account assets), policyholder account values, and guarantees measured as described in note C4.2.
Under US GAAP, most of Jackson’s products are accounted for under Accounting Standard no. 97 of the Financial Accounting Standards Board (FAS 97)
whereby deferred acquisition costs are amortised in line with expected gross profits. Recoverability of the deferred acquisition costs in the balance sheet
is tested against the projected value of future profits using current estimates and therefore no additional liability adequacy test is required by IFRS 4.
The DAC recoverability test is performed in line with US GAAP requirements which in practice is at the grouped level of those contracts managed together.
(vii) Changes in shareholders’ equity:
Operating profit based on longer-term investment returns B1.1
Short-term fluctuations in investment returns B1.2
Amortisation of acquisition accounting adjustments arising from the purchase of REALIC
Profit before shareholder tax
Tax B5
Profit for the year
Profit for the year (as above)
Items recognised in other comprehensive income:
Exchange movements
Unrealised valuation movements on securities classified as available-for-sale:
Unrealised holding (losses) gains arising during the year
Less: net gains included in the income statement on disposal and impairment
Total unrealised valuation movements
Related change in amortisation of deferred acquisition costs C5.1(b)
Related tax
Total other comprehensive (loss) income
Total comprehensive income for the year
Dividends, interest payments to central companies and other movements
Net increase in equity
Shareholders’ equity at beginning of year
Shareholders’ equity at end of year
2015 £m
2014 £m
1,691
(424)
(68)
1,199
(236)
963
1,431
(1,103)
(71)
257
(8)
249
2015 £m
2014 £m
963
230
(1,256)
(49)
(1,305)
337
339
(399)
564
(477)
87
4,067
4,154
249
235
1,039
(83)
956
(87)
(304)
800
1,049
(428)
621
3,446
4,067
188
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued C2.3 UK insurance operations
Of the total investments of £165 billion in UK insurance operations, £104 billion of investments are held by Scottish Amicable Insurance
Fund and the PAC with-profits 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-profits funds:
In respect of acquired subsidiaries for venture
fund and other investment purposes
Deferred acquisition costs
Total
Total
Deferred tax assets
Other non-investment and non-cash assets
Investments of long-term business and other
operations:
Investment properties
Investments in joint ventures and associates
accounted for using the equity method
Financial investments:
Loans
Equity securities and portfolio holdings
in unit trusts
Debt securities
Other investments note (iii)
Deposits
Total investments
Properties held for sale
Cash and cash equivalents
Total assets
2015 £m
2014 £m
Other funds and subsidiaries
Scottish
Amicable
Insurance
Fund
note (i)
PAC
with-
profits
sub-fund
note (ii)
Note
Unit-linked
assets and
liabilities
Annuity
and
other
long-term
business
Total
31 Dec
Total
31 Dec
Total
–
–
–
–
–
–
–
–
185
8
193
193
–
–
–
–
–
–
83
83
–
–
–
83
83
83
–
–
–
83
83
83
185
8
193
276
86
86
186
7
193
279
1
171
82
4,131
–
371
49
2,536
49
2,907
132
7,209
132
6,826
358
10,757
705
1,592
2,297
13,412
12,736
–
434
C3.4
61
1,998
–
–
–
–
434
536
1,512
1,512
3,571
4,254
C3.3
2,530
2,331
210
399
29,804
42,204
4,807
8,383
15,214
6,481
13
835
45
32,085
456
1,609
15,259
38,566
469
2,444
47,593
83,101
5,486
11,226
43,468
86,349
5,782
12,253
5,889
98,387
23,248
37,299
60,547 164,823 165,378
–
169
2
1,591
–
466
–
654
–
1,120
2
2,880
5
2,457
6,230 104,386
24,085
40,621
64,706 175,322 175,077
189
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C2.3 UK insurance operations continued
2015 £m
2014 £m
Other funds and subsidiaries
Scottish
Amicable
Insurance
Fund
note (i)
PAC
with-
profits
sub-fund
note (ii)
Note
Unit-linked
assets and
liabilities
Annuity
and
other
long-term
business
Total
31 Dec
Total
note (iv)
31 Dec
Total
–
–
–
–
–
–
5,140
5,140
5,140
5,140
5,140
5,140
3,804
3,804
5,919
83,607
21,442
31,382
52,824 142,350 144,088
–
10,543
–
–
–
10,543
10,348
Equity and liabilities
Equity
Shareholders’ equity
Total equity
Liabilities
Policyholder liabilities and unallocated surplus of
with-profits funds:
Contract liabilities (including amounts in respect
of contracts classified as investment contracts
under IFRS 4)
Unallocated surplus of with-profits funds
(reflecting application of ‘realistic’ basis
provisions for UK regulated with-profits
funds)
Total
C4.1(d)
5,919
94,150
21,442
31,382
52,824 152,893 154,436
Operational borrowings attributable to shareholder-
financed operations
Borrowings attributable to with-profits funds
Deferred tax liabilities
Other non-insurance liabilities
Total liabilities
Total equity and liabilities
–
12
31
268
–
1,320
821
8,095
4
–
–
2,639
175
–
310
3,614
179
–
310
6,253
179
1,332
1,162
14,616
74
1,093
1,228
14,442
6,230 104,386
24,085
35,481
59,566 170,182 171,273
6,230 104,386
24,085
40,621
64,706 175,322 175,077
Notes
(i)
(ii)
The fund is solely for the benefit of policyholders of SAIF. Shareholders have no interest in the profits of this fund although they are entitled to asset
management fees on this business. SAIF is a separate sub-fund within the PAC long-term business fund.
The PAC with-profits sub-fund (WPSF) mainly contains with-profits business but it also contains some non-profit business (unit-linked, term assurances and
annuities). Included in the PAC with-profits fund is £10.8 billion (2014: £11.7 billion) of non-profits annuities liabilities. The WPSF’s profits are apportioned
90 per cent to its policyholders and 10 per cent to shareholders as surplus for distribution is determined via the annual actuarial valuation. For the purposes
of this table and subsequent explanation, references to the WPSF also include, for convenience, the amounts attaching to the Defined Charges Participating
Sub-fund which comprises 4 per cent of the total assets of the WPSF and includes the with-profits annuity business transferred to Prudential from the
Equitable Life Assurance Society on 1 December 2007 (with assets of approximately £1.7 billion). Profits to shareholders on this with-profits annuity business
emerge on a ‘charges less expenses’ basis and policyholders are entitled to 100 per cent of the investment earnings.
(iii) Other investments comprise:
Derivative assets*
Partnerships in investment pools and other†
2015 £m
2014 £m
1,930
3,556
5,486
2,344
3,438
5,782
* After taking account of derivative liabilities of £2,125 million (2014: £1,381 million), which are also included in the statement of financial position, the overall
derivative position was a net liability of £195 million (2014: net asset of £963 million).
† Partnerships in investment pools and other comprise mainly investments held by the PAC with-profits fund. These investments are primarily investments
in limited partnerships and additionally, investments in property funds.
(iv) The shareholders’ equity at 31 December 2015 includes the effect of a classification change of £702 million from Other operations to UK insurance operations
in order to align with Solvency II segmental reporting, with no overall effect on the Group’s shareholders’ equity.
190
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued
C2.4 Asset management operations
Note
M&G
Prudential
Capital
Eastspring
Investments
US
31 Dec
Total
31 Dec
Total
2015 £m
2014 £m
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
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments
Deposits
C3.4
C3.3
Total investments
Cash and cash equivalents
Total assets
Equity and liabilities
Equity
Shareholders’ equity
Total equity
Liabilities
Core structural borrowing of shareholder-financed
operations
Operational borrowings attributable to shareholder-financed
operations
Intra-group debt represented by operational borrowings
at Group level note (i)
Other non-insurance liabilities note (ii)
Total liabilities
Total equity and liabilities
1,153
16
1,169
715
29
–
70
–
15
–
114
430
–
–
–
16
3
19
614
236
–
885
–
2,204
74
–
3,163
415
–
–
–
–
5
50
55
79
2,428
4,192
389
1,774
1,774
70
70
–
10
–
644
654
2,428
275
–
1,705
2,142
4,122
4,192
182
182
–
–
–
207
207
389
61
2
63
79
96
–
15
–
–
39
150
130
422
1,230
21
1,251
1,644
1,230
21
1,251
1,605
125
107
885
85
2,204
94
89
3,482
1,054
7,431
854
79
2,293
121
74
3,528
1,044
7,428
306
306
2,332
2,332
2,077
2,077
–
–
–
116
116
422
275
275
10
6
1,705
3,109
5,099
7,431
2,004
3,066
5,351
7,428
Notes
(i)
Intra-group debt represented by operational borrowings at Group level, which are in respect of Prudential Capital’s short-term fixed income security
programme and comprise:
Commercial Paper
Medium Term Notes
Total intra-group debt represented by operational borrowings at Group level
(ii) Other non-insurance liabilities consist primarily of intra-group balances, derivative liabilities and other creditors.
2015 £m
2014 £m
1,107
598
1,705
1,704
300
2,004
191
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C3: Assets and liabilities – classification and measurement
C3.1 Group assets and liabilities – classification
The classification of the Group’s assets and liabilities, and its corresponding accounting carrying values reflect the requirements of IFRS.
For financial investments, the basis of valuation reflects the Group’s application of IAS 39 ‘Financial Instruments: Recognition and
Measurement’ as described further below. Where assets and liabilities have been valued at fair value or measured on a different basis
but fair value is disclosed, the Group has followed the principles under IFRS 13 ‘Fair Value Measurement’. The basis applied is
summarised below:
31 Dec 2015 £m
Cost/
amortised
cost/
IFRS 4
basis value
note (i)
Total
carrying
value
Fair
value,
where
applicable
At fair value
Through profit
or loss
Available-
for-sale
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
13,422
–
2,438
157,453
113,687
7,353
–
294,353
2
–
–
–
–
–
33,984
–
–
33,984
–
–
1,463
8,422
9,885
185
50
235
1,463
8,422
9,885
185
50
235
10,120
10,120
1,197
7,903
2,819
477
2,751
1,955
1,197
7,903
2,819
477
2,751
1,955
17,102
17,102
–
1,034
10,520
–
–
–
12,088
23,642
–
7,782
13,422
1,034
12,958
157,453
147,671
7,353
12,088
351,979
2
7,782
294,355
33,984
58,646
386,985
2,751
1,955
13,422
13,482
157,453
147,671
7,353
12,088
2
7,782
Assets
Intangible assets attributable to shareholders:
Goodwill
Deferred acquisition costs and other intangible assets
Total
Intangible assets attributable to with-profits funds:
In respect of acquired subsidiaries for venture fund
and other investment purposes
Deferred acquisition costs and other intangible assets
Total
Total intangible assets
Other non-investment and non-cash assets:
Property, plant and equipment
Reinsurers’ share of insurance contract liabilities
Deferred tax assets
Current tax recoverable
Accrued investment income
Other debtors
Total
Investments of long-term business and other 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
192
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued 31 Dec 2015 £m
Cost/
amortised
cost/
IFRS 4
basis value
Total
carrying
value
Fair
value,
where
applicable
At fair value
Through profit
or loss
Available-
for-sale
Liabilities
Policyholder liabilities and unallocated surplus of
with-profits funds:
Insurance contract liabilities
Investment contract liabilities with discretionary
participation features note (iii)
Investment contract liabilities without discretionary
participation features
Unallocated surplus of with-profits funds
Total
Core structural borrowings of shareholder-financed operations
Other borrowings: note (v)
Operational borrowings attributable to shareholder-
financed operations
Borrowings attributable to with-profits operations
Other non-insurance liabilities:
Obligations under funding, securities lending and sale
and repurchase agreements
Net asset value attributable to unit holders of consolidated
unit trusts and similar funds
Deferred tax liabilities
Current tax liabilities
Accruals and deferred income
Other creditors
Provisions
Derivative liabilities
Other liabilities
Total
Total liabilities
–
–
16,022
–
16,022
–
–
–
–
7,873
–
–
–
322
–
3,119
2,347
13,661
29,683
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
260,622
260,622
42,959
42,959
2,784
13,227
18,806
13,227
319,592
335,614
18,842
5,011
5,011
5,419
1,960
1,332
1,960
1,332
1,960
1,344
3,765
–
4,010
325
952
4,554
604
–
2,241
3,765
7,873
4,010
325
952
4,876
604
3,119
4,588
3,775
7,873
4,876
3,119
4,588
16,451
30,112
344,346
374,029
193
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C3.1 Group assets and liabilities – classification continued
31 Dec 2014 £m
Cost/
amortised
cost/
IFRS 4
basis value
note (i)
Total
carrying
value
Fair
value,
where
applicable
At fair value
Through profit
or loss
Available-
for-sale
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
12,764
–
2,291
144,862
112,354
7,623
–
279,894
824
–
–
–
–
–
32,897
–
–
32,897
–
–
1,463
7,261
8,724
186
61
247
1,463
7,261
8,724
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
–
1,017
10,550
–
–
–
13,096
24,663
–
6,409
12,764
1,017
12,841
144,862
145,251
7,623
13,096
337,454
824
6,409
280,718
32,897
55,589
369,204
2,667
1,852
12,764
13,548
144,862
145,251
7,623
13,096
824
6,409
Assets
Intangible assets attributable to shareholders:
Goodwill
Deferred acquisition costs and other intangible assets
Total
Intangible assets attributable to with-profits funds:
In respect of acquired subsidiaries for venture fund
and other investment purposes
Deferred acquisition costs and other intangible assets
Total
Total intangible assets
Other non-investment and non-cash assets:
Property, plant and equipment
Reinsurers’ share of insurance contract liabilities
Deferred tax assets
Current tax recoverable
Accrued investment income
Other debtors
Total
Investments of long-term business and other 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
194
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued 31 Dec 2014 £m
Cost/
amortised
cost/
IFRS 4
basis value
Total
carrying
value
Fair
value,
where
applicable
At fair value
Through profit
or loss
Available-
for-sale
Liabilities
Policyholder liabilities and unallocated surplus
of with-profits funds:
Insurance contract liabilities
Investment contract liabilities with discretionary
participation features note (iii)
Investment contract liabilities without discretionary
participation features
Unallocated surplus of with-profits funds
Total
Core structural borrowings of shareholder-financed operations
Other borrowings: note (v)
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 note (vii)
Total liabilities
–
–
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
–
4,291
617
947
3,935
724
–
1,904
14,765
–
2,347
7,357
4,291
617
947
4,262
724
2,323
4,105
26,973
770
326,860
357,392
2,361
7,357
4,262
2,323
4,105
770
Notes
(i)
Assets carried at cost or amortised cost are subject to impairment testing where appropriate under IFRS requirements. This category also includes assets which
are valued by reference to specific IFRS standards such as reinsurers’ share of insurance contract liabilities, deferred tax assets and investments accounted for
under the equity method.
(ii) Realised gains and losses on the Group’s investments for 2015 recognised in the income statement amounted to a net gain of £3.0 billion (2014: £2.9 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 £10 million (2014: £21 million).
(v) As at 31 December 2015, £481 million (2014: £477 million) of convertible bonds were included in debt securities and £1,217 million (2014: £1,148 million) were
included in borrowings.
(vi) See note C3.5(b) for details of the derivative assets included. The balance also contains the PAC with-profits fund’s participation in various investment funds
and limited liability property partnerships.
(vii) Assets and liabilities held for sale are valued at fair value less costs to sell.
195
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C3: Assets and liabilities – classification and measurement continued
C3.2 Group assets and liabilities – measurement
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 financial instruments for which fair valuation is required under IFRS are determined by the use of current market bid prices for
exchange-quoted investments or by using quotations from independent third parties such as brokers and pricing services or by using
appropriate valuation techniques.
The estimated fair value of derivative financial instruments reflects the estimated amount the Group would receive or pay in an
arm’s length transaction. This amount is determined using quoted prices if exchange listed, quotations from independent third parties
or valued internally using standard market practices.
The loans and receivables have been shown net of provisions for impairment. The fair value of loans have been estimated from
discounted cash flows expected to be received. The rate of discount used was the market rate of interest where applicable.
The fair value of investment properties is based on market values as assessed by professionally qualified external valuers or by the
Group’s qualified surveyors.
The fair value of the subordinated and senior debt issued by the parent company is determined using quoted prices from independent
third parties.
The fair value of financial liabilities (other than derivative financial instruments) is determined using discounted cash flows of the
amounts expected to be paid.
b Fair value measurement hierarchy of Group assets and liabilities
Assets and liabilities carried at fair value on the statement of financial position
The table on the next page shows the assets and liabilities carried at fair value analysed by level of the IFRS 13 ‘Fair Value Measurement’
defined fair value hierarchy. This hierarchy is based on the inputs to the fair value measurement and reflects the lowest level input that
is significant to that measurement.
196
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued Financial instruments at fair value
Analysis of financial investments, net of derivative liabilities
by business type
With-profits
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total financial investments, net of derivative liabilities
Percentage of total
Unit-linked and variable annuity separate account
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total financial investments, net of derivative liabilities
Percentage of total
Non-linked shareholder-backed
Loans
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total financial investments, net of derivative liabilities
Percentage of total
Group total analysis, including other financial liabilities held at fair value
Group total
Loans*
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total financial investments, net of derivative liabilities
Investment contracts liabilities without discretionary participation features
held at fair value
Net asset value attributable to unit holders of consolidated unit trusts and
similar funds
Other financial liabilities held at fair value
Total financial instruments at fair value
Percentage of total
* Loans in the above table are those classified as fair value through profit and loss in note C3.1.
31 Dec 2015 £m
Level 1
Level 2
Level 3
Total
Quoted prices
(unadjusted)
in active
markets
Valuation
based on
significant
observable
market inputs
Valuation
based on
significant
unobservable
market inputs
35,441
20,312
85
(110)
55,728
54%
116,691
4,350
5
(2)
121,044
96%
–
1,150
17,767
–
–
18,917
23%
3,200
40,033
1,589
(1,526)
43,296
42%
354
4,940
20
(16)
5,298
4%
255
10
59,491
1,378
(1,112)
60,022
73%
–
153,282
42,429
90
(112)
255
3,564
104,464
2,987
(2,654)
195,689
108,616
554
525
3,371
–
4,450
4%
22
–
4
–
26
0%
2,183
31
253
901
(353)
3,015
4%
2,183
607
778
4,276
(353)
7,491
39,195
60,870
5,045
(1,636)
103,474
100%
117,067
9,290
29
(18)
126,368
100%
2,438
1,191
77,511
2,279
(1,465)
81,954
100%
2,438
157,453
147,671
7,353
(3,119)
311,796
–
(16,022)
–
(16,022)
(5,782)
–
189,907
67%
(1,055)
(322)
91,217
32%
(1,036)
(2,347)
4,108
1%
(7,873)
(2,669)
285,232
100%
197
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C3.2 Group assets and liabilities – measurement continued
Analysis of financial investments, net of derivative liabilities
by business type
With-profits
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total financial investments, net of derivative liabilities
Percentage of total
Unit-linked and variable annuity separate account
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total financial investments, net of derivative liabilities
Percentage of total
Non-linked shareholder-backed
Loans
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total financial investments, net of derivative liabilities
Percentage of total
Group total analysis, including other financial liabilities held at fair value
Group total
Loans*
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total financial investments, net of derivative liabilities
Investment contracts liabilities without discretionary participation features
held at fair value
Net asset value attributable to unit holders of consolidated unit trusts and
similar funds
Other financial liabilities held at fair value
Total financial instruments at fair value
Percentage of total
* Loans in the above table are those classified as fair value through profit or loss in note C3.1.
31 Dec 2014 £m
Level 1
Level 2
Level 3
Total
Quoted prices
(unadjusted)
in active
markets
Valuation
based on
significant
observable
market inputs
Valuation
based on
significant
unobservable
market inputs
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%
In addition to the financial instruments shown above, the assets and liabilities held for sale on the consolidated statement of financial
position at 31 December 2014 in respect of Japan life business included a net financial instruments balance of £844 million, primarily
for equity securities and debt securities. Of this amount, £814 million was classified as level 1 and £30 million as level 2.
198
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued Investment properties at fair value
2015
2014
31 Dec £m
Level 1
Level 2
Level 3
Total
Quoted prices
(unadjusted)
in active
markets
Valuation
based on
significant
observable
market inputs
Valuation
based on
significant
unobservable
market inputs
–
–
–
–
13,422
12,764
13,422
12,764
Assets and liabilities at amortised cost for which fair value is disclosed
The table below shows the assets and liabilities carried at amortised cost on the statement of financial position but for which fair value
is disclosed in the financial statements. The assets and liabilities that are carried at amortised cost but where the carrying value
approximates the fair value, are excluded from the analysis below.
Assets
Loans
Liabilities
Investment contract liabilities without discretionary participation features
Core structural borrowings of shareholder-financed operations
Operational borrowings attributable to shareholder-financed operations
Borrowings attributable to the with-profits funds
Obligations under funding, securities lending and sale and repurchase
agreements
Assets
Loans
31 Dec 2015 £m
Level 1
Level 2
Level 3
Total
Quoted prices
(unadjusted)
in active
markets
Valuation
based on
significant
observable
market inputs
Valuation
based on
significant
unobservable
market inputs
–
–
–
–
–
–
3,423
7,621
11,044
–
(5,419)
(1,956)
(1,270)
(2,820)
–
(4)
(74)
(2,820)
(5,419)
(1,960)
(1,344)
(2,040)
(1,735)
(3,775)
31 Dec 2014 £m
Level 1
Level 2
Level 3
Total
Quoted prices
(unadjusted)
in active
markets
Valuation
based on
significant
observable
market inputs
Valuation
based on
significant
unobservable
market inputs
–
4,446
6,811
11,257
Liabilities
Investment contract liabilities without discretionary participation features
Core structural borrowings of shareholder-financed operations
Operational borrowings attributable to shareholder-financed operations
Borrowings attributable to the with-profits funds
Obligations under funding, securities lending and sale and repurchase
agreements
–
–
–
–
–
–
(4,926)
(2,241)
(1,050)
(2,657)
–
(22)
(58)
(2,657)
(4,926)
(2,263)
(1,108)
(1,505)
(856)
(2,361)
The fair value of the assets and liabilities in the table above, with the exception of the subordinated and senior debt issued by the parent
company, has been estimated from the discounted cash flows expected to be received or paid. Where appropriate, the observable
market interest rate has been used and the assets and liabilities are classified within level 2. Otherwise, they are included as level 3
assets or liabilities.
The fair value included for the subordinated and senior debt issued by the parent company is determined using quoted prices
from independent third parties.
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C3.2 Group assets and liabilities – measurement continued
c Valuation approach for level 2 fair valued assets and liabilities
A significant proportion of the Group’s level 2 assets are corporate bonds, structured securities and other non-national government
debt securities. These assets, in line with market practice, are generally valued using independent pricing services or third-party broker
quotes. These valuations are determined using independent external quotations from multiple sources and are subject to a number of
monitoring controls, such as monthly price variances, stale price reviews and variance analysis on prices achieved on subsequent trades.
Pricing services, where available, are used to obtain the third-party broker quotes. Where pricing services providers are used, a single
valuation is obtained and applied.
When prices are not available from pricing services, quotes are sourced directly from brokers. Prudential seeks to obtain a number
of quotes from different brokers so as to obtain the most comprehensive information available on their executability. Where quotes are
sourced directly from brokers, the price used in the valuation is normally selected from one of the quotes based on a number of factors,
including the timeliness and regularity of the quotes and the accuracy of the quotes considering the spreads provided. The selected
quote is the one which best represents an executable quote for the security at the measurement date.
Generally, no adjustment is made to the prices obtained from independent third parties. Adjustment is made in only limited
circumstances, where it is determined that the third-party valuations obtained do not reflect fair value (eg either because the value is
stale and/or the values are extremely diverse in range). These are usually securities which are distressed or that could be subject to a debt
restructure or where reliable market prices are no longer available due to an inactive market or market dislocation. In these instances,
prices are derived using internal valuation techniques including those as described below in this note with the objective of arriving
at a fair value measurement which reflects the price at which an orderly transaction would take place between market participants on
the measurement date. The techniques used require a number of assumptions relating to variables such as credit risk and interest rates.
Examples of such variables include an average credit spread based on the corporate bond universe and the relevant duration of the asset
being valued. Prudential determines the input assumptions based on the best available information at the measurement dates. Securities
valued in such manner are classified as level 3 where these significant inputs are not based on observable market data.
Of the total level 2 debt securities of £104,464 million at 31 December 2015 (2014: £107,731 million), £10,331 million are valued
internally (2014: £10,093 million). The majority of such securities are valued using matrix pricing, which is based on assessing the credit
quality of the underlying borrower to derive a suitable discount rate relative to government securities of a comparable duration. Under
matrix pricing, the debt securities are priced taking the credit spreads on comparable quoted public debt securities and applying these
to the equivalent debt instruments factoring in a specified liquidity premium. The majority of the parameters used in this valuation
technique are readily observable in the market and, therefore, are not subject to interpretation.
200
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued 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 2015 to that presented at 31 December 2015.
Financial instruments at fair value
£m
Total
gains/
losses
recorded
as other
compre-
hensive
income Purchases
Total
gains/
losses in
income
statement
At
1 Jan
Sales
Settled
Issued
Transfers
into
level 3
Transfers
out of
level 3
At
31 Dec
2,025
2
119
747
790
4,028
(338)
52
(75)
213
(15)
3
1
68
–
–
32
243
547
–
–
(168)
205
(143)
(259)
(700)
–
–
–
–
–
–
–
–
–
–
4
82
120
–
–
2,183
(88)
(4)
607
778
–
–
4,276
(353)
7,252
177
191
822
(1,102)
(168)
205
206
(92)
7,491
(1,291)
(2,201)
(160)
(3)
(1)
(128)
(5)
–
9
–
412
218
–
(233)
–
–
–
–
(1,036)
(2,347)
3,760
14
62
817
(1,093)
462
(28)
206
(92)
4,108
1,887
1
118
649
670
3,758
(201)
118
271
337
(138)
2
(7)
36
–
–
26
49
371
–
–
(175)
194
(50)
(169)
(474)
–
–
–
–
–
–
–
–
–
6,763
589
149
446
(693)
(175)
194
(1,327)
(2,051)
(14)
(10)
–
(129)
(18)
–
18
–
123
279
(73)
(290)
–
2
11
–
–
13
–
–
–
2,025
–
(35)
747
790
–
1
4,028
(338)
(34)
7,252
–
–
(1,291)
(2,201)
3,385
565
20
428
(675)
227
(169)
13
(34)
3,760
2015
Loans
Equity securities and portfolio
holdings in unit trusts
Debt securities
Other investments (including
derivative assets)
Derivative liabilities
Total financial investments,
net of derivative liabilities
Net asset value attributable to
unit holders of consolidated
unit trusts and similar funds
Other financial liabilities
Total financial instruments
at fair value
2014
Loans
Equity securities and portfolio
holdings in unit trusts
Debt securities
Other investments (including
derivative assets)
Derivative liabilities
Total financial investments,
net of derivative liabilities
Net asset value attributable to
unit holders of consolidated
unit trusts and similar funds
Other financial liabilities
Total financial instruments
at fair value
201
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C3.2 Group assets and liabilities – measurement continued
Of the total net gains and losses in the income statement of £14 million (2014: £565 million), £67 million (2014: £344 million) relates to net
unrealised gains of financial instruments still held at the end of the year, which can be analysed as follows:
Equity securities
Debt securities
Other investments
Derivative liabilities
Net asset value attributable to unit holders of consolidated unit trusts and similar funds
Other financial liabilities
Total
Other assets at fair value – investment properties
2015 £m
2014 £m
94
(12)
160
(15)
(160)
–
67
70
149
284
(137)
(14)
(8)
344
£m
Total
gains/
losses
recorded
as other
compre-
hensive
income Purchases
21
20
757
728
Total
gains/
losses in
income
statement
537
914
At
1 Jan
12,764
11,477
Transfers
into
level 3
Transfers
out of
level 3
At
31 Dec
5
–
–
13,422
(5)
12,764
Sales
(662)
(370)
2015
2014
Of the total net gains and losses in the income statement of £537 million (2014: £914 million), £505 million (2014: £851 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 financial investments which by their nature do not have an externally quoted
price based on regular trades, and financial investments for which markets are no longer active as a result of market conditions, eg market
illiquidity. The valuation techniques used include comparison to recent arm’s length transactions, reference to other instruments that
are substantially the same, discounted cash flow analysis, option adjusted spread models and, if applicable, enterprise valuation.
These techniques may include a number of assumptions relating to variables such as credit risk and interest rates. Changes in assumptions
relating to these variables could positively or negatively impact the reported fair value of these instruments. When determining the inputs
into the valuation techniques used priority is given to publicly available prices from independent sources when available, but overall the
source of pricing is chosen with the objective of arriving at a fair value measurement which reflects the price at which an orderly
transaction would take place between market participants on the measurement date.
The fair value estimates are made at a specific point in time, based upon available market information and judgements about the
financial instruments, including estimates of the timing and amount of expected future cash flows and the credit standing of
counterparties. Such estimates do not reflect any premium or discount that could result from offering for sale at one time the Group’s
entire holdings of a particular financial instrument, nor do they consider the tax impact of the realisation of unrealised gains or losses from
selling the financial instrument being fair valued. In some cases the disclosed value cannot be realised in immediate settlement of the
financial instrument.
In accordance with the Group’s risk management framework, the estimated fair value of derivative financial instruments valued
internally using standard market practices are subject to assessment against external counterparties’ valuations.
At 31 December 2015, the Group held £4,108 million (2014: £3,760 million) of net financial instruments at fair value within level 3.
This represents 1 per cent (2014: 1 per cent) of the total fair valued financial assets net of fair valued financial liabilities.
Included within these amounts were loans of £2,183 million at 31 December 2015 (2014: £2,025 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 £2,347 million at 31 December 2015 (2014: £2,201 million) was also classified within level 3, accounted for on a fair
value basis being equivalent to the carrying value of the underlying assets.
202
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued Excluding the loans and funds withheld liability under REALIC’s reinsurance arrangements as described above, which amounted
to a net liability of £(164) million (2014: £(176) million), the level 3 fair valued financial assets net of financial liabilities were £4,272 million
(2014: £3,936 million). Of this amount, a net liability of £(77) million (2014: net asset of £11 million) was internally valued, representing
less than 0.1 per cent of the total fair valued financial assets net of financial liabilities (2014: less than 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 £381 million (2014: £298 million), which were either valued on a discounted cash flow method with an internally
developed discount rate or on external prices adjusted to reflect the specific known conditions relating to these securities
(eg distressed securities or securities which were being restructured).
(b) Private equity and venture investments of £852 million (2014: £1,002 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 £(1,013) million (2014: £(1,269) 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 £(353) million (2014: £(23) million) which are valued internally using standard market practices but are subject
to independent assessment against external counterparties’ valuations.
(e) Other sundry individual financial investments of £56 million (2014: £3 million).
Of the internally valued net liability referred to above of £(77) million (2014: net asset of £11 million):
(a) A net asset of £29 million (2014: net liability of £(133) million) was held by the Group’s participating funds and therefore shareholders’
profit and equity are not impacted by movements in the valuation of these financial instruments.
(b) A net liability of £(106) million (2014: net asset of £144 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 £11 million (2014: £14 million), which would reduce shareholders’ equity by this
amount before tax. Of this amount, a decrease of £10 million (2014: a decrease of £13 million) would pass through the income
statement substantially as part of short-term fluctuations in investment returns outside of operating profit and a £1 million decrease
(2014: a decrease of £1 million) would be included as part of other comprehensive income, being unrealised movements on assets
classified as available-for-sale.
Other assets at fair value – investment properties
The investment properties of the Group are principally held by the UK insurance operations which are externally valued by professionally
qualified external valuers using the Royal Institution of Chartered Surveyors (RICS) valuation standards. An ‘income capitalisation’
technique is predominantly applied for these properties. This technique calculates the value through the yield and rental value
depending on factors such as the lease length, building quality, covenant and location. The variables used are compared to recent
transactions with similar features to those of the Group’s investment properties. As the comparisons are not with properties which
are virtually identical to Group’s investment properties, adjustments are made by the valuers where appropriate to the variables used.
Changes in assumptions relating to these variables could positively or negatively impact the reported fair value of the properties.
e Transfers into and transfers out of levels
The Group’s policy is to recognise transfers into and transfers out of levels as of the end of each half year reporting period except
for material transfers which are recognised as of the date of the event or change in circumstances that caused the transfer.
During 2015, the transfers between levels within the Group’s portfolio were primarily transfers from level 1 to level 2 of £648 million
and transfers from level 2 to level 1 of £283 million. These transfers which relate to equity securities and debt securities arose to reflect
the change in the observability of the inputs used in valuing these securities.
In addition, in 2015, the transfers into level 3 were £136 million and the transfers out of level 3 were £92 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 financial reporting governance processes. The procedures undertaken include approval of valuation
methodologies, verification processes, and resolution of significant or complex valuation issues. In undertaking these activities the Group
makes use of the extensive expertise of its asset management functions.
203
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C3: Assets and liabilities – classification 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 financial position are analysed as follows, with
further information relating to the credit quality of the Group’s debt securities at 31 December 2015 provided in the notes below.
Insurance operations:
Asia note (a)
US note (b)
UK note (c)
Other operations note (d)
Total
2015 £m
2014 £m
28,292
34,071
83,101
2,207
23,629
32,980
86,349
2,293
147,671
145,251
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
2015 £m
2014 £m
With-profits
business
Unit-linked
assets
Other
business
831
5,997
1,872
1,872
1,778
30
395
341
734
192
12,350
1,692
558
173
497
324
79
1,631
861
1,493
184
9
68
285
10
556
162
399
178
1,228
1,701
1,527
1,213
5,847
290
1,310
178
181
9
1,968
389
944
Total
1,039
7,620
3,914
4,133
3,183
Total
962
6,332
3,922
3,545
1,839
19,889
16,600
1,032
1,492
743
790
98
4,155
1,412
2,836
1,282
1,141
366
585
68
3,442
1,009
2,578
16,335
2,809
9,148
28,292
23,629
In addition to the debt securities shown above, the assets held for sale on the consolidated statement of financial position at 31 December
2014 in respect of Japan life business included a debt securities balance of £351 million.
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.
2015 £m
2014 £m
162
481
301
944
174
654
134
962
204
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued
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†
2015 £m
2014 £m
4,242
21,776
3,733
29,751
1,284
2,403
633
34,071
3,972
20,745
3,745
28,462
1,567
2,343
608
32,980
* A 1990 SEC rule that facilitates the resale of privately placed securities under Rule 144A that are without SEC registration to qualified institutional investors.
The rule was designed to develop a more liquid and efficient institutional resale market for unregistered securities.
† Debt securities for US operations included in the statement of financial position comprise:
Available-for-sale
Fair value through profit or loss:
Securities held to back liabilities for funds withheld under reinsurance arrangement
2015 £m
2014 £m
33,984
32,897
87
83
34,071
32,980
ii Valuation basis, presentation of gains and losses and securities in an unrealised loss position
Under IAS 39, unless categorised as ‘held to maturity’ or ‘loans and receivables’, debt securities are required to be fair valued. Where
available, quoted market prices are used. However, where securities do not have an externally quoted price based on regular trades
or where markets for the securities are no longer active as a result of market conditions, IAS 39 requires that valuation techniques
be applied. IFRS 13 requires classification of the fair values applied by the Group into a three-level hierarchy. At 31 December 2015,
0.1 per cent of Jackson’s debt securities were classified as level 3 (31 December 2014: 0.1 per cent) comprising of fair values where
there are significant inputs which are not based on observable market data.
Except for certain assets covering liabilities that are measured at fair value, the debt securities of the US insurance operations are
classified as available-for-sale. Unless impaired, fair value movements are recognised in other comprehensive income. Realised gains
and losses, including impairments, recorded in the income statement are as shown in note B1.2 of this report.
Movements in unrealised gains and losses on available-for-sale securities
There was a movement in the statement of financial position value for debt securities classified as available-for-sale from a net unrealised
gain of £1,840 million to a net unrealised gain of £592 million as analysed in the table below. This decrease reflects the effects
of increasing long-term interest rates and credit spreads.
2015 £m
2014 £m
Assets fair valued at below book value
Book value*
Unrealised loss
Fair value (as included in statement of financial position)
Assets fair valued at or above book value
Book value*
Unrealised gain
Fair value (as included in statement of financial position)
Total
Book value*
Net unrealised gain
Fair value (as included in the footnote above in the overview table and the
statement of financial position)
* Book value represents cost/amortised cost of the debt securities.
† Translated at the average rate of US$1.53: £1.00.
Changes in
unrealised
appreciation†
Foreign
exchange
translation
Reflected as part of
movement in other
comprehensive income
(464)
(29)
(841)
86
(1,305)
57
13,163
(673)
12,490
20,229
1,265
21,494
33,392
592
33,984
5,899
(180)
5,719
25,158
2,020
27,178
31,057
1,840
32,897
205
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C3.3 Debt securities continued
Debt securities classified as available-for-sale in an unrealised loss position
a Fair value of securities as a percentage of book value
The following table shows the fair value of the debt securities in a gross unrealised loss position for various percentages of book value:
Between 90% and 100%
Between 80% and 90%
Below 80%:
Residential mortgage-backed securities – sub-prime
Commercial mortgage-backed securities
Other asset-backed securities
Corporates
Total
b Unrealised losses by maturity of security
1 year to 5 years
5 years to 10 years
More than 10 years
Mortgage-backed and other debt securities
Total
2015 £m
2014 £m
Fair
value
Unrealised
loss
11,058
902
4
–
9
517
530
12,490
(320)
(144)
(1)
–
(7)
(201)
(209)
(673)
Fair
value
5,429
245
4
10
9
22
45
Unrealised
loss
(124)
(37)
(1)
(3)
(6)
(9)
(19)
5,719
(180)
2015 £m
2014 £m
(51)
(334)
(247)
(41)
(673)
(5)
(90)
(54)
(31)
(180)
c Age analysis of unrealised losses for the periods indicated
The following table shows the age analysis of all the unrealised losses in the portfolio by reference to the length of time the securities
have been in an unrealised loss position:
Less than 6 months
6 months to 1 year
1 year to 2 years
2 years to 3 years
More than 3 years
Total
Non-
investment
grade
2015 £m
Investment
grade
(13)
(17)
(16)
(3)
(3)
(52)
(148)
(332)
(63)
(38)
(40)
(621)
Total
(161)
(349)
(79)
(41)
(43)
(673)
Non-
investment
grade
2014 £m
Investment
grade
(18)
(1)
(6)
(1)
(7)
(33)
(46)
(1)
(51)
(36)
(13)
Total
(64)
(2)
(57)
(37)
(20)
(147)
(180)
Further, the following table shows the age analysis as at 31 December 2015, of the securities whose fair values were below 80 per cent
of the book value:
2015 £m
2014 £m
Fair
value
450
64
16
530
Unrealised
loss
Fair
value
Unrealised
loss
(165)
(34)
(10)
(209)
17
3
25
45
(7)
(1)
(11)
(19)
Age analysis
Less than 3 months
3 months to 6 months
More than 6 months
206
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued 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†
2015 £m
2014 £m
196
5,512
8,592
11,378
817
26,495
963
41
49
88
13
1,154
2,746
45
17
2,808
345
3,269
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
Total debt securities (see overview table in note (i) above)
34,071
32,980
* The Securities Valuation Office of the NAIC classifies debt securities into six quality categories ranging from Class 1 (the highest) to Class 6 (the lowest).
Performing securities are designated as Classes 1 to 5 and securities in or near default are designated Class 6.
† The amounts within ‘Other’ which are not rated by S&P, Moody’s nor Fitch, nor are MBS securities using the revised regulatory ratings, have the following
NAIC classifications:
NAIC 1
NAIC 2
NAIC 3-6
2015 £m
2014 £m
1,588
1,549
132
3,269
1,322
1,890
124
3,336
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 an external third party, BlackRock Solutions.
207
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C3.3 Debt securities continued
c UK insurance operations
2015 £m
Other funds and subsidiaries
UK insurance operations
S&P – AAA
S&P – AA+ to AA-
S&P – A+ to A-
S&P – BBB+ to BBB-
S&P – Other
Moody’s – Aaa
Moody’s – Aa1 to Aa3
Moody’s – A1 to A3
Moody’s – Baa1 to Baa3
Moody’s – Other
Fitch
Other
Scottish
Amicable
Insurance
Fund
PAC
with-profits
fund
Unit-linked
assets
216
454
514
618
140
1,942
31
67
51
29
7
185
12
192
4,067
5,627
7,937
10,953
2,277
30,861
1,230
2,159
921
569
244
5,123
323
5,897
984
853
1,049
1,888
244
5,018
106
989
112
100
10
1,317
43
103
Other
annuity and
long-term
business
531
518
700
717
60
PRIL
3,779
3,990
6,239
3,912
269
18,189
2,526
399
3,611
1,466
304
57
5,837
160
3,839
51
901
188
29
–
14
351
Total debt securities
2,331
42,204
6,481
28,025
4,060
2015
Total
£m
9,577
11,442
16,439
18,088
2,990
58,536
1,817
7,727
2,738
1,031
318
552
10,382
83,101
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
1,169
13,631
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 £10,382 million total debt
securities held at 31 December 2015 (2014: £10,087 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
2015 £m
2014 £m
5,570
3,234
1,578
4,917
3,755
1,415
10,382
10,087
The majority of unrated debt security investments were held in SAIF and the PAC with-profits fund and relate to convertible debt
and other investments which are not covered by ratings analysts nor have an internal rating attributed to them. Of the £4,190 million
for PRIL and other annuity and long-term business investments for non-linked shareholder-backed business which are not externally
rated, £1,256 million were internally rated AA+ to AA-, £1,808 million A+ to A-, £988 million BBB+ to BBB-, £60 million BB+ to BB-
and £78 million that were internally rated B+ and below or unrated.
d Other operations
The debt securities are principally held by Prudential Capital.
AAA to A- by S&P or equivalent ratings
Other
Total
2015 £m
2014 £m
2,090
117
2,207
2,056
237
2,293
208
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued
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
2015 are as follows:
Shareholder-backed operations:
Asia insurance operations note (i)
US insurance operations note (ii)
UK insurance operations (2015: 21% AAA, 40% AA) note (iii)
Asset management operations note (iv)
With-profits operations:
Asia insurance operations note (i)
UK insurance operations (2015: 52% AAA, 20% AA) note (iii)
Total
2015 £m
2014 £m
111
4,320
1,531
911
6,873
262
4,600
4,862
104
4,518
1,864
875
7,361
228
5,126
5,354
11,735
12,715
Notes
(i)
Asia insurance operations
The Asia insurance operations’ exposure to asset-backed securities is primarily held by the with-profits operations. Of the £262 million, 84 per cent
(31 December 2014: 99 per cent) are investment grade.
(ii) US insurance operations
US insurance operations’ exposure to asset-backed securities at 31 December 2015 comprises:
RMBS
RMBS Sub-prime (2015: 4% AAA, 13% AA, 7% A)
Alt-A (2015: 1% AA, 3% A)
Prime including agency (2015: 77% AA, 2% A)
CMBS (2015: 57% AAA, 24% AA, 16% A)
CDO funds (2015: 44% AAA, 2% AA, 23% A), including £nil exposure to sub-prime
Other ABS (2015: 24% AAA, 12% AA, 54% A), including £69 million exposure to sub-prime
Total
(iii) UK insurance operations
2015 £m
2014 £m
191
191
902
2,403
52
581
4,320
235
244
1,088
2,343
53
555
4,518
The majority of holdings of the shareholder-backed business relates to the UK market and primarily relates to investments held by PRIL. Of the holdings of the
with-profits operations, £1,140 million (2014: £1,333 million) relates to exposure to the US markets with the remaining exposure being primarily to the UK market.
(iv) Asset management operations
Asset management operations’ exposure to asset-backed securities is held by Prudential Capital with no sub-prime exposure. Of the £911 million, 95 per cent
(2014: 89 per cent) are graded AAA.
209
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C3: Assets and liabilities – classification and measurement continued
C3.3 Debt securities continued
f Group sovereign debt and bank debt exposure
The Group exposures held by the shareholder-backed business and with-profits funds in sovereign debts and bank debt securities
at 31 December 2015 are analysed as follows:
Exposure to sovereign debts
Italy
Spain
France
Germany*
Other Eurozone (principally Belgium)
Total Eurozone
United Kingdom
United States†
Other, predominantly Asia
Total
2015 £m
2014 £m
Shareholder-
backed
business
With-profits
funds
Shareholder-
backed
business
With-profits
funds
55
1
19
409
62
546
4,997
3,911
3,368
60
17
–
358
44
479
1,802
6,893
1,737
62
1
20
388
5
476
4,104
3,607
2,787
12,822
10,911
10,974
* 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.
Exposure to bank debt securities
2015 £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-profits funds
Italy
Spain
France
Germany
Netherlands
Other Eurozone
Total Eurozone
United Kingdom
United States
Other, predominantly Asia
Total
–
143
26
66
–
–
235
423
–
19
677
–
156
9
94
–
–
259
545
–
257
1,061
30
11
126
4
31
20
222
157
2,227
333
2,939
57
26
179
17
200
35
514
289
1,414
888
3,105
Total
senior
debt
30
154
152
70
31
20
457
580
2,227
352
3,616
57
182
188
111
200
35
773
834
1,414
1,145
4,166
Total
Sub-
ordinated
debt
Tier 1
Tier 2
–
–
8
–
–
–
8
6
4
53
71
–
–
–
–
5
–
5
27
141
189
362
–
–
66
60
–
11
137
371
226
313
–
–
74
60
–
11
145
377
230
366
1,047
1,118
–
–
62
–
–
–
62
490
241
322
–
–
62
–
5
–
67
517
382
511
1,115
1,477
2015
Total
£m
30
154
226
130
31
31
602
957
2,457
718
4,734
57
182
250
111
205
35
840
1,351
1,796
1,656
5,643
The tables above exclude assets held to cover linked liabilities and those of the consolidated unit trusts and similar funds. In addition,
the tables above exclude the proportionate share of sovereign debt holdings of the Group’s joint venture operations.
210
61
18
–
336
29
444
2,065
5,771
1,714
9,994
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
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued
C3.4 Loans portfolio
Loans are accounted for at amortised cost net of impairment except for:
— Certain mortgage loans which have been designated at fair value through profit 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 financial position are analysed as follows:
Insurance operations:
Asia note (a)
US note (b)
UK note (c)
Asset management operations 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
2015 £m
2014 £m
1,084
7,418
3,571
885
1,014
6,719
4,254
854
12,958
12,841
2015 £m
2014 £m
130
721
233
88
672
254
1,084
1,014
* The mortgage and policy loans are secured by properties and life insurance policies respectively.
† The majority of the other loans are commercial loans held by the Malaysia operation and which are all investment graded by two local rating agencies.
b US insurance operations
The loans of the Group’s US insurance operations comprise:
Mortgage loans*
Policy loans†
Total US insurance operations loans
Loans backing
liabilities for
funds withheld
–
2,183
2,183
2015 £m
Other loans
4,367
868
5,235
Loans backing
liabilities for
funds withheld
–
2,025
2,025
Total
4,367
3,051
7,418
2014 £m
Other loans
3,847
847
4,694
Total
3,847
2,872
6,719
* All of the mortgage loans are commercial mortgage loans which are collateralised by properties. The property types are industrial, multi-family residential, suburban
office, retail and hotel.
† The 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 profit or loss. All other policy loans are accounted for at amortised cost, less any impairment.
The US insurance operations’ commercial mortgage loan portfolio does not include any single-family residential mortgage loans and
is therefore not exposed to the risk of defaults associated with residential sub-prime mortgage loans. The average loan size is £8.6 million
(2014: £7.2 million). The portfolio has a current estimated average loan to value of 45 per cent (2014: 59 per cent).
At 31 December 2015, Jackson had mortgage loans with a carrying value of £nil (2014: £13 million) where the contractual terms
of the agreements had been restructured.
211
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C3.4 Loans portfolio continued
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
2015 £m
2014 £m
727
8
1,324
2,059
1,508
4
1,512
3,571
1,145
10
1,510
2,665
1,585
4
1,589
4,254
* The mortgage loans are collateralised by properties. By carrying value, 78 per cent of the £1,508 million held for shareholder-backed business relates to lifetime
(equity release) mortgage business which has an average loan to property value of 30 per cent.
† Other loans held by the PAC with-profits fund are all commercial loans and comprise mainly syndicated loans.
d Asset management operations
These 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
A+ to A-
BBB+ to BBB-
BB+ to BB-
B and other
Total
2015 £m
2014 £m
–
157
607
119
2
885
101
161
244
49
299
854
212
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued C3.5 Financial instruments – additional information
a Financial risk
i Liquidity analysis
Contractual maturities of financial liabilities on an undiscounted cash flow basis
The following table sets out the contractual maturities for applicable classes of financial liabilities, excluding derivative liabilities and
investment contracts that are separately presented. The financial liabilities are included in the column relating to the contractual
maturities at the undiscounted cash flows (including contractual interest payments) due to be paid assuming conditions are consistent
with those of year end.
Financial liabilities
Core structural borrowings of
shareholder-financed operations C6.1
Operational borrowings attributable to
shareholder-financed operations C6.2
Borrowings attributable to with-profits
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
Financial liabilities
Core structural borrowings of
shareholder-financed operations C6.1
Operational borrowings attributable to
shareholder-financed operations C6.2
Borrowings attributable to with-profits
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
Total
carrying
value
1 year
or less
After 1
year to
5 years
After 5
years to
10 years
After 10
years to
15 years
After 15
years to
20 years
Over
20 years
No stated
maturity
Total
2015 £m
5,011
197
1,046
1,210
1,197
1,037
3,555
1,900
10,142
1,960
1,301
1,332
256
616
813
69
175
3,765
4,588
3,765
2,139
7,873
4,876
7,873
4,560
–
26
–
25
–
3
–
48
–
53
–
–
–
74
–
11
–
–
–
62
–
1,986
157
1,527
–
–
–
2,420
3,765
4,588
–
100
–
344
–
–
7,873
5,151
29,405
20,091
2,526
1,505
1,324
1,148
3,961
4,477
35,032
Total
carrying
value
1 year
or less
After 1
year to
5 years
After 5
years to
10 years
After 10
years to
15 years
After 15
years to
20 years
Over
20 years
No stated
maturity
Total
2014 £m
4,304
166
927
1,079
1,064
914
2,456
1,796
8,402
2,263
2,202
1,093
97
2,347
4,105
2,347
1,678
7,357
4,262
7,357
3,941
65
717
–
133
–
24
–
205
–
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
Maturity analysis of derivatives
The following table shows the gross and net derivative positions together with a maturity profile of the net derivative position:
2015
2014
Carrying value of net derivatives £m
Maturity profile of net derivative position £m
Derivative
assets
Derivative
liabilities
Net
derivative
position
2,958
(3,119)
(161)
1 year
or less
15
3,412
(2,323)
1,089
1,245
After 1
year to
3 years
After 3
years to
5 years
(10)
(14)
(7)
(9)
After 5
years
45
10
Total
43
1,232
213
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C3.5 Financial instruments – additional information 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 flow hedges and in
general, contractual maturities are not considered essential for an understanding of the timing of the cash flows for these instruments.
The only exception is certain identified interest rate swaps which are fully expected to be held until maturity solely for the purposes of
matching cash flows on separately held assets and liabilities. For these instruments the undiscounted cash flows (including contractual
interest amounts) due to be paid under the swap contract assuming conditions are consistent with those at year end are included in the
column relating to the contractual maturity of the derivative.
Maturity analysis of investment contracts
The table below shows the maturity profile for investment contracts on undiscounted cash flow projections of expected benefit payments.
2015
2014
£bn
After 1
year to
5 years
After 5
years to
10 years
After 10
years to
15 years
After 15
years to
20 years
Over
20 years
Total
undis-
counted
value
Total
carrying
value
21
19
19
18
14
13
10
10
9
8
79
74
55
59
1 year
or less
6
6
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 profile above excludes certain corporate unit-linked business with gross policyholder liabilities of £11 billion
(2014: £13 billion) which have no stated maturity but which are repayable on demand.
The vast majority of the Group’s financial assets are held to back the Group’s policyholder liabilities. Although asset/liability matching
is an important component of managing policyholder liabilities (both those classified as insurance and those classified as investments),
this profile is mainly relevant for managing market risk rather than liquidity risk. Within each business unit this asset/liability matching
is performed on a portfolio-by-portfolio basis.
In terms of liquidity risk, a large proportion of the policyholder liabilities contain discretionary surrender values or surrender charges,
meaning that many of the Group’s liabilities are expected to be held for the long term. Much of the Group’s investment portfolios are
in marketable securities, which can therefore be converted quickly to liquid assets.
For the reasons above, an analysis of the Group’s assets by contractual maturity is not considered appropriate to evaluate the nature
and extent of the Group’s liquidity risk.
ii Credit risk
The Group’s maximum exposure to credit risk of financial instruments (before any allowance for collateral or allocation of losses to
policyholders) is represented by the carrying value of financial instruments on the balance sheet that have exposures to credit risk
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 3.5(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.
Of the total loans and receivables held, £27 million (2014: £11 million) are past their due date but are not impaired. Of the total past
due but not impaired, £22 million are less than one year past their due date (2014: £5 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 £16 million
(2014: £13 million).
In addition, during 2015 and 2014 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.
214
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued iii Foreign exchange risk
As at 31 December 2015, the Group held 22 per cent (2014: 22 per cent) and 11 per cent (2014: 9 per cent) of its financial assets and
financial liabilities respectively, in currencies, mainly US dollar and Euro, other than the functional currency of the relevant business unit.
Of these financial assets, 53 per cent (2014: 56 per cent) are held by the PAC with-profits fund, allowing the fund to obtain exposure
to foreign equity markets.
Of these financial liabilities, 40 per cent (2014: 47 per cent) are held by the PAC with-profits fund, mainly relating to foreign
currency borrowings.
The exchange risks inherent in these exposures are mitigated through the use of derivatives, mainly forward currency contracts
(note 3.5(b) below).
The amount of exchange gain recognised in the income statement in 2015, except for those arising on financial instruments measured
at fair value through profit or loss, is £138 million (2014: £89 million gain). This constitutes £1 million loss (2014: £1 million loss) on
Medium Term Notes liabilities and £139 million of net gain (2014: £90 million net gain), mainly arising on investments of the PAC
with-profits fund. The gains/losses on Medium Term Notes liabilities are fully offset by value movements on cross-currency swaps,
which are measured at fair value through profit or loss.
b Derivatives and hedging
Derivatives
The Group enters into a variety of exchange traded and over-the-counter derivative financial instruments, including futures, options,
forward currency contracts and swaps such as interest rate swaps, cross-currency swaps, swaptions and credit default swaps.
All over-the-counter derivative transactions, with the exception of some Asia transactions, are conducted under standardised
ISDA (International Swaps and Derivatives Association Inc) master agreements and the Group has collateral agreements between
the individual Group entities and relevant counterparties in place under each of these market master agreements.
The total fair value balances of derivative assets and liabilities as at 31 December 2015 were as follows:
Derivative assets
Derivative liabilities
Derivative assets
Derivative liabilities
Asia
insurance
operations
US
insurance
operations
UK
insurance
operations
Asset
management
Unallocated
to a segment
2015 £m
57
(140)
(83)
47
(143)
(96)
905
(249)
656
916
(251)
665
1,930
(2,125)
(195)
2014 £m
2,344
(1,381)
963
65
(283)
(218)
103
(233)
(130)
1
(322)
(321)
2
(315)
(313)
Group
total
2,958
(3,119)
(161)
3,412
(2,323)
1,089
The derivative assets are included in ‘other investments’ in the statement of financial position and are used for efficient portfolio
management to obtain cost effective and efficient management of exposure to various markets in accordance with the Group’s
investment strategies and to manage exposure to interest rate, currency, credit and other business risks. The Group also uses interest
rate derivatives to reduce exposure to interest rate volatility. In particular:
— UK with-profits funds use derivatives for efficient portfolio management or reduction in investment risks. For UK annuity business
derivatives are used to assist with asset and liability cash flow matching;
— US operations and some of the UK operations hold large amounts of interest-rate sensitive investments that contain credit risks on
which a certain level of default 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.
215
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C3.5 Financial instruments – additional information continued
Hedging
The Group has formally assessed and documented the effectiveness of the following hedges under IAS 39.
Net investment hedges
At 31 December 2015, the Group has designated perpetual subordinated capital securities totalling US$2.8 billion (2014: US$2.8 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 £1,895 million as at 31 December 2015 (2014: £1,789 million). The foreign exchange loss of £104 million
(2014: loss of £96 million) on translation of the borrowings to pounds sterling at the statement of financial position date is recognised
in the translation reserve in shareholders’ equity. This net investment hedge was 100 per cent effective.
The Group has no cash flow hedges or fair value hedges in place.
c Derecognition, collateral and offsetting
Securities lending and reverse repurchase agreements
The Group has entered into securities lending (including repurchase agreements) whereby blocks of securities are loaned to third
parties, primarily major brokerage firms. The amounts above the fair value of the loaned securities required to be received as collateral
by the agreements depend on the quality of the collateral, calculated on a daily basis. The loaned securities are not removed from the
Group’s consolidated statement of financial position, rather they are retained within the appropriate investment classification. Collateral
typically consists of cash, debt securities, equity securities and letters of credit.
At 31 December 2015, the Group had lent £5,995 million (2014: £4,578 million) of securities of which £4,687 million (2014: £3,129 million)
was lent by the PAC with-profits fund and held cash and securities collateral under such agreements of £6,342 million (2014: £4,887 million)
of which £5,002 million (2014: £3,400 million) was held by the PAC with-profits fund.
At 31 December 2015, 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 £10,076 million
(2014: £12,857 million).
In addition, at 31 December 2015, the Group had entered into repurchase transactions for which the fair value of the collateral
pledged was £190 million in the form of securities and £10 million in the form of cash (2014: £186 million in the form of securities).
Collateral and pledges under derivative transactions
At 31 December 2015, the Group had pledged £1,622 million (2014: £1,411 million) for liabilities and held collateral of £1,865 million
(2014: £2,388 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.
Offsetting assets and liabilities
The Group’s derivative instruments, repurchase agreements and securities lending agreements are subject to master netting
arrangements and collateral arrangements. A master netting arrangement with a counterparty creates a right of offset for amounts
due to and due from that same counterparty that is enforceable in the event of a default or bankruptcy. The Group recognises amounts
subject to master netting arrangements on a gross basis within the consolidated balance sheets.
The following tables present the gross and net information about the Group’s financial instruments subject to master
netting arrangements:
31 Dec 2015 £m
Gross amount
presented in the
consolidated
statement of
financial
position
note (i)
Related amounts not offset in the
consolidated statement of financial position
Financial
instruments
note (ii)
Cash
collateral
Securities
collateral
note (iii)
Net amount
2,835
8,591
11,426
(1,071)
–
(1,071)
(1,122)
–
(1,122)
(591)
(8,591)
(9,182)
(2,879)
(1,779)
(200)
(4,858)
1,071
–
–
1,071
764
189
10
963
809
1,590
190
2,589
51
–
51
(235)
–
–
(235)
Financial assets:
Derivative assets
Reverse repurchase agreements
Total financial assets
Financial liabilities:
Derivative liabilities
Securities lending
Repurchase agreements
Total financial liabilities
216
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued Financial assets:
Derivative assets
Reverse repurchase agreements
Total financial assets
Financial liabilities:
Derivative liabilities
Securities lending
Repurchase agreements
Total financial liabilities
31 Dec 2014 £m
Gross amount
presented in the
consolidated
statement of
financial
position
note (i)
Related amounts not offset in the
consolidated statement of financial 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)
(1,131)
–
(1,131)
(824)
(10,537)
(11,361)
1,030
–
–
1,030
391
1,317
–
1,708
543
–
186
729
286
–
286
(72)
–
–
(72)
Notes
(i)
(ii) Represents the amount that could be offset under master netting or similar arrangements where Group does not satisfy the full criteria to offset
The Group has not offset any of the amounts presented in the consolidated statement of financial position.
on the consolidated statement of financial position.
(iii) Excludes initial margin amounts for exchange-traded derivatives.
In the tables above, the amounts of assets or liabilities presented in the consolidated statement of financial position are offset first by
financial instruments that have the right of offset under master netting or similar arrangements with any remaining amount reduced
by the amount of cash and securities collateral. The actual amount of collateral may be greater than amounts presented in the tables.
d Impairment of financial 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 2015, net impairment charges of £(35) million (2014: net impairment reversals of £37 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 (charge) credit for impairment net of reversals
* The impairment (charges) reversals relate to loans held by the UK with-profits fund and mortgage loans held by Jackson.
Impairment recognised on available-for-sale securities amounted to £(19) million (2014: £(7) million) arising from:
Residential mortgage-backed securities
Public fixed income
Other
2015 £m
2014 £m
(19)
(16)
(35)
(7)
44
37
2015 £m
2014 £m
(8)
(2)
(9)
(19)
(2)
–
(5)
(7)
217
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C3.5 Financial instruments – additional information continued
The impairment recorded on the residential mortgage-backed securities was primarily due to reduced cash flow expectations on such
securities that are collateralised by diversified pools of primarily below investment grade securities. Of the impaired losses of £19 million
(2014: £7 million), the top five individual corporate issuers made up 74 per cent (2014: 76 per cent), reflecting a deteriorating business
outlook of the companies concerned. The impairment losses have been recorded in ‘investment return’ in the income statement.
Jackson’s portfolio of debt securities is managed proactively with credit analysts closely monitoring and reporting on the credit quality
of its holdings. Jackson continues to review its investments on a case-by-case basis to determine whether any decline in fair value
represents an impairment. In addition, investments in structured securities are subject to a rigorous review of their future estimated cash
flows, including expected and stress case scenarios, to identify potential shortfalls in contractual payments (both interest and principal).
Impairment charges are recorded on structured securities when the Company forecasts a contractual payment shortfall. Situations
where such a shortfall would not lead to a recognition of a loss are rare. However, some structured securities do not have a single
determined set of future cash flows and instead, there can be a reasonable range of estimates that could potentially emerge.
With this variability, there could be instances where the projected cash flow shortfall under management’s base case set of assumptions
is so minor that relatively small and justifiable changes to the base case assumptions would eliminate the need for an impairment loss
to be recognised. The impairment loss reflects the difference between the fair value and book value.
In 2015, the Group realised gross losses on sales of available-for-sale securities of £85 million (2014: £35 million) with 57 per cent
(2014: 68 per cent) of these losses related to the disposal of fixed maturity securities of the top 10 individual issuers, which were disposed
of as part of risk reduction programmes intended to limit future credit loss exposure. Of the £85 million (2014: £ 35 million), £54 million
(2014: £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 profile of gross unrealised losses for fixed maturity securities accounted for on an available-for-sale basis
by reference to the time periods by which the securities have been held continuously in an unrealised loss position and by reference
to the maturity date of the securities concerned.
For 2015, the amount of gross unrealised losses for fixed maturity securities classified as available-for-sale under IFRS in an unrealised
loss position was £673 million (2014: £180 million). Notes B1.2 and C3.3 provide further details on the impairment charges and
unrealised losses of Jackson’s available-for-sale securities.
218
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued C4: Policyholder liabilities and unallocated surplus
The note provides information of policyholder liabilities and unallocated surplus of with-profits funds held on the Group’s statement
of financial position:
C4.1 Movement and duration of liabilities
C4.1(a) Group overview
i Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds
At 1 January 2014
Comprising:
Policyholder liabilities on the consolidated statement of financial position
Unallocated surplus of with-profits funds on the consolidated statement
of financial position
Group’s share of policyholder liabilities of joint ventures*
Reallocation of unallocated surplus for the domestication of the
Hong Kong branch†
Net flows:
Premiums
Surrenders
Maturities/Deaths
Net flows
Shareholders’ transfers post-tax
Investment-related items and other movements
Foreign exchange translation differences
As at 31 December 2014 / 1 January 2015
Comprising:
Policyholder liabilities on the consolidated statement of financial position
Unallocated surplus of with-profits funds on the consolidated statement
of financial position
Group’s share of policyholder liabilities of joint ventures*
Net flows:
Premiums
Surrenders
Maturities/Deaths
Net flows
Shareholders’ transfers post-tax
Investment-related items and other movements
Foreign exchange translation differences
At 31 December 2015
Comprising:
Policyholder liabilities on the consolidated statement of financial position‡
Unallocated surplus of with-profits funds on the consolidated statement
of financial position§
Group’s share of policyholder liabilities of joint ventures*
Average policyholder liability balances
2015
2014
Insurance operations £m
Asia
note C4.1(b)
US
note C4.1(c)
UK
note C4.1(d)
Total
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
7,784
(2,550)
(1,265)
3,969
(43)
(364)
194
–
–
10,348
–
12,450
4,215
16,699
(6,759)
(1,464)
8,476
–
(3,824)
7,515
9,692
(6,363)
(6,991)
(3,662)
(214)
2,319
14
34,175
(15,672)
(9,720)
8,783
(257)
(1,869)
7,723
48,778
138,913
152,893
340,584
41,255
138,913
142,350
322,518
2,553
4,970
44,573
38,993
–
–
10,543
–
13,096
4,970
132,830
143,219
320,622
117,079
139,362
295,434
* 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.
† 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-profits business is reported within the Asia insurance
operations segment.
‡ The policyholder liabilities of the Asia insurance operations of £41,255 million (2014: £38,705 million), shown in the table above, is after deducting the intra-group
reinsurance liabilities ceded by the UK insurance operations of £1,261 million (2014: £1,363 million) to the Hong Kong with-profits business. Including this amount total
Asia policyholder liabilities are £42,516 million (2014: £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-profits funds.
219
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C4.1 Movement and duration of liabilities continued
The items above represent the amount attributable to changes in policyholder liabilities and unallocated surplus of with-profits funds
as a result of each of the components listed. The policyholder liabilities shown include investment contracts without discretionary
participation features (as defined in IFRS 4) and their full movement in the year. The items above are shown gross of 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
At 1 January 2014
Net flows:
Premiums
Surrenders
Maturities/Deaths
Net flows note (a)
Investment-related items and other movements
Foreign exchange translation differences
At 31 December 2014 / 1 January 2015
Comprising:
Policyholder liabilities on the consolidated statement of financial position
Group’s share of policyholder liabilities relating to joint ventures
At 1 January 2015
Net flows:
Premiums
Surrenders
Maturities/Deaths
Net flows note (a)
Investment-related items and other movements
Foreign exchange translation differences
At 31 December 2015 note (b)
Comprising:
Shareholder-backed business £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
22,195
4,215
26,410
4,793
(2,308)
(618)
1,867
(121)
(312)
126,746
–
126,746
16,699
(6,759)
(1,464)
8,476
(3,824)
7,515
55,009
–
55,009
3,146
(3,227)
(2,613)
(2,694)
509
–
203,950
4,215
208,165
24,638
(12,294)
(4,695)
7,649
(3,436)
7,203
27,844
138,913
52,824
219,581
Policyholder liabilities on the consolidated statement of financial position
Group’s share of policyholder liabilities relating to joint ventures
22,874
4,970
138,913
–
52,824
–
214,611
4,970
Notes
(a)
(b)
Including net flows of the Group’s insurance joint ventures.
Policyholder liabilities relating to shareholder-backed business grew by £11.4 billion from £208.2 billion at 31 December 2014 to £219.6 billion at 31 December
2015. The increase reflects positive net flows (premiums net of upfront charges less surrenders, withdrawals, maturities and deaths) of £7.6 billion in 2015
(2014: £9.6 billion), driven by strong inflows of £8.5 billion in the US and £1.9 billion in Asia, together with a positive £7.2 billion increase from foreign exchange
effects following a strengthening of the US dollar.
220
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued iii Movement in insurance contract liabilities and unallocated surplus of with-profits funds
Further analysis of the movement in the year of the Group’s insurance contract liabilities, gross and reinsurance share, and unallocated
surplus of with-profits funds is provided below:
At 1 January 2014
Income and expense included in the income statement and other comprehensive income
Foreign exchange translation differences
At 31 December 2014 / 1 January 2015
Income and expense included in the income statement and other comprehensive income
Foreign exchange translation differences
At 31 December 2015
iv Reinsurers’ share of insurance contract liabilities
Insurance contract liabilities
Gross
£m
218,185
23,532
8,321
250,038
3,456
7,259
260,753
Reinsurers’
share
£m
6,018
(41)
338
6,315
342
335
6,992
Unallocated
surplus of
with-profits
funds
£m
12,061
54
335
12,450
522
124
13,096
Insurance contract liabilities
Claims outstanding
Asia
755
43
798
2015 £m
US
5,499
711
6,210
UK
738
157
895
Total
6,992
911
7,903
2014 £m
Total
6,315
852
7,167
The Group cedes certain business to other insurance companies. Although the ceding of insurance does not relieve the Group from
its liability to its policyholders, the Group participates in such agreements for the purpose of managing its loss exposure. The Group
evaluates the financial condition of its reinsurers and monitors concentration of credit risk from similar geographic regions, activities
or economic characteristics of the reinsurers to minimise its exposure from reinsurer insolvencies. Of the reinsurers’ share of insurance
contract liabilities balance of £7,903 million at 31 December 2015 (2014: £7,167 million), 90 per cent (2014: 93 per cent) were ceded by
the Group’s UK and US operations, of which 96 per cent (2014: 95 per cent) of the balances 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
£41 million and £442 million respectively during 2015 (2014: £35 million and £398 million respectively). There were no deferred gains
or losses on reinsurance contracts in either 2015 or 2014.
In each of 2015 and 2014, the Group’s UK insurance business entered into longevity reinsurance transactions on certain aspects
of the UK’s annuity liabilities. Further information on these transactions is provided in note B4(b). The gains and losses recognised
in profit and loss for the other reinsurance contracts written in the year were immaterial.
221
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C4.1 Movement and duration of liabilities continued
C4.1(b) Asia insurance operations
i Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds
A reconciliation of the total policyholder liabilities and unallocated surplus of with-profits funds of Asia insurance operations from the
beginning of the year to the end of the year is as follows:
At 1 January 2014
Comprising:
With-profits
business
£m
Unit-linked
liabilities
£m
13,215
13,765
Other
business
£m
8,166
Policyholder liabilities on the consolidated statement of financial position
Unallocated surplus of with-profits funds on the consolidated statement
13,138
11,918
of financial position
Group’s share of policyholder liabilities relating to joint ventures*
Reallocation of unallocated surplus for the domestication of the
Hong Kong branch note (b)
Premiums
New business
In-force
Surrenders note (d)
Maturities/Deaths
Net flows note (c)
Shareholders’ transfers post-tax
Investment-related items and other movements note (e)
Foreign exchange translation differences note (a)
At 31 December 2014 / 1 January 2015
Comprising:
Policyholder liabilities on the consolidated statement of financial position
Unallocated surplus of with-profits funds on the consolidated statement
of financial position
Group’s share of policyholder liabilities relating to joint ventures*
Premiums
New business
In-force
Surrenders note (d)
Maturities/Deaths
Net flows note (c)
Shareholders’ transfers post-tax
Investment-related items and other movements note (e)
Foreign exchange translation differences note (a)
At 31 December 2015 note (c)
Comprising:
Policyholder liabilities on the consolidated statement of financial position†
Unallocated surplus of with-profits funds on the consolidated statement
of financial position
Group’s share of policyholder liabilities relating to joint ventures*
Average policyholder liability balances‡
2015
2014
Total
£m
35,146
31,910
77
3,159
1,690
2,759
4,299
7,058
(2,425)
(1,259)
3,374
(40)
3,480
1,372
6,854
–
1,312
–
997
1,090
2,087
(279)
(604)
1,204
–
523
308
77
–
1,690
425
1,834
2,259
(207)
(615)
1,437
(40)
1,621
689
–
1,847
–
1,337
1,375
2,712
(1,939)
(40)
733
–
1,336
375
18,612
16,209
10,201
45,022
16,510
13,874
8,321
38,705
2,102
–
812
2,179
2,991
(242)
(647)
2,102
(43)
(243)
506
–
2,335
1,322
1,496
2,818
(2,043)
(88)
687
–
(536)
(394)
–
1,880
781
1,194
1,975
(265)
(530)
1,180
–
415
82
2,102
4,215
2,915
4,869
7,784
(2,550)
(1,265)
3,969
(43)
(364)
194
20,934
15,966
11,878
48,778
18,381
13,355
9,519
41,255
2,553
–
17,446
14,823
–
2,611
16,088
14,987
–
2,359
11,039
9,183
2,553
4,970
44,573
38,993
* 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 policyholder liabilities of the with-profits business of £18,381 million, shown in the table above, is after deducting the intra-group reinsurance liabilities
ceded by the UK insurance operations of £1,261 million to the Hong Kong with-profits business (2014: £1,363 million). Including this amount the Asia with-profits
policyholder liabilities are £19,642 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-profits funds.
222
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued
Notes
(a) Movements in the year have been translated at the average exchange rates for the year ended 31 December 2015. The closing balance has been translated
at the closing spot rates as at 31 December 2015. Differences upon retranslation are included in foreign exchange translation differences.
(b) 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-profits business is reported within the
Asia insurance operations segment.
(c) Net flows have increased by £595 million to £3,969 million in 2015 compared with £3,374 million in 2014 reflecting increased flows from new business and
growth in the in-force books.
(d) The rate of surrenders for shareholder-backed business (expressed as a percentage of opening liabilities) was 8.7 per cent in 2015, lower than the 10.1 per cent
(e)
recorded in 2014 (based on opening liabilities).
Investment-related items and other movements for 2015 principally represents unrealised losses on bonds and equities, following rising bond yields and
lower Asia equity markets in 2015.
ii Duration of liabilities
The table below shows the carrying value of policyholder liabilities and the maturity profile of the cash flows on a discounted basis
for 2015 and 2014, 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
2015 £m
2014 £m
41,255
38,705
%
23
20
17
12
9
19
%
23
20
17
12
9
19
iii Summary policyholder liabilities (net of reinsurance) and unallocated surplus
At 31 December 2015, the policyholder liabilities and unallocated surplus for Asia operations of £43.8 billion (2014: £40.8 billion),
net of reinsurance of £798 million (2014: £488 million), excluding joint ventures, comprised the following:
Hong Kong
Indonesia
Korea
Malaysia
Singapore
Taiwan
Other countries
Total Asia operations
2015 £m
2014 £m
16,234
2,361
2,810
3,492
12,022
2,724
3,367
43,010
13,748
2,552
2,702
3,713
12,074
2,569
2,961
40,319
223
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C4.1 Movement and duration of liabilities continued
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 2014
Premiums
Surrenders
Maturities/Deaths
Net flows note (b)
Transfers from general to separate account
Investment-related items and other movements note (c)
Foreign exchange translation differences note (a)
At 31 December 2014 / 1 January 2015
Premiums
Surrenders
Maturities/Deaths
Net flows note (b)
Transfers from general to separate account
Investment-related items and other movements note (c)
Foreign exchange translation differences note (a)
At 31 December 2015
Average policyholder liability balances*
2015
2014
* Averages have been based on opening and closing balances.
Variable
annuity
separate
account
liabilities
£m
65,681
12,220
(3,699)
(547)
7,974
1,395
1,963
4,728
81,741
12,899
(4,357)
(655)
7,887
847
(4,351)
4,898
Fixed annuity,
GIC and other
business
£m
41,730
3,272
(2,223)
(760)
289
(1,395)
1,749
2,632
Total
£m
107,411
15,492
(5,922)
(1,307)
8,263
–
3,712
7,360
45,005
126,746
3,800
(2,402)
(809)
589
(847)
527
2,617
16,699
(6,759)
(1,464)
8,476
–
(3,824)
7,515
91,022
47,891
138,913
86,382
73,711
46,448
43,368
132,830
117,079
Notes
(a) Movements in the year have been translated at an average rate of US$1.53/£1.00 (2014: US$1.65/£1.00). The closing balances have been translated at closing rate
of US$1.47/£1.00 (2014: US$1.56/£1.00). Differences upon retranslation are included in foreign exchange translation differences.
(b) Net flows for the year were £8,476 million compared with £8,263 million in 2014, reflecting continued strong in-flows into the variable annuity business.
(c) Negative investment-related items and other movements in variable annuity separate account liabilities of £4,351 million for 2015 primarily reflects the
decreases in equities and bond values during the year. Fixed annuity, GIC and other business investment and other movements of £527 million primarily reflect
the increase in interest credited to the policyholder accounts in the year and an increase in other guarantee reserves.
ii Duration of liabilities
The table below shows the carrying value of policyholder liabilities and maturity profile of the cash flows on a discounted basis for 2015
and 2014:
2015
2014
Fixed annuity
and other
business
(including GICs
and similar
contracts)
£m
47,891
%
48
26
12
7
4
3
Fixed annuity
and other
business
(including GICs
and similar
contracts)
£m
Total
£m
138,913
45,005
%
44
28
14
8
4
2
%
46
27
12
7
4
4
Variable
annuity
£m
91,022
%
43
28
15
8
4
2
Variable
annuity
£m
81,741
Total
£m
126,746
%
48
29
13
6
3
1
%
47
29
13
6
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
224
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued
C4.1(d) UK insurance operations
i Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds
A reconciliation of the total policyholder liabilities and unallocated surplus of with-profits funds of UK insurance operations from the
beginning of the year to the end of the year is as follows:
At 1 January 2014
Comprising:
Policyholder liabilities
Unallocated surplus of with-profits funds
Reallocation of unallocated surplus for the domestication
of the Hong Kong branch note (a)
Premiums
Surrenders
Maturities/Deaths
Net flows note (b)
Shareholders’ transfers post-tax
Switches
Investment-related items and other movements
Foreign exchange translation differences
At 31 December 2014 / 1 January 2015
Comprising:
Policyholder liabilities
Unallocated surplus of with-profits funds
Premiums
Surrenders
Maturities/Deaths
Net flows note (b)
Shareholders’ transfers post-tax
Switches
Investment-related items and other movements note (c)
Foreign exchange translation differences
At 31 December 2015
Comprising:
Policyholder liabilities
Unallocated surplus of with-profits funds
Average policyholder liability balances*
2015
2014
Shareholder-backed funds
and subsidiaries
SAIF and PAC
with-profits
sub-fund
£m
Unit-linked
liabilities
£m
Annuity
and other
long-term
business
£m
Total
£m
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
23,300
–
31,709
–
144,088
10,348
6,546
(3,136)
(4,378)
(968)
(214)
(189)
1,999
14
1,115
(3,168)
(573)
(2,626)
–
189
579
–
2,031
(59)
(2,040)
(68)
–
–
(259)
–
9,692
(6,363)
(6,991)
(3,662)
(214)
–
2,319
14
100,069
21,442
31,382
152,893
89,526
10,543
89,303
86,467
21,442
–
22,371
23,476
31,382
–
31,545
29,419
142,350
10,543
143,219
139,362
* Averages have been based on opening and closing balances and exclude unallocated surplus of with-profits funds.
Notes
(a) 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-profits business is reported within the
Asia insurance operations segment.
(b) Net outflows improved from £4,510 million in 2014 to £3,662 million in 2015, due primarily to higher premium flows into our with-profits funds following
increased sales into with-profits savings and retirement products. This has been offset by lower premiums into our annuity business following the introduction
of pension freedoms and lower level of bulks. The levels of inflows/outflows for unit-linked business is driven by corporate pension schemes with transfers
in or out from only a small number of schemes influencing the level of flows in the year.
Investment-related items and other movements of £2,319 million mainly reflects investment return earned in the year, attributable to policyholders.
(c)
225
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C4.1 Movement and duration of liabilities continued
ii Duration of liabilities
With the exception of most unitised with-profits bonds and other whole-of-life contracts, the majority of the contracts of the UK insurance
operations have a contract term. In effect, the maturity term of the other contracts reflects the earlier of death, maturity or the policy
lapsing. In addition, as described in note A3.1, with-profits contract liabilities include projected future bonuses based on current
investment values. The actual amounts payable will vary with future investment performance of SAIF and the WPSF.
The following tables show the carrying value of the policyholder liabilities and the maturity profile of the cash flows, on a discounted
basis for 2015 and 2014, for insurance contracts, as defined by IFRS:
With-profits business
2015 £m
Annuity business
(Insurance contracts)
Other
Total
Insurance
contracts
Investment
contracts
Total
Non-profit
annuities
within
WPSF
PRIL
Total
Insurance
contracts
Investments
contracts
Total
Policyholder liabilities
35,962
42,736
78,698
10,828
22,092
32,920
14,919
15,813
30,732
142,350
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
23
14
9
6
8
40
27
17
10
4
2
40
25
16
10
5
4
33
25
18
11
6
7
2015 %
25
21
18
14
10
12
2014 £m
27
23
18
13
9
10
37
25
15
9
6
8
36
23
17
12
6
6
37
24
16
10
6
7
36
24
16
11
6
7
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
— The cash flow projections of expected benefit payments used in the maturity profile table above are from value of in-force business
and exclude the value of future new business, including future vesting of internal pension contracts.
— Benefit payments do not reflect the pattern of bonuses and shareholder transfers in respect of the with-profits business.
— Investment contracts under ‘Other’ comprise certain unit-linked and similar contracts accounted for under IAS 39 and IAS 18.
— For business with no maturity term included within the contracts, for example with-profits investment bonds such as Prudence Bonds,
an assumption is made as to likely duration based on prior experience.
226
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued C4.2 Products and determining contract liabilities
a Asia
Features of products and guarantees
The life insurance products offered by the Group’s Asia operations include a range of with-profits and non-participating term, whole life,
endowment and unit-linked policies. The Asia operations also offer health, disability, critical illness and accident coverage to supplement
its core life products.
The terms and conditions of the contracts written by the Asia operations and, in particular, the products’ options and guarantees,
vary from territory to territory depending upon local market circumstances.
In general terms, the Asia participating products provide savings and protection where the basic sum assured can be enhanced by
a profit share (or bonus) from the underlying fund as determined at the discretion of the insurers. The Asia operations’ non-participating
term, whole life and endowment products offer savings and/or protection where the benefits are guaranteed, or determined by a set
of defined market-related parameters. Unit-linked products combine savings with protection, the cash value of the policy depends
on the value of the underlying unitised funds. Health and Protection policies provide mortality or morbidity benefits 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 classified into four main categories, namely premium rate, cash value or interest rate
guarantees, policy renewability and convertibility options.
Subject to local market circumstances and regulatory requirements, the guarantee features described in note C4.2(c) in respect of UK
business broadly apply to similar types of participating contracts written in 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
benefits. Unit-linked products have the lowest level of guarantee.
The risks on death coverage through premium rate guarantees are low due to the diversified nature of the business as well as rigorous
product pricing.
Cash value and interest rate guarantees are of three types:
Maturity values
Surrender values
Interest rate guarantees
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; and
It is common in Asia for regulations or market-driven demand and competition to provide some form
of capital value protection and minimum crediting interest rate guarantees. This would be reflected
within the guaranteed maturity and surrender values.
The guarantees are borne by shareholders for non-participating and investment-linked (non-investment guarantees only) products.
Participating product guarantees are predominantly supported by the segregated life funds and their estates.
Whole-of-life contracts with floor levels of policyholder benefits that accrue at rates set at inception and do not vary subsequently with
market conditions are written in the Korea life operations though this is not to a significant 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 2015 of £625 million and
£2,187 million respectively (2014: £596 million and £2,109 million respectively).
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C4.2 Products and determining contract liabilities continued
Determining contract liabilities
For the with-profits business, the total value of the with-profits funds is driven by the underlying asset valuation with movements
reflected principally in the accounting value of policyholder liabilities and unallocated surplus. Similarly, for the unit-linked business,
the attaching liabilities reflect the unit value obligation driven by the value of the investments of the unit fund.
For the shareholder-backed non-linked business, the future policyholder benefit provisions for Asia businesses in the Group’s IFRS
accounts, are determined in accordance with methods prescribed by local GAAP adjusted to comply, where necessary, with the
modified statutory basis or where local GAAP is not well established and in which the business written is primarily non-participating
and linked business, US GAAP principles are used as the most appropriate reporting basis.
For the countries which apply local GAAP adjusted to comply, where necessary, with modified statutory basis, the approach to
determining the contract liabilities is driven by the local solvency basis. A gross premium valuation method is used in those countries
where a risk-based capital framework is adopted for local solvency. Under the gross premium valuation method, all cash flows are valued
explicitly using best estimate assumptions.
A risk-based capital framework applying the gross premium valuation method is adopted by Singapore, Malaysia, Thailand and
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.
In the Philippines, the local regulator requires insurers to adopt the gross premium valuation method for traditional business from
30 June 2016 onwards. The Company decided to early adopt this requirement for IFRS reporting for the 2015 year end.
For India, Taiwan and, until its sale in 2015, Japan, US GAAP is applied for measuring insurance assets and liabilities. For these
countries, the future policyholder benefit provisions for non-linked business are determined using the net level premium method, with
an allowance for surrenders, maintenance and claims expenses. Rates of interest used in establishing the policyholder benefit provisions
vary by operation depending on the circumstances attaching to each block of business.
The other Asia operations principally adopt a net premium valuation method to determine the future policyholder benefit provisions.
The effect of changes in assumptions used to measure insurance assets and liabilities for Asia insurance operations is as disclosed
in note B4(a).
b US
Features of products and guarantees
Jackson provides long-term savings and retirement products to retail and institutional customers throughout the US and offers the
products discussed below:
i Fixed annuities
Fixed interest rate annuities
At 31 December 2015, fixed interest rate annuities accounted for 9 per cent (2014: 9 per cent) of policy and contract liabilities of Jackson.
Fixed interest rate annuities are primarily deferred annuity products that are used for asset accumulation in retirement planning and for
providing income in retirement. They permit tax-deferred accumulation of funds and flexible payout options.
The policyholder of a fixed interest rate annuity pays Jackson a premium, which is credited to the policyholder’s account. Periodically,
interest is credited to the policyholder’s account and in some cases administrative charges are deducted from the policyholder’s account.
Jackson makes benefit payments at a future date as specified in the policy based on the value of the policyholder’s account at that date.
The policy provides that at Jackson’s discretion it may reset the interest rate, subject to a guaranteed minimum. At 31 December 2015,
Jackson had fixed interest rate annuities totalling £12.1 billion (2014: £11.7 billion) in account value with minimum guaranteed rates
ranging from 1.0 per cent to 5.5 per cent and a 3.00 per cent average guaranteed rate (2014: 1.0 per cent to 5.5 per cent and a
3.03 per cent average guaranteed rate).
Approximately 62 per cent (2014: 57 per cent) of the fixed interest rate annuities Jackson wrote in 2015 provide for a market value
adjustment (‘MVA’), that could be positive or negative, on surrenders in the surrender period of the policy. This formula-based
adjustment approximates the change in value that assets supporting the product would realise as interest rates move up or down.
The minimum guaranteed rate is not affected by this adjustment. While the MVA feature minimises the surrender risk associated
with certain fixed annuities, Jackson still bears a portion of the surrender risk on policies without this feature, and the investment risk
on all fixed interest rate annuities.
228
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued Fixed index annuities
Fixed index annuities accounted for 6 per cent (2014: 6 per cent) of Jackson’s policy and contract liabilities at 31 December 2015. 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 2015, Jackson had fixed index annuities allocated to indexed funds totalling £6.4 billion
(2014: £6.3 billion) in account value with minimum guaranteed rates on index accounts ranging from 1.0 per cent to 3.0 per cent and a
1.79 per cent average guaranteed rate (2014: 1.0 per cent to 3.0 per cent and a 1.83 per cent average guarantee rate). At 31 December
2015, Jackson also offered fixed interest accounts on some fixed index annuity products. At 31 December 2015, fixed interest accounts of
fixed index annuities totalled £1.9 billion (2014: £1.8 billion) in account value with minimum guaranteed rates ranging from 1.0 per cent to
3.0 per cent and a 2.52 per cent average guaranteed rate (2014: 1.0 per cent to 3.0 per cent and a 2.53 per cent average guaranteed rate).
Jackson hedges the equity return risk on fixed index products using offsetting equity exposure in the variable annuity product. The
cost of hedging 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 2015, immediate annuities accounted for 1 per cent (2014: 1 per cent) of Jackson’s policy and contract liabilities.
Immediate annuities guarantee a series of payments beginning within a year of purchase and continuing over either a fixed period
of years and/or the life of the policyholder. If the term is for the life of the policyholder, then Jackson’s primary 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 2015, variable annuities accounted for 70 per cent (2014: 69 per cent) of Jackson’s policy and contract liabilities.
Variable annuities are deferred annuities that have the same tax advantages and payout options as fixed interest rate and fixed index
annuities. They are also used for asset accumulation in retirement planning and to provide income in retirement.
The primary differences between variable annuities and fixed interest rate or fixed index annuities are investment risk and return.
If a policyholder chooses a variable annuity, the rate of return depends upon the performance of the selected fund portfolio.
Policyholders may allocate their investment to either the fixed account or a selection of variable accounts. Investment risk on the variable
account is borne by the policyholder, while investment risk on the fixed account is borne by Jackson through guaranteed minimum fixed
rates of return. At 31 December 2015, 6 per cent (2014: 5 per cent) of variable annuity funds were in fixed accounts. Jackson had variable
annuity funds in fixed accounts totalling £5.5 billion (2014: £4.4 billion) with minimum guaranteed rates ranging from 1.0 per cent to
3.0 per cent and a 1.70 per cent average guaranteed rate (2014: 1.0 per cent to 3.0 per cent and a 1.81 per cent average guaranteed rate).
Jackson issues variable annuity contracts where it contractually guarantees to the policyholder a return of no less than either, a) total
deposits made to the contract adjusted for any partial withdrawals, b) total deposits made to the contract adjusted for any partial
withdrawals plus a minimum return, or c) the highest contract value on a specified anniversary date adjusted for any withdrawals
following the contract anniversary. These guarantees include benefits that are payable in the event of death (guaranteed minimum death
benefit (GMDB)), at annuitisation (guaranteed minimum income benefit (GMIB)), upon the depletion of funds (guaranteed minimum
withdrawal benefit (GMWB)) or at the end of a specified period (guaranteed minimum accumulation benefit (GMAB)). Jackson hedges
these risks using equity options and futures contracts as described in note C7.3. The GMAB and GMIB are no longer offered, with the
existing GMIB coverage being substantially reinsured.
229
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C4.2 Products and determining contract liabilities continued
iii Life insurance
Life insurance products accounted for 11 per cent (2014: 12 per cent) of Jackson’s policy and contract liabilities at 31 December 2015.
Jackson discontinued new sales of life insurance products in 2012. Life products include term life and interest-sensitive life (universal
life and variable universal life). Term life provides protection for a defined period and a benefit that is payable to a designated beneficiary
upon death of the insured. Universal life provides permanent individual life insurance for the life of the insured and includes a savings
element. Variable universal life is a type of life insurance policy that combines death benefit protection with the ability for the
policyholder account to be invested in separate account funds. For certain fixed universal life plans, additional provisions are held
to reflect the existence of guarantees offered in the past that are no longer supported by earnings on the existing asset portfolio,
or for situations where future mortality charges are not expected to be sufficient to provide for future mortality costs.
Excluding the business that is subject to the retrocession treaties at 31 December 2015, Jackson had interest-sensitive life business
in force with total account value of £6.1 billion (2014: £5.9 billion), with minimum guaranteed interest rates ranging from 2.5 per cent
to 6.0 per cent with a 4.66 per cent average guaranteed rate (2014: 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 2015, institutional products accounted for 3 per cent of policy and contract liabilities
(2014: 3 per cent). Under a traditional GIC, the policyholder makes a lump sum deposit. The interest rate paid is fixed and established
when the contract is issued. If deposited funds are withdrawn earlier than the specified term of the contract, an adjustment is made that
approximates a market value adjustment.
Under a funding agreement, the policyholder either makes a lump sum deposit or makes specified periodic deposits. Jackson agrees
to pay a rate of interest, which may be fixed or a floating short-term interest rate linked to an external index. The duration of the funding
agreements range between one and thirty years. In 2015 and 2014, 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 fixed annuities (fixed interest rate and fixed index), the fixed 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 2015 and 2014:
Minimum guaranteed interest rate
1.00%
> 1.0% – 2.0%
> 2.0% – 3.0%
> 3.0% – 4.0%
> 4.0% – 5.0%
> 5.0% – 6.0%
Total
Fixed annuities and the fixed
account portion of variable
annuities
£m
Interest-sensitive life business
£m
2015
5,563
7,670
9,586
1,263
1,639
212
2014
3,927
7,887
9,365
1,239
1,567
207
25,933
24,192
2015
–
–
204
2,322
2,023
1,574
6,123
2014
–
–
195
2,265
1,971
1,514
5,945
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 defined for US GAAP purposes by
applying in the first instance a retrospective deposit method to determine the liability for policyholder benefits. This is then augmented
by potentially three additional amounts, namely:
— Any amounts that have been assessed to compensate the insurer for services to be performed over future periods
(ie deferred income);
— Any amounts previously assessed against policyholders that are refundable on termination of the contract; and
— Any probable future loss on the contract (ie premium deficiency).
230
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued Capitalised acquisition costs and deferred income for these contracts are amortised over the life of the book of contracts. The present
value of the estimated gross profits is generally computed using the rate of interest that accrues to policyholder balances (sometimes
referred to as the contract rate). Estimated gross profits include estimates of the following, each of which will be determined based
on the best estimate of amounts over the life of the book of contracts without provision for adverse deviation:
— Amounts expected to be assessed for mortality less benefit claims in excess of related policyholder balances;
— Amounts expected to be assessed for contract administration less costs incurred for contract administration;
— Amounts expected to be earned from the investment of policyholder balances less interest credited to policyholder balances;
— Amounts expected to be assessed against policyholder balances upon termination of contracts (sometimes referred to as surrender
charges); and
— Other expected assessments and credits.
In the case of variable annuity contracts with guaranteed benefits as described above, liabilities for these benefits are accounted for
under US GAAP and are valued as described below.
In accordance with US GAAP, the Guaranteed Minimum Death Benefit and the ‘for life’ portion of Guaranteed Minimum Withdrawal
Benefit liabilities are determined each period end by estimating the expected value of benefits in excess of the projected account balance
and recognising the excess ratably over the life of the contract based on total expected assessments. At 31 December 2015, these
liabilities were valued using a series of stochastic investment performance scenarios, a mean investment return of 7.4 per cent
(2014: 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 Benefit liability is determined by estimating the expected value of the annuitisation benefits
in excess of the projected account balance at the date of annuitisation and recognising the excess ratably over the accumulation period
based on total expected assessments. The assumptions used for calculating the direct Guaranteed Minimum Income Benefit liability
at 31 December 2015 and 2014 are consistent with those used for calculating the Guaranteed Minimum Death Benefit and ‘for life’
Guaranteed Minimum Withdrawal Benefit liabilities.
Jackson regularly evaluates estimates used and adjusts the additional Guaranteed Minimum Death Benefit, Guaranteed Minimum
Income Benefit and Guaranteed Minimum Withdrawal Benefit ‘for life’ liability balances, with a related charge or credit to benefit
expense if actual experience or other evidence suggests that earlier assumptions should be revised.
Guaranteed Minimum Income Benefits are essentially fully reinsured, subject to a modest deductible and annual claim limits. As this
reinsurance benefit is net settled, it is considered to be a derivative under IAS 39, and is therefore recognised at fair value with the change
in fair value included as a component of short-term fluctuations. The direct GMIB liability is not considered a derivative instrument under
IAS 39 and, as such, an accounting difference arises from this one-sided mark to market.
Guaranteed Minimum Withdrawal Benefit ‘not for life’ features are considered to be embedded derivatives under IAS 39. Therefore,
provisions for these benefits are recognised at fair value. The change in these guaranteed benefit reserves, along with claim payments
and associated fees included in reserves, are included along with the hedge results in short-term fluctuations, resulting in removal of the
market impact from the operating profit based on longer-term investment returns.
For Guaranteed Minimum Withdrawal Benefit and Guaranteed Minimum Income Benefit reinsurance embedded derivatives that are
fair valued under IAS 39, Jackson bases its volatility assumptions on implied market volatility for periods ranging from 5 to 10 years, where
sufficient market liquidity is assumed to exist, followed by grading to long-term historical volatility levels beyond that point, 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 Benefit, Guaranteed Minimum Income Benefit, Guaranteed Minimum
Withdrawal Benefit and Guaranteed Minimum Accumulation Benefit features of variable annuity contracts, the financial guarantee
features of Jackson’s contracts are in most circumstances not explicitly valued, but the impact of any interest guarantees would be
reflected as they are earned in the current account value (ie the US GAAP liability).
For traditional life insurance contracts, provisions for future policy benefits are determined under US GAAP using the net level
premium method and assumptions as of the issue date as to mortality, interest, policy lapses and expenses plus provisions for
adverse deviation.
Institutional products are accounted for as investment contracts under IFRS with the liability classified as being in respect of financial
instruments rather than insurance contracts, as defined by IFRS 4. In practice there is no material difference between the IFRS and
US GAAP basis of recognition and measurement for these contracts.
231
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C4.2 Products and determining contract liabilities 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.
c UK
Features of products and guarantees
Prudential’s long-term products in the UK consist of life insurance, pension products and pension annuities.
These products are written primarily in:
— One of three separate sub-funds of the PAC long-term fund, namely the with-profits sub-fund (WPSF), Scottish Amicable Insurance
Funds (SAIF), and the non-profit sub-fund;
— Prudential Retirement Income Limited (PRIL), a shareholder-owned subsidiary; or
— Other shareholder-backed subsidiaries writing mainly non-profit unit-linked business.
i With-profits products and PAC with-profits sub-fund
The WPSF mainly contains with-profits business but it also contains some non-profit business (unit-linked, term assurances and
annuities). The WPSF’s profits are apportioned 90 per cent to its policyholders and 10 per cent to shareholders as surplus for distribution
is determined via the annual actuarial valuation.
The WPSF held a provision of £47 million at 31 December 2015 (2014: £50 million) to honour guarantees on a small amount of
guaranteed annuity products. SAIF’s exposure to guaranteed annuities is described below.
With-profits products provide returns to policyholders through bonuses that are ‘smoothed’. There are two types of bonuses:
‘regular’ and ‘final’. Regular bonuses are declared once a year, and once credited, are guaranteed in accordance with the terms of the
particular product. Unlike regular bonuses, final bonuses are guaranteed only until the next bonus declaration.
The main factors that influence the determination of bonus rates are the return on the investments of the with-profits fund, inflation,
taxation, the expenses of the fund chargeable to policyholders and the degree to which investment returns are smoothed. The overall
rate of return earned on investments and the expectation of future investment returns are the most important influences on bonus rates.
A high proportion of the assets backing the with-profits business are invested in equities and real estate. If the financial strength
of the with-profits business is affected, then a higher proportion of fixed interest or similar assets might be held by the fund.
Further details on the determination of the two types of the bonuses: ‘regular’ and ‘final’ are provided below.
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 final bonus which is normally declared yearly, may be added when a claim is paid or when units of a unitised product are realised.
The rates of final bonus usually vary by type of policy and by reference to the period, usually a year, in which the policy commences
or each premium is paid. These rates are determined by reference to the asset shares for the sample policies but subject to the smoothing
approach as explained below.
In general, the same final bonus scale applies to maturity, death and surrender claims except that:
— The total surrender value may be impacted by the application of a Market Value Reduction for accumulating with-profits policies and
by the surrender bases for conventional with-profits business; and
— For the SAIF and Scottish Amicable, the final bonus rates applicable on surrender may be adjusted to reflect expected future bonus rates.
Application of significant judgement
The application of the above method for determining bonuses requires the PAC Board to apply significant judgement in many respects,
including in particular the following:
— Determining what constitutes fair treatment of customers: Prudential is required by UK law and regulation to consider the fair
treatment of its customers in setting bonus levels. The concept of determining what constitutes fair treatment, while established
by statute, is not defined;
— Smoothing of investment returns: This is an important feature of with-profits products. Determining when particular circumstances,
such as a significant rise or fall in market values, warrant variations in the standard bonus smoothing limits that apply in normal
circumstances requires the PAC Board of Directors to exercise significant judgement; and
— Determining at what level to set bonuses to ensure that they are competitive: The overall return to policyholders is an important
competitive measure for attracting new business.
232
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued Key assumptions
As noted above, the overall rate of return on investments and the expectation of future investment returns are the most important
influences in bonus rates, subject to the smoothing described below. Prudential determines the assumptions to apply in respect of these
factors, including the effects of reasonably likely changes in key assumptions, in the context of the overarching discretionary and
smoothing framework that applies to its with-profits business as described above. As such, it is not possible to specifically quantify the
effects of each of these assumptions, or of reasonably likely changes in these assumptions.
Prudential’s approach, in applying significant judgement and discretion in relation to determining bonus rates, is consistent
conceptually with the approach adopted by other firms that manage a with-profits business 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-profits funds.
The principles contain an explanation of how it determines regular and final bonus rates within the discretionary framework that
applies to all with-profits policies, subject to the general legislative requirements applicable. Its purpose is therefore to:
— Explain the nature and extent of the discretion available;
— Show how competing or conflicting interests or expectations of different groups and generations of policyholders, and policyholders
and shareholders are managed so that all policyholders and shareholders are treated fairly; and
— Provide a knowledgeable observer (eg a financial adviser) with an understanding of the material risks and rewards from starting
and continuing to invest in a with-profits policy with Prudential.
Furthermore, in accordance with industry-wide regulatory requirements, the PAC Board has appointed:
— A Chief Actuary who provides the PAC Board with all actuarial advice;
— A With-Profits Actuary whose specific duty is to advise the PAC Board on the reasonableness and proportionality of the manner
in which its discretion has been exercised in applying the Principles and Practices of Financial Management and the manner in which
any conflicting interests have been addressed; and
— A With-Profits Committee of independent individuals, which assesses the degree of compliance with the Principles and Practices
of Financial Management and the manner in which conflicting rights have been addressed.
Smoothing of investment return
In determining bonus rates for the UK with-profits policies, smoothing is applied to the allocation of the overall earnings of the UK
with-profits fund of which the investment return is a significant element. The smoothing approach differs between accumulating and
conventional with-profits policies to reflect the different contract features. In normal circumstances, Prudential does not expect most
payout values on policies of the same duration to change by more than 10 per cent up or down from one year to the next, although
some larger changes may occur to balance payout values between different policies. Greater flexibility may be required in certain
circumstances, for example following a significant rise or fall in market values, and in such situations the PAC Board may decide to vary
the standard bonus smoothing limits in order to protect the overall interests of policyholders.
The degree of smoothing is illustrated numerically by comparing in the following table the relatively ‘smoothed’ level of policyholder
bonuses declared as part of the surplus for distribution, with the more volatile movement in investment return and other items of income
and expenditure of the UK component of the PAC with-profits fund for each year presented.
2015 £m
2014 £m
Net income of the fund:
Investment return
Claims incurred
Movement in policyholder liabilities
Add back policyholder bonuses for the year (as shown below)
Claims incurred and movement in policyholder liabilities (including charge for provision for asset
shares and excluding policyholder bonuses)
Earned premiums, net of reinsurance
Other income
Acquisition costs and other expenditure
Share of profits from investment joint ventures
Tax charge
Net income of the fund before movement in unallocated surplus
Movement in unallocated surplus
Surplus for distribution
Surplus for distribution allocated as follows:
90% policyholders’ bonus (as shown above)
10% shareholders’ transfers
3,130
(6,745)
(1,307)
1,943
(6,109)
6,507
210
(1,318)
53
(148)
2,325
(168)
2,157
1,943
214
2,157
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
233
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C4.2 Products and determining contract liabilities continued
ii Annuity business
Prudential’s conventional annuities include level, fixed-increase and inflation-linked annuities, the link being to the Retail Price Index
(RPI) in the majority of cases.
Prudential’s fixed-increase annuities incorporate automatic increases in annuity payments by fixed amounts over the policyholder’s
life. The RPI annuities that Prudential offers provide for a regular annuity payment to which an additional amount is added periodically
based on the increase in the UK RPI.
Prudential’s with-profits annuities, which are written in the WPSF, combine the income features of annuity products with the
investment smoothing features of with-profits products and enable policyholders to obtain exposure to investment return on the WPSF’s
equity shares, property and other investment categories over time. Policyholders select a ‘required smoothed return’ bonus from the
specific range Prudential offers for the particular product. The amount of the annuity payment each year depends upon the relationship
between the required smoothed return bonus rate selected by the policyholder when the product is purchased and the smoothed return
bonus rates Prudential subsequently declares each year during the term of the product. If the total bonus rates fall below the anticipated
rate, then the annuity income falls.
iii SAIF
SAIF is a ring-fenced sub-fund of the PAC long-term fund formed following the acquisition of the mutually owned Scottish Amicable Life
Assurance Society in 1997. No new business may be written in SAIF, although regular premiums are still being paid on policies in force
at the time of the acquisition and incremental premiums are permitted on these policies.
The fund is solely for the benefit of policyholders of SAIF. Shareholders have no interest in the profits of this fund although they are
entitled to asset management fees on this business.
The process for determining policyholder bonuses of SAIF with-profits policies, which constitute the vast majority of obligations of the
funds, is similar to that for the with-profits policies of the WPSF. However, in addition, the surplus assets in SAIF are allocated to policies
in an orderly and equitable distribution over time as enhancements to policyholder benefits ie in excess of those based on asset share.
Provision is made for the risks attaching to some SAIF unitised with-profits policies that have (Market Value Reduction) MVR-free dates and
for those SAIF products which have a guaranteed minimum benefit on death or maturity of premiums accumulated at 4 per cent per annum.
The Group’s main exposure to guaranteed annuities in the UK is through SAIF and a provision of £412 million was held in SAIF at
31 December 2015 (2014: £549 million) to honour the guarantees. As SAIF is a separate sub-fund solely for the benefit of policyholders
of SAIF, this provision has no impact on the financial position of the Group’s shareholders’ equity.
iv Unit-linked (non-annuity) and other non-profit business
Prudential UK insurance operations also have an extensive book of unit-linked policies of varying types and provide a range of other
non-profit business such as credit life and protection contracts. These contracts do not contain significant financial guarantees.
There are no guaranteed maturity values or guaranteed annuity options on unit-linked policies except for minor amounts for certain
policies linked to cash units within SAIF.
Determining contract liabilities
i Overview
The calculation of the contract liabilities involves the setting of assumptions for future experience. This is done following detailed review
of the relevant experience including in particular mortality, expenses, tax, economic assumptions and, where applicable, persistency.
For with-profits business written in the WPSF or SAIF, a market consistent valuation is performed (as described in section (ii) below).
Additional assumptions required are for persistency and the management actions under which the fund is managed. Assumptions used
for a market-consistent valuation typically do not contain margins, whereas those used for the valuation of other classes of business do.
Mortality assumptions are set based on the results of the most recent experience analysis looking at the experience over recent years
of the relevant business. For non-profit business, a margin for adverse deviation is added. Different assumptions are applied for different
product groups. For annuitant mortality, assumptions for current mortality rates are based on recent experience investigations and
expected future improvements in mortality. The expected future improvements are based on recent experience and projections of the
business and industry experience generally.
Maintenance and, for some classes of business, termination expense assumptions are expressed as per policy amounts. They are set
based on the expenses incurred during the year, including an allowance for ongoing investment expenditure and allocated between
entities and product groups in accordance with the operation’s internal cost allocation model. For non-profit business a margin for
adverse deviation is added to this amount. Expense inflation assumptions are set consistent with the economic basis and based on the
difference between yields on nominal gilts and index-linked gilts.
The actual renewal expenses incurred on behalf of SAIF by other Group companies are recharged in full to SAIF.
The assumptions for asset management expenses are based on the charges specified in agreements with the Group’s asset
management operations, plus a margin for adverse deviation for non-profit business.
Tax assumptions are set equal to current rates of taxation.
For non-profit business excluding unit-linked business, the valuation interest rates used to discount the liabilities are based on the
yields as at the valuation date on the assets backing the technical provisions. For fixed interest securities the gross redemption yield is
used except for the non-profit 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 lower of the rental yield and the redemption yield, and for equities it is the greater of the
dividend yield and the average of the dividend yield and the earnings yield. An adjustment is made to the yield on non-risk-free fixed
interest securities and property to reflect credit risk. To calculate the non-unit reserves for linked business, assumptions have been set for
the gross unit growth rate and the rate of inflation of maintenance expenses, as well as for the valuation interest rate as described above.
234
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued ii WPSF and SAIF
The policyholder liabilities reported for the WPSF are primarily for two broad types of business. These are accumulating and
conventional with-profits contracts. The policyholder liabilities of the WPSF are accounted for under FRS 27.
The provisions have been determined on a basis consistent with the detailed methodology included in regulations contained in the
PRA’s rules for the determination of reserves on the PRA’s ‘realistic’ Peak 2 basis. In aggregate, the regime has the effect of placing a value
on the liabilities of UK with-profits contracts, which reflects the amounts expected to be paid based on the current value of investments
held by the with-profits funds and current circumstances. These contracts are a combination of insurance and investment contracts with
discretionary participation features, as defined by IFRS 4.
The PRA’s Peak 2 calculation under the realistic regime requirement is explained further in note A3.1(d) under the UK regulated
with-profits section.
The contract liabilities for with-profits business also require assumptions for persistency. These are set based on the results of recent
experience analysis.
The process of determining policyholder liabilities of SAIF is similar to that for the with-profits policies of the WPSF.
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 2014 model was
used to produce the 2015 results and the CMI 2012 model was used to produce the 2014 results; both calibrated to reflect an appropriate
view of future mortality improvements.
For annuities in payment, the tables and range of percentages used are set out below:
2015
2014
CMI Model, with calibration to reflect
future mortality improvements
CMI 2014
CMI 2012
For males: with a long-term
improvement rate of 2.25% pa
For females: with a long-term
improvement rate of 1.50% pa
For males: with a long-term
improvement rate of 2.25% pa
For females: with a long-term
improvement rate of 1.50% pa
Non-profit annuities
within the WPSF
PRIL
Males
Females
Males
Females
95% – 97%
PCMA00
91% – 103%
PCFA00
93%
PCMA00
83% – 96%
PCFA00
93% – 99%
PCMA00
89% – 101%
PCFA00
91% – 95%
PCMA00
84% – 98%
PCFA00
For annuities in deferment, the tables used by both the non-profit annuities within the WPSF and PRIL were AM92 – 4 years (Males) and
AF92 – 4 years (Females) for 2015 and 2014.
iv Unit-linked (non-annuity) and other non-profit business
The majority of other long-term business written in the UK insurance operations is unit-linked business or other business with similar
features. For these contracts the attaching liability reflects the unit value obligation and provision for expenses and mortality risk.
The latter component is determined by applying mortality assumptions on a basis that is appropriate for the policyholder profile.
For unit-linked business, the assets covering unit liabilities are exposed to market risk, but the residual risk when considering the
unit-linked liabilities and assets together is limited to the effect on fund-based charges.
For those contracts where the level of insurance risk is insignificant, the assets and liabilities arising under the contracts are
distinguished between those that relate to the financial instrument liability and acquisition costs and deferred income that relate to the
component of the contract that relates to investment management. Acquisition costs and deferred income are recognised consistent
with the level of service provision in line with the requirements of IAS 18.
v Effect of changes in assumptions used to measure insurance assets and liabilities
Credit risk
There has been no change of approach in the setting of assumption levels of credit risk in 2015 and 2014. However, changes in the
portfolio have given rise to altered levels of credit risk allowance as set out in note B4(b).
Other assumption changes
The effect of other assumption changes for the shareholder-backed business is set out in note B4(b).
For the with-profits sub-fund, the aggregate effect of assumption changes in 2015 was a net charge to unallocated surplus
of £114 million (2014: net charge of £86 million).
235
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc C5: Intangible assets
C5.1 Intangible assets attributable to shareholders
a Goodwill attributable to shareholders
Cost
At beginning of year
Disposal of Japan life business
Additional consideration paid on previously acquired business
Exchange differences
At end of year
Aggregate impairment
Net book amount at end of year
Goodwill attributable to shareholders comprises:
M&G
Other
2015 £m
2014 £m
1,583
(120)
2
(2)
1,463
–
1,463
1,581
–
–
2
1,583
(120)
1,463
2015 £m
2014 £m
1,153
310
1,463
1,153
310
1,463
Other goodwill represents amounts allocated to entities in Asia and the US operations. These goodwill amounts are not individually material.
The aggregate goodwill impairment of £120 million at 31 December 2014 related to the goodwill held by the Japan life business, prior
to its sale in February 2015.
Impairment testing
Goodwill does not generate cash flows independently of other groups of assets and thus is assigned to cash-generating units for the
purposes of impairment testing. These cash-generating units are based upon how management monitors the business and represent
the lowest level to which goodwill can be allocated on a reasonable basis.
Assessment of whether goodwill may be impaired
Goodwill is tested for impairment by comparing the cash-generating units’ carrying amount, including any goodwill, with its
recoverable amount.
With the exception of M&G, the goodwill attributable to shareholders mainly relates to acquired life businesses. The Company
routinely compares the aggregate of net asset value and acquired goodwill on an IFRS basis of acquired life business with the value
of the business as determined using the EEV methodology, as described in note 13. Any excess of IFRS over EEV carrying value is then
compared with EEV basis value of current and projected future new business to determine whether there is any indication that the
goodwill in the IFRS statement of financial position may be impaired. The assumptions underpinning the Group’s EEV basis of reporting
are included in the EEV basis supplementary information in this Annual Report.
M&G
The recoverable amount for the M&G cash-generating units has been determined by calculating its value in use. This has been calculated
by aggregating the present value of future cash flows expected to be derived from the M&G operating segment (based upon
management projections).
The discounted cash flow valuation has been based on a three-year plan prepared by M&G, and approved by management, and cash
flow projections for later years.
The value in use is particularly sensitive to a number of key assumptions as follows:
i
ii
iii
The set of economic, market and business assumptions used to derive the three-year plan. The direct and secondary effects of recent
developments, eg changes in global equity markets, are considered by management in arriving at the expectations for the financial
projections for the plan;
The assumed growth rate on forecast cash flows beyond the terminal year of the plan. A growth rate of 2.5 per cent (2014:
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 (2014: 12 per cent) has been applied to post-tax
cash flows. The pre-tax risk discount rate was 16 per cent (2014: 16 per cent). Management have determined the risk discount rate
by reference to an average implied discount rate for comparable UK listed asset managers calculated by reference to risk-free rates,
equity risk premiums of 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.
236
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued b Deferred acquisition costs and other intangible assets attributable to shareholders
The deferred acquisition costs and other intangible assets attributable to shareholders comprise:
Deferred acquisition costs related to insurance contracts as classified under IFRS 4
Deferred acquisition costs related to investment management contracts, including life assurance
contracts classified as financial instruments and investment management contracts under IFRS 4
Present value of acquired in-force policies for insurance contracts as classified under IFRS 4 (PVIF)
Distribution rights and other intangibles
Total of deferred acquisition costs and other intangible assets
2015 £m
2014 £m
6,948
74
7,022
45
1,355
1,400
8,422
5,840
87
5,927
59
1,275
1,334
7,261
2015 £m
2014 £m
Balance at 1 January
Additions
Amortisation to the income statement:†
Operating profit
Non-operating profit
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
Deferred acquisition costs
Asia
650
265
(138)
–
(138)
–
4
US
5,177
734
(516)
93
(423)
–
323
–
781
337
6,148
UK
83
10
(12)
–
(12)
–
–
–
81
Asset
management
PVIF and
other
intangibles*
1,334
181
(91)
–
(91)
(8)
(16)
Total
7,261
1,190
(762)
93
(669)
(8)
311
Total
5,295
1,768
(696)
653
(43)
(6)
334
–
1,400
337
8,422
(87)
7,261
17
–
(5)
–
(5)
–
–
–
12
* PVIF and other intangibles include amounts in relation to software rights with additions of £34 million, amortisation of £29 million and a balance at 31 December 2015
of £71 million.
† Under the Group’s application of IFRS 4, US GAAP is used for measuring the insurance assets and liabilities of its US and certain Asia operations. Under US GAAP, most
of Jackson’s products are accounted for under Accounting Standard no. 97 of the Financial Accounting Standards Board (FAS 97) whereby deferred acquisition costs
are amortised in line with the emergence of actual and expected gross profits. The amounts included in the income statements and Other Comprehensive Income
affect the pattern of profit emergence and thus the DAC amortisation attaching. DAC amortisation is allocated to the operating and non-operating components of the
Group’s supplementary analysis of profit and Other Comprehensive Income by reference to the underlying items.
Note
PVIF and other intangibles comprise PVIF, distribution rights and other intangibles such as software 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 fixed period of time.
US insurance operations
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
2015 £m
2014 £m
5,713
703
(268)
6,148
5,002
759
(584)
5,177
* Consequent upon the negative unrealised valuation movement in 2015 of £1,305 million (2014: positive unrealised valuation movement of £956 million), there
is a gain of £337 million (2014: a charge of £87 million) for altered shadow DAC amortisation booked within other comprehensive income. These adjustments reflect
movement from period to period, in the changes to the pattern of reported gross profits that would have occurred if the assets reflected in the statement of financial
position had been sold, crystallising the unrealised gains and losses, and the proceeds reinvested at the yields currently available in the market. At 31 December 2015,
the cumulative shadow DAC balance as shown in the table above was negative £268 million (2014: negative £584 million).
237
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C5.1 Intangible assets attributable to shareholders 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 profits
on the relevant contracts. For fixed and fixed index annuity and interest-sensitive life business, the key assumption is the long-term
spread between the earned rate on investments and the rate credited to policyholders, which is based on an annual spread analysis.
Expected gross profits also depend on mortality assumptions, assumed unit costs and terminations other than deaths (including the
related charges), all of which are based on a combination of actual experience of Jackson, industry experience and future expectations.
A detailed analysis of actual mortality, lapse and expense experience is performed using internally developed experience studies.
Acquisition costs for Jackson’s variable annuity products are also amortised in line with the emergence of profits. The measurement
of amortisation depends on historical and expected future gross profits which include fees (including those for guaranteed minimum
death, income, or withdrawal benefits) as well as components related to mortality, lapse and expense.
Mean reversion technique
For variable annuity products, under US GAAP (as ‘grandfathered’ under IFRS 4) Jackson applies a mean reversion technique for its
amortisation of deferred acquisition costs against projected gross profits. This technique is applied with the objective of adjusting the
amortisation of deferred acquisition costs that would otherwise be highly volatile due to fluctuations in the level of future gross profits
arising from changes in equity market levels. The mean reversion technique achieves this objective by applying a dynamic adjustment
to the assumption for short-term future investment returns. Under the mean reversion technique applied by Jackson, the projected level
of return for each of the next five years is adjusted from period to period so that in combination with the actual rates of return for the
preceding three years, including the current period, the 7.4 per cent long-term annual return (gross of asset management fees and other
charges to policyholders, but net of external fund management fees) 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 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 floor feature whereby the projected returns in each of the next five years can be
no more than 15 per cent per annum and no less than 0 per cent per annum (both gross of asset management fees and other charges
to policyholders, but net of external fund management fees) in each year.
Sensitivity of amortisation charge
The amortisation charge to the income statement is reflected in both operating profit and short-term fluctuations in investment returns.
The amortisation charge to the operating profit in a reporting period comprises:
i A core amount that reflects a relatively stable proportion of underlying premiums or profit; and
ii An element of acceleration or deceleration arising from market movements differing from expectations.
In periods where the cap and floor feature of the mean reversion technique are not relevant, the technique operates to dampen the
second element above. Nevertheless, extreme market movements can cause material acceleration or deceleration of amortisation
in spite of this dampening effect.
Furthermore, in those periods where the cap or floor is relevant, the mean reversion technique provides no further dampening
and additional volatility may result.
In 2015, the DAC amortisation charge for operating profit was determined after including a charge for accelerated amortisation of
£2 million (2014: charge for accelerated amortisation of £13 million). The 2015 amount primarily reflects the offsetting impacts of the
separate account performance of negative 2 per cent, which is lower than the assumed level for the year, and the effect of releasing the
2012 fund returns of 11 per cent from the mean reversion formula.
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. In 2016, it would take approximate movements
in separate account values of more than either negative 17 per cent or positive 67 per cent for the mean reversion assumption to move
outside the corridor.
238
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued 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 classified as available-for-sale note (i)
DAC at 31 December
2015 £m
2014 £m
Insurance
contracts
Investment
management
note (i)
Insurance
contracts
Investment
management
note (i)
5,840
1,007
(566)
330
337
6,948
87
3
(16)
–
–
74
4,684
895
33
315
(87)
5,840
96
8
(17)
–
–
87
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
Present value of acquired in-force (PVIF) and other intangibles attributable to shareholders
2015 £m
2014 £m
144
(70)
74
234
(147)
87
At 1 January
Cost
Accumulated amortisation
Additions
Amortisation charge
Disposals
Exchange differences and other
movements
At 31 December
Comprising:
Cost
Accumulated amortisation
2015 £m
Other intangibles
PVIF
note (i)
Distribution
rights
note (ii)
Other
intangibles
(including
software)
note (iii)
2014 £m
Other intangibles
Total
PVIF
note (i)
Distribution
rights
Other
intangibles
(including
software)
note (ii)
222
(163)
59
–
(8)
–
(6)
45
209
(164)
45
1,269
(82)
1,187
139
(50)
(8)
(10)
1,258
1,387
(129)
1,258
238
(150)
88
42
(33)
–
–
97
278
(181)
97
1,729
(395)
1,334
181
(91)
(8)
(16)
1,400
1,874
(474)
1,400
221
(154)
67
–
(9)
–
1
59
222
(163)
59
458
(66)
392
808
(24)
(6)
17
1,187
1,269
(82)
1,187
203
(147)
56
57
(26)
(0)
1
88
238
(150)
88
Total
882
(367)
515
865
(59)
(6)
19
1,334
1,729
(395)
1,334
Notes
(i)
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 profits emerge.
(ii) Distribution rights relate to fees paid in relation to the bancassurance partnership arrangements for the bank distribution of Prudential’s insurance products
for a fixed period of time. The distribution rights amounts are amortised over the term of the distribution contracts.
(iii) Software is amortised over its useful economic life, which generally represents the licence period of the software acquired.
239
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C5.2 Intangible assets attributable to with-profits funds
a Goodwill in respect of acquired investment subsidiaries for venture fund and other investment purposes
At 1 January
Additions in the year
Impairment
Exchange differences
At 31 December
2015 £m
2014 £m
186
–
–
(1)
185
177
10
–
(1)
186
All the goodwill relates to the UK insurance operations segment.
The venture fund investments consolidated by the Group relates to investments of the PAC with-profits fund which are managed
by M&G for which the goodwill is shown in the table above. Goodwill is tested for impairment of these investments by comparing the
investment’s carrying value including goodwill with its recoverable amount (fair value less costs to sell).
b Deferred acquisition costs and other intangible assets
Other intangible assets in the Group consolidated statement of financial position attributable to with-profits funds consist of:
Deferred acquisition costs related to insurance contracts attributable to the PAC with-profits fund note (i)
Distribution rights attributable to with-profits funds of the Asia insurance operations note (ii)
Computer software attributable to with-profits funds
2015 £m
2014 £m
3
27
20
50
3
47
11
61
Notes
(i)
The above costs relate to non-participating business written by the PAC with-profits sub-fund. As the with-profits contracts are accounted for under the
UK regulatory ‘realistic basis’, no deferred acquisition costs are established for this type of business.
(ii) Distribution rights relate to fees paid in relation to the bancassurance partnership arrangements for the bank distribution of Prudential’s insurance products
for a fixed period of time. The distribution rights amounts are amortised over the term of the distribution contracts.
240
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued C6: Borrowings
C6.1 Core structural borrowings of shareholder-financed operations
Holding company operations:
US$1,000m 6.5% Notes
US$250m 6.75% Notes note (v)
US$300m 6.5% Notes note (v)
US$700m 5.25% Notes note (v)
US$550m 7.75% Notes note (v)
Perpetual Subordinated Capital Securities note (i)
¤20m Medium Term Notes 2023 note (vi)
£435m 6.125% Notes 2031
£400m 11.375% Notes 2039
£600m 5% Notes 2055 note (iv)
£700m 5.7% Notes 2063
Subordinated Notes
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 note (vii)
Total (per consolidated statement of financial position)
2015 £m
2014 £m
678
170
203
472
372
641
160
193
444
351
1,895
1,789
15
430
393
590
695
2,123
4,018
300
249
4,567
275
169
5,011
16
429
391
–
695
1,531
3,320
300
249
3,869
275
160
4,304
Notes
(i)
The Group has designated all US$2.8 billion (2014: US$2.8 billion) of its 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
(iv)
(v)
also maturing on 20 December 2017. These two tranches are currently drawn at a cost of 12-month £LIBOR plus 0.40 per cent.
In June 2015, the Company issued core structural borrowings of £600 million 5.00 per cent subordinated notes due in 2055. The proceeds net of discount
adjustment and costs, were £590 million.
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.
(vi) 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.
(vii) Jackson’s borrowings are unsecured and subordinated to all present and future indebtedness, policy claims and other creditor claims of Jackson.
C6.2 Other borrowings
a Operational borrowings attributable to shareholder-financed operations
Commercial Paper
Medium Term Notes 2015
Medium Term Notes 2018 note (ii)
Borrowings in respect of short-term fixed income securities programmes note (ii)
Non-recourse borrowings of US operations
Bank loans and overdrafts
Obligations under finance leases
Other borrowings note (iii)
Other borrowings
Total note (i),(iv)
2015 £m
2014 £m
1,107
–
598
1,705
–
10
4
241
255
1,704
300
–
2,004
19
6
4
230
240
1,960
2,263
241
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C6: Borrowings continued
C6.2 Other borrowings continued
Notes
(i)
In addition to the debt listed above, £200 million Floating Rate Notes were issued by Prudential plc in October 2015 which will mature in October 2016.
These Notes have been wholly subscribed to a Group subsidiary and accordingly have been eliminated on consolidation in the Group financial statements.
These Notes were originally issued in October 2008 and have been reissued upon their maturity.
In January and November 2015, the Company issued £300 million Medium Term Notes which will mature in January 2018 and November 2018 respectively.
The proceeds, net of costs, were £299 million for the January 2015 issue and £299 million for the November 2015 issue.
(ii)
(iii) Other borrowings mainly include amounts whose repayment to the lender is contingent upon future surplus emerging from certain contracts specified under
the arrangement. If insufficient surplus emerges on those contracts, there is no recourse to other assets of the Group and the liability is not payable to the degree
of shortfall. In addition, other borrowings include senior debt issued through the Federal Home Loan Bank of Indianapolis (FHLB), secured by collateral posted
with the FHLB by Jackson.
In all instances the holders of the debt instruments issued by these subsidiaries and funds do not have recourse beyond the assets of those subsidiaries and
funds.
(iv)
b Borrowings attributable to with-profits operations
Non-recourse borrowings of consolidated investment funds*
£100m 8.5% undated subordinated guaranteed bonds of Scottish Amicable Finance plc†
Other borrowings (predominantly obligations under finance leases)
Total
2015 £m
2014 £m
1,158
100
74
1,332
924
100
69
1,093
* In all instances the holders of the debt instruments issued by these subsidiaries and funds do not have recourse beyond the assets of these subsidiaries and funds.
† 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 as recognised in the statement
of financial position:
Less than 1 year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
Over 5 years
Total
Shareholder-financed operations
With-profits operations
Core structural borrowings
Operational borrowings
Borrowings
2015 £m
2014 £m
2015 £m
2014 £m
2015 £m
2014 £m
–
275
–
–
–
4,736
5,011
–
–
275
–
–
4,029
4,304
1,293
–
598
–
–
69
1,960
2,153
9
1
–
65
35
2,263
137
226
168
36
32
733
119
50
65
74
31
754
1,332
1,093
C7: Risk and sensitivity analysis
C7.1 Group overview
The Group’s risk framework and the management of the risk including those attached to the Group’s financial statements including
financial assets, financial liabilities and insurance liabilities, together with the inter-relationship with the management of capital have been
included in the audited sections of Group Chief Risk Officer’s report on the risks facing our business and how these are managed.
The financial 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 profit or loss and shareholders’ equity.
The market and insurance risks, including how they affect Group’s operations and how these are managed are discussed in the Group
Chief Risk Officer’s report.
The most significant items for which the IFRS shareholders’ profit or loss and shareholders’ equity for the Group’s life assurance
business is sensitive to, are shown in the following tables. The distinction between direct and indirect exposure is not intended to indicate
the relative size of the sensitivity.
242
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued
Type of business
Market and credit risk
Insurance and lapse risk
Asia insurance operations (see also section C7.2)
Investments/derivatives
Liabilities/unallocated surplus Other exposure
All business
Currency risk
With-profits business Net neutral direct exposure (indirect exposure only)
Unit-linked business
Net neutral direct exposure (indirect exposure only)
Mortality and
morbidity risk
Persistency risk
Investment performance
subject to smoothing
through declared bonuses
Investment performance
through asset
management fees
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
Interest rate and price risk
US insurance operations (see also section C7.3)
All business
Variable annuity
business
Fixed index annuity
business
Fixed index annuities,
Fixed annuities and
GIC 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
Incidence of equity
participation features
Derivative hedge programme
to the extent not fully hedged
against liability
Credit risk
Interest rate risk
Profit and loss and
shareholders’ equity are
volatile for these risks as they
affect the values of derivatives
and embedded derivatives
and impairment losses. In
addition, shareholders’ equity
is volatile for the incidence of
these risks on unrealised
appreciation of fixed income
securities classified as
available-for-sale under IAS 39
Spread difference
between earned rate
and rate credited to
policyholders
Lapse risk, but the
effects of extreme
events are mitigated by
the application of market
value adjustments
UK insurance operations (see also section C7.4)
With-profits 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)
Shareholder-backed
annuity business
Asset/liability mismatch risk
Credit risk for assets covering
liabilities and shareholder
capital
Interest rate risk for assets in
excess of liabilities, ie assets
representing shareholder
capital
Investment performance
subject to smoothing
through declared bonuses
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
243
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc C7: Risk and sensitivity analysis continued
C7.1 Group overview continued
Detailed analyses of sensitivity of IFRS basis profit or loss and shareholders’ equity to key market and other risks by business unit are
provided in notes C7.2, C7.3, C7.4 and C7.5. The sensitivity analyses provided show the effect on profit or loss and shareholders’ equity
to changes in the relevant risk variables, all of which are reasonably possible at the relevant balance sheet date. 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 diversification on risk exposure
The Group enjoys significant diversification benefits achieved through the geographical spread of the Group’s operations and, within
those operations through a broad mix of 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-financial risk factors.
Correlation across risk factors:
— Longevity risk;
— Expenses;
— Persistency; and
— Other risks.
The effect of diversification across the Group’s life businesses is to significantly reduce the aggregate standalone volatility risk to IFRS
operating profit based on longer-term investment returns. The effect is almost wholly explained by the correlations across risk types, in
particular mortality and longevity risk.
C7.2 Asia insurance operations
Exposure and sensitivity of IFRS basis profit and shareholders’ equity to market and other risks
The Asia operations sell with-profits and unit-linked policies and, although the with-profits business generally has a lower terminal bonus
element than in the UK, the investment portfolio still contains a proportion of equities. Non-participating business is largely backed by
debt securities or deposits. The Group’s exposure to market risk arising from its Asia operations is therefore at modest levels. This reflects
the fact that the Asia operations have a balanced portfolio of with-profits, unit-linked and other types of business.
In Asia, adverse persistency experience can impact the IFRS profitability of certain types of business written in the region. This risk is
managed at a business unit level through regular monitoring of experience and the implementation of management actions as necessary.
These actions could include product enhancements, increased management focus on premium collection as well as other customer
retention efforts. The potential financial impact of lapses is often mitigated through the specific features of the products, eg surrender
charges, or through the availability of premium holiday or partial withdrawal policy features.
In summary, for Asia operations, the operating profit based on longer-term investment returns is mainly affected by the impact of
market levels on unit-linked persistency, and other insurance risks. At the total IFRS profit level the Asia result is affected by short-term
value movements on the asset portfolio for non-linked shareholder-backed business.
i Sensitivity to risks other than foreign exchange risk
With-profits business
Similar principles to those explained for UK with-profits business in note C7.4 apply to profit emergence for the Asia with-profits
business. Correspondingly, the profit emergence reflects bonus declaration and is relatively insensitive to period by period fluctuations
in insurance risk or interest rate movements.
Unit-linked business
As for the UK insurance operations, for unit-linked business, the main factor affecting the profit and shareholders’ equity of the Asia
operations is investment performance through asset management fees. The sensitivity of profits and shareholders’ equity to changes
in insurance risk, interest rate risk and credit risk are not material.
Other business
Interest rate risk
Excluding its with-profits and unit-linked businesses, the results of the Asia business are sensitive to the vagaries of routine movements
in interest rates.
244
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued 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 2015, 10-year government bond rates vary from territory to territory and range
from 1.0 per cent to 8.9 per cent (2014: 1.6 per cent to 8.0 per cent).
For the sensitivity analysis as shown in the table below, the reasonably possible interest rate movement used is 1.0 per cent
for all territories.
The estimated sensitivity to the decrease and increase in interest rates at 31 December 2015 and 2014 is as follows:
Profit before tax attributable to shareholders
Related deferred tax (where applicable)
Net effect on profit and shareholders’ equity
2015 £m
2014 £m
Decrease
of 1%
Increase
of 1%
Decrease
of 1%
Increase
of 1%
185
(34)
151
(339)
59
(280)
(54)
(5)
(59)
(137)
24
(113)
The pre-tax impacts, if they arose, would mostly be recorded within the category short-term fluctuations in investments returns in the
Group’s segmental analysis of profit before tax.
The degree of sensitivity of the results of the non-linked shareholder-backed business of the Asia operations to movements in interest
rates depends upon the degree to which the liabilities under the ‘grandfathered’ IFRS 4 measurement basis reflects market interest rates
from period to period. For example for those countries, such as those applying US GAAP, the results can be more sensitive as the effect
of interest rate movements on the backing investments may not be offset by liability movements.
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.
The low interest rates in certain countries have had an adverse impact on the degree of sensitivity to a decrease in interest rates.
An additional factor to the direction of the sensitivity of the Asia operations as a whole is movement in the country mix.
Equity price risk
The non-linked shareholder business has limited exposure to equity and property investment (31 December 2015: £840 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 reflected in the short-term fluctuations component of the Group’s segmental analysis of profit before tax,
at 31 December 2015 and 2014 would be as follows:
Profit before tax attributable to shareholders
Related deferred tax (where applicable)
Net effect on profit and shareholders’ equity
2015 £m
Decrease
2014 £m
Decrease
of 20%
of 10%
of 20%
of 10%
(169)
21
(148)
(85)
10
(75)
(187)
23
(164)
(93)
11
(82)
A 10 or 20 per cent increase in their value would have an approximately equal and opposite effect on profit and shareholders’ equity
to the sensitivities shown above. The market risk sensitivities shown above reflect the impact of temporary market movements and,
therefore, the primary effect of such movements would, in the Group’s segmental analysis of profits, be included within the short-term
fluctuations in investment returns.
Insurance risk
Many of the territories in Asia are exposed to mortality/morbidity risk and provision is made within policyholder liabilities on a prudent
regulatory basis to cover the potential exposure. If these prudent assumptions were strengthened by 5 per cent then it is estimated that
post-tax profit and shareholders’ equity would be decreased by approximately £43 million (2014: £40 million). Mortality and morbidity
have a symmetrical effect on the portfolio and any weakening of these assumptions would have a similar equal and opposite impact.
245
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C7: Risk and sensitivity analysis continued
C7.2 Asia insurance operations continued
ii Sensitivity to foreign exchange risk
Consistent with the Group’s accounting policies, the profits of the Asia insurance operations are translated at average exchange rates and
shareholders’ equity at the closing rate for the reporting period. For 2015, the rates for the most significant 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 profit before tax attributable to shareholders, profit for the year and shareholders’ equity, excluding goodwill
attributable to Asia operations respectively as follows:
Profit before tax attributable to shareholders
Profit for the year
Shareholders’ equity, excluding goodwill, attributable to Asia operations
A 10% increase in local currency
to £ exchange rates
A 10% decrease in local currency
to £ exchange rates
2015 £m
2014 £m
2015 £m
2014 £m
(94)
(79)
(367)
(111)
(95)
(315)
115
97
449
135
117
384
C7.3 US insurance operations
Exposure and sensitivity of IFRS basis profit and shareholders’ equity to market and other risks
At the level of operating profit based on longer-term investment returns, Jackson’s results are sensitive to market conditions to the extent
of income earned on spread-based products and 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 92 per cent
(2014: 94 per cent) of its general account investments support fixed interest rate and fixed index annuities, variable annuity fixed account
deposits and guarantees, life business and surplus and 8 per cent (2014: 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 fixed income or fixed maturity.
Jackson is exposed primarily to the following risks:
Risks
Equity risk
Risk of loss
— related to the incidence of benefits related to guarantees issued in connection with its variable
annuity contracts; and
— related to meeting contractual accumulation requirements in fixed index annuity contracts.
Interest rate risk
— related to meeting guaranteed rates of accumulation on fixed annuity products following a sharp
and sustained fall in interest rates;
— related to increases in the present value of projected benefits related to guarantees issued in
connection with its variable annuity contracts following a sharp and sustained fall in interest rates
in conjunction with a fall in equity markets;
— related to the surrender value guarantee features attached to the Company’s fixed annuity 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 profit (ie including short-term fluctuations in investment returns) is sensitive
to market movements. In addition to these effects the Jackson shareholders’ equity is sensitive to the impact of interest rate and credit
spread movements on the value of fixed income securities. Movements in unrealised appreciation on these securities are included
as movement in shareholders’ equity (ie outside the income statement).
246
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued Jackson enters into financial derivative transactions, including those noted below to reduce and manage business risks.
These transactions manage the risk of a change in the value, yield, price, cash flows or quantity of, or a degree of exposure with respect
to assets, liabilities or future cash flows, which Jackson has acquired or incurred.
Jackson uses free-standing derivative instruments for hedging purposes. Additionally, certain liabilities, primarily trust instruments
supported by funding agreements, fixed index annuities, certain Guaranteed Minimum Withdrawal Benefit variable annuity features and
reinsured Guaranteed Minimum Income Benefit variable annuity features contain embedded derivatives as defined by IAS 39, ‘Financial
Instruments: Recognition and Measurement’. Jackson does not account for such derivatives as either fair value or cash flow hedges as
might be permitted if the specific hedge documentation requirements of IAS 39 were followed. Financial derivatives, including
derivatives embedded in certain host liabilities that have been separated for accounting and financial reporting purposes are carried
at fair value.
Value movements on the derivatives are reported within the income statement. In preparing Jackson’s segment profit as shown in
note B1.1 value movements on Jackson’s derivative contracts, are included within short-term fluctuations in investment returns and
excluded from operating results based on longer-term investment returns.
The principal types of derivatives used by Jackson and their purpose are as follows:
Derivative
Purpose
Interest rate swaps
Swaption contracts
Equity index futures contracts
and equity index options
Cross-currency swaps
Credit default swaps
These generally involve the exchange of fixed and floating payments over the period for which Jackson
holds the instrument without an exchange of the underlying principal amount. These agreements are
used for hedging purposes.
These contracts provide the purchaser with the right, but not the obligation, to require the writer to pay
the present value of a long-duration interest rate swap at future exercise dates. Jackson both purchases
and writes swaptions in order to hedge against significant 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 certain VA guarantees. Some of these
annuities and guarantees contain embedded options which are fair valued for financial reporting
purposes.
Cross-currency swaps, which embody spot and forward currency swaps and additionally, in some
cases, interest rate swaps and equity index swaps, are entered into for the purpose of hedging
Jackson’s foreign currency denominated funding agreements supporting trust instrument obligations.
These swaps, represent agreements under which Jackson has purchased default protection on certain
underlying corporate bonds held in its portfolio. These contracts allow Jackson to sell the protected
bonds at par value to the counterparty if a default event occurs in exchange for periodic payments
made by Jackson for the life of the agreement. Jackson does not write default protection using credit
derivatives.
The estimated sensitivity of Jackson’s profit and shareholders’ equity to equity and interest rate risks provided below is net of the related
changes in amortisation of DAC. The effect on the related changes in amortisation of DAC provided is based on the current
‘grandfathered’ US GAAP DAC basis but does not include any effect from an acceleration or deceleration of amortisation of DAC.
247
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C7.3 US insurance operations continued
i Sensitivity to equity risk
At 31 December 2015 and 2014, Jackson had variable annuity contracts with guarantees, for which the net amount at risk (‘NAR’)
is defined as the amount of guaranteed benefit in excess of current account value, as follows:
31 December 2015
Return of net deposits plus a minimum return
GMDB
GMWB – Premium only
GMWB*
GMAB – Premium only
Highest specified anniversary account value minus withdrawals
post-anniversary
GMDB
GMWB – Highest anniversary only
GMWB*
Combination net deposits plus minimum return, highest
specified anniversary account value minus withdrawals
post-anniversary
GMDB
GMIB‡
GMWB*
31 December 2014
Return of net deposits plus a minimum return
GMDB
GMWB – Premium only
GMWB*
GMAB – Premium only
Highest specified anniversary account value minus withdrawals
post-anniversary
GMDB
GMWB – Highest anniversary only
GMWB*
Combination net deposits plus minimum return, highest
specified anniversary account value minus withdrawals
post-anniversary
GMDB
GMIB‡
GMWB*
Minimum
return
0-6%
0%
0-5%†
0%
Account
value
£m
70,732
1,916
229
45
7,008
2,025
698
0-6%
0-6%
0-8%†
4,069
1,422
63,924
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
Weighted
average
attained age
Period
until
expected
annuitisation
65.3 years
65.4 years
68.3 years
0.5 years
Weighted
average
attained age
Period
until
expected
annuitisation
65.0 years
65.0 years
67.5 years
1.4 years
Net
amount
at risk
£m
2,614
56
23
–
587
202
101
640
518
7,758
Net
amount
at risk
£m
1,463
32
17
–
193
85
58
302
360
2,033
* Amounts shown for Guaranteed Minimum Withdrawal Benefit comprise sums for the ‘not for life’ portion (where the guaranteed withdrawal base less the account
value equals to the net amount at risk (NAR)), and a ‘for life’ portion (where the NAR has been estimated as the present value of future expected benefit payment
remaining after the amount of the ‘not for life’ guaranteed benefits is zero).
† Ranges shown based on simple interest. The upper limits of 5 per cent or 8 per cent simple interest are approximately equal to 4 per cent and 6 per cent respectively,
on a compound interest basis over a typical 10-year bonus period. For example 1 + 10 x 0.05 is similar to 1.04 growing at a compound rate of 4 per cent for a further
nine years.
‡ The GMIB reinsurance guarantees are essentially fully reinsured.
248
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued Account balances of contracts with guarantees were invested in variable separate accounts as follows:
Mutual fund type:
Equity
Bond
Balanced
Money market
Total
2015 £m
2014 £m
55,488
11,535
13,546
832
81,401
50,071
11,139
12,901
675
74,786
As noted above, Jackson is exposed to equity risk through the options embedded in the fixed index annuity liabilities and Guaranteed
Minimum Death Benefit and Guaranteed Minimum Withdrawal Benefit guarantees included in certain variable annuity benefits
as illustrated above. This risk is managed using an equity hedging programme to minimise the risk of a significant economic impact as
a result of increases or decreases in equity market levels while taking advantage of naturally offsetting exposures in Jackson’s operations.
Jackson purchases external futures and options that hedge the risks inherent in these products, while also considering the impact of
rising and falling guaranteed benefit fees.
As a result of this hedging programme, if the equity markets were to increase further in the future, the net effect of Jackson’s
free-standing derivatives would decrease in value. However, over time, this movement would be broadly offset by increased separate
account fees and reserve decreases, net of the related changes to amortisation of deferred acquisition costs. Due to the nature of the
free-standing and embedded derivatives, this hedge, while highly effective on an economic basis, may not completely mute in the
financial reporting the immediate impact of equity market movements as the free-standing derivatives reset immediately while the
hedged liabilities reset more slowly and fees are recognised prospectively. The opposite impact would be observed if the equity markets
were to decrease.
In addition to the exposure explained above, Jackson is also exposed to equity risk from its holding of equity securities, partnerships
in investment pools and other financial derivatives.
At 31 December 2015, the estimated sensitivity of Jackson’s profit and shareholders’ equity to immediate increases and decreases
in equity markets is shown below. The sensitivities are shown net of related changes in DAC amortisation.
2015 £m
2014 £m
Decrease
Increase
Decrease
Increase
of 20%
of 10%
of 20%
of 10%
of 20%
of 10%
of 20%
of 10%
Pre-tax profit, net of related changes in amortisation
of DAC
Related deferred tax effects
Net sensitivity of profit after tax and shareholders’
738
(258)
259
(91)
(86)
30
(128)
45
360
(126)
130
(46)
equity
480
168
(56)
(83)
234
84
8
(3)
5
(25)
9
(16)
Note
The table above has been prepared to exclude the impact of the instantaneous equity movements on the separate account fees. In addition, the sensitivity
movements shown include those relating to the fixed index annuity and the reinsurance of GMIB guarantees.
The above table provides sensitivity movements as at a point in time while the actual impact on financial results would vary contingent
upon the volume of new product sales and lapses, changes to the derivative portfolio, correlation of market returns and various other
factors including volatility, interest rates and elapsed time.
The directional movements in the sensitivities reflect the hedging programme in place at 31 December 2015 and 2014.
249
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C7.3 US insurance operations 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 fixed annuity liabilities of Jackson products is not generally sensitive to interest rate risk. This position derives
from the nature of the products and the US GAAP basis of measurement. The Guaranteed Minimum Withdrawal Benefit features
attached to variable annuity business (other than ‘for life’ components) are accounted for as embedded derivatives which are fair valued
and, therefore, 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 and increase in interest rates at 31 December 2015 and 2014
is as follows:
Profit and loss:
Pre-tax profit effect (net of related changes
in amortisation of DAC)
Related effect on charge for deferred tax
Net profit effect
Other comprehensive income:
Direct effect on carrying value of debt securities
(net of related changes in amortisation of DAC)
Related effect on movement in deferred tax
2015 £m
2014 £m
Decrease
Increase
Decrease
Increase
of 2%
of 1%
of 1%
of 2%
of 2%
of 1%
of 1%
of 2%
(1,776)
621
(1,155)
(847)
296
(551)
628
(220)
408
1,120
(392)
(1,398)
489
728
(909)
(690)
242
(448)
494
(173)
321
875
(306)
569
3,167
(1,108)
1,782
(624)
(1,782)
624
(3,167)
1,108
2,979
(1,043)
1,663
(582)
(1,663)
582
(2,979)
1,043
Net effect
2,059
1,158
(1,158)
(2,059)
Total net effect on shareholders’ equity
904
607
(750)
(1,331)
1,936
1,027
1,081
(1,081)
(1,936)
633
(760)
(1,367)
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 reflect the hedging programme in place on the balance sheet date, while the actual impact on financial results would
vary contingent upon a number of factors.
iii Sensitivity to foreign exchange risk
Consistent with the Group’s accounting policies, the profits of the Group’s US operations are translated at average exchange rates and
shareholders’ equity at the closing rate for the reporting period. For 2015, the average and closing rates were US$1.53 (2014: US$1.65)
and US$1.47 (2014: US$1.56) to £1.00 sterling, respectively. A 10 per cent increase (weakening of the dollar) or decrease (strengthening
of the dollar) in these rates would reduce or increase profit before tax attributable to shareholders, profit for the year and shareholders’
equity attributable to US insurance operations respectively as follows:
Profit before tax attributable to shareholders note
Profit for the year
Shareholders’ equity attributable to US insurance operations
A 10% increase in US$:£
exchange rates
A 10% decrease in US$:£
exchange rates
2015 £m
2014 £m
2015 £m
2014 £m
(109)
(87)
(378)
(23)
(23)
(370)
133
107
462
29
28
452
Note
Sensitivity on profit (loss) before tax, ie aggregate of the operating profit based on longer-term investment returns and short-term fluctuations in investment returns.
250
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued iv Other sensitivities
Total profit of Jackson is sensitive to market risk on the assets covering liabilities other than variable annuity business segregated in the
separate accounts.
As with other shareholder-backed business the profit or loss for Jackson is presented by distinguishing the result for the year between
an operating result based on longer-term investment returns and short-term fluctuations in investment returns. In this way the most
significant direct effect of market changes that have taken place to the Jackson result are separately identified. The principal determinants
of variations in operating profit based on longer-term returns are:
— Growth in the size of assets under management covering the liabilities for the contracts in force;
— Variations in fees and other income, offset by variations in market value adjustment payments and, where necessary, strengthening
of liabilities;
— Spread returns for the difference between investment returns and rates credited to policyholders; and
— Amortisation of deferred acquisition costs.
For term business, acquisition costs are deferred and amortised in line with expected premiums. For annuity and interest sensitive life
business, acquisition costs are deferred and amortised in line with expected gross profits on the relevant contracts. For interest-sensitive
business, the key assumption is the expected long-term spread between the earned rate and the rate credited to policyholders, which
is based on an annual spread analysis. In addition, expected gross profits depend on mortality assumptions, assumed unit costs and
terminations other than deaths (including the related charges) all of which are based on a combination of actual experience of Jackson,
industry experience and future expectations. A detailed analysis of actual experience is measured by internally developed expense,
mortality and persistency studies.
Except to the extent of mortality experience, which primarily affects profits through variations in claim payments and Guaranteed
Minimum Death Benefit reserves, the profits 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 Benefit product features. In the absence of hedging, equity and interest rate movements can both cause a loss directly and
cause an increased future sensitivity to policyholder behaviour. Jackson has an extensive derivative programme that seeks to manage
the exposure to such altered equity markets and interest rates.
For variable annuity business, the key assumption is the expected long-term level of separate account returns, which for 2015 was
7.4 per cent (2014: 7.4 per cent). The impact of using this return is reflected in two principal ways, namely:
— Through the projected expected gross profits which are used to determine the amortisation of deferred acquisition costs.
This is applied through the use of a mean reversion technique which is described in more detail in note C5.1(b) above; and
— The required level of provision for claims for guaranteed minimum death, ‘for life’ withdrawal, and income benefits.
C7.4 UK insurance operations
Exposure and sensitivity of IFRS basis profit and shareholders’ equity to market and other risks
The IFRS basis results of the UK insurance operations are most sensitive to asset/liability matching, mortality and default rate experience
and longevity assumptions and the difference between the return on corporate bond and risk-free rate for shareholder-backed annuity
business of Prudential Retirement Income Limited and the Prudential Assurance Company non-profit sub-fund. Further details are
described below.
The IFRS operating profit based on longer-term investment returns for UK insurance operations is sensitive to changes in longevity
assumptions affecting the carrying value of liabilities to policyholders for UK shareholder-backed annuity business. At the total IFRS
profit level, the result is particularly sensitive to temporary value movements on assets backing the capital of the shareholder-backed
annuity business.
With-profits business
SAIF
Shareholders have no interest in the profits of the ring-fenced fund of SAIF but are entitled to the asset management fees paid on the
assets of the fund.
With-profits sub-fund business
The shareholder results of the UK with-profits business (including non-participating annuity business of the with-profits 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-profits funds are subject to market risk. Changes in their carrying value, net of related changes
to asset-share liabilities of with-profits contracts, affect the level of unallocated surplus of the fund. Therefore, the level of unallocated
surplus is particularly sensitive to the level of investment returns on the portion of the assets that represents surplus. However, as
unallocated surplus is accounted for as a liability under IFRS, movements in its value do not affect shareholders’ profit and equity.
The shareholder results of the UK with-profits fund correspond to the shareholders’ share of the cost of bonuses declared on the
with-profits business which is currently one-ninth of the cost of bonuses declared. Investment performance is a key driver of bonuses,
and hence the shareholders’ share of the cost of bonuses. Due to the ‘smoothed’ basis of bonus declaration, the sensitivity to investment
performance in a single year is low relative to movements in the period-to-period performance. However, over multiple periods, it is
important as it may affect future expected shareholder transfers.
Mortality and other insurance risk are relatively minor factors in the determination of the bonus rates. Adverse persistency experience
can affect the level of profitability from with-profits but in any given one year, the shareholders’ share of cost of bonus may only be
marginally affected. However, altered persistency trends may affect future expected shareholder transfers.
251
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C7.4 UK insurance operations 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 reflect the market rates of return attaching to the covering assets.
Except to the extent of any asset/liability duration mismatch which is reviewed regularly, and exposure to credit risk, the sensitivity of
the Group’s results to market risk for movements in the carrying value of the liabilities and covering assets is broadly neutral on a net basis.
The main market risk sensitivity for the UK shareholder-backed annuity business arises from interest rate risk on the debt securities
which substantially represent shareholders’ equity. This shareholders’ equity comprises the net assets held within the long-term fund
of the Company that cover regulatory basis liabilities that are not recognised for IFRS reporting purposes, for example contingency
reserves, and shareholder capital held outside the long-term fund.
In summary, profits from shareholder-backed annuity business are most sensitive to:
— The extent to which the duration of the assets held closely matches the expected duration of the liabilities under the contracts;
— Actual versus expected default rates on assets held;
— The difference between long-term rates of return on corporate bonds and risk-free rates;
— The variance between actual and expected mortality experience;
— The extent to which changes to the assumed rate of improvements in mortality give rise to changes in the measurement of liabilities; and
— Changes in renewal expense levels.
In addition, the level of profit is affected by change in the level of reinsurance cover.
A decrease in assumed mortality rates of 1 per cent would decrease pre-tax profit by approximately £67 million (2014: £94 million).
A decrease in credit default assumptions of five basis points would increase pre-tax profit by £176 million (2014: £190 million).
A decrease in renewal expenses (excluding asset management expenses) of 5 per cent would increase pre-tax profit by £35 million
(2014: £30 million). The effect on profit would be approximately symmetrical for changes in assumptions that are directionally opposite
to those explained above. The net effect on profit after tax and shareholders’ equity from all the changes in assumptions as described
above would be an increase of approximately £115 million (2014: £101 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. Profits 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 profits are relatively
insensitive to changes in mortality experience.
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 2015 annuity liabilities accounted for 98 per cent
(2014: 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-profits sub-fund (for its non-profit annuity business) and
shareholders (for annuity liabilities of Prudential Retirement Income Limited and the non-profit sub-fund) is very substantially ameliorated
by virtue of the close matching of assets with appropriate duration. The level of matching from period to period can vary depending
on management actions and economic factors so it is possible for a degree of mis-matching profits or losses to arise.
The close matching by the Group of assets of appropriate duration to annuity liabilities is based on maintaining economic and
regulatory capital. The measurement of liabilities under capital reporting requirements and IFRS is not the same with contingency
reserves and some other margins for prudence within the assumptions required under the regulatory solvency basis not included for IFRS
reporting purposes. As a result IFRS equity is higher than regulatory capital and therefore more sensitive to interest rate and credit risk.
252
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued The estimated sensitivity of the UK non-linked shareholder-backed business (principally annuities business) to a movement in interest
rates is as follows:
2015 £m
2014 £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
10,862
(8,738)
(402)
4,812
(3,909)
(172)
(3,935)
3,208
138
(7,219)
5,872
257
11,559
(9,550)
(402)
5,063
(4,250)
(163)
(4,085)
3,454
126
(7,457)
6,297
232
Net sensitivity of profit after tax and shareholders’
equity
1,722
731
(589)
(1,090)
1,607
650
(505)
(928)
In addition the shareholder-backed portfolio of UK non-linked insurance operations covering liabilities and shareholders’ equity includes
equity securities and investment properties. Excluding any second order effects on the measurement of the liabilities for future cash
flows to the policyholder, a fall in their value would have given rise to the following effects on pre-tax profit, profit after tax and
shareholders’ equity.
Pre-tax profit
Related deferred tax effects
Net sensitivity of profit after tax and shareholders’ equity
2015 £m
2014 £m
A decrease
of 20%
A decrease
of 10%
A decrease
of 20%
A decrease
of 10%
(327)
66
(261)
(163)
33
(130)
(347)
75
(272)
(173)
37
(136)
A 10 or 20 per cent increase in their value would have an approximately equal and opposite effect on profit and shareholders’ equity
to the sensitivities shown above. The market risk sensitivities shown above reflect the impact of temporary market movements, and,
therefore the primary effect of such movements would, in the Group’s segmental analysis of profits, be included within the short-term
fluctuations in investment returns.
C7.5 Asset management and other operations
a Asset management
i Sensitivities to foreign exchange risk
Consistent with the Group’s accounting policies, the profits of Eastspring Investments and US asset management operations are
translated at average exchange rates and shareholders’ equity at the closing rate for the reporting period. The rates for the functional
currencies of most significant operations are shown in note A1.
A 10 per cent increase in the relevant exchange rates (strengthening of the pound sterling) would have reduced reported profit before
tax attributable to shareholders and shareholders’ equity, excluding goodwill attributable to Eastspring Investments and US asset
management operations, by £11 million and £38 million respectively (2014: £9 million and £33 million, respectively).
ii Sensitivities to other financial risks for asset management operations
The principal sensitivities to other financial risk of asset management operations are credit risk on the bridging loan portfolio of
the Prudential Capital operation and the indirect effect of changes to market values of funds under management. Due to the nature
of the asset management operations there is limited direct sensitivity to movements in interest rates. Total debt securities held at
31 December 2015 by asset management operations were £2,204 million (2014: £2,293 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 profit
or shareholders’ equity. The Group’s asset management operations do not hold significant investments in property or equities.
b Other operations
The Group holds certain derivatives that are used to manage foreign currency movements and macroeconomic exposures. The fair value
of these derivatives is sensitive to the combined effect of movements in exchange rates, interest rates and inflation rates. The possible
permutations cover a wide range of scenarios. For indicative purposes, a reasonably possible range of fair value movements could be plus
or minus £150 million.
253
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc C8: Tax assets and liabilities
C8.1 Deferred tax
The statement of financial position contains the following deferred tax assets and liabilities in relation to:
Unrealised losses or gains on investments
Balances relating to investment and insurance contracts
Short-term temporary differences
Capital allowances
Unused deferred tax losses
Total
Deferred tax assets
Deferred tax liabilities
2015 £m
2014 £m
2015 £m
2014 £m
21
1
2,752
10
35
2,819
83
4
2,607
9
62
2,765
(1,036)
(543)
(2,400)
(31)
(4,010)
(1,697)
(499)
(2,065)
(30)
–
(4,291)
The deferred tax asset at 31 December 2015 and 2014 arises in the following parts of the Group:
Asia insurance operations
US insurance operations
UK insurance operations
SAIF
PAC with-profits fund (including non-profit annuity business)
Other
Other operations
Total
2015 £m
2014 £m
66
2,448
1
83
48
173
84
2,343
–
71
61
206
2,819
2,765
Deferred tax assets are recognised to the extent that they are regarded as recoverable, that is to the extent that, on the basis of all
available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal
of the underlying temporary differences can be deducted.
The taxation regimes applicable across the Group often apply separate rules to trading and capital profits and losses. The distinction
between temporary differences that arise from items of either a trading or capital nature may affect the recognition of deferred tax assets.
Accordingly, for the 2015 results and financial position at 31 December 2015 the possible tax benefit of approximately £98 million
(2014: £110 million), which may arise from capital losses valued at approximately £0.5 billion (2014: £0.5 billion), is sufficiently uncertain
that it has not been recognised. In addition, a potential deferred tax asset of £52 million (2014: £47 million), which may arise from trading
tax losses and other potential temporary differences totalling £0.3 billion (2014: £0.2 billion) is sufficiently uncertain that it has not been
recognised. Of these, losses of £36 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.
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 profits
is not significantly 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 differences
Unused tax losses
Expected
period of
recoverability
2015 £m
Expected
period of
recoverability
2015 £m
34 1 to 3 years
2,433 With run-off
of in-force
book
128 1 to 10 years
157 1 to 10 years
30 3 to 5 years
–
–
–
–
5 1 to 3 years
2,752
35
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.
The reduction in the UK corporation tax rate to 19 per cent from 1 April 2017 and a further reduction to 18 per cent from 1 April 2020
was substantively enacted on 26 October 2015 which has had the effect of reducing the UK with-profits and shareholder-backed
business element of the deferred tax balances as at 31 December 2015 by £17 million and the effects of these changes are reflected
in the financial statements for the year ended 31 December 2015.
254
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued C8.2 Current tax
Of the £477 million (2014: £117 million) current tax recoverable, the majority is expected to be recovered in one year or less.
The current tax liability decreased to £325 million (2014: £617 million) reflecting accelerated tax payments in the US insurance
operations during the year.
C9: Defined benefit pension schemes
a Background and summary economic and IAS 19 financial positions
The Group’s businesses operate a number of pension schemes. The specific features of these plans vary in accordance with the
regulations of the country in which the employees are located, although they are, in general, funded by the Group and based either on
a cash balance formula or on years of service and salary earned in the last year or years of employment. The largest defined benefit
scheme is the principal UK scheme, namely the Prudential Staff Pension Scheme (PSPS). PSPS accounts for 84 per cent (2014:
84 per cent) of the underlying scheme liabilities of the Group’s defined benefit schemes.
The Group also operates two smaller UK defined benefit schemes in respect of Scottish Amicable (SASPS) and M&G (M&GGPS).
In addition, there are two small defined benefit schemes in Taiwan which have negligible deficits.
Under the IAS 19 ‘Employee Benefits’ valuation basis, the Group applies the principles of IFRIC 14, ‘IAS 19 – The Limit on a Defined
Benefit 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 financial
position recorded, reflects the higher of any underlying IAS 19 deficit and any obligation for committed deficit funding where applicable.
The Group asset/liability in respect of defined benefit pension schemes is as follows:
2015 £m
2014 £m
PSPS
note (i)
SASPS
note (ii)
M&GGPS
Other
schemes
Total
PSPS
note (i)
SASPS
note (ii)
M&GGPS
Other
schemes
Total
Underlying economic surplus
(deficit)
Less: unrecognised surplus note (i)
969
(800)
(82)
–
75
–
75
–
75
(1)
–
961
(800)
840
(710)
(144)
–
(1)
161
130
(144)
–
(1)
85
76
91
39
(72)
(72)
60
–
60
–
60
(1)
–
755
(710)
(1)
–
(1)
45
19
26
169
118
51
(82)
(33)
(49)
–
–
(77)
–
(77)
–
–
(132)
–
(132)
169
(82)
(2)
(1)
84
130
(144)
(72)
(1)
(87)
Notes
(i)
(ii)
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 benefit (impact) of the Company from the difference between future ongoing contributions to the scheme and estimated accrued cost of service.
No deficit or other funding is required for PSPS. Deficit funding, where applicable, is apportioned in the ratio of 70/30 between the PAC with-profits 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 deficit of SASPS has been allocated 40 per cent to the PAC with-profits fund and 60 per cent to the shareholders’ fund as at 31 December 2015
(2014: approximately 50/50).
(iii) The underlying position on an economic basis reflects the assets (including investments in Prudential insurance policies that are offset against liabilities
to policyholders on the Group consolidation) and the liabilities of the schemes.
(iv) At 31 December 2015, the PSPS pension asset of £169 million (2014: £130 million) and the other schemes’ pension liabilities of £85 million (2014: £217 million)
are included within ‘Other debtors’ and ‘Provisions’ respectively on the consolidated statement of financial position.
255
Economic surplus (deficit)
(including investment
in Prudential insurance
policies)
Attributable to:
PAC with-profits 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 financial position note (iv)
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc C9: Defined benefit pension schemes continued
a Background and summary economic and IAS 19 financial positions continued
Triennial actuarial valuations
The last completed actuarial valuation of PSPS was as at 5 April 2014 by CG Singer, Fellow of the Institute of Actuaries, of Towers Watson
Limited. This valuation was finalised in the first half of 2015 and demonstrated the scheme to be 107 per cent funded by reference to the
Scheme Solvency Target that forms the basis of the scheme’s funding objective. The contributions into the scheme are payable at the
minimum level required under the scheme rules. Excluding expenses, the contributions are payable at approximately £6 million per
annum for ongoing service of active members of the scheme. No deficit or other funding is required. Deficit funding for PSPS, when
applicable, is apportioned in the ratio of 70/30 between the PAC with-profits fund and shareholder-backed operations based on the
sourcing of previous contributions. Employer contributions for ongoing service of current employees are apportioned in the ratio relevant
to current activity.
The last completed actuarial valuation of SASPS was as at 31 March 2014 by Jonathan Seed, Fellow of the Institute of Actuaries,
of Xafinity Consulting Limited. This valuation was finalised in the first half of 2015 and demonstrated the scheme to be 78 per cent
funded. It has been agreed with the Trustees that the level of deficit funding be increased from the previous level of £13.1 million per
annum to £21.0 million per annum from 1 January 2015 until 31 March 2024, or earlier if the scheme’s funding level reaches 100 per cent
before this date, to eliminate the actuarial deficit. The deficit funding will be reviewed every three years at subsequent valuations.
The last completed actuarial valuation of M&GGPS was as at 31 December 2014 by Paul Belok, Fellow of the Institute of Actuaries,
of AON Hewitt Limited. This valuation was finalised in the second half of 2015 and demonstrated the scheme to be 98.6 per cent funded.
It has been agreed with the Trustees that no deficit funding is required from 1 January 2016. Deficit funding of £9.3 million was paid in
2015 (2014: £18.6 million).
Defined benefit pension schemes in the UK are generally required to be subject to full actuarial valuations every three years in order
to assess the appropriate level of funding for schemes in relation to their commitments. These valuations include assessments of the likely
rate of return on the assets held within the separate trustee administered funds.
For PSPS, the market value of the scheme assets as at the 5 April 2014 valuation was £6,165 million. The actuarial assumptions used
in determining benefit obligations and the net periodic benefit costs for the purposes of the 2014 valuation were as follows.
Rate of increase in salaries
Rate of inflation:
Retail Prices Index (RPI)
Consumer Prices Index (CPI)
Rate of increase of pensions in payment for inflation:
Guaranteed (maximum 5%)
Guaranteed (maximum 2.5%)
Discretionary
Expected returns on plan assets
Mortality assumptions:
The tables used for PSPS pensions in payment at 5 April 2014 were:
%
Nil
3.5
2.8
2.8
2.5
Nil
3.3
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) up to 2009 100% (75%) of Medium Cohort subject to a minimum rate of improvement of 2.00% pa (1.25% pa) up to
age 90, decreasing linearly to zero by age 120. From 2010 onwards, in line with the CMI’s 2009 projection model with a long-term rate
of 1.75% pa (1.50% pa), and minor scheme-specific calibrations.
Risks to which the defined benefit schemes expose the Group
Responsibility of making good of any deficit that may arise in the schemes lies with the employers of the schemes, which are subsidiaries
of the Group. Accordingly, the pension schemes expose the Group to a number of risks, the most significant of which are interest rate and
investment risk, inflation risk and mortality risk.
256
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued 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.
All three of the Group’s UK defined benefit pension schemes (the PSPS, SASPS and M&GGPS) are final salary schemes, which are
closed to new entrants.
The Trustee sets the general investment policy and specifies any restrictions on types of investment and the degrees of divergence
permitted from the benchmark, but delegates the responsibility for selection and realisation of specific investments to the Investment
Managers. 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 Trustee of each of the schemes manages the investment strategy of the scheme to achieve an acceptable balance between
investing in the assets that most closely match the expected benefit payments and assets that are expected to achieve a greater return
in the hope of reducing the contributions required or providing additional benefits to members.
The PSPS scheme has entered into a derivatives based strategy to match the duration and inflation profile of its liabilities. This
involved a reallocation from other investments to other assets with an interest and inflation swap overlay. As at 31 December 2015, the
nominal value of the interest and inflation-linked swaps amounted to £0.7 billion (2014: £0.8 billion) and £3.4 billion (2014: £3.0 billion)
respectively. The SASPS and M&GGPS use very limited or no derivatives to manage their risks.
b Assumptions
The actuarial assumptions used in determining benefit obligations and the net periodic benefit costs for the years ended 31 December
were as follows:
Discount rate*
Rate of increase in salaries
Rate of inflation†
Retail prices index (RPI)
Consumer prices index (CPI)
Rate of increase of pensions in payment for inflation:
PSPS:
Guaranteed (maximum 5%)
Guaranteed (maximum 2.5%)
Discretionary
Other schemes
2015 %
2014 %
3.8
3.0
3.0
2.0
2.5
2.5
2.5
3.0
3.5
3.0
3.0
2.0
2.5
2.5
2.5
3.0
* The discount rate has been determined by reference to an ‘AA’ corporate bond index, adjusted where applicable, to allow for the difference in duration between the
index and the pension liabilities.
† The rate of inflation reflects the long-term assumption for the UK RPI or CPI depending on the tranche of the schemes.
The calculations are based on current mortality estimates with an allowance made for future improvements in mortality. The allowance
made is in line with a custom calibration and was updated in 2014 to reflect the 2012 mortality model from the Continuous Mortality
Investigation Bureau of the Institute and Faculty of Actuaries (CMI). For the PSPS immediate annuities in payment, in 2015 and 2014, a
long-term improvement rate of 1.75 per cent per annum and 1.25 per cent per annum were applied for males and females, respectively.
c Estimated pension scheme surpluses and deficits
This section illustrates the financial position of the Group’s defined benefit pension schemes on an economic basis and the IAS 19 basis.
The underlying pension position on an economic basis reflects the assets (including investments in Prudential policies that are offset
against liabilities to policyholders on the Group consolidation) and the liabilities of the schemes. The IAS 19 basis excludes the
investments in Prudential policies. At 31 December 2015, the investments in Prudential insurance policies comprise £125 million
(2014: £131 million) for PSPS and £77 million (2014: £132 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.
257
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc C9: Defined benefit pension schemes continued
c Estimated pension scheme surpluses and deficits continued
Movements on the pension scheme deficit determined on the economic basis are as follows, with the effect of the application of IFRIC 14
being shown separately:
All schemes
Underlying position (without the effect of IFRIC 14)
Surplus
Less: amount attributable to PAC with-profits fund
Shareholders’ share:
Gross of tax surplus (deficit)
Related tax
Net of shareholders’ tax
Application of IFRIC 14 for the derecognition of PSPS surplus
Derecognition of surplus
Less: amount attributable to PAC with-profits fund
Shareholders’ share:
Gross of tax deficit
Related tax
Net of shareholders’ tax
With the effect of IFRIC 14
Surplus
Less: amount attributable to PAC with-profits fund
Shareholders’ share:
Gross of tax surplus (deficit)
Related tax
Net of shareholders’ tax
2015 £m
(Charge) credit
to income
statement
or other
comprehensive
income
Actuarial gains
and losses
in other
comprehensive
income
Surplus (deficit)
in schemes at
1 Jan 2015
Contributions
paid
Surplus (deficit)
in schemes at
31 Dec 2015
755
(525)
230
(46)
184
(710)
506
(204)
41
(163)
45
(19)
26
(5)
21
36
(38)
(2)
–
(2)
(26)
18
(8)
1
(7)
10
(20)
(10)
2
(8)
115
(78)
37
(7)
30
(64)
49
(15)
3
(12)
51
(29)
22
(4)
18
55
(17)
38
(7)
31
–
–
–
–
–
55
(17)
38
(7)
31
961
(658)
303
(60)
243
(800)
573
(227)
45
(182)
161
(85)
76
(14)
62
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†
2015
Other
schemes
£m
70
329
427
145
21
(5)
62
42
1,091
Total
£m
196
480
5,222
1,115
156
178
132
340
7,819
PSPS
£m
126
151
4,795
970
135
183
70
298
6,728
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
%
3
6
67
14
2
2
2
4
100
%
2
6
68
13
3
2
2
4
100
* 93 per cent of the bonds are investment grade (2014: 94 per cent).
† 98 per cent of the total value of the scheme assets are derived from quoted prices in an active market. None of the scheme assets included shares in Prudential plc
or property occupied by the Prudential Group. The IAS 19 basis plan assets at 31 December 2015 of £7,617 million (2014: £7,804 million) is different from the economic
basis plan assets of £7,819 million (2014: £8,067 million) as shown above due to the exclusion of investment in Prudential insurance policies, which are eliminated
on consolidation of £202 million (2014: £263 million) comprising £125 million for PSPS (2014: £131 million) and £77 million for the M&G scheme (2014: £132 million).
258
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued The movements in the IAS 19 pension schemes’ surplus and deficit between scheme assets and liabilities as consolidated in the
financial statements were:
Attributable to policyholders and shareholders
Net surplus
(deficit)
(without the
effect of
IFRIC 14)
Effect of
IFRIC 14 for
derecognition
of PSPS surplus
Economic
basis net
surplus
(deficit)
Present value
of benefit
obligations
note (i)
Other
adjustments
including for
investments
in Prudential
insurance
policies
note (ii)
IAS 19 basis
net surplus
(deficit)
2015 £m
Net deficit, beginning of year
Current service cost
Past service cost
Net interest on net defined benefit
liability (asset)
Administration expenses
Benefit payments
Employers’ contributions note (iii)
Employees’ contributions
Actuarial gains and losses note (iv)
Settlements or curtailments
Transfer out of investment in
Prudential insurance policies
Plan assets
8,067
278
(5)
(301)
56
2
(278)
–
–
(7,312)
(36)
48
(250)
301
(2)
393
–
–
Net surplus (deficit), end of year
7,819
(6,858)
2014 £m
Net deficit, beginning of year
Current service cost
Past service cost
Net interest on net defined benefit
liability (asset)
Administration expenses
Benefit payments
Employers’ contributions note (iii)
Employees’ contributions
Actuarial gains and losses note (iv)
Settlements or curtailments
Transfer into investment in
Prudential insurance policies
Net surplus (deficit), end of year
6,944
301
(6)
(266)
55
2
1,037
–
–
8,067
(6,298)
(30)
(4)
(272)
–
266
–
(2)
(975)
3
–
(7,312)
755
(36)
48
28
(5)
–
56
–
115
–
–
961
646
(30)
(4)
29
(6)
–
55
–
62
3
–
755
(710)
(26)
(64)
–
–
(800)
(602)
(26)
(82)
–
–
(710)
45
(36)
48
2
(5)
–
56
–
51
–
–
161
44
(30)
(4)
3
(6)
–
55
–
(20)
3
–
45
(132)
(5)
6
–
54
(77)
(114)
(5)
(4)
–
(9)
(132)
(87)
(36)
48
(3)
(5)
–
56
–
57
–
54
84
(70)
(30)
(4)
(2)
(6)
–
55
–
(24)
3
(9)
(87)
259
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc
C9: Defined benefit pension schemes continued
c Estimated pension scheme surpluses and deficits continued
Notes
(i) Maturity profile of the benefit obligations
The weighted average duration of the benefit obligations of the schemes is 18.2 years (2014: 18.4 years).
The following table provides an expected maturity analysis of the benefit obligations as at 31 December:
All schemes £m
2015
2014
1 year or less
240
237
After
1 year
to 5 years
1,045
1,012
After
5 years
to 10 years
After
10 years
to 15 years
After
15 years
to 20 years
1,554
1,538
1,688
1,704
1,711
1,736
Over
20 years
8,791
9,256
Total
15,029
15,483
(ii)
The adjustments for investments in Prudential insurance policies are consolidation adjustments for intragroup assets and liabilities with no impact to
operating results.
(iii) Total employer contributions expected to be paid into the Group defined benefit schemes for the year ending 31 December 2016 amounts to £45 million
(2015: £45 million).
(iv) The actuarial gains and losses attributable to policyholders and shareholders as shown in the table above are analysed as follows:
Actuarial and other gains and losses
Return on the scheme assets less amount included in interest income
Losses on changes in demographic assumptions
Gains (losses) on changes in financial assumptions
Experience gains (losses) on scheme liabilities
Effect of derecognition of PSPS surplus
Consolidation adjustment for investments in Prudential insurance policies and other adjustments
2015 £m
2014 £m
(278)
(3)
371
25
115
(64)
6
57
1,037
(9)
(939)
(27)
62
(82)
(4)
(24)
d Sensitivity of the pension scheme liabilities to key variables
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 profit or loss
attributable to shareholders or shareholders’ equity due to the effect of the application of IFRIC 14 on PSPS and the allocation of a share
of the interest in financial position of the PSPS and SASPS to the PAC with-profits fund as described above.
Assumption applied
Discount rate
2015
3.8%
2014
Sensitivity change
in assumption
Impact of sensitivity on scheme
liabilities on IAS 19 basis
2015
2014
3.5% Decrease by 0.2%
Increase in scheme liabilities by:
PSPS
Other schemes
Discount rate
3.8%
3.5% Increase by 0.2%
Decrease in scheme liabilities by:
Rate of inflation
3.0%
2.0%
3.0% RPI: Decrease by 0.2%
2.0% CPI: Decrease by 0.2%
Mortality rate
with consequent reduction
in salary increases
Increase life expectancy
by 1 year
PSPS
Other schemes
Decrease in scheme liabilities by:
PSPS
Other schemes
Increase in scheme liabilities by:
PSPS
Other schemes
260
3.3%
5.0%
3.1%
4.6%
0.5%
4.0%
3.2%
2.8%
3.4%
5.2%
3.2%
4.9%
0.6%
4.2%
3.3%
3.0%
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued
C10: Share capital, share premium and own shares
2015
2014
Number of
ordinary shares
Issued shares of 5p each fully paid
At 1 January
Shares issued under share-based schemes
2,567,779,950
4,675,008
At 31 December
2,572,454,958
Share
capital
£m
128
–
128
Share
premium
£m
Number of
ordinary shares
1,908 2,560,381,736
7,398,214
7
1,915 2,567,779,950
Share
capital
£m
128
–
128
Share
premium
£m
1,895
13
1,908
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 2015, there were options outstanding under save as you earn schemes to subscribe for shares as follows:
31 December 2015
31 December 2014
Number of
shares to
subscribe for
8,795,617
8,624,491
Share price range
from
288p
288p
to
Exercisable
by year
1,155p
1,155p
2021
2020
Transactions by Prudential plc and its subsidiaries in Prudential plc shares
The Group buys and sells Prudential plc shares (‘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 £219 million as at
31 December 2015 (2014: £195 million) is deducted from retained earnings. The Company has established trusts to facilitate the delivery
of shares under employee incentive plans. At 31 December 2015, 10.5 million (2014: 10.3 million) Prudential plc shares with a market
value of £161 million (2014: £153 million) were held in such trusts all of which are for employee incentive plans. The maximum number
of shares held during 2015 was 10.5 million which was in December 2015.
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
2015 Share Price
2014 Share Price
Number
of shares
52,474
49,423
4,660,458
52,371
145,542
160,078
55,208
57,653
154,461
58,087
56,948
61,441
5,564,144
Low
£
14.83
16.01
16.44
16.78
16.07
15.65
15.04
15.07
13.57
15.14
15.01
15.00
High
£
Cost
£
15.11
786,584
795,683
16.14
17.01 78,940,633
17.24
892,795
2,357,705
16.61
2,563,060
16.20
868,713
15.99
15.17
868,091
2,149,244
14.31
879,999
15.22
866,033
15.61
923,600
15.08
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
92,892,140
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
£
13.56
12.77
13.59
13.48
14.13
13.80
13.83
13.22
14.41
13.84
14.47
15.47
Cost
£
186,314
215,060
60,161,823
2,006,955
19,184,679
155,802
148,550
149,607
5,074,731
704,601
737,173
17,983,248
106,708,543
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 2015 was 6.1 million
(2014: 7.5 million) and the cost of acquiring these shares of £54 million (2014: £67 million) is included in the cost of own shares.
The market value of these shares as at 31 December 2015 was £94 million (2014: £112 million). During 2015, these funds made
net disposals of 1,402,697 Prudential shares (2014: net additions of 405,940) for a net decrease of £13 million to book cost
(2014: net increase of £7 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 2015 or 2014.
261
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc 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 2015.
C11.1 Life assurance business
a Summary statement
The Group’s estimated capital position for its life assurance subsidiaries as at 31 December 2015 with reconciliations to shareholders’
equity is shown below. The available capital for the Group’s life assurance operations is determined by reference to local regulations,
to meet risk and regulatory requirements. For the UK life assurance operations, the estimated capital position as shown below
is by reference to the requirements under the Solvency I basis.
2015 £m
2014 £m
UK life assurance
SAIF
PAC
WPSF
Other
UK life
assurance
subsidiaries
and funds
note (i)
Asia life
assurance
subsidiaries
Jackson
Total life
assurance
operations
note (b)
Total life
assurance
operations
–
–
–
–
–
–
–
–
–
–
–
–
4,416
4,154
3,956
12,526
11,400
10,543
(2,346)
–
–
–
–
2,553
13,096
12,450
–
(2,346)
(2,503)
(3)
–
–
(127)
(113)
(254)
7,700
(81)
–
(6,148)
169
(1,301)
–
(7,533)
169
(6,450)
160
–
–
4,927
–
–
–
4,927
3,710
(127)
(47)
–
(574)
(655)
–
364
(688)
–
(31)
1,221
(113)
(495)
7,578
(251)
(8)
7,061
7,700
3,761
3,466
5,177
20,104
18,461
Group IFRS shareholders’ equity
Adjustments to regulatory basis
Unallocated surplus of with-profits
funds
Shareholders’ share of realistic
liabilities
Deferred acquisition costs,
distribution rights and
goodwill of non-participating
business not recognised for
regulatory reporting
Jackson surplus notes note (ii)
Investment and policyholder
liabilities valuation differences
between IFRS and regulatory
basis for Jackson note (iv)
Pension liability difference
between IAS 19 and
regulatory basis
Valuation difference on non-profit
annuity liabilities within WPSF
between IFRS basis and
regulatory basis
Other adjustments note (iii)
Total adjustments
Total available capital resources
of life assurance businesses
on local regulatory bases
Notes
(i)
(ii)
(iii) Other adjustments to shareholders’ equity and unallocated surplus include amounts for the value of non-participating business for UK regulated with-profits
Excluding PAC shareholders’ equity that is included in ‘parent company and shareholders’ equity of other subsidiaries and funds’. (See note (b) below).
For regulatory purposes the Jackson surplus notes are accounted for as capital.
funds, deferred tax, admissibility and other items measured differently on the regulatory basis. For Jackson the principal reconciling item is deferred tax related
to the differences between IFRS and regulatory basis as shown in the table above and other methodology differences.
(iv) The investment and policyholder liabilities valuation difference between IFRS and regulatory bases for Jackson is mainly due to not all investments being
carried at fair value under the regulatory basis and also due to the valuation difference on annuity reserves.
262
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued 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 2015:
Group shareholders’ equity
Total life assurance operations
Parent company and shareholders’ equity of other subsidiaries note (i)
Total Group shareholders’ equity
2015 £m
12,526
429
12,955
Note
(i)
Including PAC shareholders’ equity. The £429 million (2014: £411 million) includes the core structural borrowings and the elimination of the investment
in subsidiaries at the parent company.
c Basis of preparation, capital requirements and management
Each of the Group’s long-term business operations is capitalised to a sufficiently strong level for its individual circumstances.
Details by the Group’s major operations are shown below.
i Asia insurance operations
The available capital shown above of £5,177 million (2014: £4,823 million) represents the excess of local regulatory basis assets over
liabilities before deduction of required capital of £1,622 million (2014: £1,514 million).
The businesses in Asia are subject to local capital requirements in the jurisdictions in which they operate. For material Asia operations,
the details of the basis of determining regulatory capital and regulatory capital requirements are as follows:
Hong Kong
For non-participating business, mathematical reserves are generally calculated using a modified 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 flows are discounted at a valuation interest rate based on a blend between the risk-adjusted portfolio yield and
reinvestment rate.
For participating business, mathematical reserves are based on the guaranteed benefits only and use a modified 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.
Under the risk-based capital solvency requirement, the ratio of an insurer’s available capital to required capital is calculated and the
analysis of equity capital used to determine capital adequacy must take into account market, credit, operational, insurance and interest
rate risks. The scheme requires the ratio be calculated based on integrated financial statements reflecting assets, liabilities and capital
of affiliates and subsidiaries.
263
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc C11: Capital position statement continued
C11.1 Life assurance business continued
Malaysia
A risk-based capital framework applies in Malaysia.
For participating business, a gross premium reserve on the guaranteed and non-guaranteed benefits determined using best estimate
assumptions is held. The amount held is subject to a minimum of a gross premium reserve on the guaranteed benefits, determined using
best estimate assumptions along with provisions of risk margin for adverse deviations discounted at the risk-free rate.
For non-participating business, gross premium reserves 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 deficit (if any) and the capital requirement of the non-participating
business. The capital requirement is calculated based on a prescribed series of risk charges. The local regulator has set a Supervisory
Target Capital Level of 130 per cent below which supervisory actions of increasing intensity will be taken. Each insurer is also required
to set its own Individual Target Capital Level to reflect its own risk profile and this is expected to be higher than the Supervisory Target
Capital Level.
Singapore
A risk-based 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 specified assumptions, but without allowance for future bonus, that includes
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 financial 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.
Capital adequacy is measured based on the Capital Adequacy Ratio (‘CAR’), which is determined as the Total Capital Available
divided by the Total Capital Required. 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. Insurers are
required by law to maintain capital greater than the prescribed minimum CAR of not less than 100 per cent. However, in case the insurer
has a CAR of less than 140 per cent, the regulator may intervene to oversee the insurer’s financial status.
Vietnam
For traditional business, mathematical reserves are calculated using a modified net premium approach, set using assumptions agreed
with the regulator.
For linked business, the value of units is held together with the non-unit reserves calculated in accordance with the local regulator’s
standard actuarial methodology.
The capital requirement is determined as 4 per cent of reserves plus a specified percentage of 0.1 per cent of sums at risk for policies
with original term less than or equal to five years or 0.3 per cent of sums at risk for policies with original term of more than five years.
An additional capital requirement of Vietnamese Dong 300 billion is also required for companies transacting pension business.
264
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued 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 which includes components
calculated by applying factors to various asset, premium and reserve items and a separate model-based component for market 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 £3,466 million (2014: £3,141 million) reflects US regulatory basis available capital
as adjusted to exclude asset valuation reserves. The asset valuation reserve, which is reflected as available capital, is designed to provide
for future credit-related losses on debt securities and losses on equity investments. Available capital includes a reduction for the effect of
the interest maintenance reserve, which is designed by state regulators to defer recognition of non-credit related realised capital gains
and losses and to recognise them ratably in the future.
Jackson’s Risk-Based Capital ratio is significantly in excess of regulatory requirements. At 31 December 2015, 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 £241 million at 31 December 2015.
Michigan insurance law specifically allows value of business acquired as an admitted asset as long as certain criteria are met. US NAIC
standards limit the admitted amount of goodwill/value of business acquired generally to 10 per cent of capital and surplus.
At 31 December 2015, Jackson reported £222 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, up to 31 December 2015, insurers, regulated by PRA, had to hold capital resources equal at least to the Minimum Capital
Requirement (MCR) under the Solvency I basis. In addition the rules required insurers to perform Individual Capital Assessments. Under
these rules insurers assessed for themselves the amount of capital needed to back their business. If the PRA viewed the results of this
assessment as insufficient, it might draw up its own Individual Capital Guidance for a firm, which could be superimposed
as a requirement. These requirements were replaced by the Solvency II regime on 1 January 2016 which is discussed further in the
Strategic Report.
PAC with-profits sub-fund and Scottish Amicable Insurance Fund (under Solvency I basis)
Under PRA Solvency I rules, insurers with with-profits liabilities of more than £500 million must hold capital equal to the higher of the
MCR and the Enhanced Capital Requirement (ECR). The ECR is intended to provide a more risk responsive and ‘realistic’ measure
of a with-profits insurer’s capital requirements, whereas the MCR is broadly speaking equivalent to the previous required minimum
margin under the Interim Prudential Sourcebook and satisfies the minimum EU Standards.
Available capital of the with-profits sub-fund and Scottish Amicable Insurance Fund of £7.7 billion (2014: £7.2 billion) as shown in the
table in section (a) above 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 as set on the PRA basis which is estimated to be £1.0 billion at 31 December 2015 (2014: £1.0 billion).
Other UK life assurance subsidiaries and funds
The available capital of £3,761 million (2014: £3,297 million) under the Solvency I basis as shown in the table in section (a) above reflects
the excess of regulatory basis assets over liabilities of the subsidiaries and funds, before deduction of the capital resources requirement
of £1,555 million (2014: £1,552 million).
The capital resources requirement for these companies broadly reflects a formula which, for active funds, equates to a percentage of
regulatory reserves plus a percentage of death strains. Death strains represent the payments made to policyholders upon death in excess
of amounts explicitly allocated to fund the provisions for policyholder’s claims and maturities.
iv Group capital requirements
In addition to the requirements at individual company level, PRA requirements apply additional prudential requirements for the Group
as a whole. Up until 31 December 2015 these requirements were under the IGD. Solvency II, which came into force on 1 January 2016,
replaces the IGD capital requirements. Discussion of the Group’s estimated IGD and Solvency II positions at 31 December 2015
is provided in the Strategic Report.
265
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc C11: Capital position statement continued
C11.1 Life assurance business continued
d Transferability of available capital
Up until 31 December 2015, under Solvency I basis for PAC and all other UK long-term insurers, long-term business assets and liabilities
must, by law, be maintained in funds separate from those for the assets and liabilities attributable to non-life insurance business or to
shareholders. Only the ‘established surplus’, the excess of assets over liabilities in the long-term fund determined through a formal
valuation, may be transferred so as to be available for other purposes. Distributions from the with-profits sub-fund to shareholders reflect
the shareholders’ one-ninth share of the cost of declared policyholders’ bonuses.
Any excess of assets over liabilities of the PAC with-profits fund is retained within that fund. The retention of the capital enables it to
support with-profits and other business of the fund by, for example, providing the benefits associated with smoothing and guarantees.
It also provides investment flexibility for the fund’s assets by meeting the regulatory capital requirements that demonstrate solvency and
by absorbing the costs of significant events or fundamental changes in its long-term business without affecting the bonus and investment
policies.
For other UK long-term business subsidiaries, the amounts retained within the companies are at levels which provide an appropriate
level of capital strength in excess of the regulatory minimum.
The concept of long-term fund as described above was abolished under the Solvency II regime, which came into effect on
1 January 2016. The PAC with-profits funds will still be treated as ring-fenced structures under the new regime. Therefore the
consideration of an ‘established surplus’ that needs to be formally transferred no longer exists. However companies as a whole will
be required to meet the new capital requirements. Further information on the Solvency II capital requirements is provided in the
Strategic Report.
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 less net realised investments losses for the prior
year or 10 per cent of Jackson’s prior year-end statutory surplus, excluding any increase arising from the application of permitted
practices, 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-profits funds, the excess of assets over liabilities is retained with distribution
tied to the shareholders’ share of bonuses through declaration of actuarially determined surplus. The 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.
e Sensitivity of liabilities and total capital to changed market conditions and capital management policies
Prudential manages its assets, liabilities and capital locally, in accordance with local regulatory requirements and reflecting the different
types of liabilities Prudential has in each business. As a result of the diversity of products offered by Prudential and the different
regulatory requirements in which it operates, Prudential employs differing methods of asset/liability and capital management,
depending on the business concerned.
Stochastic modelling of assets and liabilities is undertaken in the UK, Jackson and Asia to assess the economic capital requirements.
A stochastic approach models the inter-relationship between asset and liability movements, taking into account asset correlation,
management actions and policyholder behaviour under a large number of alternative economic scenarios.
In addition, reserve adequacy testing under a range of scenarios and dynamic solvency testing is carried out, including under certain
scenarios mandated by the UK, US and Asian regulators.
The sensitivity of liabilities and other components of total capital vary depending upon the type of business concerned and this
conditions the approach to asset/liability management.
For example, for businesses that are most sensitive to interest rate changes, such as immediate annuity business, Prudential uses cash
flow analysis to create a portfolio of debt securities whose value is expected to change in line with the value of liabilities when interest
rates change. This type of analysis helps protect profits from changing interest rates and is used in the UK for annuity business and by
Jackson for its fixed interest rate and fixed index annuities and institutional products.
For businesses that are most sensitive to equity price changes, Prudential uses stochastic modelling and scenario testing to look at the
future returns on its investments under different scenarios which best reflect the large diversity in returns that equities can produce.
This allows Prudential to devise an investment and with-profits policyholder bonus strategy that, based on the model assumptions,
allows it to optimise returns to its policyholders and shareholders over time while maintaining appropriate financial strength.
Prudential uses this methodology extensively in connection with its UK with-profits business.
f Intra-group arrangements in respect of the Scottish Amicable Insurance Fund
Should the assets of the Scottish Amicable Insurance Fund be inadequate to meet the guaranteed benefit obligations of the policyholders
of the Scottish Amicable Insurance Fund, the PAC long-term fund would be liable to cover any such deficiency in the first instance.
266
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued 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:
Asset management operations
2015 £m
2014 £m
M&G
US
Prudential
Capital
Eastspring
Investments
Total
Total
164
357
31
–
(150)
–
402
157
16
–
–
–
9
182
74
(39)
–
–
(55)
90
70
139
58
5
4
(57)
–
149
534
392
36
4
(262)
99
803
572
396
(34)
1
(409)
8
534
2015 £m
2014 £m
85
519
604
217
507
724
Regulatory and other surplus
Beginning of year
Gains (losses) during the year
Movement in capital requirement
Capital injection
Distributions made to the parent company
Exchange and other movements
End of year
C12: Provisions
Provision in respect of defined benefit pension schemes C9
Other provisions (see below)
Total provisions
Analysis of other provisions:
At 1 January
Charged to income statement:
Additional provisions
Unused amounts released
Used during the year
Exchange differences
Total at 31 December
2015 £m
2014 £m
Legal
provisions
Restructuring
provisions
note (i)
Other
provisions
note (ii)
9
6
(1)
(3)
1
12
11
10
(1)
(7)
–
13
487
341
(53)
(275)
(6)
494
Total
507
357
(55)
(285)
(5)
519
Legal
provisions
Restructuring
provisions
note (i)
Other
provisions
note (ii)
14
5
(3)
(7)
–
9
13
5
(3)
(4)
–
11
414
357
(10)
(277)
3
487
Total
441
367
(16)
(288)
3
507
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 benefits provisions of £384 million (2014: £395 million), provisions for onerous contracts of £31 million (2014: £35 million) and
regulatory and other provisions of £79 million (2014: £57 million). Staff benefits are generally expected to be paid out within the next three years.
267
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc C13: Property, plant and equipment
Property, plant and equipment comprise Group occupied properties and tangible assets. A reconciliation of the carrying amount of these
items from the beginning of the year to the end of the year is as follows:
At 1 January
Cost
Accumulated depreciation
Net book amount
Year ended 31 December
Opening net book amount
Exchange differences
Depreciation charge
Additions
Arising on acquisitions of subsidiaries*
Disposals and transfers
Closing net book amount
At 31 December
Cost
Accumulated depreciation
Net book amount
Group
occupied
property
2015 £m
Tangible
assets
390
(58)
332
332
(2)
(11)
40
52
–
411
480
(69)
411
1,165
(519)
646
646
(10)
(118)
216
84
(32)
786
1,387
(601)
786
Group
occupied
property
2014 £m
Tangible
assets
357
(50)
307
307
3
(9)
31
–
–
332
390
(58)
332
1,060
(447)
613
613
(18)
(81)
141
1
(10)
646
1,165
(519)
646
Total
1,555
(577)
978
978
(12)
(129)
256
136
(32)
1,197
1,867
(670)
1,197
Total
1,417
(497)
920
920
(15)
(90)
172
1
(10)
978
1,555
(577)
978
* Principally arising on an acquisition made for venture fund purposes by the PAC with-profits fund.
Tangible assets
Of the £786 million of tangible assets, £657 million were held by the Group’s with-profits operations, primarily by the consolidated
subsidiaries for venture fund and other investment purposes of the PAC with-profits fund.
Capital expenditure: property, plant and equipment by segment
The capital expenditure of £216 million (2014: £141 million) arose as follows: £143 million in UK, £20 million in US and £35 million in Asia
in insurance operations with the remaining balance of £18 million arising from asset management operations and unallocated corporate
expenditure (2014: £82 million in UK, £16 million in US, £20 million in Asia and £23 million in other operations).
268
Prudential plc Annual Report 2015 www.prudential.co.ukC: Balance sheet notes continued C14: Investment properties
Investment properties principally relate to the PAC with-profits fund and are carried at fair value. A reconciliation of the carrying amount
of investment properties at the beginning and end of the year is set out below:
At 1 January
Additions:
Resulting from property acquisitions
Resulting from expenditure capitalised
Disposals
Net gain from fair value adjustments
Net foreign exchange differences
Transfers from (to) held for sale assets
At 31 December
2015 £m
12,764
2014 £m
11,477
680
77
(662)
537
21
5
669
59
(370)
914
20
(5)
13,422
12,764
The 2015 income statement includes rental income from investment properties of £769 million (2014: £729 million) and direct operating
expenses including repairs and maintenance arising from these properties of £42 million (2014: £41 million).
Investment properties of £5,468 million (2014: £5,263 million) are held under finance leases. A reconciliation between the total
of future minimum lease payments at the statement of financial position date, and their present value is shown below.
Less than 1 year
1 to 5 years
Over 5 years
Total
2015 £m
2014 £m
Future
minimum
payments
Future
finance
charges
PV of future
minimum
payments
Future
minimum
payments
Future
finance
charges
PV of future
minimum
payments
4
16
640
660
–
(2)
(580)
(582)
4
14
60
78
5
21
936
962
–
(3)
(830)
(833)
5
18
106
129
Contingent rent is that portion of the lease payments that is not fixed in amount but is based on the future value of a factor that changes
other than with the passage of time. There was no contingent rent recognised as income or expense in 2015 and 2014.
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
2015 £m
2014 £m
309
1,091
2,595
3,995
314
1,098
2,762
4,174
The total minimum future rentals to be received on non-cancellable sub-leases for the Group’s investment properties held under finance
leases at 31 December 2015 are £2,888 million (2014: £2,600 million).
269
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D1: 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, 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 had been classified as held for sale on the statement of financial position of the Group since 2013. The held
for sale assets and liabilities of the Japan life business on the statement of financial position as at 31 December 2014 were 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
898
45
943
(124)
819
717
53
770
49
Upon its classification as held for sale in 2013, the IFRS carrying value of the Japan life business was set to represent the proceeds, net of
related expenses. Subsequent remeasurement of the carrying value of the Japan life business in 2014 resulted in a charge in the income
statement of £(13) million in 2014. These amounts, together with the results of the business including short-term value movements on
investments also included in the income statement, netted to an insignificant amount for those periods.
On completion of the sale, the cumulative foreign exchange translation loss of the Japan life business of £46 million, that had arisen
from 2004 (the year of the Group’s conversion to IFRS) to disposal was recycled from other comprehensive income through the profit and
loss account in 2015 as required by IAS 21. This amount is included within ‘Cumulative exchange loss on the sold Japan life business
recycled from other comprehensive income’ in the supplementary analysis of profit of the Group as shown in note B1.1. The adjustment
has no net effect on shareholders’ equity.
D2: 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. While 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.
Matters affecting shareholders’ funds
Unclaimed Property Provision
Jackson had previously received regulatory enquiries on an industry-wide matter regarding claims settlement practices and compliance
with unclaimed property laws. During 2015, Jackson has reached agreements to settle issues related to these enquiries.
At 31 December 2015, Jackson has accrued £16 million (2014: £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 financed by payments assessed on solvent insurance companies based on location, volume and types of business.
The estimated reserve for future guarantee fund assessments is not significant. The directors believe that the reserve is adequate for
all anticipated payments for known insolvencies.
At 31 December 2015, Jackson has unfunded commitments of £299 million (2014: £332 million) related to its investments in limited
partnerships and £64 million (2014: £73 million) related to commercial mortgage loans and other fixed maturities. These commitments
were entered into in the normal course of business and the directors do not expect a material adverse impact on the operations to arise
from them.
The Group has provided other guarantees and commitments to third parties entered into in the normal course of business, but the
Company does not consider that the amounts involved are significant.
270
Prudential plc Annual Report 2015 www.prudential.co.uk Support for long-term business funds by shareholders’ funds
As a proprietary insurance company, PAC is liable to meet its obligations to policyholders even if the assets of the long-term funds are
insufficient to do so. The assets, represented by the unallocated surplus of with-profits funds, in excess of amounts expected to be paid
for future terminal bonuses and related shareholder transfers (‘the excess assets’) in the long-term funds could be materially depleted
over time by, for example, a significant or sustained equity market downturn, costs of significant fundamental strategic change or a
material increase in the pension mis-selling provision. In the unlikely circumstance that the depletion of the excess assets within the
long-term fund was such that the Group’s ability to satisfy policyholders’ reasonable expectations was adversely affected, it might
become necessary to restrict the annual distribution to shareholders or to contribute shareholders’ funds to the long-term funds to
provide financial support.
In 1997, the business of Scottish Amicable Life Assurance Society, 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-profits business and all other pension business that
was transferred. No new business has been or will be written in the sub-fund, and it is managed to ensure that all the invested assets are
distributed to SAIF policyholders over the lifetime of SAIF policies. With the exception of certain amounts in respect of the unitised
with-profits life business, all future earnings arising in SAIF are retained for SAIF policyholders. Any excess (deficiency) of revenue over
expense within SAIF during a period is attributable to the policyholders of the fund. Shareholders have no interest in the profits of SAIF
but are entitled to the asset management fees paid on this business.
SAIF with-profits policies contain minimum levels of guaranteed benefit to policyholders. In addition, certain pensions products have
guaranteed annuity rates at retirement (see below). Should the assets of SAIF be inadequate to meet the guaranteed benefit obligations
of the policyholders of SAIF, the PAC long-term fund would be liable to cover any such deficiency in the first instance.
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 respect of the pension mis-selling review as referenced below). 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 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.
Matters affecting policyholders’ funds
Guaranteed annuities
The Group’s main exposure to guaranteed annuities in the UK is through SAIF (see above), and at 31 December 2015, a provision of
£412 million was held (2014: £549 million). However, 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. In addition, PAC used to sell guaranteed annuity
products in the UK and is therefore exposed to liabilities to honour guarantees on these products within the main with-profits fund
for which, at 31 December 2015, a provision of £47 million was held (2014: £50 million).
Inherited estate of the PAC long-term fund
The assets of the with-profits sub-fund (WPSF) within the long-term insurance fund of PAC comprise the amounts that it expects to pay
out to meet its obligations to existing policyholders and an additional amount used as working capital. The amount payable over time to
policyholders from the WPSF is equal to the policyholders’ accumulated asset shares plus any additional payments that may be required
by way of smoothing or to meet guarantees. The balance of the assets of the WPSF is called the ‘inherited estate’ and has accumulated
over many years from various sources.
This inherited estate enables PAC to support with-profits business by providing the benefits associated with smoothing and
guarantees, by providing investment flexibility for the fund’s assets, by meeting the regulatory capital requirements that demonstrate
solvency and by absorbing the costs of certain significant events or fundamental changes in its long-term business without affecting the
bonus and investment policies. The size of the inherited estate fluctuates from year to year depending on the investment return and the
extent of its utilisation.
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. The pension mis-selling provision is included within the policyholder
liabilities of the PAC with-profits funds.
The costs associated with the pension mis-selling review have been met from the inherited estate (see above) 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 (see above) would not impact its bonus or
investment policy and it gave an assurance that if this unlikely event were to occur, it would make available support to the fund from
shareholder resources for as long as the situation continued, so as to ensure that policyholders were not disadvantaged. This review
was completed on 30 June 2002 with the assurance continuing to apply to any policy in force at 31 December 2003, both for premiums
paid before 1 January 2004, and for subsequent regular premiums (including future fixed, retail price index or salary related increases
and Department of Work and Pensions rebate business). The assurance has not applied to new business since 1 January 2004.
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Dividends
The second interim and special dividends for the year ended 31 December 2015, which were approved by the Board of Directors after
31 December 2015 are described in note B7.
D4: Related party transactions
Transactions between the Company and its subsidiaries are eliminated on consolidation.
The Company has transactions and outstanding balances with certain unit trusts, Open-Ended Investment Companies (OEICs),
collateralised debt obligations and similar entities which are not consolidated and where a Group company acts as manager which are
regarded as related parties for the purposes of IAS 24. The balances are included in the Group’s statement of financial position at fair
value or amortised cost in accordance with their IAS 39 classifications. The transactions are included in the income statement and include
amounts paid on issue of shares or units, amounts received on cancellation of shares or units and paid in respect of the periodic charge
and administration fee.
In addition, there are no material transactions between the Group’s joint ventures which are accounted for on an equity method basis
and other Group companies.
Executive officers and directors of the Company may, from time to time, purchase insurance, asset management or annuity products
marketed by Group companies in the ordinary course of business on substantially the same terms as those prevailing at the time for
comparable transactions with other persons.
In 2015 and 2014, other transactions with directors were not deemed to be significant both by virtue of their size and in the context of
the directors’ financial positions. All 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.
D5: Commitments
Operating leases and capital commitments
The Group leases various offices to conduct its business. Leases in which a significant portion of the risks and rewards of ownership are
retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the
lessor) are charged to the income statement on a straight-line basis over the period of the lease.
Future minimum lease payments for non-cancellable operating leases fall due during the following periods:
Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
Future minimum sub-lease rentals received for non-cancellable operating leases for land and buildings
Minimum lease rental payments included in consolidated income statement
2015 £m
2014 £m
98
231
116
66
105
89
214
105
17
95
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 2015 were £409 million (2014: £232 million).
D6: Investments in subsidiary undertakings, joint ventures and associates
a 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 sufficient 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 sufficient distributable reserves.
The Group capital position statement for life assurance businesses is set out in note C11.1, showing the available capital reflecting
the excess of regulatory basis over liabilities for each fund or group of companies determined by reference to the local regulation of the
subsidiaries as at 31 December 2015. In addition, disclosure is also provided in note C11.1 of the local capital requirement of the principal
funds and companies.
272
Prudential plc Annual Report 2015 www.prudential.co.ukD: Other notes continued b 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-profits fund. The results of these joint
ventures are reflected in the movement in the unallocated surplus of the PAC with-profits funds and therefore do not affect
shareholders’ results.
For the Group’s joint ventures that are accounted for by using the equity method, the net of tax results of these operations are
included in the Group’s profit before tax.
The investments in these joint ventures have the same accounting year end as the Group, except for joint ventures in India.
Although these entities have reporting periods ending 31 March, 12 months of financial information up to 31 December is recorded.
Accordingly, the information covers the same period as that of the Group.
The Group’s associates, which are also accounted for under the equity method include PPM South Africa and PruHealth (until its sale
in 2014). In addition, the Group has investments in OEICs, unit trusts, funds holding collateralised debt obligations, property unit trusts
and venture capital investments of the PAC with-profits funds where the Group has significant influence. As allowed under IAS 28, these
investments are accounted for on a fair value through profit or loss basis. The aggregate fair value of associates accounted for at fair value
through profit or loss, where there are published price quotations, is approximately £1.4 billion at 31 December 2015 (2014: £1.2 billion).
The Group’s share of the profits, net of related tax, and carrying amount of interest in joint ventures and associates, which are equity
accounted as shown in the consolidated income statement comprises the following:
Shareholder-backed business
PAC with-profits fund (prior to offsetting effect in
movement in unallocated surplus)
Total
Joint ventures
Associates
2015 £m
2014 £m
2015 £m
2014 £m
171
53
224
162
129
291
14
–
14
12
–
12
There is no other comprehensive income in the joint ventures and associates. There have been no unrecognised share of losses of a joint
venture or associate that the Group has stopped recognising in the total income.
The joint ventures have no significant contingent liabilities or capital commitments to which the Group is exposed nor does the Group
have any significant contingent liabilities or capital commitments in relation to its interests in the joint ventures.
c Related undertakings
In accordance with Section 409 of the Companies Act 2006, a list of Prudential Group’s subsidiaries, joint ventures, associates and
significant holdings (being holdings more than 20 per cent) along with the country of incorporation, the classes of shares held and the
effective percentage of equity owned at 31 December 2015 is disclosed below.
The definitions of a subsidiary undertaking, joint venture and associate in accordance with the Companies Act 2006 are different from
the definition under IFRS. As a result, the related undertakings included within the following list may not be the same as the undertakings
consolidated in the Group IFRS financial statements. The Group’s consolidation policy is described in note A3.1(b).
Direct subsidiary undertakings of the parent company, Prudential plc (shares held directly or via nominees):
Name
Classes of shares held
Proportion held
Country of incorporation
M&G Group Limited
Prudential (US Holdco 1) Limited
Prudential Capital Holding Company Limited
Prudential Corporation Asia Limited
Prudential Financial Services Limited
Prudential Group Holdings Limited
Prudential Property Services Limited
Prudential US Limited
The Prudential Assurance Company Limited
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
United Kingdom
United Kingdom
United Kingdom
Hong Kong
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
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c Related undertakings continued
Other subsidiaries, joint ventures, associates and significant holdings of the Group – no shares held directly by the
parent company, Prudential plc or its nominees:
Name
Classes of shares held
Proportion held
Country of incorporation
AGR Holdco Ltd
Allied Life Brokerage Agency, Inc
Bird GP 1 Limited
BOCHK Aggressive Growth Fund
BOCHK Balanced Growth Fund
BOCHK China Equity Fund
BOCHK Conservative Growth Fund
BOCI – Prudential Asset Management Limited
BOCI – Prudential Trustee Limited
Bracknell Boulevard Management Company Limited
Brooke (Holdco 1) Inc.
Brooke Holdings (UK) (in liquidation)
Brooke Holdings LLC
Brooke Life Insurance Company
BWAT Retail Nominee (1) Limited
BWAT Retail Nominee (2) Limited
Calera Capital Partners IV – A AIV I, L.P.
Calvin F1 GP Limited
Calvin F2 GP Limited
Canada Property (Trustee) No 1 Limited
Canada Property Holdings Limited
Carraway Guildford (Nominee A) Limited
Carraway Guildford (Nominee B) Limited
Carraway Guildford General Partner Limited
Carraway Guildford Investments Unit Trust
Carraway Guildford Limited Partnership
CCC Investment S.à.r.l.
Centaurus Retail LLP
Central Square Leeds Limited
Centre Capital Non-Qualified Investors IV AIV Orion, L.P.
Centre Capital Non-Qualified Investors IV AIV-ELS, L.P.
Centre Capital Non-Qualified Investors IV AIV-RA, L.P.
Centre Capital Non-Qualified Investors IV, L.P.
Centre Capital Non-Qualified Investors V AIV-ELS LP
Centre Capital Non-Qualified Investors V LP
CEP IV-A Chicago AIV Limited Partnership
CEP IV-A CWV AIV Limited Partnership
CEP IV-A Indy AIV Limited Partnership
CEP IV-A NMR AIV Limited Partnership
CEP IV-A WBCT AIV Limited Partnership
CF European Qualified Investor Scheme
CF Japanese Qualified Investor Scheme
CF North American Qualified Investor Scheme
CF Prudential Pacific Markets Trust Fund
CF UK Growth Qualified Investor Scheme
Cimbria Holdings Limited
CITIC – CP Asset Management Co. Limited
CITIC – Prudential Fund Management Company Limited
CITIC – Prudential Life Insurance Company Limited
Creatrade Luxembourg S.à.r.l
Cribbs Causeway JV Limited
Cribbs Causeway Merchants Association Ltd
Cribbs Mall Nominee (1) Limited
Curian Capital, LLC
Curian Clearing LLC (Michigan)
Daisy 2015 Topco Limited
274
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Limited partnership interest
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Units
Limited partnership interest
Ordinary shares
Limited partnership interest
Ordinary shares
Membership interest
Membership interest
Membership interest
Membership interest
Membership interest
Membership interest
Membership interest
Membership interest
Membership interest
Membership interest
Membership interest
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ownership interest
Ownership interest
Ownership interest
Ordinary shares
Ordinary shares
Limited by guarantee
Ordinary shares
Membership interest
Membership interest
Ordinary shares
43.06%
100.00%
100.00%
54.69%
39.05%
64.15%
43.44%
36.00%
36.00%
29.10%
100.00%
100.00%
100.00%
100.00%
50.00%
50.00%
32.87%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
52.24%
50.00%
100.00%
76.75%
76.53%
71.43%
75.47%
73.16%
67.47%
31.92%
31.92%
31.92%
31.92%
31.91%
97.57%
97.68%
98.22%
97.42%
98.47%
41.78%
26.95%
49.00%
50.00%
52.27%
50.00%
100.00%
100.00%
100.00%
24.08%
United Kingdom
USA
United Kingdom
Hong Kong
Hong Kong
Hong Kong
Hong Kong
Hong Kong
Hong Kong
United Kingdom
USA
United Kingdom
USA
USA
United Kingdom
United Kingdom
USA
United Kingdom
United Kingdom
Jersey
United Kingdom
Jersey
Jersey
United Kingdom
Jersey
United Kingdom
Luxembourg
United Kingdom
United Kingdom
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Denmark
China
China
China
Luxembourg
United Kingdom
United Kingdom
United Kingdom
USA
USA
United Kingdom
Prudential plc Annual Report 2015 www.prudential.co.ukD: Other notes continued Name
Classes of shares held
Proportion held
Country of incorporation
Eastspring Al-Wara Investments Berhad
Eastspring Asset Management Korea Co. Ltd.
Eastspring Investments – Asia Pacific Equity Fund
Eastspring Investments Global Bond Navigator Fund
Eastspring Investments – Pan European Fund
Eastspring Investments – US High Yield Bond Fund
Eastspring Investments (Hong Kong) Limited
Eastspring Investments (Luxembourg) S.A.
Eastspring Investments (Singapore) Limited
Eastspring Investments Asean Income Private Fund A1
Eastspring Investments Asian Bond Fund
Eastspring Investments Asian Dynamic Fund
Eastspring Investments Asian Equity Fund
Eastspring Investments Asian Equity Income Fund
Eastspring Investments Asian High Yield Bond Fund
Eastspring Investments Asian Infrastructure Equity Fund
Eastspring Investments Asian Property Securities Fund
Eastspring Investments Berhad
Eastspring Investments Best Growth Securities Investments Trust 4
Eastspring Investments China Equity Fund
Eastspring Investments Dragon Peacock Fund
Eastspring Investments Emerging EMEA Dynamic Fund
Eastspring Investments European Investments Grade Bond Fund
Eastspring Investments Fund Management Limited Liability Company
Eastspring Investments Global Emerging Markets Bond Fund
Eastspring Investments Global Equity Navigator Fund
Eastspring Investments Global Market Navigator Fund
Eastspring Investments Global Technology Fund
Eastspring Investments Greater China Equity Fund
Eastspring Investments Hong Kong Equity Fund
Eastspring Investments Incorporated
Eastspring Investments India Consumer Equity Open Limited
Eastspring Investments India Equity Fund
Eastspring Investments India Equity Open Limited
Eastspring Investments India Infrastructure Equity Open Limited
Eastspring Investments Japan Fundamental Value Fund
Eastspring Investments Limited
Eastspring Investments Limited
Eastspring Investments North America Value Fund
Eastspring Investments Pan European Fund
Eastspring Investments Portfolio Management Limited
(in liquidation)
Eastspring Investments Services Pte. Ltd.
Eastspring Investments SICAV-FIS – Alternative Investments Fund
Eastspring Investments SICAV-FIS – Asia Pacific Loan Fund
Eastspring Investments SICAV-FIS Universal USD Bond Fund
Eastspring Investments SICAV-FIS Universal USD Bond II Fund
Eastspring Investments Unit Trusts – Asian Infrastructure Equity Fund
Eastspring Investments Unit Trusts – Global Technology Fund
Eastspring Investments US Bond Fund
Eastspring Investments US Corporate Bond Fund
Eastspring Investments US High Investments Grade Bond Fund
Eastspring Investments US Investments Grade Bond Private
Securities Investments Trust
Eastspring Investments UT Dragon Peacock Fund
Eastspring Investments UT Singapore ASEAN Equity Fund
Eastspring Investments UT Singapore Select Bond Fund
Eastspring Investments World Value Equity Fund
Eastspring Investments – Cash Reserve Fund
Eastspring Securities Investment Trust Company Limited
Edger Investments Limited
Empire Holding S.à.r.l. (in liquidation)
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ownership interest
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
100.00%
Malaysia
100.00%
Korea
75.64%
Luxembourg
96.29%
Luxembourg
88.40%
Singapore
33.90%
Luxembourg
100.00%
Hong Kong
100.00%
Luxembourg
100.00%
Singapore
100.00%
Korea
42.02%
Luxembourg
96.75%
Luxembourg
79.32%
Luxembourg
57.18%
Luxembourg
45.61%
Luxembourg
62.04%
Luxembourg
96.35%
Luxembourg
100.00%
Malaysia
83.40%
Korea
39.31%
Hong Kong
81.43%
Luxembourg
83.31%
Luxembourg
95.96%
Luxembourg
100.00%
Vietnam
93.40%
Luxembourg
99.99%
Luxembourg
47.80%
Luxembourg
90.18%
Luxembourg
90.24%
Luxembourg
99.53%
Luxembourg
100.00%
USA
100.00%
Mauritius
75.25%
Luxembourg
100.00%
Mauritius
100.00%
Mauritius
Luxembourg
100.00%
100.00% United Arab Emirates
100.00%
Japan
Luxembourg
100.00%
Luxembourg
76.55%
Mauritius
100.00%
100.00%
100.00%
94.36%
100.00%
100.00%
93.50%
96.80%
49.30%
86.39%
84.60%
37.12%
96.63%
99.93%
94.67%
83.06%
95.08%
99.54%
100.00%
100.00%
Singapore
Luxembourg
Luxembourg
Luxembourg
Luxembourg
Singapore
Singapore
Luxembourg
Luxembourg
Luxembourg
Korea
Singapore
Singapore
Singapore
Luxembourg
Indonesia
Taiwan
United Kingdom
Luxembourg
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c Related undertakings continued
Name
Classes of shares held
Proportion held
Country of incorporation
Euro Salas Properties Limited
Falan GP Limited
Fee Retail S.à.r.l
First Dakota, Inc.
Five Hotel Holdings, LLC
Foudry Properties Limited
Furnival Insurance Company PCC Limited
GCI Holdings Corporation
Geoffrey Snushall Limited (in liquidation)
Gerlach GP Limited
Global Low Volatility Equity Fund D Acc
Greenpark (Reading) General Partner Limited
Greenpark (Reading) Limited Partnership (The)
Greenpark (Reading) Nominee No. 1 Limited
Greenpark (Reading) Nominee No. 2 Limited
GS Twenty Two Limited
Harvest Partners V, L.P.
Hermitage Management LLC
Holborn Bars Nominees Limited
Holborn Finance Holding Company (in liquidation)
Holtwood Limited
Hyde Holdco 1 Limited
ICICI Prudential Asset Management Company Limited
ICICI Prudential Life Insurance Company Limited
ICICI Prudential Pension Funds Management Company Ltd
ICICI Prudential Trust Limited
ICP (TTT) GP Limited
ICP F2 (TTT) GP Limited
IFC Holdings, Inc
Infracapital (Bio) GP Limited
Infracapital (GC) GP Limited
Infracapital (TLSB) GP Limited
Infracapital ABP GP Limited
Infracapital CI II Limited
Infracapital DF II GP LLP
Infracapital DF II Limited
Infracapital EF II GP LLP
Infracapital Employee Feeder GP 1 LLP
Infracapital Employee Feeder GP 2 LLP
Infracapital Employee Feeder GP Limited
Infracapital F1 GP2 Limited
Infracapital F2 GP1 Limited
Infracapital F2 GP2 Limited
Infracapital GP 1 LLP
Infracapital GP 2 LLP
Infracapital GP II Limited
Infracapital GP Limited
Infracapital Greenfield Partners I GP 1 Limited
Infracapital Greenfield Partners I GP 2 Limited
Infracapital Greenfield Partners I GP LLP
Infracapital Long Term Income Partners GP 1 Limited
Infracapital Long Term Income Partners GP 2 Limited
Infracapital Long Term Income Partners GP LLP
Infracapital Nominees Limited
Infracapital Partners
Infracapital Partners II LP
Infracapital Sisu GP Limited
Infracapital SLP II GP LLP
Infracapital SLP Limited
276
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Membership interest
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Limited partnership interest
Ordinary shares
Ordinary shares
Ordinary shares
Membership interest
Membership interest
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Limited partnership interest
Ordinary shares
Limited partnership interest
Limited partnership interest
Limited partnership interest
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Limited partnership interest
Limited partnership interest
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Limited partnership interest
Ordinary shares
Ordinary shares
Limited partnership interest
Ordinary shares
Limited partnership interest
Limited partnership interest
Ordinary shares
Limited partnership interest
Ordinary shares
100.00%
100.00%
52.24%
100.00%
100.00%
50.00%
100.00%
75.80%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
25.13%
100.00%
100.00%
100.00%
100.00%
100.00%
49.00%
25.89%
25.89%
49.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
40.00%
100.00%
40.00%
40.00%
40.00%
100.00%
100.00%
100.00%
100.00%
40.00%
40.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
33.04%
25.98%
100.00%
40.00%
100.00%
United Kingdom
United Kingdom
Luxembourg
USA
USA
United Kingdom
Guernsey
USA
United Kingdom
United Kingdom
Luxembourg
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
USA
USA
United Kingdom
United Kingdom
Isle of Man
United Kingdom
India
India
India
India
United Kingdom
United Kingdom
USA
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Prudential plc Annual Report 2015 www.prudential.co.ukD: Other notes continued Name
Classes of shares held
Proportion held
Country of incorporation
Innisfree M&G PPP LLP
INVEST Financial Corporation Insurance Agency, Inc. of Delaware
INVEST Financial Corporation Insurance Agency, Inc. of Illinois
INVEST Financial Corporation Insurance Agency, Inc. of Maryland
Limited partnership interest
Ordinary shares
Ordinary shares
Ordinary shares
35.00%
100.00%
100.00%
100.00%
United Kingdom
USA
USA
USA
(in liquidation)
INVEST Financial Corporation Insurance Agency, Inc. of Ohio
Ordinary shares
100.00%
(in liquidation)
INVEST Financial Corporation Insurance Agency, Inc. of Oklahoma
Ordinary shares
100.00%
(in liquidation)
Investment Centers of America, Inc.
Ivy TopCo Limited
Jackson National Asset Management LLC
Jackson National Life (Bermuda) Limited
Jackson National Life Distributors LLC
Jackson National Life Insurance Company
Jackson National Life Insurance Company of New York
Jefferies Capital Partners V, L.P.
JNL PPM America Strategic Income Fund
Kalle Luxembourg S.à.r.l.
Lion Credit Opportunity Fund III
Lion Credit Opportunity Fund XII
LIPP S.à r.l. (in liquidation)
Livicos Limited
M&G (Guernsey) Limited
M&G Alternatives Investment Management Limited
M&G Asia Property Fund
M&G Dividend Fund
M&G Emerging Markets Bond Fund
M&G Episode Defensive Fund
M&G Episode Macro Fund
M&G European Credit High Yield Investments Fund
M&G European Credit Investments Fund
M&G European Fund
M&G European Property Fund
M&G European Strategic Value Fund
M&G Financial Services Limited
M&G Founders 1 Limited
M&G General Partner Inc.
M&G Gilt Fixed Interest Fund
M&G Global Corporate Bond Fund
M&G Global Credit Investments Fund
M&G Global Growth Fund
M&G Global Leaders Fund
M&G IMPPP 1 Limited
M&G International Investments Limited
M&G International Investments Nominees Limited
M&G International Investments Switzerland AG
M&G Investment Management Limited
M&G Investments (Hong Kong) Limited
M&G Investments (Singapore) Pte. Ltd.
M&G Limited
M&G Managed Growth Fund
M&G Management Services Limited
M&G Nominees Limited
M&G Pan European Dividend Fund
M&G Platform Nominees Limited
M&G Property Portfolio
M&G Property Portfolio Feeder
M&G Real Estate (Luxembourg) S.A.
M&G Real Estate Asia Holding Company Pte. Ltd
M&G Real Estate Asia Pte. Ltd
M&G Real Estate Debt Fund LP
Ordinary shares
Ordinary shares
Capital contribution
Ordinary shares
Membership interest
Ordinary shares
Ordinary shares
Limited partnership interest
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Limited partnership interest
100.00%
35.43%
100.00%
100.00%
100.00%
100.00%
100.00%
21.92%
100.00%
37.74%
29.10%
38.94%
100.00%
100.00%
100.00%
100.00%
34.06%
55.17%
46.36%
94.87%
59.00%
100.00%
100.00%
63.69%
38.23%
96.84%
100.00%
100.00%
100.00%
31.51%
82.30%
100.00%
43.19%
40.96%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
26.62%
100.00%
100.00%
67.64%
100.00%
67.39%
27.15%
100.00%
100.00%
100.00%
29.15%
USA
USA
USA
Guernsey
USA
Bermuda
USA
USA
USA
USA
USA
Luxembourg
Ireland
Ireland
Luxembourg
Ireland
Guernsey
United Kingdom
Luxembourg
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Luxembourg
Luxembourg
United Kingdom
Luxembourg
United Kingdom
United Kingdom
United Kingdom
Cayman Islands
United Kingdom
United Kingdom
Luxembourg
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Switzerland
United Kingdom
Hong Kong
Singapore
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Luxembourg
Singapore
Singapore
Guernsey
277
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc D6: Investments in subsidiary undertakings, joint ventures and associates continued
c Related undertakings continued
Name
Classes of shares held
Proportion held
Country of incorporation
M&G Real Estate Funds Management S.à.r.l.
M&G Real Estate Japan Co. Ltd
M&G Real Estate Korea Co. Ltd
M&G Real Estate Limited
M&G RED Employee Feeder GP Limited
M&G RED GP Limited
M&G RED II Employee Feeder GP Limited
M&G RED II GP Limited
M&G RED II SLP GP Limited
M&G RED III Employee Feeder GP Limited
M&G RED III GP Limited
M&G RED III SLP GP Limited
M&G RED SLP GP Limited
M&G RPF GP Limited
M&G RPF Nominee 1 Limited
M&G RPF Nominee 2 Limited
M&G Securities Limited
M&G SIF Management Company (Ireland) Limited
M&G Smaller Companies Fund
M&G Traditional Credit Fund
M&G UK Companies Financing Fund II LP
M&G UK Property GP Limited
M&G UK Property Nominee 1 Limited
M&G UK Property Nominee 2 Limited
M&G UKCF II GP Limited
Manchester JV Limited
Manchester Nominee (1) Limited
Manhattan Property Finance Company Limited
Mission Plans of America, Inc
MM&S (2375) Limited (in liquidation)
Murphy & Partners Fund, LP
NAPI REIT, Inc.
National Planning Corporation
National Planning Holdings, Inc.
National Planning Insurance Agency, Inc. (Florida) (in liquidation)
National Planning Insurance Agency, Inc. (Massachusetts)
(in liquidation)
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Limited partnership interest
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Limited partnership interest
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
47.74%
40.24%
48.32%
100.00%
100.00%
100.00%
100.00%
50.00%
100.00%
100.00%
100.00%
100.00%
21.07%
99.00%
100.00%
100.00%
100.00%
100.00%
Luxembourg
Japan
Korea
United Kingdom
United Kingdom
Guernsey
United Kingdom
Guernsey
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Ireland
United Kingdom
Ireland
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Gibraltar
USA
United Kingdom
USA
USA
USA
USA
USA
USA
National Planning Insurance Agency, Inc. (Oklahoma)
Ordinary shares
100.00%
USA
(in liquidation)
National Planning Insurance Agency, Inc. (Texas) (in liquidation)
NB Distressed Debt
North Sathorn Holdings Company Limited
Nova Sepadu Sdn. Bhd.
Oaktree Business Park Limited
Old Hickory Fund I, LLC
Optimus Point Management Company Limited
Orizon Luxembourg S.à.r.l
Pacus (UK) Limited
Park Avenue (Singapore Two) (in liquidation)
PCA IP Services Limited
PCA Life Assurance Co. Ltd.
PCA Life Insurance Co. Ltd.
PCA Reinsurance Co. Ltd.
PGDS (UK One) Limited
PGDS (US One) LLC
Phase One Imaging Holdings Ltd
Piccard at Rockville, LLC
Pinewood Limited
PPM America Capital Partners II, LLC
Ordinary shares
New global shares
Ordinary shares
Ordinary shares
Ordinary shares
Membership interest
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Membership interest
Ordinary shares
Membership interest
Ordinary shares
Membership interest
100.00%
25.66%
100.00%
51.00%
12.50%
100.00%
99.95%
78.49%
100.00%
100.00%
100.00%
99.79%
100.00%
100.00%
100.00%
100.00%
30.54%
100.00%
20.00%
63.45%
USA
Guernsey
Thailand
Malaysia
United Kingdom
USA
United Kingdom
Luxembourg
United Kingdom
Gibraltar
Hong Kong
Taiwan
Korea
Labuan, Malaysia
United Kingdom
USA
United Kingdom
USA
Malaysia
USA
278
Prudential plc Annual Report 2015 www.prudential.co.ukD: Other notes continued Name
Classes of shares held
Proportion held
Country of incorporation
PPM America Capital Partners III, LLC
PPM America Capital Partners IV, LLC
PPM America Capital Partners V, LLC
PPM America Capital Partners, LLC
PPM America Private Equity Fund II LP
PPM America Private Equity Fund III LP
PPM America Private Equity Fund IV LP
PPM America Private Equity Fund LP
PPM America Private Equity Fund V LP
PPM America, Inc.
PPM Capital (Holdings) Limited
PPM Finance, Inc.
PPM Holdings, Inc.
PPM Managers GP Limited
PPM Ventures (Asia) Limited (in liquidation)
PPMC First Nominees Limited
PPS Five Limited (in liquidation)
PPS Nine Limited (in liquidation)
PPS Twelve Limited (in liquidation)
Property Partners (Two Rivers) Limited
Pru Life Insurance Corporation of U.K.
Prudence Foundation Limited
Prudential (Cambodia) Life Assurance Plc.
Prudential (Gibraltar) Limited (in liquidation)
Prudential (Netherlands One) Limited (in liquidation)
Prudential (Netherlands) B.V. (in liquidation)
Prudential/M&G UKCF GP Limited
Prudential Africa Holdings Limited
Prudential Africa Services Limited
Prudential Annuities Limited (in liquidation)
Prudential Assurance Company Singapore (Pte) Limited
Prudential Assurance Malaysia Berhad
Prudential Assurance Uganda Limited
Prudential Australia One Limited (in liquidation)
Prudential BSN Takaful Berhad
Prudential Capital (Singapore) Pte. Ltd
Prudential Capital Public Limited Company
Prudential Corporate Pensions Trustee Limited
Prudential Corporation Australasia Holdings Pty Limited
Prudential Corporation Holdings Limited
Prudential Development Management Limited
Prudential Distribution Limited
Prudential Dublin Investment Ltd
Prudential Dynamic 0-30 Portfolio
Prudential Dynamic 10-40 Portfolio
Prudential Dynamic 20-55 Portfolio
Prudential Dynamic 40-80 Portfolio
Prudential Dynamic 60-100 Portfolio
Prudential Dynamic Focused 0-30 Portfolio
Prudential Dynamic Focused 10-40 Portfolio
Prudential Dynamic Focused 20-55 Portfolio
Prudential Dynamic Focused 40-80 Portfolio
Prudential Dynamic Focused 60-100 Portfolio
Prudential Equity Release Mortgages Limited
Prudential Europe Assurance Holdings Limited (in liquidation)
Prudential Financial Planning Limited
Prudential Five Limited
Prudential General Insurance Hong Kong Limited
Prudential GP Limited
Prudential Greenfield GP LLP
Prudential Greenfield GP1 Limited
Prudential Greenfield GP2 Limited
Prudential Greenfield LP
Membership interest
Membership interest
Membership interest
Membership interest
Limited partnership interest
Limited partnership interest
Limited partnership interest
Limited partnership interest
Limited partnership interest
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Limited by guarantee
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Limited partnership interest
Ordinary shares
Ordinary shares
Limited partnership interest
60.50%
34.50%
34.00%
19.38%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
50.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
51.00%
100.00%
100.00%
49.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
27.61%
32.39%
36.79%
39.69%
41.59%
66.84%
65.29%
48.25%
86.96%
94.18%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
United Kingdom
USA
USA
United Kingdom
Hong Kong
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Philippines
Hong Kong
Cambodia
Gibraltar
United Kingdom
Netherlands
United Kingdom
United Kingdom
Kenya
United Kingdom
Singapore
Malaysia
Uganda
United Kingdom
Malaysia
Singapore
United Kingdom
United Kingdom
Australia
United Kingdom
United Kingdom
United Kingdom
Ireland
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Hong Kong
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
279
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc D6: Investments in subsidiary undertakings, joint ventures and associates continued
c Related undertakings continued
Name
Classes of shares held
Proportion held
Country of incorporation
Prudential Greenfield SLP GP LLP
Prudential Group Pensions Limited
Prudential Group Secretarial Services Limited
Prudential Holborn Life Limited
Prudential Holdings Limited
Prudential Hong Kong Limited
Prudential International Assurance plc
Prudential International Management Services Limited
Prudential International Staff Pensions Limited
Prudential Investments (Luxembourg) 2 S.à r.l.
Prudential IP Services Limited
Prudential Lalondes Limited (in liquidation)
Prudential Life Assurance (Lao) Company Limited
Prudential Life Assurance (Thailand) Public Company Limited
Prudential Life Assurance Kenya Limited
Prudential Life Insurance Ghana Limited
Prudential Lifetime Mortgages Limited
Prudential M&G UK Companies Financing Fund LP
Prudential Mauritius Holdings Limited
Prudential Pensions Limited
Prudential Polska sp.z.oo
Prudential Portfolio Management Group Limited
Prudential Portfolio Managers (South Africa) (Pty) Limited
Prudential Process Management Services India Private Limited
Prudential Properties Trusty Pty Limited
Prudential Property Holding Limited
Prudential Property Investment Managers Limited
Prudential Property Investments Limited
Prudential Property Services (Bristol) Limited (in liquidation)
Prudential Real Estate Investments 1 Limited
Prudential Real Estate Investments 2 Limited
Prudential Real Estate Investments 3 Limited
Prudential Retirement Income Limited
Prudential Services Asia Sdn. Bhd.
Prudential Services Limited
Prudential Services Singapore Pte. Ltd.
Prudential Singapore Holdings Pte. Limited
Prudential Staff Pensions Limited
Prudential Trustee Company Limited
Prudential UK Services Limited
Prudential Unit Trusts Limited
Prudential Vietnam Assurance Private Limited
Prudential Vietnam Finance Company Limited
Prutec Limited
PT. Prudential Life Assurance
PT. Eastspring Investments Indonesia
PVFC Financial Limited
PVM Partnerships Limited
REALIC of Jacksonville Plans, Inc.
Reeds Rains Prudential Limited (in liquidation)
Reksa Dana Eastspring IDR Fixed Income Fund (NDEIFF)
Rhodium Investment Fund
Rift GP 1 Limited
Rift GP 2 Limited
ROP, Inc
SBP Management Limited
ScotAm Pension Trustees Limited
280
Limited partnership interest
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Limited partnership interest
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Unclassified shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Class D
preference shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ownership interest
Ownership interest
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
99.93%
100.00%
100.00%
100.00%
34.42%
100.00%
100.00%
100.00%
100.00%
49.99%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
94.62%
99.95%
100.00%
100.00%
100.00%
100.00%
97.49%
100.00%
100.00%
100.00%
100.00%
27.70%
100.00%
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Hong Kong
Ireland
Ireland
United Kingdom
Luxembourg
United Kingdom
United Kingdom
Laos
Thailand
Kenya
Ghana
United Kingdom
United Kingdom
Mauritius
United Kingdom
Poland
United Kingdom
South Africa
India
Australia
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Malaysia
United Kingdom
Singapore
Singapore
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Vietnam
Vietnam
United Kingdom
Indonesia
Indonesia
Hong Kong
United Kingdom
USA
United Kingdom
Indonesia
Singapore
United Kingdom
United Kingdom
USA
United Kingdom
United Kingdom
Prudential plc Annual Report 2015 www.prudential.co.ukD: Other notes continued Name
Classes of shares held
Proportion held
Country of incorporation
Scottish Amicable Finance plc
Scottish Amicable ISA Managers Limited (in liquidation)
Scottish Amicable Life Assurance Society
Scottish Amicable PEP and ISA Nominees Limited (in liquidation)
Scotts Spazio Pte. Ltd.
Sealand (No 1) Limited
Sealand (No 2) Limited
SES Manager Limited
SII Insurance Agency, Inc. (Wisconsin) (in liquidation)
SII Investments, Inc.
Smithfield Limited
Snushalls Team Limited (in liquidation)
Spanish Trail Ownership, LLC
Squire Capital I LLC
Squire Capital II LLC
Squire Reassurance Company LLC
Sri Han Suria Sdn. Bhd.
St Edward Homes Limited
Stableview Limited
Staple Limited
Staple Nominees Limited
Thanachart Life Assurance Public Company Limited (in liquidation)
The Car Auction Unit Trust
The First British Fixed Trust Company Limited
The Forum, Solent, Management Company Limited
The Green (Solihull) Management Company Ltd
The Heights Management Company Limited
The Hub (Witton) Management Company Limited
The St Edward Homes Partnership
The Strand Property Unit Trust
The Two Rivers Trust
Two Snowhill Birmingham S.à.r.l.
US Strategic Income Bond Fund D USD Acc
US Total Return Bond Fund D USD Acc
VFL International Life Company SPC, Ltd
Warren Farm Office Village Limited
Wessex Gate Limited
Westwacker Limited
Wynnefield Private Equity Partners I, L.P.
Wynnefield Private Equity Partners II, LP
Ordinary shares
Ordinary shares
No share capital
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Membership interest
Membership interest
Membership interest
Membership interest
Ordinary shares
Class A and B
preference shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Limited partnership interest
Units
Units
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Limited partnership interest
Limited partnership interest
100.00%
100.00%
100.00%
100.00%
45.00%
100.00%
100.00%
50.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
51.00%
100.00%
100.00%
100.00%
100.00%
100.00%
99.93%
50.00%
100.00%
100.00%
100.00%
50.00%
100.00%
49.95%
50.00%
50.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
99.00%
99.00%
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Singapore
Jersey
Jersey
United Kingdom
USA
USA
United Kingdom
United Kingdom
USA
USA
USA
USA
Malaysia
United Kingdom
United Kingdom
Thailand
United Kingdom
Thailand
Guernsey
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Jersey
Jersey
Luxembourg
Luxembourg
Luxembourg
Cayman Islands
United Kingdom
United Kingdom
United Kingdom
USA
USA
281
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Statement of financial position 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
Tax recoverable
Deferred tax asset
Derivative assets
Pension asset
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
Deferred tax liability
Sundry creditors
Accruals and deferred income
Net current assets
Total assets less current liabilities
Liabilities: amounts falling due after more than one year
Subordinated liabilities
Debenture loans
Other borrowings
Total net assets
Capital and reserves
Share capital
Share premium
Profit and loss account
Shareholders’ funds
Note
2015 £m
2014 £m
5
5
6
8
9
7
7
8
6
7
7
7
10
10
11
12,514
–
12,514
5,373
6,329
11,702
4,783
3
43
–
1
51
104
4,985
(1,107)
(200)
(322)
(2,711)
(20)
(9)
–
(56)
(4,425)
560
13,074
(4,018)
(549)
(598)
(5,165)
7,909
128
1,915
5,866
7,909
3,785
3
–
8
2
39
7
3,844
(1,704)
(500)
(315)
(1,108)
(55)
(8)
(3)
(39)
(3,732)
112
11,814
(3,320)
(549)
–
(3,869)
7,945
128
1,908
5,909
7,945
The financial statements of the parent company on pages 282 to 291 were approved by the Board of Directors on
8 March 2016 and signed on its behalf.
Paul Manduca
Chairman
Mike Wells
Group Chief Executive
Nic Nicandrou
Chief Financial Officer
282
Prudential plc Annual Report 2015
www.prudential.co.uk
Statement of changes in equity of the parent company
£m
Balance at 1 January 2014
Total comprehensive income for the year
Profit for the year
Actuarial gains recognised in respect of the pension scheme
Total comprehensive income for the year
Transactions with owners, recorded directly in equity
New share capital subscribed
Share-based payment transactions
Dividends
Total contributions by and distributions to owners
Balance at 31 December 2014
Balance at 1 January 2015
Total comprehensive income for the year
Profit for the year
Actuarial gains recognised in respect of the pension scheme
Total comprehensive income for the year
Transactions with owners, recorded directly in equity
New share capital subscribed
Share-based payment transactions
Dividends
Total contributions by and distributions to owners
Balance at 31 December 2015
Share
capital
128
Share
premium
1,895
Profit and
loss
account
5,329
Total
equity
7,352
1,463
6
1,469
13
6
(895)
(876)
–
–
–
13
–
–
13
1,463
6
1,469
–
6
(895)
(889)
1,908
5,909
7,945
1,908
5,909
7,945
–
–
–
7
–
–
7
920
4
924
–
7
(974)
(967)
920
4
924
7
7
(974)
(960)
–
–
–
–
–
–
–
128
128
–
–
–
–
–
–
–
128
1,915
5,866
7,909
283
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Notes on the parent company financial statements
1 Nature of operations
Prudential plc (the ‘Company’) is a parent holding company. The Company together with its subsidiaries (collectively, the ‘Group’) is an
international financial services group with its principal operations in Asia, the US and the UK. In Asia, the Group has operations in Hong
Kong, 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 financial statements of the Company, which comprise the statement of financial position, statement of changes in equity and related
notes, are prepared in accordance with UK Generally Accepted Accounting Practice, including Financial Reporting Standard 101
Reduced Disclosure Framework (‘FRS 101’) and Part 15 of the Companies Act 2006.
In preparing these financial statements, the Company applies the recognition, measurement and disclosure requirements in
International Financial Reporting Standards (‘IFRSs’) as issued by the International Accounting Standards Board (‘IASB’) and endorsed
by the EU, but makes amendments where necessary in order to comply with the Companies Act 2006, and has set out below where
advantage of the FRS 101 disclosure exemptions has been taken. The Company has also taken advantage of the exemption under
Section 408 of the Companies Act 2006 from presenting its own profit and loss account.
In preparing these financial statements, the Company has adopted FRS 101 for the first time. In the transition to FRS 101, the Company
has made no measurement and recognition adjustments. An explanation of how the transition to FRS 101 has affected the presentation
of the financial statements of the Company is provided in note 14.
In these financial statements, the Company has applied the exemptions available under FRS 101 in respect of the following disclosures:
— A cash flow statement and related notes;
— Disclosures in respect of transactions with wholly-owned subsidiaries within the Prudential Group;
— Disclosure in respect of capital management;
— The effects of new but not yet effective IFRSs; and
— An additional balance sheet for the beginning of the earliest comparative period following the retrospective change in accounting
policy to adopt FRS 101.
As the consolidated financial statements of the Group include the equivalent disclosure, the Company has also applied the exemptions
available under FRS 101 in respect of the following disclosures:
— IFRS 2 ‘Share-based Payment’ in respect of Group-settled share-based payments; and
— Disclosure required by IFRS 7 ‘Financial Instrument Disclosures’ and IFRS 13 ‘Fair Value Measurement’.
The accounting policies set out in note 3 below have, unless otherwise stated, been applied consistently to all periods presented in these
financial statements and in preparing an opening FRS 101 statement of financial position at 1 January 2014 for the purposes of the
transition to FRS 101.
3 Significant accounting policies
Shares in subsidiary undertakings
Shares in subsidiary undertakings are shown at cost less impairment.
Loans to subsidiary undertakings
Loans to subsidiary undertakings are shown at cost less provisions.
Derivatives
Derivative financial instruments are held to manage certain macroeconomic exposures. Derivative financial instruments are carried at fair
value with changes in fair value included in the profit and loss account.
Borrowings
Borrowings are initially recognised at fair value, net of transaction costs, and subsequently accounted for on an amortised cost basis using
the effective interest method. Under the effective interest method, the difference between the redemption value of the borrowing and
the initial proceeds, net of transaction costs, is amortised through the profit and loss account to the date of maturity or, for 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. From 2016, the Company will make all dividend payments as interim payments.
284
Prudential plc Annual Report 2015 www.prudential.co.uk 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 finance or provide a hedge against
Group equity investments in overseas subsidiaries, are translated at year end exchange rates. The impact of these currency translations
is recorded within the profit and loss account for the year.
Tax
Current tax expense is charged or credited to operations based upon amounts estimated to be payable or recoverable as a result of
taxable amounts for the current year. To the extent that losses of an individual UK company are not offset in any one year, they can be
carried back for one year or carried forward indefinitely to be offset against profits arising from the same company.
Deferred tax assets and liabilities are recognised in accordance with the provisions of IAS 12, ’Income Taxes’. Deferred tax assets are
recognised to the extent that it is regarded as more likely than not that future taxable profits will be available against which these losses
can be utilised. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse,
using tax rates enacted or substantively enacted at the reporting date.
The Group’s UK subsidiaries each file separate tax returns. In accordance with UK tax legislation, where one domestic UK company
is a 75 per cent owned subsidiary of another UK company or both are 75 per cent owned subsidiaries of a common parent, the companies
are considered to be within the same UK tax group. For companies within the same tax group, trading profits and losses arising in the
same accounting period may be offset for the purposes of determining current and deferred taxes.
Pensions
The Company assumes a portion of the pension surplus or deficit of the Group’s main pension scheme, the Prudential Staff Pension
Scheme (‘PSPS’). Upon adoption of FRS 101, the Company applies the requirements of IAS 19 ‘Employee Benefit’ (as revised in 2011)
for the accounting of its interest in the PSPS surplus or deficit. Further details are disclosed in note 9.
A pension surplus or deficit is recorded as the difference between the present value of the scheme liabilities and the fair value of the
scheme assets. The Company’s share of pension surplus is recognised to the extent that the Company is able to recover a surplus either
through reduced contributions in the future or through refunds from the scheme.
The assets and liabilities of the defined benefit pension schemes of the Prudential Group are subject to a full triennial actuarial
valuation using the projected unit method. Estimated future cash flows are then discounted at a high quality corporate bond rate,
adjusted to allow for the difference in duration between the bond index and the pension liabilities where appropriate, to determine
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 net income (interest) on the
net scheme assets (liabilities) at the start of the period, is recognised in the profit or loss account. Actuarial gains and losses as a result
of the changes in assumptions, experience variances or the return on scheme assets excluding amounts included in the net deferred
benefit asset (liability) are recorded in other comprehensive income.
Share-based payments
The Group offers share award and option plans for certain key employees and a Save As You Earn (‘SAYE’) plan for all UK and certain
overseas employees. The share-based payment plans operated by the Group are mainly equity-settled plans with a few cash-settled plans.
Under IFRS 2 ‘Share-based Payment’, where the Company, as the parent company, has the obligation to settle the options or awards
of its equity instruments to employees of its subsidiary undertakings, and such share-based payments are accounted for as equity-
settled in the Group financial statements, the Company records an increase in the investment in subsidiary undertakings for the value of
the share options and awards granted with a corresponding credit entry recognised directly in equity. The value of the share options and
awards granted is based upon the fair value of the options and awards at the grant date, the vesting period and the vesting conditions.
285
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc 4 Reconciliation from the FRS 101 parent company results to the IFRS Group results
The parent company financial statements are prepared in accordance with FRS 101 and the Group financial statements are prepared
in accordance with IFRSs as issued by the IASB and endorsed by the EU. At 31 December 2015, there were no differences between
FRS 101 and IFRSs as issued by the IASB and endorsed by the EU in terms of their application to the parent company.
The tables below provide a reconciliation between the FRS 101 parent company results and the IFRS Group results.
Profit after tax
Profit for the financial year of the Company (including dividends from subsidiaries) in accordance
with FRS 101 and IFRS
Share in the IFRS result of the Group, net of distributions to the Company *
Profit after tax of the Group attributable to shareholders in accordance with IFRS
Net equity
Shareholders’ equity of the Company in accordance with FRS 101 and IFRS
Share in the IFRS net equity of the Group *
Shareholders' equity of the Group in accordance with IFRS
2015 £m
2014 £m
920
1,659
2,579
1,463
753
2,216
2015 £m
2014 £m
7,909
5,046
12,955
7,945
3,866
11,811
* The ‘shares in the IFRS result and net equity of the Group’ lines represent the parent company’s equity in the earnings and net assets of its subsidiaries and associates.
The profit for the financial year of the Company in accordance with IFRS includes dividends received in the year from subsidiary
undertakings of £985 million and £1,774 million for the years ended 31 December 2015 and 2014, respectively.
As stated in note 3, under FRS 101, the Company accounts for its investments in subsidiary undertakings at cost less impairment.
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
Investment in subsidiary undertakings
Offset against amount owed to subsidiary undertaking
Reclassified as amount owed by subsidiary undertaking
Other movements
At 31 December
2015 £m
Shares in
subsidiary
undertakings
Loans to
subsidiary
undertakings
5,373
7,247
(79)
–
(27)
12,514
6,329
(5,489)
–
(840)
–
–
During the year, the Company entered into a number of intra-group transactions in order to simplify the Group’s corporate structure
relating to central finance subsidiaries. The transactions resulted in an increase of £7,247 million in the cost of shares in subsidiary
undertakings, of which £5,489 million related to the conversion to equity of existing intra-group loans and the remainder to movements
in other intercompany balances. No profit or loss arose on the transactions. Further changes to the amounts relating to shares in, and
loans to, subsidiary undertakings are set out in the table above.
Other movements comprise £7 million in respect of share-based payments, reflecting the value of payments settled by the Company
for employees of its subsidiary undertakings, less £34 million relating to cash received from subsidiaries in respect of share awards.
Subsidiary undertakings of the Company at 31 December 2015 are listed in note D6 of the Group financial statements.
286
Prudential plc Annual Report 2015 www.prudential.co.ukNotes on the parent company financial statements continued 6 Deferred tax assets and liabilities
Deferred tax asset
Short-term temporary differences
Unused deferred tax losses
Total
2015 £m
2014 £m
–
–
–
1
7
8
Deferred tax assets are recognised to the extent that they are regarded as recoverable, that is to the extent that, on the basis of all
available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal
of the underlying temporary differences can be deducted.
Deferred tax liability
Short-term temporary differences related to pension scheme
Total
2015 £m
2014 £m
(9)
(9)
(8)
(8)
Deferred tax liability of £(9) million (2014: £(8) million) disclosure arises from the change in the presentation of the pension scheme asset
on the balance sheet from net to gross of related deferred tax at the balance sheet date following adoption of FRS 101.
The reduction in the UK corporation tax rate to 19 per cent from 1 April 2017 and a further reduction to 18 per cent from 1 April 2020
was substantively enacted on 26 October 2015 which has had the effect of reducing the deferred tax balances as at 31 December 2015.
These changes are reflected in the financial statements for the year ended 31 December 2015.
7 Borrowings
Core structural borrowings note (i)
Subordinated liabilities note (ii)
Debenture loans
Other borrowings: note (iii)
Commercial Paper
Floating Rate Notes note (iv)
Medium Term Notes 2015 note (v)
Medium Term Notes 2018 note (vi)
Total borrowings
Borrowings are repayable as follows:
Within 1 year or on demand
Between 1 and 5 years
After 5 years
Core structural borrowings
Other borrowings
Total
2015 £m
2014 £m
2015 £m
2014 £m
2015 £m
2014 £m
4,018
549
4,567
–
–
–
–
3,320
549
3,869
–
–
–
–
4,567
3,869
–
–
4,567
4,567
–
–
3,869
3,869
–
–
–
1,107
200
–
598
1,905
1,307
598
–
1,905
–
–
–
1,704
200
300
–
2,204
2,204
–
–
2,204
4,018
549
4,567
1,107
200
–
598
6,472
1,307
598
4,567
6,472
3,320
549
3,869
1,704
200
300
–
6,073
2,204
–
3,869
6,073
Further details on the core structural borrowings of the Company are provided in note C6.1 of the Group financial statements.
The interests of the holders of the subordinated liabilities are subordinate to the entitlements of other creditors of the Company.
Notes
(i)
(ii)
(iii) These borrowings support a short-term fixed income securities programme.
(iv) The Company issued £200 million Floating Rate Notes in October 2015 which will mature in October 2016. These Notes have been wholly subscribed
to by a Group subsidiary and accordingly have been eliminated on consolidation in the Group financial statements. These Notes were originally issued
in October 2008 and have been continually reissued upon their maturity.
In November 2015, the Company repaid £300 million Medium Term Notes at maturity.
In January 2015 and in November 2015, the Company issued £300 million Medium Term Notes which will mature in January 2018 and November 2018
respectively. The proceeds, net of costs, were £598 million.
(v)
(vi)
287
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc 8 Derivative financial instruments
Cross-currency swap
Inflation-linked swap
Total
2015 £m
2014 £m
Fair value
assets
Fair value
liabilities
Fair value
assets
Fair value
liabilities
1
–
1
–
322
322
2
–
2
–
315
315
Derivative financial instruments are held to manage certain macroeconomic exposures. The change in fair value of the derivative financial
instruments of the Company was a loss before tax of £7 million (2014: loss before tax of £115 million).
The derivative financial instruments are valued internally using standard market practices. In accordance with the Company’s
risk management framework, all internally generated valuations are subject to independent assessment against external
counterparties’ valuations.
9 Pension scheme financial position
The majority of UK Prudential staff are members of the Group’s pension schemes. The largest scheme is the Prudential Staff Pension
Scheme (the ‘Scheme’) which is primarily a closed defined benefit scheme.
At 31 December 2005, the allocation of surpluses and deficits attaching to the Scheme between the Company and the unallocated
surplus of The Prudential Assurance Company Limited (‘PAC’) with-profits fund was apportioned in the ratio 30/70 following detailed
consideration of the sourcing of previous contributions. This ratio was applied to the base deficit position at 1 January 2006 and for the
purpose of determining the allocation of the movements in that position up to 31 December 2015. The IAS 19 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 2014. Further details on the results of this valuation and
the total employer contributions to the Scheme for the year are provided in note C9 of the Group financial statements, together with the
key assumptions adopted, including mortality assumptions.
A description of the regulatory framework in which the Scheme operates, the governance of the Scheme, and the risks to which the
Scheme exposes the Company is provided in note C9. The most recent full valuation has been updated to 31 December 2015 applying
the principles prescribed by IAS 19. The actuarial assumptions used in determining the IAS 19 benefit obligations and the net periodic
costs and sensitivity of IAS 19 benefit obligation to changes in the actuarial assumptions are also provided in note C9.
Movements in net defined benefit liability/asset
The assets and liabilities of the Scheme were:
Scheme assets:
Equities
UK
Overseas
Bonds*
Government
Corporate
Asset-backed securities
Properties
Derivatives
Other assets
Fair value of Scheme assets
Present value of benefit obligations
Underlying surplus in the Scheme
Effect of the application of IFRIC 14 for
de-recognition of surplus
Surplus in the Scheme
Surplus in the Scheme recognised by the
Company†
Quoted
prices in
an active
market
118
150
4,795
925
135
–
183
272
6,578
31 Dec 2015 £m
31 Dec 2014 £m
Quoted
prices in
an active
market
126
143
5,078
885
197
–
159
270
6,858
Other
Total
8
–
–
45
–
70
–
26
149
126
150
4,795
970
135
70
183
298
6,727
(5,758)
969
(800)
169
51
Other
Total
–
–
–
46
–
93
–
–
139
126
143
5,078
931
197
93
159
270
6,997
(6,157)
840
(710)
130
39
* 96 per cent (2014: 97 per cent) of the bonds are investment graded.
† The surplus in the Scheme recognised in the balance sheet of the Company represents the amount which is recoverable through reduced future contributions and
is net of the apportionment to the PAC with-profits fund.
288
Prudential plc Annual Report 2015 www.prudential.co.ukNotes on the parent company financial statements continued
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:
Balance at 1 January
Current service cost
Negative past service cost
Net interest income (cost)
Administration expenses
Actuarial gains (losses) note (ii)
Contributions paid by the employer note (iii)
Contributions paid by the employee
Benefits paid
Balance at 31 December
Balance at 1 January
Current service cost
Past service cost
Net interest income (cost)
Administration expenses
Actuarial gains (losses) note (ii)
Contributions paid by the employer note (iii)
Contributions paid by the employee
Benefits paid
Balance at 31 December
Scheme assets
Present value
of benefit
obligations
note (i)
6,997
–
–
240
(4)
(248)
11
1
(270)
6,727
(6,157)
(21)
48
(209)
–
312
–
(1)
270
(5,758)
Scheme assets
Present value
of benefit
obligations
note (i)
6,042
–
–
261
(5)
927
11
1
(240)
6,997
(5,316)
(17)
(4)
(229)
–
(830)
–
(1)
240
(6,157)
2015 £m
Net surplus
without the
effect of
IFRIC 14
Effect of
IFRIC 14
for de-
recognition
of surplus
IAS 19
basis net
surplus
840
(21)
48
31
(4)
64
11
–
–
969
(710)
(26)
(64)
(800)
130
(21)
48
5
(4)
–
11
–
–
169
2014 £m
Net surplus
without the
effect of
IFRIC 14
Effect of
IFRIC 14
for de-
recognition
of surplus
IAS 19
basis net
surplus
726
(17)
(4)
32
(5)
97
11
–
–
840
(602)
(26)
(82)
(710)
124
(17)
(4)
6
(5)
15
11
–
–
130
Notes
(i)
The weighted average duration of the benefit obligations of the Scheme is 17 years (2014: 17 years). The following table provides an expected maturity analysis
of the benefit obligations as at 31 December:
2015
2014
1 year or less
After 1 year
to 5 years
After 5 years
to 10 years
After 10 years
to 15 years
After 15 years
to 20 years
Over 20 years
225
222
974
945
1,422
1,417
1,489
1,519
1,438
1,476
6,303
6,716
Total
11,851
12,295
(ii)
The actuarial gains attributable to policyholders and shareholders are analysed as follows:
Return on scheme assets excluding interest income*
Actuarial gains (losses):
Experience gains (losses) on Scheme liabilities
Actuarial losses – demographic assumptions
Actuarial gains (losses) – financial assumptions
Total actuarial gains without the effect of IFRIC 14
Actuarial gains attributable to the Company before tax†
2015 £m
2014 £m
(248)
28
(3)
287
312
64
4
927
(34)
(22)
(774)
(830)
97
8
* The total return on scheme assets in 2015 was a loss of £8 million (2014: gain of £1,188 million).
† Actuarial gains attributable to the Company are net of the apportionment to the PAC with-profits fund and are related to the surplus recognised in the balance
sheet of the Company. In 2015, the gains included a charge of £15 million (2014: £21 million) for the adjustment to the unrecognised portion of surplus which has
not been deducted from the pension charge.
The gains after tax of £4 million (2014: £6 million) are recorded in other comprehensive income.
(iii) Employer contributions to be paid into the Scheme for the year ending 31 December 2016 are expected to amount to £11 million, comprising ongoing service
contributions and expenses.
289
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc 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 2015 is set
out in note C10 of the Group financial statements.
11 Retained profit of the Company
Retained profit at 31 December 2015 amounted to £5,866 million (2014: £5,909 million). The retained profit includes distributable
reserves of £3,385 million and non-distributable reserves of £2,481 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 £76 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 sufficient distributable reserves of the Company are available for the
purpose and if the amount of its net assets is greater than the aggregate of its called up share capital and non-distributable reserves (such
as the share premium account) and the payment of the dividend does not reduce the amount of its net assets to less than that aggregate.
12 Other information
a
Information on directors’ remuneration is given in the directors’ remuneration report section of this Annual Report and note B3.3
of the Group financial statements.
Information on transactions of the directors with the Group is given in note D4 of the Group financial statements.
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts were £0.1 million (2014: £0.1 million) and for
other services were £0.2 million (2014: £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
The second interim and special dividends for the year ended 31 December 2015, which were approved by the Board of Directors after
31 December 2015, are described in note B7 of the Group financial statements.
290
Prudential plc Annual Report 2015 www.prudential.co.ukNotes on the parent company financial statements continued
14 Explanation of transition to FRS 101
As stated in note 2, these are the Company’s first financial statements prepared in accordance with FRS 101.
The accounting policies set out in note 3 have been applied in preparing the financial statements for the year ended 31 December
2015, the comparative information presented in these financial statements for the year ended 31 December 2014 and in the preparation
of an opening FRS 101 statement of financial position at 1 January 2014.
In preparing its FRS 101 balance sheet, the Company has adjusted amounts reported previously in financial statements prepared
in accordance with its old basis of accounting, UK GAAP. An explanation of how the transition from UK GAAP to FRS 101 has affected
the Company’s financial statements is set out in the following tables and the notes that accompany the tables.
Fixed assets
Current assets (including pension asset)
Pension asset
Other current assets
Liabilities: amounts falling due within one year
Deferred tax liability
Other current liabilities
Net current assets
Total assets less current liabilities
Liabilities: amounts falling due after more than one year
Total net assets
Profit on ordinary activities before tax
Tax credit on profit on ordinary activities
Profit for the year
Actuarial gains (losses) recognised in respect of the pension scheme, net of tax
Total comprehensive income for the year
31 Dec 2014 £m
Effect of
transition
to FRS 101
–
8
–
8
(8)
–
(8)
–
–
–
–
2014 £m
Effect of
transition
to FRS 101
3
–
3
(3)
–
UK GAAP
11,702
31
3,805
3,836
–
(3,724)
(3,724)
112
11,814
(3,869)
7,945
UK GAAP
1,385
75
1,460
9
1,469
FRS 101
11,702
39
3,805
3,844
(8)
(3,724)
(3,732)
112
11,814
(3,869)
7,945
FRS 101
1,388
75
1,463
6
1,469
Notes:
(1)
(2)
The change in the presentation of the pension asset on the balance sheet from net to gross of related deferred tax liability at 31 December 2014 was £8 million.
The replacement of expected return on scheme assets under FRS 17 with an amount based on the liability discount rate under IAS 19 in the determination
of the pension charge and the change in the recording of the surplus restriction resulted in a reclassification of £3 million gross and net of tax between
the 2014 pension charge in the profit and loss account and the actuarial gains in other comprehensive income.
291
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Statement of directors’ responsibilities in respect of the Annual Report and the financial statements
The directors are responsible
for preparing the Annual Report
and the Group and parent
company financial statements
in accordance with applicable
law and regulations.
Company law requires the directors to
prepare Group and parent company
financial statements for each financial year.
Under that law, the directors are required
to prepare the Group financial statements
in accordance with International Financial
Reporting Standards (IFRSs) as adopted by
the European Union (EU) and applicable
law and have elected to prepare the parent
company financial statements in
accordance with UK Accounting Standards
and applicable law (UK Generally
Accepted Accounting Practice) including
FRS 101 ‘Reduced Disclosure Framework’.
Under company law, the directors must not
approve the financial statements unless
they are satisfied that they give a true and
fair view of the state of affairs of the Group
and parent company and of their profit or
loss for that period. In preparing each of the
Group and parent company financial
statements, the directors are required to:
— Select suitable accounting policies and
then apply them consistently;
— Make judgements and estimates that
are reasonable and prudent;
— For the Group financial statements,
state whether they have been prepared
in accordance with IFRS as adopted by
the EU;
— For the parent company financial
statements, state whether applicable
UK Accounting Standards have been
followed, subject to any material
departures disclosed and explained in
the parent company financial
statements; and
— Prepare the financial statements on
the going concern basis unless it is
inappropriate to presume that the
Group and the parent company will
continue in business.
The directors are responsible for keeping
adequate accounting records that are
sufficient to show and explain the parent
company’s transactions and disclose, with
reasonable accuracy at any time, the
financial position of the parent company
and enable them to ensure that its financial
statements comply with the Companies
Act 2006. They have general responsibility
for taking such steps as are reasonably
open to them to safeguard the assets of the
Group and to prevent and detect fraud and
other irregularities.
Under applicable law and regulations, the
directors are also responsible for preparing
a strategic report, directors’ report,
directors’ remuneration report and
corporate governance statement that
comply with that law and those regulations.
The directors are responsible for the
maintenance and integrity of the corporate
and financial information included on the
Company’s website. Legislation in the UK
governing the preparation and
dissemination of financial statements may
differ from legislation in other jurisdictions.
The directors of Prudential plc, whose
names and positions are set out on pages
71 to 75 confirm that to the best of their
knowledge:
— The financial statements, prepared in
accordance with the applicable set of
accounting standards, give a true and
fair view of the assets, liabilities,
financial position and profit or loss
of the Company and the undertakings
included in the consolidation taken as
a whole;
— 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 financial
statements, taken as a whole, is fair,
balanced and understandable and
provides the information necessary for
shareholders to assess the Company’s
position and performance, business
model and strategy.
292
Prudential plc Annual Report 2015 www.prudential.co.uk Independent auditor’s report to the members of Prudential plc only
Opinions and conclusions arising
from our audit
1. Our opinion on the financial
statements is unmodified
We have audited the financial statements
of Prudential plc for the year ended
31 December 2015 set out on pages 133
to 291. In our opinion:
— The financial statements give a true and
fair view of the state of the Group’s and
of the parent company’s affairs as at
31 December 2015 and of the Group’s
profit for the year then ended;
— The Group financial statements have
been properly prepared in accordance
with International Financial Reporting
Standards as adopted by the European
Union;
— The parent company financial
statements have been properly
prepared in accordance with UK
Accounting Standards including FRS
101 Reduced Disclosure Framework;
and
— The financial statements have been
prepared in accordance with the
requirements of the Companies Act
2006 and, as regards the Group
financial statements, Article 4
of the IAS Regulation.
2. Our assessment of risks of material misstatement
In arriving at our audit opinion above on the financial statements, the risks of material misstatement that had the greatest effect on our
audit, which are unchanged from 2014 including the level of risk associated with them, were as follows:
Valuation of investments (2015: £351,979 million, 2014: £337,454 million)
Refer to page 89 (Audit Committee report), page 147 (accounting policy) and pages 196 to 218 (financial disclosures)
The risk – The Group’s investment portfolio represents
91 per cent of the Group’s total assets. The valuation of the
portfolio involves judgement in selecting the valuation basis for
each investment and further judgement in performing the
valuation for harder to value investments.
The areas that involved significant audit effort and judgement in
2015 were the valuation of illiquid positions within the financial
investments portfolio representing 3 per cent of the Group’s total
assets. These included unlisted equity, unlisted debt securities,
certain 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 procedures in this
area, which included:
— Assessing the availability of quoted prices in liquid markets;
— Assessing whether the valuation process is appropriately
designed and captures relevant valuation inputs;
— Testing whether associated controls in respect of the valuation
process are functioning properly;
— 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 files to understand the
performance of the loans. We obtained an understanding
of existing and prospective investee company cash flows
to understand whether loans can be serviced or refinancing
may be required and considered the impact on impairment
testing performed.
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.
293
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Policyholder liabilities (2015: £322,518 million, 2014: £309,539 million)
Refer to page 89 (Audit Committee report), page 144 (accounting policy) and pages 219 to 235 (financial disclosures)
The risk – The Group has significant insurance liabilities
representing 86 per cent of the Group’s total liabilities. This is an
area that involves significant judgement over uncertain future
outcomes, mainly the ultimate total settlement value of long-term
policyholder liabilities. Economic assumptions, such as investment
return and associated discount rates, and operating assumptions
such as mortality and persistency (including consideration of
policyholder behaviour) are the key inputs used to estimate these
long-term liabilities.
The valuation of the guarantees in the US variable annuity business
is a complex exercise as it involves exercising significant judgement
over the relationship between the investment return attaching
to these products and the guarantees contractually provided
to policyholders and the likely policyholder behaviour in response
to changes in investment performance.
The valuation of the insurance liabilities in relation to the UK
annuity business requires the exercise of significant judgement
over the setting of mortality and credit risk assumptions.
Our response – We used our own actuarial specialists to assist us
in performing our procedures in this area, which included:
— Consideration of the appropriateness of the assumptions used
in the stochastic models for the valuation of the US variable
annuity guarantees. We assessed assumptions of policyholder
behaviour by reference to relevant company and industry
historical data. We assessed assumptions for investment mix
and projected investment returns by reference to company-
specific and industry data, and for future growth rates by
reference to market trends and market volatility; and
— Consideration of the appropriateness of the mortality
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
improvements, including evaluation of the choice of the
Continuous Mortality Investigation (‘CMI’) model and the
parameters used in relation to this. 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.
We utilised the results of KPMG benchmarking of assumptions
and actuarial market practice to inform our challenge of
management’s assumptions in both areas.
Other key 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 flows and
challenging the assumptions adopted in the context of company
and industry experience data and specific product features.
We also performed test work to ensure the appropriateness of
changes made to the reserving models during the year.
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.
Deferred Acquisition Costs (‘DAC’) (2015: £7,022 million, 2014: £5,927 million)
Refer to page 89 (Audit Committee report), page 145 (accounting policy) and pages 236 to 240 (financial disclosures)
The risk – DAC represents 1.8 per cent of the total assets and
involves judgement in the identification of, and the extent to
which, certain acquisition costs can be deferred, and assessment
of recoverability of the asset. The DAC associated with the US
business, which represents 88 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 profit profile.
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:
— Evaluating the appropriateness of the Group’s deferral policy
by comparing it against the requirements of relevant
accounting standards;
— Evaluating whether costs are deferred in accordance with the
Group’s deferral policy; and
— Assessing the calculations performed including the
appropriateness of the assumptions used in determining the
estimated future profit profile and the extent of the associated
adjustment necessary to the amortisation of the DAC asset.
We compared the estimated future profits to the carrying value
of the DAC asset to assess recoverability. Our work 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.
294
Prudential plc Annual Report 2015 www.prudential.co.uk Group profit before tax
8%
2%
90%
Audit for group reporting (2014: 88%)
Audit of account balances (2014: 4%)
Analysis at group level (2014: 8%)
3. Our application of materiality and
an overview of the scope of our audit
Materiality for the Group financial
statements as a whole was set at
£350 million (2014: £307 million)
determined with reference to a benchmark
of IFRS shareholders’ equity of £13.0 billion
(of which it represents 2.7 per cent
(2014: 2.6 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 compared our
materiality against other relevant
benchmarks, such as total assets, total
revenue and profit before tax to ensure
the materiality selected was appropriate
for our audit.
We set out below the materiality thresholds
that are key to the audit.
We subjected the Group’s operations to
audits for Group reporting purposes as
follows:
— Audits for Group reporting purposes in
relation to the financial information of
the insurance operations in the UK, the
US, Hong Kong, Indonesia, Singapore,
Malaysia, Korea, Thailand and fund
management operations in the
UK (M&G).
— Audits of account balances that
correspond to the risks of material
misstatement identified above in
relation to Prudential Capital and the
insurance operations in China, Taiwan
and Vietnam. The account balances
audited are investments, policyholder
liabilities and deferred acquisition costs.
For the remaining operations, we
performed analyses at an aggregated
Group level to re-examine our assessment
that there were no significant risks
of material misstatement within
these operations.
These components accounted for the
following percentages of the Group’s
results in 2015:
Materiality thresholds
Total group revenue
Total group assets
IFRS
shareholders’
equity
£13bn
Materiality
£350m
£110-140m
8%
2%
7%
2%
£350m
£18m
90%
91%
Threshold for misstatements reported
to the Audit Committee
Range of component materials
Materiality for the group financial
statements
We report to the Group Audit Committee
any corrected or uncorrected identified
misstatements exceeding £18 million
(2014: £15 million) in addition to other
identified misstatements that warrant
reporting on qualitative grounds.
Audit for group reporting (2014: 92%)
Audit of account balances (2014: 2%)
Analysis at group level (2014: 6%)
Audit for group reporting (2014: 91%)
Audit of account balances (2014: 2%)
Analysis at group level (2014: 7%)
Group shareholders’ equity
8%
3%
89%
Audit for group reporting (2014: 89%)
Audit of account balances (2014: 1%)
Analysis at group level (2014: 10%)
295
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Independent auditor’s report to the members of Prudential plc only continued
— 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
pages 98 and 56, in relation to going
concern and longer-term viability; and
— The part of the corporate governance
statement on page 99 relating to
the Company’s compliance with the
11 provisions of the 2014 UK
Corporate Governance Code specified
for our review.
We have nothing to report in respect of the
above responsibilities.
7. Scope of report and responsibilities
As explained more fully in the directors’
responsibilities statement set out on
page 292, 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
8 March 2016
The Group audit team in the UK covered
the UK Group head office operations.
Component auditors performed the audit
work in the remaining locations.
The Group audit team held a global
planning conference with component
auditors to identify audit risks and decide
how each component team should address
the identified audit risks. The Group audit
team instructed component auditors as to
the significant 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
(2014: £110 million–£140 million), having
regard to the size and risk profile of
the Group.
The Group audit team visited 10
component locations, comprising the
insurance operations in the UK, the US,
Hong Kong, Indonesia, Singapore,
Malaysia, Korea and Thailand, the fund
management operations in M&G and
Prudential Capital. 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, an assessment
was made of audit risk and strategy, the
findings reported to the Group audit team
were discussed in more detail, key working
papers were reviewed 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 obtain
additional understanding first-hand of the
key risks and audit issues at a component
level which may affect the Group
financial statements.
4. Our opinion on other matters
prescribed by the Companies Act
2006 is unmodified
In our opinion:
— The part of the Directors’ Remuneration
Report to be audited has been properly
prepared in accordance with the
Companies Act 2006; and
— The information given in the Strategic
Report and the Directors’ Report for the
financial year for which the financial
statements are prepared is consistent
with the financial statements.
296
5. We have nothing to report on the
disclosures of principal risks
Based on the knowledge we acquired
during our audit, we have nothing material
to add or draw attention to in relation to:
— The directors’ viability statement on
page 56 concerning the principal risks,
their management, and, based on that,
the directors’ assessment and
expectations of the Group’s continuing
in operation over the three years to
2018; or
— The disclosure on page 98 of the Annual
Report concerning the use of the going
concern basis of accounting.
6. 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
position and 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
Prudential plc Annual Report 2015 www.prudential.co.uk European
Embedded Value
(EEV) basis results
298 Index to EEV basis results
Apprenticeship programme
Over the past two years
Prudential UK has recruited
130 young people to join the highly
regarded apprenticeship programme.
Find out more on page 60.
6
Our communities
297
www.prudential.co.ukAnnualReport2015 Prudential plc01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Index to European Embedded Value (EEV) basis results
299 Post-tax operating profit based on longer-term investment returns
300 Post-tax summarised consolidated income statement
300 Movement in shareholders’ equity
301 Summary statement of financial position
Notes on the EEV basis results
302
302
304
305
307
308
309
310
313
314
316
317
318
324
327
328
1 Basis of preparation
2 Results analysis by business area
3 Analysis of new business contribution
4 Operating profit from business in force
5 Short-term fluctuations in investment returns
6 Effect of changes in economic assumptions
7 Net core structural borrowings of shareholder-financed operations
8 Analysis of movement in free surplus
9 Reconciliation of movement in shareholders’ equity
10 Reconciliation of movement in net worth and value of in-force
for long-term business
11 Expected transfer of value of in-force business to free surplus
12 Sensitivity of results to alternative assumptions
13 Methodology and accounting presentation
14 Assumptions
15 Effect of Solvency II on EEV basis results on 1 January 2016
16 New business premiums and contributions
Description of EEV basis reporting
In broad terms, IFRS profits for long-term business reflect the
aggregate of results on a traditional accounting basis. By contrast,
embedded value is a way of reporting the value of the life
insurance business.
The European Embedded Value principles were published by
the CFO Forum of major European insurers in May 2004 and
subsequently supplemented by Additional Guidance issued in
October 2005. The impact of Solvency II is not reflected in these
results in line with the guidance issued by the CFO Forum in
October 2015 (see note 15 for further details). The principles
provide consistent definitions, a framework for setting actuarial
assumptions and an approach to the underlying methodology
and disclosures.
Results prepared under the EEV principles capture the
discounted value of future profits expected to arise from the
current book of long-term business. The results are prepared by
projecting cash flows by product, using best estimate
assumptions for all relevant factors. Furthermore, in determining
these expected profits, full allowance is made for the risks
attached to their emergence and the associated cost of capital,
taking into account recent experience in assessing likely future
persistency, mortality, morbidity and expenses. Further details
are explained in notes 13 and 14.
298
Prudential plc Annual Report 2015 www.prudential.co.uk European Embedded Value (EEV) basis results
Post-tax operating profit based on longer-term investment returns
Results analysis by business area
Asia operations
New business
Business in force
Long-term business
Eastspring Investments
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
Prudential Capital
Total
Other income and expenditure note (i)
Solvency II and restructuring costs note (ii)
Results of the sold PruHealth and PruProtect businesses
Operating profit based on longer-term investment returns
Analysed as profit (loss) from:
New business*
Business in force*
Long-term business*
Asset management
Other results
Note
2015 £m
2014 £m
note (iii)
3
4
3
4
3
4
3
4
1,490
831
2,321
101
2,422
809
999
1,808
7
1,815
318
545
863
22
885
358
18
1,261
(566)
(51)
–
4,881
2,617
2,375
4,992
484
(595)
4,881
1,162
738
1,900
78
1,978
694
834
1,528
6
1,534
259
476
735
19
754
353
33
1,140
(531)
(36)
11
4,096
2,115
2,048
4,163
470
(537)
4,096
* In order to show the UK long-term business on a comparable basis, the 2014 comparative results exclude the contribution from the sold PruHealth and PruProtect
businesses which is shown separately.
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 13(a)(vii)) and an adjustment for the shareholders’ share of the pension costs attributable to
the with-profits business.
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-profits fund.
(iii) The comparative results have been prepared using previously reported average exchange rates for the year.
Basic earnings per share
Based on post-tax operating profit including longer-term investment returns (in pence)
Based on post-tax profit attributable to equity holders of the Company (in pence)
Average number of shares (millions)
2015
2014
191.2p
154.8p
2,553
160.7p
170.4p
2,549
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European Embedded Value (EEV) basis results continued
Post-tax summarised consolidated income statement
Asia operations
US operations
UK operations*
Other income and expenditure
Solvency II and restructuring costs
Results of the sold PruHealth and PruProtect businesses
Operating profit based on longer-term investment returns
Short-term fluctuations in investment returns
Effect of changes in economic assumptions
Mark to market value movements on core borrowings
Gain on sale of PruHealth and PruProtect†
Costs of domestication of Hong Kong branch
Total non-operating (loss) profit
Profit for the year attributable to equity holders of the Company
Note
2015 £m
2014 £m
2,422
1,815
1,261
(566)
(51)
–
4,881
(1,208)
57
221
–
–
(930)
3,951
1,978
1,534
1,140
(531)
(36)
11
4,096
763
(369)
(187)
44
(4)
247
4,343
5
6
* In order to show the UK long-term business on a comparable basis, the 2014 comparative results exclude the contribution from the sold PruHealth and PruProtect
businesses which is shown separately.
† 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 resulting
in a gain of £44 million in 2014.
Movement in shareholders’ equity
Profit for the year attributable to equity shareholders
Items taken directly to equity:
Exchange movements on foreign operations and net investment hedges
Dividends
New share capital subscribed
Shareholders’ share of actuarial and other gains and losses on defined benefit
pension schemes
Reserve movements in respect of share-based payments
Treasury shares
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
2015 £m
2014 £m
3,951
4,343
244
(974)
7
25
39
(18)
(76)
737
(895)
13
(11)
106
(54)
77
9
9
9
3,198
4,316
29,161
–
29,161
32,359
24,856
(11)
24,845
29,161
* On 1 January 2014, the Hong Kong branch of PAC was transferred to separate subsidiaries established in Hong Kong. The overall 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.
300
Prudential plc Annual Report 2015 www.prudential.co.uk
Movement in shareholders’ equity
Comprising:
Asia operations
US operations
UK insurance operations
M&G
Prudential Capital
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 7
Summary statement of financial position
31 Dec 2014 £m
Asset
management
and other
operations
Long-term
business
operations
31 Dec 2015 £m
Asset
management
and other
operations
306
182
22
1,774
70
(3,005)
(651)
Long-term
business
operations
note 9
13,876
9,487
9,647
–
–
–
33,010
Total
14,182
9,669
9,669
1,774
70
(3,005)
32,359
12,545
8,379
8,433
–
–
–
29,357
32,777
233
866
1,230
33,643
1,463
29,124
233
–
(2,747)
(2,747)
–
33,010
(651)
32,359
29,357
Total
12,819
8,536
8,452
1,572
74
(2,292)
29,161
30,666
1,463
(2,968)
29,161
274
157
19
1,572
74
(2,292)
(196)
1,542
1,230
(2,968)
(196)
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 2015
£m
31 Dec 2014
£m
340,666
326,633
(327,711)
19,404
(308,307)
(314,822)
17,350
(297,472)
9
32,359
29,161
128
1,915
10,912
12,955
19,404
32,359
128
1,908
9,775
11,811
17,350
29,161
9
9
9
Based on EEV basis shareholders’ equity of £32,359 million (2014: £29,161 million) (in pence)
Number of issued shares at year end (millions)
Annualised return on embedded value*
31 Dec 2015
31 Dec 2014
1,258p
2,572
1,136p
2,568
17%
16%
* 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 299 to 328 was approved by the Board of Directors on 8 March 2016.
Paul Manduca
Chairman
Mike Wells
Group Chief Executive
Nic Nicandrou
Chief Financial Officer
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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, subsequently supplemented by Additional Guidance on EEV Disclosure issued in October 2005. The impact of Solvency II
is not reflected in these results in line with the guidance issued by the CFO Forum in October 2015 (see note 15 for further details).
Where appropriate, the EEV basis results include the effects of adoption of EU-endorsed IFRS.
The directors are responsible for the preparation of the supplementary information in accordance with the EEV Principles. Except for
the change in presentation of the operating results for UK operations to show separately the contribution from the sold PruHealth and
PruProtect businesses and the presentation of Prudential Capital as a separate segment, the 2014 results have been derived from the EEV
basis results supplement to the Company’s statutory accounts for 2014.
A detailed description of the EEV methodology and accounting presentation is provided in note 13.
2 Results analysis by business area
The 2014 comparative results are shown below on both actual exchange rates (AER) and constant exchange rates (CER) bases.
The 2014 CER comparative results are translated at 2015 average exchange rates.
Annual premium and contribution equivalents (APE) note 16
Asia operations
US operations
UK operations*
Total*
2015 £m
2014 £m
% change
Note
3
2,853
1,729
1,025
5,607
AER
2,237
1,556
834
4,627
CER
2,267
1,677
834
4,778
AER
28%
11%
23%
21%
CER
26%
3%
23%
17%
* In order to show the UK long-term business on a comparable basis, the 2014 comparative results exclude the contribution from the sold PruHealth and PruProtect businesses.
Post-tax operating profit
Asia operations
New business
Business in force
Long-term business
Eastspring Investments
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
Prudential Capital
Total
Other income and expenditure
Solvency II and restructuring costs
Results of the sold PruHealth and PruProtect
businesses
Operating profit based on longer-term
investment returns
302
2015 £m
2014 £m
% change
Note
AER
CER
AER
CER
3
4
3
4
3
4
1,490
831
2,321
101
2,422
809
999
1,808
7
1,815
318
545
863
22
885
358
18
1,261
(566)
(51)
1,162
738
1,900
78
1,978
694
834
1,528
6
1,534
259
476
735
19
754
353
33
1,140
(531)
(36)
1,168
735
1,903
79
1,982
748
899
1,647
7
1,654
259
476
735
19
754
353
33
1,140
(531)
(36)
–
11
11
4,881
4,096
4,220
28%
13%
22%
29%
22%
17%
20%
18%
17%
18%
23%
14%
17%
16%
17%
1%
(45)%
11%
(7)%
(42)%
n/a
19%
28%
13%
22%
28%
22%
8%
11%
10%
–
10%
23%
14%
17%
16%
17%
1%
(45)%
11%
(7)%
(42)%
n/a
16%
Prudential plc Annual Report 2015 www.prudential.co.uk Analysed as profit (loss) from:
New business*
Business in force*
Total long-term business*
Asset management
Other results
Note
3
4
2015 £m
2014 £m
% change
AER
CER
AER
CER
2,617
2,375
4,992
484
(595)
4,881
2,115
2,048
4,163
470
(537)
4,096
2,175
2,110
4,285
472
(537)
4,220
24%
16%
20%
3%
(11)%
19%
20%
13%
16%
3%
(11)%
16%
* In order to show the UK long-term business on a comparable basis, the 2014 comparative results exclude the contribution from the sold PruHealth and PruProtect
businesses, which is shown separately.
Post-tax profit
Operating profit based on longer-term
investment returns
Short-term fluctuations in investment returns
Effect of changes in economic assumptions
Other non-operating profit (loss)
Total non-operating (loss) profit
Profit for the year attributable to shareholders
Basic earnings per share (in pence)
Note
5
6
2015 £m
2014 £m
% change
AER
CER
AER
CER
4,881
(1,208)
57
221
(930)
3,951
4,096
763
(369)
(147)
247
4,343
4,220
771
(389)
(147)
235
4,455
19%
(258)%
115%
250%
(477)%
(9)%
16%
(257)%
115%
250%
(496)%
(11)%
Based on post-tax operating profit including longer-term
investment returns
Based on post-tax profit
191.2p
154.8p
160.7p
170.4p
165.6p
174.8p
19%
(9)%
15%
(11)%
2015
2014
% change
AER
CER
AER
CER
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(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 16
£m
Present value
of new
business
premiums
(PVNBP)
note 16
£m
2,853
1,729
1,025
5,607
15,208
17,286
9,069
41,563
Annual
premium and
contribution
equivalents
(APE)
note 16
£m
Present value
of new
business
premiums
(PVNBP)
note 16
£m
2,237
1,556
834
4,627
12,331
15,555
7,305
35,191
2015
New business
contribution
note
£m
1,490
809
318
2,617
2014
New business
contribution
note
£m
1,162
694
259
2,115
New business margin
APE
%
52
47
31
47
PVNBP
%
9.8
4.7
3.5
6.3
New business margin
APE
%
52
45
31
46
PVNBP
%
9.4
4.5
3.5
6.0
* In order to show the UK long-term business on a comparable basis, the 2014 comparative results exclude the contribution from the sold PruHealth and
PruProtect businesses.
Note
The increase in new business contribution of £502 million from £2,115 million for 2014 to £2,617 million for 2015 comprises an increase on a CER basis of £442 million
and an increase of £60 million for foreign exchange effects. The increase of £442 million on the CER basis comprises a contribution of £377 million for higher sales
volumes, a £21 million effect of higher long-term interest rates (generated by the active basis of setting economic assumptions) (analysed as Asia £(2) million,
US £20 million and UK £3 million) and a £44 million impact of pricing, product and other actions.
(ii) Asia operations – new business contribution by territory
China
Hong Kong
India
Indonesia
Korea
Taiwan
Other
2015 £m
2014 £m
30
835
18
229
8
28
342
AER
27
405
12
296
11
29
382
CER
29
436
12
282
11
30
368
Total Asia operations
1,490
1,162
1,168
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Prudential plc Annual Report 2015 www.prudential.co.ukNotes on the EEV basis results continued
4 Operating profit 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
2015 £m
Asia
operations
note (ii)
US
operations
note (iii)
749
12
70
831
472
115
412
999
2014 £m
Asia
operations
note (ii)
US
operations
note (iii)
648
52
38
738
382
86
366
834
UK
insurance
operations
note (iv)
488
55
2
545
UK
insurance
operations
note (iv)
410
–
66
476
Note
The movement in operating profit from business in force of £327 million from £2,048 million for 2014 to £2,375 million for 2015 comprises:
Increase in unwind of discount and other expected returns:
Effects of changes in:
Interest rates
Foreign exchange
Growth in opening value and other items
Year-on-year change in effects of operating assumptions, experience variances and other items
Net increase in operating profit from business in force
Total
note
1,709
182
484
2,375
Total
note
1,440
138
470
2,048
2015 £m
6
22
241
269
58
327
(ii) Asia operations
Unwind of discount and other expected returns note (a)
Effect of changes in operating assumptions:
Mortality and morbidity note (b)
Persistency and withdrawals note (c)
Expense
Other note (d)
Experience variances and other items:
Mortality and morbidity note (e)
Persistency and withdrawals note (f)
Expense note (g)
Other including development expenses
Total Asia operations
2015 £m
2014 £m
749
63
(46)
(1)
(4)
12
58
20
(32)
24
70
831
648
27
(17)
(5)
47
52
23
44
(27)
(2)
38
738
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Notes
(a)
(b)
(c)
The increase in unwind of discount and other expected returns of £101 million from £648 million for 2014 to £749 million for 2015 comprises an effect
of £119 million for the growth in the opening in-force value, partially offset by a £(10) million decrease from changes in interest rates and an £(8) million
decrease for foreign exchange effects.
The 2015 credit of £63 million for mortality and morbidity assumptions mainly reflects the effect of lower projected mortality rates for traditional and linked
business in Malaysia. The 2014 credit of £27 million reflected a number of offsetting items, including the effect of reduced projected mortality rates in Hong Kong.
The 2015 charge of £(46) million for persistency assumption changes comprises positive and negative contributions from our various operations, with positive
persistency updates on health and protection products being more than offset by negative effects for unit-linked business. The 2014 charge of £(17) million
mainly reflected increased partial withdrawal assumptions on unit-linked business in Korea.
(d) The 2014 credit of £47 million for other assumption changes reflected a number of offsetting items, including modelling improvements and those arising from
(e)
(f)
(g)
asset allocation changes in Hong Kong.
The positive mortality and morbidity experience variance in 2015 of £58 million (2014: £23 million) mainly reflects better than expected experience in
Hong Kong and Indonesia.
The positive £20 million for persistency and withdrawals experience in 2015 (2014: £44 million) is driven mainly by favourable experience in Hong Kong.
The expense experience variance in 2015 is negative £(32) million (2014: £(27) million). The variance principally arises in operations which are currently
sub-scale (China, Malaysia Takaful and Taiwan) and from short-term overruns in India.
(iii) US operations
Unwind of discount and other expected returns note (a)
Effect of changes in operating assumptions:
Persistency note (b)
Other
Experience variances and other items:
Spread experience variance note (c)
Amortisation of interest-related realised gains and losses note (d)
Other note (e)
Total US operations
2015 £m
2014 £m
472
139
(24)
115
149
70
193
412
999
382
55
31
86
192
56
118
366
834
Notes
(a)
(b)
The increase in unwind of discount and other expected returns of £90 million from £382 million for 2014 to £472 million for 2015 comprises a £56 million
effect for the underlying growth in the in-force book, a £30 million foreign currency translation effect, and a £4 million impact of the 10 basis points increase
in US 10-year treasury rates.
The credit of £139 million in 2015 (2014: £55 million) for persistency assumption changes principally relates to reduced lapse rates for variable annuity business
to more closely align to recent experience.
The spread assumption for Jackson is determined on a longer-term basis, net of provision for defaults (see note 14 (ii)). The spread experience variance in 2015 of
£149 million (2014: £192 million) includes the positive effect of transactions previously undertaken to more closely match the overall asset and liability duration.
The reduction compared to the prior year reflects the effects of declining yields in the portfolio caused by the prolonged low interest rate environment.
(d) The amortisation of interest-related gains and losses reflects the fact that when bonds that are neither impaired nor deteriorating are sold and reinvested there
will be a consequent change in the investment yield. The realised gain or loss is amortised into the result over the year when the bonds would have otherwise
matured to better reflect the long-term returns included in operating profits.
(c)
(e) Other experience variances of £193 million in 2015 (2014: £118 million) include the effects of positive persistency experience and other favourable experience
variances. The 2015 result benefits from higher levels of tax relief from prior period adjustments.
(iv) UK insurance operations
Unwind of discount and other expected returns note (a)
Reduction in future UK corporate tax rate note (b)
Other note (c)
Total UK insurance operations
2015 £m
2014 £m
488
55
2
545
410
–
66
476
Notes
(a)
(b)
The increase in unwind of discount and other expected returns of £78 million from 2014 of £410 million to £488 million for 2015 comprises an effect
of £66 million reflecting the underlying growth in the in-force book and a £12 million effect of the 20 basis points increase in gilt yields.
The £55 million credit in 2015 for the change in UK corporate tax rates reflects the beneficial effect of applying lower corporation tax rates (note 14) to future life
profits from in-force business in the UK.
(c) Other items of £2 million (2014: £66 million) comprise the following:
Longevity reinsurance note (d)
Impact of specific management actions in second half of 2015 ahead of Solvency II note (e)
Other items note (f)
2015 £m
2014 £m
(134)
75
61
2
(8)
–
74
66
(d) During 2015, we extended our longevity reinsurance programme to cover an additional £6.4 billion of annuity liabilities at a net cost of £(134) million.
Of this total, some £4.8 billion was transacted in the second half of 2015 at a net cost of £(88) million.
The £75 million benefit arose from the specific management actions taken in the second half of 2015 to position the balance sheet more efficiently under
the new Solvency II regime.
The credit of £61 million for 2015 comprises assumption updates and experience variances for mortality, expense, persistency and other items.
(e)
(f)
306
Prudential plc Annual Report 2015 www.prudential.co.ukNotes on the EEV basis results continued 5 Short-term fluctuations in investment returns
Short-term fluctuations in investment returns included in profit for the year arise as follows:
(i) Group summary
Asia operations note (ii)
US operations note (iii)
UK insurance operations note (iv)
Other operations note (v)
Total
(ii) Asia operations
The short-term fluctuations in investment returns for Asia operations comprise:
Hong Kong
Indonesia
Singapore
Taiwan
Other
Total Asia operations note
2015 £m
2014 £m
(206)
(753)
(194)
(55)
(1,208)
439
(166)
583
(93)
763
2015 £m
2014 £m
(144)
(53)
(104)
44
51
(206)
178
35
92
23
111
439
Note
For 2015, the charge of £(144) million in Hong Kong, £(53) million in Indonesia and £(104) million in Singapore principally arise from unrealised losses on bonds
backing surplus assets driven by increases in long-term interest rates (as shown in note 14(i)) and from the effect of falls in equity markets in the region. The credit
of £44 million in Taiwan arises from unrealised gains on bonds following the decrease in long-term interest rates.
(iii) US operations
The short-term fluctuations in investment returns for US operations comprise:
Investment return related experience on fixed income securities note (a)
Investment return related impact due to changed expectation of profits on in-force variable annuity
business in future periods based on current period separate account return, net of related hedging
activity and other items note (b)
Total US operations
2015 £m
2014 £m
(17)
31
(736)
(753)
(197)
(166)
Notes
(a)
(b)
The (charge) credit relating to fixed income securities comprises the following elements:
– the impact on portfolio yields of changes in the asset portfolio in the year;
– the excess of actual realised gains and losses over the amortisation of interest-related realised gains and losses recorded in the profit and loss account; and
– credit experience (versus the longer-term assumption).
This item reflects the net impact of:
– changes in projected future fees and future benefit costs arising from the effect of market fluctuations on the growth in separate account asset values in the
current reporting period; and
– related hedging activity arising from realised and unrealised gains and losses on equity-related hedges and interest rate options, and other items.
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5 Short-term fluctuations in investment returns continued
(iv) UK insurance operations
The short-term fluctuations in investment returns for UK insurance operations comprise:
Shareholder-backed annuity note (a)
With-profits, unit-linked and other note (b)
Total UK insurance operations
2015 £m
2014 £m
(88)
(106)
(194)
310
273
583
Notes
(a)
(b)
Short-term fluctuations in investment returns for shareholder-backed annuity business comprise:
– (losses) gains on surplus assets compared to the expected long-term rate of return reflecting (increases) reductions in corporate bond and gilt yields;
– the difference between actual and expected default experience; and
– the effect of mismatching for assets and liabilities of different durations and other short-term fluctuations in investment returns.
The £(106) million fluctuation in 2015 for with-profits, unit-linked and other business represents the impact of achieving a 3.1 per cent pre-tax return on the
with-profits fund (including unallocated surplus) compared to the assumed rate of return of 5.4 per cent (2014: total return of 9.5 per cent compared to assumed
rate of 5.0 per cent). This line also includes the effect of a partial hedge of future shareholder transfers expected to emerge from the UK’s with-profits sub-fund
entered into to protect future shareholder with-profits transfers from declines in the UK equity market.
(v) Other operations
Short-term fluctuations in investment returns for other operations of £(55) million (2014: £(93) million) include unrealised value
movements on investments held outside our main life operations.
6 Effect of changes in economic assumptions
The effects of changes in economic assumptions for in-force business included in the profit for the year arise as follows:
(i) Group summary
Asia operations note (ii)
US operations note (iii)
UK insurance operations note (iv)
Total
(ii) Asia operations
The effect of changes in economic assumptions for Asia operations comprises:
Hong Kong
Indonesia
Malaysia
Singapore
Taiwan
Other
Total Asia operations note
2015 £m
2014 £m
(148)
109
96
57
(269)
(77)
(23)
(369)
2015 £m
2014 £m
100
(15)
(30)
(50)
(97)
(56)
(148)
(121)
25
11
(42)
(21)
(121)
(269)
Note
The negative 2015 effect in Malaysia, Indonesia and Singapore reflects the impact of valuing future health and protection profits at higher discount rates, driven by the
increase in long-term interest rates in these countries (see note 14(i)). The negative effect in Taiwan is driven by a decrease in fund earned rates reflecting the decline
in long-term interest rates and changes to the asset portfolio mix. The positive impact in Hong Kong is driven by the effect of higher assumed future fund earned rates
for participating business.
308
Prudential plc Annual Report 2015 www.prudential.co.ukNotes on the EEV basis results continued
(iii) US operations
The effect of changes in economic assumptions for US operations comprises:
Variable annuity business
Fixed annuity and other general account business
Total US operations note
2015 £m
2014 £m
104
5
109
(228)
151
(77)
Note
For 2015, the credit of £109 million mainly reflects the increase in the assumed separate account return and reinvestment rates for variable annuity business,
following the 10 basis points increase in the US treasury rate (2014: decrease of 90 basis points), resulting in higher projected fee income and a decrease in projected
benefit costs.
(iv) UK insurance operations
The effect of changes in economic assumptions for UK insurance operations comprises:
Shareholder-backed annuity business note (a)
With-profits and other business note (b)
Total UK insurance operations
2015 £m
2014 £m
(56)
152
96
352
(375)
(23)
Notes
(a)
(b)
For shareholder-backed annuity business the overall negative (2014: positive) effect reflects the change in the present value of projected spread income arising
mainly from the increase (2014: reduction) in the risk discount rates as shown in note 14(iii).
The credit of £152 million in 2015 reflects the net effect of changes in fund earned rates and risk discount rates (as shown in note 14 (iii)), driven by the 20 basis
points increase in gilt rates (2014: decrease of 130 basis points), together with the impact from changes in the composition of the asset portfolio.
7 Net core structural borrowings of shareholder-financed operations
Holding company* cash and short-term
investments
Core structural borrowings – central funds note
Holding company net borrowings
Core structural borrowings – Prudential Capital
Core structural borrowings – Jackson
Net core structural borrowings of shareholder-
IFRS basis
(2,173)
4,567
2,394
275
169
31 Dec 2015 £m
Mark to
market
value
adjustment
31 Dec 2014 £m
EEV basis at
market
value
Mark to market
value
adjustment
EEV basis at
market
value
IFRS basis
–
353
353
–
55
(2,173)
4,920
2,747
275
224
(1,480)
3,869
2,389
275
160
–
579
579
–
42
621
(1,480)
4,448
2,968
275
202
3,445
financed operations
2,838
408
3,246
2,824
* Including central finance subsidiaries.
Note
In June 2015, the Company issued core structural borrowings of £600 million 5.00 per cent subordinated notes due in 2055. The proceeds, net of discount
adjustment and costs, were £590 million.
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For EEV covered business, 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. Free surplus for asset management operations and the UK
general insurance commission is taken to be IFRS basis post-tax earnings and shareholders’ equity.
(i) Underlying free surplus generated
The 2014 comparative results are shown below on both actual exchange rates (AER) and constant exchange rates (CER) bases.
The 2014 CER comparative results are translated at 2015 average exchange rates.
2015 £m
2014 £m
% change
AER
CER
AER
CER
Asia operations
Underlying free surplus generated from in-force life business
Investment in new business notes (ii)(a), (ii)(g)
Long-term business
Eastspring Investments note (ii)(b)
Total
US operations
Underlying free surplus generated from in-force life business
Investment in new business note (ii)(a)
Long-term business
Broker-dealer and asset management note (ii)(b)
Total
UK insurance operations*
Underlying free surplus generated from in-force life business
Investment in new business note (ii)(a)
Long-term business
General insurance commission note (ii)(b)
Total
M&G note (ii)(b)
Prudential Capital note (ii)(b)
985
(413)
572
101
673
1,426
(267)
1,159
7
1,166
878
(65)
813
22
835
358
18
860
(346)
514
78
592
1,191
(187)
1,004
6
1,010
637
(65)
572
19
591
353
33
851
(352)
499
79
578
1,284
(201)
1,083
7
1,090
637
(65)
572
19
591
353
33
Underlying free surplus generated
3,050
2,579
2,645
Representing:
Long-term business:*
Expected in-force cash flows (including expected return
on net assets)
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 business notes (ii)(a), (ii)(g)
Total long-term business*
Asset management and general insurance commission note (ii)(b)
Underlying free surplus generated
2,730
2,374
2,436
559
3,289
(745)
2,544
506
3,050
314
2,688
(598)
2,090
489
2,579
336
2,772
(618)
2,154
491
2,645
15%
(19)%
11%
29%
14%
20%
(43)%
15%
17%
15%
38%
–
42%
16%
41%
1%
(45)%
18%
15%
78%
22%
(25)%
22%
3%
18%
16%
(17)%
15%
28%
16%
11%
(33)%
7%
–
7%
38%
–
42%
16%
41%
1%
(45)%
15%
12%
66%
19%
(21)%
18%
3%
15%
* In order to show the UK long-term business on a comparable basis, the 2014 comparative results exclude the contribution from the sold PruHealth and
PruProtect businesses.
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Prudential plc Annual Report 2015 www.prudential.co.ukNotes on the EEV basis results continued (ii) Movement in free surplus
Long-term business and asset management operations
Underlying movement:*
Investment in new business notes (a), (g)
Business in force:
Expected in-force cash flows (including expected return on net assets)
Effects of changes in operating assumptions, operating experience
variances and other operating items
Disposal of Japan life business note (h)
Gain on sale of PruHealth and PruProtect
Other non-operating items note (c)
Net cash flows to parent company note (d)
Exchange movements, timing differences and other items note (e)
Net movement in free surplus
Balance at beginning of year:
As previously reported
Effect of domestication of Hong Kong branch†
Balance at end of year
Representing:
Asia operations note (g)
US operations
UK operations
Balance at beginning of year:
Asia operations
US operations
UK operations
2015 £m
2014 £m
Asset
management
and UK general
insurance
commission
note (b)
Long-term
business
note 10
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
(745)
–
(745)
(598)
2,730
506
3,236
2,863
559
2,544
23
–
(407)
2,160
(1,271)
560
1,449
4,193
–
5,642
1,503
1,567
2,572
5,642
1,347
1,416
1,430
4,193
–
506
–
–
(53)
453
(354)
159
258
866
–
1,124
245
166
713
1,124
213
141
512
866
559
3,050
23
–
(460)
2,613
(1,625)
719
1,707
5,059
–
6,766
1,748
1,733
3,285
6,766
1,560
1,557
1,942
5,059
314
2,579
–
130
(266)
2,443
(1,482)
130
1,091
4,003
(35)
5,059
1,560
1,557
1,942
5,059
1,379
1,074
1,550
4,003
* In order to show the UK long-term business on a comparable basis, the 2014 comparative underlying movement in free surplus excludes the contribution from the
sold PruHealth and PruProtect businesses.
† On 1 January 2014, the Hong Kong branch of PAC was transferred to separate subsidiaries established in Hong Kong. The 2014 EEV basis results included 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 arising from the newly established subsidiaries with an overall effect of £(35) million.
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(ii) Movement in free surplus continued
Notes
(a)
(b)
(c) Non-operating items are principally short-term fluctuations in investment returns and the effect of changes in economic assumptions for long-term
Free surplus invested in new business represents amounts set aside for required capital and acquisition costs.
Free surplus for asset management operations and the UK general insurance commission is taken to be IFRS basis post-tax earnings and shareholders’ equity.
business operations.
(d) Net cash flows to parent company for long-term business operations reflect the flows as included in the holding company cash flow at transaction rates.
(e)
Exchange movements, timing differences and other items represent:
Exchange movements note 10
Mark to market value movements on Jackson assets backing surplus and required capital note 9
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes
Other items note (f)
2015 £m
Asset
management
and UK general
insurance
commission
3
–
8
148
159
Long-term
business
67
(76)
14
555
560
Total
70
(76)
22
703
719
(f)
(g)
Other items include the effect of intra-group loans, contingent loan repayments as shown in note 10(i), timing differences arising on statutory transfers and
other non-cash items. For 2015, other items for long-term business include the effect of a classification change of £702 million from Other operations to UK
insurance operations in order to align with Solvency II segmental reporting.
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 reflects the pattern in which the future economic benefits are expected to be consumed by reference to new business levels. Included
within the overall free surplus balance of our Asia life entities is £287 million representing unamortised amounts incurred to secure exclusive distribution
rights through bancassurance partners. These amounts exclude £971 million of Asia distribution rights intangibles that are financed by loan arrangements
from central companies, the costs of which are allocated to the Asia life segment as the amortisation cost is incurred.
(h) The credit of £23 million in free surplus in 2015 reflects the release of required capital and transfer of value of in-force business on the completion of the sale
of the Japan life business (see note 10).
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Prudential plc Annual Report 2015 www.prudential.co.ukNotes on the EEV basis results continued
9 Reconciliation of movement in shareholders’ equity
Long-term business operations
2015 £m
Asia
operations
note (i)
US
operations
UK
insurance
operations
Total
long-term
business
operations
Other
operations
note (i)
Group
Total
Operating profit (based on longer-term
investment returns)
Long-term business:
New business note 3
Business in force note 4
Asset management
Other results
Operating profit based on longer-term
investment returns
Total non-operating (loss) profit
Profit for the year
Other items taken directly to equity
Exchange movements on foreign operations
and net investment hedges
Intra-group dividends (including statutory
transfers) and investment in operations note (ii)
External dividends
Other movements note (iii)
Mark to market value movements on Jackson
assets backing surplus and required capital
Net increase in shareholders’ equity
Shareholders’ equity at beginning of year
Shareholders’ equity at end of year
Representing:
Statutory IFRS basis shareholders’ equity:
Net assets (liabilities)
Goodwill
Total IFRS basis shareholders’ equity
Additional retained profit (loss) on an EEV
basis note (iv)
EEV basis shareholders’ equity
Balance at beginning of year:
Statutory IFRS basis shareholders’ equity:
Net assets (liabilities)
Goodwill
Total IFRS basis shareholders’ equity
Additional retained profit (loss) on an EEV
basis note (iv)
EEV basis shareholders’ equity
1,490
831
2,321
–
–
2,321
(354)
1,967
(157)
(472)
–
(7)
–
1,331
12,312
13,643
3,723
–
3,723
9,920
13,643
3,315
–
3,315
8,997
12,312
809
999
1,808
–
(1)
1,807
(654)
1,153
510
(465)
–
(14)
(76)
1,108
8,379
9,487
4,154
–
4,154
5,333
9,487
4,067
–
4,067
4,312
8,379
318
545
863
–
(28)
835
(98)
737
2,617
2,375
4,992
–
(29)
4,963
(1,106)
3,857
–
–
–
484
(566)
(82)
176
94
–
353
(109)
(215)
–
692
–
1,214
8,433
9,647
5,118
–
5,118
4,529
9,647
3,785
–
3,785
4,648
8,433
(1,152)
–
671
(76)
3,653
29,124
32,777
12,995
–
12,995
19,782
32,777
11,167
–
11,167
17,957
29,124
2,617
2,375
4,992
484
(595)
4,881
(930)
3,951
244
–
(974)
53
(76)
3,198
29,161
32,359
1,152
(974)
(618)
–
(455)
37
(418)
(1,503)
1,463
11,492
1,463
(40)
12,955
(378)
(418)
19,404
32,359
(819)
1,463
644
(607)
37
10,348
1,463
11,811
17,350
29,161
Notes
(i)
(ii)
For the purposes of the table above, goodwill of £233 million (2014: £233 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. Investments in operations reflect increases in share capital. The amounts included in note 8 for these items are as per the holding company cash
flow at transaction rates. The difference primarily relates to intra-group loans, timing differences arising on statutory transfers and other non-cash items.
(iii) Other movements include the effect of a classification change of £702 million from Other operations to UK insurance operations in order to align with
Solvency II segmental reporting, which has no overall effect on the Group’s EEV. Other movements also includes a credit of £25 million (2014: a charge
of £(11) million) for the shareholders’ share of actuarial and other gains and losses on the defined benefit pension schemes.
(iv) The additional retained loss on an EEV basis for Other operations primarily represents the mark to market value adjustment for holding company
net borrowings of a charge of £(353) million (2014: £(579) million), as shown in note 7.
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10 Reconciliation of movement in net worth and value of in-force for long-term business
Group
Shareholders’ equity at beginning of year
New business contribution note (ii)
Existing business – transfer to net worth
Expected return on existing business note 4
Changes in operating assumptions and experience
variances note 4
Solvency II and restructuring costs
Operating profit based on longer-term investment returns
Disposal of Japan life business
Other non-operating items
Profit from long-term business
Exchange movements on foreign operations and net
investment hedges
Intra-group dividends (including statutory transfers) and
investment in operations note (i)
Other movements note (v)
Shareholders’ equity at end of year
Representing:
Asia operations
Shareholders’ equity at beginning of year
New business contribution note (ii)
Existing business – transfer to net worth
Expected return on existing business note 4
Changes in operating assumptions and experience
variances note 4
Operating profit based on longer-term investment returns
Disposal of Japan life business
Other non-operating items
Profit from long-term business
Exchange movements on foreign operations and net
investment hedges
Intra-group dividends and investment in operations
Other movements
2015 £m
Required
capital
Total net
worth
4,556
493
(355)
129
88
–
355
(48)
(216)
91
57
–
–
8,749
(252)
2,256
248
676
(29)
2,899
(25)
(623)
2,251
124
(1,373)
595
Value of
in-force
business
note (iii)
20,375
2,869
(2,256)
1,461
(10)
–
2,064
25
(483)
1,606
229
221
–
Total
long-term
business
operations
29,124
2,617
–
1,709
666
(29)
4,963
–
(1,106)
3,857
353
(1,152)
595
4,704
10,346
22,431
32,777
1,327
124
(77)
43
65
155
(48)
(6)
101
(42)
–
–
2,674
(289)
897
73
46
727
(25)
55
757
(63)
(472)
(7)
9,638
1,779
(897)
676
36
1,594
25
(409)
1,210
(94)
–
–
12,312
1,490
–
749
82
2,321
–
(354)
1,967
(157)
(472)
(7)
Free
surplus
note 8
4,193
(745)
2,611
119
588
(29)
2,544
23
(407)
2,160
67
(1,373)
595
5,642
1,347
(413)
974
30
(19)
572
23
61
656
(21)
(472)
(7)
Shareholders’ equity at end of year
1,503
1,386
2,889
10,754
13,643
US operations
Shareholders’ equity at beginning of year
New business contribution note (ii)
Existing business – transfer to net worth
Expected return on existing business note 4
Changes in operating assumptions and experience
variances note 4
Solvency II and restructuring costs
Operating profit based on longer-term investment returns
Other non-operating items
Profit from long-term business
Exchange movements on foreign operations and net
investment hedges
Intra-group dividends
Other movements
1,416
(267)
1,064
42
321
(1)
1,159
(541)
618
88
(465)
(90)
1,710
284
(196)
49
22
–
159
(162)
(3)
99
–
–
3,126
17
868
91
343
(1)
1,318
(703)
615
187
(465)
(90)
5,253
792
(868)
381
184
–
489
49
538
323
–
–
8,379
809
–
472
527
(1)
1,807
(654)
1,153
510
(465)
(90)
Shareholders’ equity at end of year
1,567
1,806
3,373
6,114
9,487
314
Prudential plc Annual Report 2015 www.prudential.co.ukNotes on the EEV basis results continued UK insurance operations
Shareholders’ equity at beginning of year
New business contribution note (ii)
Existing business – transfer to net worth
Expected return on existing business note 4
Changes in operating assumptions and experience
variances note 4
Solvency II and restructuring costs
Operating profit based on longer-term investment returns
Other non-operating items
Profit from long-term business
Intra-group dividends (including statutory transfers) note (i)
Other movements note (v)
2015 £m
Required
capital
Total net
worth
Value of
in-force
business
note (iii)
Total
long-term
business
operations
1,519
85
(82)
37
1
–
41
(48)
(7)
–
–
2,949
20
491
84
287
(28)
854
25
879
(436)
692
5,484
298
(491)
404
(230)
–
(19)
(123)
(142)
221
–
8,433
318
–
488
57
(28)
835
(98)
737
(215)
692
Free
surplus
note 8
1,430
(65)
573
47
286
(28)
813
73
886
(436)
692
Shareholders’ equity at end of year
2,572
1,512
4,084
5,563
9,647
Notes
(i)
For UK insurance operations, the amounts shown for intra-group dividends (including statutory transfers) in free surplus of £(436) million and in the value
of in-force of £221 million include the impact of intra-group contingent loan repayments during the year. Contingent loan funding represents amounts whose
repayment to the lender is contingent upon future surpluses emerging from certain contracts specified under the arrangement. If insufficient surplus emerges
on those contracts, there is no recourse to other assets of the Group and the liability is not payable to the degree of shortfall.
(ii) New business contribution per £1 million of free surplus invested:
2015 £m
2014 £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 contribution note 3
Free surplus invested in new business
1,490
(413)
809
(267)
318
(65)
2,617
(745)
1,162
(346)
694
(187)
259
(65)
2,115
(598)
Post-tax new business contribution per £1 million
of free surplus invested
3.6
3.0
4.9
3.5
3.4
3.7
4.0
3.5
* In order to show the UK long-term business on a comparable basis, the 2014 comparatives exclude the contribution from the sold PruHealth and
PruProtect businesses.
(iii) 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 2015 £m
31 Dec 2014 £m
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
Value of in-force business before deduction of cost
of capital and time value of guarantees
Cost of capital
Cost of time value of guarantees note (iv)
11,280
(438)
(88)
7,355
(229)
(1,012)
5,817
(254)
–
24,452
(921)
(1,100)
10,168
(417)
(113)
Net value of in-force business
10,754
6,114
5,563
22,431
9,638
5,914
(199)
(462)
5,253
5,756
(272)
–
21,838
(888)
(575)
5,484
20,375
(iv) The increase in the cost of time value of guarantees for US operations from £(462) million in 2014 to £(1,012) million in 2015 primarily relates to variable annuity
business, mainly arising from the level of equity market performance.
(v) Other movements for UK insurance operations include the effect of a classification change, as discussed in note 9(iii).
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11 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 2015 and 2014 totals in the tables below for the
emergence of free surplus as follows:
Required capital note 10
Value of in-force (VIF) note 10
Add back: deduction for cost of time value of guarantees note 10
Expected cash flow from sale of Japan life business
Other items note
Total
2015 £m
2014 £m
4,704
22,431
1,100
–
(1,948)
26,287
4,556
20,375
575
(23)
(1,382)
24,101
Note
‘Other items’ represent amounts incorporated into VIF where there is no definitive timeframe for when the payments will be made or receipts received. In particular,
other items include the deduction of the value of the shareholders’ interest in the estate, the value of which is derived by increasing final bonus rates so as to exhaust
the estate over the lifetime of the in-force with-profits business. This is an assumption to give an appropriate valuation. To be conservative, this item is excluded from
the expected free surplus generation profile below.
Cash flows are projected on a deterministic basis and are discounted at the appropriate risk discount rate. The modelled cash flows
use the same methodology underpinning the Group’s embedded value reporting and so are subject to the same assumptions
and sensitivities.
The table below shows how the VIF generated by the in-force business and the associated required capital is modelled as emerging
into free surplus over future years.
Asia operations
US operations
UK insurance operations
Total
Asia operations
US operations
UK insurance operations
Total
Expected period of conversion of future post-tax distributable earnings and required capital flows
to free surplus
2015 £m
1-5 years
6-10 years
11-15 years
16-20 years
21-40 years
40+ years
3,916
4,361
2,097
10,374
40%
2,552
2,752
1,498
6,802
26%
1,669
1,129
962
3,760
14%
2014 £m
1,115
383
576
2,074
8%
2,055
115
544
2,714
10%
551
–
12
563
2%
Expected period of conversion of future post-tax distributable earnings and required capital flows
to free surplus
1-5 years
6-10 years
11-15 years
16-20 years
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%
2015 total as
shown above
11,858
8,740
5,689
26,287
100%
2014 total as
shown above
10,859
7,471
5,771
24,101
100%
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Prudential plc Annual Report 2015 www.prudential.co.ukNotes on the EEV basis results continued 12 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 and the new business contribution after the effect
of required capital for 2015 and 2014 to:
— 1 per cent increase in the discount rates;
— 1 per cent increase and decrease in interest rates, including all consequential changes (assumed investment returns for all asset
classes, market values of fixed interest assets, risk discount rates);
— 1 per cent rise in equity and property yields;
— 10 per cent fall in market value of equity and property assets (embedded value only);
— The statutory minimum capital level (by contrast to EEV basis required capital), (for embedded value only);
— 5 basis point increase in UK long-term expected defaults; and
— 10 basis point increase in the liquidity premium for UK annuities.
In each sensitivity calculation, all other assumptions remain unchanged except where they are directly affected by the revised economic
conditions.
New business contribution
New business contribution note 3
Discount rates – 1% increase
Interest rates – 1% increase
Interest rates – 1% decrease
Equity/property yields – 1% rise
Long-term expected defaults – 5 bps increase
Liquidity premium – 10 bps increase
2015 £m
2014 £m
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
Asia
operations
US
operations
1,490
(260)
28
(78)
73
–
–
809
(38)
80
(127)
95
–
–
318
2,617
1,162
(40)
7
(9)
20
(8)
16
(338)
115
(214)
188
(8)
16
(176)
13
(52)
46
–
–
694
(27)
61
(101)
73
–
–
UK
insurance
operations*
Total
long-term
business
operations
259
2,115
(38)
(15)
19
12
(10)
20
(241)
59
(134)
131
(10)
20
* In order to show the UK long-term business on a comparable basis, the 2014 comparative results exclude the contribution from the sold PruHealth and PruProtect
businesses.
Embedded value of long-term business operations
31 Dec 2015 £m
31 Dec 2014 £m
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
Shareholders’ equity note 9
13,643
9,487
9,647
32,777
12,312
8,379
8,433
29,124
Discount rates – 1% increase
Interest rates – 1% increase
Interest rates – 1% decrease
Equity/property yields – 1% rise
Equity/property market values – 10% fall
Statutory minimum capital
Long-term expected defaults – 5 bps increase
Liquidity premium – 10 bps increase
(1,448)
(380)
132
506
(246)
148
–
–
(271)
(46)
(93)
514
(411)
162
–
–
(586)
(328)
426
271
(373)
4
(141)
282
(2,305)
(754)
465
1,291
(1,030)
314
(141)
282
(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
The sensitivities shown above are for the impact of instantaneous changes on the embedded value of long-term business operations and
include the combined effect on the value of in-force business and net assets at the balance sheet dates indicated. If the change in
assumption shown in the sensitivities were to occur, then the effect shown above would be recorded within two components of the profit
analysis for the following year. These are for the effect of economic assumption changes and short-term fluctuations in investment
returns. In addition to the sensitivity effects shown above, the other components of the profit for the following year would be calculated
by reference to the altered assumptions, for example new business contribution and unwind of discount, together with the effect of
other changes such as altered corporate bond spreads. In addition, for changes in interest rates, the effect shown above for Jackson
would also be recorded within the fair value movements on assets backing surplus and required capital which are taken directly
to shareholders’ equity.
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www.prudential.co.ukAnnualReport2015 Prudential plc01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information 12 Sensitivity of results to alternative assumptions continued
(b) Sensitivity analysis – non-economic assumptions
The tables below show the sensitivity of embedded value as at 31 December and the new business contribution after the effect of
required capital for 2015 and 2014 to:
— 10 per cent proportionate decrease in maintenance expenses (a 10 per cent sensitivity on a base assumption of £10 per annum would
represent an expense assumption of £9 per annum);
— 10 per cent proportionate decrease in lapse rates (a 10 per cent sensitivity on a base assumption of 5 per cent would represent a lapse
rate of 4.5 per cent per annum); and
— 5 per cent proportionate decrease in base mortality and morbidity rates (ie increased longevity).
New business contribution
2015 £m
2014 £m
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
Asia
operations
US
operations
UK
insurance
operations*
New business contribution note 3
1,490
809
Maintenance expenses – 10% decrease
Lapse rates – 10% decrease
Mortality and morbidity – 5% decrease
Change representing effect on:
Life business
UK annuities
28
112
50
50
–
8
25
1
1
–
318
2
9
(13)
1
(14)
2,617
1,162
38
146
38
52
(14)
23
88
52
52
–
694
8
27
2
2
–
259
3
6
(20)
1
(21)
* In order to show the UK long-term business on a comparable basis, the 2014 comparatives exclude the contribution from the sold PruHealth and
PruProtect businesses.
Embedded value of long-term business operations
Total
long-term
business
operations
2,115
34
121
34
55
(21)
31 Dec 2015 £m
31 Dec 2014 £m
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
Shareholders’ equity note 9
13,643
9,487
9,647
32,777
12,312
8,379
8,433
29,124
Maintenance expenses – 10% decrease
Lapse rates – 10% decrease
Mortality and morbidity – 5% decrease
Change representing effect on:
Life business
UK annuities
153
508
449
449
–
80
394
172
172
–
68
75
(299)
11
(310)
301
977
322
632
(310)
136
422
433
433
–
71
354
163
163
–
56
67
(347)
9
(356)
263
843
249
605
(356)
13 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 sufficient 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 flows 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 13(b)(iii)) no smoothing of market or account balance values,
unrealised gains or investment return is applied in determining the embedded value or profit. Separately, the analysis of profit is
delineated between operating profit based on longer-term investment returns and other constituent items (as explained in note 13(b)(i)).
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Prudential plc Annual Report 2015 www.prudential.co.ukNotes on the EEV basis results continued (i) Covered business
The EEV results for the Group are prepared for ‘covered business’, as defined by the EEV Principles. Covered business represents the
Group’s long-term insurance business, including the Group’s investments in joint venture insurance operations, 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 13(a)(vii).
The definition of long-term business operations is consistent with previous practice and comprises those contracts falling under the
definition for regulatory purposes together with, for US operations, contracts that are in substance the same as guaranteed investment
contracts (GICs) but do not fall within the technical definition.
Covered business comprises the Group’s long-term business operations, with two exceptions:
— The closed Scottish Amicable Insurance Fund (SAIF) which is excluded from covered business. SAIF is a ring-fenced sub-fund of the
Prudential Assurance Company (PAC) long-term fund, established by a Court-approved Scheme of Arrangement in October 1997.
SAIF is closed to new business and the assets and liabilities of the fund are wholly attributable to the policyholders of the fund.
— The presentational treatment of the Group’s principal defined benefit pension scheme, the Prudential Staff Pension Scheme (PSPS).
The partial recognition of the surplus for PSPS is recognised in ‘Other’ operations.
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, mortality and morbidity (as described in note 14). These assumptions are used to project
future cash flows. The present value of the future cash flows is then calculated using a discount rate which reflects both the time value
of money and the non-diversifiable risks associated with the cash flows that are not otherwise allowed for.
New business
In determining the EEV basis value of new business, premiums are included in projected cash flows on the same basis of distinguishing
annual and single premium business as set out for statutory basis reporting.
New business premiums reflect those premiums attaching to covered business, including premiums for contracts classified as
investment products for IFRS basis reporting. New business premiums for regular premium products are shown on an annualised basis.
Internal vesting business is classified as new business where the contracts include an open market option.
The post-tax contribution from new business represents profits determined by applying operating assumptions as at the end
of the year.
For UK immediate annuity business and single premium Universal Life products in Asia, primarily in Singapore, the new business
contribution is determined by applying economic assumptions reflecting point-of-sale market conditions. This is consistent with how the
business is priced as crediting rates are linked to yields on specific assets and the yield is locked in when the assets are purchased at the
point of sale of the policy. For other business within the Group, end-of-year economic assumptions are used.
New business profitability 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 profit to APE and PVNBP. APE is calculated as the
aggregate of regular new business amounts and one-tenth of single new business amounts. PVNBP is calculated as equalling single
premiums plus the present value of expected premiums of new regular premium business, allowing for lapses and other assumptions
made in determining the EEV new business contribution.
Valuation movements on investments
With the exception of debt securities held by Jackson, investment gains and losses during the year (to the extent that changes in capital
values do not directly match changes in liabilities) are included directly in the profit for the year and shareholders’ equity as they arise.
The results for any covered business conceptually reflect the aggregate of the IFRS results and the movements on the additional
shareholders’ interest recognised on the EEV basis. Thus the start point for the calculation of the EEV results for Jackson, as for other
businesses, reflects the market value movements recognised on the IFRS basis.
However, in determining the movements on the additional shareholders’ interest, the basis for calculating the Jackson EEV result
acknowledges that, for debt securities backing liabilities, the aggregate EEV results reflect the fact that the value of in-force business
instead incorporates the discounted value of future spread earnings. This value is not affected generally by short-term market
movements on securities that, broadly speaking, are held for the longer term.
Fixed income securities backing the free surplus and required capital for Jackson are accounted for at fair value. However, consistent
with the treatment applied under IFRS for Jackson securities classified as available-for-sale, movements in unrealised appreciation
(depreciation) on these securities are accounted for in equity rather than in the income statement, as shown in the movement
in shareholders’ equity.
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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 profit and
generally a release in respect of the reduction in capital requirements for business in force as this runs off.
Where required capital is held within a with-profits long-term fund, the value placed on surplus assets in the fund is already
discounted to reflect its release over time and no further adjustment is necessary in respect of required capital.
(iv) Financial options and guarantees
Nature of financial options and guarantees in Prudential’s long-term business
Asia operations
Subject to local market circumstances and regulatory requirements, the guarantee features described below in respect of UK business
broadly apply to similar types of participating contracts principally written in 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 floor levels of policyholder benefits that accrue at rates set at inception and do not vary subsequently with
market conditions.
US operations (Jackson)
The principal financial options and guarantees in Jackson are associated with the fixed annuity and variable annuity (VA) lines
of business.
Fixed annuities provide that, at Jackson’s discretion, it may reset the interest rate credited to policyholders’ accounts, subject to
a guaranteed minimum. The guaranteed minimum return varies from 1.0 per cent to 5.5 per cent for both years, depending on the
particular product, jurisdiction where issued, and date of issue. For 2015, 87 per cent (2014: 86 per cent) of the account values on fixed
annuities are for policies with guarantees of 3 per cent or less. The average guarantee rate is 2.6 per cent (2014: 2.7 per cent).
Fixed annuities also present a risk that policyholders will exercise their option to surrender their contracts in periods of rapidly rising
interest rates, possibly requiring Jackson to liquidate assets at an inopportune time.
Jackson issues VA contracts where it contractually guarantees to the contract holder either: a) return of no less than total deposits
made to the contract adjusted for any partial withdrawals; b) total deposits made to the contract adjusted for any partial withdrawals plus
a minimum return; or c) the highest contract value on a specified anniversary date adjusted for any withdrawals following the specified
contract anniversary. These guarantees include benefits that are payable at specified dates during the accumulation period (Guaranteed
Minimum Withdrawal Benefit (GMWB)), as death benefits (Guaranteed Minimum Death Benefits (GMDB)) or as income benefits
(Guaranteed Minimum Income Benefits (GMIB)). These guarantees generally protect the policyholder’s value in the event of poor equity
market performance. Jackson hedges the GMDB and GMWB guarantees through the use of equity options and futures contracts, and
fully reinsures the GMIB guarantees.
Jackson also issues fixed index annuities that enable policyholders to obtain a portion of an equity-linked return while providing
a guaranteed minimum return. The guaranteed minimum returns are of a similar nature to those described above for fixed annuities.
UK insurance operations
For covered business the only significant financial options and guarantees in the UK insurance operations arise in the with-profits fund.
With-profits products provide returns to policyholders through bonuses that are smoothed. There are two types of bonuses – annual
and final. Annual bonuses are declared once a year and, once credited, are guaranteed in accordance with the terms of the particular
product. Unlike annual bonuses, final bonuses are guaranteed only until the next bonus declaration. The PAC with-profits fund also held
a provision on the Pillar I Peak 2 basis of £47 million at 31 December 2015 (31 December 2014: £50 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 £412 million was held in SAIF at 31 December 2015 (31 December 2014: £549 million) to honour the guarantees.
As described in note 13(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 financial options and guarantees comprises two parts. One is given by a deterministic valuation on best estimate
assumptions (the intrinsic value). The other part arises from the variability of economic outcomes in the future (the time value).
Where appropriate, a full stochastic valuation has been undertaken to determine the time value of the financial options and guarantees.
The economic assumptions used for the stochastic calculations are consistent with those used for the deterministic calculations.
Assumptions specific to the stochastic calculations reflect local market conditions and are based on a combination of actual market data,
historic market data and an assessment of long-term economic conditions. Common principles have been adopted across the Group for
the stochastic asset models, for example, separate modelling of individual asset classes but with an allowance for correlation between
the various asset classes. Details of the key characteristics of each model are given in notes 14(iv), (v) and (vi).
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Prudential plc Annual Report 2015 www.prudential.co.ukNotes on the EEV basis results continued In deriving the time value of financial options and guarantees, management actions in response to emerging investment and fund
solvency conditions have been modelled. Management actions encompass, but are not confined to investment allocation decisions,
levels of reversionary and terminal bonuses and credited rates. Bonus rates are projected from current levels and varied in accordance
with assumed management actions applying in the emerging investment and fund solvency conditions.
In all instances, the modelled actions are in accordance with approved local practice and therefore reflect the options actually
available to management. For the PAC with-profits fund, the actions assumed are consistent with those set out in the Principles and
Practices of Financial Management which explains how regular and final bonus rates within the discretionary framework are determined,
subject to the general legislative requirements applicable.
(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-profits business written in a segregated life fund, as is the case in Asia and the UK, the capital
available in the fund is sufficient to meet the required capital requirements. For shareholder-backed business the following capital
requirements apply:
— Asia operations: the level of required capital has been set to an amount at least equal to the higher of local statutory requirements
and the internal target;
— US operations: the level of required capital has been set at 250 per cent 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 Solvency I Pillar I and Pillar II
requirements for shareholder-backed business of UK insurance operations as a whole.
(vi) With-profits business and the treatment of the estate
The proportion of surplus allocated to shareholders from the PAC with-profits fund has been based on the present level of 10 per cent.
The value attributed to the shareholders’ interest in the estate is derived by increasing final bonus rates (and related shareholder
transfers) so as to exhaust the estate over the lifetime of the in-force with-profits business. In any scenarios where the total assets of the
life fund are insufficient to meet policyholder claims in full, the excess cost is fully attributed to shareholders. Similar principles apply,
where appropriate, for other with-profits funds of the Group’s Asia operations.
(vii) Internal asset management
The new business and in-force results from long-term business include the projected value of profits 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 profits 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 profit margin for the year. The deduction is
on a basis consistent with that used for projecting the results for covered insurance business. Group operating profit accordingly includes
the variance between actual and expected profit in respect of management of the covered business assets.
(viii) Allowance for risk and risk discount rates
Overview
Under the EEV Principles, discount rates used to determine the present value of future cash flows are set by reference to risk-free rates
plus a risk margin. The risk margin should reflect any non-diversifiable risk associated with the emergence of distributable earnings that
is not allowed for elsewhere in the valuation. Prudential has selected a granular approach to better reflect differences in market risk
inherent in each product group. The risk discount rate so derived does not reflect an overall Group market beta but instead reflects the
expected volatility associated with the cash flows for each product category in the embedded value model.
Since financial options and guarantees are explicitly valued under the EEV methodology, discount rates under EEV are set excluding
the effect of these product features.
The risk margin represents the aggregate of the allowance for market risk, additional allowance for credit risk where appropriate,
and allowance for non-diversifiable non-market risk. No allowance is required for non-market risks where these are assumed to
be fully diversifiable.
Market risk allowance
The allowance for market risk represents the beta multiplied by an equity risk premium. Except for UK shareholder-backed annuity
business (as explained below) such an approach has been used for the Group’s businesses.
The beta of a portfolio or product measures its relative market risk. The risk discount rates reflect the market risk inherent in each
product group and hence the volatility of product cash flows. These are determined by considering how the profits from each product
are affected by changes in expected returns on various asset classes. By converting this into a relative rate of return, it is possible to derive
a product-specific beta.
Product level betas reflect the most recent product mix to produce appropriate betas and risk discount rates for each major
product grouping.
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Additional credit risk allowance
The Group’s methodology is to allow appropriately for credit risk. The allowance for total credit risk is to cover:
— Expected long-term defaults;
— Credit risk premium (to reflect the volatility in downgrade and default levels); and
— Short-term downgrades and defaults.
These allowances are initially reflected in determining best estimate returns and through the market risk allowance described above.
However, for those businesses largely backed by holdings of debt securities, these allowances in the projected returns and market risk
allowances may not be sufficient and an additional allowance may be appropriate.
The practical application of the allowance for credit risk varies depending upon the type of business as described below:
Asia operations
For Asia operations, the allowance for credit risk incorporated in the projected rates of return and the market risk allowance are sufficient.
Accordingly no additional allowance for credit risk is required.
The projected rates of return for holdings of corporate bonds comprise the risk-free rate plus an assessment of long-term spread over
the risk-free rate.
US operations (Jackson)
For Jackson business, the allowance for long-term defaults is reflected in the risk margin reserve (RMR) charge which is deducted
in determining the projected spread margin between the earned rate on the investments and the policyholder crediting rate.
The risk discount rate incorporates an additional allowance for credit risk premium and short-term downgrades and defaults as shown
in note 14(ii). In determining this allowance a number of factors have been considered. These factors, in particular, include:
— How much of the credit spread on debt securities represents an increased credit risk not reflected in the RMR long-term default
assumptions, and how much is liquidity premium (which is the premium required by investors to compensate for the risk of longer-
term investments which cannot be easily converted into cash, and converted at the fair market value). In assessing this effect,
consideration has been given to a number of approaches to estimating the liquidity premium by considering recent statistical data;
and
— Policyholder benefits for Jackson fixed annuity business are not fixed. It is possible in adverse economic scenarios to pass on
a component of credit losses to policyholders (subject to guarantee features) through lower investment return rates credited
to policyholders. Consequently, it is only necessary to allow for the balance of the credit risk in the risk discount rate.
The level of the additional allowance is assessed at each reporting period to take account of prevailing credit conditions and as the
business in force alters over time. The additional allowance for variable annuity business has been set at one-fifth of the non-variable
annuity business to reflect the proportion of the allocated holdings of general account debt securities.
The level of allowance differs from that for UK annuity business for investment portfolio differences and to take account of the
management actions available in adverse economic scenarios to reduce crediting rates to policyholders, subject to guarantee features
of the products.
UK operations
(1) Shareholder-backed annuity business
For Prudential’s UK shareholder-backed annuity business, Prudential has used a market consistent embedded value (MCEV) approach
to derive an implied risk discount rate which is then applied to the projected best estimate cash flows.
In the annuity MCEV calculations, as the assets are generally held to maturity to match long duration liabilities, the future cash flows
are discounted using the swap yield curve plus an allowance for liquidity premium based on Prudential’s assessment of the expected
return on the assets backing the annuity liabilities after allowing for:
— Expected long-term defaults, derived as a percentage of historical default experience based on Moody’s data for the period 1970
to 2009, and the definition of the credit rating assigned to each asset held is the second highest credit rating published by Moody’s,
Standard & Poor’s and Fitch;
— A credit risk premium, derived as the excess over the expected long-term defaults, of the 95th percentile of historical cumulative
defaults based on Moody’s data for the period 1970 to 2009, and subject to a minimum margin over expected long-term defaults
of 50 per cent;
— An allowance for a 1-notch downgrade of the asset portfolio subject to credit risk; and
— An allowance for short-term downgrades and defaults.
For the purposes of presentation in the EEV results, the results on this basis are reconfigured. Under this approach the projected earned
rate of return on the debt securities held is determined after allowing for expected long-term defaults and, where necessary, an
additional allowance for an element of short-term downgrades and defaults to bring the allowance in the earned rate up to best estimate
levels. The allowances for credit risk premium, 1-notch downgrade and the remaining element of short-term downgrade and default
allowances are incorporated into the risk margin included in the discount rate, shown in note 14(iii).
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Prudential plc Annual Report 2015 www.prudential.co.ukNotes on the EEV basis results continued (2) With-profits fund non-profit annuity business
For UK non-profit annuity business including that attributable to the PAC with-profits fund, the basis for determining the aggregate
allowance for credit risk is consistent with that applied for UK shareholder-backed annuity business (as described above). The allowance
for credit risk for this business is taken into account in determining the projected cash flows to the with-profits fund, which are in turn
discounted at the risk discount rate applicable to all of the projected cash flows of the fund.
(3) With-profits fund holdings of debt securities
The UK with-profits fund holds debt securities as part of its investment portfolio backing policyholder liabilities and unallocated surplus.
The assumed earned rate for with-profits holdings of corporate bonds is defined as the risk-free rate plus an assessment of the long-term
spread over gilts, net of expected long-term defaults. This approach is similar to that applied for equities and properties for which the
projected earned rate is defined as the risk-free rate plus a long-term risk premium.
Allowance for non-diversifiable non-market risks
The majority of non-market and non-credit risks are considered to be diversifiable. Finance theory cannot be used to determine the
appropriate component of beta for non-diversifiable non-market risks since there is no observable risk premium associated with it that
is akin to the equity risk premium. Recognising this, a pragmatic approach has been applied.
A base level allowance of 50 basis points is applied to cover the non-diversifiable non-market risks associated with the Group’s
businesses. For the Group’s US business and UK business other than shareholder-backed annuity, no additional allowance is necessary.
For UK shareholder-backed annuity business a further allowance of 50 basis points is used to reflect the longevity risk which is of
particular relevance. For the Group’s Asia operations in China, 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 profits and losses have been translated at average exchange rates for the year. Foreign currency assets and liabilities
have been translated at year end rates of exchange. The principal exchange rates are shown in note A1 of the IFRS statements.
(x) Taxation
In determining the post-tax profit 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 flows 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 year.
(xi) Inter-company arrangements
The EEV results for covered business incorporate annuities established in the PAC non-profit sub-fund from vesting pension policies in
SAIF (which is not covered business). The EEV results also incorporate the effect of the reinsurance arrangement of non-profit immediate
pension annuity liabilities of SAIF to PRIL. In addition, the free surplus and value of in-force business are calculated after taking account
of the impact of contingent loan arrangements between Group companies (movements in the contingent loan liability are reflected via
the projected cash flows in the value of in-force, and the related funding is reflected in free surplus).
(b) Accounting presentation
(i) Analysis of post-tax profit
To the extent applicable, the presentation of the EEV post-tax profit for the year is consistent in the classification between
operating and non-operating results with the basis that the Group applies for the analysis of IFRS basis results. Operating results
reflect underlying results including longer-term investment returns (which are determined as described in note 13(b)(ii) below)
and incorporate the following:
— New business contribution, as defined in note 13(a)(ii);
— Unwind of discount on the value of in-force business and other expected returns, as described in note 13(b)(iii);
— The impact of routine changes of estimates relating to non-economic assumptions, as described in note 13(b)(iv); and
— Non-economic experience variances, as described in note 13(b)(v).
In order to show the UK long-term business result on a comparable basis, the presentation of 2014 results has been adjusted to show
the results of the sold PruHealth and PruProtect businesses separately.
Non-operating results comprise the recurrent items of:
— Short-term fluctuations in investment returns;
— The mark to market value movements on core borrowings; and
— The effect of changes in economic assumptions.
In addition, non-operating profit includes:
— The effect on free surplus generated from the disposal of the Japan life business in 2015;
— The gain on sale of the PruHealth and PruProtect businesses in 2014; and
— The costs associated with the domestication of the Hong Kong branch which became effective on 1 January 2014.
Total profit attributable to shareholders and basic earnings per share include these items, together with actual investment returns.
The Group believes that operating profit, as adjusted for these items, better reflects underlying performance.
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(ii) Investment returns included in operating profit
For the investment element of the assets covering the net worth of long-term insurance business, investment returns are recognised
in operating results at the expected long-term rate of return. These expected returns are calculated by reference to the asset mix of
the portfolio. For the purpose of calculating the longer-term investment return to be included in the operating result of the PAC
with-profits fund of UK operations, where assets backing the liabilities and unallocated surplus are subject to market volatility, asset
values at the beginning of the reporting period are adjusted to remove the effects of short-term market movements as explained
in note 13(b)(iii) below.
For the purpose of determining the long-term returns for debt securities of US operations for fixed annuity and other general account
business, a risk margin charge is included which reflects the expected long-term rate of default based on the credit quality of the
portfolio. For Jackson, interest-related realised gains and losses are amortised to the operating results over the maturity period of the sold
bonds and for equity-related investments, a long-term rate of return is assumed, which reflects the aggregation of end-of-year risk-free
rates and equity risk premium. For US variable annuity separate account business, operating profit includes the unwind of discount on
the opening value of in-force adjusted to reflect end-of-year projected rates of return with the excess or deficit of the actual return
recognised within non-operating profit, together with the related hedging activity.
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 year (adjusted for the effect of current period economic and operating
assumption changes); and
— Required capital and surplus assets.
In applying this general approach, the unwind of discount included in operating profit for the with-profits business of UK insurance
operations is determined by reference to the opening value of in-force, as adjusted for the effects of short-term investment volatility due
to market movements (ie smoothed). In the summary statement of financial position and for total profit reporting, asset values and
investment returns are not smoothed. At 31 December 2015 the shareholders’ interest in the smoothed surplus assets used for this
purpose only, were £58 million lower (31 December 2014: £194 million lower) than the surplus assets carried in the statement of financial
position.
(iv) Effect of changes in operating assumptions
Operating profit includes the effect of changes to non-economic assumptions on the value of in-force at the end of the year.
For presentational purposes, the effect of change is delineated to show the effect on the opening value of in-force as operating
assumption changes, with the experience variance subsequently being determined by reference to the end-of-year assumptions
(see note 13(b)(v) below).
(v) Operating experience variances
Operating profit includes the effect of experience variances on non-economic assumptions, such as persistency, mortality and morbidity,
expenses and other factors, which are calculated with reference to the end-of-year assumptions.
(vi) Effect of changes in economic assumptions
Movements in the value of in-force business at the beginning of the year 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.
14 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 year end rates of return on government bonds. Expected
returns on equity and property asset classes and corporate bonds are derived by adding a risk premium, based on the Group’s long-term
view, to the risk-free rate.
The total profit that emerges over the lifetime of an individual contract as calculated using the embedded value basis is the same
as that calculated under the IFRS basis. Since the embedded value basis reflects discounted future cash flows, under this methodology
the profit emergence is advanced, thus more closely aligning the timing of the recognition of profit 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 2015 www.prudential.co.ukNotes on the EEV basis results continued
(i) Asia operations notes (b), (c)
China
Hong Kong notes (b), (c)
Indonesia
Korea
Malaysia note (c)
Philippines
Singapore note (c)
Taiwan
Thailand
Vietnam
Total weighted risk discount rate note (a)
Risk discount rate %
New business
31 Dec
In force
31 Dec
2015
9.4
3.7
12.8
6.1
6.6
11.3
4.3
4.0
9.3
13.8
5.9
2014
10.2
3.7
12.0
6.7
6.6
10.8
4.3
4.2
9.5
14.0
6.9
2015
9.4
3.7
12.8
5.7
6.7
11.3
5.1
3.9
9.3
13.8
6.4
2014
10.2
3.7
12.0
6.5
6.6
10.8
5.0
4.1
9.5
14.0
6.6
10-year government
bond yield %
Expected long-term
inflation %
31 Dec
31 Dec
2015
2014
2015
2014
2.9
2.3
8.9
2.1
4.2
4.6
2.6
1.0
2.5
7.1
3.7
2.2
7.9
2.6
4.1
4.0
2.3
1.6
2.7
7.2
2.5
2.3
5.0
3.0
2.5
4.0
2.0
1.0
3.0
5.5
2.5
2.3
5.0
3.0
2.5
4.0
2.0
1.0
3.0
5.5
Notes
(a)
(b)
(c)
The weighted risk discount rates for Asia operations shown above have been determined by weighting each country’s risk discount rates by reference to the
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 reflect the
movements in government bond yields, together with the effects of movements in the allowance for market risk and changes in product mix.
For Hong Kong, the assumptions shown are for US dollar denominated business. For other territories, the assumptions are for local currency denominated
business.
Equity risk premiums in Asia range from 3.5 per cent to 8.6 per cent (2014: from 3.5 per cent to 8.7 per cent). The mean equity return assumptions for the most
significant 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 spread note 13 (a)(viii)
Risk discount rate:
Variable annuity:
Risk discount rate
Additional allowance for credit risk included in risk discount rate note 13 (a)(viii)
Non-variable annuity:
Risk discount rate
Additional allowance for credit risk included in risk discount rate note 13 (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 inflation
Equity risk premium
S&P equity return volatility note (v)
* Including the proportion of variable annuity business invested in the general account and fixed index annuity business, the assumed spread margin grades
up linearly by 25 basis points to a long-term assumption over five years.
† Including the proportion of variable annuity business invested in the general account.
31 Dec 2015 %
31 Dec 2014 %
6.3
10.2
8.6
6.2
10.1
8.3
31 Dec 2015 %
31 Dec 2014 %
1.25
1.5
1.5
1.75
0.7
0.24
6.8
0.2
3.9
1.0
6.7
6.2
2.3
6.3
2.8
4.0
18.0
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
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(iii) UK insurance operations
Shareholder-backed annuity business:
Risk discount rate:note
New business
In force
Pre-tax expected long-term nominal rate of return for shareholder-backed annuity business: note
New business
In force
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 inflation
Equity risk premium
* The 2014 risk discount rates exclude the sold PruHealth and PruProtect businesses.
31 Dec 2015 %
31 Dec 2014 %
5.7
7.4
3.5
3.5
5.6
5.7
6.5
6.9
4.1
3.2
5.5
5.9
6.4
6.3 to 9.4
5.2
2.4
4.1
3.1
4.0
6.2
6.2 to 9.0
4.9
2.2
3.8
3.0
4.0
Note
For shareholder-backed annuity business, the movements in the pre-tax long-term nominal rates of return and risk discount rates for new and in-force businesses
reflect the effect of changes in asset yields (based on average yields for new business).
Stochastic assumptions
Details are given below of the key characteristics of the models used to determine the time value of the financial options and guarantees
as referred to in note 13(a)(iv).
(iv) Asia operations
— The stochastic cost of guarantees is primarily of significance 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.
— The volatility of equity returns ranges from 18 per cent to 35 per cent, and the volatility of government bond yields ranges from
0.9 per cent to 2.3 per cent for both years.
(v) US operations (Jackson)
— Interest rates and equity returns are projected using a log-normal generator reflecting historical market data.
— Corporate bond returns are based on treasury yields plus a spread that reflects current market conditions.
— The volatility of equity returns ranges from 18 per cent to 27 per cent, and the standard deviation of interest rates ranges from
2.2 per cent to 2.5 per cent for both years.
(vi) UK insurance operations
— Interest rates are projected using a 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 reflecting total property
returns.
— The standard deviation of equities and property ranges from 15 per cent to 20 per cent for both years.
326
Prudential plc Annual Report 2015 www.prudential.co.ukNotes on the EEV basis results continued Operating assumptions
Best estimate assumptions
Best estimate assumptions are used for the cash flow projections, where best estimate is defined as the mean of the distribution of future
possible outcomes. The assumptions are reviewed actively and changes are made when evidence exists that material changes in future
experience are reasonably certain.
Assumptions required in the calculation of the value of options and guarantees, for example relating to volatilities and correlations,
or dynamic algorithms linking liabilities to assets, have been set equal to the best estimates and, wherever material and practical, reflect
any dynamic relationships between the assumptions and the stochastic variables.
Demographic assumptions
Persistency, mortality and morbidity assumptions are based on an analysis of recent experience, but also reflect expected future
experience. Where relevant, when calculating the time value of financial options and guarantees, policyholder withdrawal rates vary
in line with the emerging investment conditions according to management’s expectations.
Expense assumptions
Expense levels, including those of service companies that support the Group’s long-term business operations, are based on internal
expense analysis investigations and are appropriately allocated to acquisition of new business and renewal of in-force business.
Exceptional expenses are identified and reported separately. For mature business, it is Prudential’s policy not to take credit for future cost
reduction programmes until the savings have been delivered. For businesses which are currently sub-scale (China, Malaysia Takaful and
Taiwan), and India (where the business model is being adapted 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 office, that are
attributable to covered business. The assumed future expenses for these operations also include projections of these future recharges.
Development expenses are charged as incurred.
Corporate expenditure, which is included in other income and expenditure, comprises:
— Expenditure for Group head office, to the extent not allocated to the PAC with-profits funds, together with Solvency II implementation
and restructuring costs, which are charged to the EEV basis results as incurred; and
— Expenditure of the Asia regional head office that is not allocated to the covered business or asset management operations which
is charged as incurred. These costs are primarily for corporate related activities and are included within corporate expenditure.
Tax rates
The assumed long-term effective tax rates for operations reflect the incidence of taxable profits and losses in the projected cash flows
as explained in note 13(a)(x).
The local standard corporate tax rates applicable for the most significant operations are as follows:
Standard corporate tax rates
Asia operations:
Hong Kong
Indonesia
Malaysia
Singapore
US operations
UK operations†
%
16.5*
25.0
2015: 25.0; from 2016: 24.0
17.0
35.0
2015: 20.0; from 2017: 19.0; from 2020: 18.0
* 16.5 per cent on 5 per cent of premium income
† The impact of the reductions in future UK corporate tax rates on the opening value of in-force business is £55 million as shown in note 4(iv)(b).
15 Effect of Solvency II on EEV basis results on 1 January 2016
The Solvency II framework is effective from 1 January 2016. For our operations in Asia and the US, there is no impact on the EEV results
since Solvency II does not act as the local constraint on the ability to distribute profits to the Group. The EEV basis results and profile
of free surplus generation for these businesses will continue to be driven by local regulatory and target capital requirements.
For the UK insurance operations Solvency II will impact the EEV results as it changes the local regulatory valuation of net worth and
capital requirements, affecting the components of the EEV and the expected profile of free surplus generation. In line with guidance
provided by the CFO Forum in October 2015, the impact of Solvency II on the UK EEV has not been included in the results presented
in this section. An early estimate on the likely impact of Solvency II on the EEV net worth and value of in-force business is provided
in section II(i) of the additional unaudited information.
327
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16 New business premiums and contributions note (i)
Group insurance operations
Asia
US
UK note (iv)
Group total note (iv)
Asia insurance operations
Cambodia
Hong Kong
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
SE Asia operations including Hong Kong
China note (ii)
Korea
Taiwan
India note (iii)
Single
Regular
Annual premium
and contribution
equivalents
(APE)
note 13(a)(ii)
Present value
of new business
premiums
(PVNBP)
note 13(a)(ii)
2015 £m 2014 £m 2015 £m 2014 £m 2015 £m 2014 £m 2015 £m 2014 £m
2,120
17,286
8,463
2,272
15,555
6,681
2,641
–
179
2,010
–
166
2,853
1,729
1,025
2,237
1,556
834
15,208
17,286
9,069
12,331
15,555
7,305
27,869
24,508
2,820
2,176
5,607
4,627
41,563
35,191
–
546
230
100
146
454
69
6
–
419
280
117
121
677
92
4
1,551
308
182
45
34
1,710
239
212
83
28
8
1,158
303
201
44
264
88
82
2,148
111
123
127
132
3
603
357
189
39
289
74
61
1,615
81
92
116
106
8
1,213
326
211
59
309
95
83
2,304
142
141
131
135
3
645
385
201
51
357
83
61
38
7,007
1,224
1,208
287
2,230
422
343
16
3,861
1,619
1,284
248
2,683
392
247
1,786
105
113
124
109
12,759
739
780
442
488
10,350
550
609
462
360
Total Asia insurance operations
2,120
2,272
2,641
2,010
2,853
2,237
15,208
12,331
US insurance operations
Variable annuities
Elite Access (variable annuity)
Fixed annuities
Fixed index annuities
Wholesale
Total US insurance operations
UK and Europe insurance operations note (iv)
Individual annuities
Bonds
Corporate pensions
Individual pensions
Income drawdown
Other products
Total retail note (iv)
Wholesale
11,977
3,144
477
458
1,230
10,899
3,108
527
370
651
17,286
15,555
565
3,327
175
1,185
1,024
679
6,955
1,508
1,065
2,934
92
508
352
20
4,971
1,710
Total UK and Europe insurance operations note (iv)
8,463
6,681
–
–
–
–
–
–
–
–
135
32
–
12
179
–
179
–
–
–
–
–
–
1,198
314
48
46
123
1,090
311
53
37
65
11,977
3,144
477
458
1,230
10,899
3,108
527
370
651
1,729
1,556
17,286
15,555
–
–
138
22
–
6
166
–
166
57
333
152
150
102
80
874
151
1,025
106
294
147
72
35
9
663
171
834
565
3,328
600
1,295
1,024
749
7,561
1,508
1,065
2,937
592
595
352
54
5,595
1,710
9,069
7,305
Group total note (iv)
27,869
24,508
2,820
2,176
5,607
4,627
41,563
35,191
Notes
(i)
The tables shown above are provided as an indicative volume measure of transactions undertaken in the reporting year that have the potential to generate
profits for shareholders. The amounts shown are not, and not intended to be, reflective of premium income recorded in the IFRS income statement.
(ii) New business in China is included at Prudential’s 50 per cent interest in the China life operation.
(iii) New business in India is included at Prudential’s 26 per cent interest in the India life operation.
(iv) The 2014 UK and Europe insurance operations comparatives have been adjusted to exclude the contribution from the sold PruHealth and PruProtect
businesses (APE sales of £23 million and PVNBP of £166 million), following the disposal of our 25 per cent interest in the businesses in November 2014.
328
Prudential plc Annual Report 2015 www.prudential.co.ukNotes on the EEV basis results continued
Statement of directors’ responsibilities in respect of the
European Embedded Value (EEV) basis supplementary information
The directors have chosen to
prepare supplementary
information in accordance with
the EEV Principles issued in
May 2004 by the European CFO
Forum as supplemented by the
Additional Guidance on EEV
Disclosures issued in October
2005 and the Additional
Guidance on the impact
of Solvency II issued
in October 2015.
When compliance with the EEV Principles
is stated, those principles require the
directors to prepare supplementary
information in accordance with the
Embedded Value Methodology (EVM)
contained in the EEV Principles and to
disclose and explain any non-compliance
with the EEV guidance included
in the EEV Principles.
In preparing the EEV supplementary
information, the directors have:
— Prepared the supplementary
information in accordance with the
EEV Principles;
— Identified and described the business
covered by the EVM;
— Applied the EVM consistently to the
covered business;
— Determined assumptions on a realistic
basis, having regard to past, current and
expected future experience and to any
relevant external data, and then applied
them consistently;
— Made estimates that are reasonable and
consistent; and
— Described the basis on which business
that is not covered business has been
included in the supplementary
information, including any material
departures from the accounting
framework applicable to the Group’s
financial statements.
329
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Independent auditor’s report to Prudential plc on the
European Embedded Value (EEV) basis supplementary information
The purpose of this report and
restrictions on its use by persons
other than the Company
This report is made solely to the Company
in accordance with the terms of our
engagement. Our audit work has been
undertaken so that we might state to the
Company those matters we have been
engaged to state in this report and for
no other purpose. To the fullest extent
permitted by law, we do not accept or
assume responsibility to anyone other than
the Company for our audit work, for this
report, or for the opinions we have formed.
Rees Aronson
for and on behalf of KPMG LLP
Chartered Accountants
London
8 March 2016
Respective responsibilities of
directors and auditor
As explained more fully in the directors’
responsibilities statement set out on
page 329, 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/
auditscopeother2014 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.
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 2015 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
2015 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 and
the Additional Guidance on the impact of
Solvency II issued in October 2015
(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.
330
Prudential plc Annual Report 2015 www.prudential.co.uk Additional
information
332 Index to the additional unaudited
financial information
358 Risk factors
364 Glossary
368 Shareholder information
371 How to contact us
Scholarship scheme
The Prudential scholarship scheme
in Ghana and Kenya will help more
than 700 students to complete their
secondary school education. Find
out more on page 62.
7
Our communities
331
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I.
IFRS profit and loss information
333
a Analysis of long-term insurance business pre-tax IFRS operating
profit based on longer-term investment returns by driver
b Asia operations – analysis of IFRS operating profit by territory
c Analysis of asset management operating profit based on longer-term
investment returns
d Contribution to UK Life financial metrics from specific management
actions undertaken to position the balance sheet more effectively
under the new Solvency II regime
Other information
a Holding company cash flow
b Funds under management
c Solvency II capital position at 31 December 2015
d IGD capital position at 31 December 2015
e Reconciliation of expected transfer of value of in-force business
(VIF) and required capital to free surplus
f Foreign currency source of key metrics
g Option schemes
h Selected historical financial information of Prudential
i Effect of Solvency II on EEV basis results on 1 January 2016
338
339
340
II.
341
342
343
346
347
350
351
353
355
332
Prudential plc Annual Report 2015 www.prudential.co.uk Additional unaudited financial information
I: IFRS profit and loss information
a Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment returns
by driver
This schedule classifies the Group’s pre-tax operating earnings from long-term insurance operations into the underlying drivers of those
profits, using the following categories:
— 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 profits driven by net investment performance, being asset management fees that vary with the size of the
underlying policyholder funds net of investment management expenses.
— With-profits business represents the gross of tax shareholders’ transfer from the with-profits fund for the year.
— Insurance margin primarily represents profits 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 profit 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 comprise DAC amortisation for the year, excluding amounts related to short-term fluctuations in investment
returns, net of costs deferred in respect of new business.
Analysis of pre-tax IFRS operating profit by source and margin analysis of Group long-term insurance business
The following analysis expresses certain of the Group’s sources of operating profit as a margin of policyholder liabilities or other suitable
driver. Details on the calculation of the Group’s average policyholder liability balances are given in note (iv).
2015 £m
Asia
US
UK
Total
Spread income
Fee income
With-profits
Insurance margin
Margin on revenues
Expenses:
Acquisition costs note (i)
Administration expenses
DAC adjustments note (vi)
Expected return on shareholder assets
153
162
45
783
1,732
(1,161)
(701)
124
72
1,209
746
1,672
–
796
–
(939)
(828)
218
26
1,691
Impact of specific management actions in second
half of 2015 ahead of Solvency II
–
–
258
62
269
180
179
(86)
(159)
(2)
127
828
339
1,157
1,896
314
1,759
1,911
(2,186)
(1,688)
340
225
3,728
339
Long-term business operating profit
1,209
1,691
1,167
4,067
See notes at the end of this section.
Average
liability
note (iv)
73,511
125,380
106,749
Total
bps
note (ii)
157
151
29
5,607
206,423
(39)%
(82)
Spread income
Fee income
With-profits
Insurance margin
Margin on revenues
Expenses:
Acquisition costs note (i)
Administration expenses
DAC adjustments note (vi)
Expected return on shareholder assets
Long-term business operating profit
See notes at the end of this section.
Asia
US
125
155
43
675
1,545
(1,031)
(618)
92
64
1,050
734
1,402
–
670
–
(887)
(693)
191
14
1,431
2014 AER £m
UK
note (v)
272
61
255
73
176
(96)
(143)
(6)
137
729
Total
1,131
1,618
298
1,418
1,721
(2,014)
(1,454)
277
215
3,210
Average
liability
note (iv)
67,252
110,955
101,290
Total
bps
note (ii)
168
146
29
4,627
186,049
(44)%
(78)
333
www.prudential.co.ukAnnualReport2015 Prudential plc01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information I: IFRS profit and loss information continued
a Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment returns
by driver continued
Spread income
Fee income
With-profits
Insurance margin
Margin on revenues
Expenses:
Acquisition costs note (i)
Administration expenses
DAC adjustments note (vi)
Expected return on shareholder assets
Long-term business operating profit
See notes at the end of this section.
Asia
US
126
154
44
669
1,532
(1,025)
(615)
92
63
1,040
791
1,511
–
722
–
(956)
(747)
206
16
1,543
Margin analysis of long-term insurance business – Asia
Long-term business
Spread income
Fee income
With-profits
Insurance margin
Margin on revenues
Expenses:
2015
Average
liability
note (iv)
£m
11,039
16,088
17,446
Margin
note (ii)
bps
139
101
26
Profit
£m
153
162
45
783
1,732
Profit
£m
125
155
43
675
1,545
Acquisition costs note (i)
Administration expenses
DAC adjustments note (vi)
Expected return on shareholder assets
Operating profit
(1,161)
2,853
(701) 27,127
124
72
(258)
(41)% (1,031)
(618)
92
64
1,209
1,050
See notes at the end of this section.
2014 CER £m
note (iii)
UK
note (v)
272
61
255
73
176
(96)
(143)
(6)
137
729
Asia
2014 AER
Average
liability
note (iv)
£m
9,183
14,987
14,823
2,237
24,170
Average
liability
note (iv)
69,628
116,507
101,653
Total
bps
note (ii)
171
148
29
4,778
194,588
(43)%
(77)
Total
1,189
1,726
299
1,464
1,708
(2,077)
(1,505)
292
216
3,312
2014 CER
note (iii)
Average
liability
note (iv)
£m
9,333
14,967
15,186
Margin
note (ii)
bps
135
103
29
2,267
24,300
(45)%
(253)
Margin
note (ii)
bps
136
103
29
Profit
£m
126
154
44
669
1,532
(46)% (1,025)
(615)
(256)
92
63
1,040
Analysis of Asia operating profit drivers:
— Spread income increased by 21 per cent at constant exchange rates to £153 million in 2015, predominantly reflecting the growth of
the Asia non-linked policyholder liabilities.
— Fee income increased by 5 per cent at constant exchange rates from £154 million in 2014 to £162 million in 2015, broadly in line with
the increase in movement in average unit-linked liabilities.
— Insurance margin increased by 17 per cent at constant exchange rates to £783 million in 2015, predominantly reflecting the continued
growth of the in-force book, which contains a relatively high proportion of risk-based products.
— Margin on revenues increased by £200 million at constant exchange rates to £1,732 million in 2015, primarily reflecting higher
premium income recognised in the year.
— Acquisition costs increased by 13 per cent at constant exchange rates (AER 13 per cent) to £1,161 million in 2015, compared to the
26 per cent increase in APE sales (AER 28 per cent increase), resulting in a decrease in the acquisition costs ratio. The analysis above
uses shareholder acquisition costs as a proportion of total APE sales. If with-profits APE sales were excluded from the denominator
the acquisition cost ratio would become 68 per cent (2014: 66 per cent at CER), the small increase being the result of changes to
product and country mix.
— Administration expenses increased by 14 per cent at constant exchange rates to £701 million in 2015 as the business continues to
expand. At constant exchange rates, the administration expense ratio has increased from 253 basis points in 2014 to 258 basis points
in 2015, the result of changes to product and country mix.
334
Prudential plc Annual Report 2015 www.prudential.co.ukAdditional unaudited financial information continued
Margin analysis of long-term insurance business – US
2015
Average
liability
note (iv)
£m
30,927
86,921
Margin
note (ii)
bps
241
192
Profit
£m
746
1,672
796
US
2014 AER
Average
liability
note (iv)
£m
28,650
72,492
Margin
note (ii)
bps
256
193
Profit
£m
734
1,402
670
Profit
£m
791
1,511
722
2014 CER
note (iii)
Average
liability
note (iv)
£m
30,876
78,064
Long-term business
Spread income
Fee income
Insurance margin
Expenses:
Acquisition costs note (i)
Administration expenses
DAC adjustments
Expected return on shareholder assets
Operating profit
(939)
1,729
(828) 125,380
218
26
1,691
(54)%
(66)
(887)
1,556
(693) 108,984
191
14
1,431
(57)%
(64)
(956)
1,677
(747) 117,393
206
16
1,543
See notes at the end of this section.
Margin
note (ii)
bps
256
194
(57)%
(64)
Analysis of US operating profit drivers:
— Spread income declined by 6 per cent at constant exchange rates (AER increased by 2 per cent) to £746 million in 2015. The reported
spread margin decreased to 241 basis points from 256 basis points in 2014 primarily due to lower investment yields. Spread income
benefited from swap transactions previously entered into to more closely match the asset and liability duration. Excluding this effect,
the spread margin would have been 166 basis points (2014 CER: 182 basis points and AER: 183 basis points).
— Fee income increased by 11 per cent at constant exchange rates (AER 19 per cent) to £1,672 million in 2015, primarily due to higher
average separate account balances reflecting positive net cash flows from variable annuity business. Fee income margin has remained
broadly in line with the prior year at 192 basis points (2014 CER: 194 basis points and AER: 193 basis points).
— Insurance margin represents operating profits from insurance risks, including variable annuity guarantees and other sundry items.
Insurance margin increased to £796 million in 2015 compared to £722 million in the previous year at constant exchange rates,
primarily due to higher fee income from variable annuity guarantees following positive net flows in recent periods into variable annuity
business with guarantees. REALIC contributed £215 million to this total (2014: £233 million at constant exchange rates).
— Acquisition costs, which are commissions and expenses incurred to acquire new business, including those that are not deferrable,
decreased in absolute terms at constant exchange rates in line with trends observed in recent years. As a percentage of APE sales,
acquisition costs have decreased to 54 per cent, compared to 57 per cent in 2014. This is due to the continued increase in producers
selecting asset-based commissions which are treated as an administrative expense in this analysis, rather than front-end commissions.
— Administration expenses increased to £828 million in 2015 compared to £747 million for 2014 at constant exchange rates (AER
£693 million), primarily as a result of higher asset-based commissions paid on the larger 2015 separate account balance subject to
these trail commissions. These are paid on policy anniversary dates and are treated as an administration expense in this analysis.
Excluding these trail commissions, the resulting administration expense ratio would be unchanged at 36 basis points (2014: CER 36
basis points and AER 36 basis points).
335
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a Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment returns
by driver continued
Analysis of pre-tax operating profit before and after acquisition costs and DAC adjustments
2015 £m
2014 AER £m
Other
operating
profits
Acquisition costs
Incurred Deferred
Total
Other
operating
profits
Acquisition costs
Incurred Deferred
Total
Other
operating
profits
2014 CER £m
note (iii)
Acquisition costs
Incurred Deferred
Total
Total operating profit
before acquisition
costs and DAC
adjustments
Less new business
strain
Other DAC
adjustments
– amortisation of
previously deferred
acquisition costs:
Normal
(Accelerated)/
Decelerated
2,412
2,412
2,127
2,127
2,293
2,293
(939)
734
(205)
(887)
678
(209)
(956)
731
(225)
(514)
(514)
(2)
(2)
(474)
(474)
(13)
(13)
(511)
(511)
(14)
(14)
Total
2,412
(939)
218
1,691
2,127
(887)
191
1,431
2,293
(956)
206
1,543
Margin analysis of long-term insurance business – UK
Long-term business
Spread income
Fee income
With-profits
Insurance margin
Margin on revenues
Expenses:
Acquisition costs note (i)
Administration expenses
DAC adjustments
Expected return on shareholders’ assets
Impact of specific management actions in second
half of 2015 ahead of Solvency II
Operating profit
See notes at the end of this section.
Profit
£m
258
62
269
180
179
(86)
(159)
(2)
127
828
339
1,167
2015
Average
liability
note (iv)
£m
31,545
22,371
89,303
UK
Margin
note (ii)
bps
82
28
30
1,025
53,916
(8)%
(29)
2014
note (v)
Average
liability
note (iv)
£m
29,419
23,476
86,467
Margin
note (ii)
bps
92
26
29
834
52,895
(12)%
(27)
Profit
£m
272
61
255
73
176
(96)
(143)
(6)
137
729
–
729
336
Prudential plc Annual Report 2015 www.prudential.co.ukAdditional unaudited financial information continued
Analysis of UK operating profit drivers:
— Spread income reduced from £272 million in 2014 to £258 million in 2015, mainly due to lower annuity new business profit post the
reforms brought about by Pension Freedoms.
— Fee income principally represents asset management fees from unit-linked business, including direct investment only business
to group pension schemes, where liability flows are driven by a small number of large single mandate transactions and fee income
mostly arises within our UK asset management business. Excluding these schemes, the fee margin on the remaining balances was
43 basis points (2014: 41 basis points).
— With-profits transfers increased from £255 million in 2014 to £269 million in 2015, due to an increase in terminal bonus rates.
— Insurance margin increased to £180 million in 2015, reflecting the higher contribution from longevity reinsurance transactions
undertaken during the first half of the year, positive experience in the year and the modest net effect of the annual review of assumptions.
— Margin on revenues represents premium charges for expenses and other sundry net income received by the UK. The 2015 margin
remained stable at £179 million compared to the previous year.
— Acquisition costs incurred declined to £86 million, equivalent to 8 per cent of total APE sales in 2015 (2014: 12 per cent). The decline
reflects a shift in business mix towards with-profits business where acquisition costs are funded by the estate. The acquisition cost
ratio is also distorted by the high contribution to APE of bulk annuity sales in the year, where acquisition costs are comparatively lower.
Acquisition costs expressed as a percentage of shareholder-backed APE sales (excluding the bulk annuity transactions) were
36 per cent (2014: 36 per cent).
— Administration expenses increased by £16 million to £159 million in 2015 largely due to increased spend associated with
UK pension reforms.
— The contribution from specific management actions undertaken in the second half of 2015 to position the balance sheet more
effectively under the new Solvency II regime was £339 million. Further explanation and analysis is provided in Additional Unaudited
IFRS Financial Information section I(d).
Notes to sources of earnings tables
(i)
The ratio for acquisition costs is calculated as a percentage of APE sales including with-profits sales. Acquisition costs include only those relating to shareholder-
backed business.
(ii) Margin represents the operating return earned in the year as a proportion of the relevant class of policyholder liabilities excluding unallocated surplus.
(iii) The 2014 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 profit figures 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.
In order to show the UK long-term business on a comparable basis, the 2014 comparative results exclude the contribution from the sold PruHealth
and PruProtect businesses.
(v)
(vi) The DAC adjustments contain a charge of £3 million in respect of joint ventures in 2015 (2014: AER credit of £11 million).
337
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I: IFRS profit and loss information continued
b Asia operations – analysis of IFRS operating profit by territory
Operating profit based on longer-term investment returns for Asia operations is analysed as follows:
Hong Kong
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
South-east Asia operations including Hong Kong
China
India
Korea
Taiwan
Other
Non-recurrent items note (ii)
Total insurance operations note (i)
Development expenses
Total long-term business operating profit
Eastspring Investments
Total Asia operations
2015 £m
AER
2014 £m
CER
2014 £m
2014 AER
vs 2015
2014 CER
vs 2015
150
356
120
32
204
70
86
1,018
32
42
38
25
(4)
62
1,213
(4)
1,209
115
1,324
109
309
118
28
214
53
72
903
13
49
32
15
(9)
49
1,052
(2)
1,050
90
1,140
118
295
107
29
213
54
75
891
14
49
32
15
(9)
50
1,042
(2)
1,040
91
1,131
38%
15%
2%
14%
(5)%
32%
19%
13%
146%
(14)%
19%
67%
56%
27%
15%
100%
15%
28%
16%
27%
21%
12%
10%
(4)%
30%
15%
14%
129%
(14)%
19%
67%
56%
24%
16%
100%
16%
26%
17%
Notes
(i)
Analysis of operating profit between new and in-force business
The result for insurance operations comprises amounts in respect of new business and business in force as follows:
New business strain*
Business in force
Non-recurrent itemsnote (ii)
Total
2015 £m
2014 £m
(4)
1,155
62
1,213
AER
(18)
1,021
49
1,052
CER
(23)
1,015
50
1,042
* The IFRS new business strain corresponds to approximately 0.1 per cent of new business APE premiums for 2015 (2014: approximately 0.8 per cent of new
business APE).
The strain reflects the aggregate of the pre-tax regulatory basis strain to net worth after IFRS adjustments for deferral of acquisition costs and deferred income
where appropriate.
(ii) Other non-recurrent items of £62 million in 2015 (2014: £49 million) represent a number of items none of which are individually significant and that are not
anticipated to reoccur in subsequent years.
338
Prudential plc Annual Report 2015 www.prudential.co.ukAdditional unaudited financial information continued
c Analysis of asset management operating profit based on longer-term investment returns
M&G
note (ii)
Eastspring
Investments
note (ii)
2015 £m
Prudential
Capital
Operating income before performance-related fees
Performance-related fees
Operating income (net of commission) note (i)
Operating expense note (i)
Share of associate’s results
Group’s share of tax on joint ventures’ operating profit
Operating profit based on longer-term investment returns
Average funds under management
Margin based on operating income*
Cost/income ratio†
939
22
961
(533)
14
–
442
304
3
307
(176)
–
(16)
115
£252.5bn
37bps
57%
£85.1bn
36bps
58%
118
–
118
(99)
–
–
19
M&G
note (ii)
Eastspring
Investments
notes (ii),(iii)
2014 £m
Prudential
Capital
Operating income before performance-related fees
Performance-related fees
Operating income (net of commission) note (i)
Operating expense note (i)
Share of associate’s results
Group’s share of tax on joint ventures’ operating profit
Operating profit based on longer-term investment returns
Average funds under management
Margin based on operating income*
Cost/income ratio†
954
33
987
(554)
13
–
446
240
1
241
(140)
–
(11)
90
£250.0bn
38bps
58%
£68.8bn
35bps
59%
130
–
130
(88)
–
–
42
US
Total
321
–
321
(310)
–
–
11
1,682
25
1,707
(1,118)
14
(16)
587
US
Total
303
–
303
(291)
–
–
12
1,627
34
1,661
(1,073)
13
(11)
590
Notes
(i)
Operating income and expense includes the Group’s share of contribution from joint ventures (but excludes any contribution from associates).
In the income statement as shown in note B2 of the IFRS financial statements, these amounts are netted, tax deducted and shown as a single amount.
(ii) M&G and Eastspring Investments can be further analysed as follows:
2015
2014
2015
2014
M&G
Operating income before performance-related fees
Margin
of FUM*
bps
Institutional‡
£m
87
84
357
361
Margin
of FUM*
bps
19
20
Eastspring Investments
Operating income before performance-related fees
Margin
of FUM*
bps
Institutional‡
£m
61
60
116
101
Margin
of FUM*
bps
21
22
Total
£m
939
954
Total
£m
304
240
Retail
£m
582
593
Retail
£m
188
139
Margin
of FUM*
bps
37
38
Margin
of FUM*
bps
36
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.
339
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I: IFRS profit and loss information continued
d Contribution to UK Life financial metrics from specific management actions undertaken to position the balance
sheet more effectively under the new Solvency II regime
In the second half of 2015 and ahead of securing Solvency II internal model approval, a number of specific actions were taken by
Prudential’s UK life business to position the balance sheet more efficiently under the new regime. These actions included extending
the reinsurance of longevity risk to cover £8.7 billion of annuity liabilities (on a Pillar 1 basis) by the end of 2015 (end 2014: programme
covered £2.3 billion of liabilities). It also included the repositioning of the fixed income asset portfolio, increasing to 95 per cent the
proportion that would benefit from the matching adjustment under Solvency II. The effect of these actions on the UK’s long-term IFRS
operating profit, underlying free surplus generation and EEV operating profit, is shown in the tables below.
IFRS operating profit of UK long-term business
Shareholder annuity new business
In-force business:
Longevity reinsurance transactions
Impact of specific management actions ahead of Solvency II
With-profits and other in-force
Total Life IFRS operating profit
Underlying free surplus generation of UK long-term business
Expected in-force and return on net worth
Longevity reinsurance transactions
Impact of specific management actions ahead of Solvency II
Changes in operating assumptions, experience variances and Solvency II and
other restructuring costs
Underlying free surplus generated from in-force business
New business strain
Total underlying free surplus generation
EEV post-tax operating profit of UK long-term business
Unwind of discount and other expected return
Longevity reinsurance transactions
Impact of specific management actions ahead of Solvency II
Changes in operating assumptions and experience variances
Operating profit from in-force business
New business profit
Total post-tax Life EEV operating profit
First half
2015
Second half
2015
Full year
2015
Full year
2014
66
61
–
61
309
436
57
170
169
339
335
731
123
231
169
400
644
1,167
162
30
–
30
537
729
First half
2015
Second half
2015
Full year
2015
Full year
2014
310
52
–
52
(10)
352
(57)
295
310
148
75
223
(7)
526
(8)
518
620
200
75
275
(17)
878
(65)
813
571
30
–
30
36
637
(65)
572
First half
2015
Second half
2015
Full year
2015
Full year
2014
245
(46)
–
(46)
57
256
155
411
243
(88)
75
(13)
59
289
163
452
488
(134)
75
(59)
116
545
318
863
410
(8)
–
(8)
74
476
259
735
340
Prudential plc Annual Report 2015 www.prudential.co.ukAdditional unaudited financial information continued
II: Other information
a Holding company cash flow
Net cash remitted by business units:
UK net remittances to the Group
UK Life fund paid to the Group
Shareholder-backed business:
Other UK paid to the Group
Total UK net remittances to the Group
US remittances to the Group
Asia net remittances to the Group
Asia paid to the Group:
Long-term business
Other operations
Group invested in Asia:
Long-term business
Other operations (including funding of regional head office costs)
Total Asia net remittances to the Group
M&G remittances to the Group
PruCap remittances to the Group
Net remittances to the Group from business units
Net interest paid
Tax received
Corporate activities
Solvency II costs
Total central outflows
Operating holding company cash flow before dividend*
Dividend paid
Operating holding company cash flow after dividend*
Non-operating net cash flow†
Total holding company cash flow
Cash and short-term investments at beginning of year
Foreign exchange movements
Cash and short-term investments at end of year
2015 £m
2014 £m
200
131
331
470
494
74
568
(5)
(96)
(101)
467
302
55
1,625
(290)
145
(193)
(16)
(354)
1,271
(974)
297
376
673
1,480
20
2,173
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
* Including central finance subsidiaries.
† Non-operating net cash flow is principally for corporate transactions for distribution rights and acquired subsidiaries and issue and repayment of subordinated debt.
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b Funds under management
(a) Summary
Business area:
Asia operations
US operations
UK operations
Prudential Group funds under management note (i)
External funds note (ii)
Total funds under management
Notes
(i)
Prudential Group funds under management of £357.0 billion (2014: £341.6 billion) comprise:
Total investments per the consolidated statement of financial 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
2015 £bn
2014 £bn
54.0
134.6
168.4
357.0
151.6
508.6
49.0
123.6
169.0
341.6
154.3
495.9
2015 £bn
2014 £bn
352.0
(1.0)
0.4
5.6
357.0
337.4
(1.0)
0.3
4.9
341.6
(ii)
External funds shown above as at 31 December 2015 of £151.6 billion (2014: £154.3 billion) comprise £162.7 billion (2014: £167.2 billion) of funds managed by
M&G and Eastspring Investments as shown in note (b) below less £11.1 billion (2014: £12.9 billion) that are classified within Prudential Group’s funds.
(b) Investment products – external funds under management
1 January
Market gross inflows
Redemptions
Market exchange translation and other
movements
31 December
Eastspring
Investments
note
30,133
110,396
(103,360)
2015 £m
M&G
2014 £m
Group
total
Eastspring
Investments
note
M&G
Group
total
137,047
33,626
(40,634)
167,180
144,022
(143,994)
(882)
(3,634)
(4,516)
36,287
126,405
162,692
22,222
82,440
(77,001)
2,472
30,133
125,989
38,017
(30,930)
148,211
120,457
(107,931)
3,971
6,443
137,047
167,180
Note
The £162.7 billion (2014: £167.2 billion) investment products comprise £156.7 billion (2014: £162.4 billion) plus Asia Money Market Funds of £6.0 billion
(2014: £4.8 billion).
(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
2015 £bn
note
2014 £bn
note
2015 £bn
2014 £bn
36.3
52.8
89.1
30.1
47.2
77.3
126.4
119.7
246.1
137.0
127.0
264.0
Note
The external funds under management for Eastspring Investments include Asia Money Market Funds at 31 December 2015 of £6.0 billion (2014: £4.8 billion).
342
Prudential plc Annual Report 2015 www.prudential.co.ukAdditional unaudited financial information continued c Solvency II capital position at 31 December 2015
The estimated Group Solvency II surplus at 31 December 2015 was £9.7 billion, before allowing for the 2015 second interim ordinary and
special dividend.
Estimated Group Solvency II capital position
Own funds
Solvency capital requirement
Surplus
Solvency ratio
These results allow for:
31 December
2015
£bn
20.1
10.4
9.7
193%
— Capital in Jackson in excess of 250 per cent of the US local Risk Based Capital requirement. As agreed with the Prudential Regulation
Authority, this is incorporated in the result above as follows:
– Own funds: represent Jackson’s local US Risk Based available capital less 100 per cent of the US Risk Based Capital requirement
(Company Action Level); and
– Solvency Capital Requirement: represent 150 per cent of Jackson’s local US Risk Based Capital requirement (Company Action Level);
— Non-recognition of a portion of Solvency II surplus capital relating to the Group’s Asia life operations, reflecting regulatory prudence;
— Matching adjustment for UK annuities, based on the 31 December 2015 calibration published by the European Insurance and
Occupational Pensions Authority; and
— Transitional measures which have the effect of preserving the Solvency II surplus for our UK business at the same level as under
Solvency I, for business written before 1 January 2016.
The Group’s Solvency II capital surplus excludes:
— Diversification benefits between Jackson and the rest of the Group;
— Surplus in ring-fenced with-profits funds including the shareholders’ share of the estate of with-profits funds; and
— Surplus in pension funds.
Analysis of movement in capital position
We previously reported our economic capital results at year end 2013 and year end 2014 before there was certainty in the final outcome
of Solvency II and before we received internal model approval. The Solvency II results now reflect the output from our approved internal
model under the final Solvency II rules. Allowing for this change in basis, the movement from the previously reported economic capital
basis solvency surplus at 31 December 2014 to the Solvency II approved internal model surplus at 31 December 2015 is set out in the
table below:
Analysis of movement in Group surplus
Economic capital surplus as at 1 January 2015
Operating experience
Non-operating experience (including market movements)
Other capital movements
Subordinated debt issuance
Foreign currency translation impacts
Dividends paid
Methodology and calibration changes
Changes to Own Funds (net of transitionals) and Solvency Capital Requirement calibration strengthening
Effect of partial derecognition of Asia Solvency II surplus
Estimated Solvency II surplus as at 31 December 2015
The movement in Group surplus over 2015 is driven by:
£bn
9.7
2.4
(0.6)
0.6
0.2
(1.0)
(0.2)
(1.4)
9.7
— Operating experience of £2.4 billion: generated by in-force business and new business written in 2015, including £0.4 billion of
benefit from the specific actions taken in the second half of the year to position the balance sheet more efficiently under the new
Solvency II regime;
— Non-operating experience of £0.6 billion: mainly arising from negative market experience during the year; and
— Other capital movements: comprising an increase in capital from subordinated debt issuance, a gain from positive foreign currency
translation effects and a reduction in surplus from payment of dividends.
In addition, the methodology and calibration changes arising from Solvency II relate to:
— A £0.2 billion reduction in surplus due to an increase in the Solvency Capital Requirement from strengthening of internal model
calibrations, mainly relating to longevity risk, operational risk, credit risk and correlations, and a corresponding increase in the risk
margin, which is partially offset by UK transitionals; and
— A £1.4 billion reduction in surplus due to the negative impact of Solvency II rules for ‘contract boundaries’ and a reduction in the
capital surplus of the Group’s Asia life operations, as agreed with the Prudential Regulation Authority.
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c Solvency II capital position at 31 December 2015 continued
The change in US treatment from including 150 per cent, rather than 250 per cent of US Risk Based Capital (Company Action Level) in
the Group Solvency Capital Requirement, is offset by a corresponding reduction in the Group Own Funds and therefore has no impact
on surplus despite the positive impact on the solvency ratio.
The impacts above, including the impact of the change in basis from economic capital to Solvency II, represent an overall reduction
in the Group solvency ratio from 218 per cent to 193 per cent.
Analysis of movement in Group solvency position (£ billion)
Economic capital position at 1 January 2015
Capital generation and other movements
Methodology and calibration changes
Changes to Own Funds (net of transitionals) and Solvency Capital
Requirement calibration strengthening
Effect of partial derecognition of Asia Solvency II surplus
US Risk Based Capital treatment
Estimated Solvency II position at 31 December 2015
Own
Funds
17.9
2.0
2.3
(1.4)
(0.7)
20.1
Solvency
Capital
Requirement
8.2
0.4
2.5
–
(0.7)
10.4
Surplus
9.7
1.6
(0.2)
(1.4)
–
9.7
Solvency
ratio
218%
13%
(32)%
(12)%
6%
193%
Analysis of Group Solvency Capital Requirements
The split of the Group’s estimated Solvency Capital Requirement by risk type, including the capital requirements in respect of Jackson’s
risk exposures based on 150 per cent of US Risk Based Capital requirements (Company Action Level) but with no diversification between
Jackson and the rest of the Group, is as follows:
Split of the Group’s estimated Solvency Capital Requirements
Market
Equity
Credit
Yields (interest rates)
Other
Insurance
Mortality/morbidity
Lapse
Longevity
Operational/expense
FX translation
Reconciliation of IFRS equity to Group Solvency II Own Funds
Reconciliation of IFRS equity to Group Solvency II Own Funds
IFRS shareholders’ equity
Restate US insurance entities from IFRS onto local US statutory basis
Remove DAC, goodwill and intangibles
Add subordinated-debt
Impact of risk margin (net of transitionals)
Add value of shareholder-transfers
Liability valuation differences
Increase in value of net deferred tax liabilities
(resulting from valuation differences above)
Other
Estimated Solvency II Own Funds
344
31 December
2015
31 December
2015
% of
undiversified
Solvency
Capital
Requirements
% of
diversified
Solvency
Capital
Requirements
55%
11%
28%
13%
3%
27%
5%
14%
8%
11%
7%
72%
16%
47%
6%
3%
20%
2%
14%
4%
7%
1%
31 December
2015
£bn
13.0
(1.5)
(3.7)
4.4
(2.5)
3.1
8.6
(0.9)
(0.4)
20.1
Prudential plc Annual Report 2015 www.prudential.co.ukAdditional unaudited financial information continued The key items of the reconciliation are:
— £1.5 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. This item also reflects a derecognition of Own Funds of £0.7 billion, equivalent to the
value of 100 per cent of Risk Based Capital requirements (Company Action Level), as agreed with the Prudential Regulation Authority;
— £3.7 billion due to the removal of DAC, goodwill and intangibles from the IFRS balance sheet;
— £4.4 billion due to the addition of subordinated debt which is treated as available capital under Solvency II but as a liability under IFRS;
— £2.5 billion due to the inclusion of a risk margin for UK and Asia non-hedgeable risks, net of transitionals, all of which are not
applicable under IFRS;
— £3.1 billion due to the inclusion of the value of future shareholder transfers from with-profits business (excluding the shareholders’
share of the with-profits estate, for which no credit is given under Solvency II), which is excluded from the determination of the
Group’s IFRS shareholders’ funds;
— £8.6 billion due to differences in insurance valuation requirements between Solvency II and IFRS, with Solvency II Own Funds
partially capturing the value of in-force business which is excluded from IFRS;
— £0.9 billion due to the impact on the valuation of deferred tax assets and liabilities resulting from the other valuation differences
noted above; and
— £0.4 billion due to other items, including the impact of revaluing loans, borrowings and debt from IFRS to Solvency II.
Sensitivity analysis
At 31 December 2015, the estimated sensitivity of the Group Solvency II surplus to significant changes in market conditions is as follows:
— An instantaneous 20 per cent fall in equity markets would reduce surplus by £1.0 billion and reduce the solvency ratio to 186 per cent;
— 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 surplus by £1.8 billion and reduce the solvency ratio to 179 per cent;
— A 50 basis points reduction in interest rates (subject to a floor of zero and allowing for transitional recalculation) would reduce surplus
by £1.1 billion and reduce the solvency ratio to 179 per cent;
— A 100 basis points increase in interest rates (allowing for transitional recalculation) would increase surplus by £1.1 billion and increase
the solvency ratio to 210 per cent; and
— A 100 basis points increase in credit spreads (with credit defaults of 10 times the expected level in Jackson) would reduce surplus by
£1.2 billion and reduce the solvency ratio to 187 per cent.
UK Solvency II capital position1, 2
On the same basis as above, the estimated UK Solvency II surplus at 31 December 2015 was £3.3 billion. This relates to shareholder-
backed business including the shareholders’ share of future with-profits transfers, but excludes the shareholders’ share of the estate
in line with Solvency II requirements.
While the surplus position of the UK with-profits funds remains strong on a Solvency II basis, it is ring-fenced from the shareholder
balance sheet and is therefore excluded from both the Group and the UK shareholder Solvency II surplus results. The estimated UK
with-profits funds Solvency II surplus at 31 December 2015 was £3.2 billion.
Estimated Solvency II capital position
Own Funds
Solvency Capital Requirement
Surplus
Solvency ratio
31 December 2015 £bn
UK
shareholder
UK
with-profits
10.5
7.2
3.3
146%
7.6
4.4
3.2
175%
The UK with-profits funds surplus has reduced from £3.7 billion at 30 June 2015 to £3.2 billion at 31 December 2015. This is principally
due to an increase in the equity backing ratio of the Prudential Assurance Company with-profits sub-fund by 5 per cent, in order to utilise
the strength of the fund in line with the Principles and Practices of Financial Management, and strong new business growth.
Notes
1
2
The UK shareholder capital position represents the consolidated capital position of the shareholder funds of Prudential Assurance Company Ltd and
all its subsidiaries.
The UK with-profits capital position includes the Prudential Assurance Company with-profits sub-fund, the Scottish Amicable Insurance Fund and
the defined charge participating sub-fund.
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c Solvency II capital position at 31 December 2015 continued
Reconciliation of UK with-profits IFRS unallocated surplus to Solvency II Own Funds2
Reconciliation of UK with-profits funds
IFRS unallocated surplus of UK with-profits funds
Existing adjustments from IFRS to Solvency I in Capital Position Statement:
Value of shareholder transfers
Other valuation differences
With-profits fund estate (Solvency I Pillar 1 Peak 2 basis)
Adjustments to Solvency II:
Risk margin (net of transitional)
Other valuation differences
Estimated Solvency II Own Funds
31 December
2015
£bn
10.5
(2.1)
(0.7)
7.7
(0.7)
0.6
7.6
A reconciliation from IFRS to Solvency I is disclosed annually in the Capital Position Statement in the Group IFRS financial statements.
The additional reconciling items to Solvency II mainly reflect the risk margin net of transitionals, with other items including differences
in the definition of the risk-free rate and the matching adjustment impact for non-profit annuity liabilities within the with-profits funds.
UK shareholder sensitivity analysis
At 31 December 2015, the estimated sensitivity of the UK shareholder Solvency II surplus to significant changes in market conditions
is as follows:
— An instantaneous 20 per cent fall in equity markets would reduce surplus by £0.4 billion;
— A 40 per cent fall in equity markets would reduce surplus by £0.8 billion;
— A 50 basis points reduction in interest rates (subject to a floor of zero and allowing for transitional recalculation) would reduce
surplus by £0.7 billion;
— A 100 basis points increase in interest rates (allowing for transitional recalculation) would increase surplus by £0.9 billion;
— A 100 basis points increase in credit spreads would reduce surplus by £0.2 billion; and
— 15 per cent of the UK annuity portfolio downgrading by one whole letter rating would reduce surplus by £0.5 billion.
Statement of independent review
The methodology, assumptions and overall result have been subject to examination by KPMG LLP.
d IGD capital position at 31 December 2015
Up to 31 December 2015, Prudential was subject to the capital adequacy requirements of the European Union Insurance Groups
Directive as implemented by the Prudential Regulation Authority in the UK. The Insurance Groups Directive 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 Insurance Groups Directive capital surplus is £5.5 billion
at 31 December 2015 (before taking into account 2015 second interim ordinary and special dividends), with available capital covering
our capital requirements 2.5 times. This compares to a capital surplus of £4.7 billion at the end of 2014 (before taking into account the
2014 final dividend).
The movements in 2015 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 £1.8 billion; and
— £0.6 billion of subordinated debt issuance.
Offset by:
— Final 2014 dividend of £0.7 billion and first interim 2015 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.
The UK shareholder capital position represents the consolidated capital position of the shareholder funds of Prudential Assurance Company Ltd and
all its subsidiaries.
The UK with-profits capital position includes the Prudential Assurance Company with-profits sub-fund, the Scottish Amicable Insurance Fund and
the defined charge participating sub-fund.
Notes
1
2
346
Prudential plc Annual Report 2015 www.prudential.co.ukAdditional unaudited financial information continued e Reconciliation of expected transfer of value of in-force business (VIF) and required capital to free surplus
The tables below show how the value of in-force business (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 3 per cent) of the Group’s
embedded value emerges after this date, analysis of cash flows emerging in the years shown in the tables is considered most meaningful.
The modelled cash flows use the same methodology underpinning the Group’s embedded value reporting and so are subject to the same
assumptions and sensitivities used to prepare our 2015 results.
The impact of Solvency II which is effective from 1 January 2016 is not reflected in the analysis below in line with the guidance issued
by the CFO Forum. The new regulatory regime will not impact the free surplus generation profile of our operations in Asia and the US
as Solvency II does not act as the local constraint on the ability to distribute profits to the Group. For these businesses, free surplus
generation will continue to be driven by local regulatory and target capital requirements. For the UK insurance operations, Solvency II
will alter free surplus generation and an early estimate is provided in section D of the additional unaudited information.
In addition to showing the amounts, both discounted and undiscounted, expected to be generated from all in-force business at
31 December 2015, the tables also present the expected future free surplus to be generated from the investment made in new business
during 2015 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
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036-2040
2041-2045
2046-2050
2051-2055
Undiscounted expected generation from
all in-force business at 31 December*
Undiscounted expected generation from
2015 long-term new business written*
2015 £m
Asia
1,015
962
926
905
871
889
887
871
844
817
800
789
766
740
724
699
681
661
648
636
3,020
2,659
2,342
2,056
US
UK
Total
1,120
991
951
970
1,018
982
921
894
755
680
606
512
447
386
328
276
272
166
130
102
190
–
–
–
486
510
506
503
499
498
489
491
478
466
454
437
424
411
398
383
373
353
331
313
1,255
1,081
470
261
2,621
2,463
2,383
2,378
2,388
2,369
2,297
2,256
2,077
1,963
1,860
1,738
1,637
1,537
1,450
1,358
1,326
1,180
1,109
1,051
4,465
3,740
2,812
2,317
Asia
148
140
150
134
139
123
128
124
118
123
105
109
102
100
108
96
94
91
89
94
429
396
368
350
US
276
120
131
65
106
106
88
157
140
129
110
95
85
76
69
55
48
42
35
30
48
–
–
–
UK
28
28
29
29
33
31
29
28
29
29
26
24
24
23
22
21
20
20
20
18
81
104
43
26
Total
452
288
310
228
278
260
245
309
287
281
241
228
211
199
199
172
162
153
144
142
558
500
411
376
Total free surplus expected to emerge
in the next 40 years
26,208
12,697
11,870
50,775
3,858
2,011
765
6,634
* The analysis excludes amounts incorporated into VIF at 31 December 2015 where there is no definitive timeframe for when the payments will be made or receipts
received. In particular, it excludes the value of the shareholders’ interest in the estate. It also excludes any free surplus emerging after 2055.
The above amounts can be reconciled to the new business amounts as follows:
Undiscounted expected free surplus generation for years 2016 to 2055
Less: discount effect
Discounted expected free surplus generation for years 2016 to 2055
Discounted expected free surplus generation for years 2055+
Less: Free surplus investment in new business
Other items†
Post-tax EEV new business profit
Asia
3,858
(2,138)
1,720
153
(413)
30
1,490
2015 £m
US
2,011
(725)
1,286
–
(267)
(210)
809
UK
765
(392)
373
2
(65)
8
318
Total
6,634
(3,255)
3,379
155
(745)
(172)
2,617
† Other items represent the impact of the time value of options and guarantees on new business, foreign exchange effects and other non-modelled items. Foreign exchange
effects arise as EEV new business profit amounts are translated at average exchange rates and the expected free surplus generation uses year end closing rates.
347
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e Reconciliation of expected transfer of value of in-force business (VIF) and required capital to free surplus continued
The undiscounted expected free surplus generation from all in-force business at 31 December 2015 shown below can be reconciled to
the amount that was expected to be generated as at 31 December 2014 as follows:
Group
2014 expected free surplus generation for years
2015 to 2054
Less: Amounts expected to be realised in the
current year
Add: Expected free surplus to be generated
in year 2055*
Foreign exchange differences
New business
Operating movements
Non-operating and other movements
2015 expected free surplus generation for years
2016 to 2055
Asia
2014 expected free surplus generation for years
2015 to 2054
Less: Amounts expected to be realised in the
current year
Add: Expected free surplus to be generated
in year 2055*
Foreign exchange differences
New business
Operating movements
Non-operating and other movements
2015 expected free surplus generation for years
2016 to 2055
US
2014 expected free surplus generation for years
2015 to 2054
Less: Amounts expected to be realised in the
current year
Add: Expected free surplus to be generated
in year 2055*
Foreign exchange differences
New business
Operating movements
Non-operating and other movements
2015 expected free surplus generation for years
2016 to 2055
UK
2014 expected free surplus generation for years
2015 to 2054
Less: Amounts expected to be realised in the
current year
Add: Expected free surplus to be generated
in year 2055*
New business
Operating movements
Non-operating and other movements
2015 expected free surplus generation for years
2016 to 2055
* Excluding 2015 new business.
348
2015
£m
2016
£m
2017
£m
2018
£m
2019
£m
2020
£m
Other
£m
Total
£m
2,513
2,336
2,228
2,141
2,179
2,079
33,666
47,142
(2,513)
–
–
–
–
–
–
(2,513)
–
–
–
–
–
–
29
452
5
(201)
–
28
288
35
(116)
–
27
310
25
(120)
–
31
228
50
(110)
–
27
278
29
(25)
355
(165)
5,078
355
(23)
6,634
(392)
(820)
–
2,621
2,463
2,383
2,378
2,388
38,542
50,775
2015
£m
2016
£m
2017
£m
2018
£m
2019
£m
2020
£m
Other
£m
Total
£m
953
920
883
846
819
796
19,360
24,577
(953)
–
–
–
–
–
–
(953)
–
–
–
–
–
–
(23)
148
3
(33)
–
(22)
140
–
(39)
–
(19)
150
(20)
(31)
–
(19)
134
6
(35)
–
(20)
139
(15)
(29)
315
(466)
3,147
315
(569)
3,858
(827)
(1,020)
–
1,015
962
926
905
871
21,529
26,208
2015
£m
2016
£m
2017
£m
2018
£m
2019
£m
2020
£m
Other
£m
Total
£m
1,054
902
844
792
866
801
5,271
10,530
(1,054)
–
–
–
–
–
–
(1,054)
–
–
–
–
–
–
52
276
4
(114)
–
50
120
22
(45)
–
46
131
30
(48)
–
50
65
35
(46)
–
47
106
40
24
–
301
1,313
–
546
2,011
762
664
–
1,120
991
951
970
1,018
7,647
12,697
2015
£m
2016
£m
2017
£m
2018
£m
2019
£m
2020
£m
Other
£m
Total
£m
506
514
501
503
494
482
9,035
12,035
(506)
–
–
–
–
–
–
28
(2)
(54)
–
–
28
13
(32)
–
–
29
15
(41)
–
–
29
9
(29)
–
–
33
4
(20)
–
(506)
40
618
40
765
(327)
(464)
–
486
510
506
503
499
9,366
11,870
Prudential plc Annual Report 2015 www.prudential.co.ukAdditional unaudited financial information continued
At 31 December 2015 the total free surplus expected to be generated over the next five years (2016 to 2020 inclusive), using the same
assumptions and methodology as those underpinning our 2015 embedded value reporting was £12.2 billion, an increase of £1.2 billion
from the £11.0 billion expected over the same period at the end of 2014.
This increase primarily reflects the new business written in 2015, which is expected to generate £1,556 million of free surplus over
the next five years.
At 31 December 2015 the total free surplus expected to be generated on an undiscounted basis in the next 40 years is £50.8 billion,
up from the £47.1 billion expected at the end of 2014 reflecting the effect of new business written across all three business operations
of £6.6 billion and a positive foreign exchange translation effect of £0.4 billion. These positive effects have been offset by a £(0.8) billion
adverse effect reflecting operating, market assumption changes and other items. In Asia, these principally reflect the impact of falls in
equity market returns and bond values. In the US these mainly reflect higher future separate account growth due to the increase in
interest rates, together with improved persistency. Offsetting these positive impacts is the negative effect of lower than expected
separate account growth in the year due to broadly flat equity market returns in 2015. In the UK, these mainly arise from the effect of
longevity reinsurance transactions entered into during the year and the effect of a partial hedge to protect future shareholder with-profits
transfers from declines in UK equity markets. The longevity reinsurance transactions executed this year had the effect of accelerating the
generation of future free surplus into 2015. The overall growth in the Group’s undiscounted value of free surplus reflects our ability to
write both growing and profitable new business.
Actual underlying free surplus generated in 2015 from life business in force at the end of 2015 was £3.3 billion including £0.6 billion
of changes in operating assumptions and experience variances. This compares with the expected 2015 realisation at the end of 2014
of £2.5 billion. This can be analysed further as follows:
Transfer to free surplus in 2015
Expected return on free assets
Changes in operating assumptions and experience variances
Underlying free surplus generated from in-force life business in 2015
2015 free surplus expected to be generated at 31 December 2014
Asia £m
974
30
(19)
985
953
US £m
1,064
42
320
1,426
1,054
UK £m
Total £m
573
47
258
878
506
2,611
119
559
3,289
2,513
The equivalent discounted amounts of the undiscounted expected transfers from in-force business and required capital into free surplus
shown previously are as follows:
Expected period of emergence
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036-2040
2041-2045
2046-2050
2051-2055
Discounted expected generation from all in-force
business at 31 December
Discounted expected generation from
long-term 2015 new business written
2015 £m
Asia
969
851
766
701
629
597
558
512
464
421
388
362
333
304
282
258
239
220
206
192
807
565
403
280
US
1,081
902
817
785
776
706
625
574
459
388
330
261
216
177
145
118
113
62
49
41
115
–
–
–
UK
457
452
424
395
369
347
320
302
276
253
232
209
190
174
157
142
129
115
101
89
289
183
51
21
Total
2,507
2,205
2,007
1,881
1,774
1,650
1,503
1,388
1,199
1,062
950
832
739
655
584
518
481
397
356
322
1,211
748
454
301
Asia
141
122
122
103
101
84
83
75
68
66
52
51
45
42
43
37
34
32
30
31
126
97
76
59
US
267
110
112
52
79
76
58
97
81
71
56
45
38
32
27
20
16
13
11
9
16
–
–
–
UK
28
25
24
24
25
22
20
18
18
17
14
13
12
11
10
9
8
7
7
6
23
22
7
3
Total
436
257
258
179
205
182
161
190
167
154
122
109
95
85
80
66
58
52
48
46
165
119
83
62
Total discounted free surplus expected
to emerge in the next 40 years
11,307
8,740
5,677
25,724
1,720
1,286
373
3,379
349
www.prudential.co.ukAnnualReport2015 Prudential plc01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information II: Other information continued
e Reconciliation of expected transfer of value of in-force business (VIF) and required capital to free surplus continued
The above amounts can be reconciled to the Group’s financial statements as follows:
Discounted expected generation from all in-force business for years 2016-2055
Discounted expected generation from all in-force business for years after 2055
Discounted expected generation from all in-force business at 31 December 2015
Add: Free surplus of life operations held at 31 December 2015
Less: Time value of guarantees
Other non-modelled items
Total EEV for life operations
f 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 2015 results
2015 £m
25,724
563
26,287
5,642
(1,100)
1,948
32,777
US$ linked note 1
Other Asia currencies
Total Asia
UK sterling notes 3,4
US$ note 4
Total
EEV 2015 results
US$ linked note 1
Other Asia currencies
Total Asia
UK sterling notes 3,4
US$ note 4
Total
Underlying free
surplus
generated
note 2
%
Pre-tax
operating
profit
notes 2,3,4
%
Shareholders’
funds
notes 2,3,4
%
11
11
22
40
38
16
17
33
25
42
14
19
33
46
21
100
100
100
Post-tax new
business
profits
%
44
13
57
12
31
100
Post-tax
operating
profit
notes 2,3,4
%
Shareholders’
funds
notes 2,3,4
%
38
12
50
13
37
100
30
14
44
32
24
100
US$ linked – comprising the Hong Kong and Vietnam operations where the currencies are pegged to the US dollar, and the Malaysia and Singapore operations
where the currencies are managed against a basket of currencies including the US dollar.
Includes long-term, asset management business and other businesses.
For operating profit and shareholders’ funds, UK sterling includes amounts in respect of central operations as well as UK insurance operations and M&G.
For shareholders’ funds, the US$ grouping includes US$ denominated core structural borrowings. Sterling operating profits include all interest payable as
sterling denominated, reflecting interest rate currency swaps in place.
Notes
1
2
3
4
350
Prudential plc Annual Report 2015 www.prudential.co.ukAdditional unaudited financial information continued
g Option schemes
The Group presently grants share options through four schemes and exercises of the options are satisfied by the issue of new shares.
Executive directors and eligible employees based in the UK may participate in the UK savings-related share option scheme. Executives
and eligible employees based in Asia as well as eligible employees based in Europe can participate in the international savings-related
share option scheme while agents based in certain regions of Asia can participate in the international savings-related share option
scheme for non-employees. Employees based in Dublin are eligible to participate in the Prudential International Assurance sharesave
plan, which currently has no outstanding options in issue. Further details of the schemes and accounting policies are detailed in note B3.2
of the IFRS basis consolidated financial statements.
All options were granted at £nil consideration. No options have been granted to substantial shareholders, suppliers of goods or
services (excluding options granted to agents under the non-employee savings-related share option scheme) or in excess of the
individual limit for the relevant scheme.
The options schemes will terminate as follows, unless the directors resolve to terminate the plans at an earlier date:
— UK savings-related share option scheme: 16 May 2023;
— International savings-related share option scheme: 31 May 2021;
— Prudential International Assurance sharesave plan: 3 August 2019; and
— International savings-related share option scheme for non-employees 2012: 17 May 2022.
The weighted average share price of Prudential plc for the year ended 31 December 2015 was £15.49 (2014: £13.75).
Particulars of options granted to directors are included in the Directors’ remuneration report on page 101.
The closing price of the shares immediately before the date on which the options were granted during the current period was £13.80.
The following analyses show the movement in options for each of the option schemes for the year ended 31 December 2015.
UK savings-related share option scheme
Exercise period
Number of options
Date of grant
Exercise
price £
27 Sep 07
25 Apr 08
25 Sep 08
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
22 Sep 15
22 Sep 15
5.52
5.51
4.38
2.88
4.25
4.61
4.61
4.66
4.66
6.29
6.29
9.01
9.01
11.55
11.55
11.11
11.11
Beginning
01 Dec 14
01 Jun 15
01 Dec 15
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
01 Dec 18
01 Dec 20
End
Beginning
of year
Granted
Exercised
Cancelled
Forfeited
Lapsed
End of
year
31 May 15
30 Nov 15
31 May 16
30 Nov 16
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
31 May 19
31 May 21
663
1,468
10,541
165,328
14,408
731
114,795
92,714
161,372
823,005
131,336
351,482
78,576
975,724
490,157
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– 1,047,049
– 235,417
(663)
(1,468)
(5,794)
(7,753)
(14,043)
(731)
(68,636)
(90,089)
–
(592,728)
(1,073)
(2,754)
(1,165)
(3,603)
(907)
–
–
–
–
–
–
–
–
–
–
–
(4,834)
(238)
(13,903)
(1,664)
(64,316)
(30,990)
(3,078)
(810)
–
–
(1,660)
(2,274)
–
–
–
(772)
(980)
(8,583)
(1,192)
(7,573)
(2,329)
(25,133)
(13,372)
(4,212)
–
–
–
(16)
–
–
3,071
(320) 154,981
–
(365)
–
–
45,959
(200)
–
(1,853)
160,392
–
(1,340) 215,520
(1,313) 127,520
(2,773) 324,479
70,590
(2,828)
(12,364) 870,308
(4,337) 440,551
– 1,039,759
– 234,607
3,412,300 1,282,466
(791,407) (119,833)
(68,080)
(27,709) 3,687,737
The total number of securities available for issue under the scheme is 3,687,737 which represents 0.143 per cent of the issued share
capital at 31 December 2015.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the
current period was £15.44.
The weighted average fair value of options granted under the plan in the year was £2.90.
351
www.prudential.co.ukAnnualReport2015 Prudential plc01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information II: Other information continued
g Option schemes continued
International savings-related share option scheme
Exercise period
Number of options
Date of grant
Exercise
price £
Beginning
End
25 Sep 09
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
22 Sep 15
22 Sep 15
4.25
4.61
4.66
4.66
6.29
6.29
9.01
9.01
11.55
11.55
11.11
11.11
01 Dec 14
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
01 Dec 18
01 Dec 20
31 May 15
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
31 May 19
31 May 21
Beginning
of year
2,682
6,130
123,515
25,739
569,993
19,272
647,503
57,073
8,643
4,464
–
–
Granted
Exercised
Cancelled
Forfeited
Lapsed
End of
year
–
–
–
–
–
–
–
–
–
–
24,284
3,240
(2,682)
(4,551)
(102,691)
(4,371)
(285,177)
–
–
–
–
–
–
–
–
–
–
–
(5,585)
–
(33,170)
(4,479)
–
–
–
–
–
(1,579)
–
(3,751)
(29,762)
(4,771)
(42,366)
(5,258)
–
–
–
–
–
–
(20,824)
–
–
–
–
17,617
(40) 249,429
14,501
571,967
47,004
8,643
4,464
24,284
3,240
–
–
(332)
–
–
–
–
1,465,014
27,524
(399,472)
(43,234)
(87,487)
(21,196) 941,149
The total number of securities available for issue under the scheme is 941,149 which represents 0.037 per cent of the issued
share capital at 31 December 2015.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during
the current period was £15.55.
The weighted average fair value of options granted under the plan in the year was £2.87.
Prudential International Assurance sharesave plan
There are no securities available for issue under the scheme at 31 December 2015.
Non-employee savings-related share option scheme
Exercise period
Number of options
Date of grant
Exercise
price £
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
22 Sep 15
22 Sep 15
4.61
4.66
4.66
6.29
6.29
9.01
9.01
11.55
11.55
11.11
11.11
Beginning
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
01 Dec 18
01 Dec 20
End
Beginning
of year
Granted
Exercised
Cancelled
Forfeited
Lapsed
End of
year
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
31 May 19
31 May 21
361,823
257,030
257,774
434,335
89,335
769,255
421,947
630,613
525,065
–
–
–
–
–
–
–
–
–
– 499,600
– 422,356
(10,182)
(253,578)
–
(152,577)
–
–
–
–
–
–
–
–
–
(657)
(6,762)
(6,463)
(11,700)
(1,164)
(14,104)
(9,552)
–
–
(9,693)
–
(13,476)
(1,431)
–
(2,015)
(1,331)
(1,028)
(2,596)
–
–
–
(3,452)
–
–
–
–
–
341,948
–
243,641
273,565
82,872
755,540
419,452
(155) 615,326
512,917
(324) 499,276
(162) 422,194
–
3,747,177
921,956
(416,337)
(50,402)
(31,570)
(4,093) 4,166,731
The total number of securities available for issue under the scheme is 4,166,731 which represents 0.162 per cent of the issued
share capital at 31 December 2015.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during
the current period was £15.88.
The weighted average fair value of options granted under the plan in the year was £3.02.
352
Prudential plc Annual Report 2015 www.prudential.co.ukAdditional unaudited financial information continued
h Selected historical financial information of Prudential
The following table sets forth Prudential’s selected consolidated financial data for the periods indicated. Certain data is derived from
Prudential’s audited consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS)
as issued by the International Accounting Standards Board (IASB) and as adopted by the European Union (EU) and European Embedded
Value (EEV).
This table is only a summary and should be read in conjunction with Prudential’s consolidated financial statements and the related
notes included elsewhere in this document.
Income statement data
IFRS basis results
Gross premium earned
Outward reinsurance premiums
Earned premiums, net of reinsurance
Investment return
Other income
Total revenue, net of reinsurance
Benefits and claims and movement in unallocated surplus
of with-profits funds, net of reinsurance
Acquisition costs and other expenditure
Finance costs: interest on core structural borrowings of
shareholder-financed operations
Cumulative exchange loss recycled from other
comprehensive income
Remeasurement adjustments
Total charges, net of reinsurance
Share of profits from joint ventures and associates, net of
related tax
Profit before tax (being tax attributable to shareholders’ and
policyholders’ returns) note 1
Tax (charge) credit attributable to policyholders’ returns
Profit before tax attributable to shareholders
Tax (charge) credit attributable to shareholders’ returns
Profit for the year
Based on profit for the year attributable to the equity holders
of the Company:
Basic earnings per share (in pence)
Diluted earnings per share (in pence)
Dividend per share declared and paid in reporting period
Year ended 31 December
2015 £m
2014 £m
2013 £m
2012 £m
2011 £m
36,663
(1,157)
35,506
3,304
2,495
41,305
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
(29,656)
(8,208)
(50,169)
(6,752)
(43,154)
(6,861)
(45,144)
(6,032)
(28,706)
(4,717)
(312)
(341)
(46)
–
–
(13)
(305)
–
(120)
(280)
(286)
–
–
–
–
(38,222)
(57,275)
(50,440)
(51,456)
(33,709)
238
303
147
135
76
3,321
(173)
3,148
(569)
2,579
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
101.0p
100.9p
86.9p
86.8p
52.8p
52.7p
85.1p
85.0p
57.1p
57.0p
(in pence)
38.05p
35.03p
30.52p
25.64p
25.19p
Supplementary IFRS income statement data
Operating profit based on longer-term investment returns note 2
Non-operating items
Profit before tax attributable to shareholders
Operating earnings per share (in pence)
Year ended 31 December
2015 £m
2014 £m
2013 £m
2012 £m
2011 £m
4,007
(859)
3,148
125.8p
3,186
(572)
2,614
96.6p
2,954
(1,319)
1,635
90.9p
2,520
227
2,747
76.9p
2,017
(151)
1,866
62.7p
353
www.prudential.co.ukAnnualReport2015 Prudential plc01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
II: Other information continued
h Selected historical financial information of Prudential continued
Supplementary EEV income statement data (post-tax)
Operating profit based on longer-term investment returns note 2
Non-operating items
Profit attributable to shareholders
Operating earnings per share (in pence)
New business data
Annual premium equivalent (APE) sales
EEV new business profit (NBP) (post-tax)
NBP margin (% APE)
Year ended 31 December
2015 £m
2014 £m
2013 £m
2012 £m
2011 £m
4,881
(930)
3,951
4,096
247
4,343
4,204
154
4,358
3,174
595
3,769
2,942
(751)
2,191
191.2p
160.7p
165.0p
124.9p
116.0p
Year ended 31 December
2015 £m
2014* £m
2013 £m
2012 £m
2011 £m
5,607
2,617
47%
4,627
2,115
46%
4,423
2,082
47%
4,195
1,791
43%
3,681
1,536
42%
* Excluding the £23 million APE and £11 million NBP for the sold PruHealth and PruProtect businesses.
Statement of financial position data
As of and for the year ended 31 December
2015 £m
2014 £m
2013 £m
2012 £m
2011 £m
Total assets
Total policyholder liabilities and unallocated surplus of
with-profits funds
Core structural borrowings of shareholder-financed operations
Total liabilities
Total equity
386,985
369,204
325,932
307,644
270,018
335,614
5,011
374,029
12,956
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
Other data
As of and for the year ended 31 December
2015 £bn
2014 £bn
2013 £bn
2012 £bn
2011 £bn
Funds under management note 3
EEV shareholders’ equity, excluding non-controlling interests
Insurance Groups Directive capital surplus before final dividend note 4
509
32.4
5.5
496
29.2
4.7
443
24.9
5.1
406
22.4
5.1
352
19.6
4.0
This measure is the formal profit (loss) before tax measure under IFRS but is not the result attributable to shareholders.
Operating profits are determined on the basis of including longer-term investment returns. EEV and IFRS operating profits are stated after excluding the effect
of short-term fluctuations in investment returns against long-term assumptions, gain on dilution of Group’s holdings, the costs arising from the domestication of
the Hong Kong business, and profit (loss) attached to the sale of Japan life. Separately on the IFRS basis, operating profit also excludes amortisation of acquisition
accounting adjustments. In addition, for EEV basis results, operating profit excludes the effect of changes in economic assumptions, the market value
movement on core borrowings and in 2012, the gain arising on the acquisition of REALIC.
Funds under management comprise funds of the Group held in the statement of financial position and external funds that are managed by Prudential asset
management operations.
The 2015 surplus is estimated.
Notes
1
2
3
4
354
Prudential plc Annual Report 2015 www.prudential.co.ukAdditional unaudited financial information continued i Effect of Solvency II on EEV basis results on 1 January 2016
i Group summary
The Solvency II framework is effective from 1 January 2016. For our operations in Asia and the US there is no impact on the EEV results
since Solvency II does not act as the local constraint on the ability to distribute profits to the Group. The embedded value and profile of
free surplus generation for these businesses will continue to be driven by local regulatory and target capital requirements. For the UK
insurance operations Solvency II will impact the EEV results as it changes the local regulatory valuation of net worth and capital requirements,
affecting the components of the EEV and the expected profile of free surplus generation. In line with guidance provided by the CFO
Forum in October 2015, the impact of Solvency II on the UK EEV has not been included in the main supplementary reporting. An early
estimate on the likely impact of Solvency II on the EEV net worth and value of in-force business, together with the impact on free surplus
generation is provided in this section of the additional unaudited information.
The impact of Solvency II on the EEV net worth and value of in-force business reported on 1 January 2016 are shown below:
Adjustment to shareholders’ equity at 1 January 2016
Long-term insurance operations
As reported at 31 December 2015
Opening adjustment at 1 January 2016
Solvency II impact on net worth
Solvency II impact on net VIF
Total opening adjustments at 1 January 2016 note
Long-term insurance operations as at 1 January 2016
Total EEV £m
32,777
3,108
(3,412)
(304)
32,473
Note
The Solvency II framework requires technical provisions to be valued on a best estimate basis and capital requirements to be risk-based. It also requires the
establishment of a risk margin (which for business in force at 31 December 2015 can be broadly offset by transitional measures). As a result of applying this framework,
the EEV net worth increased by £3,108 million following the release of the prudent regulatory margins previously included under Solvency I, and also from the
recognition within net worth of a portion of future shareholder transfers expected from the with-profits fund. The higher net worth is mirrored by increases in
required capital reflecting the higher solvency capital requirements of the new regime.
The net value of in-force business (VIF) is correspondingly impacted as follows:
– The release of prudent regulatory margins and recognition of a portion of future shareholders’ transfers within net worth leads to a corresponding reduction in VIF;
– The run-off of the risk margin, net of transitional measures, is now captured in VIF; and
– The cost of capital deducted from gross VIF increases as a result of higher Solvency II capital requirements;
The overall impact of these changes is to reduce the value of in-force by £3,412 million. The overall impact on the Group’s EEV of the above changes is a reduction
of £304 million.
ii Expected transfer of value of in-force business and required capital to free surplus
The tables below show how the UK value of in-force business and the associated required capital is expected to emerge into free surplus
over the next 40 years. A comparison is shown between the current Solvency I and Solvency II regimes. A small amount (less than 3 per cent)
of the Group’s embedded value emerges after this date. The modelled cash flows use the methodology underpinning the Group’s
embedded value reporting, updated under Solvency II.
355
www.prudential.co.ukAnnualReport2015 Prudential plc01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information II: Other information continued
i Effect of Solvency II on EEV basis results on 1 January 2016 continued
a Undiscounted expected generation from all in-force business at 31 December 2015 is as follows:
Expected period of emergence
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036-2040
2041-2045
2046-2050
2051-2055
Undiscounted expected generation 2015
UK insurance operations
As reported
£m
Solvency II
basis
£m
Difference
£m
As reported
£m
Group total
Solvency II
basis
£m
Difference
£m
486
510
506
503
499
498
489
491
478
466
454
437
424
411
398
383
373
353
331
313
1,255
1,081
470
261
527
560
549
542
535
539
531
526
513
504
493
475
462
447
429
410
505
479
446
416
1,614
1,228
539
292
41
50
43
39
36
41
42
35
35
38
39
38
38
36
31
27
132
126
115
103
359
147
69
31
2,621
2,463
2,383
2,378
2,388
2,369
2,297
2,256
2,077
1,963
1,860
1,738
1,637
1,537
1,450
1,358
1,326
1,180
1,109
1,051
4,465
3,740
2,812
2,317
2,662
2,513
2,426
2,417
2,424
2,410
2,339
2,291
2,112
2,001
1,899
1,776
1,675
1,573
1,481
1,385
1,458
1,306
1,224
1,154
4,824
3,887
2,881
2,348
41
50
43
39
36
41
42
35
35
38
39
38
38
36
31
27
132
126
115
103
359
147
69
31
Total free surplus expected to emerge in the
next 40 years
11,870
13,561
1,691
50,775
52,466
1,691
356
Prudential plc Annual Report 2015 www.prudential.co.ukAdditional unaudited financial information continued b The equivalent discounted amounts of the undiscounted totals shown above are as follows:
Expected period of emergence
Discounted expected generation 2015
UK insurance operations
As reported
£m
Solvency II
basis
£m
Difference
£m
As reported
£m
Group total
Solvency II
basis
£m
Difference
£m
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036-2040
2041-2045
2046-2050
2051-2055
457
452
424
395
369
347
320
302
276
253
232
209
190
174
157
142
129
115
101
89
289
183
51
21
513
524
491
462
433
412
384
359
331
306
282
257
235
215
195
176
208
186
166
146
501
279
116
52
56
72
67
67
64
65
64
57
55
53
50
48
45
41
38
34
79
71
65
57
212
96
65
31
2,507
2,205
2,007
1,881
1,774
1,650
1,503
1,388
1,199
1,062
950
832
739
655
584
518
481
397
356
322
1,211
748
454
301
2,563
2,277
2,074
1,948
1,838
1,715
1,567
1,445
1,254
1,115
1,000
880
784
696
622
552
560
468
421
379
1,423
844
519
332
56
72
67
67
64
65
64
57
55
53
50
48
45
41
38
34
79
71
65
57
212
96
65
31
Total free surplus expected to emerge in the
next 40 years
5,677
7,229
1,552
25,724
27,276
1,552
c The above amounts can be reconciled to the Group’s financial statements as follows:
Reconciliation of discounted expected free surplus generation to EEV
Discounted expected generation from all in-force business for years 2016-2055
Discounted expected generation from all in-force business for years after 2055
Discounted expected generation from all in-force business at 31 December 2015
Add: Free surplus of life operations held at 31 December 2015
Less: Time value of guarantees
Other non-modelled items
Total EEV for insurance operations
Representing:
Asia
US
UK
Total EEV for insurance operations
As reported
£m
Solvency II
basis
£m
25,724
563
26,287
5,642
(1,100)
1,948
32,777
13,643
9,487
9,647
32,777
27,276
578
27,854
3,958
(1,100)
1,761
32,473
13,643
9,487
9,343
32,473
Impact
£m
1,552
15
1,567
(1,684)
–
(187)
(304)
–
–
(304)
(304)
357
www.prudential.co.ukAnnualReport2015 Prudential plc01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
Risk factors
A number of risk factors affect Prudential’s
operating results and financial condition
and, accordingly, the trading price of its
shares. The risk factors mentioned below
should not be regarded as a complete and
comprehensive statement of all potential
risks and uncertainties. The information
given is as of the date of this document,
and any forward looking statements are
made subject to the reservations specified
below under ‘Forward Looking
Statements’.
Prudential’s approaches to managing risks
are explained in the ‘Group Chief Risk
Officer’s report on the risks facing our
business and how these are managed’
section of this document.
Risks relating to Prudential’s
business
Prudential’s businesses are
inherently subject to market
fluctuations and general economic
conditions
Prudential’s businesses are inherently
subject to market fluctuations and general
economic conditions. Uncertainty or
negative trends in international economic
and investment climates could adversely
affect Prudential’s business and
profitability. Since 2008 Prudential has
operated against a challenging background
of periods of significant volatility in global
capital and equity markets, interest rates
(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
profitability.
In the future, the adverse effects of such
factors would be felt principally through
the following items:
— investment impairments and/or reduced
investment returns, which could reduce
Prudential’s capital and impair its ability
to write significant volumes of new
business, increase the potential adverse
impact of product guarantees, or have
a negative impact on its assets under
management and profit;
— higher credit defaults and wider credit
and liquidity spreads resulting in
realised and unrealised credit losses;
— failure of counterparties who have
transactions with Prudential (eg banks
and reinsurers) to meet commitments
that could give rise to a negative impact
on Prudential’s financial position and
358
on the accessibility or recoverability
of amounts due or, for derivative
transactions, adequate collateral
not being in place;
— estimates of the value of financial
instruments being difficult because
in certain illiquid or closed markets,
determining the value at which financial
instruments can be realised is highly
subjective. Processes to ascertain such
values require substantial elements of
judgement, assumptions and estimates
(which may change over time); and
— increased illiquidity also adds to
uncertainty over the accessibility of
financial resources and may reduce
capital resources as valuations decline.
Global financial markets are subject to
uncertainty and volatility created by a
variety of factors, including concerns
over the energy and commodity sectors,
sovereign debt, general slowing in world
growth, the monetary policies in the US,
the UK and other jurisdictions and
potentially negative socio-political events.
In addition, a possible withdrawal of the UK
from the EU would have political, legal and
economic ramifications for both the UK
and the EU, although these are expected
to be more pronounced on the UK.
Upheavals in the financial markets may
affect general levels of economic activity,
employment and customer behaviour. As a
result, 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
profitability. 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
fluctuations and general economic
conditions may continue to emerge.
For some non-unit-linked investment
products, in particular those written in
some of the Group’s Asian operations,
it may not be possible to hold assets which
will provide cash flows to match those
relating to policyholder liabilities. This is
particularly true in those countries where
bond markets are not developed and in
certain markets where regulated surrender
values are set with reference to the interest
rate environment prevailing at the time
of policy issue. This results in a mismatch
due to the duration and uncertainty of the
liability cash flows and the lack of sufficient
assets of a suitable duration. While this
residual asset/liability mismatch risk can be
managed, it cannot be eliminated. Where
interest rates in these markets remain lower
than those used to calculate surrender
values over a sustained period, this could
have a material adverse effect on
Prudential’s reported profit.
In the US, fluctuations in prevailing interest
rates can affect results from Jackson which
has a significant spread based business,
with the majority of its assets invested in
fixed income securities. In particular, fixed
annuities and stable value products written
by Jackson expose Prudential to the risk
that changes in interest rates, which are not
fully reflected in the interest rates credited
to customers, will reduce spread. The
spread is the difference between the rate
of return Jackson is able to earn on the
assets backing the policyholders’ liabilities
and the amounts that are credited to
policyholders in the form of benefit
increases, subject to minimum crediting
rates. Declines in spread from these
products or other spread businesses
that Jackson conducts, and increases in
surrender levels arising from interest rate
rises, could have a material impact on its
businesses or results of operations.
Jackson also writes a significant amount
of variable annuities that offer capital or
income protection guarantees. The value
of these guarantees is affected by market
factors (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
(with consideration of the local regulatory
position) and, thus, accepts variability in
its accounting results in the short term in
order to achieve the appropriate result on
these bases. 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
Prudential plc Annual Report 2015 www.prudential.co.uk the economic or local regulatory
results that may be less significant under
IFRS reporting.
A significant part of the profit from
Prudential’s UK insurance operations
is related to bonuses for policyholders
declared on with-profits products, which
are broadly based on historical and current
rates of return on equity, real estate
and fixed income securities, as well
as Prudential’s expectations of future
investment returns. This profit could
be lower in a sustained low interest
rate environment.
Prudential is subject to the risk
of potential sovereign debt credit
deterioration owing to the amounts
of sovereign debt obligations held
in its investment portfolio
Prudential is subject to the risk of potential
sovereign debt credit deterioration on
the amounts of sovereign debt obligations
held in its investment portfolio.
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 flow
situation, its relations with its central bank,
the extent of its foreign currency reserves,
the availability of sufficient foreign
exchange on the date a payment is due,
the relative size of the debt service burden
to the economy as a whole, the sovereign
debtor’s policy toward local and
international lenders, and the political
constraints to which the sovereign debtor
may be subject.
Moreover, governments may use a variety
of techniques, such as intervention by their
central banks or imposition of regulatory
controls or taxes, to devalue their
currencies’ exchange rates, or may adopt
monetary and other policies (including to
manage their debt burdens) that have a
similar effect, all of which could adversely
impact the value of an investment in
sovereign debt even in the absence of
a technical default. Periods of economic
uncertainty may affect the volatility of
market prices of sovereign debt to a greater
extent than the volatility inherent in debt
obligations of other types of issuers.
In addition, if a sovereign default or other
such events described above were to
occur, other financial institutions may also
suffer losses or experience solvency or
other concerns, and Prudential might face
additional risks relating to any debt of such
financial institutions held in its investment
portfolio. There is also risk that public
perceptions about the stability and
creditworthiness of financial institutions
and the financial sector generally might
be affected, as might counterparty
relationships between financial institutions.
If a sovereign were to default on its
obligations, or adopt policies that devalue
or otherwise alter the currencies in which
its obligations are denominated this
could have a material adverse effect
on Prudential’s financial condition and
results of operations.
Prudential is subject to the risk of
exchange rate fluctuations owing
to the geographical diversity of
its businesses
Due to the geographical diversity of
Prudential’s businesses, Prudential is
subject to the risk of exchange rate
fluctuations. Prudential’s operations in the
US and Asia, which represent a significant
proportion of operating profit based on
longer-term investment returns and
shareholders’ funds, generally write
policies and invest in assets denominated
in local currencies. Although this practice
limits the effect of exchange rate
fluctuations on local operating results,
it can lead to significant fluctuations in
Prudential’s consolidated financial
statements upon the translation of results
into pounds sterling. This exposure is
not currently separately managed.
The currency exposure relating to the
translation of reported earnings could
impact on financial reporting ratios such
as dividend cover, which is calculated as
operating profit after tax on an IFRS basis,
divided by the dividends relating to the
reporting year. The impact of gains or
losses on currency translations is recorded
as a component of shareholders’ funds
within other comprehensive income.
Consequently, this could impact on
Prudential’s gearing ratios (defined as
debt over debt plus shareholders’ funds).
The Group’s surplus capital position for
regulatory reporting purposes may also be
affected by fluctuations in exchange rates
with possible consequences for the degree
of flexibility the Prudential has in managing
its business.
Prudential conducts its businesses
subject to regulation and associated
regulatory risks, including the effects
of changes in the laws, regulations,
policies and interpretations and any
accounting standards in the markets
in which it operates
Changes in government policy and
legislation (including in relation to tax and
capital controls), regulation or regulatory
interpretation applying to companies in the
financial services and insurance industries
in any of the markets in which Prudential
operates, which in some circumstances
may be applied retrospectively, may
adversely affect Prudential’s product
range, distribution channels,
competitiveness, profitability, capital
requirements and, consequently, reported
results and financing requirements.
Also, regulators in jurisdictions in which
Prudential operates may change the level
of capital required to be held by individual
businesses or could introduce possible
changes in the regulatory framework for
pension arrangements and policies, the
regulation of selling practices and solvency
requirements. 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 financial and global
economic conditions, it is widely expected
that there will continue to be a substantial
increase in government regulation and
supervision of the financial services
industry, including the possibility of higher
capital requirements, restrictions on
certain types of transactions and enhanced
supervisory powers.
The European Union’s Solvency II Directive
came into effect on 1 January 2016. This
measure of regulatory capital is more
volatile than under the previous Solvency I
regime and regulatory policy may evolve
under the new regime. The European
Commission will review elements of the
Solvency II legislation from 2016 onwards
including a review of the Long Term
Guarantee measures by 1 January 2021.
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).
359
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc The Dodd-Frank Act represents a
comprehensive overhaul of the financial
services industry within the US that, among
other reforms to financial services entities,
products and markets, may subject financial
institutions designated as systemically
important to heightened prudential and
other requirements intended to prevent
or mitigate the impact of future disruptions
in the US financial system. The full impact
of the Dodd-Frank Act on Prudential’s
businesses is not currently clear, as many
of its provisions are primarily focused on
the banking industry, have a delayed
effectiveness and/or require rulemaking
or other actions by various US regulators
over the coming years.
The IAIS has various initiatives which are
detailed in this section. On 18 July 2013,
it published a methodology for identifying
G-SIIs, and a set of policy measures that
will apply to them, which the FSB endorsed.
Groups designated as a G-SII are subject
to additional regulatory requirements,
including enhanced group-wide
supervision, effective resolution planning,
development of a Systemic Risk
Management Plan, a Recovery Plan and
a Liquidity Risk Management Plan.
Prudential’s designation as a G-SII was
reaffirmed on 3 November 2015.
Prudential is monitoring the development
and potential impact of the 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 first, a Basic
Capital Requirement (BCR), is designed
to act as a minimum group capital
requirement and the second, a Higher Loss
Absorption (HLA) requirement reflects
the drivers of the assessment of G-SII
designation. The IAIS intends for these
requirements to take effect from January
2019, but G-SIIs will be expected to
privately report to their group-wide
supervisors in the interim.
The IAIS is also developing ComFrame
which is focused on the supervision of
large and complex Internationally Active
Insurance Groups (IAIGs). ComFrame will
establish a set of common principles and
standards designed to assist regulators in
addressing risks that arise from insurance
groups with operations in multiple
jurisdictions. As part of this, work is
under way to develop a global Insurance
Capital Standard (ICS) that would apply
to IAIGs. Once the development of the
ICS has been concluded, it is intended to
replace the BCR as the minimum group
capital requirement for G-SIIs. Further
consultations on the ICS are expected
360
over the coming years, and a version of
the ICS is expected to be adopted as part
of ComFrame in late 2019.
Various jurisdictions in which Prudential
operates have created investor
compensation schemes that require
mandatory contributions from market
participants in some instances in the event
of a failure of a market participant. As a
major participant in the majority of its
chosen markets, circumstances could
arise where Prudential, along with other
companies, may be required to make
such contributions.
The Group’s accounts are prepared in
accordance with current International
Financial Reporting Standards (IFRS)
applicable to the insurance industry.
The International Accounting Standards
Board (IASB) introduced a framework that
it described as Phase I, which permitted
insurers to continue to use the statutory
basis of accounting for insurance assets and
liabilities that existed in their jurisdictions
prior to January 2005. In July 2010, the IASB
published its first Exposure Draft for its
Phase II on insurance accounting, which
would introduce significant changes to the
statutory reporting of insurance entities
that prepare accounts according to IFRS.
A revised Exposure Draft was issued in June
2013. The IASB is currently redeliberating
the Exposure Draft proposals in light of
comments by the insurance industry and
other respondents. The timing of the final
proposals taking effect is uncertain but not
expected to be before 2020.
Any changes or modification of IFRS
accounting policies may require a change
in the future results or a retrospective
adjustment of reported results.
The resolution of several issues
affecting the financial services
industry could have a negative
impact on Prudential’s reported
results or on its relations with current
and potential customers
Prudential is, and in the future may be,
subject to legal and regulatory actions in
the ordinary course of its business, both in
the UK and internationally. These actions
could involve a review of types of business
sold in the past under acceptable market
practices at the time, such as the
requirement in the UK to provide redress
to certain past purchasers of pension and
mortgage endowment policies, changes
to the tax regime affecting products, and
regulatory reviews on products sold and
industry practices, including, in the latter
case, lines of business it has closed.
Regulators’ 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 deficiencies
of third-party distributors.
In the US, there has been significant
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 benefit and pension plans would
be considered a fiduciary which 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.
New requirements could be introduced
in these and other regulatory regimes
that challenge current practices, or could
retrospectively be applied to sales made
prior to their introduction, which could
have a negative impact on Prudential’s
business or reported results.
Litigation, disputes and regulatory
investigations may adversely affect
Prudential’s profitability and
financial condition
Prudential is, and may be in the future,
subject to legal actions, disputes and
regulatory investigations in various
contexts, including in the ordinary course
of its insurance, investment management
and other business operations. These legal
actions, disputes and investigations may
relate to aspects of Prudential’s businesses
and operations that are specific to
Prudential, or that are common to
companies that operate in Prudential’s
markets. Legal actions and disputes may
arise under contracts, regulations (including
tax) or from a course of conduct taken by
Prudential, and may be class actions.
Although Prudential believes that it has
adequately provided in all material aspects
for the costs of litigation and regulatory
matters, no assurance can be provided that
such provisions are sufficient. Given the
large or indeterminate amounts of damages
sometimes sought, other sanctions that
might be applicable and the inherent
Prudential plc Annual Report 2015 www.prudential.co.ukRisk factors continued unpredictability of litigation and disputes,
it is possible that an adverse outcome could,
from time to time, have an adverse effect on
Prudential’s reputation, results of operations
or cash flows.
Prudential’s businesses are
conducted in highly competitive
environments with developing
demographic trends and continued
profitability depends upon
management’s ability to respond
to these pressures and trends
The markets for financial services in the
UK, US and Asia are highly competitive,
with several factors affecting Prudential’s
ability to sell its products and continued
profitability, including price and yields
offered, financial strength and ratings,
range of product lines and product quality,
brand strength and name recognition,
investment management performance,
historical bonus levels, developing
demographic trends and customer appetite
for certain savings products. In some of its
markets, Prudential faces competitors that
are larger, have greater financial resources
or a greater market share, offer a broader
range of products or have higher bonus
rates. Further, heightened competition for
talented and skilled employees and agents
with local experience, particularly in Asia,
may limit Prudential’s potential to grow
its business as quickly as planned.
In Asia, the Group’s principal competitors
in the region are international financial
companies, including global life insurers
such as Allianz, AXA, AIA and Manulife,
and multinational asset managers such
as J.P. Morgan Asset Management,
Schroders, HSBC Global Asset
Management and Franklin Templeton.
In a number of markets, local companies
have a very significant market presence.
Within the UK, Prudential’s principal
competitors include many of the major
retail financial services companies and
fund management companies including,
in particular, Aviva, Legal & General, Lloyds
Banking Group, Standard Life, Schroders,
Invesco Perpetual and Fidelity.
Jackson’s competitors in the US include
major stock and mutual insurance
companies, mutual fund organisations,
banks and other financial services
companies such as AIG, AXA Financial
Inc., 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 significantly
upon its capacity to anticipate and respond
appropriately to these competitive
pressures.
Downgrades in Prudential’s financial
strength and credit ratings could
significantly impact its competitive
position and damage its relationships
with creditors or trading
counterparties
Prudential’s financial strength and credit
ratings, which are used by the market to
measure its ability to meet policyholder
obligations, are an important factor
affecting public confidence in
Prudential’s products, and as a result
its competitiveness. Downgrades in
Prudential’s ratings, as a result of, for
example, decreased profitability, increased
costs, increased indebtedness or other
concerns, could have an adverse effect on
its ability to market products; retain current
policyholders; and on the Group’s financial
flexibility. In addition, the interest rates
Prudential pays on its borrowings are
affected by its credit ratings, which are
in place to measure the Group’s ability
to meet its contractual obligations.
Prudential plc’s long-term senior debt is
rated as A2 by Moody’s, A+ by Standard &
Poor’s and A by Fitch. These ratings are all
on 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 financial strength is rated Aa3
by Moody’s, AA by Standard & Poor’s
and AA by Fitch. These ratings are all
on a stable outlook.
Jackson’s financial strength is rated AA
by Standard & Poor’s and Fitch, A1 by
Moody’s, and A+ by AM Best. These
ratings have a stable outlook.
Prudential Assurance Co. Singapore
(Pte) Ltd’s financial strength is rated AA
by Standard & Poor’s. This rating is on
a stable outlook.
In addition, changes in methodologies and
criteria used by rating agencies could result
in downgrades that do not reflect changes
in the general economic conditions or
Prudential’s financial condition.
Adverse experience in the
operational risks inherent in
Prudential’s business could 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 significant periods.
These factors, among others, result
in significant reliance on and require
significant investment in information
technology (IT), compliance and other
operational systems, personnel and
processes. In addition, Prudential
outsources several operations, including
a significant part of its UK back office and
customer facing functions as well as a
number of IT functions, resulting in
reliance upon the operational processing
performance of its outsourcing partners.
Although Prudential’s IT, compliance and
other operational systems and processes
incorporate controls designed to manage
and mitigate the operational risks
associated with its activities, there can be
no assurance that such controls will always
be effective. 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. Prudential’s legacy and
other IT systems and processes, as with
operational systems and processes
generally, may be susceptible to failure
or breaches.
Such events could, among other things,
harm Prudential’s ability to perform
necessary business functions, result in
the loss of confidential or proprietary data
(exposing it to potential legal claims and
regulatory sanctions) and damage its
reputation and 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.
Attempts by third parties to disrupt
Prudential’s IT systems could result
in loss of trust from Prudential’s
customers, reputational damage
and financial loss
Being part of the financial services sector,
Prudential and its business partners are
increasingly exposed to the risk that
third parties may attempt to disrupt the
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of its IT systems, which could result in
disruption to the key operations, make it
difficult to recover critical services, damage
assets and compromise data (both
corporate or customer). This could result
in loss of trust from Prudential’s customers,
reputational damage and financial loss.
The cyber-security threat continues to
evolve globally in sophistication and
potential significance. As a result of
Prudential’s increasing market profile, the
growing interest by customers to interact
with their insurance provider and asset
manager through the internet and social
media, improved brand awareness and the
classification of Prudential as a G-SII, there
is an increased likelihood of Prudential
being considered a target by cyber
criminals. Prudential has not identified a
failure or breach which has had a material
impact in relation to its legacy and other IT
systems and processes to date. However,
it has been, and likely will continue to be,
subject to computer viruses, attempts at
unauthorised access and cyber-security
attacks such as ‘denial of service’ attacks
(which, for example, can cause temporary
disruption to websites and IT networks),
phishing and disruptive software
campaigns.
Prudential is continually enhancing its IT
environment to remain secure against
emerging threats, together with increasing
its ability to detect system compromise and
recover should such an incident occur.
However, there can be no assurance that
such events will not take place with adverse
consequential effects on Prudential’s
business and financial position.
Adverse experience relative to
the assumptions used in pricing
products and reporting business
results could significantly affect
Prudential’s results of operations
In common with other life insurers, the
profitability of the Group’s businesses
depends on a mix of factors including
mortality and morbidity levels and trends,
policy surrenders and take-up rates on
guarantee features of products, investment
performance and impairments, unit cost
of administration and new business
acquisition expenses.
Prudential needs to make assumptions
about a number of factors in determining
the pricing of its products, for setting
reserves, and for reporting its capital levels
and the results of its long-term business
operations. For example, the assumption
that Prudential makes about future
expected levels of mortality is particularly
relevant for its UK annuity business, where
payments are guaranteed for at least as
362
long as the policyholder is alive. Prudential
conducts rigorous research into longevity
risk, using industry data as well as its own
substantial annuitant experience. 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 informed by models
from the Continuous Mortality
Investigation (CMI) as published by
the Institute and Faculty of Actuaries.
Assumptions about future expected levels
of mortality are also of relevance to the
Guaranteed Minimum Withdrawal Benefit
(GMWB) of Jackson’s variable annuity
business. If mortality improvement rates
significantly exceed the improvement
assumed, Prudential’s results of operations
could be adversely affected.
A further factor is the assumption that
Prudential makes about future expected
levels of the rates of early termination of
products by its customers (known as
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 reflect recent past experience
for each relevant line of business. Any
expected change in future persistency is
also reflected in the assumption. If actual
levels of future persistency are significantly
different from 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 give rise
to a large number of deaths or additional
sickness claims. Significant influenza
epidemics have occurred a number of
times over the past 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 Prudential’s 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 co-operation between, the
joint venture participants. Prudential may
face financial, reputational and other
exposure (including regulatory censure)
in the event that any of its joint venture
partners fails to meet its obligations under
the joint venture, encounters financial
difficulty or fails to comply with local or
international regulation and standards
such as those pertaining to the prevention
of financial crime. In addition, a significant
proportion of the Group’s product
distribution is carried out through
arrangements with third parties not
controlled by Prudential and is dependent
upon continuation of these relationships.
A temporary or permanent disruption to
these distribution arrangements, such as
through significant deterioration in the
reputation, financial position or other
circumstances of the third party or material
failure in controls (such as those pertaining
to the prevention of financial 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
Prudential plc Annual Report 2015 www.prudential.co.ukRisk factors continued shareholder (in its capacity as such) against
Prudential and/or its directors and/or its
professional service providers. It also applies
to legal proceedings between Prudential
and its directors and/or Prudential and
Prudential’s professional service providers
that arise in connection with legal
proceedings between the shareholder
and such professional service provider.
This provision could make it difficult for US
and other non-UK shareholders to enforce
their shareholder rights.
Changes in tax legislation may
result in adverse tax consequences
Tax rules, including those relating to the
insurance industry, and their interpretation
may change, possibly with retrospective
effect, in any of the jurisdictions in which
Prudential operates. Significant tax
disputes with tax authorities, and any
change in the tax status of any member
of the Group or in taxation legislation or
its scope or interpretation could affect
Prudential’s financial condition and results
of operations.
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AER
Actual Exchange Rates are actual historical
exchange rates for the specific accounting
period, being the average rates over the
period for the income statement and the
closing rates for the balance sheet at the
balance sheet date.
Annual premium equivalent or APE
A measure of new business activity that is
calculated as the sum of annualised regular
premiums from new business plus
10 per cent of single premiums on new
business written during the period.
Asset backed security
A security whose value and income
payments are derived from and
collateralised (or ‘backed’) by a specified
pool of underlying assets. The pool of
assets is typically a group of small and
illiquid assets that are unable to be
sold individually.
Available for sale (AFS)
Securities that have been acquired neither
for short-term sale nor to be held to
maturity. AFS securities are measured at
fair value on the statement of financial
position with unrealised gains and losses
being booked in Other Comprehensive
Income instead of the income statement.
Back book of business
The insurance policies sold in past periods
that are still in force and hence are still
recorded on the insurer’s balance sheet.
Bonuses
Bonuses refer to the non-guaranteed
benefit added to participating life insurance
policies and are the way in which
policyholders receive their share of the
profits of the policies. There are normally
two types of bonuses:
— Regular bonus – expected to be added
every year during the term of the policy.
It is not guaranteed that a regular bonus
will be added each year, but once it is
added, it cannot be reversed, also known
as annual or reversionary bonus; and
— Final bonus – an additional bonus
expected to be paid when policyholders
take money from the policies. If
investment return has been low over
the lifetime of the policy, a final bonus
may not be paid. Final bonuses may
vary and are not guaranteed.
Bulk annuity
A bulk annuity, sometimes referred to
as a bulk purchase annuity, is a contract
between a defined benefit pension scheme
and an insurance company, whereby an
insurance company insures some or all
of the liabilities of the pension scheme.
364
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 Rates – Prudential plc
reports its results at both actual exchange
rates (AER) to reflect actual results and
also constant exchange rates (CER)
so as to eliminate the impact from exchange
translation. CER results are calculated by
translating prior period results using
current period foreign currency exchange
rates, ie, current period average rates for
the income statements and current period
closing rate for the balance sheet.
Closed-book life insurance business
A ‘closed book’ is essentially a group of
insurance policies that are no longer sold,
but are still featured on the books of a life
insurer as a premium-paying policy. The
insurance company has ‘closed the books’
on new sales of these products which will
remain in run-off until the policies expire
and all claims are settled.
Core structural borrowings
Borrowings which Prudential considers to
form part of its core capital structure and
exclude operational borrowings.
Credit risk
The risk of loss if another party fails
to meet its obligations, or fails to do so
in a timely fashion.
Currency risk
The risk that asset or liability values, cash
flows, income or expenses will be affected
by changes in exchange rates. Also
referred to as foreign exchange risk.
Deferred acquisition costs or DAC
Acquisition costs are expenses of an
insurer which are incurred in connection
with the acquisition of new insurance
contracts or the renewal of existing
insurance policies. They include
commissions and other variable sales
inducements and the direct costs of issuing
the policy, such as underwriting and other
policy issue expenses. Typically, under
IFRS, an element of acquisition costs are
deferred ie not expensed in the year
incurred, and instead amortised in the
income statement in line with the
emergence of surpluses on the
related contracts.
Deferred annuities
Annuities or pensions due to be paid from
a future date or when the policyholder
reaches a specified age.
Discretionary participation features
or DPF
A contractual right to receive, as a
supplement to guaranteed benefits,
additional benefits:
— That are likely to be a significant portion
of the total contractual benefits;
— Whose amount or timing is
contractually at the discretion of the
issuer; and
— That are contractually based on asset,
fund, company or other entity
performance.
Dividend cover
Dividend cover is calculated as operating
profit after tax on an IFRS basis, divided by
the current period interim dividend plus
the proposed second interim dividend.
Endowment product
An ordinary individual life insurance
product that provides the insured party
with various guaranteed benefits if it
survives specific maturity dates or periods
stated in the policy. Upon the death of the
insured party within the coverage period,
a designated beneficiary receives the face
value of the policy.
European Embedded Value or EEV
Financial results that are prepared on
a supplementary basis to the Group’s
consolidated IFRS results and which are
prepared in accordance with a set of
Principles issued by the Chief Financial
Officers Forum of European Insurance
Companies in May 2004 and expanded
by the Additional Guidance of EEV
Disclosures published in October 2005.
The principles are designed to capture the
value of the new business sold in the period
and of the business in force.
Fixed annuities
Fixed annuity contracts written in the US
which allow for tax-deferred accumulation
of funds, are used for asset accumulation
in retirement planning and for providing
income in retirement and offer flexible
pay-out options. The contract holder pays
the insurer a premium, which is credited to
the contract holders’ account. Periodically,
interest is credited to the contract holders’
account and administrative charges are
deducted, as appropriate.
Fixed indexed annuities
These are similar to fixed annuities in that
the contract holder pays the insurer a
premium, which is credited to the contract
holder’s account and, periodically, interest
is credited to the contract holder’s account
and administrative charges are deducted,
as appropriate. An annual minimum
interest rate may be guaranteed, although
Prudential plc Annual Report 2015 www.prudential.co.uk actual interest credited may be higher and
is linked to an equity index over its indexed
option period.
Funds under management
These comprise funds of the Group held
in the statement of financial position and
external funds that are managed by
Prudential asset management operations.
Group free surplus
Group free surplus at the end of the period
comprises free surplus for the insurance
businesses, representing the excess of the
net worth over the required capital included
in the EEV results, and IFRS net assets for
the asset management businesses excluding
goodwill. The free surplus generated
during the period comprises the movement
in this balance excluding foreign exchange,
capital, and other reserve movements.
Specifically, it includes amounts maturing
from the in-force operations during the
period less the investment in new business,
the effect of market movements and other
one-off items.
Guaranteed annuities
Policies that pay out a fixed amount
of benefit for a defined period.
Guaranteed investment contract
(GIC) (US)
An investment contract between an
insurance company and an institutional
investor, which provides a stated rate of
return on deposits over a specified period
of time. They typically provide for partial or
total withdrawals at book value if needed
for certain liquidity needs of the plan.
Guaranteed minimum accumulation
benefit (GMAB) (US)
A guarantee that ensures that the contract
value of a variable annuity contract will be
at least equal to a certain minimum amount
after a specified number of years.
Guaranteed minimum death benefit
(GMDB) (US)
The basic death benefit offered under
variable annuity contracts, which specifies
that if the owner dies before annuity
income payments begin, the beneficiary
will receive a payment equal to the greater
of the contract value or purchase payments
less withdrawals.
Guaranteed minimum income
benefit (GMIB) (US)
A guarantee that ensures, under certain
conditions, that the owner may annuitise
the variable annuity contract based on the
greater of (a) the actual account value or (b)
a pay-out base equal to premiums credited
with some interest rate, or the maximum
anniversary value of the account prior
to annuitisation.
Guaranteed minimum withdrawal
benefit (GMWB) (US)
A guarantee in a variable annuity that
promises that the owner may make annual
withdrawals of a defined amount for the life
of the owner or until the total guaranteed
amount is recovered, regardless of market
performance or the actual account balance.
Health and protection
These comprise health and personal
accident insurance products, which
provide morbidity or sickness benefits and
include health, disability, critical illness and
accident coverage. Health and protection
products are sold both as standalone
policies and as riders that can be attached
to life insurance products. Health and
protection riders are presented together
with ordinary individual life insurance
products for purposes of disclosure of
financial information.
Immediate annuity
An annuity in which payments to the
annuitant or beneficiary start at once
upon establishment of the annuity plan
or scheme. Such annuities are almost
always purchased with a single
(lump sum) payment.
In-force
An insurance policy or contract reflected
on records that has not expired, matured or
otherwise been surrendered or terminated.
Inherited estate
For life insurance proprietary companies,
surplus capital available on top of what is
necessary to cover policyholders
reasonable expectations. An inherited
(orphan) estate is effectively surplus capital
on a realistic basis built over time and not
allocated to policyholders or shareholders.
Internal rate of return (IRR)
The IRR is equivalent to the discount rate
at which the present EEV value of the
post-tax cash flows expected to be earned
over the life time of the business written
in shareholder-backed life funds is equal
to the total invested capital to support
the writing of the business. The capital
included in the calculation of the IRR
is equal to the amount required to pay
acquisition costs and set up reserves less
premiums received, plus encumbered
capital. The impact of the time value
of options and guarantees is included
in the calculation.
Internal vesting
Internal vestings are proceeds from a
Prudential policy which the policyholder
has decided to reinvest in a Prudential
annuity product.
International Financial Reporting
Standards (IFRS)
Accounting standards that all publicly listed
groups in the European Union are required
to apply in preparing consolidated financial
statements.
Investment grade
Investments rated BBB- or above for S&P,
Baa3 or above for Moody’s. Generally they
are bonds that are judged by the rating
agency as likely enough to meet payment
obligations that banks are allowed to invest
in them.
Investment-linked products or
contracts
Insurance products where the surrender
value of the policy is linked to the value of
underlying investments (such as collective
investment schemes, internal investment
pools or other property) or fluctuations in
the value of underlying investment or indices.
Investment risk associated with the product
is usually borne by the policyholder.
Insurance coverage, investment and
administration services are provided for
which the charges are deducted from the
investment fund assets. Benefits payable will
depend on the price of the units prevailing
at the time of surrender, death or the maturity
of the product, subject to surrender charges.
These are also referred to as unit-linked
products or unit-linked contracts.
Liquidity coverage ratio
Prudential calculates this as assets and
resources available to us that are readily
convertible to cash to cover corporate
obligations in a prescribed stress scenario.
We calculate this ratio over a range of time
horizons extending to 12 months.
Liquidity premium
This comprises the premium that is
required to compensate for the lower
liquidity of corporate bonds relative
to swaps and the mark to market risk
premium that is required to compensate
for the potential volatility in corporate
bond spreads (and hence market values)
at the time of sale.
Market value reduction (MVR)
A reduction applied to the payment on
with-profits bonds when policyholders
surrender in adverse market conditions.
Money Market Fund (MMF)
An MMF is an open-ended mutual fund
that invests in short-term debt securities
such as US treasury bills and commercial
paper. The purpose of an MMF is to
provide investors with a safe place to
invest easily accessible cash-equivalent
assets characterised as a low-risk,
low-return investment.
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Mortality rate
Rate of death, varying by such parameters
as age, gender and health, used in pricing
and computing liabilities for future
policyholders of life and annuity products,
which contain mortality risks.
Net premiums
Life insurance premiums, net of reinsurance
ceded to third-party reinsurers.
Net worth
Net assets for EEV reporting purposes
that reflect the regulatory basis position,
sometimes with adjustments to achieve
consistency with the IFRS treatment of
certain items.
New business margin
The value of new business on an EEV basis
expressed as a percentage of the present
value of new business premiums expected
to be received from the new business.
New business profit
The profits, calculated in accordance with
European Embedded Value Principles,
from business sold in the financial reporting
period under consideration.
Non-participating business
A life insurance policy where the
policyholder is not entitled to a share of the
company’s profits and surplus, but receives
certain guaranteed benefits. Also known
as non-profit in the UK. Examples include
pure risk policies (eg fixed annuities, term
insurance, critical illness) and unit-linked
insurance contracts.
OIEC Open ended investment
company
A collective investment fund structured
as a limited company in which investors
can buy and sell shares.
Operational borrowings
Borrowings which arise in the normal
course of the business.
Participating funds
Distinct portfolios where the policyholders
have a contractual right to receive at the
discretion of the insurer additional benefits
based on factors such as the performance
of a pool of assets held within the fund, as
a supplement to any guaranteed benefits.
The insurer may either have discretion
as to the timing of the allocation of those
benefits to participating policyholders or
may have discretion as to the timing and
the amount of the additional benefits. For
Prudential the most significant participating
funds are with-profits funds for business
written in the UK, Hong Kong, Malaysia
and Singapore.
366
Participating policies or
participating business
Contracts of insurance where the
policyholders have a contractual right
to receive, at the discretion of the insurer,
additional benefits based on factors
such as investment performance, as a
supplement to any guaranteed benefits.
This is also referred to as with-profits
business.
Payback period
Payback period is the time in which the
initial ‘cash’ outflow of investment is
expected to be recovered from the ‘cash’
inflows generated by the investment. We
measure cash outflow by our investment
of free surplus in new business sales. The
payback period equals the time taken for
this business to generate free surplus to
cover this investment. Payback periods
are measured on an undiscounted basis.
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.
Prudential Regulation Authority
or PRA
The PRA is a UK regulatory body
responsible for Prudential regulation and
supervision of banks, building societies,
credit unions, insurers and major
investment firms.
Regular premium product
A life insurance product with regular
periodic premium payments.
Rider
A supplemental plan that can be attached
to a basic insurance policy, with payment
of additional premium.
Risk margin reserve (RMR) charge
An RMR is included within operating profit
based on longer-term investment returns
and represents a charge for long-term
expected defaults of debt securities,
determined by reference to the credit
quality of the portfolio.
Scottish Amicable Insurance Fund
(SAIF)
SAIF is a ring-fenced sub-fund of the
Prudential Assurance Company’s
long-term fund following the acquisition
of the mutually owned Scottish Amicable
Life Assurance Society in 1997. The fund
is solely for the benefit of policyholders of
SAIF. Shareholders of Prudential plc have
no interest in the profits of this fund
although they are entitled to asset
management fees on this business.
Separate account
A separate account is a pool of investments
held by an insurance company not in
or ‘separate’ from its general account.
They generally accrue to the policyholder.
A separate account allows an investor to
choose an investment category according
to his individual risk tolerance, and desire
for performance.
Single premiums
Single premium policies of insurance are
those that require only a single lump sum
payment from the policyholder.
Stochastic techniques
Stochastic techniques incorporate results
from repeated simulations using key
financial parameters which are subject
to random variations and are projected
into the future.
Subordinated debt
A fixed interest issue or debt that ranks
below other debt in order of priority for
repayment if the issuer is liquidated.
Holders are compensated for the added
risk through higher rates of interest.
Under EU insurance regulation,
subordinated debt is not treated as a
liability and counts towards the coverage
of the required minimum margin of
solvency, with limitations.
Surrender
The termination of a life insurance policy
or annuity contract at the request of the
policyholder after which the policyholder
receives the cash surrender value, if any,
of the contract.
Surrender charge or surrender fee
The fee charged to a policyholder when
a life insurance policy or annuity contract
is surrendered for its cash surrender
value prior to the end of the surrender
charge period.
Takaful
Insurance that is compliant with
Islamic principles.
Time value of options and guarantees
The value of financial options and
guarantees comprises two parts, the
intrinsic value and the time value. The
intrinsic value is given by a deterministic
valuation on best estimate assumptions.
The time value is the additional value
arising from the variability of economic
outcomes in the future.
Prudential plc Annual Report 2015 www.prudential.co.uk Total shareholder return (TSR)
TSR represents the growth in the value
of a share plus the value of dividends
paid, assuming that the dividends are
reinvested in the Company’s shares on
the ex-dividend date.
Unallocated surplus
Unallocated surplus is recorded wholly as a
liability and represents the excess of assets
over policyholder liabilities for Prudential’s
with-profits funds. The balance retained
in the unallocated surplus represents
cumulative income arising on the with-
profits business that has not been allocated
to policyholders or shareholders.
Unit-linked products or unit-linked
contracts
See ‘investment-linked products
or contracts’ above.
Universal life
An insurance product where the customer
pays flexible premiums, subject to specified
limits, which are accumulated in an account
and are credited with interest (at a rate
either set by the insurer or reflecting
returns on a pool of matching assets).
The customer may vary the death benefit
and the contract may permit the customer
to withdraw the account balance, typically
subject to a surrender charge.
Variable annuity (VA) (US)
An annuity whose value is determined by
the performance of underlying investment
options that frequently includes securities.
A variable annuity’s value is not guaranteed
and will fluctuate, depending on the value
of its underlying investments. The holder
of a variable annuity assumes the
investment risk and the funds backing a
variable annuity are held in the insurance
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-profits funds
See ‘participating funds’ above.
Yield
A measure of the income received from
an investment compared to the price paid
for the investment. Normally expressed
as a percentage.
367
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Rights to dividends under the various
schemes are set out in the Directors’
remuneration report on pages 101 to 129.
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 page 104 and page 121
of the Directors’ remuneration report.
Major shareholders
The following notifications have been
disclosed under the FCA’s Disclosure and
Transparency Rules in respect of notifiable
interests exceeding 3 per cent in the voting
rights of the issued share capital.
As at 31 December 2015
Capital Group Companies, Inc.
BlackRock, Inc
Norges Bank
% of total
voting rights
9.96
5.08
4.03
On 5 February 2016, the Capital Group
Companies, Inc. notified that their holding
had increased to 10.135 per cent of the
issued share capital.
Shareholder information
Communication with shareholders
Share capital
The Group maintains a corporate website
containing a wide range of information
relevant for private and institutional
investors, including the Group’s financial
calendar: www.prudential.co.uk
Annual General Meeting
The 2016 Annual General Meeting will
be held in the Churchill Auditorium at the
Queen Elizabeth II Conference Centre,
Broad Sanctuary, Westminster, London
SW1P 3EE on 19 May 2016 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 2015 Annual General
Meeting, 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 5 per cent or more
of the fully paid up issued share capital are
able to require the Directors to hold a
general meeting. Written shareholder
requests should be addressed to the Group
Company Secretary at the registered office.
Documents on display
The terms and conditions of all Directors’
appointments are available for inspection
at the Company’s registered office during
normal business hours and at the Annual
General Meeting.
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 2015. The Memorandum and
Articles of Association are available
on the Company’s website.
368
Issued share capital
The issued share capital as at 31 December
2015 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 261.
Issued share
capital
2,572,454,958
2,567,779,950
Number of
accounts on
the register
56,276
55,760
2015
2014
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 sufficiency
of public float throughout the reporting
period as required by the Hong Kong
Listing Rules.
A number of dividend waivers are in place
and these relate to shares issued but not
allocated under the Group’s employee
share plans. These shares are held by the
Trustees and will, in due course, be used
to satisfy requirements under the Group’s
employee share plans.
Rights and obligations
The rights and obligations attaching to the
Company’s shares are set out in full in the
Articles of Association. There are currently
no voting restrictions on the ordinary
shares, all of which are fully paid, and each
share carries one vote on a poll. If votes are
cast on a show of hands, each shareholder
present in person or by proxy, or in the case
of a corporation, each of its duly authorised
corporate representatives, has one vote
except that if a proxy is appointed by more
than one member, the proxy has one vote
for and one vote against if instructed by
one or more members to vote for the
resolution and by one or more members
to vote against the resolution.
Where, under an employee share plan,
participants are the beneficial owners of
the shares but not the registered owners,
the voting rights are normally exercisable
by the registered owner in accordance with
the relevant plan rules. Trustees may vote
at their discretion, but do not vote on any
unawarded shares held as surplus assets.
As at 8 March 2016, Trustees held
0.45 per cent of the issued share capital
under the various plans in operation.
Prudential plc Annual Report 2015 www.prudential.co.uk
Authority to issue shares
The Directors require authority from
shareholders in relation to the issue of
shares. Whenever shares are issued, these
must be offered to existing shareholders
pro rata to their holdings unless the
directors have been given authority by
shareholders to issue shares without
offering them first to existing shareholders.
Prudential seeks authority from its
shareholders on an annual basis to issue
shares up to a maximum amount and
to issue up to 5 per cent of its issued
share capital without offering them to
existing shareholders, in line with
relevant regulations and best practice.
Disapplication of statutory pre-emption
procedures is also sought for rights issues.
The existing authorities to issue shares and
to do so without observing pre-emption
Dividend information
rights are due to expire at the end of this
year’s Annual General Meeting. An
ordinary resolution and a special resolution
to approve the renewal of these authorities
respectively will be put to shareholders
at the Annual General Meeting on
19 May 2016.
Details of shares issued during 2014 and
2015 are given in note C10 on page 261.
In accordance with the terms of a waiver
granted by the Hong Kong Stock
Exchange, Prudential confirms that it
complies with the applicable law and
regulation in the UK in relation to the
holding of shares in treasury and with
the conditions of the waiver in connection
with the purchase of own shares and
any treasury shares it may hold.
Authority to purchase own shares
The directors also require authority from
shareholders in relation to the purchase
of the Company’s own shares. Prudential
seeks authority by special resolution on
an annual basis for the buyback of its own
shares in accordance with the relevant
provisions of the Companies Act 2006 and
other related guidance. This authority has
not been used since it was last granted at
the 2015 Annual General Meeting. 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 19 May 2016.
2015 second interim dividend
Ex-dividend date
Record date
Payment date
Analysis of shareholder accounts as at 31 December 2015
Shareholders
registered on
the UK register
and Hong Kong
and Irish
branch registers
Holders of
US American
Depositary
Receipts
Shareholders
with ordinary
shares standing
to the credit of
their CDP
securities
accounts
24 March 2016
– 24 March 2016
29 March 2016 29 March 2016 29 March 2016
20 May 2016
On or about
27 May 2016
On or about
27 May 2016
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
260
148
473
1,632
2,024
13,081
36,691
54,309
Number of
shares
2,258,268,681
106,230,409
108,755,788
46,022,238
14,014,903
28,734,396
10,428,543
0.48
0.27
0.87
3.00
3.73
24.09
67.56
100
2,572,454,958
% of total
number of
shares
87.79
4.13
4.23
1.79
0.54
1.12
0.40
100
369
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc Shareholder information continued
Shareholder enquiries
For enquiries about shareholdings, including dividends and lost share certificates, please contact the Company’s registrars:
Register
By post
By telephone
Principal UK register
Equiniti Limited, Aspect House, Spencer Road,
Lancing, West Sussex BN99 6DA.
Irish branch register
Hong Kong branch register
Singapore registers
ADRs
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 The Central
Depository (PTE) Limited (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.
J.P. Morgan Chase Bank N.A, PO Box 64504,
St. Paul, MN 55164-0854, USA.
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
Income tax: changes to dividend
taxation
The UK government has announced that
from 6 April 2016 the Dividend Tax Credit
will be replaced by a new tax-free Dividend
Allowance for shareholders subject to UK
income tax. This will be in the form of a
0 per cent tax rate on the first £5,000 of
dividend income per year. UK residents will
pay tax on any dividends received over the
£5,000 allowance at the following rates:
— 7.5 per cent on dividend income within
the basic rate (20 per cent) band;
— 32.5 per cent on dividend income
within the higher rate (40 per cent)
band; and
— 38.1 per cent on dividend income within
the additional rate (45 per cent) band.
Dividends paid on shares held within
pensions and Individual Savings Accounts
(ISAs) will continue to be tax free.
Further information is available on the
HMRC website.
IMPORTANT: You will be required to retain
details of any dividend payments you
receive and complete Tax Returns where
required. For further advice please contact
a tax or financial adviser who in the UK
must be authorised by the Financial
Conduct Authority.
Electronic communications
Shareholders are encouraged to elect
to receive shareholder documents
electronically by registering with
Shareview at www.shareview.co.uk
This will save on printing and distribution
costs, and create environmental benefits.
Shareholders who have registered will
be sent an email notification whenever
shareholder documents are available
on the Company’s website and a link will
be provided to that information. When
registering, shareholders will need their
370
Tel 0371 384 2035
Fax 0371 384 2100
Textel 0371 384 2255 (for hard of hearing).
Lines are open from 8.30am to 5.30pm (UK),
Monday to Friday.
International shareholders
tel +44 (0) 121 415 7026
Tel + 353 1 553 0050
Tel +852 2862 8555
Tel +65 6535 7511
Tel +1 800 990 1135
or from outside the US +1 651 453 2128
or log on to www.adr.com
shareholder reference number which can
be found on their share certificate or proxy
form. The option to receive shareholder
documents electronically is not available to
shareholders holding shares through The
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 or telephone
0371 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 0345 603 7037
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
Prudential plc Annual Report 2015 www.prudential.co.uk How to contact us
Prudential plc
Prudential UK & Europe
Laurence Pountney Hill
London EC4R 0HH
Tel +44 (0)20 7220 7588
www.prudential.co.uk
Paul Manduca
Chairman
Mike Wells
Group Chief Executive
Nic Nicandrou
Chief Financial Officer
Penny James
Group Chief Risk Officer
Julian Adams
Group Regulatory Director
Jonathan Oliver
Group Communications Director
Alan Porter
Group General Counsel and Company
Secretary
Al-Noor Ramji
Group Chief Digital Officer
Tim Rolfe
Group Human Resources Director
3 Sheldon Square
London W2 6PR
Tel +44 (0)800 000 000
www.pru.co.uk
John Foley
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
Tony Wilkey
Chief Executive
Jackson National Life Insurance
Company
1 Corporate Way
Lansing
Michigan 48951
USA
Tel +1 517 381 5500
www.jackson.com
Barry Stowe
Chairman & Chief Executive Officer
of North America Business Unit
Institutional Analyst and Investor
Enquiries
Tel +44 (0)20 7548 3300
E-mail investor.relations@prudential.co.uk
UK Register Private Shareholder
Enquiries
Tel: 0871 384 2035
International shareholders
Tel +44 (0)121 415 7026
Irish Branch Register Private
Shareholder Enquiries
Tel +353 1 553 0050
Hong Kong Branch Register Private
Shareholder Enquiries
Tel +852 2862 8555
US American Depositary Receipts
Holder Enquiries
Tel +1 651 453 2128
The Central Depository (Pte) Limited
Shareholder Enquiries
Tel +65 6535 7511
Media Enquiries
Tel +44 (0)20 7548 3559
E-mail media.relations@prudential.co.uk
371
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationwww.prudential.co.uk Annual Report 2015 Prudential plc or re-estimations of reserves for future
policy benefits. Further discussion of these
and other important factors that could
cause Prudential’s actual future financial
condition or performance or other
indicated results to differ, possibly
materially, from those anticipated in
Prudential’s forward-looking statements
can be found under the ‘Risk factors’
heading in the Annual Report and the ‘Risk
factors’ heading of Prudential’s most recent
annual report on Form 20-F filed with the
U.S. Securities and Exchange Commission.
Prudential’s most recent Annual Report
and Form 20-F are 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 financial
condition, performance, results, strategy
and objectives. Statements that are not
historical facts, including statements about
Prudential’s beliefs and expectations and
including, without limitation, statements
containing the words ‘may’, ‘will’, ‘should’,
‘continue’, ‘aims’, ‘estimates’, ‘projects’,
‘believes’, ‘intends’, ‘expects’, ‘plans’,
‘seeks’ and ‘anticipates’, and words of
similar meaning, are forward-looking
statements. These statements are based
on plans, estimates and projections as at
the time they are made, and therefore
undue reliance should not be placed on
them. By their nature, all forward-looking
statements involve risk and uncertainty.
A number of important factors could
cause Prudential’s actual future financial
condition or performance or other
indicated results to differ materially from
those indicated in any forward-looking
statement. Such factors include, but are
not limited to, future market conditions,
including fluctuations in interest rates
and exchange rates, the potential for a
sustained low-interest rate environment,
and the performance of financial markets
generally; the policies and actions of
regulatory authorities, including, for
example, new government initiatives;
the impact of continuing designation as
a Global Systemically Important Insurer
or ‘G-SII’; the impact of competition,
economic uncertainty, inflation, and
deflation; the effect on Prudential’s
business and results from, in particular,
mortality and morbidity trends, lapse
rates and policy renewal rates; the timing,
impact and other uncertainties of future
acquisitions or combinations within
relevant industries; the impact of changes
in capital, solvency standards, accounting
standards or relevant regulatory
frameworks, and tax and other legislation
and regulations in the jurisdictions in which
Prudential and its affiliates operate; and
the impact of legal actions and disputes.
These and other important factors may, for
example, result in changes to assumptions
used for determining results of operations
How to contact us continued
Prudential public limited company
Incorporated and registered in England
and Wales
Registered office
Laurence Pountney Hill
London EC4R 0HH
Registered number 1397169
www.prudential.co.uk
Prudential plc is a holding company,
subsidiaries of which are authorised and
regulated by the Prudential Regulation
Authority and the Financial Conduct
Authority
372
Prudential plc Annual Report 2015 www.prudential.co.uk History
Providing financial
security since 1848
Successive generations have looked to Prudential to safeguard their
financial security – from industrial workers and their families in Victorian
Britain to around 24 million insurance customers worldwide today.
Our financial strength, heritage, prudence and focus on our customers’
long‑term needs ensure that people continue to turn to our trusted
brands to help them plan for today and tomorrow.
1854
Prudential opens the Industrial Department to
sell a new type of insurance, Industrial Insurance,
to the working classes, for premiums of a penny
and upwards.
1923
Prudential’s first overseas life
branch is established in India, with
the first policy being sold to a tea
planter in Assam.
1848
Prudential is established
as Prudential Mutual Assurance
Investment and Loan Association in
Hatton Garden, London, offering loans
and life assurance to professional people.
1949
The ‘Man from the Pru’ advertising
campaign is launched.
1994
Prudential Corporation
Asia is formed in Hong
Kong as a regional head
office to expand
operations beyond an
existing presence in
Malaysia, Singapore
and Hong Kong.
1986
Prudential acquires Jackson
in the United States.
2013
Prudential Polska is
launched in Poland.
1999
Prudential acquires
M&G, pioneer of unit
trusts in the UK and a
leading provider of
investment products.
2014
Prudential acquires
businesses in Ghana and
Kenya, marking its entry into
the fast-growing African life
insurance industry.
www.prudentialhistory.co.uk
Prudential public limited company
Incorporated and registered in
England and Wales
Registered office
Laurence Pountney Hill
London EC4R 0HH
Registered number 1397169
www.prudential.co.uk
Prudential plc is a holding company,
subsidiaries of which are authorised
and regulated, as applicable, by the
Prudential Regulation Authority and
the Financial Conduct Authority.
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