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Adding more to life
Prudential plc Annual Report 2017
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The Directors’ Report of Prudential plc for the
year ended 31 December 2017 is set out on pages 2 to 8,
82 to 122 and 362 to 407, and includes the sections of
the Annual Report referred to in these pages.
Contents
01 Group overview
Chairman’s statement
Group Chief Executive’s report
02 Strategic report
At a glance
Our business model
Our distribution
Our performance
Our businesses and their performance
Chief Financial Officer’s report on the 2017 financial performance
Report on the risks facing our business and how these are managed
Corporate responsibility review
03 Governance
Chairman’s introduction
Board of Directors
How we operate
Further information on Directors
Risk management and internal control
Committee reports
Statutory and regulatory disclosures
Additional information
Index to principal Directors’ report disclosures
04 Directors’ remuneration report
Annual statement from the Chairman of the Remuneration Committee
Our Executive Directors’ remuneration at a glance
Summary of the current Directors’ remuneration policy
Annual report on remuneration
Supplementary information
05 Financial statements
06 European Embedded Value (EEV) basis results
07 Additional information
Additional unaudited financial information
Risk factors
Glossary
Shareholder information
How to contact us
Page
02
04
10
12
14
16
18
33
48
64
82
83
88
98
99
101
120
121
122
124
126
128
132
154
159
325
362
391
398
402
406
By helping to take the financial
risk out of life’s big decisions,
Prudential creates long-term value
for our customers, our shareholders
and the communities we serve.
Adding more to life.
Our year in numbers
Summary financials
2017
2016
Change
on actual
exchange
rate basis6
Change
on constant
exchange
rate basis6
IFRS operating profit based on longer‑term investment returns
Underlying free surplus generated 1,2
Life new business profit
IFRS profit after tax 3
Net cash remittances from business units
IFRS shareholders’ funds
EEV shareholders’ funds
Group Solvency II capital surplus 4,5
£4,699m £4,256m 10%
£3,640m £3,566m 2%
£3,616m £3,088m 17%
£2,390m £1,921m 24%
£1,788m £1,718m 4%
£14.7bn
£16.1bn
£44.7bn £39.0bn
£13.3bn £12.5bn
15%
10%
6%
6%
(1)%
12%
21%
–
Full‑year ordinary dividend
47 pence
(2016: 43.5 pence)
+8%
Employees volunteered
96,493 hours
Notes
1 Underlying free surplus generated comprises
underlying free surplus generated from the Group’s
long‑term business (net of investment in new
business) and that generated from asset management
operations. Further information is set out in note 11 of
the EEV basis results.
2 The 2016 comparative results have been
re‑presented from those previously published
following reassessment of the Group’s operating
segments as described in note B1.3 of the IFRS
financial statements, as a result Prudential Capital is
not included in underlying free surplus generated.
3
IFRS profit after tax reflects the combined effects of
operating results determined on the basis of longer‑term
investment returns, together with negative short‑term
investment variances, which in 2017 largely arose within
Jackson, profit (loss) on disposal of businesses,
amortisation of acquisition accounting adjustments and
the total tax charge for the year.
4 The Group shareholder capital position excludes the
contribution to Own Funds and the Solvency Capital
Requirement from ring‑fenced with‑profits funds
and staff pension schemes in surplus. The estimated
solvency position includes management’s calculation
of UK transitional measures reflecting operating and
market conditions at each valuation date. An application
to recalculate the transitional measures as at
31 December 2017 has been approved by the Prudential
Regulation Authority.
5 Before allowing for second interim ordinary dividend.
6 Further information on actual and constant exchange
rates basis is set out in note A1 of the IFRS financial
statements.
www.prudential.co.uk
Annual Report 2017 Prudential plc 01
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Chairman’s statement – Paul Manduca
A customer-focused Group delivering
long-term sustainable returns
I am pleased to present Prudential’s 2017 Annual Report. Prudential has
produced another well balanced performance while making a number of
important changes to our business. Alongside our 2017 results, the Board
announced its intention to demerge M&G Prudential, our UK and European
business, from the Group.
The Board has always considered it
important to create optionality within our
corporate structure. After a rigorous
review, which considered all options
including the status quo, we have
concluded that it is in the best interest of
the business to operate as two separately
listed companies, able to focus on their
distinct strategic priorities in their chosen
geographies. This will unlock the potential
for enhanced value creation in both
businesses, as each benefits from strategic
focus and capital allocation policies aligned
to its market opportunity. On completion of
the demerger, shareholders will hold
interests in both companies.
M&G Prudential is one of the leading
retirement and savings businesses in the
UK and Europe. As a standalone entity, it
will continue to drive its transformation into
a more capital‑efficient and customer‑
focused business, targeting growing
customer demand for comprehensive
financial solutions in these markets. In line
with this strategy M&G Prudential agreed
in March 2018 to the partial sale of its
shareholder annuity portfolio. As with
other changes to the business, our priority
is to ensure these customers are treated
fairly.
The international Group will combine the
exciting growth potential of our Asia, US
and Africa businesses, meeting the
growing needs of customers in these
markets. These businesses will form a
leading international Group focused on the
largest insurance markets globally with
significant growth prospects.
Both independent groups will be
headquartered in London, which we
regard as the pre‑eminent city from which
to operate global financial service
businesses, and both are expected to meet
the criteria for inclusion in the FTSE100.
The Board believes this demerger is in the
interests of all our stakeholders. Customers
will receive greater focus, employees will
be more closely aligned with their
businesses and we believe shareholders
will benefit from investments in both
companies.
Our strong full year results demonstrate
the positive momentum across all our
businesses.
Our impact
Throughout the demerger process, we will
continue to hold ourselves to the highest
standards to ensure that both businesses
deliver long‑term sustainable returns.
As ever, our customers remain our key
priority. We help customers make plans for
the future by reducing the risks they face.
Whether they are saving for the family,
protecting their health or managing their
retirement, Prudential enables them to
manage uncertainty. We also turn their
capital into a source of stable investment in
companies and countries across the world,
driving economic growth and improving
infrastructure. Changing the structure of
our business will not reduce our
commitment to delivering on these
promises.
Our customer focus means actively
engaging with the critical issues facing both
our businesses and the wider world. In
2017, the Group published its first
environmental, social and governance
(ESG) report, demonstrating how we
approach all our stakeholders, from our
suppliers and employees to the wider
communities in which we operate, with the
same sense of responsibility and
commitment that we apply to our
customers, and how we engage with
investors and regulators around the risks
and impact of issues such as climate
change. We will publish our next ESG
report in May 2018.
Performance and dividend
We have delivered another broad‑based
operating and financial performance,
driven by all of our business units and in
particular by our growing Asia businesses.
In view of this performance and our
confidence about the outlook for the
Group, the Board has decided to increase
the full‑year ordinary dividend by
8 per cent to 47 pence per share. In line
with this, the Directors have approved a
second interim ordinary dividend of
32.5 pence per share (2016: 30.57 pence
per share).
Governance
All our stakeholders benefit from the Board
taking an active role in the development
and execution of our strategy, ensuring it is
fit for today and for the future. The Board’s
decision to separate M&G Prudential was
not taken lightly and we took significant
time to consider the benefits for
shareholders and customers and the
impact on our wider stakeholders. We took
an important step towards this decision in
August 2017 when we announced our
intention to merge our UK asset manager,
M&G, and our UK and Europe life
insurance business to form
M&G Prudential. The combined business
now manages £351 billion in assets1 for
more than seven million customers and is
well placed to thrive as an independent
business.
The Board now has a vital role to play
stewarding the separation process,
working with management and ensuring
that every part of the Group continues to
deliver for customers. This task makes
ensuring a strong and diverse Board more
important than ever. There were a number
of changes to the Board in 2017 in both
non‑executive and executive roles,
reflecting the strength of our succession
planning.
02 Prudential plc Annual Report 2017
www.prudential.co.uk
This has enabled us to recruit high‑calibre
candidates with a diverse set of skills and
expertise and ensured continuity while
minimising disruption. I would like to thank
Ann Godbehere, Tony Wilkey and Penny
James for their significant contribution
during their tenures, and to welcome Mark
FitzPatrick, Tom Watjen and James Turner
to the Board. The global market for talent
continues to be highly competitive and our
priority remains to ensure that we have the
best possible executive and non‑executive
team. We have committed to focusing
particularly on strengthening gender
diversity, alongside diversity of skills, in our
succession planning in 2018.
Ensuring the effectiveness of the Board
also remains a priority for me as Chairman.
An external independent evaluation was
conducted at the end of 2017 to consider
how the Board can improve and work
together more effectively. I was pleased
that the review concluded that the Board’s
strengths included creating a collegiate and
constructive environment, effective use of
time and materials, and strong risk and
control oversight.
Our shareholders and other
stakeholders
A well governed company engages
regularly and effectively with its
shareholders, responding to their
challenges and taking their ideas and
concerns seriously. At Prudential, we have
open and constructive dialogue with
investors via a regular and comprehensive
programme of engagement. I have
personally found this active engagement
hugely valuable and fully commit to
continuing this dialogue. Shareholder input
is vital to ensuring well informed Board
discussions.
Policy and regulatory change affects both
our short‑term performance and long‑term
strategy. Prudential places great
importance on having an effective
relationship with the regulators and
policymakers who supervise us and our
markets. We engage regularly and
constructively with all our regulators and
supervisors, as well as with governments
around the world. Throughout the
demerger process, the Board will continue
to engage with all our stakeholders to
ensure that they are kept informed and
their input is sought.
Our people
The success of Prudential is rooted in the
commitment, creativity and drive of our
teams in each of our markets and
businesses. The structural changes we are
proposing will only succeed because of the
hard work of our people and we will
support them through these changes.
We are committed to ensuring that
Prudential’s people represent the
communities we serve and we therefore
take a strategic approach to diversity and
inclusion at every level of our business.
While this is an ongoing journey, we firmly
believe diversity both adds strength and
ensures a wide range of perspectives. We
aim to encourage an inclusive working
environment where we develop our talent,
reward great performance and recognise
our differences in order to continue to
deliver outstanding results for our
customers, shareholders and communities.
As part of our commitment to diversity,
Prudential has signed the HM Treasury
Women in Finance Charter, which aims to
increase the number of women working in
senior management in financial services
companies, and we have set a gender
diversity target of 30 per cent females in
senior management by the end of 2021.
Our communities
Prudential provides important benefits to
society through our core business activities.
In addition to these benefits, Prudential is a
responsible business that invests in our local
communities, which we strongly believe is
in the interests of all our stakeholders.
Our community investment work focuses
particularly on financial education, disaster
preparedness and social inclusion. The
Cha‑Ching programme, our financial
education platform aimed at primary
school‑aged children, is now in its seventh
year. It has expanded from its origins in
Asia to each of the four continents in which
the Group does business, and in all of the
markets where it has been launched it has
been extremely positively received, with
strong feedback from parents, teachers,
children and political stakeholders. The
Prudence Foundation’s 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,
with a potential reach of 200 million people.
And in the UK, over the past five years
Prudential RideLondon has raised over
£50 million for charity and become one of
the largest fundraising events in the country.
In 2017 alone, more than 800 charities
benefited from riders’ fundraising.
The direct contribution made by our
people to the communities in which they
live and participate makes me particularly
proud. In 2017, Prudential colleagues
volunteered 96,493 hours of their time.
I support this activity personally through
our flagship international volunteering
programme, the Chairman’s Challenge,
and I am delighted by the continuing
success of the programme, with the
number of volunteers increasing year‑on‑
year. From its launch in 2006, when 2,603
employees signed up, volunteer numbers
have more than trebled. Last year 8,500
colleagues around the world – over
30 per cent of our workforce – took part,
volunteering more than 35,000 hours to
support 30 projects.
Conclusion
Prudential has announced a significant
change that we believe will secure the
future success of both M&G Prudential and
our international business. This decision
has been made from a position of strength,
with a well balanced 2017 performance
driven by every part of our business. The
Board has confidence in the creation of two
valuable businesses that will continue to
deliver for our shareholders, customers
and other stakeholders.
Paul Manduca
Chairman
Note
1 Represents M&G Prudential asset management
external funds under management and internal funds
included on the M&G Prudential long‑term insurance
business balance sheet.
www.prudential.co.uk
Annual Report 2017 Prudential plc 03
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Group Chief Executive’s report – Mike Wells
Strong performance and
continued profitable growth
I am pleased to report that over 2017 our clear, consistent strategy, high-quality
products and improving capabilities have enabled us to meet the needs of
customers around the world better than ever before.
Our purpose is to help remove uncertainty
from life’s big events. Whether that’s starting
a family, saving for a child’s education or
planning for retirement, we provide our
customers with financial peace of mind,
enabling them to face the future with greater
confidence. We also invest our customers’
money actively in the real economy, helping
not only to improve the lives of individuals
and families, but also to build stronger
communities and drive the cycle of growth.
Our strategy is aligned to structural trends:
the savings and protection needs of the fast‑
growing middle class in Asia, the retirement
income needs of the approximately 75 million
baby boomers in the United States1 and the
growing demand for managed savings
solutions among the ageing populations of
the United Kingdom and Europe. These
trends are sustained, and we remain
focused on the opportunities they present.
We have continued to develop our
products and our capabilities in order to
improve the way we meet customers’
needs. We are creating new, better and
more personalised products, and we have
a flexible, collaborative approach to
incorporating the best digital technologies
into our operations, while also leveraging
our global scale to share new insights
across our businesses at pace. The result is
constant improvement in the way we serve
our customers, providing value both to
them and to our shareholders.
In March 2018 the Group announced its
intention to demerge its UK and Europe
businesses (‘M&G Prudential’) from
Prudential plc, resulting in two separately
listed companies, with different investment
characteristics and opportunities. Our
businesses share common heritage, values
and purpose. Looking forward, we believe
we will be better able to focus on meeting
our customers’ rapidly evolving needs and
to deliver long‑term value to investors as two
separate businesses. On completion of the
demerger, shareholders will hold interests
in both Prudential plc and M&G Prudential.
In line with its strategy to transition towards
a more capital efficient, de‑risked business
model, M&G Prudential agreed in March
2018 to the sale of £12.0 billion20 of its
shareholder annuity portfolio to Rothesay
Life. Under the terms of the agreement,
M&G Prudential has reinsured
£12.0 billion20 of liabilities to Rothesay Life,
which is expected to be followed by a Part
VII transfer of the portfolio by the end of
2019. The capital benefit of this transaction
will be retained within the Group to
support the UK demerger process.
In preparation for the UK demerger
process, and to align the ownership of the
Group’s businesses with their operating
structures, Prudential plc intends to
transfer the legal ownership of its Hong
Kong insurance subsidiaries from The
Prudential Assurance Company Limited
(M&G Prudential’s UK regulated insurance
entity) to Prudential Corporation Asia
Limited, which is expected to complete by
the end of 2019.
Our financial performance
We have built on our good start to 2017
through disciplined execution of our
strategy, again led by our businesses in Asia.
We announce today the achievement of
our remaining 2017 objectives, which were
set in December 2013. During the first half
of 2017, we exceeded the Group objective
of underlying free surplus generation of at
least £10 billion from the beginning of 2014
to the end of 2017. By the end of 2017 we
had generated £12.8 billion over this four
year period. Our Asia businesses delivered
growth in IFRS operating profit based on
longer‑term investment returns2 (‘IFRS
operating profit’) at a compound average
rate of 16 per cent3 over the period 2012
to 2017, and underlying free surplus
generation of £1,078 million3 for the full
year 2017. This is testament to the strength,
scale and diversity of our Asia platform,
validates our focus on recurring premium
health and protection business and
demonstrates the strength of our
operational execution. It also marks the
third set of objectives that we have
successfully achieved within the last
10 years.
During 2017 we combined our UK and
European life and asset management
businesses to form M&G Prudential, which
delivered record levels of external asset
management net inflows of £17.3 billion in
2017. This contributed to combined assets
under management4 of £351 billion at
31 December 2017.
As in previous years, we comment on our
performance in local currency terms
(expressed on a constant exchange rate
basis) to show the underlying business
trends in a period of currency movement.
IFRS operating profit*
by business and currency
% 2017
25%
35%
GBP
11%
Other
18%
US$
linked
24%
US$
47%
40%
Asia
US
UK and Europe
* Segmental earnings of key businesses and excludes
other income and expenditure.
04 Prudential plc Annual Report 2017
www.prudential.co.uk
Adding more to life:
Helen, Prudential Hong Kong
‘I’ve always considered good health to be very important to my
life. It’s great that Prudential offered me access to myDNA Pro,
which has given me key insights into my genetic risk profiles.
The first step was to do a DNA test, which showed my body
to be sensitive to carbohydrate and fat intake due to my
genetic makeup. Based on these findings, the personal health
coach I chose as part of the programme helped me set a
weight loss goal and plan to maintain a healthier lifestyle,
including changing my dietary habits and ensuring
I incorporated more cardio workouts into my exercise regime.
With these, I have been able to maintain a healthy weight and
am now in an overall better shape.
I’ve been very impressed by the genetics‑based
recommendations and level of personal guidance provided
by the programme. Huge thanks to my coach and Prudential
for all the support and motivation.’
Group IFRS operating profit was 6 per cent5
higher at £4,699 million (up 10 per cent on
an actual exchange rate basis). IFRS
operating profit from our Asia life insurance
and asset management businesses grew
by 15 per cent5, reflecting continued
broad‑based business momentum across
the region, with double‑digit5 growth in
eight out of 12 life insurance markets. In the
US, Jackson’s total IFRS operating profit
increased by 3 per cent5, due mainly to
growth in fee income on higher asset
balances, which outweighed the
anticipated reduction in spread earnings.
In the UK and Europe, M&G Prudential’s
total IFRS operating profit was 10 per cent
higher than the prior year, reflecting
6 per cent growth in the IFRS operating
profit generated from insurance business
and 18 per cent growth in that generated
from asset management.
The Group’s capital generation is
underpinned by our large and growing
in‑force business portfolio, and focus on
profitable, short‑payback business. Overall
underlying free surplus generation6
decreased by 1 per cent5 to £3,640 million,
with higher contributions in Asia and the
UK and Europe, offset by higher
restructuring costs and a lower
contribution from our US business.
2016 benefited from the impact of a US
transaction to enhance local capital
efficiency that was not repeated in 2017.
Cash remittances to the Group increased
to £1,788 million, with Asia the largest
contributor7 at £645 million. The Group’s
overall performance supported an
8 per cent increase in the 2017 full year
ordinary dividend to 47 pence per share.
The Group remains robustly capitalised,
with a 2017 year‑end Solvency II cover
ratio8,9 of 202 per cent. Over the period,
IFRS shareholders’ funds increased by
10 per cent to £16.1 billion, reflecting profit
after tax of £2,390 million (2016:
£1,921 million on an actual exchange rate
basis) net of other movements that
included dividend payments to
shareholders of £1,159 million and adverse
foreign exchange movements of
£470 million. EEV shareholders’ funds
increased by 15 per cent to £44.7 billion,
equivalent to 1,728 pence per share10,11.
New business profit11 increased by
12 per cent5 to £3,616 million (up
17 per cent on an actual exchange rate
basis), driven by improved business mix in
Asia, higher UK volumes and the
favourable effect of tax reform in the US.
In Asia, we continue to develop our
capabilities and reach, which build scale
and enhance quality. Our strategic
emphasis on increasing sales from health
and protection business has contributed to
a 12 per cent5 increase in new business
profit in Asia. Our asset management
business, Eastspring Investments, has
again seen growth, with its total assets
under management up 18 per cent12 to
£138.9 billion and IFRS operating profit also
up 18 per cent5 to £176 million.
In the US we remain focused on meeting
the retirement income needs of the
growing generation of baby boomer
retirees and expanding our operations into
the large asset pools of the fee‑based
advisory market. Although the evolving
regulatory environment continues to cause
industry sales disruption, in 2017 Jackson
delivered positive separate account net
inflows of £3.5 billion, with separate
account assets reaching £130.5 billion, an
increase of 19 per cent5. In December 2017
the US enacted a major tax reform
package, including a reduction in the
corporate income tax rate from 35 per cent
to 21 per cent effective from 1 January
2018. While this led to a £445 million
charge in the income statement from
re‑measuring deferred tax balances on the
IFRS balance sheet, we expect the tax
changes to be positive in the long term. The
US effective tax rate is expected to fall from
the current rate of circa 28 per cent to circa
18 per cent in the future.
www.prudential.co.uk
Annual Report 2017 Prudential plc 05
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Group Chief Executive’s report – Mike Wells continued
In the UK, both our UK life and asset
management businesses performed well
in 2017. PruFund new business APE sales
increased 36 per cent to £1.2 billion,
while M&G saw record net inflows of
£17.3 billion from external clients.
Overall M&G Prudential assets under
management4 reached £351 billion, up
from £311 billion at 31 December 2016.
Our financial KPIs continue to reflect the
outcome of the Group’s strategy. Our Asia
life businesses are driven by growth in our
recurring premium base and focus on health
and protection business, and elsewhere we
are benefiting from our prioritisation of
fee‑generating products across our Asia
asset management, US variable annuity and
UK and European asset management
activities.
A successful strategy
Our performance is based on our clear,
consistent and successful strategy, which is
focused on long‑term opportunities arising
from structural trends in our markets
around the world.
In Asia, the growth of the middle class is
creating significant and long‑term demand
for the products we offer. The working‑age
population in the region is growing by
a million people a month, and by 2030 is
expected to reach 2.5 billion13, while
65 per cent of Asian private financial wealth
is held in cash14 and at the same time, that
wealth is growing by US$4 trillion a year14.
The growing and increasingly wealthy
middle classes of the region are under‑
protected. In Asia, out‑of‑pocket
healthcare spend makes up 42 per cent of
total health expenditure15, compared with
just 12 per cent in the US and 9 per cent in
the UK. While in a more developed market
such as the UK insurance penetration is
equivalent to 7.5 per cent16 of GDP, in Asia
that figure is just 2.4 per cent16, giving an
idea of the scale of the growth opportunity
that remains in our Asian markets. The gap
between the insurance cover of people in
the region and what they need in order to
maintain the living standards of their
families has been estimated at circa
£35 trillion17. We help to bridge that gap
with a broad range of solutions across
14 markets in the region. We are in the top
three in nine of our markets in Asia18, and
we have 15 million life customers, with
access to total markets of more than
3.3 billion people.
The United States is the world’s largest
retirement market, with approximately
40 million Americans reaching retirement
age over the next decade alone, and these
consumers have a need for investment
options through which they can grow their
savings while at the same time protecting
their income. This is creating demand for
our variable annuity products, which are
designed to help this cohort of Americans
avoid running out of money and provide
them with a reliable cushion against volatile
markets. In the US, over US$15 trillion is
invested in adviser‑distributed financial
assets net of existing annuities, while
penetration of variable annuity sales into
the retirement market remains low,
demonstrating the scale of the opportunity
for us.
In the UK and Europe there is growing
demand among customers for managed
solutions, savings products that provide
better long‑term returns than cash, while
smoothing out the ups and downs of the
market. We meet that need through our
PruFund propositions and our
comprehensive range of actively managed
funds. M&G Prudential is well positioned to
target this growing customer demand for
comprehensive financial solutions and the
demerger will enable this business to play
an even greater role in these markets.
Doing more for our customers
We deliver on our clear strategy and our
long‑term opportunities by paying close
attention to the needs of our customers, by
responding to those needs with products
that fit their changing requirements, and by
improving our capabilities continually in
order to deliver the best products in the
most effective way.
In Asia, our broad‑based portfolio of
businesses continues to drive the growth of
the Group. We are constantly improving
the range and quality of the products we
offer in the region, developing our
multi‑channel distribution platform to
ensure that those products reach as many
customers as possible and improving our
capabilities throughout our operations, not
least by accessing new innovations in
digital technology.
We develop products that meet the needs
of our customers, whether that is for more
personalised features or products aimed at
new areas of the market and in 2017 we
launched a number of new health and
protection products in Indonesia, Vietnam,
Singapore, Malaysia and Hong Kong.
Prudential’s Group
Executive Committee
Mike Wells is advised and assisted
by the Group Executive Committee,
which comprises our Executive
Directors and a team of functional
specialists.
The members of the Group
Executive Committee and their
roles are set out on page 406.
Back, left to right: Tim Rolfe, Julian Adams,
Al‑Noor Ramji, Anne Richards, Jonathan Oliver,
Alan Porter.
Front, left to right: Nic Nicandrou, John Foley,
Mike Wells, Mark FitzPatrick, Barry Stowe.
James Turner was appointed as an Executive
Director and as Group Chief Risk Officer in
March 2018.
06 Prudential plc Annual Report 2017
www.prudential.co.uk
Prudential won the
insurance category
of Management
Today’s ‘Britain’s
Most Admired
Companies’ awards
in December 2017.
We were also named Britain’s most
admired company overall for quality of
management and inspirational
leadership and fourth for our ability to
attract and retain top talent. The highly
regarded awards are based on a review
by peers.
We are also continuing to improve both our
agency platform and our bancassurance
partnerships in Asia to ensure that we
reach as many customers as possible.
Nowhere is this clearer than in China,
where, through our joint venture CITIC‑
Prudential, we now have a presence in
77 cities, with access to 940 million people,
or about 70 per cent of the population of
the world’s most populous country. We
have over 44,000 agents in China and
access to more than 4,000 bank branches.
Across the region during 2017 we
increased our total agents to over 600,000
and we ended the year with over 15 million
life insurance customers. Recent
announcements of new agreements in the
Philippines, Thailand, Indonesia and
Vietnam have also increased the reach of
our bancassurance partnerships.
Continuous improvement of our
capabilities is also a key part of our
approach, and in Asia we introduced a
number of digital initiatives that will benefit
both our customers and our shareholders,
including apps and chatbots, that, among
other services, can provide rapid claims
payment, constant customer support,
answer queries, help schedule
appointments and transfer feedback from
customers to our businesses. Building on
its success in Hong Kong, our myDNA
service, which provides diet and exercise
advice based on genetic profiles, has been
launched in Vietnam, Malaysia and
Singapore. In Singapore we also launched
PRU Fintegrate, a new initiative enabling us
to collaborate with fintech startups to
co‑develop digital solutions for customers.
Eastspring is well placed for the anticipated
growth in Asia’s retail mutual fund market.
To prepare further, we have strengthened
our in‑house investment teams, entered
into new strategic partnerships and made
significant progress in systems and
operating model upgrades. In addition,
Eastspring recognises that environmental,
social and governance (ESG) factors can be
material to investment returns, particularly
in the long term, and has become a
signatory to the United Nations‑supported
Principles for Responsible Investment
(PRI), joining M&G Prudential asset
management.
In the United States, we are continuing to
develop our business to ensure we capture
the opportunity presented by the millions
of Americans moving into retirement now
and over the coming years. Regulatory and
industry changes are creating new areas of
growth potential and we are adapting our
offering to meet those opportunities.
During 2017, in response to evolving
conditions in the hybrid adviser segment of
the market, Jackson launched Perspective
Advisory II, an advisory version of our
flagship product, Perspective II. We also
announced the formation in November
of our Private Wealth & Trust group,
a specialised team focused on complex
planning, investment management and tax
mitigation strategies for high‑net‑worth
clients. At the same time, we are improving
communication for customers, and our
initiatives in this area last year included the
launch of a new website, the Financial
Freedom Studio, where consumers can
learn about financial planning for
retirement, aimed at simplifying the
language and focusing on planning for
lifetime income.
In the UK and Europe, the combination of
our life and asset management businesses
into M&G Prudential has enabled us to
meet the needs of our customers better
than ever before. The business manages
£351 billion of assets4 for more than
seven million customers, both in the UK
and internationally, and we are leveraging
our scale, financial strength and
complementary product and distribution
capabilities to enhance the development of
capital‑efficient, customer‑focused
solutions. Bringing these businesses
together has given us the opportunity to
deliver better collaboration across business
segments and more innovative and
differentiated propositions. It also provides
better access to customers and channels,
merger cost synergies and transformation
benefits, including the chance to invest to
create a digital, data‑led business with low
marginal cost of growth. M&G Prudential is
in the top five in UK retail funds19, with an
active management offering, and provides
a range of consumer‑focused retirement
and savings wrappers. The performance of
its products continues to make them very
popular among customers. The flagship
PruFund Growth Life Fund, for example,
has grown by 36 per cent since the start of
2013, compared with benchmark growth
of 30 per cent, and this performance has
driven growth in PruFund assets under
management from £7.5 billion in 2012 to
£35.9 billion at the end of 2017. To improve
the offering to customers, in 2017 the
business rolled out myM&G, its direct‑to‑
consumer platform.
We took another step forward in our Africa
business in 2017 when we entered Nigeria,
Africa’s largest economy and our fifth
market in the region. Following the launch
of our businesses in Ghana, Kenya, Uganda
and Zambia, this further demonstrates our
commitment to Africa and our
determination to bring the benefits of our
products to customers across the region.
We continue to invest in our capabilities
and our people across the organisation. In
July we welcomed Mark FitzPatrick to our
executive team as Chief Financial Officer,
succeeding Nic Nicandrou, who took over
from Tony Wilkey as Chief Executive of
Prudential Corporation Asia. Mark brings
with him significant experience and
knowledge of the sector, and I am
confident that Nic will lead our Asian
business to further success. In March 2018
James Turner was appointed Group Chief
Risk Officer, bringing fresh perspective and
additional leadership capacity to our
executive team.
www.prudential.co.uk
Annual Report 2017 Prudential plc 07
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Group Chief Executive’s report – Mike Wells continued
A positive outlook
With our clear strategy focused on
long‑term trends around the world and
continued improvements in our execution
capabilities, we are delivering value to our
customers, our shareholders and the
communities in which we operate. This is
supported by our ongoing focus on risk
management and the strength of our
balance sheet. We believe the demerger
of M&G Prudential from the international
group will leave both businesses better able
to focus on meeting our customers’ rapidly
evolving needs and to deliver long‑term
value to investors as two separate
companies. I have no doubt that the
strength of our underlying opportunities
and our proven ability to innovate and
improve the way we do things, will ensure
that both businesses are well positioned to
continue to serve our customers well and
grow profitably into the future.
Mike Wells
Group Chief Executive
Notes
1 Source: US Census Bureau, Population Division, 2017
2
estimate of population.
IFRS operating profit is management’s primary measure of
profitability and provides an underlying operating result
based on longer‑term investment returns and excludes
non‑operating items. Further information on its definition
and reconciliation to profit for the period is set out in note
B1 of the IFRS financial statements.
3 The current year and all comparative amounts for the Asia
objectives exclude contributions from the Korea life
business which was sold in 2017. The 2017 Asia IFRS
operating profit objective was adjusted accordingly. 2012
comparative amounts include the one‑off gain on sale of
the stake in China Life of Taiwan of £51 million.
4 Represents M&G Prudential asset management external
funds under management and internal funds included on
the M&G Prudential long‑term insurance business balance
sheet.
5 Year‑on‑year percentage increases are stated on a
constant exchange rate basis unless otherwise stated.
6 Underlying free surplus generated comprises underlying
free surplus generated from the Group’s long‑term
business (net of investment in new business) and that
generated from asset management operations. Further
information is set out in note 11 of the EEV basis results.
7 Based on the 2017 operating segments.
8 The Group shareholder capital position excludes the
contribution to Own Funds and the Solvency Capital
Requirement from ring‑fenced with‑profits funds and
staff pension schemes in surplus. The estimated solvency
position includes management’s calculation of UK
transitional measures reflecting operating and market
conditions at each valuation date. An application
to recalculate the transitional measures as at
31 December 2017 has been approved by the
Prudential Regulation Authority.
9 Estimated before allowing for second interim dividend.
10 Closing EEV shareholders’ funds divided by issued shares,
as set out in note II(n) of the Additional unaudited financial
information.
11 Embedded value reporting provides investors with a
measure of the future profit streams of the Group. The EEV
basis results have been prepared in accordance with EEV
principles discussed in note 1 of EEV basis results. A
reconciliation between IFRS and the EEV shareholder
funds is included in note II(k) of the Additional unaudited
financial information.
12 Growth rate on an actual exchange rate basis.
13 Working age population 15 ‑ 64 years. Source: United
Nations, Department of Economic and Social Affairs,
Population Division (2015). World Population Prospects:
The 2015 Revision, DVD Edition.
14 Source: BCG Global Wealth 2016. Navigating the New
Client Landscape.
15 Source: World health Organisation ‑ Global Health
Observatory data repository (2013). Out of pocket as
percentage of total health expenditure.
16 Source: Swiss Re Sigma 2015. Insurance penetration
calculated as premiums as percentage of GDP. Asia
penetration calculated on a weighted population basis.
17 Source: Swiss Re, Mortality Protection Gap: Asia‑Pacific,
2015.
18 Source: Based on formal (Competitors’ results release,
local regulators and insurance associations) and informal
(industry exchange) market share data. Ranking based on
new business (APE or weighted FYP depending on the
availability of data).
19 Source: The Investment Association, September 2017.
20 Relates to £12.0 billion of IFRS shareholder annuity
liabilities, valued as at 31 December 2017.
08 Prudential plc Annual Report 2017
www.prudential.co.uk
Strategic report
Page
At a glance
Our business model
Our distribution
Our performance
Our businesses and their performance
10
12
14
16
18
18
24
28
Chief Financial Officer’s report on the 2017 financial performance
33
Report on the risks facing our business and how these are managed 48
64
Corporate responsibility review
Asia
US
UK and Europe
www.prudential.co.uk
Annual Report 2017 Prudential plc 09
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information02 At a glance
Group at a glance
We meet the long-term savings and protection needs of a growing
middle class and ageing population. We focus on three markets – Asia,
the US and UK and Europe – where the need for our products is strong and
growing and we use our capabilities, footprint and scale to meet that need.
In recent years, we have expanded into Africa, taking advantage of the
emerging demand for our products in the region.
Our strategy
Asia
Savin
s, h e a lth & prote
cti
o
g
n
Asia
Significant
protection gap
and investment
needs of the
middle class
US
Transition of
‘baby-boomers’
into retirement
UK and Europe
‘Savings gap’ and
ageing population
in need of returns/
income
Savin g s
Savin g s
We aim to capture three long-term opportunities
across our key geographical markets:
— serving the protection and investment needs of the
growing middle class in Asia;
— providing asset accumulation and retirement income
products to US baby boomers; and
— meeting the savings and retirement needs of an ageing
British and continental European population.
We aim to generate attractive returns, enabling us to provide
financial security to our customers, invest in growth
opportunities and meet our customers’ high expectations.
Africa
Prudential Corporation Asia
Prudential Corporation Asia has leading insurance and
asset management operations across 14 markets and
serves the families of the region’s high potential economies.
We have been operating in Asia for over 90 years and
have built high‑performing businesses with 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.
Leading pan-regional franchise
94%
of APE sales are regular premium
£139bn
Eastspring Investments funds under management
£3.1bn
Eastspring Investments external net inflows1
We entered Africa in 2014 to offer products to new
customers in one of the fastest‑growing regions in the world.
We aim to provide products that help our customers to live
longer and healthier lives, and save to improve future choices
for them and their families.
1 Excluding money market funds.
10 Prudential plc Annual Report 2017
www.prudential.co.uk
£669bn
total funds under management
+26m
customers worldwide
US
UK and Europe
Jackson
Jackson provides retirement savings and income strategies
aimed at the large number of people approaching retirement in
the United States. Jackson’s pursuit of excellence in product
innovation and distinctive distribution capabilities has helped
us forge a solid reputation for meeting the needs of customers.
Jackson’s variable annuities offer a distinct retirement solution
designed to provide a variety of investment choices to help
customers pursue their financial goals.
M&G Prudential
In August we announced the formation of M&G Prudential, a
leading savings and investments business, ideally positioned
to target growing customer demand for financial solutions in
the UK and Europe. Our vision is a business built for the
customer: simple, efficient, digitally enabled, capital light,
fast‑growing and above all focused on delivery. The
combined business benefits from two strong complementary
brands, a world‑class investment capability, international
distribution and a robust capital position.
Premier retirement income player
premium growth since 1995
6.8x
19%
market share of US variable annuities1
£3.5bn
separate account net inflows
Well recognised brands with a strong track record
of a long-term conviction-led investment approach
£17.3bn
asset management external net inflows
M&G Prudential funds under management1
£351bn
+7.2m
customers
1 ©2018 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is
proprietary to Morningstar and/or its content providers; (2) 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 www.AnnuityIntel.com.
Total Sales by Company 3Q YTD 2017.
1 Represents M&G Prudential asset management external funds under management
and internal funds included on the M&G Prudential long‑term insurance business
balance sheet.
www.prudential.co.uk
Annual Report 2017 Prudential plc 11
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Our business model
Creating shared value
Our trusted brands and strong distribution channels enable us to understand the growing
needs of our customers for long-term savings and financial security, and to design innovative
products that meet those needs. By helping to build better lives and stronger communities
and to fuel the growth cycle, we create long-term value for both our customers and
our shareholders.
Understanding our markets
Driving our business
Asia
— Low life insurance and mutual fund
penetration
— Significant health and protection
gap
— Growing working age population
— Increasing consumer affluence
Our businesses and their performance
page 18
US
— Retiring ‘baby boomer’ generation
— Large and growing retirement
asset pools
— Growing demand for guaranteed
income
Our businesses and their performance
page 24
UK and Europe
— Ageing population
— Large and growing retirement
asset pools
— Growing demand for savings and
income
Our businesses and their performance
page 28
Customers
Customers are at the heart of our strategy. We proactively listen to both new and
existing customers to understand and respond to their changing needs. This allows
us to propose financial solutions customised for different groups, whether that is
young and middle‑aged people or those in the retirement phase of life. We are
expanding our digital infrastructure to enhance our customer experience.
Products
We offer solutions for customers as they face the biggest financial challenges of
their lives. 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 risks of illness, death or critical life events.
Distribution
Distribution plays a key role in our ability to reach, attract and retain customers
in different parts of the world. Building out and diversifying our distribution
capabilities, including adding digital tools, helps ensure that we fully capitalise
on the opportunities available to us in each of our markets.
Investment for growth
We focus on strategic investment in long‑term opportunities and capabilities to drive
future growth and value for our stakeholders. We invest to improve relationships
with our customers and distributors, to create innovative products, to improve
our operating platforms and to capture new opportunities and build new
relationships. We invest in digital capabilities to empower our distributors
and improve customer service.
Risk management
We generate value by selectively taking exposures to risks that are adequately
rewarded and that can be appropriately quantified and managed. Balance sheet
strength and proactive risk management enable us to make good our promises to
our customers and create long‑term value for our stakeholders.
Report on the risks facing our business page 48
12 Prudential plc Annual Report 2017
www.prudential.co.uk
Creating value…
…for our stakeholders
Growth
£4,699m
IFRS operating profit
+6%1 on 2016
£3,616m
New business profit
+12%1 on 2016
£6,598m
EEV operating profit
+15%1 on 2016
Cash
£3,640m
Free surplus generation
‑1%1 on 2016
£1,788m
Remittances
+4%2 on 2016
Capital
£13.3bn
Solvency II surplus
+6%2 on 2016
202%
Cover ratio
+1pp on 2016
The Group has a number of key
performance indicators internally to
measure financial performance. Read more
on page 16
1 Growth rates on constant exchange rate basis.
2 Growth rates on an actual exchange rate basis.
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 enhance
shareholder value.
Read more on pages 68 to 70
Read more on pages 16 to 80
Employees Providing an environment
with equal opportunities, career potential
and rewards enabling us to attract and
retain high‑quality individuals to deliver
our strategy.
Communities Supporting communities
where we operate, through investment in
business and infrastructure, tax revenues
and community support activities.
Read more on pages 74 to 77
Read more on pages 70 to 74
www.prudential.co.uk
Annual Report 2017 Prudential plc 13
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
Our distribution
Our global distribution strength
Our trusted brands and strong distribution channels enable us to understand
the diverse needs of our customers, and respond to those needs.
Jackson
Prudential Africa
Strength and flexibility of our
distribution network gives us
a distinctive advantage
Largest VA wholesale distribution force in the US1
Most productive VA wholesale
distribution force in the US1
627 broker‑dealers’ selling agreements covering
+226,545 (73%) of total US advisers2
#1 selling variable annuity contract3 in the independent
channel since 2003
Establishing network with
market-leading initiatives
+2,200 agents
4 exclusive bank partners
Access to +600 bank branches
2 mobile bank partners
Approximately 700,000 customers
14 Prudential plc Annual Report 2017
www.prudential.co.uk
M&G Prudential
Prudential Corporation Asia
Diversified distribution model
underpinned by strong brand
Pan-regional multi-channel
network
£351 billion total assets under management4
Products registered in 24 jurisdictions around the world
+7.2 million customers
+300 Prudential Financial Planning partners
+600,000 agents
Multiple established bank partnerships
Active in +10,000 bank branches
Eastspring Investments are present in 10 major Asian
markets and distribution offices in US and Europe
Independent research and Market Metrics, a Strategic Insight Business.
Notes
1
2 The Cerulli Report Adviser Metrics 2017 and Jackson research.
3 ©2018 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) 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 www.AnnuityIntel.com. Total Sales by Company & by Contract 3Q YTD 2017. Jackson ranks #1 out of 735 VA contracts with reported sales in the Independent Channel in 3Q YTD 2017.
4 Represents M&G Prudential asset management external funds under management and internal funds included on the M&G Prudential long‑term insurance business balance sheet.
www.prudential.co.uk
Annual Report 2017 Prudential plc 15
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Our performance
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 capital1
Prudential takes a balanced approach to performance management across IFRS, EEV and cash. We aim to demonstrate how we generate
profit under different accounting bases, reflecting the returns we generate on capital invested and the cash generation of our business.
IFRS operating profit based on longer-term investment returns2 £m
The Group’s business involves entering into
long‑term contracts with customers, and
hence the Group manages its associated
assets and liabilities over a longer‑term time
horizon. This enables the Group to manage a
degree of short‑term market volatility.
Therefore IFRS operating profit based on
longer‑term investment returns gives a more
relevant measure of the performance of the
business. Other items are excluded from
IFRS operating profit to allow more relevant
period‑on‑period comparisons of the trading
operations of the Group, eg the effects of
corporate transactions are excluded.
Group IFRS operating profit in 2017 is
6 per cent higher on a constant exchange
rate basis (10 per cent on an actual exchange
rate basis), compared with 2016, reflecting
resilient performance in our life businesses,
with Asia up 15 per cent (20 per cent on an
actual exchange rate basis), the US up
3 per cent (8 per cent on an actual exchange
rate basis) and UK and Europe up 8 per cent.
Our asset management businesses have
performed well with M&G Prudential asset
management up 18 per cent and Eastspring
also up 18 per cent (25 per cent on an actual
exchange rate basis).
CAGR
+12%
3,969
4,699
4,256
2,937
3,154
2013
2014
2015
2016
2017
EEV new business profit3 £m
Life insurance products are, by their nature,
long‑term and generate profit over a
number of years. Embedded value reporting
provides investors with a measure of the
future profit 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 new business profit in 2017 increased
by 12 per cent on a constant exchange rate
basis (17 per cent on an actual exchange
rate basis) compared with 2016, driven by
strong performance in each of our
businesses with Asia up 12 per cent
(17 per cent on an actual exchange rate
basis), the US up 9 per cent (15 per cent on
an actual exchange rate basis), and the UK
up 28 per cent.
CAGR
+15%
2,492
3,616
3,088
2,077
2,021
2013
2014
2015
2016
2017
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 EEV operating profit in 2017
increased by 15 per cent on a constant
exchange rate basis (20 per cent on an
actual exchange rate basis), compared
with 2016, driven by higher new business
profit and higher contributions from the
in‑force business.
Group free surplus generation4,5 £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 year.
Overall underlying free surplus generation
decreased by 1 per cent on a constant
exchange rate basis (increased 2 per cent
on an actual exchange rate basis),
reflecting a one‑off benefit in the prior
year in our US business and higher
restructuring costs within the Group,
offsetting higher contributions in Asia
and the UK and Europe.
CAGR
+12%
4,840
6,598
5,497
4,225
4,108
2013
2014
2015
2016
2017
CAGR
+11%
3,025
3,566
3,640
2,417
2,553
2013
2014
2015
2016
2017
16 Prudential plc Annual Report 2017
www.prudential.co.uk
Business unit remittances6 £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.
Total remittances to the Group increased
by 4 per cent in 2017, compared with 2016,
with significant contributions from each of
our major businesses. This increase was
driven by remittances from Asia, up
25 per cent (on an actual exchange rate
basis) compared with 2016.
CAGR
+7%
1,625
1,718
1,788
1,482
1,341
2013
2014
2015
2016
2017
Group Solvency II capital surplus7,8 £bn
Prudential is subject to the risk‑sensitive
solvency framework required under
European Solvency II Directives
(Solvency II) as implemented by the
Prudential Regulation Authority in the UK.
The Solvency II surplus represents the
aggregated capital (own funds) held by the
Group, less solvency capital requirements.
The high quality and recurring nature of
our operating capital generation, beneficial
effects of debt issued and disciplined
approach to managing balance sheet risks
is reflected in the solvency capital surplus,
which increased to £13.3 billion at
31 December 2017.
13.3
12.5
9.7
2015
2016
2017
2017 objectives
We are pleased to report that the Group has successfully achieved the financial objectives announced in December 2013.
This demonstrates the successful execution of our strategy and is testament to the strength, scale and diversity of our Asia platform.
Asia objectives9
Asia IFRS operating profit, £m
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.
Asia underlying free surplus, £m
Asia underlying free surplus generation4
of £0.9 billion to £1.1 billion in 2017.
Group objective10
Group cumulative underlying
free surplus, £bn
Cumulative Group underlying free surplus
generation of at least £10 billion over the
four‑year period from 2014 to end‑2017.
CAGR
+16%
1,885*
2017 objective
>£1,826m
1,029*
2017 objective
£0.9-1.1bn
12.8
2014-2017
objective
>£10bn
884*
909
2012
Comparative
stated at reported
currency basis
*Expressed at
Dec 2013 FX rates
1,975
2017
454*
468
2012
Comparative
stated at reported
currency basis
*Expressed at
Dec 2013 FX rates
1,078
2017
2017
Notes
1 The comparative results shown above have been
prepared using actual exchange rates (AER) basis except
where otherwise stated. Comparative results on a
constant exchange rate (CER) basis are also shown in
financial tables in the Chief Financial Officers’ report on
our 2017 financial performance. CAGR is Compound
Annual Growth Rate.
IFRS operating profit is management’s primary measure of
profitability and provides an underlying operating result
based on longer‑term investment returns and excludes
non‑operating items. Further information on its definition
and reconciliation to profit for the period is set out in note
B1 of the IFRS financial statements.
2
3 Embedded value reporting provides investors with a
measure of the future profit streams of the Group. The
EEV basis results have been prepared in accordance with
EEV principles discussed in note 1 of the EEV basis results.
A reconciliation between IFRS and the EEV shareholder
funds is included in note C of the Additional EEV financial
information.
4 Underlying free surplus generated comprises underlying
free surplus generated from the Group’s long‑term
business (net of investment in new business) and that
generated from asset management operations. Further
information is set out in note 11 of the EEV basis results.
Free surplus generation represents ‘underlying free
surplus’ based on operating movements, including the
general insurance commission earned during the period
and excludes market movement, foreign exchange,
capital movements, shareholders’ other income and
expenditure and centrally arising restructuring and
Solvency II implementation costs. Further information
is set out in note 11 of the EEV basis results.
5 The 2016 comparative results have been re‑presented
from those previously published following reassessment
of the Group’s operating segments as described in note
B1.3 of the IFRS financial statements. On re‑presentation,
Prudential Capital is excluded from underlying free
surplus generated.
6 Cash remitted to the Group forms part of the net cash
flows of the holding company. A full holding company
cash flow is set out in note II (a) of Additional IFRS financial
information. This differs from the IFRS Consolidated
Statement of Cash Flows which includes all cash flows
relating to both policyholders and shareholders’ funds.
The holding company cash flow is therefore a more
meaningful indicator of the Group’s central liquidity.
7 The Group shareholder capital position excludes the
contribution to Own Funds and the Solvency Capital
Requirement from ring‑fenced with‑profits funds and
staff pension schemes in surplus. The estimated solvency
position includes management’s calculation of UK
transitional measures reflecting operating and market
conditions at each valuation date. An application
to recalculate the transitional measures as at
31 December 2017 has been approved by the
Prudential Regulation Authority.
8 Estimated before allowing for second interim ordinary
dividend.
9 The current year and all comparative amounts for the
Asia objectives exclude contributions from the Korea life
business which was sold in 2017. The 2017 Asia IFRS
operating profit objective was adjusted accordingly.
2012 comparative amounts include the one‑off gain on
sale of the stake in China Life of Taiwan of £51 million.
10 For the purpose of the Group objective, cumulative
underlying free surplus generation includes the free
surplus relating to Prudential Capital.
www.prudential.co.uk
Annual Report 2017 Prudential plc 17
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Our businesses and their performance
Asia
There are compelling structural trends that underpin the
long term opportunities for savings and protection across
the region, and Prudential is positioned for further growth
in these markets.
2017
performance
highlights
— Continued performance in key
metrics: new business profit up
12 per cent1, IFRS operating profit
up 15 per cent1 and underlying free
surplus generation up 19 per cent1
— 2017 financial objectives achieved
— Eastspring total funds under
management of £138.9 billion up
18 per cent2
— Operating in 77 cities in China
with APE sales up 43 per cent1
— Eastspring named ‘Best Asset
Management House’ by Asia Asset
Management for 2018 Awards
In Asia the insurance and savings industries
are still in their infancy with average
insurance penetration rates at just
2.4 per cent6, well below those seen in the
UK. 65 per cent of personal wealth in Asia
is held in cash or deposits relative to
14 per cent in the US. There are significant
growth opportunities that arise from simply
addressing these existing concerns.
However, there are key structural trends
that will further increase this strong
demand for savings and protection for
decades ahead.
The first is the growing working population
which is predicted to increase at over
1 million people per month. This means
that between 2015 and 2030 some
178 million people will reach working age,
roughly the equivalent to the combined
populations of the UK, France and Italy.
The second trend relates to the significant
economic growth potential of the region
with, GDP in Asia predicted to increase
significantly. The implications on wealth
creation are profound, with private
financial wealth increasing by some
US$4 trillion per annum from 2016 to
reach US$78 trillion by 2021.
The third trend covers the expanding
mortality and morbidity protection gaps;
as families’ wealth increases so does the
amount of money they need to sustain their
lifestyles in the event of a life‑changing
event such as the death of a breadwinner
or the diagnosis of a critical illness.
Research concluded that in Prudential’s life
markets the mortality gap is US$45 trillion8
and out of pocket healthcare expenditure
is roughly four times the rates seen in the
US and UK.
While these opportunities are attractive,
there are a number of challenges associated
with executing them. The industry is highly
regulated as governments are rightly very
concerned about ensuring individuals do
not take undue risks with their savings and
receive fair outcomes. The products are
intangible, with the benefits potentially not
crystallising for many years; customers
need to have a high level of confidence in
the company that they are entrusting their
financial well‑being to. The products can
be complex and unfamiliar, so customers
typically need advice and guidance on how
to address their individual needs. Building,
training and managing teams of financial
advisers that can do this takes considerable
time and expertise. Within this context,
Prudential is differentiated by its long
history in Asia, the breadth and depth of
its operations, and its discipline and quality
of execution.
Prudential Corporation Asia has all the key
attributes for continuing success, starting
with a footprint of life insurance and asset
management business spanning 14
countries and giving us access to 3.3 billion
people. We also have unrivalled expertise
in the region, having been in Malaysia since
1924, and entering markets early such as
India, China, Vietnam and most recently
Cambodia and Laos. We also pioneered
industry developments in the region, such
as unit‑linked products and bancassurance.
Our sheer scale is a key competitive
advantage with over 600,000 agents,
access to more than 10,000 bank branches,
15 million life customers, 24 million life
policies currently in force and £139 billion
of assets under management.
From this position of strength, we are now
leveraging our expertise further to deliver
greater value from our agency and bank
channels, broaden our product offering
and drive efficiencies in our operational
platforms. We are also being increasingly
innovative in the ways we add value for
our customers, often harnessing digital
technology.
Distribution
Prudential Corporation Asia has one of
the strongest distribution platforms in the
region, with a well diversified mix of tied
agents and bank partners that enables us
to reach a broad range of customers. Our
experience is that customers’ fundamental
preference for face‑to‑face advice and
service from a trusted financial adviser is
undiminished, and so tied agency and
in‑branch bank sales staff will remain our
primary distribution channels.
However, we are making significant
investments in upgrading our capabilities
to ensure we not only meet but exceed our
customers’ expectations, including digital
innovations and efficiencies, when they
interact with our distributors. For example,
in Singapore our agents are now equipped
18 Prudential plc Annual Report 2017
www.prudential.co.uk
Adding more to life:
Nasrun, Prudential Indonesia
‘As a PRUcustomer Friend20, one of my first direct interactions
with a Prudential customer was meeting a gentleman who
was thinking of surrendering his policy. I encouraged him to
maintain an active policy by citing the benefits, and thankfully
he did just that. Not long after our meeting, I received the sad
news that he had passed away.
His daughter, who was the beneficiary of his life insurance
policy, visited and thanked me for persuading her father not
to surrender the policy. She said, “thanks to you, we were able
to cover the hospital bills and other expenses after my father
passed away”.
It’s moments like these that I’m grateful for my role at
Prudential, which gives me the opportunity to make a
difference in people’s lives.’
with our fourth generation of an electronic
point of sales (‘ePos’) portal that uses the
latest developments in biometric
authentication and produces a detailed
quote within three minutes. In China our
mobile policy application process has
reduced customer on‑boarding time from
five days to 30 minutes, and includes auto
underwriting and verification so policies
can be issued within seconds. These
initiatives not only give our customers a
better experience, but also help our agents
become more productive; in China the
number of active agents increased
24 per cent last year and their average case
sizes increased 21 per cent.
Our agency management capabilities in
terms of recruiting and training are well
proven, but we are continuing to upgrade
these. For example in Indonesia, where we
recruited an average of over 4,500 agents
per month during 2017, our PRUforce
agency workbench has enabled us to
reduce significantly on‑boarding times.
‘Million Dollar Round Table’ membership is
an industry‑recognised indicator of agency
quality, and in Hong Kong we lead the
market with over 4,000 qualifiers up by
53 per cent9. We are also adapting
technology to improve the service we
provide to our agents, such as askPRU
in Singapore, the industry’s first chatbot
policy enquiry system. Since its launch,
calls to the service centre have reduced
by 30 per cent.
We believe bancassurance is an effective
way to increase insurance penetration and
Prudential has an excellent track record in
growing high quality business through this
channel with a number of different
partners. For example, we have had
an enduring regional relationship with
Standard Chartered Bank since 1998
and the ongoing effectiveness of this
relationship is evidenced by a 12 per cent
growth in APE last year. We have also
had great success in securing and then
activating newer relationships, for example
Thanachart Bank in Thailand grew APE by
17 per cent last year following collaboration
on a new regular premium product.
In addition we are actively increasing our
engagement with other banks. We have
recently announced new agreements with
Robinsons Bank in the Philippines, Siam
Commercial Bank in Thailand for the
provision of unit linked products to their
high worth customers and Shinhan Bank
in Indonesia and Vietnam.
Products
Prudential has a full suite of products that
are tailored to meet individual market
requirements and customer needs. Our
overarching priority is to ensure firstly that
customers have appropriate levels of
protection and then support them with
their long‑term savings objectives.
Consequently a relatively high proportion
of our average premiums are directed to
protection products; equal to 27 per cent of
total APE in 2017, and regular premiums
comprised 94 per cent of the total APE.
This mix is also beneficial to shareholders,
as regular premiums provide a reliable
stream of compounding revenues and
protection business has higher profit
margins as shareholders are providing
capital to support risks.
Understanding
our markets
Working age population3,4
+1 million a month
2.5bn
2.5bn
2030
2030
2.3bn
2015
Health gap:
out-of-pocket healthcare spend5
42%
Asia
12%
US
9%
UK
Insurance penetration6
7.5%
UK
2.4%
Asia
Private financial wealth7
+US$4 trillion a year
US$78tr
2021
US$53tr
2016
www.prudential.co.uk
Annual Report 2017 Prudential plc 19
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Our businesses and their performance continued
A leading pan-Asia franchise
The combination of Prudential Corporation Asia’s broad capability set,
wide business footprint, and the significant opportunity across the market
underpins our business in Asia.
Accelerate Asia
Compounding
revenues and
profits
Prudential Corporation Asia is a
business with compounding revenues
underpinned by high quality recurring
income that is uncorrelated to
investment markets. The current scale
and profitability has been achieved
by increasing our customer base and
penetration across the continent.
Growth is driven by our ability to meet
customer needs through the breadth
of markets we operate in, the scale
and innovation of our operations, the
capabilities of Eastspring Investments,
our pan‑Asia asset manager, and our
diverse and talented workforce.
Life
Life weighted premium income10,11
£bn CER
Asset management
Funds under management12
£bn
139
118
11.5
9.5
8.0
6.9
5.9
4.9
4.3
3.6
2.6
1.2
3.1
1.1
1.4
1.5
1.8
2.0
2.4
3.8
3.6
3.7
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
In‑force
New business
+1.2x
2016
2017
20 Prudential plc Annual Report 2017
www.prudential.co.uk
Diversification
11
1
10
9
8
7
6
5
£1,975m
+15%
3
4
Hong Kong
Philippines
Life insurance
Market ranking12
Population
Penetration13
2
Eastspring
Funds under management14
India15
Life insurance
Market ranking12
Population
Penetration13
2nd
7m
16.2%
£3.4bn
1st
1.3bn
2.7%
Life insurance
Market ranking12
Population
Penetration13
Singapore18
Life insurance
Market ranking12
Population
Penetration13
3rd
102m
1.2%
2nd
6m
5.5%
Eastspring
Funds under management14
£74.8bn
IFRS operating profit by region
Full year 2017 %
1
Indonesia
2 Singapore
3 Hong Kong
4 Malaysia
5 Vietnam
6 Thailand
7 China
8 Philippines
9 Taiwan
10 Eastspring
11 Others
23%
+2%
14% +10%
17% +38%
9% +15%
7% +15%
5%
+7%
5% +38%
2% +11%
7% +10%
9% +18%
2% +14%
Eastspring
Funds under management14
£17.2bn
Taiwan
Indonesia
Life insurance
Market ranking12
Population
Penetration13
Life insurance
Market ranking12
Population
Penetration13
Eastspring
Funds under management14
1st
261m
1.6%
Eastspring
Funds under management14
£4.0bn
Thailand
12th
24m
16.6%
£5.4bn
10th
68m
3.7%
2nd
94m
1.0%
Life insurance
Market ranking12
Population
Penetration13
Vietnam
Life insurance
Market ranking12
Population
Penetration13
Eastspring
Funds under management14
£2.0bn
Growth rate vs 2016
constant exchange rates
Japan
Eastspring
Funds under management14
£7.2bn
Korea
Eastspring
Funds under management14
£8.7bn
Cambodia19
Life insurance
Market ranking12
Population
Penetration13
China15
Life insurance
Market ranking12
Population
Penetration13
Laos
Life insurance
Market ranking12
Population
Penetration13
1st
16m
0.1%
Malaysia17
4th
1.4bn
2.3%
Life insurance
Market ranking12
Population
Penetration13
3rd
7m
0.0%
1st
31m
3.1%
Eastspring
Funds under management14
£6.3bn
Eastspring
Funds under management14
£7.4bn
www.prudential.co.uk
Annual Report 2017 Prudential plc 21
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Our businesses and their performance continued
Investing for growth
Given the compelling opportunities we see
in the region we will continue investing for
growth. We will continue to enhance our
core operations, expanding our traditional
distribution reach with more, higher quality
agents; we will add new bank distribution
partners and explore adding some non‑
traditional ones too. We will accelerate the
work in digitising and automating our
processes and ensure we have enhanced
abilities to connect with the broader
cloud‑based ecosystem.
We are already one of the leaders in the
health space, but we will investigate
opportunities to participate more broadly
in this area with more comprehensive
and flexible coverages and a wider range
of value added services. We will position
Eastspring to play a greater role in
managing Asia’s rising wealth and we will
also expand our presence in China.
Underpinning our ability to build on our
existing strengths and build out our
capabilities is our priority to continue
investing in our people. It is vital that we
further enhance our diverse and highly
talented workforce.
Nic Nicandrou
Chief Executive
Prudential Corporation Asia
While we are already one of the leaders in
the protection space, continued innovation
is essential for our ongoing success. In
Hong Kong we recently launched a very
popular upgrade to our critical illness
product, PRUhealth critical illness
multi‑care, which provides lifetime
multi‑claim, lump‑sum cover for 113
disease conditions, including three claims
for cancer up to a total of 300 per cent of
the sum assured.
We are also successfully evolving our
product ranges within markets to cater for
a more differentiated range of customer
needs. For example, in Indonesia we have
introduced Hebat, a lower premium
investment linked product, at one end of
the spectrum for emerging customers and
an ‘as charged’ medical product at the
other end for higher net worth customers.
In Indonesia and Malaysia we have been
successfully developing Takaful products
to provide for the specific needs of Muslim
customers.
Work is also underway to ensure we have
active dialogues with our customers so
their products keep up with their changing
needs. Technology is also helping here;
during 2017 we piloted ‘next best offer’
with our agents in Hong Kong. This is
an AI‑driven app that automatically
recommends additional coverage to
existing customers.
Customers
Excellent customer service is a prerequisite
for sustained success in the industry and
we are continuously driving improvements.
For example, in China we have introduced
WeChat e‑claims that have reduced the
processing time for a seven day
hospitalisation claim from around 18 days
to two days. The usage rate of e‑claims
is 99 per cent. In Hong Kong we have
simplified the verification processes for
Mainland China customers using iPads
and GPS so they no longer need to visit
our customer service centre. In Indonesia
we have developed PRUcheers, an
analytics‑driven business engine that
performs a pre‑assessment of claims so
that low risk ones can now be turned
around in minutes, and the turnaround
time for medical claims has been reduced
by 15 per cent.
However, in addition to improved
processes, customers are increasingly
looking for value added services that go
beyond the basic product proposition and
so provide opportunities for us to increase
our connections with them. In Hong Kong
we found that myDNA, a service that
provides customised diet and exercise
advice supported by an app and based on
an individual’s genetic profile, is very
popular and so this has already been rolled
out to Vietnam, Malaysia and Singapore.
In Malaysia we have partnered with
BP Global for their Doctor2U app. This
gives our customers preferential rates on
services that include online video medical
consultations and the option to have a
call‑out 24/7. In Indonesia we have the
PRUmedical network covering 45 hospitals
in 24 cities. Our customers receive priority
admission and discharge to reduce waiting
times, and are also guaranteed rooms.
More broadly, we are also engaging with
customers in areas that concern them.
Our Relationship Index gives insights on
one of the most important areas of
customers’ lives, their relationships with
their loved ones. Customers are also
increasingly concerned that companies
they are associated with are ‘good’. Our
Prudence Foundation has well recognised
community initiatives around children’s
education, including the Cha‑Ching
financial literacy programme and our
disaster preparedness initiatives including
the Safe Steps campaigns on natural
disasters, road safety and first aid.
Our YouTube channels that hold videos
related to these and other initiatives have
had over 100 million views.
Eastspring Investments
Eastspring has a number of advantages
and is well placed for the anticipated
growth in Asia’s retail mutual fund market.
It has one of the largest footprints in Asia,
being operational in 10 major markets.
It has a well diversified customer base
comprising Prudential’s internal life funds,
and a number of institutional clients,
including sovereign wealth funds and
retail customers. Assets managed are
also well diversified between fixed
income and equities and also include
infrastructure funds.
Recent developments include a
broadening and strengthening of our
in house investment teams with some
key hires, winning the ‘Best Asset
Management House’ award21, new
strategic partnerships (BlackRock,
Sustainable Growth Advisers and Korea
Advanced Institute of Science and
Technology), significant progress with our
systems and operating model upgrades
and enhancing our institutional coverage
by adding consultants in Asia and the US.
We have also recently received approval
of our business licence as an investment
management wholly‑foreign owned
enterprise in China.
22 Prudential plc Annual Report 2017
www.prudential.co.uk
Driving our business
Customers
In Asia, we focus our efforts on helping
new and existing 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.
Creating value
and benefiting
our stakeholders
15 million life customers
Products
We listen to our customers to help us
understand their changing needs and tailor
our design of product solutions and
services. For example: PRUhealth cancer
multi‑care was launched to address the
impact of multiple cancer diagnoses in
Hong Kong and the region.
94% of APE sales
in regular premium
Brand awareness of 85%
(average 94% in top four markets)
Distribution
We are well‑positioned in terms of the
scale and diversity of our distribution to
reach and serve our customers’ needs.
At the core of our distribution model is
face‑to‑face customer interaction that
delivers high‑quality, needs‑based advice.
+600,000 agents
Access to over 10,000
bank branches
Investment
for growth
Building on our strong track record, we are
building for future growth by investing in
new opportunities and capabilities.
Now in 77 cities in China
Indonesia distribution expansion –
circa 400 offices
Eastspring Investments total
funds under management
£139 billion
Notes
1 Growth rate on a constant exchange rate basis.
2 Growth rate on an actual exchange rate basis.
3 United Nations, Department of Economic and Social
Affairs, Population Division (2015). World Population
Prospects: The 2015 Revision, DVD Edition 15.
4 Working age population: 15 to 64 years.
5 World Health Organisation – Global Health Observatory
data repository (2013). Out‑of‑pocket as a percentage
of Total Health Expenditure. Asia calculated as average
out‑of‑pocket.
6 Source: Swiss Re Sigma 2015. Insurance penetration
calculated as premiums as percentage of GDP. Asia
penetration calculated on a weighted population basis.
7 Source: BCG Global Wealth 2017:
Winning the growth game.
8 Source: Swiss Re Mortality Protection Gap Report
– Asia Pacific 2015.
9 Annual growth to 1 July 2017. Source: The Premier
13 Market penetration: Swiss Re (Sigma) – based on
Association of Financial Professionals.
10 Weighted premium income comprises gross earned
premiums at 100 per cent of renewal premiums,
100 per cent of first year premiums and 10 per cent of
single premiums.
11 Comparatives have been stated on an constant exchange
rate basis. Historic have been restated to exclude sales
from Korea Life, classified as held for sale. 2014 excludes
intra‑group reinsurance contracts between the UK and
Asia with‑profits businesses.
12 Based on FY17 or the latest information available.
Source include formal (eg Competitors results release,
local regulators and insurance association) and informal
(industry exchange) market share data. Ranking based on
new business (APE sales on weighted full year premium
depending on availability of data).
insurance premiums as a percentage of GDP in 2016
(estimated).
14 FUM reported based on the country where the funds
are managed.
15 Ranking among foreign JVs.
16 Ranking among private players.
17 Includes Takaful sales at 100 per cent.
18 Singapore includes onshore only, excluding Eldershield
and DPS.
19 First year premiums.
20 PRUcustomer Friends are employed by Prudential
Indonesia to provide customer service and support,
and enhance customer relationships.
21 2018 Asia Asset Management ‘Best of the Best Regional
Awards’ – Best Asset Management House.
www.prudential.co.uk
Annual Report 2017 Prudential plc 23
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Our businesses and their performance
United States
Providing an ageing American population
with financial strategies for stable retirements.
2017
performance
highlights
— Cash remittance of £475 million
— Total IFRS operating profit of
£2.2 billion – up 3 per cent1
— Variable annuity total net inflows
of £4.7 billion
— Strong separate account asset
growth – up 19 per cent1 at
US$176.6 billion (£130.5 billion)
— Awarded ‘Contact Center World
Class FCR Certification’ and
‘Highest Customer Service for
the Financial Industry’ awards by
The Service Quality Measurement
Group, Inc. – the 11th consecutive
year of recognition for customer
service performance in both
categories
The US is the world’s largest retirement
savings market with approximately
40 million Americans reaching retirement
age over the next decade alone. This
transition will trigger the need for an
unprecedented shift of trillions of dollars
from savings accumulation to retirement
income generation.
However, these Americans face challenges
in planning for life after work. For many
members of this generation, a financially
secure retirement is at risk, due to
insufficient accumulation of savings during
their working years and the current
combination of low yields and market
volatility. Employer‑based pensions are
disappearing and government plans are
underfunded. Social security was never
intended to be a primary retirement
solution and today its long‑term funding
status is in question. Additionally, the life
expectancy of an average retiree has
significantly increased, lengthening the
number of years for which retirement
funding is needed.
To overcome these challenges, Americans
need and demand retirement strategies
that offer them the opportunity to grow
and protect the value of their existing
assets, as well as the ability to provide
guaranteed income that will last
throughout their extended lifetimes.
Jackson continues to respond to this
demand with product innovation and
distribution strategies that meet the needs
of a growing retirement population, while
generating shareholder value.
Customers and products
Through its distribution partners, Jackson
provides products, including variable,
fixed and fixed index annuities, which
offer Americans the retirement strategies
they need. These products offer a range
of features:
— Variable annuity
A Jackson variable annuity, with
investment freedom, represents an
attractive option for retirees, providing
both access to equity market
appreciation and guaranteed lifetime
income as an add on benefit.
— Fixed index annuity
A Jackson fixed index annuity is a
guaranteed product with limited market
exposure but no actual equity
ownership. It is designed to build wealth
through a combination of a base
crediting rate that is generally lower
than a traditional fixed annuity crediting
rate, but with the potential for additional
upside based upon the performance of
the linked index.
— Fixed annuity
A Jackson fixed annuity is a guaranteed
product designed to build wealth
without market exposure, through a
crediting rate that is likely to be superior
to interest rates offered from banks or
money market funds.
These products also offer tax deferral,
which allows interest and earnings to grow
tax‑free until withdrawals are made.
Jackson has a proven track record in this
market with its market‑leading flagship
product6, Perspective II. Jackson’s success
has been built on its quick‑to‑market
product innovation, as demonstrated by
the development and launch of Elite Access
in 2012, our investment‑only variable
annuity. Further demonstrating Jackson’s
flexibility and manufacturing capabilities,
Jackson has launched Perspective
Advisory II and Elite Access Advisory
to serve advisers and distributors with
a preference for advisory products.
In November, Jackson launched Private
Wealth Shield (PWS), a variable annuity
developed specifically for trusts and
private banks. To support this new
product, Jackson also announced the
formation of its Private Wealth & Trust
group, a specialised team focused on
complex planning, investment
management and tax mitigation strategies
for high‑net‑worth and ultra‑high
net‑worth clients.
Distribution
Jackson distributes products in all 50 states
of the US and in the District of Columbia.
Operations in the state of New York are
conducted through a New York subsidiary.
Jackson markets its retail products
primarily through advice based distribution
channels, including independent agents,
independent broker‑dealer firms, regional
24 Prudential plc Annual Report 2017
www.prudential.co.uk
Adding more to life:
Saundra, Jackson
‘My retirement story is about how I want to spend the winter
of my life. It’s about having fun, enjoying my family, travelling
and having the freedom to do the things I want to do, like
spending time with my grandson.
My relationship with my financial adviser is a wonderful one.
He is like a family member and confidant; easy to work with
and establish goals.
I’m very pleased I chose a Jackson annuity. It gives me the
confidence I need for my retirement. And to just live my life
the way I want to live my life.’
Understanding
our markets
Retirement wave
Baby boomer population by age2
4.5m
Age 55
in 2016
4.0m
Age 60
in 2016
3.5m
Age 65
in 2016
Under-saved
Median net worth3
US$000
187.3
55-64
124.2
45-54
Increased longevity
Life expectancy at 654
19.4
years
2015
14.3
years
1960
Regulatory landscape
The industry has continued to manage
through an ever‑changing regulatory
landscape. In April 2016, the US
Department of Labor (DoL) released a final
version of its Fiduciary Duty Rule (Rules),
which seeks to eliminate conflicts of
interest in investment advice, in order
to protect and encourage savings and
investment for working Americans. The
DoL implemented a partial applicability
date of 9 June 2017 where fiduciary
advisers have an obligation to give advice
that adheres to ‘impartial conduct
standards’. These impartial conduct
standards require advisers to adhere to
a best interest standard when making
investment recommendations, charge no
more than reasonable compensation for
their services, and refrain from making
misleading statements. In late November,
the DoL announced an 18‑month extension
on the full applicability date from 1 January
2018 to 1 July 2019. The DoL intends to
complete its review under the Presidential
Memorandum, instructing the DoL to
re‑examine its fiduciary rule and decide
whether to propose further changes,
leaving the final form of the Rules unclear.
broker‑dealers, wirehouses, and banks.
For variable annuity sales, Jackson is the
leader in the independent broker‑dealer,
bank and wirehouse channels9 and second
in regional firms9.
Jackson’s distribution strength also sets
us apart from our competitors. Our
wholesaling force is the largest7 in the
variable annuity industry and is
instrumental in supporting the independent
advisers who help the growing pool of
American retirees develop effective
retirement strategies. Our wholesalers
provide extensive training to thousands of
advisers about the range of our products
and the investment strategies that are
available to support their clients. Based on
the latest available data, Jackson is the most
productive variable annuity wholesale
distribution force in the US7.
In August 2017, National Planning Holdings
(NPH), an affiliate of Jackson, announced
the sale of the business of the four firms
in its independent broker‑dealer network
to LPL Financial LLC (LPL). With the US
financial services industry experiencing
a time of significant regulatory change
and consolidation in the independent
broker‑dealer (IBD) sector, Jackson has
determined its overall strategy did not
include being a consolidator in the retail
IBD space. Rather, our primary strategy is
to focus on expanding Jackson’s success as
the leading manufacturer of retirement
income products in the country.
www.prudential.co.uk
Annual Report 2017 Prudential plc 25
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Our businesses and their performance continued
Jackson’s competitive strengths are even
more critical during periods of disruption.
Our best‑in‑class distribution team, our
agility and success in launching well
designed products, the continued success
through many economic cycles of our risk
management and hedging programmes
and our effective technology platforms
and award‑winning customer service will
provide Americans with the retirement
strategies they so desperately need, and
will enable us to be positioned to capture
additional growth during times of transition
and into the future.
Barry Stowe
Chairman and Chief Executive
North American Business Unit
As a result of the DoL regulatory initiative
and the uncertainties regarding the
application and implementation of the
Rules, the annuity industry saw continued
pressure on sales in 2017. Sales in the
variable annuity industry as of the third
quarter of 2017 at US$70.9 billion10 were
down 11 per cent compared with the same
period last year. Even with competitors
recently offering fixed index annuities with
benefits that resemble those of variable
annuities, sales of fixed index annuities
(US$42.9 billion)10 along with fixed annuity
products (US$38.9 billion)10 were lower as
of the third quarter of 2017 at 9 per cent
and 13 per cent respectively, compared
with the same period last year. Total
annuity industry sales were down
approximately 11 per cent10 as of the
third quarter of 2017.
Regardless of the outcome of the Rules,
the regulatory disruption has challenged
the industry to review the ways in which
investment advice is provided to American
investors. Manufacturers will need to have
the ability to provide product and system
adaptations in order to support the success
of various distribution partners in their
delivery of invaluable retirement strategies
that investors need. Because of its strong
distribution, leadership in the annuities
market, best‑in‑class service and low‑cost
efficient operation, Jackson is extremely
well positioned to take advantage of this
opportunity.
The US National Association of Insurance
Commissioners (NAIC) is currently
conducting an industry consultation with
the aim of reducing the non‑economic
volatility in the variable annuity statutory
balance sheet and enhancing risk
management. Following an industry
quantitative impact study (QIS), changes
have been proposed to the current
framework. These changes were
presented to the December NAIC national
meeting, and were exposed for comment
by industry and interested parties until
early March 2018. Jackson will continue
to engage with the industry and the NAIC
during the comment period.
On 22 December, 2017, President Trump
signed into law the Tax Cuts and Jobs Act
making significant changes to America’s
tax code. In 2017, the lowering of the
corporate tax rate resulted in a charge for
the reduction of Jackson’s deferred tax
assets. In the future, the lower rate and the
effect of other changes to the calculation
of taxable income are expected to lead to
higher after‑tax earnings, return on equity
and capital generation, all else being equal.
Investment for growth
With trillions of dollars of adviser‑
distributed assets across distribution
platforms that have not historically been
a focus, such as the dually registered
investment adviser channel, there is
significant opportunity to reach even more
American retirees and serve their needs
with annuity products going forward.
The industry will need to remain flexible
and cost‑effective in making changes to
products, systems, and processes.
We continue to ensure that we understand
and make the necessary adjustments to
support the needs and demands of
American retirees into the future.
Jackson has implemented changes
necessary to meet the requirements of the
sections of the fiduciary rules which are
effective. Jackson has made and continues
to consider changes to its product
offerings, entered into new selling
agreements with advisory providers, and
is working with its distributors to support
implementation of the Best Interest
Contract Exemption or product changes to
the extent those become necessary before
July 2019.
Evolution of capabilities to succeed in the advisory market
Near‑term
Mid‑term
Long‑term
Product
launches
+ Changing the
narrative
+
New selling
agreements
+
Technology
integration
26 Prudential plc Annual Report 2017
www.prudential.co.uk
Driving our business
Customers
Products
Distribution
Investment
for growth
Many retirees or soon to be retirees
face a reality of under‑saving, having no
guaranteed income source and the prospect
of living longer than any prior generation.
Jackson’s focus is to provide solutions to
help address these concerns for the millions
of Americans currently transitioning to and
through retirement.
Jackson’s products provide needed access
to equity market growth, protection of
principal, and a way of converting retirees’
savings into retirement income with a
degree of certainty. With a long history of
disciplined product design and prudent
risk management, Jackson has earned and
continues to earn trust from its key
stakeholders.
Jackson’s distribution teams set us apart
from our competitors. Jackson’s wholesaling
force is the largest and most productive in
the industry, supporting thousands of
advisers across multiple channels and
distribution outlets.
Creating value
and benefiting
our stakeholders
Average of 10,000 Americans
retire per day5
Assisting 4 million customers
with their financial needs
2 of the top 10 variable annuity
contracts by premium6
Perspective II is the #1 selling
variable annuity contract6
Largest VA wholesale
distribution force in the US7
Most productive
VA wholesale distribution force
in the US7
Jackson continues to invest in technology
and innovative products to efficiently and
effectively adapt to what our customers and
regulatory environment require. Jackson
has recently launched an advisory version
of our flagship product Perspective II and
our innovative Elite Access product to allow
for penetration into untapped distribution
channels.
Corporate Insight Annuity Monitor
Awards for excellence in the online
and offline experience offered to
prospects, clients and advisers
Approximately 35% of Jackson’s
advisory variable annuity sales from
new advisers8
Notes
1 Growth rate on a constant exchange rate basis.
2 US Census Bureau Population division 2014 estimate of
population.
3 2016 Federal Reserve Board’s Triennial Survey of
Consumer Finances.
4 US Department of Health and Human Services, ‘Health,
United States 2016’.
5 Social Security Administration, Annual Performance Plan
for FY 2012, and Revised Final Performance Plan for FY
2011.
6 ©2018 Morningstar, Inc. All Rights Reserved. The
information contained herein: (1) is proprietary to
Morningstar and/or its content providers; (2) 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 www.AnnuityIntel.com. Total Sales
by Contract 3Q YTD 2017. Jackson’s Perspective II for
base states ranks #1 and Elite Access for base states ranks
#8 for Total VA Sales out of 991 VA contracts with
reported sales to Morningstar’s quarterly sales survey as
of 3Q YTD 2017.
Independent research and Market Metrics, a Strategic
Insight Business.
7
8 New advisers defined as producers who have not sold
Jackson product since 2014.
9 ©2018 Morningstar Inc. All Rights Reserved. The
information contained herein: (1) is proprietary to
Morningstar and/or its content providers; (2) 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 www.AnnuityIntel.com. Total sales
by company and channel 3Q YTD 2017. Jackson ranks #1
out of 25 companies in the Independent NASD channel,
#1 out of 19 companies in the Bank channel, #1 out of 14
companies in the Wirehouse channel, and #2 out of 19
companies in the Regional Firms channel.
10 LIMRA/Secure Retirement Institute, US Individual
Annuity Participants Report 3Q YTD 2017.
www.prudential.co.uk
Annual Report 2017 Prudential plc 27
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Our businesses and their performance
United Kingdom and Europe
Creating a simple, modern savings and investments business.
2017
performance
highlights
— Announcement of merger of M&G
and Prudential’s UK and European
business
— Start of major investment
programme to improve customer
service, accelerate product
development and widen customer
choice
— Total M&G Prudential assets
under management1 of
£351 billion, up 13 per cent
— Net investment inflows to mutual
funds and institutional investment
strategies of £17.3 billion
— PruFund range reaches £36 billion
in customer assets under
management, up 46 per cent
— 45 per cent growth in funds under
advice from our in house direct
advice service, Prudential Financial
Planning, to £5.5 billion
Understanding our markets
In August 2017, we combined M&G, our
international investment management
business, with Prudential’s UK and
European life insurance business to form
M&G Prudential. We also announced a
major investment programme in the new
combined business’s infrastructure to
improve customer service, accelerate
product development and widen
customer choice.
M&G Prudential serves two of the world’s
largest savings and investments markets
with asset pools in the UK and Europe of
£7 trillion and ¤14 trillion respectively.
Across the region, people increasingly
need help to meet their long‑term financing
goals as responsibility for retirement
savings passes from state and employer to
the individual. They want easy access to
savings and investment solutions, as well
as guidance and advice from trusted
providers. In addition, persistently low
rates of return on bank cash deposits are
fuelling demand for investment solutions,
whether people are saving for retirement,
building a lump sum or protecting their
wealth from inflation.
Managing £351 billion of assets1 for
over seven million customers in the UK
and internationally, M&G Prudential has
investment expertise, scale and financial
strength and two well‑respected brands
– M&G Investments and Prudential UK.
With the substantial investment we will
be making over the next five years in
transforming the business’s operations,
including building our digital distribution
capability, M&G Prudential is well placed
to meet the growing and evolving saving
and investment needs of customers across
intermediated, institutional and retail
direct channels.
Customers
Whether we’re helping an individual saver
plan for their future with more confidence,
or helping a big pension fund to meet its
future commitments to pensioners, serving
the long‑term interests of our customers
is key to the long‑term performance of
our business.
Assets under
management
31 Dec 2017
Customers
UK customers
Investment
funds
£36bn
186k direct customers
PruFund
Traditional
products
European customers
Institutions
£36bn
400k customers
£151bn
6.6m customers
£44bn
Leading cross‑border
fund sales
£84bn
794 clients
£351bn1,2 +7.2m customers
28 Prudential plc Annual Report 2017
www.prudential.co.uk
Adding more to life:
Maureen, M&G Prudential
‘I was in my early 20s when I started investing with M&G
through a monthly savings plan. I found the idea of investing
with other people in different companies fascinating. I still do,
in fact. I wasn’t saving up for anything specific, but I wanted
to put my money to work for the future – either for a big
purchase, like a home, or just for more financial security.
At the end of the day, money can give you choices. You never
know what opportunities or challenges might be around the
corner. And not just for yourself – it’s great to be able to help
your family.
Having grown over the years, my investments with M&G
have given me more options in life. Decades on from the
first £10 I put in to one of their funds, I really value still being
an investor.’
We offer a range of investment and saving
propositions to different customer groups.
In the UK, we manage the savings of direct
and intermediated customers through a
range of mutual funds. We are also a
leading provider of savings and retirement
solutions to direct and advised UK
customers with a 19 per cent market share
in life and pensions retail investments as at
end September 2017, including the popular
and successful PruFund proposition in a
number of different wrappers. We also
have a large book of UK customers who
own traditional insurance‑based savings
products. In continental Europe, where we
have a leading position in cross‑border
fund distribution with £44 billion2 in assets
under management, customers in
17 countries are able to access our
investment strategies. Finally, we manage
the pension and other long‑term savings
of millions of people through our
relationships with 794 institutional clients,
including 70 per cent of the UK’s 50 largest
pension schemes.
We see significant opportunities for
continued revenue growth in four of these
customer segments, including from the
synergies available from the combination of
our investment management and savings
and retirement solutions businesses.
We also see an opportunity to offer
customers in our existing book of
traditional savings products a new set of
propositions as their needs evolve.
The expertise of the business in delivering
investment outcomes for all of our
customers is demonstrated by the scale of
our operations. In total, M&G Prudential
fund managers invest over £187 billion
of assets on behalf of Prudential
policyholders, in addition to the £164 billion
of assets for customers invested in M&G
mutual funds and institutional strategies.
This combined investment footprint
bolsters our investment solution capabilities
allowing us to build the business around
our customers and use our experience
and insights to meet their needs.
Our products
Our aim is to provide our customers with
savings and investment solutions which
meet their long‑term financial needs and
goals, in the structure which best suits
them. Behind these solutions is a powerful
investment engine: a highly skilled team
of over 120 fund managers who put our
customers’ money to work by sourcing
investment opportunities globally across a
wide spectrum of asset classes, including
equities, bonds, credit, real estate and cash
across both private and public markets.
Of the total of £351 billion in assets under
management1 across our entire product
range, approximately 60 per cent is now
invested in multi‑asset solutions and
strategies, including the market leading
£36 billion PruFund range and the strongly
performing £12 billion Episode Allocation
range. This expertise in asset allocation is a
key part of our investment capability and has
again driven substantial inflows over the last
year, as customers across the UK and Europe
have continued to seek the diversification
and flexibility of a multi‑asset solution.
www.prudential.co.uk
Annual Report 2017 Prudential plc 29
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Our businesses and their performance continued
PruFund investment performance3
100%
75%
50%
25%
0%
-25%
Mutual fund investment performance, net of fees,
weighted by: assets under management4
%
+80%
+53%
25%
45%
17%
13%
39%
35%
14%
12%
71%
13%
4%
12%
42%
18%
25%
15%
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
PruFund Growth
ABI sector comparator
One year – Dec 2017
Three years – Dec 2017
Five years – Dec 2017
Since fund manager
tenure Dec 2017
(Average = 6.1 years)
First quartile
Second quartile
Third quartile
Fourth quartile
Other products include a range of
unit‑linked and collective investments,
and within our corporate pension portfolio
we continue to facilitate a range of
auto‑enrolment services.
For our savings and retirement customers
we offer the PruFund range, which invests
in our with‑profits fund, the largest in the
UK. The with‑profits fund aims to smooth
some of the extreme ups and downs of
short‑term investment performance to
provide a more stable return. It has
performed well over the past five years:
for example, customers in the PruFund
Growth Fund have seen growth of
36 per cent since the start of 2013 against
benchmark growth of 30 per cent.
For direct investors in the UK and
intermediated customers in the UK and
internationally, we offer a range of 75 open‑
ended funds. The range offers a broad
choice of asset types, geographies and
investment strategies to help achieve a
diversified portfolio. Our funds generally
aim to deliver a rising income stream,
long‑term capital growth or a mixture of
both, and the vast majority are available in
ISA or JISA wrappers to UK direct
customers. Almost all of our funds are
managed actively for the long term.
Our open‑ended flexible global bond fund,
the M&G Optimal Income Fund, performed
strongly in 2017. Having achieved an
average annualised return of over
7 per cent since its launch in 2006, Optimal
Income has been one of the top performing
bond funds across all sectors over the last
decade. This return for its customers has
been rewarded with net inflows of over
£5 billion during 2017, bringing its assets
under management to £23 billion.
This year we added our first open‑ended
infrastructure fund to our range, which
aims to provide individual investors with
both a growing income stream and
long‑term capital appreciation through
exposure to the equity of global listed
infrastructure companies. We also
launched the M&G ESG Global High Yield
Fund, a sister fund to our £1 billion Global
High Yield Bond Fund. The new fund is
aimed at meeting the needs of individual
investors seeking higher yield.
During 2017, we also launched a further
six M&G funds on our new Luxembourg‑
domiciled SICAV platform. As one of the
most popular investment vehicles within
Europe, the ability to offer SICAV funds will
enable us to expand and deepen our highly
successful international business further
over the coming years. The new platform
will also ensure we can continue to serve
our European‑based customers regardless
of the outcome of Brexit negotiations
between the UK and the EU. To that end,
in September we announced our plans to
migrate assets in four UK‑domiciled funds
held by European customers to the SICAV
platform during 2018.
For our own life funds as well as for
our third‑party institutional clients,
we continue to deliver innovative and
competitive investment strategies to
meet their specific needs. We are leading
investors in ‘alternative’ assets such as
commercial real estate debt, infrastructure
debt and equity, and direct lending. These
private assets are increasingly attractive
options for investors looking for a yield to
match their long‑term pension liabilities,
and of course also provide a valuable
source of competitively‑priced funding for
new housing and infrastructure projects.
Reflecting growing demand from
institutional clients for investments which
make a positive societal and environmental
impact, in 2017 we seeded our first Impact
Financing Fund with investment from the
Prudential life business and two third‑party
investors. Through private and illiquid debt
transactions, the fund is already financing
projects including a regeneration scheme,
green energy and social housing
construction.
Distribution
In M&G and Prudential, we have two
well‑respected and complementary
brands: Prudential is closely associated
with retirement in the UK, while M&G
is recognised as a leading investment
brand, both in the UK and across
international markets.
30 Prudential plc Annual Report 2017
www.prudential.co.uk
Driving our business
Creating value
and benefiting
our stakeholders
Customers
Meeting the growing and fast‑evolving
saving and investment needs of customers
across retail, institutional and direct
channels.
+7.2 million customers
£351 billion total assets
under management1 across a broad
range of strategies and asset classes
Products
Market leading propositions, including
PruFund and the M&G Optimal Income
Fund, available in a number of saving and
investment wrappers; and a range of
strategies to help institutional customers
meet their long‑term commitments.
£36 billion
PruFund assets under management
Launch of new M&G Global Listed
Infrastructure Fund
Distribution
Multi‑channel distribution, based on strong
relationships with institutional investors,
advisors and intermediaries, and substantial
direct‑to‑customer franchises, including
Prudential Financial Planning.
Investment
for growth
Investing circa £250 million of shareholders’
funds into our infrastructure to improve
customer service and business efficiency
and drive long‑term growth.
+5,400 adviser firms dealing
with M&G Prudential
MyPru and MyM&G digital services
for direct customers
Extension of SICAV fund platform
for European growth
Roll out of new scalable, simplified
investment platform through Aladdin
implementation
Strategic partnership with Tata
Consultancy Services leveraging
digital capabilities to enhance
customers’ experience
www.prudential.co.uk
Annual Report 2017 Prudential plc 31
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Our businesses and their performance continued
While our two brands occupy different
market segments, both share a common
philosophy of aiming to deliver excellent
long‑term customer outcomes, and both
offer solutions powered by a world‑class
investment capability. Working together
as M&G Prudential gives us new
opportunities for growth by building on
these shared values and strengths.
In the UK, where both M&G and Prudential
products are distributed, we will be
building on the great success of the
PruFund range by broadening the existing
proposition, making full use of M&G and
Prudential’s combined distribution network
and making our customers’ experiences –
whether direct or advised – as good as
possible throughout the lifetime of their
products. Our digital transformation
programme is essential to this, providing
the infrastructure necessary to offer good
value, state of the art solutions.
With over 15 years of experience in
international distribution, offices in
18 countries and a new Luxembourg
investment platform, we are well placed to
continue to take advantage of the attractive
growth opportunities in Europe and
beyond. This includes retail distribution in
Europe, and in international institutional
markets, where our strong track record
in private asset origination is a real
competitive advantage.
Investment for growth
In a world of low interest rates and
increasing life expectancy, more people
than ever need long‑term savings and
investment solutions. We also know that
our customers have far higher expectations
of service and value for money, thanks to
new technology and digital disruption.
Over the last 169 years we have had a
proud track record of innovating to deliver
good outcomes to our customers, but we
need to invest in our business to continue
to do so. Over the next five years, we will
be investing circa £250 million of
shareholders’ funds in our business,
including a new digital infrastructure which
will improve customer service, accelerate
product development and increase
customer choice. Strategic partnerships,
such as the recently announced Tata
Consultancy Services partnership to
enhance service for our UK savings and
retirement customers, are an important
part of these plans to improve customer
outcomes. With a simpler, more efficient,
digitally enabled business, we will respond
quicker and better to our customers’
needs, offer better value and compete at
scale in our markets even more effectively.
John Foley
Chief Executive
M&G Prudential
Notes
1 Represents M&G Prudential asset management external
funds under management and internal funds included
on the M&G Prudential long‑term insurance business
balance sheet.
2 Europe includes AUM in Asia and South Africa.
3 ABI Mixed Investment 20 per cent – 60 per cent Shares
(performance is net of charge). PruFund returns are also
net of charge (0.65 per cent).
4 Quartile ranking based on ranking of the funds
representative share class, net of fees, within their
respective Investment Association (IA) or Morningstar
sectors. Closed funds excluded. M&G total wholesale
AUM was £79.7bn as at 31 December 2017, representing
23 per cent of the total M&G Prudential AUM. One year
figures represent £78.1bn AUM, three year figures
represent £76.1bn AUM, 5 year figures represent
£71.2bn AUM, fund manager tenure figures represent
£78.2bn AUM. Performance figures in GBP, bid to bid,
net income reinvested. Average fund manager tenure
December 2017 = 6.1 years. Source: M&G Prudential,
December 2017. IA and Morningstar Inc. combined
UK and Pan‑European peer groups as at end
December 2017.
32 Prudential plc Annual Report 2017
www.prudential.co.uk
Chief Financial Officer’s report on the 2017
financial performance – Mark FitzPatrick
Broad-based performance and strong
growth in high quality business
I am pleased to report that Prudential’s financial performance in 2017 has resulted in all of our
2017 financial objectives being met. Our progress across our KPIs reflects the benefits of our
focus on driving growth in high-quality, recurring health and protection and fee business
across our geographies, products and distribution channels.
Performance was broad‑based across our
business units led by our Asia businesses
which delivered double digit growth in
new business profit (up 12 per cent1), IFRS
operating profit based on longer‑term
investment returns (‘IFRS operating profit’)
(up 15 per cent1) and underlying free
surplus generation3 (up 19 per cent1). Asia
achieved its 2017 financial objectives,
demonstrating successful execution of its
strategy, focusing on diversified recurring
premium business, at scale. In the US, we
saw good growth in fee income, driven by
positive net inflows and favourable equity
market conditions, which outweighed the
expected reduction in the contribution
from spread income.
During 2017 we combined M&G and our
UK and Europe life business to form
M&G Prudential. I am pleased to report
that M&G Prudential asset management
delivered record external net inflows of
£17.3 billion, with overall assets under
management4 at a new high of £351 billion
at the end of 2017. We are making good
progress in delivering our merger and
transformation programme, and remain on
track to deliver our previously announced
savings by the end of 2022.
Sterling continued to strengthen against
most of the currencies in our major
international markets over 2017. However,
on an average basis, sterling exchange
rates remain lower than 2016, contributing
to a positive effect on the translation of
results from our non‑sterling operations in
2017. If sterling exchange rates remain at or
above end 2017 levels over the remainder
of 2018, this will act to depress our results
on translation of our non‑sterling
operations in 2018 compared with 2017. To
aid comparison of underlying progress, we
continue to express and comment on the
performance trends in our Asia and US
operations on a constant currency basis.
Our performance in 2017 was also
supported by favourable equity markets,
which lifted average investment balances
on which we earn fees. During the year the
S&P 500 index increased 19 per cent, the
FTSE 100 index 8 per cent and the MSCI
Asia excluding Japan index 39 per cent.
Long‑term yields showed little movement
in 2017 and therefore have had no material
impact on 2017 performance versus 2016.
The key financial highlights in 2017 were as
follows:
— New business profit was 12 per cent
higher at £3,616 million (17 per cent on
an actual exchange rate basis),
underpinned by higher volumes with
APE sales up 6 per cent (10 per cent on
an actual exchange rate basis). In Asia,
new business profit increased
12 per cent primarily as a result of
prioritisation of health and protection
products and positive pricing actions.
Jackson’s new business profit increased
by 9 per cent, including the benefit of
US tax reform. UK life new business
profit grew by 28 per cent, driven by a
29 per cent increase in APE sales,
supported by consumer demand for
products offering access to our PruFund
investment option.
— Asset management net inflows
reached record levels, with
M&G Prudential asset management
reporting external net inflows of
£17.3 billion (2016: net outflows of
£8.1 billion) reflecting growth across its
wholesale/direct and institutional
businesses, and Eastspring delivering
external net inflows of £3.1 billion
(excluding money market funds) (2016:
£1.8 billion on an actual exchange rate
basis).
— IFRS operating profit based on
longer-term investment returns
was 6 per cent higher at £4,699 million
(10 per cent higher on an actual
exchange rate basis). IFRS operating
profit from our Asia business grew by
15 per cent to £1,975 million, reflecting
continued business momentum. In the
US, IFRS operating profit increased by
3 per cent, reflecting mainly growth in
fee income on higher asset balances,
which outweighed the anticipated
reduction in spread earnings. In the UK,
M&G Prudential’s total IFRS operating
profit was 10 per cent higher than the
prior year reflecting 6 per cent growth
in the insurance business, with core5 life
operating profit stable at £597 million,
and record asset management profit of
£500 million resulting from the positive
impact on earnings of net fund inflows,
supportive markets and higher
performance fees.
— Total IFRS post tax profit was up
21 per cent at £2,390 million (24 per cent
on an actual exchange rate basis) and
total EEV after‑tax profit was 87 per cent
higher at £8,751 million (94 per cent on
an actual exchange rate basis). Total
profit includes the impact of short‑term
fluctuations in financial assets held to
back the commitments that we have
made to our customers, and the related
liabilities, and are reported outside the
operating result which is based on
longer‑term investment return
assumptions. In 2017 these principally
arose within Jackson as discussed later in
my report. Total profit after‑tax includes
the impact of the US tax reform, which
generated an IFRS charge of £445 million
from the re‑measurement of US net
deferred tax balances following the
reduction in the corporate income tax
rate and an EEV gain of £390 million
which additionally includes the benefit
of future profits being taxed at a lower
rate. Reflecting this post tax profit,
Group IFRS shareholders’ equity was
10 per cent higher at £16.1 billion.
Similarly, EEV basis shareholders’ equity
was up 15 per cent at £44.7 billion.
www.prudential.co.uk
Annual Report 2017 Prudential plc 33
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information — Underlying free surplus
generation2,3, our preferred measure
of cash generation, from our life and
asset management businesses,
decreased by 1 per cent to
£3,640 million (up 2 per cent on an
actual exchange rate basis), after
financing new business growth.
Increased contributions from our Asia
and UK businesses were balanced by a
lower contribution from our US
business primarily as a result of
non‑recurrence of a transaction
undertaken in 2016 to enhance local
capital efficiency. We continue to focus
on high‑return new business with fast
payback periods.
£12.5 billion, 201 per cent). The
improvement in the period reflects the
continuing strength of the Group’s
operating capital generation in excess
of growing dividend payments to
shareholders.
— Group shareholders’ Solvency II
capital surplus6 was estimated at
£13.3 billion at 31 December 2017,
equivalent to a cover ratio of
202 per cent7 (1 January 2017:
— Full year ordinary dividend
increased by 8 per cent to 47 pence per
share, reflecting our 2017 performance
and our confidence in the future
prospects of our Group.
IFRS profit2
Operating profit before tax based on longer-term
investment returns
Asia
Long‑term business
Asset management
Total
US
Long‑term business
Asset management
Total
UK and Europe
Long‑term business
General insurance commission
Total insurance operations
Asset management
Total
Other income and expenditure8
Total operating profit based on longer‑term investment
returns before tax, restructuring costs and interest
received from tax settlement
Restructuring costs
Interest received from tax settlement
Total operating profit based on longer-term investment
returns before tax
Non‑operating items:
Short‑term fluctuations in investment returns on
shareholder‑backed business
Amortisation of acquisition accounting adjustments
Profit (loss) attaching to disposal of businesses
Profit before tax
Tax charge attributable to shareholders' returns
Profit for the year
IFRS earnings per share
Actual exchange rate
Constant exchange rate
2017 £m
2016 £m
Change %
2016 £m
Change %
1,799
176
1,975
2,214
10
2,224
861
17
878
500
1,378
(775)
4,802
(103)
–
1,503
141
1,644
2,052
(4)
2,048
799
29
828
425
1,253
(694)
4,251
(38)
43
20
25
20
8
350
9
8
(41)
6
18
10
(12)
13
(171)
n/a
1,571
149
1,720
2,156
(4)
2,152
799
29
828
425
1,253
(700)
4,425
(39)
43
15
18
15
3
350
3
8
(41)
6
18
10
(11)
9
(164)
n/a
4,699
4,256
10
4,429
6
(1,563)
(63)
223
3,296
(906)
2,390
(1,678)
(76)
(227)
2,275
(354)
1,921
7
17
n/a
45
(156)
24
(1,764)
(79)
(244)
2,342
(360)
1,982
11
20
n/a
41
(152)
21
Basic earnings per share based on operating profit after tax
Basic earnings per share based on total profit after tax
145.2
93.1
131.3
75.0
11
24
136.8
77.4
6
20
Actual exchange rate
Constant exchange rate
2017 pence
2016 pence
Change %
2016 pence
Change %
34 Prudential plc Annual Report 2017
www.prudential.co.uk
Chief Financial Officer’s report on the 2017 financial performance – Mark FitzPatrick continued IFRS operating profit based on
longer-term investment returns
2017 total IFRS operating profit increased
by 6 per cent (10 per cent on an actual
exchange rate basis) to £4,699 million, with
increased contributions from all of our core
business units.
Asia total operating profit of
£1,975 million was 15 per cent higher than
the previous year (20 per cent on an actual
exchange rate basis). IFRS operating profit
from life insurance operations increased
15 per cent to £1,799 million (20 per cent
on an actual exchange rate basis), reflecting
the continued growth of our in‑force book
of recurring premium business, with
renewal insurance premiums9 reaching
£11.6 billion (2016: £9.5 billion on a
constant exchange rate basis). Insurance
margin was up 21 per cent, reflecting our
continued focus on health and protection
business. At a country level, we have seen
improvement in all of our markets, with
double‑digit growth in IFRS operating
profit in eight out of 12, led by Hong Kong
and China (both increasing 38 per cent).
Including money market funds and the
assets managed for internal life operations,
Eastspring’s total assets under
management increased to £138.9 billion
(2016: £117.9 billion on an actual exchange
rate basis), while the cost‑income ratio was
stable at 56 per cent (2016: 56 per cent),
driving an 18 per cent increase in IFRS
operating profit to £176 million
(2016: £149 million).
US total operating profit at
£2,224 million increased by 3 per cent
(9 per cent increase on an actual exchange
rate basis), reflecting increased profit from
our variable annuity business. US equity
markets have continued to rise in 2017,
which together with separate account net
asset inflows of £3.5 billion, has led to
separate account balances that were on
average 17 per cent higher than the prior
period. As a result, fee income increased
15 per cent to £2,343 million. Spread‑
based income decreased 10 per cent, as
anticipated, reflecting the impact of lower
yields on our fixed annuity portfolio and a
reduced contribution from asset duration
swaps. We expect these effects to
continue to compress spread margins,
although continued upwards movements
in US yields may help to reduce the speed
of the decline.
UK and Europe total operating profit
was 10 per cent2 higher at £1,378 million.
Life insurance IFRS operating profit
increased by 8 per cent to £861 million
(2016: £799 million). Within this total, the
contribution from our core5 with‑profits
and in‑force annuity business was
£597 million (2016: £601 million), including
an increased transfer to shareholders from
the with‑profits funds of £288 million
(2016: £269 million) of which 15 per cent
was from PruFund business (2016:
10 per cent). The balance of the life
insurance result reflects the contribution
from other activities which are not
expected to recur to the same extent going
forward. This includes, as anticipated,
lower IFRS operating profit from the sale of
annuities of £9 million (2016: £41 million)
and a number of other items discussed
below. Asset management IFRS operating
profit increased 18 per cent to £500 million,
driven by higher average assets under
management and improved performance
fees, together with a lower cost‑income
ratio of 58 per cent (2016: 59 per cent).
We took a number of actions during the
year to optimise our asset portfolios and
capital position, which generated profit of
£276 million (2016: £332 million). Of this
amount £31 million related to profit from
longevity risk transactions (2016:
£197 million) and £245 million from the
effect of repositioning the fixed income
asset portfolio (2016: £135 million).
Favourable longevity assumption changes,
reflecting updated actuarial mortality
tables, contributed a further £204 million.
This was offset partly by an increase of
£225 million (2016: £175 million) in the
provision related to the potential costs and
related potential redress of reviewing
internally vesting annuities sold without
advice after 1 July 2008. The provision
does not include potential insurance
recoveries of up to £175 million.
Life insurance profit drivers
The increase in our IFRS operating profit
levels reflects the growth in the scale of our
operations, driven primarily by positive
business flows. 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
increase as we write new business and
collect regular premiums from existing
customers and decrease as we pay claims
IFRS operating profit
by business2
£m (% vs 2016)
42%
(18%)
29%
47%
£4,699m
+6% (+10% AER)
Asia £1,975m, +15% (+20% AER)
US £2,224m, +3% (+9% AER)
UK and Europe £1,378m, +10%
Others8 £(878)m, ‑26%
and policies mature. The overall scale of
these policyholder liabilities is relevant in
the evaluation of our profit potential in that
it reflects, for example, our ability to earn
fees on the unit‑linked element and
indicates the scale of the insurance
element, another key source of profitability
for the Group.
Focusing on business supported by
shareholder capital, which generates the
majority of the life profit, in 2017 net flows
into our businesses were overall positive at
£2.7 billion driven by our US and Asian
operations, as we continue to focus on both
retaining our existing customers and
attracting new business to drive long‑term
value creation. In the UK our shareholder
liabilities includes the run‑off of the
in‑force annuity portfolio following our
effective withdrawal from selling new
annuity business. This has been more than
offset by inflows into the with‑profits funds
of £3.5 billion. Positive investment markets,
offset partly by currency effects as sterling
has strengthened over the period,
increased liabilities by £5.1 billion. In total,
business flows and market movements
have increased shareholder‑backed
policyholder liabilities from £266.6 billion
to £274.5 billion.
www.prudential.co.uk
Annual Report 2017 Prudential plc 35
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Shareholder-backed policyholder liabilities and net liability flows10
£m
Net liability flows11
£3,638m
2,086
5,198
(3,646)
46,228
266,635
32,851
177,626
Net liability flows11
£2,717m
2,301
3,137
(2,721)
5,141
274,493
37,402
180,724
Reclassification of Korea life
business held for sale
Asia life
US life
UK and Europe life
Market and other movements
56,158
56,367
216,769
(2,812)
27,844
138,913
52,824
1 Jan 2016
Asia life
US life
UK and
Europe life
Market
and other
movements
31 Dec 2016
Asia life
US life
UK and
Europe life
Market
and other
movements
31 Dec 2017
Policyholder liabilities and net liability flows in with-profits business10,12
2017 £m
Actual exchange rate
2016 £m
Actual exchange rate
Asia
UK and Europe
Total Group
At 1
January
Net liability
flows11
29,933
113,146
143,079
4,574
3,457
8,031
Market and
other
movements
1,930
8,096
10,026
At 31
December
36,437
124,699
161,136
At 1
January
Net liability
flows11
20,934
100,069
121,003
3,696
1,119
4,815
Market and
other
movements
5,303
11,958
17,261
At 31
December
29,933
113,146
143,079
Policyholder liabilities in our with‑profits
business have increased by 13 per cent to
£161.1 billion reflecting the growing
popularity of our participating funds in Asia
and PruFund in the UK, as consumers seek
protection from some of the short‑term ups
and downs of direct stock market
investments by using an established
smoothing process. Across our Asia and
UK operations, net liability flows increased
to £8.0 billion. As returns from these funds
are smoothed and shared with customers,
the emergence of shareholder profit is
more gradual. This business, nevertheless,
remains an important source of future
shareholder value.
Analysis of long-term insurance business IFRS operating profit by driver
£m (% vs 2016)
UK one‑off items
Other income
Spread income
Insurance margin
Fee income
Life expenses
(net of DAC adjustments
and margin on revenues)
Growth vs 2016 on a constant
exchange rate basis
£4,354m
£4,525m
£4,874m
157
538
1,171
1,991
157
546
1,215
2,083
2,175
2,280
255
576
1,108
2,271
2,603
(1,678)
(1,756)
(1,939)
2016 AER
2016 CER
2017
+5%
-9%
+9%
+14%
-10%
36 Prudential plc Annual Report 2017
www.prudential.co.uk
Chief Financial Officer’s report on the 2017 financial performance – Mark FitzPatrick continued Asset management external net flows and external funds under management13,14
£m
Net flows
£20,478m
15,248
17,337
3,141
1,495
Asia Money Market Funds (MMF)
Asia asset management15
UK and Europe asset management
Market and other movements
219,740
9,317
46,568
163,855
Net flows
£(6,255)m
(8,090)
1,835
403
25,679
182,519
7,714
38,042
136,763
162,692
6,006
30,281
126,405
1 Jan 2016
UK and
Europe
asset
management
Asia
asset
management
MMF
Market
and other
movements
31 Dec 2016
UK and
Europe
asset
management
Asia
asset
management
MMF
Market
and other
movements
31 Dec 2017
We continue to maintain our preference for
high‑quality sources of income such as
insurance margin from life and health and
protection business, 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. In line with this approach, on a
constant exchange rate basis, insurance
margin has increased by 9 per cent (up
14 per cent on an actual exchange rate
basis) and fee income by 14 per cent (up
20 per cent on an actual exchange rate
basis), while spread income decreased by
9 per cent (down 5 per cent on an actual
exchange rate basis). Administration
expenses increased to £2,297 million
(2016: £2,025 million) as the business
continues to expand. The expense margin
has grown from 85 basis points to 88 basis
points reflecting the continued increase in
US producers selecting asset‑based
commissions which are treated as an
administrative expense in this analysis.
Asset management profit drivers
Movements in asset management operating
profit are also influenced primarily by
changes in the scale of these businesses, as
measured by funds managed on behalf of
external institutional and retail customers
and our internal life insurance operations.
In 2017, average assets under management
in our asset management businesses in the
UK and Asia benefited from positive net
inflows of assets and favourable markets,
driving higher fee revenues. Reflecting
this, IFRS operating profit derived from
asset management activities in
M&G Prudential increased by 18 per cent
to £500 million and in Eastspring by
18 per cent (up 25 per cent on an actual
exchange rate basis) to £176 million.
M&G Prudential’s external assets under
management have benefited from a record
level of net inflows, reflecting improvement
in investment performance and supportive
markets. External asset management net
inflows totalled £17.3 billion (2016: net
outflows of £8.1 billion), with significant
contributions from European investors in
the Optimal Income Fund, Global Floating
Rate High Yield Fund and multi‑asset
range, and from institutional clients,
notably within our public debt, illiquid
credit strategies and infrastructure equity
funds. External assets under management
increased 20 per cent to £163.9 billion
during the year. Internal assets benefiting
from PruFund sales and favourable markets
increased 7 per cent, taking total
M&G Prudential assets under management
to £350.7 billion (2016: £310.8 billion).
Eastspring also attracted good levels of
external net inflows during the year across
its equity, fixed income and balanced fund
range, totalling £3.1 billion, excluding money
market funds (2016: £1.8 billion on an actual
exchange rate basis). Overall external assets
under management increased by 22 per cent
to £46.6 billion, combined with higher
internal assets under management and
money market funds lifted Eastspring’s total
assets under management to £138.9 billion.
Other income and expenditure
and restructuring costs8
Higher interest costs following the debt
issued in 2016 and 2017, and restructuring
costs of £103 million, as the business invests
for the future, including UK and Europe
infrastructure, contributed to an increase
in net central expenditure of £139 million
to £878 million (2016: £732 million on an
actual exchange rate basis).
IFRS non-operating items8
IFRS non‑operating items consist of
short‑term fluctuations in investment
returns on shareholder‑backed business of
negative £1,563 million (2016:
negative £1,764 million), the results
attaching to disposal of businesses of
£223 million (2016: negative £244 million),
and the amortisation of acquisition
accounting adjustments of
negative £63 million (2016:
negative £79 million) arising mainly from
the REALIC business acquired by Jackson
in 2012. The profit attributable to disposal
of businesses relates to amounts in respect
of the Korea life business sold in 2017 and
the disposal of the US broker‑dealer
network in August 2017.
Short‑term fluctuations in investment
returns on shareholder‑backed business
represent the most significant component
of non‑operating items and are discussed
further below.
www.prudential.co.uk
Annual Report 2017 Prudential plc 37
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information IFRS short-term fluctuations in
investment returns on shareholder-
backed business
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 2017, the total
short‑term fluctuations in investment
returns on shareholder‑backed business
were negative £1,563 million and
comprised negative £1 million for Asia,
negative £1,568 million in the US,
negative £14 million in the UK and
positive £20 million in other operations.
In the US, Jackson provides certain
guarantees on its annuity products, the
value of which would rise typically when
equity markets fall and long‑term interest
rates decline. Jackson includes the
expected cost of hedging when pricing its
products and charges fees for these
guarantees which are used, as necessary, to
purchase downside protection in the form
of options and futures to mitigate the effect
of equity market falls, and swaps and
swaptions to cushion the impact of declines
in long‑term interest rates. Under IFRS,
accounting for the movement in the
valuation of these derivatives, which are all
fair valued, is asymmetrical to the
movement in guarantee liabilities, which are
not fair valued in all cases. Jackson designs
its hedge programme to protect the capital
and economics of the business from large
movements in investment markets and
accepts the variability in accounting results.
The negative short‑term fluctuations in
investment returns on shareholder‑backed
business of £1,568 million in the year are
attributable mainly to the net value
movement in the period of the hedge
instruments held to manage market
exposures and reflect the positive equity
market performance in the US during the
period.
IFRS effective tax rates
In 2017, the effective tax rate on IFRS
operating profit based on longer‑term
investment returns was 21 per cent, which
is unchanged from 2016 (21 per cent).
The 2017 effective tax rate on the total
IFRS profit was 27 per cent (2016:
16 per cent), reflecting the inclusion of a
£445 million one‑off charge on the
re‑measurement of US deferred tax
balances using a rate of 21 per cent
(previously 35 per cent) following the
enactment in December 2017 of a
comprehensive US tax reform package.
Excluding this one‑off charge, the 2017
effective tax rate would have been
14 per cent.
In addition to the impact on the IFRS profit,
the re‑measurement of US deferred tax
balances also resulted in a separate benefit
of £134 million recognised in other
comprehensive income, in relation to
changes to deferred tax on cumulative
unrealised gains (net of DAC) on bonds
which are taken directly through other
comprehensive income.
The main driver of the Group’s effective tax
rate is the relative mix of the profits
between jurisdictions with higher tax rates
(such as Indonesia and Malaysia),
New business performance
Life EEV new business profit and APE new business sales (APE sales)
jurisdictions with lower tax rates (such as
Hong Kong and Singapore), and
jurisdictions with rates in between (such as
the UK, and now from 2018, the US).
Once the US tax changes are fully
reflected, we would expect a favourable
impact on the Group’s effective tax rate.
The US operating profit effective tax rate is
expected to be circa 18 per cent
(previously 28 per cent), and the overall
Group operating profit effective tax rate is
likely to settle in the range of 16 per cent to
18 per cent.
Total tax contribution
The Group continues to make significant
tax contributions in the jurisdictions in
which it operates, with £2,903 million
remitted to tax authorities in 2017. This was
similar to the equivalent amount of
£2,887 million in 2016.
Tax strategy
In May 2017 the Group published its tax
strategy, which in addition to complying
with the mandatory UK (Finance Act 2016)
requirements, also included a number of
additional disclosures, including a
breakdown of revenues, profits and taxes
for all jurisdictions where more than
£5 million tax was paid. This disclosure was
included as a way of demonstrating that
our tax footprint (ie where we pay taxes) is
consistent with our business footprint. An
updated version of the tax strategy,
including 2017 data, will be available on the
Group’s website before 31 May 2018.
Actual exchange rate
Constant exchange rate
2017 £m
2016 £m
Change %
2016 £m
Change %
APE
sales
New
business
profit
APE
sales
New
business
profit
APE
sales
New
business
profit
APE
sales
New
business
profit
APE
sales
New
business
profit
3,805
1,662
1,491
6,958
2,368
906
342
3,616
3,599
1,561
1,160
6,320
2,030
790
268
3,088
6
6
29
10
17
15
28
17
3,773
1,641
1,160
6,574
2,123
830
268
3,221
1
1
29
6
12
9
28
12
Asia
US
UK and Europe
Total Group
38 Prudential plc Annual Report 2017
www.prudential.co.uk
Chief Financial Officer’s report on the 2017 financial performance – Mark FitzPatrick continued New business performance
£m (% vs 2016)
55%
9%
66%
21%
25%
24%
Split of APE new business sales
£6,958m, +6% (+10% AER)
Asia £3,805m, +1% (+6% AER)
US £1,662m, +1% (+6% AER)
UK and Europe £1,491m, +29%
Split of new business profit
£3,616m, +12% (+17% AER)
Asia £2,368m, +12% (+17% AER)
US £906m, +9% (+15% AER)
UK and Europe £342m, +28%
Life insurance new business profit was
up 12 per cent (17 per cent on an actual
exchange rate basis) to £3,616 million, and
Life insurance new business APE sales
increased by 6 per cent (10 per cent on an
actual exchange rate basis) to
£6,958 million.
In Asia, new business profit was
12 per cent higher at £2,368 million
(17 per cent on an actual exchange rate
basis), primarily reflecting the beneficial
impact of our strategic emphasis on
increasing sales from health and protection
business and pricing actions.
Our focus on quality is undiminished with
regular premium contracts accounting for
94 per cent of APE sales and supporting a
26 per cent increase in health and
protection new business profit. This
favourable mix provides a high level of
recurring income and an earnings profile
that is significantly less correlated to
investment markets.
In Hong Kong new business profit has
increased by 8 per cent as we continue to
focus on driving growth in health and
protection business. This targeted shift to
higher margin, but lower case size
protection business, aligned with the
de‑emphasis of broker sales and the
expected moderation in the level of sales
from Mainland China has, as we reported
previously, resulted in a 14 per cent
reduction in Hong Kong APE sales.
Outside Hong Kong, new business profit
increased by 20 per cent, in line with APE
sales which were up 17 per cent. Our
performance remains broad‑based, with
double digit growth in new business profit
across both agency and bancassurance
channels. In China, new business profit
more than doubled, driven by higher sales
and a significant uplift in regular premium
health and protection business from our
increased scale and productivity in the
agency channel, together with a positive
contribution from our bancassurance
partners. In Singapore, new business profit
increased by 22 per cent supported by APE
sales growth of 21 per cent, reflecting
growth across both agency and
bancassurance channels. Indonesia’s
APE sales grew 2 per cent while new
business profit declined 5 per cent due
to product mix.
In the US, new business profit increased
by 9 per cent to £906 million (up
15 per cent on an actual exchange rate
basis) reflecting a modest increase in APE
sales, up 1 per cent (6 per cent on an actual
exchange rate basis) and the positive
impact on future profit from a reduction in
corporate income tax rates. Uncertainty
regarding the application and
implementation of the US Department of
Labor Fiduciary Duty Rule has led to
continued pressure on industry sales in
2017 which were down 11 per cent over
the first nine months of the year. Despite
this, Jackson’s variable annuity sales
increased by 1 per cent, with the
economics on new business in variable
annuities remaining extremely attractive,
with high internal rates of return and short
payback periods. Net inflows into Jackson’s
separate account asset balances, which
drive fee‑based earnings on variable
annuity business, remained positive at
£3.5 billion. More favourable market
conditions relating to the institutional
product market also provided Jackson with
the opportunity to write APE sales of
£232 million (2016: £193 million).
In our UK life business, our strategy of
extending customer access to PruFund’s
with‑profits investment option via
additional product wrappers continues to
drive growth in new business profit, which
increased to £342 million, up 28 per cent.
APE sales increased 29 per cent to
£1,491 million. We have seen notable
success with the build out of PruFund,
which has contributed significantly
towards an APE sales increase in individual
pensions (up 110 per cent), income
drawdown (up 35 per cent) and ISAs (up
7 per cent). Reflecting this performance,
total PruFund assets under management of
£35.9 billion as at 31 December 2017 were
46 per cent higher than at the start of
the year.
www.prudential.co.uk
Annual Report 2017 Prudential plc 39
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Free surplus generation2,3
Free surplus generation
Asia
US
UK and Europe
Underlying free surplus generated from in‑force life business
and asset management before restructuring costs
Restructuring costs
Underlying free surplus generated from in‑force life business
and asset management
Investment in new business
Underlying free surplus generated
Market related movements, timing differences and other
non‑operating movements
Profit (loss) attaching to disposal of businesses
Net cash remitted by business units
Total movement in free surplus
Free surplus at end of year
Actual exchange rate
Constant exchange rate
2017 £m
2016 £m
Change %
2016 £m
Change %
17
(15)
15
3
(381)
2
(1)
2
1,405
1,957
1,287
4,649
(16)
4,633
(942)
3,691
11
(19)
15
–
(381)
(2)
3
(1)
1,562
1,582
1,486
4,630
(77)
4,553
(913)
3,640
(1,012)
172
(1,788)
1,012
7,578
1,335
1,863
1,287
4,485
(16)
4,469
(903)
3,566
(432)
(86)
(1,718)
1,330
6,566
Free surplus generation is the financial
metric we use to measure the internal cash
generation of our business operations and
is based on the capital regimes which apply
locally in the various jurisdictions in which
our life businesses operate. 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
operating profit for the period.
We drive free surplus generation by
targeting markets and products that have
low capital 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 2017, underlying free surplus generation
from our life insurance and asset
management business decreased by
1 per cent to £3,640 million (increased
2 per cent on an actual exchange rate
basis), reflecting increased contributions
from our Asia and UK businesses, a
non‑recurrence of a one‑off prior year gain
from our US business, and higher
restructuring costs. In Asia, growth in the
in‑force life portfolio, combined with
post‑tax asset management profit from
Eastspring, contributed to free surplus
generation of £1,562 million, up
11 per cent. In the US, in‑force free surplus
generation decreased by 19 per cent
reflecting the non‑recurrence of a
£247 million benefit from contingent
financing actions taken in 2016, together
with lower favourable experience
variances. In the UK, in‑force free surplus
generation increased by 15 per cent to
£1,486 million, attributable to growth in
asset management earnings, the adoption
of the CMI 2015 assumption basis and
portfolio and capital management actions
including longevity reinsurance to improve
the solvency position of our UK life
business of £400 million (2016:
£351 million). The result includes an
increase in the provision for the costs of the
UK review of past non‑advised annuity
sales practices and related potential
redress, which has a post‑tax impact of
£187 million in 2017 (2016: £145 million).
Although new business profit increased by
12 per cent, the amount of free surplus
invested in writing new life business
in the period was lower at £913 million
(2016: £942 million) reflecting a greater
proportion of sales in Asia and the UK
where strain is lower, and a higher
proportion of variable annuity premium
being allocated to the separate account in
the US.
After funding cash remittances from the
business units to the Group, recognition of
the profit attaching to the disposal of
businesses, and other movements, which
includes adverse currency effects and
the impact of US tax reform, the closing
value of free surplus in our life and asset
management operations was £7.6 billion at
31 December 2017.
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.
40 Prudential plc Annual Report 2017
www.prudential.co.uk
Chief Financial Officer’s report on the 2017 financial performance – Mark FitzPatrick continued Actual exchange rate
2017 £m
2016 £m
645
475
643
25
1,788
2,264
516
420
590
192
1,718
2,626
Business unit remittance2,16
Net cash remitted by business units:
Asia
US
UK and Europe
Other UK (including Prudential Capital)
Net cash remitted by business units
Holding company cash at 31 December
Movement in central cash2,16
£m
1,788
(1,159)
645
475
Asia
US
UK and
643
Europe
Other UK 25
2,626
(470)
(521)
2,264
1 Jan 2017
Cash remitted
to Group
Dividends
paid
Central
costs
Corporate
activities/other
31 Dec 2017
2016 second interim dividend and 2017 first interim dividend
Cash remitted to the corporate centre in
2017 amounted to £1,788 million, driven by
higher remittances from Asia. For the first
time, our Asia business unit is the largest
contributor17 to cash in the Group,
demonstrating the quality and scale of its
growth. Jackson made sizeable remittances
of £475 million. The remittance from
M&G Prudential of £643 million was
9 per cent higher than the combined
remittance in 2016. Prudential Capital
contributed a further £25 million.
Cash remitted to the Group in 2017 was
used to meet central costs of £470 million
(2016: £416 million) and pay the 2016
second interim and 2017 first interim
dividends respectively. These movements
and other corporate cash flows, including a
net reduction in core structural borrowings
and the impact of currency movements, led
to holding company cash decreasing from
£2,626 million to £2,264 million over 2017.
www.prudential.co.uk
Annual Report 2017 Prudential plc 41
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Post-tax profit – EEV2
Post-tax operating profit based on longer-term investment returns
Asia operations
Long‑term business
Asset management
Total
US operations
Long‑term business
Asset management
Total
UK and Europe operations
Long‑term business
General insurance commission
Total insurance operations
Asset management
Total
Other income and expenditure18
Post‑tax operating profit based on longer‑term investment returns before
restructuring costs and interest received from tax settlement
Restructuring costs18
Interest received from tax settlement
Post-tax operating profit based on longer-term investment returns
Non‑operating items:
Short‑term fluctuations on investment returns
Effect of changes in economic assumptions
Mark to market value movements on core structural borrowings
Impact of US tax reform
Profit (loss) attaching to disposal of businesses
Post-tax profit for the year
Earnings per share
Actual exchange rate
Constant exchange rate
2017 £m
2016 £m
Change %
2016 £m
Change %
3,705
155
3,860
2,143
7
2,150
1,015
13
1,028
403
1,431
(746)
6,695
(97)
–
6,598
2,111
(102)
(326)
390
80
8,751
3,074
125
3,199
1,971
(3)
1,968
643
23
666
341
1,007
(682)
5,492
(32)
37
5,497
(507)
(60)
(4)
–
(410)
21
24
21
9
333
9
58
(43)
54
18
42
(9)
22
(203)
n/a
20
516
(70)
(8,050)
n/a
n/a
3,220
132
3,352
2,071
(4)
2,067
643
23
666
341
1,007
(688)
5,738
(32)
37
5,743
(567)
(54)
(4)
–
(445)
4,516
94
4,673
15
17
15
3
275
4
58
(43)
54
18
42
(8)
17
(203)
n/a
15
472
(89)
(8,050)
n/a
n/a
87
Basic earnings per share based on post‑tax operating profit
Basic earnings per share based on post‑tax total profit
257.0
340.9
214.7
176.4
20
93
224.3
182.5
15
87
Actual exchange rate
Constant exchange rate
2017 pence
2016 pence
Change %
2016 pence
Change %
EEV operating profit
On an EEV basis, Group post‑tax operating
profit based on longer‑term investment
return increased by 15 per cent (up
20 per cent on an actual exchange rate
basis) to £6,598 million in 2017.
EEV operating profit includes new business
profit from the Group’s life business, which
increased by 12 per cent (up 17 per cent on
an actual exchange rate basis) to
£3,616 million. It also includes in‑force life
business profit of £3,247 million, which was
20 per cent higher than prior year (up
25 per cent on an actual exchange rate
basis), primarily reflecting the growth in our
in‑force business. This is most evident in
the profit from the unwind of the in‑force
business, which was 10 per cent higher
at £2,166 million (2016: £1,962 million).
Experience and assumption changes
were positive at £1,081 million
(2016: £751 million), reflecting our
ongoing focus on managing the in‑force
book for value.
In Asia, EEV life operating profit was up
15 per cent to £3,705 million, reflecting
growth in new business profit of
12 per cent at £2,368 million. In‑force profit
was 22 per cent higher at £1,337 million
reflecting the increased value of in‑force
business and positive assumption changes
and experience as the business continues
to grow with discipline.
Jackson’s EEV life operating profit was up
3 per cent to £2,143 million, reflecting a
9 per cent increase in new business profit
to £906 million and a stable contribution
from in‑force profit of £1,237 million, which
included favourable operating assumption
changes and experience variances of
£543 million (2016: £628 million), related
largely to persistency and mortality effects.
The increase in our US EEV new business
profit reflects the positive impact on future
profits from lower tax rates.
42 Prudential plc Annual Report 2017
www.prudential.co.uk
Chief Financial Officer’s report on the 2017 financial performance – Mark FitzPatrick continued EEV operating profit
by business2
£m (% vs 2016)
56%
(13%)
9%
15%
Capital position, financing and liquidity
Capital position
Analysis of movement in Group shareholder Solvency II surplus20
Solvency II surplus at 1 January
Operating experience
Non‑operating experience (including market movements)*
Other capital movements
Subordinated debt (redemption)/issuance
Foreign currency translation impacts
Dividends paid
Model changes
Estimated Solvency II surplus at 31 December
* 2017 includes a £(0.6) billion reduction in deferred tax assets following US tax reform.
2017 £bn
2016 £bn
12.5
3.6
(0.6)
(0.2)
(0.7)
(1.2)
(0.1)
13.3
9.7
2.7
(1.1)
1.2
1.6
(1.3)
(0.3)
12.5
32%
£6,598m
+15% (+20% AER)
Asia life £3,705m, +15% (+21% AER)
US life £2,143m, +3% (+9% AER)
UK and Europe life £1,015m, +58%
Asset management and general
insurance £578m, +17% (+19% AER)
Other18 £(843)m, ‑23% (‑25% AER)
In the UK and Europe, EEV life operating
profit increased by 58 per cent to
£1,015 million (2016: £643 million). The
increase was driven by a 28 per cent
increase in new business profit, and higher
in‑force profit including a £195 million
benefit from revisions to longevity
assumptions following adoption of updated
actuarial mortality projections under CMI
201519. Profits arising from actions
undertaken to improve solvency were
more than offset by an increase in the
provision related to the potential costs and
related potential redress of reviewing
internally vesting annuities sold without
advice after 1 July 2008.
The high quality and recurring nature of
our operating capital generation and our
disciplined approach to managing balance
sheet risk has resulted in an increase in the
Group’s shareholders’ Solvency II capital
surplus which is estimated at
£13.3 billion6,7, at 31 December 2017
(equivalent to a solvency ratio of
202 per cent), compared with £12.5 billion
(201 per cent) at 31 December 2016. In
2017 we generated £3.6 billion of operating
capital. This was offset by dividends to
shareholders, net repayment of
subordinated debt, adverse foreign
currency effects and the £0.6 billion
reduction in statutory deferred tax assets
following US tax reform.
Prudential has been designated as a Global
Systemically Important Insurer (G‑SII) and
is monitoring and engaging with the PRA
on the development and potential impact
of the policy measures associated with
such a designation.
Solvency II surplus20 £bn
12.5
13.3
201%
202%
31 Dec 2016
31 Dec 2017 6
Solvency II capital ratio
Local statutory capital
All of our subsidiaries continue to hold
appropriate capital levels on a local
regulatory basis. In the UK, at
31 December 2017 The Prudential
Assurance Company Limited and its
subsidiaries21 had an estimated Solvency II
shareholder surplus22 of £6.1 billion
(equivalent to a cover ratio of 178 per cent)
and a with‑profits surplus23 of £4.8 billion
(equivalent to a cover ratio of 201 per cent).
In the US, following the enactment in
December 2017 of a comprehensive
reform package, a £628 million reduction in
the level of the statutory net admitted
deferred tax asset more than offset
operational capital formation, resulting in a
risk based capital ratio of 409 per cent
(2016: 485 per cent).
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 97 per cent of our US
portfolio are investment grade29. During
2017, default losses were minimal and
reported impairments across the UK
and US portfolios were £2 million
(2016: £35 million).
www.prudential.co.uk
Annual Report 2017 Prudential plc 43
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information 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 2022. Apart from small
drawdowns to test the process, these
facilities have never been drawn, and there
were no amounts outstanding at
31 December 2017. The medium‑term note
programme, the US shelf programme
(platform for issuance of SEC registered
public bonds in the US market), 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 flexible funding
capacity.
Net core structural borrowings
£m (EEV basis)
4,594
422
4,172
22%
2016
4,759
743
4,016
20%
2017
IFRS basis of value of net core structural borrowings
Mark to market value
Gearing ratio*
* Net core structural borrowings as proportion of IFRS
shareholders’ funds plus net debt, as set out in note II(d)
of the Additional unaudited financial information.
Financing and liquidity
The Group had central cash resources of
£2.3 billion at 31 December 2017
(31 December 2016: £2.6 billion). Total
core structural borrowings reduced by
£0.5 billion, from £6.8 billion to £6.3 billion,
with the issue of US$750 million
(£547 million at 31 December 2017)
4.875 per cent tier 2 perpetual
subordinated debt in October 2017 being
more than offset by the redemption of
US$1 billion (£741 million at 31 December
2017) 6.5 per cent tier 2 perpetual
subordinated debt in December 2017.
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 2017, we had issued
commercial paper under this programme
totalling US$650 million, to finance
non‑core borrowings.
Shareholders’ funds
Profit after tax for the year24
Exchange movements, net of related tax
Cumulative exchange gain of Korea life business recycled to profit and loss account
Unrealised gains and losses on Jackson fixed income securities classified
as available for sale25
Dividends
Market to market value movements on Jackson assets backing surplus and
required capital
Other
Net increase in shareholders’ funds
Shareholders’ funds at 1 January
Shareholders’ funds at 31 December
Shareholders’ value per share26
Return on shareholders’ funds27
IFRS
EEV
2017 £m
2016 £m
2017 £m
2016 £m
2,389
(409)
(61)
1,921
1,161
–
8,750
(2,045)
–
4,516
4,211
–
486
(1,159)
31
(1,267)
–
(1,159)
–
(1,267)
–
175
1,421
14,666
16,087
622p
25%
–
(135)
1,711
12,955
14,666
568p
26%
40
144
5,730
38,968
44,698
(11)
(367)
7,082
31,886
38,968
1,728p
1,510p
17%
17%
44 Prudential plc Annual Report 2017
www.prudential.co.uk
Chief Financial Officer’s report on the 2017 financial performance – Mark FitzPatrick continued Based on asset and liability values as at
31 December 2017, the transaction is
estimated to give rise to a pre‑tax IFRS loss
of around £500 million in the first half of
2018, alongside the de‑risking being
achieved.
Prudential plc’s Hong Kong subsidiaries
which are subject to legal transfer from The
Prudential Assurance Company Limited to
Prudential Corporation Asia Limited
comprise its life business, Prudential Hong
Kong Limited, and its general insurance
business, Prudential General Insurance
Hong Kong Limited. Hong Kong will
continue to be included in the segmental
reporting of Asia’s IFRS and embedded
value results. The transfers will be subject
to regulatory approval.
The sale of the UK annuity portfolio and
the transfer of Prudential plc’s Hong Kong
subsidiaries to Asia are expected to
complete by the end of 2019. Assuming
that these actions had both been
completed as at 31 December 2017, the
Group’s embedded value of £44.7 billion is
estimated to reduce by approximately
£300 million, reflecting the loss of future
profits on the portion of annuity liabilities
being sold.
The estimated pro forma impact on the
Group shareholder Solvency II capital
position, assuming that these actions had
both been completed as at 31 December
2017, is an increase in surplus of £0.3 billion
and an increase in the shareholder
solvency ratio of 6 percentage points.
The Group’s EEV basis shareholders’
funds also increased by 15 per cent to
£44.7 billion (31 December 2016:
£39.0 billion on an actual exchange rate
basis), On a per share basis the Group’s
embedded value at 31 December 2017
equated to 1,728 pence, up from
1,510 pence at 31 December 2016.
Corporate transactions
Intention to demerge the Group’s
UK businesses and sale of
£12.0 billion30 UK annuity portfolio
In March 2018, the Group announced its
intention to demerge its UK and Europe
businesses (‘M&G Prudential’) from
Prudential plc, resulting in two separately
listed companies. On completion of the
demerger, shareholders will hold interests
in both Prudential plc and M&G Prudential.
In preparation for the UK demerger
process, and to align the ownership of the
Group’s businesses with their operating
structures, Prudential plc intends to
transfer the legal ownership of its Hong
Kong insurance subsidiaries from The
Prudential Assurance Company Limited
(M&G Prudential’s UK regulated insurance
entity) to Prudential Corporation Asia
Limited, which is expected to complete by
the end of 2019.
M&G Prudential agreed in March 2018 to
the sale of £12.0 billion30 of its shareholder
annuity portfolio to Rothesay Life. Under the
terms of the agreement, M&G Prudential
has reinsured £12.0 billion30 of liabilities to
Rothesay Life, which is expected to be
followed by a Part VII transfer of the portfolio
by the end of 2019. The capital benefit of
this transaction will be retained within the
Group to support the demerger process.
The IFRS liabilities relating to
M&G Prudential’s total UK shareholder
annuity portfolio as at 31 December 2017
were £32.6 billion. The UK annuity
business being sold contributed around
£140 million towards UK life insurance
core5 IFRS operating profit before tax of
£597 million in 2017. Total M&G Prudential
IFRS operating profit before tax was
£1,378 million in 2017.
IFRS shareholders’ funds
£bn
+10%
14.7
16.1
31 Dec 2016
31 Dec 2017
EEV shareholders’ funds
£bn
+15%
39.0
44.7
1,510p
1,728p
31 Dec 2016
31 Dec 2017
EEV value per share
Group IFRS shareholders’ funds at
31 December 2017 increased by
10 per cent to £16.1 billion (31 December
2016: £14.7 billion on an actual exchange
rate basis), driven by the strength of the
operating result, offset by dividend
payments of £1,159 million. During the
period, UK sterling has strengthened
relative to the US dollar and various Asian
currencies. With approximately 50 per cent
of the Group’s IFRS net assets (71 per cent
of the Group’s EEV net assets)
denominated in non‑sterling currencies,
this generated a negative exchange rate
movement on the net assets in the period.
In addition, the moderate decline in US
long‑term interest rates between the start
and the end of the reporting period
produced unrealised gains on fixed income
securities held by Jackson accounted
through other comprehensive income.
www.prudential.co.uk
Annual Report 2017 Prudential plc 45
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Pro forma estimated Group shareholder Solvency II capital position
31 December 2016 as reported
31 December 2017 as reported
31 December 2017 pro forma estimate*
Solvency
capital
requirement
£bn
Own funds
£bn
24.8
26.4
26.2
12.3
13.1
12.6
Surplus
£bn
12.5
13.3
13.6
Ratio
%
201
202
208
* The pro forma estimate assumes that the partial sale of the UK annuity portfolio and the transfer of Prudential plc’s Hong Kong subsidiaries to Asia had both been completed as at
31 December 2017.
On the same basis, the estimated pro forma impact on the shareholder Solvency II capital position of the UK regulated insurance entity,
The Prudential Assurance Company Limited, is provided in the table below. This pro forma solvency position reflects the reduced risk
exposures in the UK insurance entity after the partial annuity sale and Hong Kong transfer.
Pro forma estimated The Prudential Assurance Company Limited shareholder Solvency II capital position
31 December 2016 as reported
31 December 2017 as reported
31 December 2017 pro forma estimate*
Solvency
capital
requirement
£bn
Own funds
£bn
12.0
14.0
8.5
7.4
7.9
5.7
Surplus
£bn
4.6
6.1
2.8
Ratio
%
163
178
150
* The pro forma estimate assumes that the partial sale of the UK annuity portfolio and the transfer of Prudential plc’s Hong Kong subsidiaries to Asia had both been completed as at
31 December 2017. In relation to the sale of the UK annuity portfolio, this estimate includes a £1.3 billion reduction in the Solvency Capital Requirement (SCR) and a £0.2 billion decrease
in Own Funds, resulting in an increase in capital surplus of £1.1 billion, of which £0.6 billion is expected to be recognised in the UK capital position as at 30 June 2018 under the
reinsurance agreement. In relation to the Hong Kong transfer, the impact on the SCR allows for the release of the Hong Kong business standalone SCR of £2.0 billion, partially offset by
the removal of diversification benefits between UK and Hong Kong of £1.1 billion.
Dividend
The Board has decided to increase the
full‑year ordinary dividend by 8 per cent to
47 pence per share, reflecting our 2017
financial performance and our confidence
in the future prospects of the Group. In line
with this, the Directors have approved a
second interim ordinary dividend of
32.5 pence per share (2016: 30.57 pence
per share).
The Group’s dividend policy remains
unchanged. The Board will maintain focus
on delivering a growing ordinary dividend.
In line with this policy, Prudential aims to
grow the ordinary dividend by 5 per cent
per annum. The potential for additional
distributions will continue to be
determined after taking into account the
Group’s financial flexibility across a broad
range of financial metrics and an
assessment of opportunities to generate
attractive returns by investing in specific
areas of the business28.
Entrance into Nigeria
In July 2017 the Group acquired a majority
stake in Zenith Life of Nigeria and formed
exclusive bancassurance partnerships with
Zenith Bank in Nigeria and Ghana. The
acquisition and bancassurance
partnerships will see Prudential enter the
market in Nigeria, Africa’s largest economy,
with a population of over 180 million. This
expands Prudential’s regional platform in
Africa following the launch of businesses in
Ghana and Kenya in 2014, in Uganda in
2015 and Zambia in 2016.
Disposal of Korea life
In May 2017, the Group completed the sale
of the Group’s life insurance subsidiary in
Korea, PCA Life Insurance Co. Ltd to Mirae
Asset Life Insurance Co. Ltd. for
KRW170 billion (equivalent to £117 million
at 17 May 2017 closing rate).
Disposal of broker-dealer network
in the US
In August 2017, the Group, through its
subsidiary National Planning Holdings, Inc.
(‘NPH’) sold its US independent broker‑
dealer network to LPL Financial LLC for an
initial purchase price of US$325 million
(equivalent to £252 million at
15 August 2017).
Mark FitzPatrick
Chief Financial Officer
46 Prudential plc Annual Report 2017
www.prudential.co.uk
Chief Financial Officer’s report on the 2017 financial performance – Mark FitzPatrick continued Notes
Increase stated on a constant exchange rate basis.
1
2 The 2016 comparative results have been re‑presented
from those published previously, following reassessment
of the Group’s operating segments as described in note
B1.3 of the IFRS financial statements.
3 Underlying free surplus generated comprises underlying
free surplus generated from the Group’s long‑term
business (net of investment in new business) and that
generated from asset management operations. Further
information is set out in note 11 of the EEV basis results.
Free surplus represents ‘underlying free surplus’ based on
operating movements and excludes market movements,
foreign exchange, capital movements, shareholders’
other income and expenditure and restructuring and
Solvency II implementation costs arising centrally.
4 Represents M&G Prudential asset management external
funds under management and internal funds included on
the M&G Prudential long‑term insurance business
balance sheet.
5 Core refers to the underlying profit of the UK and Europe
insurance business excluding the effect of, for example,
management actions to improve solvency and material
assumption changes. Details of these are set out in note
I(d) of the Additional unaudited financial information.
6 The Group shareholder capital position excludes the
contribution to Own Funds and the Solvency Capital
Requirement from ring‑fenced with‑profits funds and
staff pension schemes in surplus. The estimated solvency
position includes management’s calculation of UK
transitional measures reflecting operating and market
conditions at each valuation date. An application to
recalculate the transitional measures as at 31 December
2017 has been approved by the Prudential Regulation
Authority.
7 Before allowing for second interim ordinary dividend.
8 Refer to note B1.1 in IFRS financial statements for the
breakdown of other income and expenditure and other
non‑operating items.
9 Gross earned premiums for contracts in second and
subsequent years, comprising Asia segment IFRS gross
earned premium of £15.7 billion less gross earned
premiums relating to new regular and single premiums of
£5.7 billion, plus renewal premiums from joint ventures of
£1.6 billion, and excluding any amounts relating to the
sold Korea life business.
10 Includes Group’s proportionate share of the liabilities and
associated flows of the insurance joint ventures and
associates in Asia.
11 Defined as movements in shareholder‑backed
policyholder liabilities arising from premiums (net of
charges), surrenders/withdrawals, maturities and deaths.
12 Includes Unallocated surplus of with‑profits business.
13 Includes Group’s proportionate share in PPM South Africa
and the Asia asset management joint ventures.
14 For our asset management business the level of funds
managed on behalf of third parties, which are not
therefore recorded on the balance sheet, is a driver of
profitability. We therefore analyse the movement in the
funds under management each period, focusing between
those which are external to the Group and those held by
the insurance business and included on the Group
balance sheet. This is analysed in note II(b) of the
Additional unaudited financial information.
Company Limited are Prudential General Insurance Hong
Kong Limited, Prudential Hong Kong Limited, Prudential
International Assurance plc and Prudential Pensions
Limited.
22 The UK shareholder capital position excludes the
contribution to Own Funds and the Solvency Capital
Requirement from ring‑fenced with‑profits funds and
staff pension schemes in surplus. The estimated
solvency position includes management’s calculation
of UK transitional measures reflecting operating
and market conditions at each valuation date. An
application to recalculate the transitional measures
as at 31 December 2017 has been approved by the
Prudential Regulation Authority.
23 The estimated solvency position includes management’s
calculation of UK transitional measures reflecting
operating and market conditions at each valuation date.
An application to recalculate the transitional measures as
at 31 December 2017 has been approved by the
Prudential Regulation Authority.
24 Excluding profit for the year attributable to non‑
controlling interests.
15 Net inflows exclude Asia Money Market Fund (MMF)
25 Net of related charges to deferred acquisition costs
inflows of £1,495 million (2016: net inflows £403 million).
External funds under management exclude Asia MMF
balances of £9,317 million (2016: £7,714 million).
16 Net cash remitted by business units are included in the
Holding company cash flow, which is disclosed in detail in
note II(a) of the Additional unaudited financial information.
17 Based on the 2017 operating segments.
18 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 further detail on other
income and restructuring costs.
19 Continuous Mortality Investigation 2015 mortality
improvements model.
20 The methodology and assumptions used in calculating
the Solvency II capital results are set out in note II(f) of the
Additional unaudited financial information.
and tax.
26 Closing IFRS shareholders’ funds divided by issued
shares, as set out in note II(e) of the Additional unaudited
financial information. Closing EEV shareholders’ funds
divided by issued shares, as set out in note II(n) of the
Additional unaudited financial information.
27 Operating profit after tax and non‑controlling interests as
percentage of opening shareholders’ funds, as set out in
notes II(c) and II(m) of the Additional unaudited financial
information.
28 Refer to note 11 on the parent company financial
statements for further detail on the distributable profits of
Prudential plc.
29 Based on hierarchy of Standard & Poor’s, Moody’s and
Fitch, where available and if unavailable, internal ratings
have been used.
30 Relates to £12.0 billion of IFRS shareholder annuity
21 The insurance subsidiaries of The Prudential Assurance
liabilities, valued as at 31 December 2017.
www.prudential.co.uk
Annual Report 2017 Prudential plc 47
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Report on the risks facing our business and how these are managed
Generating value through
selective exposure to risk
2017 was, in many respects, a year of
global geopolitical transition. Popular
discontent was one of the driving factors,
shifting the political landscape in many
countries, in particular in the US and across
Western Europe. The nature of technology
risks evolved during the year, with high
profile and untargeted attacks affecting
companies around the world. Despite all
this, financial markets appeared largely
unperturbed during 2017 with low volatility
and steady and broad global economic
growth, and the first steps were taken
toward monetary policy tightening in
key economies.
As in previous years, we continue to
maintain a sustained focus on managing
prevailing market conditions and
macroeconomic uncertainty arising from
the global environment. Looking internally,
in August 2017 we announced our
intention to combine M&G and our UK life
business to form M&G Prudential, allowing
us better to leverage our scale and
capabilities. Change inherently carries risk,
but we will manage and minimise this
appropriately in order to provide better
outcomes for our customers.
Our results show that, even in times of
unpredictability, we can generate value
for our shareholders by taking selective
exposure to risks that are rewarded
commensurately and that can be quantified
appropriately and managed. We retain
risks within a clearly defined risk appetite,
where we believe doing so contributes to
value creation and the Group is able to
withstand the impact of an adverse
outcome. For our retained risks, we ensure
that we have the necessary capabilities,
expertise, processes and controls to
manage the exposure appropriately.
Our Group Risk Framework and risk
appetite have allowed us to control our risk
exposure successfully throughout the year.
Our governance, processes and controls
enable us to deal with the uncertainty
ahead in order to continue helping our
customers achieve their long‑term financial
goals.
This section explains the main risks
inherent in our business and how we
manage those risks, with the aim of
ensuring we maintain an appropriate risk
profile.
Risk governance, culture and
our risk management cycle
Prudential defines ‘risk’ as the uncertainty
that we face in implementing our strategies
and objectives successfully, which are
outlined on page 10. This includes all
internal or external events, acts or
omissions that have the potential to threaten
the success and survival of the Group.
Accordingly, material risks will be retained
selectively when we think there is value to
do so, and where it is consistent with the
Group’s risk appetite and philosophy
towards risk‑taking.
The following section provides more detail
on our risk governance, risk culture and risk
management process.
Risk governance
Our risk governance comprises the Board,
organisational structures, reporting
relationships, delegation of authority, roles
and responsibilities, and risk policies that
the Group Head Office and our business
units establish to make decisions and
control their activities on risk‑related
matters. This encompasses individuals,
Group‑wide functions and committees
involved in overseeing and managing risk.
Risk committees and
governance structure
Our risk governance structure is led by
the Group Risk Committee, supported
by independent non‑executives on risk
committees of major subsidiaries. These
committees monitor the development of
the Group Risk Framework, which includes
risk appetite, limits, and policies, as well as
risk culture.
In addition to our risk committees, there are
various executive risk forums to ensure risk
issues are shared and considered across
the Group. These are led by the Group
Executive Risk Committee, an advisory
committee to the Group Chief Risk Officer
which is supported by a number of
sub‑committees, including security and
information security where specialist skills
and knowledge are required.
Risk governance
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48 Prudential plc Annual Report 2017
www.prudential.co.uk
Group Risk Framework
The Group Risk Framework has been
developed to monitor and manage the risks
to our business and is owned by the Board.
The aggregate Group exposure to our key
risk drivers is monitored and managed by
the Group Risk function which is responsible
for reviewing, assessing and reporting on
the Group’s risk exposure and solvency
position from the Group economic,
regulatory and ratings perspectives.
The Framework requires all our businesses
and functions to establish processes for
identifying, evaluating, managing and
reporting of the key risks faced by the
Group – the ‘Risk Management Cycle’
(see below) is based on the concept of the
‘three lines of defence’, comprising risk
taking and management, risk control and
oversight, and independent assurance.
A major part of the Risk Management Cycle
is the annual assessment of the Group’s
most material risks. These risks range from
those associated with the economic,
market, political and regulatory
environment; those that we assume when
writing our insurance products and by
virtue of the investments we hold; and
those that are inherent in our business
model and its operations. This is used to
inform risk reporting to the risk committees
and the Board for the year.
The Group Risk Committee reviews the
Group Risk Framework and recommends
changes to our Board to ensure that it
remains effective in identifying and
managing the risks faced by the Group.
A number of core risk policies and
standards support the Framework to
ensure that risks to the Group are identified,
assessed, managed and reported.
During 2017 we made a number of
enhancements to our policies and
processes. These included changes to our
processes around new product approvals,
management of our critical outsourcing
arrangements and increased oversight
of model risk across the Group. A new
framework was developed to support
the monitoring and reporting of risks
associated with material transformation
programmes, and work continued over
the year on the Group’s risk culture.
Risk appetite, limits and triggers
The extent to which we are willing to take
risk in the pursuit of our business strategy
and objective to create shareholder value
is defined by a number of qualitative and
quantitative expressions of risk appetite,
operationalised through measures such as
limits, triggers, thresholds and indicators.
The Group Risk function is responsible for
reviewing the scope and operation of these
risk appetite measures at least annually to
determine that they remain relevant. The
Board approves all changes made to the
Group’s aggregate risk appetite, and has
delegated authority to the Group Risk
Committee to approve changes to the
system of limits, triggers and indicators.
Group risk appetite is set with reference to
economic and regulatory capital, liquidity
and earnings volatility, as well as for our
major risks, and is aimed at ensuring that
we take an appropriate level of aggregate
risk. It covers risks to shareholders,
including those from participating and
third‑party business.
We have some appetite to take market
and credit risk where it arises from
profit‑generating insurance activities,
to the extent that it remains part of a
balanced portfolio of sources of income
for shareholders and is compatible with
a robust solvency position. We also have
some appetite for retaining insurance
risks in areas where we believe we have
expertise and operational controls, and
where we judge it to create more value to
retain rather than transfer the risk. The
extent of insurance risk that we are willing to
hold is conditional on a balanced portfolio
of income to shareholders and compatibility
with a robust solvency position.
We have no appetite for material losses
(direct or indirect) suffered as a result of
failing to develop, implement or monitor
appropriate controls to manage operational
risks. Similarly, we have no appetite for
liquidity risk, ie for any business to have
insufficient resources to cover its
outgoing cash flows, or for the Group as a
whole to not meet cash flow requirements
from its debt obligations under any
plausible scenario.
Group limits operate within these
expressions of risk appetite to constrain
material risks, while triggers and indicators
provide further constraint and ensure
escalation. The Group Chief Risk Officer
determines the action to be taken upon all
breaches of Group limits which may
include escalation to the Group Risk
Committee or Board. Any decision on
action taken by the Group Chief Risk
Officer is reviewed at the subsequent
Group Risk Committee meeting.
Earnings volatility
The objectives of the aggregate risk limits
seek to ensure 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 ensure that the Group is
able to generate sufficient cash resources
to meet financial obligations as they fall due
in business as usual and stressed scenarios.
Risk appetite with respect to liquidity risk is
measured using a Liquidity Coverage Ratio
which considers the sources of liquidity
against liquidity requirements under stress
scenarios.
Capital requirements
The limits aim to ensure 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 at the Group level
are Solvency II capital requirements and
internal economic capital (ECap)
requirements. In addition, capital
requirements are monitored on local
statutory bases.
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.
www.prudential.co.uk
Annual Report 2017 Prudential plc 49
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Report on the risks facing our business and how these are managed
continued
Risk policies
These set out the specific requirements
which cover the fundamental principles
for risk management within the Group Risk
Framework. Policies are designed to give
some flexibility so that business users can
determine how best to comply with policies
based on their local expertise.
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.
Group Head Office and business units
must confirm on an annual basis that they
have implemented the necessary controls
to evidence compliance with the Group
Governance Manual.
Risk standards
The Group‑wide Operating Standards
provide supporting detail to the higher
level risk policies. In many cases they
define the minimum requirements for
compliance with Solvency II regulations
which in some areas are highly
prescriptive. The standards are more
detailed than policies.
Our risk culture
Culture is a strategic priority of the Board
who recognise the importance of good
culture in the way that we do business.
Risk culture is a subset of broader
organisational culture, which shapes the
organisation‑wide values that we use to
prioritise risk management behaviours
and practices.
An evaluation of risk culture forms part of
the Group Risk Framework and in particular
seeks to identify evidence that:
— Senior management in business units
articulate the need for good risk
management as a way to realise
long‑term value and continuously
support this through their actions;
— Employees understand and care about
their role in managing risk – they are
aware of and discuss risk openly as part
of the way they perform their role; and
— Employees invite open discussion
on the approach to the management
of risk.
During 2017 a risk culture assessment
was performed across the Group. The
assessment allowed us to compare the
Group’s risk culture against best practice
behaviours, identify any areas which need
improvement and provide high‑level
industry benchmarking and peer
comparison. The Group Risk Committee
also has a key role in providing advice to the
Remuneration Committee on risk
management considerations to be applied
in respect of executive remuneration.
Our Code of Conduct and our Group
Governance Manual include a series of
guiding principles that govern the
day‑to‑day conduct of all our people and
any organisations acting on our behalf. This
is supported by specific risk policies which
require that we act in a responsible manner.
This includes, but is not limited to, policies
on anti‑money laundering, financial crime
and anti‑bribery and corruption. Our
Group outsourcing and third‑party supply
policy ensures that human rights and
modern slavery considerations are
embedded within all of our supplier and
supply chain arrangements. We also have
embedded procedures to allow individuals
to speak out safely and anonymously
against unethical behaviour and conduct.
The risks associated with our environmental,
social and governance (ESG) activities and
the policies we maintain in relation to them,
are detailed in the Corporate responsibility
review on page 64.
Risk identification
Group‑wide risk identification takes
place throughout the year and includes
processes such as our Own Risk and
Solvency Assessment (ORSA) and the
horizon‑scanning performed as part of
our emerging risk management process.
On an annual basis, a top‑down
identification of the Group’s key risks is
performed, which considers those risks
that have the greatest potential to impact
the Group’s operating results and financial
condition. A bottom‑up process of risk
identification is performed by the business
units who identify, assess and document
risks, with appropriate coordination and
challenge from the risk functions.
The Group ORSA 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 report covers the
full known risk universe of the Group.
In accordance with provision C.2.1 of the
UK Code, the Directors perform a robust
assessment of the principal risks facing the
Company through the Group‑wide risk
identification process, Group ORSA report,
and the risk assessments done as part of
the business planning review, including
how they are managed and mitigated.
Reverse stress testing, which requires us
to ascertain the point of business model
failure, is another tool that helps us to
identify the key risks and scenarios that
may have a material impact on the Group.
Our emerging risk management process
identifies potentially material risks which
have a high degree of uncertainty around
timing, magnitude and propensity to
evolve. In 2017 we enhanced our Emerging
Risk Framework to bring it closer to the
Group’s risk management activity. This
included a redefinition of the relationship
between emerging and emerged risks,
enabling a consistent framework for
evaluating and escalating sufficiently
developed emerging risks for risk
management activity. The Group holds
emerging risk sessions over the year to
identify emerging risks which includes
input from local subject matter and
industry experts. We maintain contacts
with thought leaders and peers to
benchmark and refine our process.
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. The risk identification
processes support the creation of our
annual set of key risks, which are then
given enhanced management and
reporting focus.
Risk measurement and assessment
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 Solvency II and our own economic
capital basis. Governance arrangements
are in place to support the internal model,
including independent validation and
process and controls around model
changes and limitations.
50 Prudential plc Annual Report 2017
www.prudential.co.uk
The risk management cycle
The risk management cycle comprises processes to identify, measure and assess, manage and control, and monitor and report on our risks.
Risk identification covers Group‑wide:
— Top down risk identification
— Bottom up risk identification
— Emerging risk identification
Risk reports provide monthly updates
to the Group Executive Risk Committee,
Group Risk Committee and Board on
exposure against Board‑approved risk
appetite statements and limits.
Risk reports also provide updates on the
Group top risks.
Risk management and control
The control procedures and systems
established within the Group are designed
to manage the risk of failing to meet
business objectives reasonably and are
detailed in the Group risk policies. This can
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, and
form part of the holistic risk management
approach under the Group’s ORSA.
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Risks are assessed in terms of materiality.
Material risks which are modelled are
included in capital models, including
ECap.
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
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.
The methods and risk management tools
we employ to mitigate each of our major
categories of risks are detailed in the
Further risk information section below.
Risk monitoring and reporting
The identification of the Group’s key risks
informs the management information
received by the Group risk committees and
the Board. Risk reporting of key exposures
against appetite is also included, as well as
ongoing developments in other key and
emerging risks.
www.prudential.co.uk
Annual Report 2017 Prudential plc 51
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
Report on the risks facing our business and how these are managed
continued
Summary risks
The components of our business model,
outlined on page 12, give rise to risks of
varying nature across the Group which
can broadly be categorised as those which
arise as a result of our business operations;
those risks arising from our investments;
those which arise from the nature of our
products; and those broad risks which
apply to us because of the global
environment in which we operate. These
risks, where they materialise, may have a
financial impact on the Group, and could
also impact on the performance of our
products or the services we provide our
customers and distributors, which gives
rise to potential risks to our brand,
reputation and have conduct risk
implications. These risks are summarised
below. We have indicated whether these
risks are considered material at the level
of the Group or our business units. Our
disclosures covering risk factors can be
found at the end of this document.
‘Macro’ risks
Risks from our investments
Risks from our products
Risks from our business operations
Some of the risks that we are exposed to are necessarily broad given the external
influences which may impact on the Group.
These risks include:
Global economic conditions
Changes in global economic conditions can impact us directly; for example by leading
to poor returns on our investments and increasing the cost of promises (guarantees) we
have made to our customers. Our fund investment performance may also be impacted,
which is a fundamental part of our business in providing appropriate returns for our
customers and shareholders. Changes in economic conditions can also have an
indirect impact on us; for example economic pressures could lead to decreased
savings, reducing the propensity for people to buy our products. Global economic
conditions may also impact on regulatory risk for the Group by changing prevailing
political attitudes towards regulation. We consider this to be a risk which is material
at the level of the Group.
Geopolitical risk
The geopolitical environment has produced varying levels of volatility in recent years
as seen by political developments in the UK, the US and the Eurozone. Uncertainty in
these regions, combined with conflict in the Middle East and elevated tensions in east
Asia and the Korean peninsula underline that geopolitical risks are truly global and their
potential impacts are wide‑ranging; for example through increased regulatory and
operational risks. The geopolitical and economic environments are increasingly closely
linked, and changes in the political arena may have direct or indirect impacts on
our Group.
Digital disruption
The emergence of advanced technologies such as artificial intelligence and block chain
is providing an impetus for companies to rethink their existing operating models and
how they interact with their customers. We consider digital disruption from both an
external and internal view. The external view considers the rise of new technologies
and how this may impact on our industry and our competitiveness within it, while the
internal view considers the risks associated with our own internal developments in
meeting digital change challenges and opportunities. While we are embracing such
opportunities, we are also closely monitoring any risks which arise.
Credit risk
Insurance risks
Operational risks
Is the potential for reduced value of our
The nature of the products offered by the
The complexity of our Group and activities
investments due to the uncertainty
Group exposes it to insurance risks,
around investment returns arising from
which we consider to form a significant
means we face a challenging operating
environment. This results from the high
the potential for defaults of our
part of our overall Group risk profile.
volume of transactions we process; product
investment counterparties. Invested
credit risk arises from our asset portfolio.
We increase sector focus where
necessary.
The insurance risks that we are exposed
to by virtue of our products include
longevity risk (policyholders living
and investment portfolios; our people,
processes and IT systems; and the extensive
regulations under which we operate.
The assets backing the M&G Prudential
(policyholders with life protection dying);
business transformation; introducing new
and Jackson annuity businesses means
morbidity risk (policyholders with
products; new technologies; engaging in third
credit risk is considered a material risk for
health protection becoming ill) and
party relationships; and entering into new
these business units in particular.
persistency risk (customers lapsing
markets and geographies. Implementing our
longer than expected); mortality risk
We also face operational risks through
Market risk
Is the potential for reduced value of our
investments resulting from the volatility
of asset prices as driven by fluctuations
in equity prices, interest rates, foreign
exchange rates and property prices.
Certain market risks are considered more
material for specific business units.
In our Asia business, our main market
risks arise from the value of fees from
our fee‑earning products. In the US,
Jackson’s fixed and variable annuity
books are exposed to a variety of market
risks due to the assets backing these
policies.
In the UK, exposure arises from the
valuation of the proportion of the
with‑profits fund’s future profits which is
transferred to the shareholders (future
transfers), which is dependent on equity,
property and bond values.
M&G Prudential invests in a broad range
of asset classes and its income is subject
to the price volatility of global financial
and currency markets.
Liquidity risk
assets to meet our obligations as they fall
due, and incorporates the risk arising
from funds composed of illiquid assets.
It results from a mismatch between the
liquidity profile of assets and liabilities.
We consider this a risk which is material
at the level of the Group.
their policies, and a type of policyholder
business strategy requires interconnected
behaviour risk).
From our health protection products,
increases in the costs of claims (including
change initiatives across the Group. The pace
of change further adds to the complexity of
our operational risk profile.
the level of medical expenses) increasing
Without an effective operational risk
over and above price inflation (claim
framework, such risks could cause significant
inflation) is another risk.
The processes that determine the price of
our products and reporting the results of
our long‑term business operations
require us to make a number of
disruption our systems and operations,
resulting in financial loss and/or reputational
damage. We consider operational risk to be
material at the level of the Group.
Information security risk is a significant
assumptions. Where experience deviates
consideration within operational risk,
from these assumptions our profitability
including both the continuously evolving risk
may be impacted.
Across our business units, some
insurance risks are more material than
others.
Persistency and morbidity risks are
of malicious attack on our systems as well as
risks relating to data security and integrity and
network disruption. The size of Prudential’s IT
infrastructure and network, our move toward
digitalisation and the increasing number of
high profile cyber security incidents across
among the most material insurance risks
industries means that this risk will continue to
for our Asia business given our focus on
be an area of high focus and is one considered
health protection products in the region.
to be material to the Group.
For M&G Prudential the most material
insurance risk is longevity risk driven by
legacy annuity business.
At Jackson, the most material insurance
risk is policyholder behaviour risk,
profitability of the variable annuity
business and influenced by market
performance and the value of policy
guarantees.
Regulatory risk
We also operate under the ever‑evolving
requirements set out by diverse regulatory
and legal and tax regimes, as well as utilising a
significant number of third parties to distribute
products and to support business operations;
all of which adds to the complexity of our
operations.
The number of regulatory changes underway
across Asia, in particular those focusing on
consumer protection means that regulatory
change in the region is considered a key risk.
Both Jackson and M&G Prudential operate in
highly regulated markets. Regulatory reforms
can have a material impact on our businesses,
and regulatory focus continues to be high.
Is the risk of not having sufficient liquid
including persistency. This impacts the
52 Prudential plc Annual Report 2017
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‘Macro’ risks
Risks from our investments
Risks from our products
Risks from our business operations
Some of the risks that we are exposed to are necessarily broad given the external
influences which may impact on the Group.
These risks include:
Global economic conditions
Changes in global economic conditions can impact us directly; for example by leading
to poor returns on our investments and increasing the cost of promises (guarantees) we
have made to our customers. Our fund investment performance may also be impacted,
which is a fundamental part of our business in providing appropriate returns for our
customers and shareholders. Changes in economic conditions can also have an
indirect impact on us; for example economic pressures could lead to decreased
savings, reducing the propensity for people to buy our products. Global economic
conditions may also impact on regulatory risk for the Group by changing prevailing
political attitudes towards regulation. We consider this to be a risk which is material
at the level of the Group.
Geopolitical risk
The geopolitical environment has produced varying levels of volatility in recent years
as seen by political developments in the UK, the US and the Eurozone. Uncertainty in
these regions, combined with conflict in the Middle East and elevated tensions in east
Asia and the Korean peninsula underline that geopolitical risks are truly global and their
potential impacts are wide‑ranging; for example through increased regulatory and
operational risks. The geopolitical and economic environments are increasingly closely
linked, and changes in the political arena may have direct or indirect impacts on
our Group.
Digital disruption
The emergence of advanced technologies such as artificial intelligence and block chain
is providing an impetus for companies to rethink their existing operating models and
how they interact with their customers. We consider digital disruption from both an
external and internal view. The external view considers the rise of new technologies
and how this may impact on our industry and our competitiveness within it, while the
internal view considers the risks associated with our own internal developments in
meeting digital change challenges and opportunities. While we are embracing such
opportunities, we are also closely monitoring any risks which arise.
Credit risk
Is the potential for reduced value of our
investments due to the uncertainty
around investment returns arising from
the potential for defaults of our
investment counterparties. Invested
credit risk arises from our asset portfolio.
We increase sector focus where
necessary.
The assets backing the M&G Prudential
and Jackson annuity businesses means
credit risk is considered a material risk for
these business units in particular.
Market risk
Is the potential for reduced value of our
investments resulting from the volatility
of asset prices as driven by fluctuations
in equity prices, interest rates, foreign
exchange rates and property prices.
Certain market risks are considered more
material for specific business units.
In our Asia business, our main market
risks arise from the value of fees from
our fee‑earning products. In the US,
Jackson’s fixed and variable annuity
books are exposed to a variety of market
risks due to the assets backing these
policies.
In the UK, exposure arises from the
valuation of the proportion of the
with‑profits fund’s future profits which is
transferred to the shareholders (future
transfers), which is dependent on equity,
property and bond values.
M&G Prudential invests in a broad range
of asset classes and its income is subject
to the price volatility of global financial
and currency markets.
Liquidity risk
Is the risk of not having sufficient liquid
assets to meet our obligations as they fall
due, and incorporates the risk arising
from funds composed of illiquid assets.
It results from a mismatch between the
liquidity profile of assets and liabilities.
We consider this a risk which is material
at the level of the Group.
Insurance risks
The nature of the products offered by the
Group exposes it to insurance risks,
which we consider to form a significant
part of our overall Group risk profile.
The insurance risks that we are exposed
to by virtue of our products include
longevity risk (policyholders living
longer than expected); mortality risk
(policyholders with life protection dying);
morbidity risk (policyholders with
health protection becoming ill) and
persistency risk (customers lapsing
their policies, and a type of policyholder
behaviour risk).
From our health protection products,
increases in the costs of claims (including
the level of medical expenses) increasing
over and above price inflation (claim
inflation) is another risk.
The processes that determine the price of
our products and reporting the results of
our long‑term business operations
require us to make a number of
assumptions. Where experience deviates
from these assumptions our profitability
may be impacted.
Across our business units, some
insurance risks are more material than
others.
Persistency and morbidity risks are
among the most material insurance risks
for our Asia business given our focus on
health protection products in the region.
For M&G Prudential the most material
insurance risk is longevity risk driven by
legacy annuity business.
At Jackson, the most material insurance
risk is policyholder behaviour risk,
including persistency. This impacts the
profitability of the variable annuity
business and influenced by market
performance and the value of policy
guarantees.
Operational risks
The complexity of our Group and activities
means we face a challenging operating
environment. This results from the high
volume of transactions we process; product
and investment portfolios; our people,
processes and IT systems; and the extensive
regulations under which we operate.
We also face operational risks through
business transformation; introducing new
products; new technologies; engaging in third
party relationships; and entering into new
markets and geographies. Implementing our
business strategy requires interconnected
change initiatives across the Group. The pace
of change further adds to the complexity of
our operational risk profile.
Without an effective operational risk
framework, such risks could cause significant
disruption our systems and operations,
resulting in financial loss and/or reputational
damage. We consider operational risk to be
material at the level of the Group.
Information security risk is a significant
consideration within operational risk,
including both the continuously evolving risk
of malicious attack on our systems as well as
risks relating to data security and integrity and
network disruption. The size of Prudential’s IT
infrastructure and network, our move toward
digitalisation and the increasing number of
high profile cyber security incidents across
industries means that this risk will continue to
be an area of high focus and is one considered
to be material to the Group.
Regulatory risk
We also operate under the ever‑evolving
requirements set out by diverse regulatory
and legal and tax regimes, as well as utilising a
significant number of third parties to distribute
products and to support business operations;
all of which adds to the complexity of our
operations.
The number of regulatory changes underway
across Asia, in particular those focusing on
consumer protection means that regulatory
change in the region is considered a key risk.
Both Jackson and M&G Prudential operate in
highly regulated markets. Regulatory reforms
can have a material impact on our businesses,
and regulatory focus continues to be high.
www.prudential.co.uk
Annual Report 2017 Prudential plc 53
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Report on the risks facing our business and how these are managed
continued
Further risk information
In reading the sections below, it is useful to
understand that there are some risks that
our policyholders assume by virtue of the
nature of their products, and some risks
that the Company and its shareholders
assume. Examples of the latter include
those risks arising from assets held directly
by and for the Company or the risk that
policyholder funds are exhausted. This
report is focused mainly on risks to the
shareholder, but will include those which
arise indirectly through our policyholder
exposures.
Risks from our investments
Market risk
The main drivers of market risk in the
Group are:
— Investment risk (including equity
and property risk);
— Interest rate risk; and
— Given the geographical diversity of
our business, foreign exchange risk.
With respect to investment risk, equity
and property risk arises from our holdings
of equity and property investments, the
prices of which can change depending on
market conditions.
The valuation of our assets (particularly the
bonds that we invest in) and liabilities are
also dependent on market interest rates
and exposes us to the risk of those moving
in a way that is detrimental for us.
Given our global business, we earn our
profits and have assets and liabilities in
various currencies. The translation of those
into our reporting currency exposes us to
movements in foreign exchange rates.
Our main investment risk exposure arises
from the portion of the profits from the
M&G Prudential with‑profits fund to which
we are entitled to receive; the value of the
future fees from our fee‑earning products
in our Asia business; and from the asset
returns backing Jackson’s variable
annuities business.
Our interest rate risk is driven in the UK
business by our need to match the duration
of our assets and liabilities; from the
guarantees of some non unit‑linked
investment products in Asia; and the cost
of guarantees in Jackson’s fixed, fixed
index and variable annuity business.
The methods that we use to manage and
mitigate our market risks include the
following:
— Our market risk policy;
— Risk appetite statements, limits and
triggers that we have in place;
— The monitoring and oversight of market
risks through the regular reporting of
management information;
— Our asset and liability management
programmes;
— Use of derivative programmes,
including, for example, interest rate
swaps, options and hybrid options for
interest rate risk;
— Regular deep dive assessments; and
— Use of currency hedging.
Investment risk
(Audited)
In the UK business, our main investment
risk arises from the assets held in the
with‑profits funds. Although this is mainly
held by our policyholders, a proportion
of the funds’ declared bonuses and
policyholder net investment gains is shared
with shareholders and so our investment
exposure relates to the future performance
of that proportion (future transfers).
This investment risk is driven mainly
by equities in the funds, although there
is some risk associated with other
investments such as property and bonds.
Some hedging to protect against a
reduction in the value of these future
transfers against falls in equity prices
is performed outside the funds using
derivatives. The with‑profits funds’ large
Solvency II own funds – estimated at
£9.6 billion as at 31 December 2017
(31 December 2016: £8.4 billion) – helps
to protect against market fluctuations and
helps the funds to maintain appropriate
solvency levels. The with‑profits funds’
Solvency II own funds are protected
partially against falls in equity markets
through an active hedging programme
within the fund.
In Asia, our shareholder exposure to equity
price movements results from unit‑linked
products, where our fee income is linked
to the market value of the funds under
management. Further exposure arises from
with‑profits businesses where bonuses
declared are based broadly on historical
and current rates of return from our
investment portfolios which include
equities.
In Jackson, investment risk arises from the
assets backing customer policies. In the
case of spread‑based business, including
fixed annuities, these assets are generally
bonds, and shareholder exposure comes
from the minimum returns needed to meet
the guaranteed rates that we offer to
policyholders. For our variable annuity
business, these assets include both
equities and bonds. In this case, the main
risk to the shareholder comes from the
guaranteed benefits that can be included
as part of these products. Our exposure to
this is reduced by using a derivative
hedging programme, as well as through the
use of reinsurance to pass on the risk to
third‑party reinsurers.
Interest rate risk
(Audited)
While long‑term interest rates in advanced
economies have increased broadly since
mid‑2016 and indications are for further
gradual tightening of monetary policy and
the start of balance sheet normalisation
by central banks, they remain close to
historical lows. Some products that we
offer are sensitive to movements in interest
rates. We have already taken a number of
actions to reduce the risk to the in‑force
business, as well as re‑pricing and
restructuring new business offerings in
response to these historically low interest
rates. Nevertheless, we still retain some
sensitivity to interest rate movements.
Interest rate risk arises in M&G Prudential’s
insurance business from the need to match
cash payments to meet annuity obligations
with the cash we receive from our
investments. To minimise the impact on
our profit, we aim to match the duration
(a measure of interest rate sensitivity) of
assets and liabilities as closely as possible
and the position is monitored regularly.
Under the Solvency II regulatory regime,
additional interest rate risk results from the
way the balance sheet is constructed, such
as the requirement for us to include a risk
54 Prudential plc Annual Report 2017
www.prudential.co.uk
margin. The UK business assesses on a
continual basis the need for any derivatives
in managing its interest rate sensitivity. The
with‑profits business is exposed to interest
rate risk because of underlying guarantees
in some of its products. Such risk is borne
largely by the with‑profits fund itself but
shareholder support may be required in
extreme circumstances where the fund has
insufficient resources to support the risk.
In Asia, our exposure to interest rate risk
arises from the guarantees of some non
unit‑linked investment products. This
exposure exists because it may not be
possible to hold assets which will provide
cash payments to us which match exactly
those payments we in turn need to make to
policyholders – this is known as an asset
and liability mismatch and although it is
small and managed appropriately, 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
impact on the cost of guarantees in these
products; in particular the cost of
guarantees to us may increase when
interest rates fall. We monitor the level of
sales of variable annuity products with
guaranteed living benefits actively, and
together with the risk limits we have in
place this helps us to ensure that we are
comfortable with the interest rate and
market risks we incur as a result. The
Jackson hedging programme includes
hybrid derivatives to provide some
protection from a combined fall in interest
rates and equity markets since Jackson is
exposed to the combination of these
market movements.
Foreign exchange risk
(Audited)
The geographical diversity of our
businesses means that we have some
exposure to the risk of exchange rate
fluctuations. Our operations in the US and
Asia, which represent a large proportion
of our operating profit and shareholders’
funds, generally write policies and invest
in assets in local currencies. Although this
limits the effect of exchange rate
movements on local operating results,
it can lead to fluctuations in our Group
financial statements when results are
reported 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. We accept the foreign
exchange risk this can produce when
reporting our Group balance sheet and
income statement. In cases where a surplus
arises in an overseas operation which is to
be used to support Group capital, or where
a significant cash payment is due from an
overseas subsidiary to the Group, this
foreign exchange exposure is hedged
where we believe it is favourable
economically to do so. Generally, we do
not have appetite for significant direct
shareholder exposure to foreign exchange
risks in currencies outside of the countries
in which we operate, but we do have some
appetite for this on fee income and on
non‑sterling investments within the
with‑profits fund. Where foreign exchange
risk arises outside our appetite, currency
borrowings, swaps and other derivatives
are used to manage our exposure.
Credit risk
We invest in bonds that provide a regular,
fixed amount of interest income (fixed
income assets) in order to match the
payments we need to make to
policyholders. We also enter into
reinsurance and derivative contracts with
third parties to mitigate various types of
risk, as well as holding cash deposits at
certain banks. As a result, we are exposed
to credit risk and counterparty risk across
our business.
Credit risk is the potential for reduction in
the value of our investments which results
from the perceived level of risk of an
investment issuer being unable to meet its
obligations (defaulting). Counterparty risk
is a type of credit risk and relates to the risk
that the counterparty to any contract we
enter into being unable to meet their
obligations causing us to suffer loss.
We use a number of risk management tools
to manage and mitigate this credit risk,
including the following:
— Our credit risk policy;
— Risk appetite statements and limits
that we have defined on issuers, and
counterparties;
— Collateral arrangements we have in
place for derivative, secured lending
reverse repo and reinsurance
transactions;
— The Group Credit Risk Committee’s
oversight of credit and counterparty
credit risk and sector and/or name‑
specific reviews. In 2017 it has
conducted sector reviews in the Asia
sovereign sector, the UK banking
sector, the US retail property sector,
and continues to review the
developments around central clearing;
— Regular deep dive assessments; and
— Close monitoring or restrictions on
investments that may be of concern.
Debt and loan portfolio
(Audited)
Our UK business is exposed mainly to
credit risk on fixed income assets in the
shareholder‑backed portfolio. At
31 December 2017, this portfolio contained
fixed income assets worth £35.3 billion.
Credit risk arising from a further
£57.4 billion of fixed income assets is borne
largely by the with‑profits fund, to which
the shareholder is not exposed directly
although under extreme circumstances
shareholder support may be required if the
fund is unable to meet payments as they
fall due.
Credit risk also arises from the debt
portfolio in our Asia business, the value of
which was £41.0 billion at 31 December
2017. The majority (68 per cent) of the
portfolio is in unit‑linked and with‑profits
funds and so exposure of the shareholder
to this component is minimal. The
remaining 32 per cent of the debt portfolio
is held to back the shareholder business.
Credit risk also arises in the general
account of the Jackson business, where
£35.4 billion of fixed income assets are held
to support shareholder liabilities including
those from our fixed annuities, fixed index
annuities and life insurance products.
The shareholder‑owned debt and loan
portfolio of the Group’s other operations
was £2.3 billion as at 31 December 2017.
Further details of the composition and
quality of our debt portfolio, and exposure
to loans, can be found in the IFRS financial
statements.
www.prudential.co.uk
Annual Report 2017 Prudential plc 55
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Report on the risks facing our business and how these are managed
continued
Group sovereign debt
(Audited)
We also invest in bonds issued by national
governments. This sovereign debt
represented 19 per cent or £16.5 billion of
the shareholder debt portfolio as at
31 December 2017 (31 December 2016:
19 per cent or £17.1 billion). 5 per cent of
this was rated AAA and 90 per cent was
considered investment grade
(31 December 2016: 92 per cent
investment grade).
The particular risks associated with holding
sovereign debt are detailed further in our
disclosures on risk factors.
The exposures held by the shareholder‑
backed business and with‑profits funds in
sovereign debt securities at 31 December
2017 are given in note C3.2(f) of the
Group’s IFRS financial statements.
Bank debt exposure and counterparty
credit risk
(Audited)
Our exposure to banks is a key part of our
core investment business, as well as being
important for the hedging and other
activities we undertake to manage our
various financial risks. Given the importance
of our relationship with our banks, exposure
to the sector is considered a material risk
for the Group with an appropriate level 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
bank debt securities at 31 December 2017
are given in note C3.2(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, buy credit protection or use
additional collateral arrangements to
manage our levels of counterparty
credit risk.
At 31 December 2017, shareholder
exposures by rating1 and sector are
shown below:
— 95 per cent of the shareholder portfolio
is investment grade rated. In particular,
69 per cent of the portfolio is rated A
and above; and
— 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 sovereign sectors).
Shareholder exposure by rating
5
1
2
3
4
10%
1 AAA
27%
2 AA
32%
3 A
4 BBB
26%
5 BB or below or non‑rated assets 5%
Shareholder exposure by sector
1
12
11
10
9
8
7
6
5
4
3
1 Financial
2 Government
3 Real estate
4 Utilities
5 Consumer, non‑cyclical
6 Mortgage securities
7
8 Energy
9 Communications
10 Consumer, cyclical
11 Asset‑backed securities
12 Other
Industrial
2
22.43%
26.23%
9.80%
7.66%
7.87%
3.02%
3.78%
4.01%
3.10%
2.46%
3.25%
6.39%
56 Prudential plc Annual Report 2017
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Liquidity risk
Our liquidity risk arises from the need to
have sufficient liquid assets to meet
policyholder and third‑party payments as
they fall due. This incorporates the risk
arising from funds composed of illiquid
assets and results from a mismatch
between the liquidity profile of assets and
liabilities. Liquidity risk may impact on
market conditions and valuation of assets
in a more uncertain way than for other risks
like interest rate or credit risk. It may arise,
for example, where external capital is
unavailable at sustainable cost, increased
liquid assets are required to be held as
collateral under derivative transactions or
redemption requests are made against
Prudential external funds.
We have significant internal sources of
liquidity, which are sufficient to meet all of
our expected cash requirements for at least
12 months from the date the financial
statements are approved, without having
to resort to external sources of funding. In
total, the Group has £2.6 billion of undrawn
committed facilities that we can make use
of, expiring in 2022. We have access to
further liquidity by way of the debt capital
markets, and also have in place an extensive
commercial paper programme and have
maintained a consistent presence as an
issuer in this market for the last decade.
Liquidity uses and sources are assessed
at a Group and business unit level under
both base case and stressed assumptions.
We calculate a Liquidity Coverage Ratio
(LCR) under stress scenarios as one
measure of our liquidity risk, and this ratio
and the liquidity resources available to us
are monitored regularly and are assessed
to be sufficient.
Our risk management and mitigation of
liquidity risk include:
— Our liquidity risk policy;
— The risk appetite statements, limits
and triggers that we have in place;
— The monitoring of liquidity risk we
perform through regular management
information to committees and
the Board;
— Our Liquidity Risk Management Plan,
which includes details of the Group
Liquidity Risk Framework as well as
gap analysis of our liquidity risks and
the adequacy of our available
liquidity resources under normal
and stressed conditions;
— Regular stress testing;
— Our established contingency plans
and identified sources of liquidity;
— Our ability to access the money and
debt capital markets;
— Regular deep dive assessments; and
— The access we have to external sources
of finance through committed credit
facilities.
Risks from our products
Insurance risk
Insurance risk makes up a significant
proportion of our overall risk exposure. The
profitability of our businesses depends on a
mix of factors including levels of, and
trends in, mortality (policyholders dying),
morbidity (policyholders becoming ill) and
policyholder behaviour (variability in how
customers interact with their policies,
including utilisation of withdrawals,
take‑up of options and guarantees and
persistency, ie lapsing of policies), and
increases in the costs of claims, including
the level of medical expenses increases
over and above price inflation (claim
inflation).
The principal drivers of the Group’s
insurance risks are persistency and
morbidity risk in the Asia business;
longevity risk in the UK legacy business
of M&G Prudential; and policyholder
behaviour risks in Jackson.
We manage and mitigate our insurance risk
using the following:
— Our insurance and underwriting
risk policies;
— The risk appetite statements, limits
and triggers we have in place;
— Using longevity, morbidity and
persistency assumptions that reflect
recent experience and expectation of
future trends, and industry data and
expert judgement where appropriate;
— Using reinsurance to mitigate longevity
and morbidity risks;
— Ensuring appropriate medical
underwriting when policies are issued
and appropriate claims management
practices when claims are received in
order to mitigate morbidity risk;
— Maintaining the quality of our sales
processes and using initiatives to
increase customer retention in order to
mitigate persistency risk;
— Using product re‑pricing and other
claims management initiatives in order
to mitigate medical expense inflation
risk; and
— Regular deep dive assessments.
Longevity risk is an important element
of our insurance risks for which we need
to hold a large amount of capital under
Solvency II regulations. Longevity
reinsurance is a key tool for us in managing
our risk. The enhanced pensions freedoms
introduced in the UK during 2015 reduced
the demand for retail annuities greatly
and further liberalisation is anticipated.
Although we have withdrawn from selling
new annuity business, given our significant
annuity portfolio the assumptions we
make about future rates of improvement
in mortality rates remain key to the
measurement of our insurance liabilities
and to our assessment of any 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
is considerable volatility in year‑on‑year
longevity experience, which is why we
need expert judgement in setting our
longevity basis.
Our 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, we write significant volumes of
health protection business, and so a key
assumption for us is the rate of medical
inflation, which is often in excess of general
price inflation. There is a risk that the
expenses of medical treatment increase
more than we expect, so the medical claim
cost passed on to us is higher than
anticipated. Medical expense inflation risk
is best mitigated by 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 total across a policy.
www.prudential.co.uk
Annual Report 2017 Prudential plc 57
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continued
The business environment we operate
in has become increasingly complex over
the years. The political, environmental,
societal, legal and economic landscape is
highly dynamic and uncertain. Changes
and developments on the horizon may
result in emerging risks to us which are
monitored under our Emerging Risk
Framework.
The Group maintains active engagement
with our shareholders, governments,
policymakers and regulators in our key
markets, as well as with international
institutions. This introduces expectations
for the Group to act and respond to
environmental, social and governance
(ESG) matters in a certain manner. The
perception that our key stakeholders have
of us and our businesses is crucial in
forming and maintaining a robust brand
and reputation. As such, the Group’s
operational risk framework explicitly
incorporates ESG as a component of our
social and environmental responsibility,
brand management and external
communications within our framework.
This is further strengthened by factoring
considerations for reputational impacts
when the materiality of operational risks
are assessed.
The climate risk landscape continues to
evolve and is moving up the agenda of
many regulators, governments, non‑
governmental organisations and investors.
Examples of this include the US
Department of Labor’s decision to change
its guidance to pension fund fiduciaries
to allow them to factor ESG issues into
investment decisions; Hong Kong Stock
Exchange listing rules requiring listed
companies to provide a high‑level
discussion of ESG approaches and
activities in external disclosures, and the
Financial Stability Board’s (FSB) Task Force
for Climate‑related Financial Disclosures.
Our persistency assumptions reflect
similarly a combination of recent past
experience for each relevant line of
business and expert judgement, especially
where a lack of relevant and credible
experience data exists. Any expected
change in future persistency is also
reflected in the assumption. 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 business with
high lapse rates. Where appropriate, we
make allowance for the relationship (either
assumed or observed historically) between
persistency and investment returns and
account for the resulting additional risk.
Modelling this dynamic policyholder
behaviour is particularly important when
assessing the likely take‑up rate of options
embedded within certain products.
The effect of persistency on our financial
results can vary but depends mostly on
the value of the product features and
market conditions.
Risks from our business operations
Non-financial risks
In the course of doing business, the Group
is exposed to non‑financial risks arising
from our operations, the business
environment and our strategy. Our main
risks across these areas are detailed below.
We define operational risk as the risk of loss
(or unintended gain or profit) arising from
inadequate or failed internal processes,
personnel or systems, or from external
events. This includes employee error,
model error, system failures, fraud or some
other event which disrupts business
processes. Processes are established for
activities across the scope of our business,
including operational activity, regulatory
compliance, and those supporting
environmental, social and governance
(ESG) activities among others, any of which
can expose us to operational risks.
We process a large volume of complex
transactions across a number of diverse
products, and are subject to a high number
of varying legal, regulatory and tax
regimes. We also have a number of
important third‑party relationships that
provide the distribution and processing
of our products, both as market
counterparties and as outsourcing
partners. M&G Prudential outsources
several operations, including a significant
part of its back office, customer‑facing
functions and a number of IT functions.
These third‑party arrangements help us
to provide a high level and cost‑effective
service to our customers, but they also
make us reliant on the operational
performance of our outsourcing partners.
The performance of our core business
activities places reliance on the IT
infrastructure that supports day‑to‑day
transaction processing. Our IT
environment must also be secure and
we address an increasing cyber risk threat
as our digital footprint increases – see
separate Cyber risk section below. The risk
that our IT infrastructure does not meet
these requirements is a key area of focus
for us, particularly the risk that legacy
infrastructure supporting core activities/
processes affects business continuity or
impacts on business growth.
Operational challenges also exist in
keeping pace with regulatory changes.
This requires implementing processes
to ensure we are, and remain, compliant
on an ongoing basis, including regular
monitoring and reporting. The high rate
of global regulatory change, in an already
complex regulatory landscape, increases
the risk of non‑compliance due to a failure
to identify, interpret correctly, implement
and/or monitor regulatory compliance.
See Global regulatory and political risk
section below. Legislative developments
over recent years, together with enhanced
regulatory oversight and increased
capability to issue sanctions, have resulted
in a complex regulatory environment that
may lead to breaches of varying magnitude
if the Group’s business‑as‑usual operations
are not compliant. As well as prudential
regulation, we focus on conduct regulation,
including those related to sales practice
and anti‑money laundering, bribery and
corruption. We have a particular focus on
regulations related to the latter in newer/
emerging markets.
58 Prudential plc Annual Report 2017
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— An internal incident capture process,
which identifies, quantifies and
monitors remediation conducted
through application of action plans for
risk events that have occurred across
the business;
— A scenario analysis process for the
quantification of extreme, yet plausible
manifestations of key operational risks
across the business on a forward
looking basis. This is carried out at least
annually and supports external and
internal capital requirements as well as
informing risk activity across
the business; and
— An operational risk appetite framework
that articulates the level of operational
risk exposure the business is willing
to tolerate and sets out escalation
processes for breaches of appetite.
Outputs from these processes and
activities performed by individual business
units are monitored by the Group Risk
function, who provide an aggregated view
of risk profile across the business to the
Group Risk Committee and Board.
These core framework components are
embedded across the Group via the Group
Operational Risk Policy and Standards
documents, which sets out the key
principles and minimum standards for
the management of operational risk across
the Group.
The Group operational risk policy,
standards and operational risk appetite
framework sit alongside other risk policies
and standards that individually engage
with key operational risks, including
outsourcing and third‑party supply,
business continuity, technology and data,
and operations processes.
The increased regulatory focus on
environmental issues not only reflects
existing commitments, for example in the
UK under the 2008 Climate Change Act,
but also a heightened societal awareness
of climate change as a pressing global
concern. Regulatory and stakeholder
interest in environmental matters is
expected to increase as climate change
moves higher up governmental agendas.
This increase in focus creates a number of
potential near term risks.
These include:
— Investment risk in the form of ‘transition
risk’. This is the risk that an abrupt,
unexpected tightening of carbon
emission policies lead to a disorderly
re‑pricing of carbon‑intensive assets;
— Liability risk, if the Group is unable to
demonstrate sufficiently that we have
acted to mitigate our exposure to
climate change risk; and
— Reputational risks, where the Group’s
actions could affect external perceptions
of our brand and corporate citizenship.
The Group has established a Group‑wide
Responsible Investment Advisory
Committee with designated responsibility
to oversee Prudential’s responsible
investment activities as both asset owners
and asset managers.
Physical impacts of climate change could
also arise, driven by specific climate‑related
events such as natural disasters. These
impacts are mitigated through our crisis
management and disaster recovery plans.
Further information on the climate risks
facing our business and how we are
managing and responding to these can
be found in the Corporate responsibility
review on page 77.
Strategic risk requires a forward‑looking
approach to risk management. A key part
of our approach are the risk assessments
performed as part of the Group’s annual
strategic planning process, which supports
the identification of potential future threats
and the initiatives needed to address them,
as well as competitive opportunities.
We also assess the impact on the Group’s
businesses and our risk profile to ensure
that strategic initiatives are within the
Group’s overall risk appetite.
Implementation of the Group’s strategy
and the need to comply with emerging
regulation has resulted in a significant
portfolio of transformation and change
initiatives, which may further increase in
the future. In particular the intention to
demerge the UK and Europe business
from the rest of the Group will result in a
substantial change programme which will
need to be managed at the same time that
other material transformation programmes
are being delivered. The scale and the
complexity of the transformation
programmes could impact business
operations and customers, and has the
potential for reputational damage if these
programmes fail to deliver their objectives.
Implementing further strategic initiatives
may amplify these risks.
Other significant change initiatives are
occurring across the Group. The volume,
scale and complexity of these programmes
increases the likelihood and potential
impact of risks associated with:
— Dependencies between multiple
projects;
— The organisational ability to absorb
change being exceeded;
— Unrealised business objectives/
benefits; and
— Failures in project design and execution.
The risks detailed above form key elements
of the Group’s operational risk profile.
In order to effectively identify, assess,
manage, control and report on all
operational risks across the business,
a Group‑wide operational risk framework
is in place. The key components of the
framework are:
— Application of a risk and control
assessment (RCA) process, where
operational risk exposures are identified
and assessed as part of a periodical
cycle. The RCA process takes into
account a range of internal and external
factors, including an assessment of
the control environment, to determine
the business’s most significant risk
exposures on a prospective basis;
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continued
These policies and standards include
subject matter expert‑led processes that
are designed to identify, assess, manage
and control operational risks, including
the application of:
— A transformation risk framework that
assesses, manages and reports on the
end‑to‑end transformation lifecycle,
project prioritisation and the risks,
interdependencies and possible
conflicts arising from a large portfolio
of transformation activities;
— Internal and external review of cyber
security capability;
— Regular updating and testing of
elements of disaster‑recovery plans and
the Critical Incident Procedure process;
— Group and business unit‑level
compliance oversight and testing in
respect of adherence with in‑force
regulations;
— Regulatory change teams in place assist
the business in proactively adapting
and complying with regulatory
developments;
— A framework in place for emerging risk
identification and analysis in order to
capture, monitor and allow us to prepare
for operational risks that may crystallise
beyond the short‑term horizon;
— Corporate insurance programmes to
limit the financial impact of operational
risks; and
— Reviews of key operational risks and
challenges within Group and business
unit business plans.
These activities are fundamental in
maintaining an effective system of internal
control, and as such outputs from these
also inform core RCA, incident capture and
scenario analysis processes and reporting
on operational risk. Furthermore, they also
ensure that operational risk considerations
are embedded in key business decision‑
making, including material business
approvals and in setting and challenging
the Group’s strategy.
Global regulatory and political risk
Our risk management and mitigation
of regulatory and political risk includes
the following:
— Risk Assessment of the Business
Plan which includes consideration
of current strategies;
— Close monitoring and assessment
of our business environment and
strategic risks;
— The consideration of risk themes
in strategic decisions; and
— Ongoing engagement with national
regulators, government policy teams
and international standard setters.
Recent shifts in the focus of some
governments toward more protectionist
or restrictive economic and trade policies
could impact on the degree and nature
of regulatory changes and Prudential’s
competitive position in some geographic
markets. This could take effect, for
example, through increased friction in
cross‑border trade, capital controls or
measures favouring local enterprises such
as changes to the maximum level of
non‑domestic ownership by foreign
companies. We continue to monitor these
developments at a national and global level
and these considerations form part of our
ongoing engagement with government
policy teams and regulators.
On 29 March 2017 the UK submitted
formal notification of its intention to
withdraw from the EU. In December 2017,
agreement was reached between the UK
and EU to progress negotiations onto
transitional arrangements and the future
trading relationship. The outcome of
negotiations remains highly uncertain.
If no formal withdrawal agreement is
reached then it is expected the UK’s
membership of the EU will terminate
automatically two years after the
submission of the notification.
The ongoing uncertainty during the
remainder of the negotiation period and
the potential for a disorderly exit from
the EU by the UK without a negotiated
agreement may increase volatility in the
markets where we operate, creating the
potential for a general downturn in
economic activity and for falls in interest
rates in some jurisdictions due to easing
of monetary policy and investor sentiment.
As a Group, our diversification by
geography, currency, product and
distribution should reduce some of the
potential impact. We have UK‑domiciled
operations including M&G Prudential, and
due to the geographical location of both its
businesses and its customers, its insurance
and the fund management operations have
most potential to be affected by the UK’s
exit. The extent of the impact will depend
in part on the nature of the arrangements
that are put in place between the UK and
the EU. Contingency plans were developed
ahead of the referendum by business units
and operations that may be impacted
immediately by a vote to withdraw the UK
from the EU, and these plans have been
enacted since the referendum result. We
have since also undertaken significant work
to ensure that our business, and in
particular our customer base, is not unduly
affected by the decision of the UK to exit
from the EU.
60 Prudential plc Annual Report 2017
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The UK’s decision to leave the EU has
introduced uncertainty to the extent of
future applicability of the Solvency II regime
in the UK. In October 2017, the Treasury
Committee published its report on the
Solvency II Directive and the UK Insurance
Industry, which highlighted the need for a
strategy, post‑UK exit, to foster innovation,
competition and competitiveness for the
benefit of UK consumers. In late 2016 the
European Commission began a review of
some aspects of the Solvency II legislation,
with a particular focus on the Solvency
Capital Requirement calculated using the
standard formula, which is expected to run
until 2021.
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, the
work of the Financial Stability Board (FSB)
on Global Systemically Important Insurers
(G‑SIIs) and the Insurance Capital Standard
being developed by the International
Association of Insurance Supervisors
(IAIS). There are also 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
(FCA) reviews, ongoing engagement with
the Prudential Regulation Authority (PRA),
and the work of the Financial Stability
Board (FSB) and standard‑setting
institutions such as the IAIS. Decisions
taken by regulators, including those related
to solvency requirements, corporate or
governance structures, capital allocation
and risk management may have an impact
on our business.
The IAIS’s G‑SII regime forms additional
compliance considerations for us.
Groups designated as G‑SIIs 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. The FSB
did not publish a new list of G‑SIIs in 2017,
however the policy measures set out in
the FSB’s 2016 communication on G‑SIIs
continue to apply to the Group. Prudential
is monitoring the development and
potential impact of the policy measures
and is continuing to engage with the PRA
on the implications of such measures
and Prudential’s designation as a G‑SII.
The IAIS has launched a public interim
consultation on an activities‑based
approach to systemic risk. Following the
feedback from this, a second consultation
with proposals for policy measures is due
to be launched in 2018. Any changes to the
designation methodology are expected to
be implemented in 2019.
We continue to engage with the IAIS on
developments in capital requirements for
groups with G‑SII designation. The regime
introduces capital requirements in the form
of a Higher Loss Absorption (HLA)
requirement. This requirement was initially
intended to come into force in 2019 but has
been postponed until 2022. The HLA is also
now intended to be based on the Insurance
Capital Standard, which is being developed
by the IAIS as the capital requirements
under its Common Framework
(ComFrame). This framework is focused
on the supervision of Internationally Active
Insurance Groups (IAIGs) and 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 (ICS)
that is intended to apply to Internationally
Active Insurance Groups.
The IAIS has announced that the
implementation of ICS will be conducted in
two phases – a five‑year monitoring phase
followed by an implementation phase.
During the monitoring phase, IAIGs will be
required to report on ICS to the group‑
wide supervisor on a confidential basis,
although these results will not be used as
a basis to trigger supervisory action.
The IAIS’s 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.
In the US, some parts of the Department
of Labor (DoL) rule introducing fiduciary
obligations for distributors of investment
products, which may reshape dramatically
the distribution of retirement products,
became effective on 9 June 2017. This
included those provisions on impartial
conduct standards, although other
provisions of the rule have now been
delayed until 1 July 2019. Jackson has
introduced fee‑based variable annuity
products in response to the introduction
of the rule, and we anticipate that the
business’s strong relationships with
distributors, history of product innovation
and efficient operations should further
mitigate any impacts.
The US National Association of Insurance
Commissioners (NAIC) is continuing its
industry consultation with the aim of
reducing the non‑economic volatility in the
variable annuity statutory balance sheet
and risk management. Following two
industry quantitative impact studies,
proposed changes to the current
framework have been released by the
NAIC for comment from industry and other
interested parties. Jackson continues to be
engaged in the consultation and testing
process. The proposed changes are
expected to be effective from 2019 at the
earliest. In December 2017, the Tax Cuts
and Jobs Act was signed into law in the US.
Some uncertainty exists on the implications
of the tax reforms on the NAIC’s proposals.
A degree of uncertainty as to the timing,
status and final scope of these key US
reforms exists. Our preparations to manage
the impact of these reforms will continue
while we await further clarification.
In May 2017, the International Accounting
Standards Board (IASB) published IFRS 17
which will introduce fundamental changes
to the statutory reporting of insurance
entities that prepare accounts according to
IFRS from 2021. The Group is reviewing
the complex requirements of the standard
and is considering its potential impact. This
is expected to, among other things, include
altering the timing of IFRS profit
recognition, and the implementation of the
standard is likely to require changes to the
Group’s IT, actuarial and finance systems.
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continued
In Asia, regulatory regimes are developing
at different speeds, driven by a
combination of global factors and local
considerations. New local capital rules
and requirements could be introduced in
these and other regulatory regimes that
challenge legal or ownership structures,
current sales practices, or could be applied
to sales made prior to their introduction
retrospectively, which could have a
negative impact on Prudential’s business
or reported results.
Cyber risk
Cyber risk remains an area of heightened
focus after a number of recent high profile
attacks and data losses. The growing
maturity and industrialisation of cyber‑
criminal capability, together with an
increasing level of understanding of
complex financial transactions by criminal
groups, are two reasons why risks to the
financial services industry are increasing.
Disruption to the availability, confidentiality
and integrity of our IT systems could make
it difficult to recover critical services, result
in damage to assets and compromise the
integrity and security of data. This could
result in significant impacts to business
continuity, our customer relationship and
our brand reputation. Developments in
data protection worldwide (such as the
EU General Data Protection Regulation
that comes into force in May 2018) may
increase the financial and reputational
implications for Prudential of a breach of
its (or third‑party suppliers’) IT systems.
Given this, cyber security is seen as a
key risk for the Group and is an area of
increased scrutiny by global regulators.
The threat landscape is continuously
evolving, and our assessment is that the
systemic risk from untargeted but
sophisticated and automated attacks has
increased. Cyber risks are also increasingly
stemming from geopolitical tensions.
The core objectives of our Cyber Risk
Management Strategy are: to develop a
comprehensive situational awareness of
our business in cyberspace; to proactively
engage cyber attackers to minimise harm to
our business; and to enable the business to
grow confidently and safely in cyberspace.
Our Cyber Defence Plan consists of a
number of work‑streams, including
developing our ability to deal with
incidents; alignment with our digital
transformation strategy; and increasing
cyber oversight and assurance to the
Board. We have made progress in all of
these across 2017. Protecting our
customers remains core to our business,
and the successful delivery of the Cyber
Defence Plan will reinforce our capabilities
to continue doing so in cyberspace as we
transition to a digital business.
The Board receives periodic updates
on cyber risk management throughout
the year, which includes assessments
against the core objectives under our
Group‑wide Cyber Risk Management
Strategy and progress updates on the
associated Group‑wide Coordinated
Cyber Defence Plan.
Group functions work with each of the
business units to address cyber risks locally
within the national and regional context
of each business, following the strategic
direction laid out in the Cyber Risk
Management Strategy and managed
through the execution of the Cyber
Defence Plan.
The Group Information Security
Committee, which consists of senior
executives from each of the businesses
and meets on a regular basis, governs
the execution of the Cyber Defence Plan
and reports on delivery and cyber risks
to the Group Executive Risk Committee.
Both committees also receive regular
operational management information
on the performance of controls.
Viability statement prepared in
accordance with the provision
C.2.2 of the UK code
The Group’s longer-term prospects
The Group’s strategy is based around
meeting the long‑term savings and
protection needs of its customers and
hence creating value for both customers
and shareholders over a time frame that
can be many years. As described on pages
12 to 13, the Group’s business model
supports this strategy by constantly
evolving our products to meet changing
customers’ needs, building out and
diversifying distribution capabilities and
relationships to reach new customers and
investing in technology to better empower
and serve the salesforce and customers.
Examples of the actions undertaken during
2017 are set out on pages 18 to 32. This
focus, together with our risk management
framework, supports the sustainability of
our business over the longer term.
The Directors regularly consider strategic
matters that may affect the longer‑term
prospects of the Group. In performing
this viability assessment, the Directors
considered the potential impact on the
viability of the Company and the Group of
the announced intention to demerge the
Group’s UK operations. 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. Further details on the
current capital strength of the Group are
provided on pages 48 to 63.
Period of viability assessment
The Directors have assessed the viability
of the Company and the Group for a period
longer than the 12 months required by the
going concern statement.
62 Prudential plc Annual Report 2017
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The Directors also considered the risks that
would arise from the proposed intention to
demerge M&G Prudential that could
impact their assessment of the Group’s
viability over the three years ended
December 2020. The assessment did not
change the Board’s conclusion.
Conclusion on viability
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 2020.
The Directors performed the assessment
by reference to the three‑year period to
December 2020. Three years is considered
an appropriate period as it represents the
period covered by the detailed business
plan that is prepared annually on a rolling
three‑year basis. In approving the business
plan the Directors review the Group’s
projected performance with regards to
profitability, cash generation and capital
position, together with the parent
company’s liquidity over this three‑year
period. This projection involves setting
a number of economic and other
assumptions that are inherently volatile
over a much longer reporting period. Such
assumptions include foreign exchange
rates, interest rates, economic growth
rates and the impact on the business
environment for events such as the exit
of the United Kingdom from the European
Union or changes in regulation.
Assessment of risks over the period
The Group’s business plan implements the
Group’s strategic objectives through the
business model and activities discussed
on pages 10 to 13. As noted above,
underpinning the projections in the
business plan are a number of economic
and other assumptions. Assessment of
the risks to achieving the projected
performance therefore remains an integral
part of the planning process. The Group’s
approach to risk management and a
summary of the key risks facing the Group
are set out on pages 48 to 63.
For the purposes of assessing the Group’s
viability, the Directors considered those
risks where the impact of possible adverse
external developments could be of such
speed and severity to present a shock to
the Group’s financial position. The risks
further considered, from those detailed
on page 53, are: market risk, credit risk,
liquidity risk and regulatory risk.
To evaluate the Group’s resilience to
significant deteriorations in market and
credit conditions and other shock events,
these risks are grouped together into
severe but plausible scenarios which are
then applied to the assumptions underlying
the business plan. For example, the
impacts of scenarios assuming a disorderly
transition to a more normalised interest rate
environment and an international recession
were considered in the preparation of the
most recent business plan, together with
the impact on Group liquidity of a scenario
assuming the closure of short‑term debt
markets for three months. In addition,
the Group conducts an annual reverse
stress test which gives the Directors an
understanding of the maximum resilience
of the Group to extremely severe adverse
scenarios.
The scenarios tested showed that the
Group would be able to maintain viability,
over the three‑year period under
assessment, after taking account of the
actions available to management to
mitigate the impacts on capital and liquidity
in such scenarios.
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.
As well as known areas of regulatory
change the Group is exposed to the risk
of sudden and unexpected changes in
regulatory requirements at the Group and
local level. While unexpected changes
cannot be fully anticipated and hence
modelled, the risk of regulatory change is
mitigated by capital held by the Group and
its subsidiaries in excess of Group and local
regulatory requirements, the Group’s
ability to generate significant capital
annually through its operational delivery
and the availability of compensating
actions designed to restore key capital
and solvency metrics.
Note
1 Based on hierarchy of Standard & Poor’s, Moody’s
and Fitch, where available and if unavailable, internal
ratings have been used.
www.prudential.co.uk
Annual Report 2017 Prudential plc 63
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Corporate responsibility review
Building stronger communities
We build stronger communities by delivering products that
enable our customers to move ahead in their lives with confidence,
and by investing in the real economy to drive the cycle of growth.
2017
performance
highlights
— £25 million total community
investment
— £500,000 raised through
Prudential RideLondon from
charity partners and employees
— 96,493 hours volunteered
by employees across the
Prudential Group
— £412,375 donated by employees
through payroll giving across
the Group
Alongside the benefits we provide
through our core business activities,
we also play a wider role in fostering
sustainable development through our
corporate responsibility programmes
around the world.
This corporate responsibility review
provides an overview of our community
investment, environmental, diversity and
inclusion, talent development and
performance management activities and
progress in 2017, which have helped to
improve the lives of customers and
strengthened communities throughout the
markets in which we operate. More detailed
information is available online at www.
prudential.co.uk/corporate‑responsibility
and in our 2017 Environmental, social and
governance report.
Environmental, social
and governance (ESG) –
a changing landscape
The ESG landscape is evolving rapidly.
We recognise these changes and position
ourselves to adapt to them proactively,
to ensure that we remain a sustainable
business and demonstrate that
sustainability as transparently as possible.
We will report in detail on our material,
non‑financial ESG issues in our 2017
ESG Report.
We have chosen to include a summary
of our material ESG issues and how we
manage these for the first time here in our
Annual Report and commit to continuing
to develop these disclosures for our
investors in future Annual Reports. This
reflects our belief in the importance of ESG
considerations to our long‑term success.
Our approach to ESG
Our relationships with our customers are
long term, so it is vital that our strategy
and its execution ensure that we are a
sustainable business. Our success in
delivering for our customers and
shareholders depends on effective
engagement with our stakeholders.
Our business model is set out on
pages 12 to 13.
Managing a sustainable business means
managing a wide range of ESG issues.
Every one of these areas is integral to our
performance and sustainability and we
approach them accordingly. We recognise
that the ESG landscape is changing and
position ourselves to adapt to this
proactively.
Managing our material ESG issues
In 2016, we undertook a Group‑wide
review to identify the ESG issues that are
most material for Prudential. We
determined the relevance and significance
of each ESG issue, based on the risks and
opportunities to Prudential and our
stakeholders, and prioritised these issues
according to the greatest impact to the
sustainability of our business. Our material
ESG issues fall into the following areas:
business integrity, customers,
environment, responsible investment,
suppliers, technology, people and
communities. These remain the most
material issues for Prudential.
64 Prudential plc Annual Report 2017
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Adding more to life:
Prudential Scholarship
programme, Zambia
Prudential’s scholarship programme in Zambia is run in
partnership with the international charity, Camfed, and was
endorsed by the Ministry of Education. The programme
focuses on educating young girls and people with disabilities
in rural Zambia.
Sara is the sixth born in a family of eight children. Having
completed primary school and achieved impressive results in
her primary leaving examination, she was awarded a place at
secondary school, but her parents did not have the money to
pay the fees and it looked as if she would have to turn down
her place. Fortunately, Sara was awarded a scholarship.
Prudential’s support is enabling Sara to take her final school
leaving examination, giving her the potential to go on and
pursue her dream of becoming a medical professional. She
says: ‘I encourage Camfed donors to continue supporting
other vulnerable children in the same way they have done
for me. When I complete my Grade 12, I wish to work in the
health sector as a medical personnel by studying for
Medicine at the University of Zambia, if possible becoming
a surgeon.’
Business integrity
At Prudential, responsible and ethical
behaviour is a business imperative and is
integrated throughout our operations and
locations. We believe that the way in which
we conduct ourselves on a daily basis is key
to building trust, maintaining our
reputation and positive relationships with
our stakeholders and ultimately in
achieving long‑term business success. We
have embedded a robust framework
throughout our operations to ensure that
we are able to effectively manage existing
and emerging risks in this area, including
maintaining our financial strength, fighting
financial crime, undertaking responsible
tax practices and upholding the highest
standards for professional conduct.
Customers
Serving our customers well is core to our
strategy and to creating long‑term
sustainable value. We provide fair and
transparent products that meet our
customers’ needs, often providing
solutions to the biggest financial challenges
of their lives. Prudential serves a global
customer base with a broad range of
needs. The financial challenges facing our
customers continue to change and we want
to serve our customers for the long term,
which involves proactively listening to their
needs and developing our products and
solutions to improve financial access and
deliver consistent, long‑term sustained
performance.
Environment
Managing the climate‑related risks facing
our business is crucial to creating long‑term
value for our customers, shareholders and
the communities of which we are a part. As
an occupier of approximately 400
properties worldwide, we recognise the
importance of our own internal
environmental targets and decarbonisation
goals in reducing our direct footprint. As a
life insurer, asset owner and manager, we
also recognise the positive role we can play
in financing the transition to a low‑carbon
economy and in managing associated risks.
Responsible investment
Responsible investment for us is the
integration of ESG considerations into our
investment processes and our stewardship
activities. Our general approach is one of
‘inclusion’ through engagement with
investee companies and active ownership
practices rather than ‘exclusion’
(the restriction of investment
opportunities). However, we maintain the
ability to exclude entities from our internal
insurance mandates, where their practices,
policies or procedures conflict with our
Group values, or where we see a need to
explicitly recognise international
consensus. To date, owing to the
decentralised nature of our Group, our
asset management and ownership
businesses have managed ESG risks in our
investment portfolios, distinctly. In
recognition of the importance of ESG in
delivering long‑term sustainable returns
across our investment portfolio, we created
our Group Responsible Investment
Framework during 2017. The framework
sets minimum requirements and provides
guidance that enables our Business Units to
explain, in a manner that is consistent with
our Group Values and Code of Conduct,
how they incorporate ESG considerations
into their investment processes and
stewardship commitments as asset
owners. Further information on our Group
Responsible Investment Framework will be
found in our 2017 ESG Report.
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Suppliers
As a global financial services organisation,
we source goods and services from
thousands of outsourced and third‑party
suppliers across the world. We recognise
the need to source these goods and
services in a way that maximises value and
minimises our supply risk, and we do this
in an ethically and socially responsible
manner. Given the number of our
outsourced and third‑party supply
relationships, we also have a responsibility
to make it as simple as possible for our
suppliers to do business with us. We
manage this through our responsible
procurement practices. We believe in
respecting human rights and acting
responsibly and with integrity. We have
always believed this commitment extends
beyond our organisation and into our
supply chain. For information around
modern slavery and how we are identifying
and managing our risks in relation to
slavery, human trafficking, child and forced
labour, please read our forthcoming 2017
Modern Slavery Statement.
Technology
Emerging technologies enable us to
provide financial protection to previously
unreachable communities and deliver
better, more efficient outcomes for our
customers. They also bring new concerns,
in particular cyber risks, which pose threats
to our business operations and the
customer data that we hold and protect.
Cyber risk remains a prominent concern
and focus area for regulators and
corporates globally, and could have a
significant impact on business continuity,
our customer relationships and our brand
reputation. We closely monitor and
respond to developments in this area,
to ensure that we can maximise the
benefits of new emerging technology
while minimising the risks.
People
At Prudential we encourage an inclusive
working environment where we continually
develop our talent, reward great
performance and value our differences in
order to deliver outstanding service and
products for our customers, shareholders
and communities. This is achieved through
our continued focus on diversity and
inclusion, talent development, performance
and reward and health and safety.
Further information on the diversity of our
Board, our policy in respect of this, how this
is implemented and the associated results
in 2017 can be found in our Governance
statement on page 101.
Communities
We recognise that we have a role to play
in the broader sustainable development
agenda, for example in building financial
literacy and improving financial inclusion.
Our community investment strategy is
closely aligned with our business objectives
and with our stakeholders’ concerns and
interests, and is aimed at protecting and
encouraging more sustainable and resilient
communities. To achieve this, our
programme is focused around four
principal areas: social inclusion, financial
education and life skills, disaster
preparedness, and employee engagement.
Further information on our material ESG
issues, including 2017 progress and
performance can be found in our
forthcoming 2017 ESG Report. For more
information on the principal risks facing our
business and general risk governance and
risk management policies and procedures
and how these are managed, refer to the
report on the Risks facing our business and
how these are managed on pages 48 to 63.
ESG policy framework – Group Governance Manual
Group‑wide ESG standards are established through the Group Governance Manual. The Manual sets out the policies and procedures by
which the Group operates within our framework of internal governance, taking into account relevant statutory and regulatory matters.
Group‑wide policies relating to the Group’s material ESG issues include:
Material
ESG issues
Business
integrity
Our Group-wide policies*
— Code of Business Conduct Policy, setting out the standards that are required across the Group, by all employees
and any individuals and organisations acting on our behalf. This includes our core values – prudence, security,
integrity and initiative – and that we pursue opportunities to grow our business in line with these values, and our
commitments to our customers, investors and economies, our people and communities.
— Anti Bribery and Corruption Policy, outlining the value we place on our reputation for ethical behaviour and for
financial probity and reliability, our prohibition of corruption and the payment or receipt of bribes for any purpose
and how we limit our exposure to this.
— Anti Money Laundering and Counter Terrorist Financing Policy, setting out our prohibition of money
laundering and terrorist financing, and how we combat and limit our exposure to this.
— Sanctions Policy, outlining our commitment to complying with sanctions laws and regulation and how we comply
with this through screening, prohibited business activity, restricting business activities and investigation.
— Security Policy, outlining how we ensure a level of security commensurate with our regulatory and legal
obligations, while meeting the demands of our competitive, commercial organisation. This includes our principles
to enhance commercial opportunity, while minimising corporate risks utilising financial crime and fraud
investigations and ‘Speak out’ whistleblowing processes.
— Tax Risk Policy, covering our processes to identify, measure, control and report on tax‑related risks, including
technical judgement, operational, regulatory and reputational tax risk.
66 Prudential plc Annual Report 2017
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Material
ESG issues
Our Group-wide policies*
Customers
— Customer Commitments Policy, covering our five key commitments to our customers and how we assess,
manage and report on these:
1 Treat customers fairly, openly and honestly;
2 Provide and promote a range of products and services that meet customer needs, are easy to understand
and that deliver real value;
3 Maintain the confidentiality of our customer information (except where the law requires disclosure);
4 Provide and promote high standards of customer service and monitor these standards rigorously; and
5 Ensure that our complaints processes provide an effective and fair means of arbitration between the
Group’s businesses and customers.
Environment
— Environment Policy, covering how we manage the impact of our businesses on the environment, including our
environmental commitments and how we measure, monitor, review and report on our environmental
performance.
Responsible
investment
Suppliers
— Owing to the distinct investment risks faced by our asset management and ownership businesses, with each
investing in different markets and asset classes, each business manages ESG‑related matters through the pursuit
of business‑specific responsible investment policies. This is overlain by our Group‑wide Responsible Investment
Framework, aligned to our Group‑wide Code of Conduct and underpinned by our Group Responsible Investment
Standards. Further information on our Group Responsible Investment Framework will be found in our 2017
ESG Report.
— Outsourcing and Third Party Supply Policy, outlining our commitment to ensuring we have a robust, well
managed outsourcing and third‑party supplier network. It covers how we manage and oversee these
arrangements, through: due diligence/selection criteria, contractual requirements, the ongoing monitoring of
such relationships and reporting and escalation. Additionally, our policy considers the requirements of the UK
Modern Slavery Act, and the principles of the UN’s Universal Declaration of Human Rights.
Technology
— Risk Security Policy – we are in the process of updating our data protection policies to prepare for the
implementation of the General Data Protection Regulation (GDPR). This policy ensures the protection of
information, information systems and technical infrastructure from unauthorised access, use, disclosure,
disruption, modification, or destruction, in order to provide confidentiality, integrity, and availability
of information.
People
— Diversity and Inclusion Policy, setting out how we foster an inclusive workforce and ensure all our employees
are treated fairly and feel valued, and together have the diversity in skill sets and backgrounds that enriches the
organisation. Our policy considers a range of diversity aspects of our employees, including gender, age, ethnicity,
disability, sexual orientation and background. Further information on the diversity of our Board, our policy in
respect of this, how this is implemented and the associated results in 2017 can be found in our Governance
statement on page 101.
— Employee Relations Policy, outlining the way we engage our employees and motivate them to achieve success
for the Group: promoting positive relationships with employees, representative organisations and trade unions,
and maintaining a positive reputation for the treatment of employees.
— Performance and Learning Policy, setting out the importance of our people and framing how we invest in their
development to deliver against our strategy and the future success of the organisation. This includes our
Performance Management Framework.
— Remuneration Policy, outlining our effective approach to appropriately rewarding our employees in a way which:
aligns incentives to business objectives and enables the recruitment, retention and incentivisation of high‑calibre
employees in line with our risk appetite and Group Reward Principles.
— Talent Policy, demonstrating how we attract and select the best people for roles that will ensure high
performance in the short term and improve the longer‑term succession and talent pipeline. It sets out our fair and
effective approach to pursuing this.
— Health and Safety Policy, covering our employees, business partners, customers and others that may be affected
by our operations. This details our health and safety core principles, our commitments and the measuring and
reporting on our health and safety performance.
Communities
— Community Investment Policy, outlining our commitment and approach to being an active and supporting
member of the community. The policy includes the development of our community investment strategy and sets
out investments that are not permitted, relevant records and reporting.
* In addition to our Group‑wide policies, our business units have underlying business‑specific policy frameworks, reflective of their individual risks and operating environments. For the
purposes of this report, we focus primarily on the Group policy framework.
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Corporate responsibility review continued
The Group Governance Manual is used as
a platform for mandating specific ways of
working across the Group. Each Business
Unit chief executive attests annually to
compliance with applicable requirements
set out in the Group‑wide ESG policies,
including matters that must be reported to
the Group. Specific procedures are followed
for the reporting of non‑compliance.
Business units present such instances in
their annual certification, which in turn is
reported to the Group Audit Committee.
Due diligence on
ESG-related policies
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 risks, including
those relating to ESG issues. This includes
conducting due diligence on related policy
requirements. Compliance guidance is also
provided by the policy owners to clarify
Business Unit scope and minimum
evidencing standards required to
demonstrate compliance.
The Group Audit Committee reviewed the
results of the year‑end certificate of
compliance with Group Governance
Manual requirements. While a number of
improvements to ensure the policies are
fully embedded were discussed, no
significant areas of non‑compliance in
relation to the policies relevant to ESG
issues were noted.
For further information on our Group
business standards and policies pursued in
relation to our material ESG issues, refer to
the ‘Business standards’ pages of our
website at: www.prudential.co.uk/
responsibility/standards
Serving our customers
Improving the lives of customers is at the
heart of what we do. Across our markets in
Asia, the US, the UK and Europe and Africa,
the needs of customers are often very
different and this is reflected in the products
we offer, but wherever we operate we aim
to remove uncertainty from life’s big events
and help customers build their lives with
confidence. Whether that means starting
a family, saving for a child’s education or
planning for old age, our products are
shaped around that core purpose.
Asia
In Asia, the demand for savings and
protection products continues to grow
as people seek greater financial security
and peace of mind. Lack of insurance
protection is one of the primary reasons
why a middle‑income family falls below the
poverty line following a significant life
event, and through some of our products
that situation can be averted. We continue
to broaden our offering to help meet the
distinct needs of our customers.
The value of insurance in helping
customers move away from poverty is
being increasingly recognised. The China
Insurance Regulatory Commission, for
example, has set a penetration target for
insurance of 5 per cent by 2020, from a
current rate of only 2 per cent. We are
working with the Chinese authorities to
help them reach that target and deliver
all the benefits to both customers and
communities that our industry’s
products bring.
Our 15 million life insurance customers in
Asia give us access to fast, comprehensive
feedback on what they want, how their
needs are evolving and how we can best
adapt our products and capabilities to
improve our service and operational
efficiency.
Customers are increasingly looking for
product features that reflect changes in
their own lives. One of these is a more
personalised approach, and one example
of how we are addressing this demand is
‘myDNA’, a DNA‑based, personalised
precision health programme, which we are
making accessible to more customers
across the region. Following its successful
launch in Hong Kong in 2016, ‘myDNA’
can now be accessed by customers in
Singapore, Malaysia and Vietnam, with its
launch in these markets last year.
Last year, Prudential Hong Kong also
introduced ‘myDNA Pro’, which offers
users a simple DNA test and lifestyle
assessment to evaluate the overall risk of
developing three common and potentially
life‑threatening conditions – type 2
diabetes, hypertension and high
cholesterol. It includes a dedicated mobile
app which offers guidance from a personal
health coach, plus a 16‑week programme
to help customers establish good diet,
nutrition and exercise regimes, and reduce
their risks of developing these three
debilitating conditions.
Through both ‘myDNA’ and ‘myDNA Pro’,
we are enabling our customers to make
better lifestyle decisions and ultimately
lead healthier lives, bringing benefits to
families and communities.
Customers are also increasingly expecting
an on‑demand digital experience in all
areas of their lives, and we are meeting that
need in a number of ways. In Singapore,
Vietnam and Hong Kong, we have
launched artificial intelligence‑driven
chatbots. Prudential Vietnam’s ‘PruBot’,
available on its corporate website and
Facebook page, provides customers with
24/7 support by answering queries related
to its products and services, as well as
helping them schedule appointments with
financial consultants. ‘AskPRU’ allows
Prudential Singapore’s financial consultants
to instantly retrieve information specific to
their customers’ life insurance plans.
Prudential Vietnam has also launched
‘Matchbook’, a mobile app allowing
customers to choose their financial
consultants based on several criteria,
including preferred personality traits and
type of consultation services they require,
and to make appointments.
Prudential Malaysia has launched
‘PRUDream Planner’, a first‑of‑its kind
needs‑based mobile app that allows its
financial consultants to provide tailored
solutions to customers, enabling them to
collect pertinent information on customers’
financial profiles, assess their needs and
financial priorities in relation to their life
goals, and navigate our wide selection of
insurance solutions to provide tailored
recommendations.
Prudential Singapore’s ground‑breaking
‘PRU Fintegrate Partnership’ identifies
fintech startups from around the world to
co‑develop digital solutions for customers.
The scope of these solutions covers the
entire value chain – from helping
customers understand how to bridge their
protection gaps and to plan for their
financial future, to simplifying purchase
and claims processes and improving
service levels.
Another example of how we develop our
products in response to the needs of
customers in different markets is Prudential
Indonesia’s launch last year of ‘PRUprime
healthcare’, a hospitalisation product that is
comprehensive, offers growing benefits
and is available to customers in both
conventional and sharia versions. The plan
provides an additional 10 per cent of the
annual benefit limit if no claims are made
within a year, up to a maximum of
50 per cent of the initial annual limit. It also
offers cashless admission, where a letter of
guarantee is issued by Prudential Indonesia
to the hospital so the customer does not
have to pay upfront, at a wide network of
partner hospitals in Indonesia, Singapore
and Malaysia.
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The proven investment capability and
risk‑managed solution offered by our
PruFund range of investment fund options
also continues to meet customer needs,
especially for those investors who are
moving towards the latter stages of saving
before needing to secure an income for
their retirement. In offering unparalleled
diversification, financial strength and
smoothed investment returns across ISA,
bond, pension income and drawdown
products, the assets under management in
PruFund reached £36 billion in 2017.
The service we provide to customers and
financial advisers goes hand‑in‑hand with
the retirement solutions we offer. An
important part of this service is the ongoing
support for intermediary advisers provided
by our regional sales units, business
development team and technical helpline,
which handled 17,000 adviser enquiries
in 2017.
A number of technology improvements
were delivered in 2017, each designed to
help reduce the time advisers spend on
administration. These included the
introduction of paperless offshore bond
claims and an electronic signature facility
for the Prudential Retirement Account.
A further customer milestone was reached
in 2017 when our digital customer
engagement strategy reached one million
customer log‑ins through the MyPru
service, a customer portal giving access
to update contact details, view annual
statements and check valuations and
payment information online.
External recognition at the 2017 Financial
Adviser Service Awards saw us retain the
coveted Five Star ratings in the Life and
Pensions and Investments categories for
the seventh consecutive year. We once
again achieved success at one of the most
sought‑after awards in our industry,
receiving top awards at the Investment Life
& Pensions MoneyFacts Awards in 2017 for
Best Investment Bond Provider and Best
Income Drawdown Provider.
US
Jackson provides retirement income
strategies aimed at the approximately
75 million baby boomers in the US. Our
pursuit of excellence in product innovation
and our distinctive distribution capabilities
have helped us forge a solid reputation for
meeting the needs of customers, through
a diverse range of variable, fixed and
fixed‑index annuity products. As part of
a carefully designed plan, our variable
annuities help retirees avoid running out
of money and provide a reliable cushion
against volatile markets. We support our
industry‑leading product development and
distribution teams with award‑winning
customer service.
In 2017, Jackson launched two new
fee‑based variable annuity products:
Perspective Advisory II (PAII), the next
evolution of Perspective Advisory, and
Private Wealth Shield (PWS), designed to
serve clients within the trust market.
As with previous fee‑based launches, PAII
and PWS are intended to meet increased
market demand for products compatible
with fee‑based accounts and platforms as a
result of the US Department of Labor (DOL)
fiduciary rules, released in April 2016. We
believe commissions and fees can co‑exist
in the annuity space, and our growing suite
of products is a step towards making this a
reality for our distribution partners.
PAII has more than 130 investment options,
providing access to world‑class money
managers and the flexibility to build a
portfolio that meets consumers’ investing
needs. Furthermore, this product has no
surrender charges and a low‑cost
sub‑account structure. A robust suite of
optional living and death benefits is also
available for an additional charge, designed
to provide the opportunity to grow
retirement assets and obtain guaranteed
income for life.
PWS will be sold through companies in the
trust space, following a distribution process
that differs from Jackson’s other products.
The company has developed a Trust Team
to form relationships with professionals in
the private wealth and trust industry who
are interested in using annuities in trusts to
manage taxes and control income for
multiple generations.
In 2017, we also introduced ‘Retire on
Purpose’, a new platform with a focus on
thoughtful life planning as a crucial first
step towards creating a comprehensive
financial plan. The presentation and its
accompanying materials are designed to
help advisers build richer relationships with
their clients and integrate a more holistic
approach to financial and life planning in
their practices.
Jackson has been simplifying the language
used around financial products to make
them clearer and more transparent for
consumers, and change the conversation
to focus on planning for the lifetime income
consumers need to live well throughout
their lives. To promote this simple language
approach, Jackson has launched a new
website, The Financial Freedom Studio
(www.jackson.com/financialfreedomstudio/),
which now serves as the company’s central
content ‘hub.’ The site is an evolution and
expansion of the financial education
resource for consumers, the Center for
Financial Insight.
UK and Europe
Growing customer demand for
comprehensive financial solutions was at
the heart of our announcement in August
2017 that we were combining our asset
manager, M&G, and Prudential UK &
Europe to form M&G Prudential, a leading
savings and investments business. The
combined business manages £351 billion of
assets for more than six million customers,
both in the UK and internationally, and will
leverage its scale, financial strength and
complementary product and distribution
capabilities to enhance the development of
capital‑light, customer‑focused solutions.
The new entity combines M&G’s active
investment expertise with Prudential UK &
Europe’s capabilities in volatility‑adjusted
savings and liability‑driven investment to
provide more choice for customers across
both brands through retail, institutional and
direct channels. The unified business is
also better positioned to develop and fund
joint product propositions and to build new
digital service and distribution to meet
fast‑changing customer needs.
With core strengths in with‑profits and
retirement solutions, M&G Prudential is
well positioned to continue to meet the
growing needs of customers taking on the
responsibility for managing their own
savings, following reform of the UK’s
pension and retirement income system in
2015. The Prudential Retirement Account,
which allows customers to save flexibly for
their retirement and access their retirement
income, has proven extremely popular
since launching at the end of 2016,
accumulating assets under management
of £7.2 billion in its first year.
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In investment management,
M&G Prudential is a long‑term investor that
takes seriously its responsibilities as a
steward of clients’ assets. Our fund
managers believe that if a company is run
well it is more likely to be successful in the
long run. Regular meetings with company
directors allow us to identify whether a
company’s strategy is aligned with our
interests as long‑term shareholders and the
interest of our customers. Active voting is
an integral part of our investment
approach, both adding value and
protecting our interests as shareholders
and those of our customers. We provide
transparency on our voting record by
publishing it quarterly on our website at
www.mandg.com/about‑us/responsible‑
investment/equities/voting‑history/
In 2017, we launched myM&G, a new
online investing service. Over 90 per cent
of our direct customers will benefit from
lower fund charges if they move their old
paper‑based account to the online service,
which is free to join and carries no platform
or service fee. A customer with £100,000
invested across M&G equity funds which
offer R class shares, for example, should
save at least £5,000 in fees over 10 years by
switching their account to myM&G.
At M&G, we actively involve our
customers in the development of services
such as myM&G, as well as new products
and investor communications. This is
achieved through engagement with end
investors, including our Client Council, our
own panel of around 400 direct customers.
During 2017, our principal research focus
has been to engage with private investors,
including those in our Client Council,
to understand the role that socially
responsible investing plays in driving their
investment decisions and how they would
like to receive more information about
responsible investment.
In Africa, we are continually looking for
new ways to meet our customers’ needs,
and in 2017 we rolled out a new ‘never
lapse’ feature in Ghana. This addresses one
of the main concerns our customers in
Ghana have about insurance – that
unforeseen circumstances might lead them
to miss premium payments on their
insurance policies and result in them losing
their benefits. This new feature ensures
that, beyond the first policy year, the policy
will never lapse or become inactive. The
feature is due to be rolled out in Kenya,
Uganda and Zambia in 2018.
Investing for positive change
As an asset manager and asset owner, we
have the ability to affect positive change,
indirectly through the direction of our
capital and our customers’ capital. We
allocate our customers’ capital into projects
that fuel economic growth and improve the
quality of people’s lives, including through
investments in affordable homes, transport
programmes that cut commuting times,
broadband networks that connect people
and power stations using clean energy.
These investments translate into strong,
reliable returns for our customers and
tangible benefits for the communities we
serve. The long‑term nature of the
promises we make to our customers and
clients makes long‑term investments in
infrastructure an ideal way of ensuring we
can afford to meet those promises in full.
In 2017, Eastspring Investments
announced a significant step forward in our
infrastructure investment capabilities. IFC,
part of the World Bank, chose Eastspring
as its first Asian partner in a programme
that mobilises funds from institutional
investors into projects in emerging
markets. This US$500 million partnership
will help us scale up our skills in the region.
Worldwide, 1.2 billion people still have no
access to electricity and 660 million lack a
clean source of drinking water. This
programme will help at least some of those
people get these basic amenities, while at
the same time helping our customers meet
their own vital savings needs.
Our investment teams in Asia, Europe and
the US are all working hard to invest with a
positive purpose. Developed economies
may not face the same basic threats to
survival that are found in emerging
markets, but traffic congestion, electricity
‘brown‑outs’ and rural broadband black
spots can constrain economic growth and
make daily life frustrating. M&G Prudential
is innovating in this important field. Our
new Greenfield Fund will enable our clients
to participate in infrastructure projects at an
earlier stage than was previously possible,
which will translate into stronger returns
and more essential projects receiving the
funding they need. The UK government
in 2017 recognised our skills in this
area by appointing M&G Prudential to
manage a portion of its £400 million
Digital Infrastructure Investment Fund,
aimed at kick‑starting better broadband
connections across the country.
In the US too we are investing in important
infrastructure. PPMA, our American asset
manager, is helping states such as
California and Texas meet their ambitious
green energy targets and reduce the risk of
future power shortfalls, with investments
in wind and solar generation. We have also
made a recent investment in new storage
batteries, which enable consistent power
delivery from renewable sources.
The value we provide through investments
in the real economy and through our
products is complemented by investments
in communities 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.
Supporting local communities
Our investments in communities are
designed to support the communities
in which we operate and deepen
engagement with colleagues. As such,
our community investment programme
is linked to our strategy and is focused
around four principal areas:
— Social inclusion;
— Education and life skills;
— Disaster preparedness; and
— Employee engagement.
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. In
addition, we believe it is important to make
a contribution to delivering the United
Nation’s Sustainable Development Goals
and we are supportive of those priorities.
Education and life skills
Cha-Ching – the first global financial
education programme
Developed by Prudential, Cha‑Ching is the
world’s only global financial education
platform aimed at primary school‑aged
children. Now in its seventh year, the
programme has expanded from its origins
in Asia to each of the four continents where
the Group does business. In all of the
markets where it has been launched it has
been very well received, with positive
feedback from parents, teachers, children
and political stakeholders.
In Asia, the programme reaches over
34 million households a day through a
multi‑distribution platform including
Cartoon Network, and through a school
contact programme that has reached more
than 300,000 children since inception.
The standardised Cha‑Ching curriculum
developed in partnership with Junior
Achievement has been well received and
70 Prudential plc Annual Report 2017
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Adding more to life:
Jackson National Life Insurance
with Junior Achievement, US
Jackson volunteers worked with Junior Achievement Middle
Tennessee (JA) to teach work‑readiness, entrepreneurship
and financial literacy skills through hands‑on programmes
in schools, and led a programme at the Nashville Rescue
Mission, a shelter for families experiencing homelessness.
Through this partnership, JA was able to reach students
outside the traditional classroom and provide experiences
to help young people break the cycles of financial and
personal hardship.
Jackson volunteers joined nearly 700 students at a STEM
(science, technology, engineering and mathematics) Summit,
which combined hands‑on activities in the fields of science,
technology, engineering and mathematics with a career
panel from employees in many fields of the local economy.
Colleagues also provided support at the JA Finance Park,
an experiential budgeting simulation facility to help students
build a foundation for smart financial decisions.
rolled out to more than 90,000 students in
Indonesia, the Philippines and Malaysia. In
addition, Cha‑Ching increased its presence
during the year on digital platforms,
including a new smartphone app called the
‘Cha‑Ching Challenge’, which helps further
engagement with children.
In the US, the Jackson Charitable
Foundation has introduced Cha‑Ching
nationally in a partnership with Discovery
Education and Junior Achievement USA.
The Jackson Charitable Foundation has
integrated Cha‑Ching videos and lessons
into Junior Achievement’s third grade
classroom programme, which is funded by
the Foundation for six years and is
expected to reach approximately
2.7 million students over that time, in
15,000 classrooms annually throughout the
country. The partnership with Discovery
Education is aimed toward supporting
educators and includes free classroom
activities and teacher guides to use
Cha‑Ching in their classrooms and will
reach more than 1 million students across
the country.
In the UK, working with Young Enterprise,
we have developed an online educational
resource for primary school students in
England and Wales that has enabled the
Cha‑Ching programme to be brought into
the classroom. The Quality Marked
teaching resource is linked to the Personal
Finance Education Group’s Financial
Education Framework and has guidance
for teachers on how most effectively to
integrate activities into their teaching as
well as activities for home‑learning. Since
launch in late 2016, the resource has been
downloaded over 20,000 times in more
than 650 schools across the UK.
In other markets, the online educational
resource has also been utilised to support
the roll‑out of the Cha‑Ching programme
across our African markets as part of a
financial literacy campaign delivered jointly
by Junior Achievement Africa and Prudential
Africa employees. Cha‑Ching was launched
in Poland in 2015 and the first 10 films were
translated into Polish and aired on several
children’s television channels. A website
with materials for children and teachers
was created to share in local schools.
First Read – developing
children’s skills
Prudence Foundation has funded and
supported the First Read programme since
2013, partnering with Save the Children to
focus on investing in early childhood care
and development in Cambodia and the
Philippines. First Read is a programme that
helps parents to develop their children’s
numeracy and literacy skills by providing
books in the local language or dialect, and
encouraging them to read, sing and count
together. It also helps parents understand
the importance of healthy and nutritious
food for children’s development.
Since First Read’s inception, over 270,000
children and adults have benefited directly
and over 540,000 community members
indirectly. In 2018, the partnership will
continue, with Save the Children focusing
on quality implementation and building a
strong evidence base to demonstrate First
Read’s impact.
Fostering careers in IT and coding
Through four programmes, Jackson’s IT
employees are devoting considerable
personal time and skills toward increasing
IT exposure to diverse youth in Middle
Tennessee. In 2014, Nashville IT associates
adopted a small coding club at Woodland
Middle School in Williamson County. The
programme has gained momentum
through Jackson and other local
businesses’ volunteers. So much so, that
after seeing the impact of volunteer efforts
alone, the school system invested in paid
training for teachers to further support and
professionalise the efforts.
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Female colleagues encourage
careers in finance
Since 2014, Jackson has supported Rock
the Street, Wall Street (RTSWS), a charity
that increases financial literacy and interest
in finance careers for high‑school girls.
What began in 2014 with a field trip to the
Jackson Sales Desk has grown over time,
with Jackson now sponsoring two RTSWS
classes at Ravenwood and Centennial High
Schools. Sponsorship of a class is much
more than the financial contribution, also
entailing five female sales professionals
teaching a six‑week curriculum, hosting
students for a field trip, pairing students
with female finance professional mentors
and creating job shadow experiences with
their mentors.
Supporting young people with
employability and financial skills
M&G Prudential is a partner member of
the KickStart Money primary financial
education programme. The programme
aims to reach 20,000 primary school
children and focuses on saving, budgeting,
careers, borrowing and consumer and
public finance.
Through three secondary school
partnerships in Paddington, Reading and
Stirling, Prudential UK has also been
directly involved in building the knowledge
and skills of young people. These
partnerships have supported over 3,700
young people since 2013, with 360
employees giving their time and sharing
their knowledge and skills. The M&G
business is a supporter of The Lord Mayor
of London’s Appeal Charity, which aims to
work towards a City that is healthy, skilled,
inclusive and fair.
Prudential’s partnership with MyBnk,
which delivers financial literacy
programmes in secondary schools in
London, helped develop money skills for
5,000 young people in secondary schools
in deprived areas of the capital.
Secondary school scholarships
across Africa
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.
Prudential has worked with a number
of charities operating in Ghana, Kenya,
Uganda and Zambia by funding
educational programmes and projects
since 2014. Education and gender equality
are key priorities and we have already
provided scholarships to 700 young people
on the continent and expect to reach over
1,000 more in the near future. These
programmes have focused on allowing
vulnerable children in these countries to
access quality education through the
provision of scholarship awards, as well as
ensuring that those marginalised by society
receive education, skills and support.
Disaster readiness and relief
Helping to make Asia more prepared
and safer
As a life insurance and asset management
company, our core business is to help
protect and reduce the vulnerability of
individuals and their families in the face
of unfortunate events. Asia Pacific is the
world’s most disaster‑prone region
so Prudence Foundation is working with
humanitarian and private sector
organisations and governments to help
communities better prepare for disasters
and also, when required, provide
immediate emergency response and
longer‑term recovery support.
Aligned with aiming to protect
communities and make them less
vulnerable in emergency situations,
Prudence Foundation launched its third
Safe Steps programme in September 2017.
Safe Steps First Aid is in partnership with
the International Federation of Red Cross
and Red Crescent Societies (IFRC) and
National Geographic. It builds on the
success of its previous two Safe Steps
programmes, which focus on natural
disasters and road safety. Safe Steps First
Aid provides essential, easy‑to‑understand
first aid information to millions of people
throughout Asia.
Safe Steps is a first‑of‑its‑kind, in terms of
reach and breadth of partnerships,
pan‑Asian public service initiative to
enhance awareness through the
dissemination of educational survival tips
for natural disasters, road safety and first
aid. It is a multi‑platform programme
including on‑air video messages and
informative website and educational
collateral that can be shared among
communities. Core to the programme is a
series of 60‑second educational videos
that advise individuals and households on
what to do should a natural disaster strike,
how to be safe on the roads and what to do
if they encounter a first aid emergency.
The programme has been well received
and partnerships continue to be formed
across Asia, helping to spread the
messages, including free‑to‑air channels,
radio stations and cinema. Through these
partnerships, Safe Steps currently reaches
more than 200 million people a day in Asia.
Safe Schools programme
Prudence Foundation supports the Safe
Schools programme, partnering with Plan
International and Save the Children in
Cambodia, Indonesia, the Philippines,
Thailand and Vietnam. The programme
focuses on capacity‑building for students,
teachers and local community members on
disaster preparedness, placing schools at
the heart of building a culture of disaster
preparedness within communities. The
programme trains students and their
teachers in key disaster management skills
and supports the organisation of disaster
simulations and evacuation drills for
students and their communities. Since
2013, more than 82,000 students and
33,000 teachers have participated.
Volunteering to build disaster-resilient
homes
Prudence Foundation continues to provide
support to major emergency relief efforts
across Asia. During 2017, Prudence
Foundation completed its long‑term
commitment to support the Typhoon
Haiyan/Yolanda disaster recovery efforts
in the Philippines. In March, around 70
volunteers spent one week helping to
complete the building of 126 homes with
partner Habitat for Humanity and the local
government. In total, almost 400 regional
volunteers have donated their time and
skills to help Bantayan Island since 2014.
Emergency fund relief
Prudential has also been a Group‑level
supporter of Save the Children since 2010
and is one of the Children’s Emergency
Fund’s major supporters. This allows us
to act swiftly when disasters occur in any
of our markets and provides an instant,
effective fundraising mechanism for
employees when needed. In 2017 the
emergency fund was used 81 times and
reached over a million people in
40 countries caught up in emergencies.
This included help for casualties of heavy
monsoon rains in India, Bangladesh and
Nepal, a mudslide in Sierra Leone, an
earthquake in Mexico and hurricanes in
the US.
Social inclusion
Commitment to social inclusion in the
UK through Prudential RideLondon
In the past five years Prudential
RideLondon has raised over £50 million for
charity and become one of the UK’s largest
fundraising events. In 2017, more than 846
72 Prudential plc Annual Report 2017
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Adding more to life:
PruGoals programme, UK
Prudential’s PruGoals programme provides inspiration and
support for disadvantaged young people, helping them
build confidence and employability and encouraging
personal motivation. The programme provides aspirational
challenges and workshops leading up to the Prudential
RideLondon‑Surrey 46 mile cycle ride, and participants are
provided with bikes, training and equipment, as well as
coaching and mentoring.
Around 260 students completed the PruGoals programme
in 2017 as part of Prudential’s partnership with Teach First
and Greenhouse Sports, and 82 per cent said that taking
part in PruGoals had changed their mindset in a positive
way. Jessica, aged 16, said: ‘I have developed motivation
skills and learnt that I can complete anything if I put my
mind to it’, and Fatima added: ‘I’ve realised as part of this
programme that a strong mindset is important. If I want to
accomplish something, I can.’
charities benefited from riders’ fundraising,
up from 740 in 2016. Prudential has
sponsored the event since inception in
2013 and, as part of our renewal of the
sponsorship in 2016, we decided to refocus
support to concentrate on charity and
community engagement. The PruGoals
programme helps young people to achieve
their goals regardless of social or economic
background by providing aspirational
challenges culminating in taking on the
Prudential RideLondon‑Surrey 46. In 2017
this programme supported 300
disadvantaged young people to take part in
the Prudential RideLondon‑Surrey 46.
Following the success of the 2016 ‘Fixing
Dad’ documentary, in 2017 Prudential
supported the ‘Fixing Challenge’. The new
challenge followed four people hoping to
improve their type‑2 diabetes, weight
issues or weight‑related health concerns.
As with Fixing Dad, the culmination of the
Fixing Challenge shows the four individuals
taking on the challenge of Prudential
RideLondon‑Surrey 100 and having their
journey filmed as part of a new
documentary.
Employee fundraising
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 strengthen families and
increase economic opportunities through
bi‑annual grants in communities where
Jackson’s 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 that Jackson’s
support is received by responsible
organisations where funding will create
a significant impact.
Enhancing later life
Building on previous Age UK programmes,
Prudential is funding the Later Life Links
programme with the charity, providing
long‑term companionship, advice and
practical help to older people. Launched in
six UK communities in February 2017, the
programme has supported over 9,000
older people in its first year. Last year also
saw the launch of a new partnership with
Royal Voluntary Service (RVS). First Time
for Everything events run in 11 RVS
centres, providing around 1,200 elderly
people in 2017 with a chance to try
something for the first time for free,
such as tai chi, yoga and drawing, aiming to
tackle loneliness and social isolation with
the support of RVS volunteers.
Apprenticeships in the UK
Youth unemployment is a huge social
challenge and M&G Prudential is helping
to shape future job prospects for young
people.
Over the past five years Prudential UK has
recruited over 200 young people to our
apprenticeship programme. Based at our
London, Reading or Stirling offices,
apprentices gain important paid work and
life skills as well as achieving recognised
vocational and professional qualifications.
In 2017, 40 apprentices completed a
13‑month apprenticeship. 93 per cent
secured ongoing employment with
Prudential, while others choose to work
elsewhere or move on to higher education.
In 2017, the UK business was recognised
as a ‘Top 100 Employer for 2017‑2018’
by RateMyApprenticeship.
The clear benefits to both the young
people and to the business mean
Prudential is committed to continuing the
apprenticeship programme but with an
increased focus on social inclusion. Twenty
two apprentices joined Prudential in 2017
on the apprenticeship programme, which
targets GCSE and A‑level school leavers,
and in 2018 12 trainees will join the
traineeship programme, which is aimed at
recruiting young people aged 16 to 24 not
in employment, education or training.
M&G has run its Apprentice programme
for the last six years and, as part of
Investment20/20, offers the scheme to
encourage school leavers to establish a
career in the financial services industry.
The programme is designed to help people
without degrees start their careers, straight
after sixth form or college, providing an
opportunity to receive on‑the‑job training
and earn a competitive salary. A total of 65
apprentices have been hired by the
business since 2012 across all Business
Units, including fund management teams.
One of the benefits of this programme is
that the positions are permanent and
training and development is undertaken
from the outset.
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Annual Report 2017 Prudential plc 73
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Support for disadvantaged
communities
M&G supports disadvantaged
communities near its offices and during
2017 more than 190 charities received
support either by donation or as a result of
employee volunteering. Grants typically
focused on education, medical research,
social and welfare programmes and
children and youth projects. In 2017, M&G
continued its support of the City Giving
initiative led by the Lord Mayor of London’s
Appeal, and an onsite event showcased
the services provided by charities that had
received support from M&G. The Lord
Mayor of the City of London attended
M&G’s event as part of his initiative to
promote the varied charitable activities
undertaken by City businesses.
M&G continues to sponsor the RHS
Chelsea Flower Show and is refocusing
the sponsorship to increase charitable
activity through support of RHS campaigns
such as Greening Grey Britain, which
aims to transform urban grey spaces
into community green spaces.
Employee engagement
Successful volunteering programme –
Chairman’s Challenge
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.
Chairman’s Challenge is our flagship
international volunteering programme,
bringing together people from across the
Group to help in their communities.
Colleagues from across the Group give
their time and skills to support our global
charity partners, including Plan
International, Help Age International and
Junior Achievement.
The programme continues to appeal to
colleagues, with the number of volunteers
signing up increasing year‑on‑year. From
its launch in 2006, when 2,603 employees
signed up, volunteer numbers have
increased by 227 per cent. Last year 8,500
colleagues around the world took part,
volunteering over 35,000 hours to support
30 projects.
Each volunteering project focuses on one
or more of our CR priorities 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 registers for the programme. Charity
partners use this money to seed‑fund
charitable projects for Prudential
volunteers. Each year, employees across
the Group are involved in the voting
process to decide on the most innovative
projects, which receive extra funding
towards their charitable objectives.
Volunteering across the Group
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. 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.
Charitable donations
We calculate our community investment
spend using the internationally recognised
London Benchmarking Group (LBG)
standard. This includes cash donations to
registered charitable organisations, as well
as a cash equivalent for in‑kind
contributions.
In 2017, the Group spent £25 million
supporting community activities. The direct
cash donations to charitable organisations
amounted to £19.2 million, of which
approximately £4.9 million came from our
UK and EU operations. The remaining
£14.3 million was contributed to charitable
organisations by Jackson National Life
Insurance Company and Prudential
Corporation Asia.
The cash contribution to charitable
organisations from our UK and EU operations
is broken down as follows: education
£2,971,000; social, welfare and environment
£1,861,000 and cultural £62,000.
The balance includes in‑kind donations
as set out on the Group website at
www.prudential.co.uk/responsibility/
performance/community‑investment
and prepared in accordance with LBG
guidelines. This included 9,460 employees
who dedicated 96,493 hours of volunteer
service in their communities. Furthermore,
£412,375 was donated across the Group
by our employees through our payroll
giving scheme.
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 UK
Political Parties, Elections and
Referendums Act 2000. The Group did not
make any such donations or incur any such
expenditure in 2017.
Valuing our people
We strive to foster an environment in which
employees can derive meaning and
empowerment from their work and feel
that they are making an active contribution
to the organisation. In addition to the core
principle of providing interesting work and
challenging opportunities to engage our
people we drive employee engagement
through an array of initiatives across our
businesses. These include colleague
appreciation programmes, wellbeing
programmes, employee engagement
surveys, networking opportunities with
peers and senior leaders across functions,
employee focus groups, and volunteering
activities. The success of our engagement
efforts has again been recognised
externally by winning prestigious awards.
For example, in 2017 M&G Investments
was ranked number one Asset Manager in
both the HITC Best Places to Work and the
RateMyPlacement Top 100 employers
surveys. Our businesses, including Group
Head Office, have processes, and where
appropriate a policy, in place for engaging
with employees. 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. See page 76 for further detail.
Diversity and inclusion
Prudential believes that diversity of
experience and background is vital to
success, both today and in the future.
The Board has made D&I one of the
strategic objectives for Prudential. Tim
Rolfe, Group HR Director, is the executive
responsible for sponsoring D&I activities
across the Group, with Nic Nicandrou,
Chief Executive of Prudential Corporation
Asia, acting as the Board member
accountable for D&I work. Our policies
and plans support an inclusive culture
sensitive to the needs of all employees.
We protect all our employees against
discrimination and provide opportunities
for our people regardless of their age,
caring responsibilities, disability status,
ethnicity, gender, religion, sexual
orientation or professional and educational
background. We make appropriate
disability adjustments as required and
provide training and career development
opportunities for all. We give full and
fair consideration and encouragement
to all applicants with suitable aptitude
and abilities.
74 Prudential plc Annual Report 2017
www.prudential.co.uk
Adding more to life:
Prudential Charity Trustee
programme, UK
Colleagues have been taking part in the Prudential Charity Trustee
programme to develop valuable skills to become trustees on charity
boards. A series of training workshops outlined what was involved in
becoming a trustee and the skills and time required. Working with
our charity partner, Getting on Board, colleagues were then given
help to find the right role.
Melissa Kantor, from Prudential plc’s Group Talent team, is now a
trustee for SEED Madagascar, which is working to alleviate poverty
and maintain the island nation’s unique environment. ‘Since joining
SEED’s board in May, I have learned much about functions outside
my main areas of expertise and I hope to continue to be challenged
outside my comfort zone’, said Melissa. ‘I am thrilled to be able to
assist SEED by leveraging my corporate experience, largely around
HR, relationships and governance.’
Tony Jones, Chair of Trustees at SEED Madagascar, said: ‘We have
been fortunate recently in appointing two enthusiastic trustees with
very relevant skills for us. Coming from major institutions which
encourage staff to get involved in the third sector, we have enhanced
our capacity to manage change more effectively and also to ensure
our own staff and volunteers are properly motivated and rewarded.’
Photo © SEED Madagascar.
We aim to foster a working environment
where individuals are empowered and
differences recognised. We aspire that
over time our senior management,
including our Board, better represents the
experiences and backgrounds of our
customers and stakeholders. We recognise
that diversity contributes to effectiveness
and is essential for successfully delivering
the strategy of an international Group. We
are committed to recruiting and developing
the best available talent and appointing the
most appropriate candidate for each role
while at the same time ensuring
appropriate diversity of experience,
skillsets and professional background.
Further information on the diversity of our
Board, our policy in respect of this, how this
is implemented and the associated results
in 2017 can be found in our Governance
statement on page 101.
We have a strategic, long‑term approach to
D&I and the Board monitors progress
regularly. We invest in targeted activity
across 10 priority areas, ranging from
unconscious bias training to mentoring and
support for various affinity groups. In
addition our commitment to D&I is
supported, across our businesses, by
initiatives such as reviews of pay,
performance management consistency,
providing training to staff, engaging with
recruitment firms and awareness
campaigns to diversify the pool of potential
candidates.
For example, 268 senior managers and
executives from our businesses in Asia,
the US and the UK participated in
unconscious bias workshops in 2017.
We sponsored Dive In, the D&I festival in
insurance and the financial sector, which
took place in 17 countries in the Americas,
Asia, Africa, the Middle East and Europe,
and we published the first Group‑wide D&I
newsletter for all employees.
We are committed to developing a robust
and diverse talent pipeline and increasing
representation of women in senior
positions in the Group and on the Board.
We were among the first cohort of
companies to sign the HM Treasury
Women in Finance Charter in 2016. In
2017, we monitored progress against our
target of 30 per cent of women in senior
management by the end of 2021. We will
continue to focus effort toward achieving
our aim to have 27 per cent women in
senior management by the end of 2019.
Please see Basis of Reporting at
www.prudential.co.uk/~/media/Files/
P/Prudential‑v2/content‑pdf/basis‑of‑
reporting‑2017 for the definition of
senior managers.
Gender diversity: senior management
We are committed to supporting women
who aim to return to work after an
extended career break. As an example of
this commitment, in 2017 Eastspring
Malaysia launched the ‘Career Comeback
for Women’ programme. In the US, Jackson
sponsored a 10‑stop national speaking tour
focusing on women’s empowerment. As
part of our diversity agenda more broadly,
at M&G Prudential, 57 employees qualified
as mental health first aiders this year and
M&G Real Estate was awarded the National
Equality Standard. In Africa the Prudential
Actuarial Support System supports the top
10 graduates in Ghana and the top three in
Kenya, helping them with exam fees.
Group Head Office (GHO) also rolled out
the ‘PruThrive’ programme for colleagues,
covering physical health, mental wellness
and inclusivity.
In addition to the established Prudential
Women’s Network and M&G Pride (for
LGBT employees and allies), several new
affinity group networks launched, focusing
on mental health, disability and cultural
awareness. Across all businesses and at
GHO, more than 20 initiatives supported
schools and students, often from
underprivileged backgrounds.
75%
83%
Male
Female
2017
2017
25%
2012
2012
17%
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Annual Report 2017 Prudential plc 75
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Corporate responsibility review continued
Prudential headcount as at 31 December 2017 – total population
Headcount
Total
Male
Female Undisclosed2 Unspecified3
Chairman & Independent Non‑executive Directors
Executive Directors
Group Executive Committee (GEC)
Includes Executive Directors
Senior managers
Excludes the Chairman, all directors and GEC members
Whole company1 full time equivalent
9
6
11
92
=
=
=
=
8
5
10
69
1
1
1
23
Includes the Chairman, all directors, GEC members and senior managers
24,711
= 11,777
12,864
23
47
Notes
1 Excludes Prudential Corporation Asia joint ventures
2
3 No specification or information is captured on gender for an immaterial number of our employees. These employees are recorded as ‘unspecified’.
In many of our businesses, we provide our employees with the option to not disclose their gender. For these employees, gender is recorded as ‘undisclosed’.
We believe in supporting human rights
and 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. Our Business Units implement
policies and practices at a local level that
aim to ensure compliance with statutory
and regulatory requirements in the local
labour market and the prevention of
slavery, human trafficking, child and forced
labour. As a global business, focused on
our customers, it is important that our
employment models reflect the markets
in which we operate. In certain markets,
this means hiring local agents to sell our
products, or partnering with joint ventures
to offer the breadth of products and
services that meet our customers’ needs.
We are clear – slavery, human trafficking,
child labour or any other abuse of human
rights has no place in our organisation or
supply chain. This supply chain includes
our joint ventures and the agents we use
to distribute our products. For further
information around how we manage
slavery, human trafficking, child and forced
labour risks, refer to our forthcoming
Modern Slavery Statement.
Talent development
People development is essential to deliver
our strategy. The quality of leadership
across the Group is fundamental to the
future growth and success of the business
and we therefore review our talent
annually, and offer a range of programmes
that enable our people to continue to grow
and develop. The majority of our
programmes 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. We support them with the
appropriate development and career
planning to ensure that we maintain a
relevant 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 2017, 120 senior
high‑potential individuals participated in
our established and well respected
Group‑wide leadership development
programmes ‘Impact’ and ‘Agility’ and the
‘Next Generation’ emerging talent
programme. These programmes were
developed in partnership with world‑
leading academic institutions and
co‑delivered with business school thought
leaders.
Within our businesses there are many
examples of our continuing commitment to
talent development. In 2015 we launched a
Group‑wide Long‑Term Workforce
Planning Initiative, which has progressed
in 2016 and 2017. For example, in 2017
Prudential Corporation Asia deployed
strategic workforce planning to predict the
capabilities required to ensure our
continued success utilising a succession‑
driven talent strategy to build the next
generation of leaders with the capabilities
we require. In the US, Jackson offers
customised on‑premises programmes, as
well as access to an online university, to
meet the personal and professional
development needs of employees with all
levels of experience. M&G Prudential
supports talent development through a
range of development programmes to
increase personal and organisational
capability alongside bespoke development
support for key individuals. GHO provides
innovative programmes designed in
partnership with top academic institutions
and industry experts ‑ focused on early
career development, leadership
development, and opportunities to
develop a strategic and innovation mindset
through varied career experiences and
projects.
Employee engagement
We want to foster an environment in which
employees can derive meaning and
empowerment from their work and feel
that they are making an active contribution
to the organisation. We drive employee
engagement through an array of initiatives,
including colleague appreciation
programmes, wellbeing programmes,
networking opportunities with peers and
senior leaders across functions, employee
focus groups, and volunteering activities
with charitable causes such as
Prudential UK’s partnerships with
numerous schools. Each of our businesses
manage their own activities including
employee engagement surveys, regular
employee open‑forums with senior
management, and away days to discuss
business performance and internal
management. The success of our
engagement efforts has again been
recognised externally by winning
prestigious awards. For example, in 2017
M&G Investments was ranked number one
Asset Manager in both the HITC Best
Places to work and the RateMyPlacement
Top 100 employers surveys.
76 Prudential plc Annual Report 2017
www.prudential.co.uk
Our businesses, including GHO, have
processes, and where appropriate a policy,
in place for engaging with employees.
Reporting to Group HR is required on
jurisdiction specific or sector specific
trends and developments in certain areas.
For any significant issues that are likely to
impact either positively or negatively on
our reputation as an employer – at both
business and Group level – immediate
reporting to Group HR is required. 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.
See page 74 for further detail.
Performance and reward
Our reward arrangements are designed to
attract, motivate and retain high‑calibre
people. Each individual contributes to the
success of the Group and is rewarded
accordingly.
We recognise and reward high
performance and are committed to a fair
and transparent system of reward. We
have recently reported our 2017 UK
gender pay gap figures/data along with
information about how we are working
to increase the number of women in
leadership, investment management and
senior operational roles.
Remuneration 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 have
done so.
There are recognition initiatives running
across our businesses, such as the Jackson
High Five Recognition Program, which
allows individuals to recognise when their
colleagues go above and beyond, and for
Prudential Stars awards at GHO, in which
individuals can nominate their colleagues
to recognise examples of exceptional
contributions, specifically in the areas of
delivering synergy, adding value, fostering
innovation, demonstrating stakeholder
focus and maintaining risk awareness. We
also believe in the importance of giving
employees the opportunity to benefit from
the Group’s success through share
ownership, and operate share plans for
employees in the UK and Asia. This
includes PruSharePlus, which enables
employees in Asia to share in the longer‑
term success of the business, and actively
encourages share ownership and
engagement. Of all eligible employees,
59 per cent participate in the Group’s UK
Sharesave and 25 per cent in the share
incentive plans.
Protecting the environment
and managing the risks from
climate change
We take a long‑term and holistic approach
to managing the risks and opportunities
posed by climate change and our impact on
the environment and strive to play our part
in reducing both our direct and indirect
impacts where possible. Our long‑term
approach includes investing in the
low‑carbon economy, measuring and
improving the environmental performance
of our global operations and reducing the
impact of our investments on the
environment.
Managing our climate-related risks
and opportunities
As a life insurer, asset owner and manager,
we are long‑term stewards of our
customers’ assets and we recognise the
challenge that climate change presents.
We also recognise our responsibility to
customers, society and the environment
to effectively integrate associated
considerations into investment decisions
and fiduciary and stewardship duties and
help finance the transition to a more
sustainable economy. Active consideration
of ESG factors is integral to our stewardship
responsibilities. For example, in 2017
M&G Prudential joined Climate Action
100+, an initiative bringing together more
than 250 global institutional investors to
engage with the world’s largest corporate
greenhouse gas emitters to improve
climate‑related financial disclosure and
curb emissions, and in October
M&G Prudential launched the ESG Global
High Yield Bond Fund, which fully
integrates ESG factors into its investment
process. In February 2018 Eastspring
became the third Prudential signatory to
the United Nations Principles for
Responsible Investment, joining PPMSA
and M&G. Further information on the
indirect environmental impact of our asset
management activities is available in our
forthcoming ESG Report.
In 2017 the Financial Stability Board (FSB)
published the recommendations of its
Task Force on Climate‑Related Financial
Disclosures (TCFD). We welcomed the
release of these recommendations, which
provide additional guidance in this area.
Currently, our oversight in this area is
provided at Group Executive Committee
level by the Group’s ESG sponsor, Jonathan
Oliver, Group Director of Communications,
who has responsibility for our corporate
responsibility strategy and activities more
broadly. The Board approves the Group’s
annual ESG Report, which is also reviewed
by the Group Audit Committee and Group
Disclosure Committee. We are in the
process of refreshing our enterprise‑wide
assessment of climate‑related risks, while
also establishing the internal capabilities
needed to make enhanced climate‑related
financial disclosures in future reporting
periods, considering the geographical and
asset class breadth of our investment
activities.
Managing our direct
environmental impact
Managing the climate‑related risks facing
our business is crucial to creating long‑term
value for our customers, shareholders and
the communities of which we are part.
As an occupier of approximately 400
properties worldwide, we recognise the
importance of our own internal
environmental targets and decarbonisation
goals in reducing our direct footprint. In
2017, we decreased our absolute
greenhouse gas (GHG) emissions (scope 1
and 2) from our occupied estate and
company‑owned vehicles by 5 per cent
to 70,723 tCO2e (2016: 74,315 tCO2e).
This was driven by consolidation of our
property portfolio and continued
investment in energy efficiency initiatives
through our mechanical and electrical life
cycle replacement programmes to ensure
that we occupy efficient buildings. When
normalised against net lettable floor area,
our GHG emissions efficiency metric
improved by 2 per cent to 148 kgCO2e/m2
in 2017 (2016: 151 kgCO2e/m2).
Prudential Group
Scope 1 and 2 GHG Emissions
tCO2e
37,536
71,104
14,893
74,315
15,035
70,723
2015
2016
2017
Investment Estate
Occupied Estate
www.prudential.co.uk
Annual Report 2017 Prudential plc 77
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Corporate responsibility review continued
Adding more to life:
Jackson, a star performer
In 2017, Jackson were awarded a U.S. Environmental
Protection Agency (EPA) Energy Star for a second building
on our Lansing campus, demonstrating superior energy
efficiency. Commercial buildings that earn EPA’s Energy Star
certification use an average of 35 per cent less energy than
typical buildings. Our new building, 8 Corporate Way,
received an Energy Star score of 93 placing it in the top
10 per cent of all similar facilities nationwide.
To earn the Energy Star certification, Jackson created a
five‑year energy plan that included the installation of new
mechanical and electrical building controls to enhance
monitoring and control of all systems, improving comfort and
efficiency along with the advanced lighting controls to with
occupancy sensors and daylight harvesting to maximise the
use of natural light.
Jackson received honourable mention for best commercial
project in Michigan State at the 2017 Governor’s Energy
Excellence Awards. As one of the largest companies in the
Greater Lansing area, Jackson’s commitment to energy
efficiency and environmental conservation sets a positive
example for other local companies and organisations and
helps bring awareness to this important topic.
We improved our CDP Climate Change
disclosure and were awarded a
‘Leadership’ ranking of A‑ (2016: B) and in
ClimateWise, the insurance sector climate
initiative managed by the Cambridge
Institute for Sustainability Leadership, we
improved our score, achieving 71 per cent
(2016: 60 per cent). Our performance in
ClimateWise against six core principles is
independently audited by PwC.
We continue to develop our energy and
environmental management strategies,
14 per cent of our global electricity
consumption is now renewably sourced.
In the UK, we successfully transitioned our
environmental management system to
ISO 14001:2015 and renewed our focus on
waste and recycling by collecting our waste
coffee grounds for energy recovery by
conversion into biofuel. We are also rolling
out advanced energy analytics software
across our largest UK properties following
a successful trial. In the US, we continue to
demonstrate superior energy efficiency
with an Energy Star score of 93 for our new
corporate office in Lansing, placing it in the
top 10 per cent of all similar facilities
nationwide. In Asia we have developed an
environmental management framework to
review current site performance and
identify opportunities for energy and water
efficiency improvements for our most
significant buildings.
M&G Real Estate, part of M&G Prudential,
has an approach to responsible property
investment that enables it to manage and
respond to the growing range of
environmental and social issues that can
impact property values. It continues to
decarbonise its property estate through
continued LED lighting rollout and its first
UK solar photovoltaic installation, covering
an area of 3,800 m2, equivalent to 15 tennis
courts. It is anticipated the system will
generate enough electricity annually to
power the equivalent of 68 average UK
households and save 165 tonnes of carbon
dioxide. 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/
Further detail on our environmental
performance throughout 2017 is available
online and will be published in our 2017
ESG Report later in 2018, including
performance against our global
environmental targets framework.
Prudential plc – greenhouse gas
emissions statement
We have compiled our global GHG
emissions in accordance with the
Companies Act 2006 (Strategic and
Directors’ Reports) Regulations 2013.
GHG emissions are broken down into three
scopes; we have included full reporting for
Scope 1 and 2, and select Scope 3
reporting as best practice.
Scope 1 emissions are our direct emissions
from the combustion of fuel, fugitive
emissions and company owned vehicles.
Scope 2 emissions cover our indirect
emissions from the purchase of electricity,
heating and cooling. We have reported our
Scope 2 emissions using both the location
and market‑based methods in line with the
GHG Protocol Scope 2 Guidance. Our
Scope 3 footprint includes UK booked
business travel, global water consumption
and waste generated from our investment
properties with operational control, UK
and US occupied properties. We continue
to work with our Business Units to review
the extent of our Scope 3 reporting and
increase coverage where practicable.
Please refer to our Basis of Reporting and
supplementary reporting online for further
detail on our methodology, reported
consumption and drivers of variation.
78 Prudential plc Annual Report 2017
www.prudential.co.uk
Emissions source (tCO2e)
Scope 1
Scope 2 – Location‑based
Occupied
Investments
Occupied
Investments
Scope 2 – Market‑based (supplier and residual mix)
Occupied
Scope 3
Scope 1 and Scope 2*
Total Scope 1 and 2*
Total Scope 1, 2 and 3*
Carbon intensity*
Investments
Group
Occupied
Investments
Group
Group
kg CO2e per m2 – Scope 1 and 2 only
kg CO2e per employee – Scope 1 and 2 only
kg CO2e per m2 – Scope 1, 2 and 3
Group
Group
Group
* Note that when reporting Group totals, the market‑based emission are used.
2016
% Change
2017
10,498
7,703
59,227
18,751
60,225
7,332
15,313
70,723
15,035
85,758
10,2331
7,8141
62,413
21,3981
64,0822
7,0792
11,5801
74,315
14,893
89,208
101,071
100,788
3%
‑1%
‑5%
‑12%
‑6%
4%
32%
‑5%
1%
-4%
0%
2017
2016
% Change
31
3.4
36
34
3.8
38
-9%
-12%
-5%
Data notes
Reporting Period:
Baseline year:
Independent Assurance:
1 October 2016 to 30 September 2017
1 October 2015 to 30 September 2016
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.
Consolidation (boundary) approach:
Operational Control
Consistency with financial statements:
The reporting period does not correspond with the Directors’ Report period
(01 January 2017 to 31 December 2017) as it was brought forward by three
months to improve the availability of invoice data and reduce 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:
Scope 1 and 3 reporting uses the UK DEFRA 2017 GHG Conversion Factors.
Scope 2 calculations use the IEA GHG 2017 Conversion Factors for location‑
based reporting. Market‑based reporting uses supplier emission factors for our
UK REGO‑backed supply (Investment) and RE‑DISS factors where available.
The Greenhouse Gas Protocol Corporate Accounting and Reporting Standard
Five per cent
Accounting methodology:
Materiality threshold:
Notes
1 2016 figure restated as accurate data became available from suppliers.
2 This figure has not been assured as not reported in 2016.
www.prudential.co.uk
Annual Report 2017 Prudential plc 79
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
Corporate 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.
Local governance
We believe that CR is best managed on the
ground by our people running the
businesses. In M&G Prudential and
Jackson 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.
The Prudence Foundation is governed by a
statutory Board of Directors, under which a
Board of Trustees operates as a decision‑
making forum, directing the management
of the programmes in collaboration with
our local markets, and ensuring that we
maximise the value of our spend to local
communities.
The boards of each of our Material
Subsidiaries consider updates on corporate
responsibility activities and spend in their
communities on an annual basis.
Code of Business Conduct
Consideration of environmental, social and
community matters is integrated in our
Code of Business Conduct. Our code is
reviewed by the Board on an annual basis.
Refer to page 76 for more information.
Risk assessment
For more information on the risks facing
our business see our Report on the risks
facing our business and how these are
managed on page 48. Further information
on how we manage our material ESG issues
and associated risks are provided in the
‘Managing our material ESG issues’ section
of the Corporate responsibility review on
page 64.
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, aligned with the
methods and practices of the Chartered
Institute of Purchasing and Supply, an
industry‑recognised body.
Further information on our supply chain
management and performance will be
provided in our forthcoming 2017 ESG
Report.
Strategic report approval by the
Board of Directors
The strategic report set out on pages 9 to 80
is approved by the Board of Directors.
Signed on behalf of the Board of Directors
Mike Wells
Group Chief Executive
14 March 2018
80 Prudential plc Annual Report 2017
www.prudential.co.uk
03
Governance
Chairman’s introduction
Board of Directors
How we operate
Further information on Directors
Risk management and internal control
Committee reports
Statutory and regulatory disclosures
Additional information
Index to principal Directors’ report disclosures
Page
82
83
88
98
99
101
120
121
122
www.prudential.co.uk
Annual Report 2017 Prudential plc 81
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Chairman’s introduction
Robust and transparent governance
supporting the delivery of our strategy
Dear Shareholder
This report provides an explanation
of the Group’s governance
arrangements and our activities
in this area during 2017.
Good governance encourages decisions to
be made in the best interests of the
business, taking account of the views
of stakeholders. We aim to achieve this
through a responsive governance
framework that supports and challenges
our executives’ decision making.
Effective leadership
As Chairman, one of my priorities is how
we as a Board can improve and work
together even more effectively. The Board
undertakes an annual review of its
performance, both collectively and as
individuals and uses the outcomes of these
reviews to drive improvements over the
coming year. The actions taken by the
Board in 2017 to address the
recommendations of the 2016 review are
set out on pages 93 and 94. An external
independent evaluation was conducted at
the end of 2017 in order to provide
shareholders with further comfort that the
Board continues to operate effectively.
Details of the 2017 review can be found on
page 94 and I was pleased that the review
concluded that the Board’s strengths
included “strong leadership in a collegiate
and constructive environment”, “effective
use of time and materials”, and “strong risk
and control oversight”.
2017 has seen a refresh of the Board in
both Non‑executive and Executive roles.
The changes to the Board have highlighted
the strength of our succession planning
activities which have allowed us to
successfully navigate a number of changes
without disruption. This planning has
enabled us to recruit very high calibre
candidates to the Board, with diverse skills
and expertise. Succession planning has
therefore been a particular area of focus
during the year and we continue to keep
this under active review. The activities of
the Nomination & Governance Committee
in this respect are set out on pages 101 to
104 and all changes to the Board are set out
on page 83 of this report. I would like to
express my thanks once again for the
contributions made by Ann Godbehere,
Penny James and Tony Wilkey during their
tenures and to welcome Mark FitzPatrick,
James Turner and Tom Watjen to the
Board.
Risk and internal controls
Fundamental to demonstrating good
governance and stewardship is having in
place processes to allow the Board to make
a robust assessment of the risks facing our
business and those internal controls used
to mitigate them. Details of our approach to
internal controls and risk management are
set out on pages 99 to 100. The Audit
Committee report on pages 105 to 114
describes how the Committee monitors the
effectiveness of the internal control and
risk management systems and the Risk
Committee report on pages 115 to 119
sets out how that Committee has
considered the Group’s risk appetite.
Culture
I continue to believe that tone is set from the
top and the Board and senior management
must therefore exhibit the behaviours
expected throughout the Group. Individual
businesses are also shaping culture locally,
contributing to our shared values. Under my
stewardship, our international volunteering
programme, Chairman’s Challenge, has
grown significantly and over 8,000
colleagues offered their time and skills to
supporting the community in 2017.
The Board has set itself an objective for
the Group to develop a framework for a
measurable, definable culture. As part of
this, a risk culture survey was developed by
the Risk Committee covering all businesses.
The Board will continue to build on this in
2018, bringing together the many strands
of initiatives around the Group.
In December, the Board approved an
updated Group Code of Conduct which
introduced standards of business conduct.
This clarifies expectations over employee
behaviour and seeks to ensure employees
understand the individual obligations that
the Group imposes on them through our
policies, including financial crime
prevention, conflicts of interest, information
security and securities dealing, public
communications and social media, people
related policies and confidential reporting.
Strategic projects
In 2017, the Board considered a number of
strategic projects. Most notably, we
announced in August 2017 our intention to
merge our UK asset manager, M&G, and
our UK life insurance business to form
M&G Prudential. The combined business
manages over £330 billion in assets for
more than six million customers. Further
details of the merger are set out in the
Strategic report on pages 10 to 80. From a
governance perspective, the Board and
Audit Committee spent significant time
considering the benefits of the transaction
for shareholders and customers and the
impact on our wider stakeholders.
During the year we also announced the
sale of our broker‑dealer network in the
US, which was owned by our subsidiary
National Planning Holdings Inc. and
consisted of INVEST Financial Corporation,
Investment Centres of America, Inc,
National Planning Corporation and SII
Investments, Inc., to LPL Financial LLC. This
allows us to focus on our primary strategy
in North America of being the leading
manufacturer of retirement products.
Looking after our stakeholders
The Board continues to be aware of the
impact of its decisions on all of our
stakeholders. Feedback we receive from
engaging with stakeholders helps us to
devise and manage policies and processes.
In 2017, the Group published its first
environmental, social and governance
(ESG) report which gave a detailed account
of our approach to ESG matters. That
report explains that while serving our
customers is at the centre of our business,
we approach other stakeholders with the
same sense of responsibility and
commitment, from our suppliers and
employees to the wider communities in
which we operate. We expect to publish
our next ESG report in May 2018.
Looking forward
On the governance front, of key interest
will be the changes proposed to the UK
Corporate Governance Code, which are
set to include a range of new requirements
for both behaviour and reporting. Once in
place, the Board and its Committees will
consider how any changes will affect the
way we work.
On a regulatory level, the impact of
International Financial Reporting Standard
17 (IFRS 17) on the Group will be further
assessed following work already undertaken
by the Board and Audit Committee.
I hope that this report and the reports of my
fellow Committee Chairs will demonstrate
to you the work we have undertaken over
the course of the year as well as the
tangible and positive impact this has had
on our business.
Paul Manduca
Chairman
82 Prudential plc Annual Report 2017
www.prudential.co.uk
Board of Directors
Chairman
NG
Paul Manduca
Chairman
Appointment: October 2010
Age: 66
Chief Executive
Michael Wells
Group Chief Executive
Appointment: January 2011
Age: 57
Key to Committee membership
Chair
Au
Audit
Re
Remuneration
Ri
Risk
NG
Nomination & Governance
Relevant skills and experience
Paul has held a number of senior leadership
roles. Notable appointments include serving
as chairman of the Association of Investment
Companies (1991 to 1993), acting as founding
CEO of Threadneedle Asset Management
Limited (1994 to 1999), directorships of Eagle
Star and Allied Dunbar, holding the offices of
European CEO of Deutsche Asset Management
(2002 to 2005), global CEO of Rothschild Asset
Management (1999 to 2002), chairman of
Bridgewell Group plc and a director of Henderson
Smaller Companies Investment Trust plc.
Other previous appointments include the
chairmanship of Aon UK Limited and JPM
European Smaller Companies Investment Trust
Plc. From September 2005 until March 2011,
Paul was a non‑executive director of Wm
Morrison Supermarkets Plc, including as senior
independent director, audit committee chairman
and remuneration committee chairman. He was
also a non‑executive director and audit committee
chairman of KazMunaiGas Exploration &
Production until the end of September 2012.
During 2017, Paul stepped down as chairman
and a member of the board of Henderson
Diversified Income Limited with effect from
26 April and was appointed to the board of
RateSetter (Retail Money Market Limited) with
effect from 1 June and as chairman from 17 July.
Paul initially joined the Board in October 2010
as the Senior Independent Director and member
of the Audit and Remuneration Committees,
roles he held until his appointment as Chairman
in July 2012. On becoming Chairman, Paul was
also appointed Chair of the Nomination &
Governance Committee, having been a member
of the Committee since January 2011.
Other appointments
— Securities Institute
— RateSetter (Retail Money Market Limited)
(chairman)
— Templeton Emerging Markets Investment
Trust (TEMIT) (chairman)
— TheCityUK advisory council
Relevant skills and experience
Mike has more than three decades’ experience
in insurance and retirement services, having
started his career at the US brokerage house
Dean Witter, before going on to become a
managing director at Smith Barney Shearson.
During his leadership of Jackson, Mike was
responsible for the development of Jackson’s
market‑leading range of retirement solutions.
He was also part of the Jackson teams that
purchased and successfully integrated a savings
institute and two life companies.
Mike joined the Prudential Group in 1995
and became Chief Operating Officer and
Vice‑Chairman of Jackson in 2003. In 2011,
he was appointed President and Chief
Executive Officer of Jackson, and joined
the Board of Prudential.
Mike joined the Board in 2011 and was
appointed Group Chief Executive in June 2015.
Board changes
Non-executive Directors
Ann Godbehere retired from the Board at the
conclusion of the Annual General Meeting
held on 18 May 2017.
David Law succeeded Ms Godbehere as
Chair of the Audit Committee and became
a member of the Risk Committee and the
Nomination & Governance Committee with
effect from 19 May 2017. Lord Turner was
appointed a member of the Audit Committee
with effect from 19 May 2017.
Post year end, Alice Schroeder was appointed
a member of the Risk Committee with effect
from 1 March 2018.
Executive Directors
Tony Wilkey stepped down as a member
of the Board and as Chief Executive of
Prudential Corporation Asia and Nic
Nicandrou succeeded him in this position.
Mark FitzPatrick was appointed to the Board
to succeed Mr Nicandrou as Chief Financial
Officer. The effective date for these changes
was 17 July 2017.
Tom Watjen was appointed to the Board and
as a member of the Remuneration Committee
with effect from 11 July 2017.
In August 2017, the Company announced its
intention to merge its asset manager, M&G,
and Prudential UK & Europe to form
M&G Prudential. John Foley became
Chief Executive of M&G Prudential and
Anne Richards became Deputy Chief
Executive of M&G Prudential (retaining her
role as Chief Executive of M&G).
Penny James stepped down from the Board
and as Chief Risk Officer with effect from
30 September 2017. James Turner was
appointed as an Executive Director and as
Group Chief Risk Officer with effect from
1 March 2018. Pat Casey held the role of
Group Chief Risk Officer on an interim basis
until 1 March 2018.
www.prudential.co.uk
Annual Report 2017 Prudential plc 83
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Board of Directors continued
Executive Directors
Mark FitzPatrick ca
Chief Financial Officer
Appointment: July 2017
Age: 49
Relevant skills and experience
Mark previously worked at Deloitte for 26 years,
building his industry focus on insurance and
investment management globally. During this
time, Mark was Managing Partner for Clients
and Markets, a member of the executive
committee and a member of the board of
Deloitte UK. He was a vice chairman of Deloitte
for four years, leading the CFO Programme and
developing the CFO Transition labs. Mark
previously led the Insurance & Investment
Management audit practice and the insurance
industry practice.
Mark joined the Board as an Executive Director
and Chief Financial Officer in July 2017.
Relevant skills and experience
John spent over 20 years at Hill Samuel & Co,
where 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. Before joining Prudential, John
spent three years as general manager, global
capital markets at National Australia Bank.
John joined Prudential as Deputy Group
Treasurer in 2000 and became Managing
Director of Prudential Capital and Group
Treasurer in 2001. During his career at
Prudential, John has held the offices of Chief
Executive of Prudential Capital, Group Chief
Risk Officer, Group Investment Director and
Chief Executive of Prudential UK & Europe.
John first joined the Board in 2011 as Group
Chief Risk Officer and was reappointed in
January 2016, having stepped down during his
time as Group Investment Director.
In 2017, John’s role was expanded from Chief
Executive of Prudential UK & Europe to Chief
Executive of M&G Prudential, the Group’s
combined UK asset management and savings
and retirement solutions business.
John Foley
Chief Executive of M&G Prudential
Appointment: January 2016
Age: 61
Other appointments
— European Insurance CFO Forum (chairman)
— CITIC‑Prudential Life Insurance Company
Limited (a Prudential plc joint venture)
Relevant skills and experience
Nic started his career at PricewaterhouseCoopers
(PwC). Before joining Prudential, he worked at
Aviva, where he held a number of senior finance
roles, including Norwich Union Life finance
director and board member, Aviva group
financial control director, Aviva group financial
management and reporting director and CGNU
group financial reporting director.
In July 2017, Nic became Chief Executive of
Prudential Corporation Asia having originally
joined the Board in October 2009 as an
Executive Director and Chief Financial Officer.
Nicolaos Nicandrou aca
Chief Executive of Prudential
Corporation Asia
Appointment: October 2009
Age: 52
84 Prudential plc Annual Report 2017
www.prudential.co.uk
Key to Committee membership
Chair
Au
Audit
Re
Remuneration
Ri
Risk
NG
Nomination & Governance
Relevant skills and experience
Anne became an analyst for Alliance Capital
in 1992 and then moved into portfolio
management roles at JP Morgan Investment
Management and Mercury Asset Management.
She joined the board of Edinburgh Fund
Managers plc as chief investment officer and
joint managing director in 2002 and continued in
this role following Aberdeen Asset Management
PLC’s acquisition of Edinburgh Fund Managers
in 2003. Anne was chief investment officer and
head of the EMEA region for Aberdeen Asset
Management PLC, positions she held until
February 2016.
Anne joined the Board in 2016 as an Executive
Director and Chief Executive of M&G. She
became Deputy Chief Executive of
M&G Prudential in 2017 whilst remaining Chief
Executive of M&G.
Other appointments
— Financial Services advisory board
— CFA UK Advisory
— Financial Conduct Authority practitioner
panel (chair)
— Standing Council on Europe
— IBDE advisory board
Anne Richards
Deputy Chief Executive of M&G Prudential
and Chief Executive of M&G
Appointment: June 2016
Age: 53
Other appointments
— International Insurance Society
— American Council of Life Insurers
Relevant skills and experience
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.
Barry joined the Board in 2006 as an Executive
Director and the Chief Executive of Prudential
Corporation Asia, leading Prudential’s Asian
business through a period of major growth and
development.
Barry fulfilled this role until June 2015 when
he became Chairman and Chief Executive
of the North American Business Unit.
Barry Stowe
Chairman and Chief Executive Officer
of the North American Business Unit
Appointment: November 2006
Age: 60
Executive Director appointment post year end
Relevant skills and experience
James led internal audit teams in UBS in both the
UK and Switzerland. Prior to joining Prudential,
James was the deputy head of compliance for
Barclays plc. He also held a number of senior
internal audit roles across the Barclays group,
leading teams that covered the UK, the US,
Western Europe, Africa and Asia retail and
commercial banking activities.
James joined Prudential in November 2010 as
the Director of Group‑wide Internal Audit and
was appointed Director of Group Finance in
September 2015, with responsibility for delivery
of the Group’s internal and external financial
reporting, business planning, performance
monitoring and capital and liquidity planning.
He also led the development of the Group’s
Solvency II internal model.
James joined the Board as an Executive Director
and Group Chief Risk Officer in March 2018.
Other appointments
— West Bromwich Building Society
James Turner fca
Group Chief Risk Officer
Appointment: March 2018
Age: 48
www.prudential.co.uk
Annual Report 2017 Prudential plc 85
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Board of Directors continued
Non-executive Directors
NG Au Re
The Hon. Philip Remnant cbe fca
Senior Independent Director
Appointment: January 2013
Age: 63
NG Au Ri
Sir Howard Davies
Appointment: October 2010
Age: 67
NG Au Ri
David Law aca
Appointment: September 2015
Age: 57
Ri
Re
Kaikhushru Nargolwala fca
Appointment: January 2012
Age: 67
Relevant skills and experience
Philip was a senior advisor at Credit Suisse and
a vice chairman of Credit Suisse First Boston
(CSFB) Europe and head of the UK Investment
Banking Department. He was twice seconded
to the role of director general of the Takeover
Panel. Philip also served on the board of
Northern Rock plc and as chairman of the
Shareholder Executive.
Philip joined the Board in January 2013 as a
Non‑executive Director, as Senior Independent
Director and as a member of each of the Audit
Committee, the Remuneration Committee and
the Nomination & Governance Committee.
Relevant skills and experience
Sir Howard has a wealth of experience in the
financial services industry, across the 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.
Sir Howard joined the Board in October 2010 as
a Non‑executive Director and Chair of the Risk
Committee. He joined the Audit Committee in
November 2010 and the Nomination &
Governance Committee in July 2012.
Relevant skills and experience
David was the Global Leader of
PricewaterhouseCoopers (PwC)
insurance practice, a partner in PwC’s UK firm,
and worked as the lead audit partner for
multi‑national insurance companies until his
retirement in 2015. David has also been
responsible for PwC’s insurance and investment
management assurance practice in London
and the firm’s Scottish assurance division.
David joined the Board in September 2015 as a
Non‑executive Director and member of the
Audit Committee. David was appointed Chair of
the Audit Committee and a member of the Risk
Committee and of the Nomination &
Governance Committee in May 2017.
Relevant skills and experience
Kai spent 19 years at Bank of America and was
based in Hong Kong in roles as group executive
vice president and head of the Asia Wholesale
Banking Group during 1990 to 1995. He spent
10 years working for Standard Chartered PLC
in Singapore as group executive director
responsible for Asia Governance and Risk
during 1998 to 2007. Kai was chief executive
officer of the Asia Pacific Region of
Credit Suisse AG during 2008 to 2010
and now serves as director and chairman
of their remuneration committee.
Other appointments
— City of London Investment Trust (chairman)
— M&G Group Limited (Prudential plc
subsidiary) (chairman)
— Severn Trent plc
— Takeover Panel
— UK Financial Investments Limited
Other appointments
— China Banking Regulatory Commission
international advisory board
— China Securities Regulatory Commission
international advisory board (chairman)
— Institut d’Études Politiques (Sciences Po)
— Millennium LLC regulatory advisory board
— Royal Bank of Scotland (chairman)
Other appointments
— L&F Holdings Limited (CEO) and its
subsidiaries (the professional indemnity
captive insurance group that serves the
PwC network and its member firms)
Kai has served on a number of other boards,
including Singapore Telecommunications and
Tate and Lyle plc.
Kai joined the Board in January 2012 as a
Non‑executive Director and member of the
Remuneration and Risk Committees.
Other appointments
— Clifford Capital Pte. Ltd (chair)
— Credit Suisse Group AG
— Duke‑NUS Medical School (chairman)
— Prudential Corporation Asia Limited
(Prudential plc subsidiary) (chairman)
— PSA International Pte Ltd
86 Prudential plc Annual Report 2017
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Key to Committee membership
Chair
Au
Audit
Re
Remuneration
Ri
Risk
NG
Nomination & Governance
Other appointments
— Jardine Matheson Holdings (and other
Jardine Matheson group companies)
— Schindler Holding Limited
— Shui On Land Limited
— The Hong Kong‑APEC trade policy study
group (chairman)
— UK‑ASEAN Business Council
— Vitasoy International Holdings Limited
Re NG
Anthony Nightingale cmg sbs jp
Appointment: June 2013
Age: 70
Relevant skills and experience
Anthony spent his career in Asia, where he
joined the Jardine Matheson Group in 1969,
holding a number of senior positions before
joining the board of Jardine Matheson Holdings
in 1994. He was managing director of the
Jardine Matheson Group from 2006 to 2012.
Anthony joined the Board in June 2013 as a
Non‑executive Director and member of the
Remuneration Committee. He became Chair of
the Remuneration Committee and a member of
the Nomination & Governance Committee in
May 2015.
Ri
Au
Relevant skills and experience
Alice began her career as a qualified accountant
at Ernst & Young. She joined the Financial
Accounting Standards Board as a manager
in 1991, overseeing the issuance of several
significant insurance accounting standards.
From 1993, she led teams of analysts specialising
in property‑casualty insurance as a managing
director at CIBS Oppenheimer, PaineWebber
(now UBS) and Morgan Stanley. Alice was also
an independent board member of the Cetera
Financial Group.
Alice joined the Board in June 2013 as a
Non‑executive Director and member of the
Audit Committee. She became a member of the
Risk Committee in March 2018.
Other appointments
— Bank of America Merrill Lynch International
— Showfer Media LLC (formerly WebTuner
Corp) (chair)
Alice Schroeder
Appointment: June 2013
Age: 61
Au Ri
Relevant skills and experience
Lord Turner began his career with McKinsey
& Co, advising companies across a range of
industries.
Lord Turner joined the Board in September 2015
as a Non‑executive Director and member of the
Risk Committee. He became a member of the
Audit Committee in May 2017.
He served as director‑general of the
Confederation of British Industry, 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, a member of the
international Financial Stability Board and a
non‑executive director of the Bank of England.
Other appointments
— Chubb Europe (chairman)
— Energy Transition Commission (chairman)
— House of Lords crossbench member
(from 2005)
— Institute for New Economic Thinking
(chairman)
— London School of Economics and Cass
Business School (visiting professor)
— OakNorth Bank (advisor)
Lord Turner frs
Appointment: September 2015
Age: 62
Re
Relevant skills and experience
Tom started his career at Aetna Life and
Casualty before joining Conning & Company,
an investment and asset management provider,
where he became partner in the capital markets
and venture capital division.
A key architect of Provident’s merger with Unum
in 1999, Tom was appointed president and chief
executive officer of the renamed Unum Group
in 2003, a role he held for 12 years before
becoming non‑executive chairman until his
retirement in May 2017.
He joined Morgan Stanley in 1987 as a managing
director in its insurance practice and in 1994,
was appointed executive vice president and
chief financial officer of Provident Companies Inc.
Tom joined the Board in July 2017 as a
Non‑executive Director and member of the
Remuneration Committee.
Other appointments
— SunTrust Banks, Inc
Thomas Watjen
Appointment: July 2017
Age: 63
www.prudential.co.uk
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01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information How we operate
Corporate governance codes –
statement of compliance
The Company has dual primary listings in
London (premium listing) and Hong Kong
and has therefore adopted a governance
structure based on the UK and Hong Kong
Corporate Governance Codes.
The Board confirms that, for the year under
review, the Company has complied with
all the principles and provisions of those
Codes other than the provision of the
Hong Kong Corporate Governance Code
set out below.
A narrative description of how the
Company has complied is set out in the
following pages and in the Directors’
remuneration report.
The Company does not comply with
provision B.1.2(d) of the Hong Kong
Corporate Governance Code which
requires companies, on a comply or explain
basis, to have a remuneration committee
which makes recommendations to a main
board on the remuneration of non‑
executive directors. This provision is not
compatible with supporting provision
D.2.3 of the UK Corporate Governance
Code which recommends that the board
determines the remuneration of non‑
executive directors. Prudential has chosen
to adopt a practice in line with the
recommendations of the UK Corporate
Governance Code.
The Executive Directors are the senior
management population for the purposes
of the Hong Kong Listing Rules.
The UK Corporate Governance Code
is available from: www.frc.org.uk
The HK Corporate Governance Code
is available from: www.hkex.com.hk
How the Board leads the Group
The Group is headed by a Board which
the Chairman is responsible for leading.
The Board is currently made up of 16
Directors, of which a majority, excluding
the Chairman, are independent Non‑
executive Directors. Biographical details
of each of the Directors can be found on
pages 83 to 87 and further details of the
roles of the Chairman, Group Chief
Executive, Senior Independent Director,
Committee Chairs and the Non‑executive
Directors can be found on pages 89
and 90.
The Board is collectively responsible to
shareholders for the success of the
business through:
— The delivery of sustainable value to
shareholders;
The content of the Manual is reviewed
regularly with significant changes reported
to the relevant Board Committee, reflecting
the developing nature of both the Group
and the markets in which it operates.
— Setting the Group’s strategy and overall
risk appetite;
— Providing leadership within a
Material Subsidiary governance
Material Subsidiaries
framework of effective controls; and
Jackson National Life Insurance Company
— Monitoring management’s
performance against strategic goals
and ensuring sufficient resources are
in place to achieve these goals.
Specific matters are reserved for decision
by the Board, including:
— Determination of dividends;
— Approval of strategic projects;
— Approval of the three‑year business
and financial plan;
— Approval of key financial reporting
including the Group’s full and half yearly
Report and Accounts; and
— Responsibility for the system of internal
control and risk management.
In making decisions, the Board has regard
to the balance of interests between all
relevant stakeholders, including
shareholders, employees, customers,
regulators and the community.
Our governance framework
The Group has established a governance
framework for the business which is
designed to promote appropriate
behaviours across the Group.
The governance framework outlines the
key mechanisms through which the Group
sets strategy, plans its objectives, monitors
performance, considers risk management,
holds business units to account for
delivering on business plans and arranges
governance. The Group Governance
Manual (the Manual) sets out the policies
and procedures by which the Group
operates within this framework, taking into
account relevant statutory, regulatory and
governance matters.
Business units manage and report
compliance with Group‑wide mandatory
requirements set out in the Manual
through their Governance, Risk
Management and Internal Control –
Annual Statement of Compliance
attestations. This includes compliance with
our risk management framework, details
of which are set out on pages 99 and 100
of this report.
M&G Group Limited
Prudential Corporation Asia Limited
The Prudential Assurance Company Limited
Prudential has appointed independent
non‑executive directors to the boards of
its four Material Subsidiary entities within
the Group. Each Material Subsidiary has a
board of directors led by an independent
chair and an audit committee and risk
committee, composed entirely of
independent non‑executives.
Dialogue between the Group Chair, Group
Risk Committee Chair and Group Audit
Committee Chair and their counterparts
in the Material Subsidiaries provides an
effective information flow.
An externally facilitated evaluation of each
Material Subsidiary board and their audit
and risk committees was carried out by
Lintstock Limited, a corporate advisory
firm, which concluded that each of those
boards and committees operated
effectively during the year.
The Nomination & Governance Committee
is responsible for oversight of governance
arrangements for the Material Subsidiaries.
The activities of the Nomination &
Governance Committee during 2017
is set out on pages 101 to 104.
Regulatory environment
The Group’s business means it is subject
to regulatory requirements and oversight.
The Group’s primary regulator is the
Prudential Regulatory Authority (PRA).
We are also regulated by the Financial
Conduct Authority in the UK and by other
regulators worldwide.
Interactions with our regulators shape our
governance framework and the Chairman
and Group Chief Executive play a leading
role in representing the Group to regulators
and ensuring our dialogue with them
is constructive.
88 Prudential plc Annual Report 2017
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Independent scrutiny
of corporate social
responsibility actions
As part of the Group’s focus on corporate
responsibility, the Chairman has instructed the boards
of our Material Subsidiaries to consider updates on
corporate responsibility activities and spend in their
communities on an annual basis.
This initiative has added a layer of independent
scrutiny and helped to ensure that those boards are
close to the community and charitable activities of their
business units.
Board roles and governance
Chairman – Paul Manduca
The Chairman is responsible for the leadership and governance of the Board, ensuring its smooth and effective running
in discharging its responsibilities to the Group’s stakeholders and managing Board business.
Managing Board business
— Responsible for setting the Board agenda, ensuring the
right issues are brought to the Board’s attention through
collaboration with the Group Chief Executive and the Group
General Counsel and Company Secretary
— Facilitating open, honest and constructive debate among
Directors. When chairing meetings, ensuring there is
sufficient time to consider all topics, all views are heard and all
Board members, and in particular Non‑executive Directors,
have an opportunity to constructively challenge management
— Meeting with Non‑executive Directors throughout the year.
In 2017, the Chairman met with Non‑executive Directors
without Executive Directors being present on three
occasions
— Ensuring information brought to the Board is accurate, clear,
timely and contains sufficient analysis appropriate to the
scale and nature of the decisions to be made
— Promoting effective reporting of Board Committee business
at Board meetings through regular Committee Chair updates
Membership and composition of the Board
— Leading the Nomination & Governance Committee in
succession planning and the identification of potential
candidates, having regard to the skills and experience the
Board needs to fulfil its strategy, and making
recommendations to the Board
— Considering the development needs of the Directors so that
Directors continually update their skills and knowledge
required to fulfil their duties, including the provision of a
comprehensive induction for new Directors
— Maintaining an effective dialogue with the Non‑executive
Directors to encourage engagement and maximise their
contributions
Governance
— Leading the Board’s determination of appropriate corporate
governance and business values, including ethos, values and
culture at Board level and throughout the Group
— Working with the Group General Counsel and Company
Secretary to ensure continued good governance
— Acting as key contact for independent chairs of
Material Subsidiaries
— Meeting with the independent chairs of the Group’s Material
Subsidiaries on a regular basis and reporting to the Board on
the outcome of those meetings
Relationship with the Group Chief Executive
— Discussing broad strategic plans with the Group Chief
Executive prior to submission to the Board
— Ensuring the Board is aware of the necessary resources to
achieve the strategic plan
— Providing support and advice to the Group Chief Executive
Representing the Group externally to shareholders and
other stakeholders
— Representing the Board externally at business, political and
community level. Presenting the Group’s views and positions
as determined by the Board
— Playing a major role in the Group’s engagement with
regulators
— Balancing the interests of different categories of
stakeholders, preserving an independent view and ensuring
effective communication
— Engaging in a programme of meetings with key shareholders
throughout the year and reporting to the Board on the issues
raised at those meetings
www.prudential.co.uk
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Group Chief Executive – Mike Wells
Senior Independent Director – Philip Remnant
The Group Chief Executive leads the Executive Directors
and senior executives and is responsible for the operational
management of the Group on behalf of the Board on a
day‑to‑day basis:
The Senior Independent Director acts as an alternative
conduit to the Board for shareholder concerns and leads the
evaluation of the Chairman:
— Keeps in close contact with the Chairman and acts as
— Responsible for the implementation of Board decisions
sounding board for him
— Establishes processes to ensure operations are compliant
— Leads the Non‑executive Directors in conducting the
with regulatory requirements
Chairman’s annual evaluation
— Sets policies, provides day‑to‑day leadership and makes
— Holds meetings with Non‑executive Directors without
management being present, typically at least once a year to
evaluate the performance of the Chairman
— Offers meetings to major shareholders to provide them
with an additional communication point on request and is
generally available to any shareholder to address concerns
not resolved through normal channels
decisions on matters affecting the operation, performance
and strategy of the Group, seeking Board approval for
matters reserved to the Board
— Supported by the Group Executive Committee (GEC)
which he chairs and which receives reports on
performance and implementation of strategy for each
business unit and discusses major projects and other
activities related to the attainment of strategy
— Chairs the Chief Executive’s Committee (CEC) meetings
which are held weekly to review matters requiring approval
under the Group’s framework of delegated authorities
— Keeps in regular contact with the Chairman and briefs him
on key issues
— Meets with key regulators worldwide
Committee Chairs
Non-executive Directors
Each of the Committee Chairs is responsible for the effective
operation of their respective Committees:
— Responsible for the leadership and governance of
their Committee
All of the Non‑executive Directors are deemed to be
independent and together have a wide range of experience
used to attain the strategic aims of the Group through:
— Constructive and effective challenge
— Sets the agenda for Committee meetings
— Scrutinising the performance of management in meeting
— Reports to the Board on the activities of each Committee
meeting and the business considered, including,
where appropriate, seeking Board approval for actions
in accordance with the Committees’ terms of reference
— Works with the Group General Counsel and Company
Secretary to ensure the continued good governance of
each Committee during the year
— The Chairs of the Audit and Risk Committees act as key
contact points for the independent chairs of the audit
and risk committees of the Material Subsidiaries
agreed goals and objectives
— Serving on at least one of the Board’s principal Committees
— Engaging with Executive Directors and management at
Board and Committee meetings as well as at site visits,
training sessions and on an informal basis
— Taking part in one‑to‑one meetings with the
Group Strategy team and participation in the annual
Strategy Away Day
90 Prudential plc Annual Report 2017
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The Board has established four principal Committees whose functions are summarised below.
Board
Nomination &
Governance Committee
Audit
Committee
Risk
Committee
Remuneration
Committee
Chair
Paul Manduca
— Responsible for
reviewing, maintaining
and enhancing the
balance of skills and
experience on the
Board in support of
the Group’s strategic
objectives
— Maintains an effective
framework for senior
succession planning
including at Board level
— Recommends
appointments to the
Board and its principal
Committees and
appointments of
non‑executive chairs
to the boards of the
Material Subsidiaries
— Oversees the
governance of Material
Subsidiaries and the
Group’s overall
governance framework
See Nomination
& Governance
Committee report on
pages 101 to 104
Chair
David Law
— Responsible for the
integrity of the Group’s
financial reporting,
including scrutinising
accounting policies
— Monitors the
effectiveness of internal
control and risk
management systems,
including compliance
arrangements
— Monitors the
effectiveness and
objectivity of internal
and external auditors
— Approves the internal
audit plan and
recommends the
appointment of the
external auditor
Chair
Howard Davies
— Leads on and oversees
the Group’s overall risk
appetite, risk tolerance
and strategy
— Approves the Group’s
risk management
framework and
monitors its
effectiveness
— Supports the Board
and management
in embedding and
maintaining a
supportive culture
in relation to the
management of risk
— Provides advice to
the Remuneration
Committee on
risk management
considerations to inform
remuneration decisions
Chair
Anthony Nightingale
— Recommends the
Directors’ Remuneration
Policy for approval
by shareholders
— Approves individual
remuneration packages
of the Chairman, the
Executive Directors,
other senior executives
and the non‑executive
directors of Material
Subsidiaries
— Determines the overall
Remuneration Policy for
the Group
— Reviews the design and
development of share
plans and approves and
assesses performance
targets where applicable
See Audit Committee
report on pages 105
to 114
See Risk Committee
report on pages 115
to 119
See Remuneration
Committee report on
pages 124 to 157
Terms of reference for the principal Committees can be accessed at
www.prudential.co.uk/investors/governance‑and‑policies/board‑committees‑terms‑of‑reference
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Annual Report 2017 Prudential plc 91
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Key areas of focus – how the Board spent its time
The Board held 10 meetings during 2017. In addition to those meetings set out in the table below, the Board held a separate three‑day
strategy event in June. In addition to meetings, the Board receives monthly update reports from management.
Feb
Mar1
May
Jun
Jul
Aug
Sep
Nov
Dec
Strategy and implementation
Approval and review of strategic priorities
Strategic priorities monitoring
Approval of three year operating plan
Strategic projects2
Tax strategy reporting
Group Chief Executive’s report
Report from Committee Chairs
Audit
Nomination & Governance
Remuneration
Risk
Financial reporting and dividends
Chief Financial Officer’s performance report
Full year
Half year
Group Solvency II reporting
Business unit Chief Executive updates
Prudential Corporation Asia
North American business unit
M&G Prudential3
Risk, regulatory and compliance
Regulatory and compliance updates
Chief Risk Officer’s report
Government relations
PRA relations
Governance and stakeholders
Governance updates
Board evaluation and actions tracking
Succession planning
Corporate responsibility reporting and ESG
Diversity and inclusion
Talent review
Non‑executive Directors’ fees
Feedback on investor meetings
Notes
1 The Board held two meetings in March 2017.
2 Strategic projects during the year included the merger of our business units M&G and Prudential UK & Europe, and the sale of our broker‑dealer network in the USA.
3 Prior to their merger in August 2017, M&G and Prudential UK & Europe reported to the Board separately.
92 Prudential plc Annual Report 2017
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Board and Committee meeting attendance throughout 2017
Individual Directors’ attendance at meetings throughout the year is set out in the table below.
Board
Audit
Committee
Nomination
& Governance
Committee
Remuneration
Committee
Risk
Committee
Joint Audit and
Risk Committee
General
Meeting
Number of meetings held
Chairman
Paul Manduca
Executive Directors
Mike Wells
Mark FitzPatrick1
John Foley
Nic Nicandrou
Anne Richards
Barry Stowe
Executive Directors who stepped
down during the year
Tony Wilkey2
Penny James3
Non-executive Directors
Philip Remnant
Howard Davies
David Law
Kai Nargolwala
Anthony Nightingale
Alice Schroeder
Lord Turner
Tom Watjen4
Non-executive Director who
10
10
10
5/5
10
10
10
10
4/5
8/8
10
10
10
10
10
10
10
5/5
9
–
–
–
–
–
–
–
–
–
9
9
9
–
–
9
5/5
–
4
4
–
–
–
–
–
–
–
–
4
4
2/2
–
4
–
–
–
stepped down during the year
Ann Godbehere5
4/ 4
4/ 4
2/ 2
Notes
1 Mark FitzPatrick joined the Board with effect from 17 July 2017.
2 Tony Wilkey stepped down from the Board with effect from 17 July 2017.
3 Penny James stepped down from the Board with effect from 30 September 2017.
4 Tom Watjen joined the Board with effect from 11 July 2017.
5 Ann Godbehere retired from the Board with effect from 18 May 2017.
6
–
–
–
–
–
–
–
–
–
6
–
–
6
6
–
–
2/2
–
6
–
–
–
–
–
–
–
–
–
–
6
3/3
6
–
–
6
–
3/3
1
–
–
–
–
–
–
–
–
–
1
1
1
1
–
1
1
–
1
1
1
1
–
1
1
1
1
1
1
1
1
1
1
1
1
1
–
1
Full details of changes to the Board during the year can be found on page 83.
Board and Committee papers are usually provided one week in advance of a meeting. Where a Director is unable to attend a meeting,
his or her views are canvassed in advance by the Chairman of that meeting where possible.
Board effectiveness
Actions during 2017
During the year, the action points that had
been identified in the 2016 evaluation were
addressed and the Board received an
update on progress against those actions
in September 2017 and February 2018.
Subsidiary governance – the 2016
review identified that ensuring good
subsidiary governance was maintained
was a continuing priority from 2015.
— Group Secretariat continued to monitor
and support the regular interactions
between the Chairman, Audit
Committee Chair and Risk Committee
Chair with their Material Subsidiary
counterparts;
and to the Audit and Risk Committees
as regular agenda items;
— Subsidiary independent non‑executive
directors and chairs, along with all
Prudential Non‑executive Directors,
were invited to a meeting at which the
Executive team gave presentations on
each business unit with a question and
answer session. The sessions also
provided the opportunity for the
Prudential Board and subsidiary boards
to spend time together in an informal
setting; and
— Group Secretariat continued its
established quarterly ‘round table’
sessions with subsidiary counterparts
to share governance best practices.
— Reports of all material issues at
subsidiary level were given to the Board
Board agenda – the 2016 review noted
that time spent at meetings should flex
to reflect strategic priorities, with an
increased focus on products and
customers.
— Agendas continued to be reviewed by
the Chairman, Group Chief Executive
and the Group General Counsel and
Company Secretary, as well as other
senior executives where appropriate;
— The Board specifically debated at its
July 2017 meeting, as part of a wider
discussion on good governance,
whether sufficient time was allowed for
discussion and debate and concluded
positively; and
— The aspiration to create an information
pack on products and markets for Board
background information was developed
into an app, which was trialled to the
GEC in the first quarter of 2018.
www.prudential.co.uk
Annual Report 2017 Prudential plc 93
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information How we operate continued
Senior employee focus – the 2016
review noted the focus on rebuilding
strength in senior management teams
around the Group, following a number
of successful internal promotions.
— The Board met all members of the
Prudential Corporation Asia executive
committee as well as a number of senior
Prudential Corporation Asia executives
at its Jakarta sessions in April 2017. All
members of the Prudential Indonesia
executive committee also presented
to the Board on this occasion;
— The Board held a two‑day session in
Craigforth in September 2017 at which
the M&G Prudential executive
committee and senior executives
gave business and strategy updates,
including on the merger of the M&G
and Prudential UK & Europe
businesses;
— The Board received reports from all
business units at its meetings on key
joiners and leavers; and
— A number of senior executives below
GEC level presented to each of the
Audit Committee and Risk Committee
on a regular basis during the year.
Remuneration – the 2016 review noted
the growing complexity of remuneration
across all UK‑listed companies and, over
the course of 2017, the Board noted the
increased governance focus in this area.
— A training session on remuneration was
established for those Non‑executive
Directors who do not serve on the
Remuneration Committee, to discuss
the Directors’ Remuneration Policy and
broader market practice information.
This took place in May 2017 and further
sessions will be delivered on an
as‑required basis; and
— A specific and detailed induction
was arranged for Mr Watjen on his
appointment, given his role as a
member of the Remuneration
Committee.
2017 review and actions for 2018
The Board undertook an external
evaluation of its performance and that of
its Committees in 2017. The review was
facilitated by Boardroom Review Limited,
a consultancy which undertakes no other
business for the Company. The external
nature of the review met the provision of
the UK Corporate Governance Code which
requires external evaluations on no less
than three‑yearly intervals.
The evaluation included interviews with
all Board members and the Group General
Counsel and Company Secretary, and
attendance and observation by Dr Tracy
Long at a number of Board and Committee
meetings. Supporting materials to enhance
the assessment team’s understanding of
how the Board and its Committees operate
were provided.
The findings were presented to the Board
in December 2017 and a collective Board
discussion to exchange ideas and agree
priorities arising from the report took place.
The report identified a number of strengths
of the Board, including strong leadership
from the Chairman and Group Chief
Executive; a collegiate and constructive
environment; effective use of time; high
quality information flow; robust risk and
control oversight; appropriate tone
through the Remuneration Committee;
attention to leadership development and
effective shareholder communication.
Through the evaluation and subsequent
discussion at the Board meeting in
February 2018, the Board identified areas
of particular focus and related actions:
Theme
Summary of actions
Creating
the right
environment
for critical
decision
making
Highlighting
culture on
the agenda
Increasing
the Board’s
resilience
Spend additional time on
site visits. Continue to hold
Non‑executive Director only
sessions on an as‑required
basis
Provide further reports to the
Board on culture in 2018 and
mature the Group’s strategic
objective to ‘develop a
framework for a measurable,
definable culture’
Continue to focus on gender
and other diversity in all
new Board appointments.
Introduce a skills map to
monitor experience and
expertise more formally
Director evaluation
The performance during 2017 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.
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.
The outcome of these evaluations is
reported to the Nomination & Governance
Committee in February each year in order
to inform the Committee’s recommendation
that each Board member be put forward
for re‑election by shareholders.
Executive Director performance is also
reviewed by the Remuneration Committee
as part of its deliberations on bonus
payments.
94 Prudential plc Annual Report 2017
www.prudential.co.uk
Building Directors’ knowledge
Induction – new Directors
On appointment, each new Director is provided with a comprehensive induction, tailored to reflect the experience of the individual and
his or her position as a Non‑executive or Executive Director.
Our two new Directors, Mr Watjen and Mr FitzPatrick each received a full induction to the business.
A summary of the general topics covered, as well as the role specific topics on which they each received comprehensive briefings, are set
out in the table below.
General induction programme
relevant to all new Directors
Role-specific induction programme
for new Directors
Understanding
our governance
Understanding
our business
— Tailored briefings with
each business unit to
gain a comprehensive
understanding of each
of their business models,
product suites, pricing
arrangements and
governance structures
— Introductory meetings with
all Group functions
— Comprehensive briefings on
the regulatory environment
in which the Group operates
— Briefings on top risks and
internal controls
— Meetings with the Chairman
and Group Chief Executive
separately
— Explanation of the Group’s
strategy and business plan
— Explanation of Prudential’s
corporate structure,
Board and Executive
Committee structure
— Briefings on Group
governance framework and
key policies
— Training as needed on the
rules and governance
requirements of the London
and Hong Kong Stock
Exchanges and on fulfilling
the statutory duties of
a Director
Mark FitzPatrick
Tom Watjen
— Tailored meetings with
members of the Group
Finance function
— Company financial reporting
overview on key Group
issues including US GAAP
differences, IFRS Insurance
Performance Management,
IFRS contracts and tax
— Walkthrough of financial
reporting disclosures
— Additional tailored support
in his first role as Chief
Financial Officer of a global
financial services operation
— Human Resources‑specific
induction provided by
the Director of Human
Resources, including an
overview of Group Reward,
current UK remuneration hot
topics, and the role of the
Remuneration Committee
and business unit
remuneration committees
— Meeting with the Chair of the
Remuneration Committee to
discuss the annual cycle of
Committee work, its current
focus and focus for 2018
and beyond
Lord Turner received a detailed briefing
from the Director of Group Finance on
appointment to the Audit Committee.
A full description of all Board and role
changes during 2017 are set out on
page 83.
Induction – role changes
Since Mr Nicandrou was appointed Chief
Executive of Prudential Corporation Asia
he has continued to deepen his knowledge
of the Asia business with a tour of
operations across each of the 14 markets
in which Prudential Corporation Asia
operates. As part of his visits, Mr
Nicandrou spent time with senior
management, staff and agents of both
Prudential Corporation Asia’s Life and
Eastspring operations. He held a regional
conference to provide insights on the
strategic direction of the business and to
discuss opportunities to broaden
distribution, simplify products and
services, and the role of digital technology
in upgrading the way the business engages
and services its customers. He has also
engaged extensively with regulators,
government officials, existing and
prospective partners and hosted a regional
investor conference.
Mr Law had been a member of the Audit
Committee for almost two years at the
time of his appointment as Chair, which
provided him with detailed knowledge of
its operations and he worked closely with
the outgoing Chair to ensure a smooth
transition. In addition Mr Law met with the
Chief Financial Officer and other members
of Group Finance, the Group‑wide Internal
Audit Director, the Group Regulatory and
Government Relations Director and the
Director of Group Compliance in
preparation for his role as Chair. Mr Law
attended one of each of the Material
Subsidiary audit committee meetings
to gain a better understanding of their
operations. He also met with the Group
Chief Risk Officer and other members
of Group Risk to prepare him for his role
as a member of the Risk Committee.
www.prudential.co.uk
Annual Report 2017 Prudential plc 95
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information How we operate continued
Board site visits
Jakarta, Indonesia
All Board members made a site visit to the Group’s operations
in Jakarta, Indonesia in March 2017. The visit included
presentations from the Prudential Corporation Asia executive
team on regional financial performance and an overview of
the asset management and life businesses across Asia.
This was followed by detailed presentations by the local
Indonesian executive team focusing on agency, Sharia
strategy, products, operations, compliance and risk
management, brand and corporate social responsibility.
The Board also attended an agency ‘Greater Together’
recognition event at the Kasablanca Hall with more than
4,000 agents and visited an agency training centre and two
agency offices in Menara 88 (PruVictory and PruFavor) which
gave an opportunity to see the Group’s distribution in action.
Craigforth, Scotland
All Board and GEC members visited the Group’s operations in
Craigforth, Scotland in September 2017. The visit included
presentations from the M&G Prudential executive team,
which gave opportunity to demonstrate to the Board the
activity that had taken place in merging the M&G and
Prudential life businesses.
In addition, focus sessions were held to provide an in‑depth
understanding of Prudential Savings & Retirement Solutions
and M&G. These included sessions on the annuities business,
the customer vision and strategy, distribution, investment
management, transformation and culture.
As well as formal presentations, the Board visited different
parts of the Craigforth site for demonstrations from
employees on typical processing systems and technology
innovation.
Continuing development
of knowledge and skills
During 2017, the Board and its Committees
received a number of technical and
business updates as part of their scheduled
meetings, providing information on
external developments relevant to the
Group and on particular products or
operations. Below is an overview of how
Directors are kept up to date:
— The Board holds an annual strategy
session, which allows for detailed
updates on each of the business units
and deep dives on strategic direction
and objectives for the Group;
— The Board receives updates on brand
and corporate responsibility activities,
usually once a year;
— The Board receives updates at each of
its full Board meetings on corporate
governance, political and regulatory
developments, and the dynamics of
equity and currency markets. In 2017,
this included updates on the political
environment, such as Brexit and tax
reform in the USA. The Board also
considered MiFID II, the General Data
Protection Regulation, the Modern
Slavery Act, and the review of the FRC’s
UK Corporate Governance Code;
— In December 2017, the Group ran
a focused cyber training session
for members of the Risk and Audit
Committees, which was open to
all Directors;
— The Board reviews each business unit at
least once a year and conducts periodic
site visits as part of this. In 2017, the
Board met in Jakarta, Indonesia and
Craigforth, Scotland. Details of the
activities undertaken on these visits
are set out above;
— The Board and the Risk Committee
receive regular updates on market
developments and key risks, including
updates on Solvency II and cyber risk.
The Risk Committee reviews top risks
on an annual basis and deep dives into
specific topics in response to the
identification of key risks. This review
covers the financial, operational and
strategic risks, whilst also identifying
and addressing business environment
and insurance risks within the Group.
The identification of such risks inform
the risk reporting provided to the
Committee and the Board;
— The Audit Committee receives updates
on developments affecting financial
reporting and the role of audit
committees generally. In 2017, this
included updates on MiFID II, audit
matters for consideration, and financial
reporting disclosures as well as forward
looking consideration for IFRS 17; and
— The Remuneration Committee receives
updates on regulatory and governance
developments affecting the Group’s
remuneration arrangements. In 2017,
these included the PRA’s guidance on
Solvency II remuneration requirements,
the Investment Association Principles
of Remuneration, BEIS Corporate
Governance reform concerning
remuneration and gender pay
gap reporting.
Further information on the activities of the
Board and its Committees can be found in
the tables explaining how the Board and its
Committees spent their time on pages 92,
102, 107, 117 and 133.
All Directors have the opportunity to
discuss their individual development needs
as part of the annual Board effectiveness
review and Directors are asked to provide
a record of training received externally
on an annual basis. All Directors have the
right to obtain professional advice at
Prudential’s expense.
96 Prudential plc Annual Report 2017
www.prudential.co.uk
Shareholder engagement
As a major institutional investor, the Board
recognises the importance of maintaining
an appropriate level of two‑way
communication with shareholders.
Shareholder feedback and key issues
from these meetings is communicated to
the Board. Details of when feedback was
discussed by the Board in 2017 can be
found on page 92.
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 2017 Annual General Meeting.
Details of the 2018 Annual General
Meeting are available on
www.prudential.co.uk/investors
A full programme of engagement with
shareholders, potential investors and
analysts, in the UK and overseas, is
conducted each year by the Group Chief
Executive and the Chief Financial Officer,
led by the Investor Relations team.
A conference for investors and analysts is
held on a regular basis, including in‑depth
business presentations and opportunities
for attendees to meet with members of
the Board and senior executives and an
opportunity for the executive team to
communicate progress and strategy
outside of the financial reporting cycle.
The most recent event was held in
November 2017 and feedback was
provided to the Board in December 2017.
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 2017, as part of the investor relations
programme, over 320 meetings were held
with approximately 700 individual
institutional investors in London,
continental Europe, the USA and Asia.
The Company holds an ongoing programme
of regular contact with major shareholders,
conducted by the Chairman, to discuss
their views on the Company’s governance.
The Senior Independent Director offers
meetings to major shareholders as needed.
Engagement with institutional investors on
the Directors’ remuneration policy and
implementation is led by the Remuneration
Committee Chair. Other Non‑executive
Directors are available to meet with major
shareholders on request.
Diversity
Given the global reach of the Group’s
operations, and our business strategy and
long‑term focus, the Board makes every
effort to ensure it is able to recruit Directors
from different backgrounds, with diverse
experience, perspective and skills. This
diversity not only contributes towards
Board effectiveness but is essential for
successfully delivering the strategy of an
international Group.
This is reflected in our Group Diversity and
Inclusion Policy which aims to provide
equal opportunities to all who apply for and
who perform work for our organisation –
including our Directors – irrespective of
sex, race, age, ethnic origin, educational,
social and cultural background, marital
status, pregnancy and maternity, civil
partnership status, any gender
reassignment, religion or belief, sexual
orientation, disability, or part‑time/
fixed‑term work, and to ensure appropriate
diversity of experience, skill sets and
professional backgrounds.
The Board is committed to recruiting the
best available talent and appointing the
most appropriate candidate for each role
while at the same time aiming for an
appropriate diversity on the Board. The
Nomination & Governance Committee
takes into account the Group Diversity
and Inclusion Policy when considering
succession planning. Prudential has a
preference for using suppliers recognised
for their commitment to diversity. The
Board considers that its diversity of
experience, skill set and professional
background has been increased as a result
of Board level succession in 2017.
The Board continues to commit to
developing a robust and diverse talent
pipeline and to increasing representation of
women in senior positions in the Group and
on the Board. As part of this commitment
the Board may endorse relevant
measurable objectives for increasing
diversity. For example, in 2016 the Board
decided to sign the HM Treasury Women
in Finance Charter with an aim to achieve
at least 30 per cent of women in senior
management by the end of 2021 and in
2017, all Executive Directors volunteered
to mentor members from our senior
management team of various ages, gender,
educational and professional backgrounds.
The Group also engaged in a number of
targeted activities in support of our
Diversity and Inclusion Policy, including
awareness training of unconscious bias.
www.prudential.co.uk
Annual Report 2017 Prudential plc 97
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information 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.
Area
Prudential’s approach
Rules governing
appointment and
removal
— The appointment and removal of Directors is governed by the provisions in the Articles of Association (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 (the HK Listing Rules) and the Companies Act 2006.
Terms of
appointment
— Non‑executive Director tenure is shown on page 150.
— Non‑executive Directors are appointed for an initial term of three years, commencing with their election
by shareholders.
— Subject to review by the Nomination & Governance Committee and re‑election by shareholders, it would be
expected that Non‑executive Directors 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. Reappointment is subject to rigorous review as well as re‑election by shareholders.
— The Directors’ remuneration report sets out the terms of the Non‑executive Directors’ letters of appointment
on page 130 and the terms of Executive Directors’ service contracts on page 150.
Time
commitment
— At present, the average time commitment expected of a Non‑executive Director is 32.5 days per annum.
In addition, all Non‑executive Directors currently serve on at least one of the Board’s principal Committees,
which requires an additional commitment of time dependent on the Committee and role.
— On appointment, all Non‑executive Directors confirm they are able to devote sufficient time to the Group’s
affairs to meet the demands of the role.
— All Non‑executive Directors are required to discuss any additional commitments which might impact the time
which he or she is able to devote to their role with the Chairman prior to accepting.
Independence
— The independence of the Non‑executive Directors is determined by reference to the UK Code and HK Listing
Rules as follows:
– 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; and
– all the Non‑executive Directors were considered independent for the purposes of the HK Listing Rules, and
each Non‑executive Director provides an annual confirmation of his or her independence as required under
the HK Listing Rules.
— In accordance with US regulatory requirements, Prudential affirms annually that all members of the Audit
Committee are independent within the meaning of the Sarbanes‑Oxley legislation.
— Prudential is one of the UK’s largest institutional investors. 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.
Audit Committee
experience
— In relation to the provisions of the UK Corporate Governance Code and HK Listing Rules, the Board is satisfied
that Mr Law has recent and relevant financial experience and that the Committee as a whole has competence
relevant to the sectors in which the business operates. Full biographies of the Committee members including
experience and professional qualifications, are set out on pages 86 and 87.
— The Board has determined that Mr Law qualifies as the Audit Committee financial expert under the
requirements of Form 20‑F.
Indemnities
— Subject to the provisions of the Companies Act 2006, 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.
— Qualifying third‑party indemnity provisions are also available for the benefit of the Directors of the Company
and certain other such persons, including certain directors of other companies within the Group.
— Qualifying pension scheme indemnity provisions are also in place for the benefit of certain pension trustee
directors within the Group.
— These indemnities were in force during 2017 and remain so.
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.
98 Prudential plc Annual Report 2017
www.prudential.co.uk
Risk management and internal control
Risk management
A key component of the 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 Risk Committee is constituted by
the Board for the purpose of assisting the
Board in providing leadership, direction
and oversight of the Group’s overall risk
appetite, risk tolerance and strategy, and
for monitoring the effectiveness of the risk
management framework and adherence
to the various risk policies. The Risk
Committee also has authority to review
and approve changes made to the Group
risk framework and risk policies, approve
changes to risk limits within the overall
Board approved risk appetite, approve the
Group’s top risks, and oversee, and advise
the Board, on the current and potential
future risk exposures of the Group. Regular
activities are detailed in the report on
pages 115 to 119.
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 Manual, which includes the Group
Risk Framework and risk policies as well
as approval requirements, among other
requirements.
Second line of defence
(risk control and oversight)
— Assists the Board to formulate and then
implement 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,
where appropriate challenging the
actions being taken to manage and
control risks and approving 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.
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 risk
management and internal control
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 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 risk management and internal controls
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. The framework is
designed to manage rather than eliminate
the risk of failure to achieve business
objectives, and can only provide
reasonable and not absolute assurance
against material misstatement or loss.
Internal control
The Group Governance Manual (the
Manual) sets out 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 Manual.
Internal controls and processes, based on
the provisions established in the 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 105 to 114.
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Annual Report 2017 Prudential plc 99
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Risk management and internal control continued
Board
Nomination
& Governance
Committee
Group Chief
Executive
1st line
of defence
Executives
Chief Executive
Committee
Remuneration
Committee
Risk
Committee
Audit
Committee
2nd line
of defence
3rd line
of defence
Group Executive
Committee
Chief Financial
Officer
Group Regulatory
Director
Group Chief
Risk Officer
Balance Sheet &
Capital Management
Committee
Management
Group Executive
Risk Committee
Technical
Actuarial
Committee
Group
Security
Committee
Group
Credit Risk
Committee
Emerging
Risk Assessment
Committee
Solvency II
Technical Oversight
Committee
Group
Information Security
Committee
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
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.
For the purposes of the effectiveness
review, the Group has followed the 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 Corporate Governance Code and
provision C.2.1 of the HK Corporate
Governance Code, the Board reviewed
the effectiveness and performance of the
system of risk management and internal
control during 2017. 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, internal audit and financial
reporting functions. The review identified
a number of areas for improvement and
the necessary actions have been or are
being taken.
100 Prudential plc Annual Report 2017
www.prudential.co.uk
Committee reports
The principal Board Committees are the Nomination & Governance, Audit, Risk and
Remuneration Committees. These Committees form a key element of the Group
governance framework, providing effective independent oversight of the Group’s activities
by the Non-executive Directors.
Each Committee Chair provides an update to the Board of each Committee meeting,
supported by a short written summary of the Committee business considered.
Nomination & Governance
Committee report
Dear Shareholder
The Board changes in 2017 have again
demonstrated the effectiveness of our
preparations for Board level succession.
Full details of all Board changes during the
year can be found on page 83.
The smooth transition of David Law as our
new Audit Committee Chair, who also
joined this Committee in May, and the
appointment and induction of Tom Watjen
has helped to refresh the Non‑executive
roles on the Board.
The move by Nic Nicandrou to become
Chief Executive of Prudential Corporation
Asia and the appointment of Mark
FitzPatrick as Chief Financial Officer
demonstrates both the effectiveness of our
succession planning preparations and the
ability of the Committee to recruit high
calibre candidates with the appropriate
skills and knowledge for our business.
Having the right individuals in place in
leadership roles is fundamental to the
successful delivery of our strategy. The
Board requires a diverse skill set which can
be deployed across our Committees and
businesses for the benefit of the Group and
its stakeholders.
Careful ongoing review and planning
ensures that our Board continues to attract
the high calibre individuals it requires and
that there are no gaps in leadership. In
2017, the Committee formalised its
approach in this area by creating a skills
map to support succession planning, which
identifies sector‑specific and general
operational competencies as well as
geographic and business experience.
The retirement of Ann Godbehere, in May
2017, at the end of nine years of service as a
Non‑executive Director, and Penny James
stepping down as an Executive Director
and Group Chief Risk Officer in September
2017, have impacted the Board’s gender
diversity. The Committee has therefore
committed to focus particularly on
strengthening gender diversity, alongside
diversity of skills, in its succession planning
in 2018.
The role of the Committee has grown since
2016 when we took on responsibility for
overseeing the governance arrangements
in the Group. This includes the governance
of our Material Subsidiaries, in order to
ensure that those boards operate
effectively and that their independent
non‑executive directors can constructively
challenge and monitor performance in
those businesses. We have spent time as a
Committee considering the composition
and effectiveness of those boards, the
processes around their risk and audit
committees, and the tenure and succession
of their non‑executives.
Part of my role as Chair is to oversee the
governance arrangements for this
Committee. The Committee considered its
terms of reference in November 2017, and
in the preparation of this report I have
considered the time commitment, number
of meetings and skills and experiences
required for Committee members.
As the Committee Chair, I also have the
responsibility for ensuring the Committee
runs effectively and makes the most of its
meeting time. I encourage open debate
and contributions from all Committee
members.
As part of the Board’s effectiveness review,
described in more detail on pages 93 and
94, the Committee was found to be
operating effectively and given action
points around developing its skills map and
considering Committee membership, both
of which are ongoing tasks.
Paul Manduca
Chair of the Nomination &
Governance Committee
Committee members
— Paul Manduca (Chair)
— Howard Davies
— David Law (from May 2017)
— Anthony Nightingale
— Philip Remnant
— Ann Godbehere (until May 2017)
Regular attendees
— Group Chief Executive
— Group Human Resources Director
— Group General Counsel and
Company Secretary
Number of meetings in 2017: Four
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May
Jun
Nov
Committee reports continued
How the Committee spent its time during 2017
Year end matters, re-election and tenure
Review external positions, conflicts of interests and independence, time commitment,
tenure and terms of appointment
Review performance of Chairman and Non‑executive Directors
Review relevant disclosures in the Annual Report and Accounts
Recommend election of Directors by shareholders
Succession planning, skills mapping and appointments
Chairman
Non‑executive Directors
Group Chief Executive
Executive Directors
GEC composition
Governance
Membership review of principal Board Committees
Committee terms of reference
Material Subsidiary governance
Subsidiary board composition, non‑executive succession planning and appointments
Material Subsidiary committee attendance
Terms of reference for Material Subsidiary boards, chairs and committees
Material Subsidiary governance manual
Material Subsidiary board, chair and director evaluations
Key matters considered during the year
Matter considered
How the Committee addressed the matter
Succession planning
Throughout the year, the Committee kept succession plans for all Executive and Non‑executive
Board roles under review. Succession plans are supported by the year end Board evaluation and
individual performance evaluations.
The Committee takes account of the size, structure and composition of the Board and its
Committees, including existing knowledge, experience and diversity. In doing so, the Committee
considers the Group’s strategic needs and anticipates future needs, skills and experience. The
Committee is responsible for developing and periodically reviewing objectives established for the
implementation of diversity on the Board and monitoring progress toward the achievements of
those objectives. A description of the Group Diversity and Inclusion Policy is included on page 97.
Following the departure of Ann Godbehere and Penny James in 2017, the Committee is focusing on
gender diversity, alongside diversity of skills, in its succession planning in 2018.
The Committee works with the Group Chief Executive and Group Human Resources Director to
ensure that when a vacancy or a gap in the Board’s skills is identified, a role specification is prepared,
taking into account feedback from the Committee and the Group’s Diversity and Inclusion Policy.
Once the specification is agreed, specialist talent agencies are typically engaged to create a shortlist
of candidates for review by the Committee and other stakeholders. Interviews with individuals then
take place and feedback is provided to the Committee members. In this manner, a preferred
candidate is selected and the Committee then recommends the individual to the Board for
appointment (subject to regulatory approval where required).
Contemporaneously with this process, thorough due diligence checks are undertaken on the
candidate and we liaise with the FCA and PRA as to the suitability of the individual from a regulatory
perspective, as needed.
102 Prudential plc Annual Report 2017
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Key matters considered during the year continued
Matter considered
How the Committee addressed the matter
Non‑executive Directors
During the year, the Committee finalised the terms of appointment of Mr Watjen as a Non‑executive
Director. The work of the Committee was supported by Russell Reynolds as search consultant.
See page 104.
In 2017, the Committee debated and approved a skills map for use in Non‑executive succession
planning discussions. The skills map identifies key skills and experiences, including sector,
geographic and operational skills, which are desirable for the Board as a whole, taking account of the
Group’s strategic direction.
As part of its focus on searching for an additional Non‑executive Director, in November 2017 The
Miles Partnership was instructed to begin a market mapping exercise with particular focus on
potential female candidates to ensure that the Board’s gender diversity was addressed in a positive
manner.
Executive Directors
and senior executives
The Committee carried out its annual review of the succession plans in place for the Group Chief
Executive, other Executive Directors and Group Executive Committee roles.
The development and renewal of these plans was led by the Group HR Director, supported by Egon
Zehnder in the case of the Group Chief Executive plan and by Talent Intelligence for the other
Executive Director roles and GEC members. In 2017, Talent Intelligence prepared long‑lists and
short‑lists with a focus on gender and ethnic diversity requirements.
The Committee has oversight of senior executive level succession planning and the talent pipeline.
The Committee discussed these plans closely with the Group Chief Executive to identify business
requirements and plan for future succession needs and gave feedback on the planning process. The
Company continues to commit to developing a robust and diverse talent pipeline, increasing
representation of women in senior positions.
During 2017:
— Mr FitzPatrick was appointed as Chief Financial Officer in July 2017, following completion of a
comprehensive search;
— Following the departure of Penny James in September 2017, Prudential appointed Pat Casey
as Interim Group Chief Risk Officer while the search for a permanent successor continued.
Following a recommendation from the Committee, the Board appointed James Turner as an
Executive Director and as Group Chief Risk Officer with effect from 1 March 2018; and
— Mr Nicandrou took on the role of Chief Executive of Prudential Corporation Asia, following
Mr Wilkey’s departure.
In each case, the Committee was well prepared and responsive, considering candidate profiles and
skills and conducting interviews.
Neither Russell Reynolds nor The Miles Partnership have any additional connection with Prudential.
In addition to acting as search consultant for certain executive hires, Egon Zehnder also provides
support for senior development assessments. Talent Intelligence also provides additional succession
planning support to the Group below GEC level.
Use of search consultancies
Review of principal Committee
membership
The Committee regularly reviews the membership of all principal Committees and makes
recommendations to the Board as appropriate.
In February 2017, the Committee made recommendations to the Board to appoint Lord Turner to the
Audit Committee and to appoint Mr Law to the Risk Committee and as Audit Committee Chair,
which changes became effective in May 2017. The Committee recommended the appointment of
Mr Watjen to the Remuneration Committee on his appointment as a Non‑executive Director in July
2017.
In February 2018, the Committee also recommended the appointment of Ms Schroeder as a
member of the Risk Committee, which was effective from 1 March 2018.
Full details of changes to the membership of the principal Committees are set out on page 83.
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Key matters considered during the year continued
Matter considered
How the Committee addressed the matter
Election of Directors
As part of its ongoing work on Board succession planning, the Committee considered the terms of
appointment for the Chairman, Committee Chairs and Non‑executive Directors taking into account
time commitment and the general balance of skills, diversity, experience and knowledge on the
Board, assessing length of service in their roles.
Particular attention has been paid to the recommendation to re‑elect Mr Nargolwala and
Sir Howard Davies at the Annual General Meeting to be held in 2018 due to their length of service.
Having reviewed the performance of the Non‑executive Directors in office at the time, and having
received feedback from the Group Chief Executive on the performance of the Executive Directors,
the Committee concluded that each Director continued to perform effectively and was able to
devote sufficient time to fulfil their duties, taking account of the number and nature of their external
appointments. The Committee recommended to the Board that all Directors should stand for
election at the Company’s Annual General Meeting.
Independence and conflicts of interest
Independence criteria
The Committee considered the independence of the Non‑executive Directors against relevant
requirements as outlined on page 98.
Conflicts of interest
The Board has delegated authority to the Committee to consider, and authorise where necessary,
any actual or potential conflicts of interest.
Prior to proposing Directors for re‑election, 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. In addition, the Committee considered the
external positions of those Directors appointed during the year, noted changes in the external
positions of existing Directors and considered whether these gave rise to any conflicts.
The Board considers that the procedures set out above for dealing with conflicts of interest, operate
effectively.
During the year under review, the Committee carried out various duties related to the Material
Subsidiaries including succession planning arrangements for non‑executive directors, evaluating the
performance of the Material Subsidiary boards, chairs and directors, reviewing Material Subsidiary
governance arrangements, including principles for attendance at committee meetings, and the
terms of reference for the Material Subsidiary boards and chairs.
Governance
Group subsidiaries
Appointment of Tom Watjen
The Committee undertook a thorough and international
search for potential candidates, supported by Russell
Reynolds who were engaged for this purpose. The objective
of the search was to enhance the Board’s US expertise and
insurance executive experience. Mr Watjen was identified as
a preferred candidate following interviews with the
Chairman, the Senior Independent Director and Group Chief
Executive. The Committee reviewed Mr Watjen’s skills and
experiences against the needs of the business, noting in
particular his knowledge of the insurance sector, his many
years in senior executive roles and his understanding of US
regulatory matters. His appointment was then recommended
to the Board for consideration and subsequently approved in
July 2017.
104 Prudential plc Annual Report 2017
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Audit Committee report
Dear Shareholder
It has been a great pleasure to take over
responsibility as Chair of the Committee
from Ann Godbehere who retired from the
Board in May 2017. I would like to thank
her for the significant contribution she
made to the Committee during her nine
years of service.
In May 2017 we welcomed Lord Turner as
an additional Committee member. Lord
Turner’s biography is included on page 87.
A key part of the Committee’s role is to
provide the Board with assurance as to the
integrity of the business through our
activities in monitoring financial reporting
and the second and third lines of defence
as part of our internal control environment.
The Committee continued to focus on the
integrity of the Group’s financial reporting
and ensuring appropriate financial
accounting policies are adopted and
implemented. We reviewed management’s
annual process for setting assumptions
which underpin the Group’s IFRS insurance
liabilities and European Embedded Value
(EEV) results and requested additional
information and clarification where
needed. Building on work undertaken in
prior years, in 2017 we further accelerated
our year end process and carried out a
substantive review of key judgements,
such as UK mortality and expenses,
policyholder behaviour assumptions in
Jackson and, for EEV reporting in
particular, persistency in Asia, before the
year end. As in previous years, the
Committee reviewed the Group’s Annual
Report and Accounts and advised the
Board that they were considered to be fair,
balanced and understandable. The
Committee also reviewed the Group’s
Solvency II reporting disclosures forming
part of our 2016 full year and 2017 half and
full year reports. Following a transfer of
duties from the Risk Committee during the
year, the Committee is now responsible for
reviewing the Solvency and Financial
Condition Report (SFCR) and the
Regulatory Supervisory Report (RSR),
which is a private regulatory filing.
An important part of the Committee’s
duties is to monitor the relationship with
the Group’s external and internal auditors.
The Committee reviewed the activities of
KPMG as external auditor and made a
recommendation to the Board concerning
their continuing appointment (subject to
shareholder approval) which took into
account a number of factors including
independence and objectivity, the level of
remuneration, effectiveness, and tenure.
The Committee also approved non audit
work that was considered appropriate and
in line with the Group’s policy. During the
year, KPMG scored highly in our
effectiveness review which included
feedback from senior finance personnel
across all our business units. It remains the
Committee’s current view that, without
exceptional circumstances, change to
auditors should not occur prior to the
adoption of the new accounting standards
on insurance contracts (IFRS 17). A plan to
identify their successors to ensure a
smooth transition has been developed.
During the year the Committee continued
to receive regular briefings from the
Group‑wide Internal Audit (GwIA)
function. Delivery of the internal audit plan
represents a key component of the
Committee’s oversight of the Group’s
internal controls procedures. GwIA
undertook a programme of risk‑based
audits covering matters across the business
units in addition to assurance work on
significant change programmes such as
preparations for the implementation of the
General Data Protection Regulations
(GDPR) and MiFID II. We also approved
the 2018 audit plan which focuses on
matters such as financial, business change,
regulatory and operational risks as well as
consideration of controls to deliver
appropriate customer outcomes. The plan
was mapped to the key risks identified by
the Group Risk Committee and is kept
under review throughout the year as
necessary to ensure the programme
remains in line with business needs.
The Committee regularly reviews the
performance of GwIA and monitors the
adequacy of the resourcing available to the
function. In addition, in 2017 an
independent External Quality Assessment
(EQA) of GwIA was undertaken by Deloitte
in line with the Chartered Institute of
Internal Auditors Standards (the
Standards). The EQA concluded that GwIA
met the Standards and code of ethics, and
assisted both the Committee and the
executive management in identifying and
mitigating risk.
During the year I was involved in recruiting
a successor to the role of Director of GwIA.
After an extensive internal and external
search, we appointed an individual with
extensive knowledge of the Group, having
previously been the Chief Operating
Officer of Group Risk, and before that the
Group Compliance Director.
David Law
Chair of the Audit Committee
Committee members
— David Law (Chair) (from May 2017)
— Ann Godbehere (until May 2017)
— Howard Davies
— Philip Remnant
— Alice Schroeder
— Lord Turner (from May 2017)
Regular attendees
— Chairman of the Board
— Group Chief Executive
— Chief Financial Officer
— Group Chief Risk Officer
— Director of Group Finance
— Group Regulatory and Government
Relations Director
— Group General Counsel and
Company Secretary
— Director of Group Compliance
— Director of Group‑wide Internal
Audit
— External Audit Partner
Number of meetings in 2017: Nine.
In addition, a joint meeting was
held with the Risk Committee
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As part of my transition, as well as the
regular meetings with the Material
Subsidiary audit committee chairs to
facilitate escalation of important matters
and reporting of material issues to the
Committee, I attended one of each of the
Material Subsidiary audit committee
meetings to gain a better understanding of
how they operate. I found this helpful and
will look to repeat this in the coming years.
Part of my role as Chair is to consider the
governance arrangements for the
Committee. The Committee considers its
terms of reference at least annually and
proposed changes to its terms of reference
in December 2017. The only significant
change related to the review of Solvency II
disclosures which now rests with the
Committee.
As Chair of the Committee, I have
responsibility for ensuring the Committee
operates effectively. To ensure we do so
and provide constructive challenge to
management, I encourage open debate
and contributions from all Committee
members. Committee members are
encouraged to meet with management or
the internal and external audit team where
this assists them in their preparations. I
report to the full Board after each meeting
on the main matters discussed.
An annual review of our effectiveness was
carried out as part of the Board evaluation,
described in more detail on page 94. The
Committee was found to be functioning
effectively.
The Committee received updates against
the annual Compliance Plan (the Plan). In
2017 the Plan focused on a number of
areas to help strengthen the compliance
framework, which is intended to aid the
Group in meeting regulatory obligations.
The Plan also included the management
and review of Group Compliance top risks,
including anti‑money laundering and
anti‑bribery and corruption.
We also refreshed the Group’s
whistleblowing protocols and spent time
with the Group Resilience Director to gain
comfort that he was appropriately
supported. The Committee sponsored a
special review to ensure there was no
evidence of abuse of power in the
workplace.
During 2017 the Committee reviewed
our first published tax strategy and
environmental, social and governance
(ESG) report, both released in May.
Another key piece of work was our review
of the disclosures about the merger of
M&G and Prudential UK & Europe into one
business and an additional meeting was
held to discuss these. Members of the
Committee also received additional
updates on the impact of MiFID II,
and reviewed the financial disclosures
relating to the partial sale of the UK
annuity portfolio.
The Committee looks to identify matters
likely to impact the Group going forward.
In addition to its usual activities, in 2018 the
Committee expects to consider further the
impact of IFRS 17, as well as monitoring
regulatory changes and the impact of major
projects such as the creation of
M&G Prudential on the Group’s internal
controls functions.
The Committee also works closely with the
Risk Committee to make sure both
Committees are updated and aligned on
matters of common interest. Where
responsibilities are perceived to overlap
between the two Committees, I work with
Sir Howard to agree the most appropriate
Committee to consider the matter. In
December we held a joint informational
session on cyber security, to which all
Directors were invited.
106 Prudential plc Annual Report 2017
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Feb Mar1 May
Jul
Aug1
Nov
Dec
How the Committee spent its time during 2017
Financial reporting and external auditor
Periodic financial reporting including:
— Key accounting judgements and disclosures
— Solvency II results and governance processes
— Associated audit reports
Review of announcement of the merger of M&G and Prudential UK & Europe
Developments in tax disclosures
Audit planning, fees, independence, effectiveness and re appointment
Internal control framework
Internal control framework effectiveness
Internal auditors
Status updates and effectiveness
Internal audit plan
Compliance
Status updates
Compliance plan
MiFID II updates
Financial crime and whistleblowing
Update on whistleblowing issues raised
Financial crime prevention including anti‑money laundering, prevention of tax evasion
and anti‑bribery and corruption programmes
Governance and reporting
Material Subsidiaries updates
Internal framework effectiveness/refresh
Environmental, social and governance reporting
Business unit audit committee effectiveness, status updates and terms of reference
Committee terms of reference
Note
1 Two meetings were held in each of March and August 2017.
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Key matters considered during the year
Matter considered
How the Committee addressed the matter
Financial reporting and tax
Overview
One of the Committee’s key responsibilities is to monitor the integrity of the financial statements.
The Committee assessed whether appropriate accounting policies had been adopted throughout
the accounting period and whether management had made appropriate estimates and judgements
over the recognition, measurement and presentation of the financial results. There were no new or
altered accounting standards in 2017 that had a material effect on the Group’s financial statements.
The Committee considered compliance with accounting standards and obligations under applicable
laws, regulations and governance codes. Particular areas on which the Committee focused during
the year included the fair, balanced and understandable requirement under the UK Corporate
Governance Code, providing advice to the Board in respect of this requirement and reviewing the
up‑date of these disclosures for revised reporting requirements.
In May 2017 the Group published externally, for the first time, a Group tax strategy document and a
Group environmental, social and governance report. Both documents were reviewed by the
Committee, which was updated on the approach and progress as the documents were developed.
Key assumptions and judgements 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 (including mortality) affecting the
measurement of Jackson guaranteed liabilities and amortisation of deferred acquisition costs; and
— Mortality, expense and credit risk assumptions for the UK annuity business. Mortality
assumptions were a particular focus for the Committee following a detailed review of granular
historic experience data by the UK business and the release of new industry mortality
improvement tables. Further information is contained in the consolidated financial statements on
pages 267 to 269.
The Committee was satisfied that the assumptions adopted by management were appropriate.
The Committee also received information on the nature of goodwill and intangible asset values and
considered what factors might give rise to an impairment of the Group’s intangibles and whether
those factors had arisen in the period. The Committee was satisfied that there was no impairment of
the Group’s intangibles at 31 December 2017.
The Committee reviewed and challenged updates to the Group’s independent price valuation policy
for investments and endorsed the proposed enhancements to Group Finance oversight of this
policy. It also received information on the carrying value of investments in the Group’s balance sheet
including data on the approach used in that valuation (for example, the level of asset valued on a
mark to market basis).
The Committee satisfied itself that overall investments were valued appropriately.
The Committee regularly reviews the Group’s provisions, including the level of provisioning for
regulatory and litigation matters and provisions for certain open tax items including tax matters
in litigation. The Committee was satisfied that the level of provisioning adopted by management
was appropriate.
108 Prudential plc Annual Report 2017
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Key matters considered during the year continued
Matter considered
How the Committee addressed the matter
Other financial reporting matters
and tax reporting
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, 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. Following the announcement of the
merger of M&G and the UK life business, the Committee re‑evaluated the Group’s segmental
disclosure, resulting in a revision to reflect the revised business unit structure. Prior to the
announcement of the merger, the Committee also reviewed the basis of preparation of the costs and
synergies disclosed. This work was supported by external independent review of management’s
proposed disclosures.
The potential impact of proposed US tax reforms was considered in advance of their implementation
in December 2017 and the impact of the final rule changes were discussed in detail post year end.
The Committee reviewed and approved the Group’s tax strategy which was subsequently published
in May 2017 and was also updated on the 2016 country by country tax disclosures required to be
filed with HM Revenue & Customs by the end of 2017.
The Committee reviewed the parent company profit and loss account and balance sheet, which
included recognition of a pension surplus asset.
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 new accounting standards due to be implemented over the period 2018‑2021. In particular
it received an overview of the requirements of IFRS 17 on insurance contracts, following publication
of the final standard in the first half of 2017.
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Key matters considered during the year continued
Matter considered
How the Committee addressed the matter
External audit
Review of effectiveness, non-audit services and auditor reappointment
External audit effectiveness
The Group’s external auditor is KPMG LLP (KPMG) and oversight of the relationship with them is one
of the Committee’s key responsibilities. This included challenging and querying KPMG’s approach to
risk and other issues regularly throughout the year.
Auditor independence
and objectivity
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.
The separate internal evaluation of the auditor was conducted using a questionnaire which was
circulated to the Committee, the Chief Financial Officer and the Group’s senior financial leadership
for completion.
The feedback provided was reviewed and compiled into a report for the Committee which covered
areas such as the knowledge and expertise of the partners and team members, their understanding
of the Group, the resourcing applied to the audit and continuity of the team, liaison with Group‑wide
Internal Audit and approach to resolution of issues, as well as factors such as their coordination
across the Group’s multiple jurisdictions and quality of their written and oral communication. The
degree of challenge and robustness of approach to the audit were key components of the evaluation.
The Committee Chairman invited other Group stakeholders to provide their views on the
performance of the auditor, and KPMG were given the opportunity to respond to the findings
in the report.
KPMG also provided commentary on the findings of the FRC’s Annual Audit Quality Review of
KPMG and the firm‑wide actions being taken to address observations made.
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.
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 usage of 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 rules and regulations of the US Securities and Exchange Commission (SEC) and the
standards of the Public Company Accounting Oversight Board (PCAOB). In 2016, the Committee
considered and approved revisions to the Policy with effect from 1 January 2017, to reflect final rules
and guidance issued by the Financial Reporting Council, in connection with the implementation
of broader European Union (EU) reforms to the audit market. This ensured that the schedule of
prohibited non‑audit services was in line with EU reforms referenced above. In 2017 the Committee
reconsidered the Policy and concluded that it remained appropriate.
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 that was considered
by the Committee prior to publication of the financial results.
110 Prudential plc Annual Report 2017
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Key matters considered during the year continued
Matter considered
How the Committee addressed the matter
Fees paid to the auditor
Reappointment
Audit tender
The fees paid to KPMG for the year ended 31 December 2017 amounted to £17.3 million
(2016: £16.2 million) of which £2.6 million (2016: £2.8 million) was payable in respect of non‑audit
services. Non‑audit services accounted for 15 per cent of total fees payable (2016: 17 per cent).
A breakdown of the fees paid to KPMG can be found in Note B2.4 to the financial statements on
page 194.
Of the £2.6 million of non‑audit services, the principal types of non‑audit engagements approved for
2017 were other assurance services of £1.5 million (of which £0.8 million related to Solvency II
reporting and disclosures) and other non‑audit services of £0.7 million. In accordance with the
Policy, all non‑audit services were pre‑approved by the Committee. It was considered appropriate
for KPMG to undertake work relating to the Group’s Solvency II reporting and disclosure
requirements because the terms of the engagement were in compliance with the Policy and KPMG’s
knowledge of the Group’s processes facilitated the efficient execution of the work.
Based on the outcome of the effectiveness evaluation and all other considerations, the Committee
concluded that there was nothing in the performance of the auditor which would require a change.
The Committee therefore recommended that KPMG be reappointed as the auditor. A resolution to
this effect will be proposed to shareholders at the 2018 Annual General Meeting.
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
conformance with these requirements, the Company will be required to change audit firm no later
than for the 2023 financial year end.
The external audit was last put out to competitive retender in 1999 when the present auditor, KPMG,
was appointed. Since 2005, the Committee has annually considered the need to retender the
external audit service. The Committee recognises that the industry is in a period of unprecedented
change with the IASB issuing its new insurance accounting standard in 2017, for implementation in
2021. 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 change auditors before the adoption of IFRS 17. This remains subject to the Committee’s
normal annual review of auditor performance and recommendation to shareholders as described
above. The Committee considered its strategy on audit tendering in November 2017, concluding
that the existing timeline for appointing a new auditor by the 2022 year end, did not need to be
amended. In conducting this review, the Committee concluded that it would be appropriate to
commence a competitive tender for the 2022 audit in 2019.
The Company has complied throughout the 2017 financial year with the provisions of the Statutory
Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender
Processes and Audit Committee Responsibilities) Order 2014 issued by the Competition and
Markets Authority.
A plan to identify successor firms to ensure that there is sufficient time for an orderly transition and
to safeguard independence was considered and agreed by the Committee.
In line with the FRC Ethical Standard, the rules and regulations of the SEC and the standards of the
PCAOB, a new lead audit partner, Philip Smart, has been appointed in respect of the 2017 financial
year. Mr Smart is expected to be in place until the completion of the 2021 reporting cycle. Prior to
taking up this role, Mr Smart shadowed the outgoing lead audit partner. During the 2016 year end
audit, he met with members of the Committee and management team, including management teams
of our business units, and attended Committee meetings and met with members of the Committee.
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Key matters considered during the year continued
Matter considered
How the Committee addressed the matter
Third line oversight
Internal audit
Regular reporting
The quality of the internal control systems is assessed by the Group’s Internal Audit function using
independent audit procedures. Each of the Group’s business units has an Internal Audit team, the
heads of which report to the Director of GwIA. The Committee received regular updates from GwIA
on audits conducted and management’s progress in addressing audit findings within agreed
timelines. Any delays in implementing remediation action are escalated to the Committee and given
particular scrutiny. The independent assurance provided by GwIA formed a key part of the
Committee’s deliberations on the Group’s overall control environment. The Director of GwIA reports
functionally to the Chairman of the Committee and for management purposes to the Group Chief
Executive, and also has direct access to the Chairman of the Board. In addition to formal Committee
meetings, the Committee meets with the Director of GwIA in private to discuss matters relating to,
for example, the effectiveness of the internal audit function, significant audit findings and the risk
and control culture of the organisation.
Annual plan and focus for 2018
The Committee approved the half year update of the 2017 plan. It also considered and approved the
Internal Audit Plan, resource and budget for 2018.
Internal audit effectiveness
At the half year, the Committee considered recommendations to refresh the Internal Audit Plan in
response to changes in the business unit operating environments and an update to the Group’s top
risks. The 2018 Internal Audit Plan was formulated based on a bottom‑up risk assessment of audit
needs mapped against various metrics combined with top‑down challenge. The plan was then
mapped against a series of risk and control parameters, including the top risks identified by the Risk
Committee, to verify that it is appropriately balanced between financial, business change, regulatory
and operational risk drivers and provides appropriate coverage of key risk areas and audit themes
within a risk‑based cycle of coverage. Key areas of focus for 2018 include strategic change initiatives,
customer outcomes, cyber security and digitalisation.
The Committee is responsible for approval of the GwIA charter, audit plan, resources, and for
monitoring the effectiveness of the function. The Committee assesses the effectiveness of GwIA
through a combination of EQA reviews, required every five years, and an annual internal
effectiveness review, performed by the GwIA Quality Assurance Director.
In 2017, Deloitte performed an EQA of GwIA, which assessed that GwIA generally conforms with the
Institute of Internal Audit (IIA) Standards and Code of Ethics (the highest rating under the IIA’s
framework), and displays an overall level of adherence to the principles set out in the UK Chartered
IIA Code. The assessment also considered GwIA’s purpose, position, processes and reporting in the
context of Group’s wider systems of governance. In addition, to ensure GwIA skill sets and
resourcing levels align to the approved audit plan, a skills and resource gap analysis was undertaken
to highlight any resource shortfall or required change in available skill sets to support the delivery of
the plan. The analysis concluded that resources were sufficient to execute the plan.
Having considered the findings of the EQA, and the 2017 internal effectiveness review, the
Committee concluded that GwIA had continued to operate in compliance with the requirements of
GwIA policies, procedures and practice standards in all material respects and had remained aligned
to mandated objectives during 2017.
112 Prudential plc Annual Report 2017
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Key matters considered during the year continued
Matter considered
How the Committee addressed the matter
Business unit audit committees
Business unit model terms
of reference
The Committee is supported by the work carried out by the audit committees at the level of
individual business units, in particular those established by our Material Subsidiaries, which provide
oversight of the respective business units. The Committee annually reviews the effectiveness of
these committees in meeting their defined terms of reference.
Membership of the committees for all Material Subsidiaries comprises solely of independent
non‑executive directors of those subsidiaries. Minutes of business unit audit 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 GwIA) and from Group Head Office. In addition, the Committee
Chair meets in person or telephonically with the chairs of each of the Material Subsidiary audit
committees, usually on a quarterly basis. The Chair has also attended one of each of the Material
Subsidiary audit committee meetings since his appointment to enhance his understanding of how
they operate.
An assessment of the business unit audit committees was completed and the outcomes reported to
the Committee and to the business unit audit committees in February 2018. The assessment was
supported by local teams from GwIA and considered whether each of the committees fulfilled the
responsibilities documented in their terms of reference. The evaluation also considered attendance
rates by audit committee members and evidence of the audit committees’ coverage of key business
unit issues, as well as the appropriate escalation of concerns to the Committee. The evaluation
concluded that the audit committees operated in accordance with their terms of reference.
The Committee approved the Group’s standard terms of reference for the Material Subsidiary and
other 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 where necessary.
The Committee also reviewed the membership of the Material Subsidiary audit committees.
Second line oversight
Compliance, financial crime prevention, whistleblowing
Regular reporting from the
Compliance function
Regular updates were provided to the Committee by the Group Regulatory and Government Affairs
Director and the Group Compliance Director. The reports kept the Committee apprised of key
compliance activities, issues and controls, including progress against the 2017 Compliance Plan, the
outcome of compliance monitoring activities across the Group and the effectiveness of business
units’ compliance activities.
Compliance Plan and focus
for 2018
Financial crime prevention
The Committee considered and approved the 2018 Group Compliance Plan. The strategic focus of
the Plan in 2018 will be on enhancing the assurance framework, building on work undertaken in
2017. Group Compliance will also continue to drive forward capabilities within the team and wider
compliance community, carrying out activities to maintain oversight of the top risks identified.
The Committee received the Money Laundering Reporting Officer’s report which assessed the
operation and effectiveness of the Group’s systems and controls in relation to managing financial
crime risks.
As part of its responsibility for the oversight of financial crime prevention, the Committee received
updates on Anti‑bribery and Corruption and Anti‑money Laundering, Sanctions and Fraud
procedures. The Risk Committee was updated on risk assessments of anti‑bribery and corruption
and fraud prevention, during the year, which informed the update provided to the Committee in
early 2018.
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Key matters considered during the year continued
Matter considered
How the Committee addressed the matter
Whistleblowing
Internal control
Internal control and risk
management systems
Governance
Group Governance Framework
In 2016 Prudential launched a Group‑wide whistleblowing programme (‘Speak Out’). The
programme captures and comprehensively records matters raised through the Group’s confidential
reporting process.
Throughout the year the Committee received regular updates on matters raised through the
programme and on actions taken to address them. The Committee also reviewed the arrangements
for the monitoring and reporting of whistleblowing activities to ensure they continue to comply with
regulatory requirements and governance best practice. The procedures were refreshed during the
year and the Chair communicated the enhanced protocols to the chairs of each of the Material
Subsidiary audit committees. The Committee and the Chair also spent time privately with the Group
Resilience Director to ensure cases were being appropriately followed up.
The role of the whistleblowing champion, for the purpose of the Senior Insurance Managers Regime,
is carried out by the chair of the audit committee of Prudential Assurance Company (PAC), who is an
independent non‑executive director of PAC and is supported by the PAC audit committee. The
terms of reference for each Material Subsidiary audit committee provides for them to ensure Speak
Out arrangements are in place for those business units. The Committee was also updated on
arrangements for promoting awareness of the Speak Out policy, including computer based training
tailored for each business unit, and the distribution of communications across the Group.
At Group level, the Chair of the Audit Committee is responsible for oversight of whistleblowing
activities across the whole of the Group.
The Committee is responsible for reporting and making recommendations to the Board on the
effectiveness of Group‑wide internal control and risk management systems.
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, risk management systems and the adequacy of the resources, qualifications
and experience of staff of the Group’s accounting, internal audit and financial reporting functions.
The review identified a number of areas for improvement and the necessary actions have been or are
being taken.
Having considered the review, the Committee made recommendations to the Board regarding
the ongoing process for identifying, evaluating and managing the significant risks faced by the
Group, noting that it had been in place throughout the period and confirming that the systems
remain effective.
The Board’s statement regarding effectiveness of these systems can be found on page 100.
The Group Governance Manual sets out the policies and procedures by which the Group operates
within its framework of internal governance, taking into account relevant statutory and regulatory
matters. Used as a platform for mandating specific ways of working across the Group, each business
unit attests annually to compliance with:
— Mandatory requirements set out in Group‑wide policies, including matters which must be
reported to the Group functions; and
— Matters requiring prior approval from those parties with delegated authority.
The Committee reviewed the results of the Group Governance Manual annual content review and
the results of the year end certification of compliance with Group Governance Manual requirements
for the year ended 31 December 2017.
Committee effectiveness
A review of the Committee’s activities was conducted against applicable regulation and codes of
conduct. The results of this assessment were provided to the Committee alongside the outcome of
the part of the annual Board evaluation relating to the Committee.
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In respect of our principal risks, we
continued to focus on those arising from
the products we offer our customers, those
inherent in our investment portfolios and
the risks that arise from the operation of
our businesses. We regularly reviewed
the strength of our capital and liquidity
positions, and the significant ongoing
changes to the regulatory framework
and environment. In addition, we
closely monitored risks arising from the
macroeconomic environment and the
pace of regulatory developments across
the globe.
The Committee reviewed in depth the risks
arising from our business. This included a
further review into the Jackson hedging
programme and providing oversight of
implementation of recommended actions.
Reviews were also performed on asset
liability management for our UK with‑profit
business, our China joint ventures and
other aspects relating to our Asia business.
During the year we continued to oversee
the work required as a result of the Group’s
continuing designation as a Global
Systemically Important Insurer (G‑SII),
which included the approval of the 2017
Systemic Risk Management Plan, Liquidity
Risk Management Plan and Recovery Plan.
The Committee reviewed the methodology
and annual calibration of the Solvency II
internal model, and we also oversaw the
successful submission of the Group’s Major
Model Change application in November
2017 in respect of the model.
Cyber security remains an area of focus
which saw attention from the Committee
in 2017. During the year we reviewed
progress achieved on the implementation
of our Cyber Defence Plan. The Committee
considered the Group‑wide approach, and
changes in governance and processes
required, for compliance with the EU’s
General Data Protection Regulations which
are due to come into force in May 2018.
The Group also prepared its first
environmental, social and governance
report in 2017 with the Committee
reviewing the risk elements included
in that report.
Risk Committee report
Dear Shareholder
As Chairman of the Risk Committee, I am
pleased to report on the Committee’s
activities and focus during 2017.
The Committee assists the Board in
providing leadership, direction and
oversight of the Group’s overall risk
appetite and limits, risk strategy, and risk
culture. We also oversee and advise the
Board on current and future risk exposures
of the Group, including those which have
the potential to impact on the delivery of
the Group’s Business Plan. The Committee
reviews the Group Risk Framework and
recommends changes to it for approval by
the Board, to ensure that it remains
effective in identifying and managing the
risks faced by the Group.
We work closely with the Audit Committee
to ensure both Committees are updated
and aligned on matters of common interest.
Where responsibilities are perceived to
overlap between the two Committees,
I work with Mr Law to agree the most
appropriate Committee to consider the
matter. During the year we transferred
responsibility for the review of Solvency II
disclosures to the Audit Committee.
The Committee received regular reports
from the Group Chief Risk Officer (CRO),
who is advised by the Group Executive Risk
Committee (GERC). I provided feedback
on the performance of the CRO to the
Group Chief Executive Officer as part of
the annual evaluation of the Board and its
members. The Committee also received
regular reports from the Group‑wide
Internal Audit and Compliance functions
and updates from other areas of the
business as needed.
During 2017, we reviewed the Group’s risk
policies and the aggregate limits
accompanying the Group risk appetite
statements. In addition, the Group’s risk
appetite limits were reviewed and updated
where necessary to reflect changes in the
Group’s risk profile and the evolving
regulatory and macroeconomic
environments. We also reviewed the
principal risks facing the Group and
received regular updates on these through
the course of the year. We receive regular
reports from the Chief Risk Officers of our
major subsidiaries. A fuller explanation of
key risks facing the Group and the way in
which the Group manages these is set out
in the Report on the risks facing our
business on pages 48 to 63.
Howard Davies
Chair of the Risk Committee
Committee members
— Howard Davies (Chair)
— Ann Godbehere (until May 2017)
— David Law (from May 2017)
— Kai Nargolwala
— Alice Schroeder (from March 2018)
— Lord Turner
Regular attendees
— Chairman of the Board
— Group Chief Executive
— Group Chief Risk Officer
— Chief Financial Officer
— Group Regulatory and Government
Relations Director
— Group General Counsel and
Company Secretary
— Director of Group‑wide
Internal Audit
Number of meetings in 2017: Six.
In addition, a joint meeting was
held with the Audit Committee
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As Chair of the Committee, I have
responsibility for ensuring the Committee
operates effectively. To ensure we do so
and provide constructive challenge to
management, I encourage open debate
and contributions from all Committee
members. An annual review of our
effectiveness was carried out as part of the
Board evaluation, described in more detail
on page 94. The Committee was found to
be functioning effectively.
During 2017 the Committee considered
the results of a Group‑wide risk culture
assessment which built on the previous
work of the Committee in this area. The
assessment was intended to compare
the Group’s risk culture against best
practice behaviours, identify any areas
which need improvement and provide
high‑level industry benchmarking and
peer comparison.
In August we announced the merger
of two of our business units to form
M&G Prudential. The Committee
considered the approach for managing
risks associated with the merger, and
will monitor and assess these risks
through 2018.
The Committee will remain focused on
monitoring the Group’s principal risks,
including those posed by regulatory
developments and macroeconomic
conditions, in the context of the Group’s
operations as a whole and the environment
in which we operate.
I meet the Material Subsidiary risk
committee chairs to facilitate escalation
of important matters and reporting of
material issues to the Committee.
Since the year end, we welcomed Alice
Schroeder as a member of the Committee
with effect from 1 March 2018. Her
biography is set out on page 87.
Part of my role as Chair is to consider
the governance arrangements for the
Committee. The Committee considers
its terms of reference at least annually and
in October 2017 considered proposed
changes to its terms of reference. We
formalised the Committee’s role in
considering how changes in the financial
environment impact the Group’s risk
profile. We also refreshed our terms of
reference to reflect the Committee’s role
in providing advice to the Remuneration
Committee on risk management
considerations to be applied in respect
of executive remuneration.
116 Prudential plc Annual Report 2017
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How the Committee spent its time during 2017
Feb1 May
Jul
Oct
Dec
Markets and Group risk updates
Group risk update
Risk management
Group top risk identification
Top risk discussions
Business unit specific risk matters
Risk assessment of Business Plan
Risk function effectiveness
Risk culture survey
Risk oversight of remuneration
Regulatory matters
Regulatory matters
Risk framework
Solvency II internal model development
Solvency II Major Model Change
Group risk appetite review
Risk limit updates
Risk policy framework refresh
Year‑end E‑cap results
Group operation risk appetite statement
Responsible investing framework
Governance and reporting
Material Subsidiaries updates
Year‑end risk disclosures
Policy compliance
Own Risk and Solvency Assessment
Governance, Risk and Compliance report
Global Systemically Important Insurer
Liquidity Risk Management Plan, Systemic Risk Management Plan and Recovery Plan
Pillar 3 reporting
Solvency II reporting and governance processes
Environmental, social and governance (ESG) reporting
Committee terms of reference
Note
1 Two meetings were held in February 2017.
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Key matters considered during the year
Matter considered
How the Committee addressed the matter
Business Plan
As part of the Committee’s role in overseeing and advising the Board on future risk exposures and
strategic risks, the Committee reviewed Group Risk’s assessment of the Group’s Business Plan,
which covered a range of both financial and non‑financial considerations.
As part of the Group Risk’s review of the annual Group Business Plan, Group Approved Limits were
reviewed, updated and approved by the Committee.
Risk appetite
The Risk Committee is responsible for recommending the Group’s overall risk appetite and tolerance
to the Board.
Risk management
Group top risks
The Committee approved the Group Risk Appetite Statement, which sets aggregate risk limits in
respect of capital requirements, earnings volatility and liquidity as well as maintaining the existing
tolerance levels associated with each of these limits.
Annually, business units must assess and certify their compliance with the Group Risk Framework
and risk policies as part of the annual Group Governance Manual certification. The annual
certification process for risk policies is facilitated by Group Risk and subject to oversight by the Risk
Committee. In 2017, the Group Risk Framework and risk policies were subject to their annual review,
with changes being approved by the Risk Committee.
In October 2017, the Committee considered the results of a Group‑wide survey on Risk Culture
which provided high‑level industry and peer benchmarking.
The Risk Committee considered the results of a number of ‘deep dive’ reviews undertaken during
2017. These focused on risks embedded within the existing portfolio of products in our US, Asia and
UK businesses.
The Cyber Strategy and Cyber Defence Plan articulates the strategic outcomes and key deliverables
relating to our cyber resilience. The Group Cyber Risk Strategy was reviewed by the Risk Committee
in mid‑2017. The Committee also reviewed the Cyber Defence Plan and were provided further detail
around the implementation of the Cyber Strategy at the end of 2017.
The Committee considered the Group‑wide approach for compliance with GDPR regulations and
received updates through the year on progress on implementation activity.
The Committee also agreed the characteristics of an effective risk function and conducted its second
annual review of risk effectiveness in May.
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 the top risks and
mitigating actions over the course of the year.
The Group Chief Risk Officer’s reports also provided the Committee with regulatory updates,
particularly regarding Solvency II and the Group’s Internal Model; the implications of the developing
global capital standards; and developments and the deliverables required as a result of the Group’s
designation as a Global Systemically Important Insurer (see further, opposite).
Solvency II and Pillar 3
reporting
The Committee considered the Own Risk and Solvency Assessment report based on the outcomes
of the Group’s Business Plan and the FY16 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 Committee reviewed the methodology and annual calibration of the Solvency II internal model.
The 2017 Major Model Change application was closely overseen by the Committee throughout the
year and we approved the model changes as part of the submission of the application to the
regulator.
Solvency II results and associated governance processes were considered in a separate meeting held
jointly with the Audit Committee.
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Key matters considered during the year continued
Matter considered
How the Committee addressed the matter
Global Systemically
Important Insurer
Reverse Stress Testing
The Financial Stability Board (FSB) announced on 21 November 2016 that the Group continues to be
designated as a Global Systemically Important Insurer. In 2017, the Group was required to consider
and approve updated deliverables associated with the designation. These included the Systemic
Risk Management Plan, Recovery Plan and Liquidity Risk Management Plan.
Stress and scenario testing is a key risk measurement and management tool for the Group. 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 2017
position and was submitted to the PRA.
Remuneration
The role of the Committee with respect to the provision of advice to the Remuneration Committee on
risk management considerations in respect of remuneration was formalised during the year.
The Committee considered a plan enabling it to meet its Remuneration responsibilities and received
updates on Remuneration‑related matters.
Committee effectiveness
A review of the Committee’s activities was conducted against applicable regulation and codes of
conduct. The results of this assessment were provided to the Committee alongside the outcome of
the part of the annual Board evaluation relating to the Committee.
Compliance reporting
The Committee received regular reporting on key compliance risks and mitigation activity, including
assessments and reporting on anti‑bribery and corruption customer commitments.
The Committee also reviewed and approved a number of regulatory compliance risk‑related policies.
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Financial reporting
The Directors have a duty to report to
shareholders on the performance and
financial position of the Group and are
responsible for preparing the financial
statements on pages 160 to 314 and the
supplementary information on pages 326
to 359. 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
315 to 323 and page 360.
Company law requires the Directors to
prepare financial statements for each
financial year that 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 pages 314 and 360.
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 pages 314 and 360.
The Strategic report provides, on pages 43
and 44, 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 Report
on the risks facing our business on pages
48 to 63.
Powers of the Board
The Board may exercise all powers
conferred on it by the Company’s 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.
Securities dealing and inside
information
Prudential has adopted securities dealing
rules relating to transactions by Directors
on terms no less exacting than required by
Appendix 10 to the HK Listing Rules and
by relevant UK regulations. The Directors
have complied with these rules throughout
the period.
The Group has adopted an Inside
Information Policy which includes guidance
and procedures for the identification,
dissemination and escalation of inside
information as well as appropriate controls
on the disclosure of such information in line
with regulatory requirements. All staff are
made aware of the policy and receive
communications reminding them of their
obligations when they work on any
confidential matters in the business or are
notified when the Company enters or exits
a closed period.
Requirements of Listing Rule 9.8.4
Information to be included in the annual
report and accounts under Listing Rule
9.8.4 may be found as follows:
Listing
Rule
Description
Page
9.8.4 (4) Details of long‑term
146
incentive schemes
required by Listing Rule
9.4.3
9.8.4 (10) Contracts of Significance
98
involving a Director
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.
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 the
Strategic report on pages 10 to 80. The
risks facing the Group’s capital and liquidity
positions and their sensitivities are referred
to in the Strategic report on pages 48 to 63
and note II(c) ‘Solvency Capital Position
at 31 December 2017’ within Additional
Unaudited Financial Information. The
Group’s IFRS financial statements include
the details of the Group’s borrowings in
Note C6 on page 257, the market risk
and liquidity analysis associated with the
Group’s assets and liabilities can be found
in Note C3.4(a) on pages 225 to 227,
policyholder liability maturity profile by
business units in Notes C4.1(b), (c) and (d)
on pages 233, 235 to 237 respectively, cash
flow details in the consolidated statement
of cash flows and provisions and
contingencies in Notes C11 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 2017.
120 Prudential plc Annual Report 2017
www.prudential.co.uk
Additional information
US regulation and legislation
As a result of its listing on the New York
Stock Exchange, the Company is required
to comply with the relevant provisions of
the Sarbanes‑Oxley Act 2002 as they apply
to foreign private issuers and has adopted
procedures to ensure such compliance. In
particular, in relation to 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 head
office 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.
Change of control
Under the agreements governing
Prudential Corporation Holdings Limited’s
life insurance and fund management joint
ventures with China International Trust &
Investment Corporation (CITIC), if there is
a change of control of the Company, CITIC
may terminate the agreements and either
(i) purchase the Company’s entire interest
in the joint venture or require the Company
to sell its interest to a third party designated
by CITIC, or (ii) require the Company to
purchase all of CITIC’s interest in the joint
venture. The price of such purchase or sale
is to be the fair value of the shares to be
transferred, as determined by the auditor
of the joint venture.
Customers
The five largest customers of the Group
constituted in aggregate less than
30 per cent of its total revenue from sales
for each of 2017 and 2016.
www.prudential.co.uk
Annual Report 2017 Prudential plc 121
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Index to principal Directors’ report disclosures
Information required to be disclosed in the Directors’ report may be found in the following sections:
Information
Section in Annual Report
Page number(s)
Disclosure of information to auditor
Statutory and regulatory disclosures
Directors in office during the year
Board of Directors
Corporate responsibility governance
Corporate responsibility review
Employment practices
Greenhouse gas emissions
Charitable donations
Corporate responsibility review
Corporate responsibility review
Corporate responsibility review
Political donations and expenditure
Corporate responsibility review
Remuneration Committee report
Directors’ remuneration report
Directors’ interests in shares
Agreements for compensation for loss of office or
employment on takeover
Directors’ remuneration report
Directors’ remuneration report
Details of qualifying third‑party indemnity provisions
Governance report
Internal control and risk management
Powers of Directors
Governance report
Governance report
Rules governing appointment of Directors
Governance report
Significant agreements impacted by a change of control
Governance report
Future developments of the business of the Company
Group Chief Executive’s report
Post‑balance sheet events
Note D3 of the Notes on the Group financial
statements
Rules governing changes to the Articles of Association
Shareholder information
120
83 to 87
64 to 80
74 to 77
78 and 79
74
74
124 to 157
148
151 and 152
98
99 and 100
120
98
121
4 to 8
284
402
Structure of share capital, including changes during the
year and restrictions on the transfer of securities, voting
rights and significant shareholders
Shareholder information and Note C10 of the Notes
on the Group financial statements
402 and 277
Business review
Changes in borrowings
Dividend details
Financial instruments
Strategic report
Strategic report and Note C6 of the
Notes on the Group financial statements
Strategic report
Strategic report
10 to 80
44 and 257
2 and 34
48 and 63
In addition, the risk factors set out on pages 391 to 397 and the additional unaudited financial information set out on pages 362 to 390,
are incorporated by reference into the Directors’ report.
Signed on behalf of the Board of Directors
Alan F Porter
Group General Counsel and Company Secretary
14 March 2018
122 Prudential plc Annual Report 2017
www.prudential.co.uk
04
Directors’
remuneration
report
Annual statement from the Chairman of the
Remuneration Committee
Our Executive Directors’ remuneration at a glance
Summary of the current Directors’ remuneration policy
Annual report on remuneration
Supplementary information
Page
124
126
128
132
154
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: Table of 2017 and 2016
Executive Director total remuneration (the ’single figure’) and related notes,
salary information table in section entitled Remuneration in respect of
performance in 2017, Pension entitlements, Long-term incentives awarded
in 2017, Chairman and Non-executive Director remuneration in 2017,
Statement of Directors’ shareholdings, Outstanding share options,
Recruitment arrangements and Payments to past Directors and payments
for loss of office.
www.prudential.co.uk
Annual Report 2017 Prudential plc 123
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information 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 2017.
The Committee’s report is presented in the
following sections:
1
2
3
An ‘at a glance’ summary of the Group’s
remuneration arrangements on pages
126 and 127;
A summary of our Directors’
remuneration policy on pages 128 to
131 which describes how we pay
Directors. This policy was approved
by shareholders at the 2017 AGM;
Our Annual report on remuneration on
pages 132 to 153 which describes how
the Committee applied the Directors’
remuneration policy in 2017 and the
decisions it has made in respect of 2018;
and
4
Supplementary information on pages
154 to 157.
By way of preface, I would like to share
the context for the key decisions the
Committee took during 2017, in particular,
how we rewarded the performance
achieved in 2017 and the decisions relating
to remuneration arrangements in 2018.
I am also delighted to welcome Thomas
Watjen, who joined the Committee in
July 2017.
Implementing the Directors’
remuneration policy
During 2017, the Committee operated all
elements of remuneration in line with the
Directors’ remuneration policy, which
received the support of 90.7 per cent of
shareholders at the AGM in May 2017. As
you may recall, the new policy simplified
pay arrangements by reducing the number
of annual bonus measures and by offering
the Chief Executive of M&G awards under
a single long‑term incentive plan rather
than two. The policy also introduced a
two‑year holding period on long‑term
incentive awards and increased share
ownership guidelines.
During late 2017 and early 2018, I
corresponded with and met the majority of
our major shareholders, as well as
organisations that represent and advise
shareholders. On behalf of the Committee,
I would like to thank shareholders for their
engagement.
Rewarding 2017 performance
Prudential’s executive remuneration
arrangements reward the achievement of
Group, business and personal targets,
provided that this performance is delivered
within the Company’s risk framework and
appetites, and that the conduct
expectations of Prudential, our regulators
and other stakeholders are met.
As set out in the Business review section
earlier in this Annual Report, the Group
delivered sustained growth in profit and
cash in 2017.
Performance against business unit
remittances and IFRS operating profit
exceeded, or were closely aligned to, the
stretching targets established by the
Board. EEV new business profit delivered
double digit growth, a strong result in the
light of the challenges outlined in the
business performance review and
delivered a result approaching the Board
approved targets. The Group achieved
these results while maintaining appropriate
levels of capital and operating within the
Group’s risk framework and appetites. The
Committee believes that the bonuses it
awarded to Executive Directors for 2017
(between 89 per cent and 100 per cent of
executives’ maximum opportunities)
appropriately reflect this performance.
Performance in 2017 built on the
momentum achieved in recent years. The
Group delivered total IFRS operating
profits of £12,924 million in 2015, 2016 and
2017 financial years. I am pleased to say
that the continued impressive financial
performance has translated into significant
returns to the Company’s shareholders,
with £100 invested on 1 January 2015
being worth £139 on 31 December 2017.
Based on this level of total shareholder
return (TSR) and strong cumulative IFRS
operating profit performance over the
performance period 2015 to 2017, the
Committee determined that between 89.3
and 95.8 per cent of the Prudential Long
Term Incentive Plan (PLTIP) awards made
to Executive Directors in 2015 would vest
(depending on the business unit).
The Committee continues to ensure
that payments and releases reflect the
performance of the business, and remains
mindful of its scope to use discretion if
it is not satisfied that underlying financial
performance justifies the payments
arithmetically suggested by the
achievement of the performance conditions.
The Group Chief Executive’s total
remuneration
The total 2017 remuneration or ‘single
figure’ for the Group Chief Executive, Mike
Wells, is 18 per cent higher than the total
2016 ‘single figure’. This chiefly reflects that
a greater proportion of 2015 PLTIP awards
vested than of 2014 awards, based on the
Company’s sustained performance and
share price growth achieved over the period
1 January 2015 to 31 December 2017.
2015 was also the first year in which Mike
received a PLTIP award in his capacity as
Group Chief Executive. This remuneration
outcome reflects Mike’s exceptional
leadership and personal performance.
Changes to the executive team
As you will be aware, there have been three
changes to Prudential’s team of Executive
Directors during 2017; Nic Nicandrou was
appointed Chief Executive of Prudential
Corporation Asia in July 2017 after Tony
Wilkey stepped down from the Board;
Mark FitzPatrick replaced Nic Nicandrou as
Chief Financial Officer in July 2017 and
Penny James stepped down from the Board
as Group Chief Risk Officer on
30 September 2017. The Committee
applied the Directors’ recruitment policy
and loss of office policy when determining
joining and separation remuneration
arrangements for these executives. 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.
Implementation in 2018
The Committee intends to continue to
operate within the current Directors’
remuneration policy during 2018. In
determining remuneration packages for
2018, the Remuneration Committee was
mindful of the need for restraint in base
salary increases. All Executive Directors
received a salary increase of 2 per cent.
The 2018 salary increase budgets for other
employees across the Group’s business
units were between 2.5 per cent and
10 per cent. No changes have been made
to executives’ maximum opportunities
under either the annual incentive or the
long‑term incentive plans, as we believe
remuneration packages provide an
appropriate balance between performance
over the short and the long term.
124 Prudential plc Annual Report 2017
www.prudential.co.uk
The Committee has enhanced the Annual
Incentive Plan (AIP) reporting this year, a
development that I trust you find welcome.
The details of the targets, ranges and
results achieved for the Group financial
performance measures for the 2016 and
2017 AIP bonuses are included in this
Directors’ remuneration report, thereby
removing the one‑year reporting lag
previously adopted.
In response to shareholder feedback, the
Committee has decided that the
sustainability scorecard element of the
PLTIP awards from 2018 onwards will be
assessed on a sliding scale rather than on a
meet or fail basis.
UK gender pay gap
The UK business entities have recently
reported their 2017 UK gender pay gap
data and details can be found on
www.prudential.co.uk. We have a policy
and carry out procedures to ensure that,
where men and women perform similar
roles, they are paid equally. However, the
gender pay gaps demonstrate the
demographic profile of the business (and
the financial services sector more widely):
there is a greater proportion of males in
more senior and front‑office roles and a
greater proportion of females in more
junior, support and back‑office non‑finance
roles. All the Group’s businesses are
working on initiatives to increase the
proportion of women in senior
management and operating roles as part of
the Group’s strategic focus on diversity and
inclusion as described in the Diversity and
Inclusion Statement on our website. This
important priority is reflected in the
Group’s reward structure as a result of the
diversity measure attached to PLTIP
awards granted from 2017 onwards.
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 2017.
Anthony Nightingale, CMG SBS JP
Chairman of the
Remuneration Committee
14 March 2018
Strategic priority
IFRS operating profit1
Prudential’s primary measure of
profitability and a key driver of
shareholder value
CAGR4 (excluding Korea): +12%
Group performance £m
EEV new business profit2
A measure of the future profitability of
the new business sold during the year
and indicates the profitable growth of
the Group
CAGR4 (excluding Korea and UK bulk
annuity new business profits): +15%
Business unit remittances
Cash flows across the Group balance these
net remittances (which support dividend
payments) with the retention of cash for
profitable reinvestment
CAGR4: +7%
2016-2017 growth3 10%
2016-2017 growth3 17%
2016-2017 growth3 4%
4,256
3,969
4,699
2,937
3,154
2,077
2,021
2,492
3,616
3,088
1,482
1,625
1,341
1,718
1,788
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
2017 bonus achievement
Above target, approaching
stretch target level
IFRS operating profit accounted
for 35 per cent of Group financial
bonus targets
Approaching target level
EEV new business profit accounted
for 15 per cent of Group financial
bonus targets
Above stretch target level
A cash flow measure was used to
determine 20 per cent of the Group
financial bonus targets
Notes
1 As previously reported and excluding the contribution from the Korea life business for all years.
2 As previously reported and excluding the contribution from the Korea life business and UK bulk annuity new business profits for all years.
3 As reported.
4 2013‑2017 CAGR
www.prudential.co.uk
Annual Report 2017 Prudential plc 125
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Our Executive Directors’ remuneration at a glance
Our current remuneration architecture
Key elements1,2
Salary and benefits
7
1
0
2
8
1
0
2
9
1
0
2
0
2
0
2
1
2
0
2
2
2
0
2
Key features of the policy
How we implemented the policy
Broadly aligned with pay budget
for other employees
Salary increase of 2% in 2017
Financial/functional
and personal
objectives set
with reference
to business plans
approved by
the Board
Cash bonus
Deferred bonus
The maximum opportunity is up to
200% of salary
40% of bonus is deferred into shares
for three years
Award is subject to malus and
clawback provisions
The Group Chief Executive has a
maximum bonus opportunity of 200%
of salary. For other Executive Directors
the maximum is 180% of salary or less
2017 bonuses were paid based on
financial performance or functional
measures as well as personal objectives
Maximum award under the plan is
550% of salary
Aligned with long-term business
strategy and delivery of shareholder
value, with vesting subject to:
— Relative TSR;
— Group or business unit IFRS
operating profit; and
— Balanced scorecard measures.
Measured over three financial years
from year of award with a two-year
post-performance holding period
Award is subject to malus and
clawback provisions
Awards in 2017 were below the plan limits:
— Group Chief Executive: 400% of salary
— CEO, NABU: 460% of salary
— CEO, M&G: 450% of salary
— Other PLTIP awards were
250% of salary
For business unit CEOs, awards vest
based on TSR, business unit IFRS
operating profit and balanced
scorecard measures
For other Executive Directors, awards
vest based on TSR, Group IFRS
operating profit and balanced
scorecard measures
Significant share ownership guidelines for all Executive Directors as follows:
— 400% of salary for the Group Chief Executive
— 250% of salary for other Executive Directors
Stretching IFRS profit
ranges set with
reference to business
plans approved by
the Board
TSR vesting relative
to international
insurance peers
Balanced scorecard
of capital, conduct
and diversity
measures
Prudential Long Term
Incentive Plan (PLTIP)
Share ownership
guidelines
Key
Fixed pay
Short‑term variable pay
Long‑term variable pay
Share ownership guidelines
Notes
1 The Chief Executive, NABU also receives a 10% share of the Jackson bonus pool.
2 The Chief Executive, M&G retains separate bonus arrangements.
126 Prudential plc Annual Report 2017
www.prudential.co.uk
What 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 125, sustained growth across all of our key performance metrics has delivered substantial value to our shareholders. This
has been reflected in both the annual bonuses paid and the release of long‑term incentive awards, as set out in the Annual report on
remuneration.
In particular, the long‑term incentives awarded to Executive Directors in 2015 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 reflected in the value of the LTIP releases.
The value of these performance‑related elements of remuneration is added to the fixed packages provided to Executive Directors to
calculate the 2017 ‘single figure’ of total remuneration. The total 2017 ‘single figure’ for the Group Chief Executive is higher than the total
2016 ‘single figure’, which is chiefly a result of the higher value of the 2015 PLTIP release. The values for the current Executive Directors
who were Directors during the year are outlined in the table below:
Executive Director
Role
Mark FitzPatrick1
John Foley
Chief Financial Officer
Chief Executive,
Fixed pay
Performance related
2017
salary
Pension and
benefits
2017
bonus
LTIP
vesting
2017
single figure
2016
single figure
£335,000
£102,000
£1,197,000
–
£1,634,000
N/A
Nic Nicandrou2
Anne Richards
Barry Stowe
Mike Wells
M&G Prudential
Chief Executive, PCA3
Chief Executive, M&G
Chairman & CEO, NABU4
Group Chief Executive
£765,000
£869,000
£400,000
£880,000
£1,103,000
£306,000
£521,000
£253,000
£279,000
£769,000
£1,283,000
£1,414,000
£2,400,000
£5,354,000
£2,072,000
£2,378,000
£2,016,000
–
£3,109,000
£4,758,000
£4,732,000
£4,820,000
£3,053,000
£9,622,000
£8,702,000
£4,291,000
£4,184,000
£3,875,000
£7,679,000
£7,370,000
Notes
1 Mark FitzPatrick was appointed to the Board on 17 July 2017 as Chief Financial Officer. The remuneration above was paid in respect of his service as an Executive Director.
2 Nic Nicandrou was appointed Chief Executive, Prudential Corporation Asia on 17 July 2017. The remuneration above was paid in respect of his service as Chief Financial Officer and
Chief Executive, Prudential Corporation Asia.
3 PCA is an abbreviation of Prudential Corporation Asia.
4 NABU is an abbreviation of North American Business Unit which includes Jackson National Life and PPM America.
Aligning 2018 pay to performance
The Remuneration Committee awarded salary increases to the Executive Directors for 2018 of 2 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 2018 are set out in detail in the Annual report on remuneration and summarised below:
Executive Director
Role
Mark FitzPatrick
John Foley
Nic Nicandrou
Anne Richards1
Barry Stowe2
Mike Wells
Chief Financial Officer
Chief Executive, M&G Prudential
Chief Executive, PCA
Chief Executive, M&G
Chairman & CEO, NABU
Group Chief Executive
AIP
2018
salary
Maximum
bonus
(% salary)
Bonus
deferred
PLTIP award
(% salary)3
£745,000
£781,000
HK$10,710,000
£408,000
US$1,157,000
£1,126,000
175%
180%
180%
600%
160%
200%
40%
40%
40%
40%
40%
40%
250%
250%
250%
450%
460%
400%
Notes
1 The bonus opportunity for the Chief Executive, M&G remains the lower of 0.75 per cent of M&G’s IFRS operating profit or six times salary.
2 The Chairman & CEO, NABU will also continue to have a 10 per cent share of the Jackson bonus pool. 40 per cent of this is deferred in shares.
3 The PLTIP award is subject to a three‑year performance period and a further two‑year holding period.
www.prudential.co.uk
Annual Report 2017 Prudential plc 127
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Summary of the current Directors’ remuneration policy
The Company’s Directors’ remuneration policy was approved by shareholders at the 2017 AGM. This policy came into effect following
the AGM on 18 May 2017 and is expected to apply until the 2020 AGM, when shareholders will be asked to approve a revised Directors’
remuneration policy.
The pages that follow present a summary of the current Directors’ remuneration policy. The complete policy can be found on our website
at www.prudential.co.uk/investors/governance‑and‑policies/directors‑remuneration‑policy
Remuneration for Executive Directors
Fixed pay
Element
Salary
Operation
The Committee reviews salaries annually, considering factors such as:
— Salary increases for other employees across the Group;
— The performance and experience of the executive;
— The size and scope of the role;
— Group and/or business unit financial performance;
— Internal relativities; and
— External factors such as economic conditions and market data.
Market data is also reviewed so that salaries remain in a competitive range
relative to each Executive Director’s local market.
Benefits
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;
— Relocation and expatriate benefits; and
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.
— Reimbursed business expenses (including any tax liability) incurred
when travelling overseas in performance of duties.
Provision for
an income in
retirement
Current Executive Directors 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 Jackson.
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,
Prudential Corporation Asia receives
statutory contributions into the
Mandatory Provident Fund.
128 Prudential plc Annual Report 2017
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, other than the Group Chief Risk
Officer, are subject to the achievement of financial and personal objectives.
The Group Chief Risk Officer’s performance measures are entirely based on
a combination of functional and personal measures.
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 Chairman and CEO, NABU 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
and cash flow targets and payments depend on the achievement of minimum
capital thresholds. 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 bonuses
made in respect of performance in 2015 and subsequent years.
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 Chairman
and CEO, NABU receives a
10 per cent share of the Jackson
Senior Management Bonus Pool.
Deferred
bonus shares
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 maximum vesting under this
arrangement is 100 per cent of the
original deferral plus accrued
dividend shares.
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, 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).
Prudential
Long Term
Incentive Plan
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 total shareholder return; and
— Group IFRS operating profit; or
— Business unit IFRS operating profit; and
— Balanced scorecard of sustainability measures.
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 Committee has the authority to apply a malus
adjustment to all, or a portion of, an outstanding award in specific
circumstances. For 2015 and subsequent years, 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).
From 2017, PLTIP awards are usually subject to an additional two‑year
holding period following the end of the three‑year performance period.
Share ownership guidelines
The guidelines for share ownership are as follows:
— 400 per cent of salary for the Group Chief Executive; and
— 250 per cent of salary for other Executive Directors.
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.
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.
www.prudential.co.uk
Annual Report 2017 Prudential plc 129
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Summary of the current Directors’ remuneration policy continued
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.
Scenarios of total remuneration
The chart below provides an illustration of the future total remuneration for each Executive Director in respect of their remuneration
opportunity for 2018. Three scenarios of potential outcome are provided based on underlying assumptions shown in the notes to
the chart.
The Committee is satisfied that the maximum potential remuneration of the Executive Directors is appropriate. Prudential’s policy is to
offer Executive Directors remuneration which reflects the performance and experience of the executive, internal relativities and Group
and/or business unit financial performance. In order for the maximum total remuneration to be payable:
— Financial performance must exceed the Group and/or business unit’s stretching business plan;
— Relative TSR must be at or above the upper quartile relative to the peer group;
— The sustainability scorecard, aligned to the Group’s strategic priorities, must be fully satisfied;
— Functional and personal performance objectives must be fully met; and
— Performance must be achieved within the Group’s and business units’ risk framework and appetites.
£000
12,000
10,000
8,000
6,000
4,000
2,000
0
1,091
100%
i
i
M
n
m
u
m
4,450
44%
32%
24%
i
M
a
x
m
u
m
3,014
41%
23%
36%
I
n
l
i
n
e
w
i
t
h
e
x
p
e
c
t
a
t
i
o
n
s
1,046
100%
i
i
M
n
m
u
m
4,213
44%
31%
25%
i
M
a
x
m
u
m
2,862
41%
23%
36%
I
n
l
i
n
e
w
i
t
h
e
x
p
e
c
t
a
t
i
o
n
s
4,947
37%
50%
13%
i
M
a
x
m
u
m
3,035
38%
40%
22%
I
n
l
i
n
e
w
i
t
h
e
x
p
e
c
t
a
t
i
o
n
s
663
100%
i
i
M
n
m
u
m
10,960
38%
51%
8,605
30%
56%
1,182
100%
14%
11%
1,788
100%
i
i
M
n
m
u
m
i
i
M
n
m
u
m
i
M
a
x
m
u
m
I
n
l
i
n
e
w
i
t
h
e
x
p
e
c
t
a
t
i
o
n
s
6,389
42%
30%
28%
i
M
a
x
m
u
m
4,423
38%
22%
40%
I
n
l
i
n
e
w
i
t
h
e
x
p
e
c
t
a
t
i
o
n
s
8,657
52%
26%
22%
i
M
a
x
m
u
m
5,842
48%
19%
33%
I
n
l
i
n
e
w
i
t
h
e
x
p
e
c
t
a
t
i
o
n
s
1,901
100%
i
i
M
n
m
u
m
John Foley
Mark FitzPatrick
Anne Richards
Barry Stowe
Nic Nicandrou
Mike Wells
Fixed
Short‑term incentives
Long‑term incentives
Note
The scenarios in the chart above have been calculated on the following assumptions:
Fixed pay
Base salary at 1 January 2018.
Minimum
In line with expectations
Maximum
Pension allowance at 1 January 2018.
Estimated value of benefits based on amounts paid in 2017.
Nic Nicandrou and Barry Stowe are paid in HK$ and US$
respectively and figures have been converted to GBP for the
purposes of this chart.
Annual bonus
No bonus paid.
Long‑term incentives
(excludes share price
growth and dividends)
No PLTIP vesting.
50% of maximum AIP.
100% of maximum AIP.
Jackson bonus pool at the average
of the last three years.
Jackson bonus pool at highest
of the last three years.
Vesting of 62.5% of award under
PLTIP (midway between threshold
and maximum).
100% of award under PLTIP.
130 Prudential plc Annual Report 2017
www.prudential.co.uk
Remuneration for Non-executive Directors and the Chairman
Non-executive Directors
Fees
Benefits
Share ownership guidelines
All Non‑executive Directors receive a basic
fee for their duties as a Board member.
Additional fees are paid for added
responsibilities such as chairmanship and
membership of committees or acting as the
Senior Independent Director. Fees are paid
to Non‑executive Directors in cash. Fees
are reviewed annually by the Board with
any changes effective from 1 July.
Non‑executive Directors are not eligible
to participate in annual bonus plans or
long‑term incentive plans.
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.
Chairman
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.
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.
The Chairman may be offered benefits
including:
— Health and wellness benefits;
— Protection and security benefits;
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.
— Transport benefits;
— Reimbursement of business expenses
(and any associated tax liabilities)
incurred when travelling overseas in
performance of duties; 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 Chair 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.
www.prudential.co.uk
Annual Report 2017 Prudential plc 131
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Annual report on remuneration
The Board has established Audit, Remuneration, Risk and Nomination & Governance 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 (the Chair of the Committee)
Kai Nargolwala
Philip Remnant
Thomas Watjen (member since 11 July 2017)
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, Executive
Directors and other members of the Group Executive Committee;
— Approving the design of performance‑related pay schemes operated for the Executive Directors and other members of the Group
Executive Committee, 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 other members of the Group Executive
Committee, and monitoring compliance;
— Reviewing and approving individual packages for the Executive Directors and other members of the Group Executive Committee, and
the fees of the Chairman and the Non‑executive Directors of the Group’s material subsidiaries;
— Reviewing and approving packages to be offered to newly recruited Executive Directors and other members of the Group Executive
Committee;
— Reviewing and approving the structure and quantum of any severance package for Executive Directors and other members of the
Group Executive Committee;
— Ensuring the process for establishing remuneration policy is transparent and consistent with the Group’s risk framework and
appetites, encouraging strong risk management and solvency management practices and taking account of remuneration practices
across the Group;
— Monitoring the remuneration and risk management implications of remuneration of senior executives across the Group, other
selected roles 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.
An annual review of the Committee’s effectiveness was carried out as part of the Board evaluation, as described in more detail on
page 94. The Committee was found to be functioning effectively.
132 Prudential plc Annual Report 2017
www.prudential.co.uk
In 2017, the Committee met six times. Key activities at each meeting are shown in the table below:
Meeting
Key activities
February 2017
Approve the 2016 Directors’ remuneration report; consider 2016 bonus awards for Executive Directors; consider
vesting of the long‑term incentive awards with a performance period ending on 31 December 2016; approve
2017 long‑term incentive awards, performance measures and plan documentation; and note an update on
regulation affecting remuneration.
March 2017
May 2017
June 2017
Confirm 2016 annual bonuses and the vesting of long‑term incentive awards with a performance period ending
on 31 December 2016, in light of audited financial results.
Approve remuneration arrangements for a new Executive Director and an Executive Director whose role changed
and separation arrangements for an Executive Director who stepped down from the Board.
Consider performance for outstanding long‑term incentive awards, based on the half‑year results; review the
remuneration of senior executives across the Group, employees with a remuneration opportunity over £1 million
per annum and employees within the scope of the Solvency II remuneration rules; review progress towards share
ownership guidelines by the Chairman, Executive Directors and other Group Executive Committee members;
approve the Chairman’s fees; and note an update on regulation affecting remuneration.
September 2017
Review proposed 2018 remuneration arrangements ahead of consultation with shareholders; approve the
Solvency II Remuneration Policy Statement; and review the Remuneration Committee’s terms of reference.
December 2017
Review level of participation in the Company’s all‑employee share plans and dilution levels resulting from the
Company’s share plans; approve Group Executive Committee members’ 2018 salaries and incentive
opportunities in light of initial shareholder feedback; consider the annual bonus and long‑term incentive
measures and targets to be used in 2018; review an initial draft of the 2017 Directors’ remuneration report;
approve the Committee’s 2018 work plan; approve the fees for independent non‑executive directors of the
material subsidiaries; and note an update on regulation affecting remuneration.
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 2017, 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 interest. Deloitte is a member of the Remuneration Consultants’ Group and voluntarily
operates under their code of conduct when providing advice on executive remuneration in the UK. Deloitte regularly meet with the Chair
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 2017 were £56,000 charged on a
time and materials basis. During 2017, Deloitte gave Prudential management advice on remuneration, as well as providing guidance on
capital optimisation, digital and technology, taxation, internal audit, real estate, global mobility 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.
www.prudential.co.uk
Annual Report 2017 Prudential plc 133
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Table of 2017 Executive Director total remuneration (the ‘single figure’)
£000’s
Mark FitzPatrick1
John Foley
Penny James2
Nic Nicandrou3, 8
Anne Richards4
Barry Stowe5,8
Mike Wells6
Tony Wilkey7
Total
2017
taxable
benefits*
18
115
81
303
153
59
493
456
2017
total
bonus
1,197
1,283
–
1,414
2,400
5,354
2,072
787
Of which:
Amount
deferred
into
Prudential
shares†
Amount
paid in
cash
2017
LTIP
releases‡
2017
pension
benefits§
Total 2017
remuneration
the ‘single
figure’¶
718
770
–
848
1,440
3,212
1,243
472
479
513
–
566
960
2,141
829
315
–
2,378
–
2,016
–
3,109
4,758
2,952
84
191
119
218
100
220
276
123
1,634
4,732
678
4,820
3,053
9,622
8,702
4,808
1,678
14,507
8,703
5,803
15,213
1,331
38,049
2017
salary
335
765
478
869
400
880
1,103
490
5,320
* 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 but no further conditions.
‡ In line with the regulations, the estimated value of PLTIP releases in 2017 has been calculated based on the average share/ADR price over the last three months of 2017 (£18.52/$49.12).
The actual value of PLTIPs, based on the share price on the date awards are released, will be shown in the 2018 report.
§ 2017 pension benefits include cash supplements for pension purposes and contributions into DC schemes as outlined on page 142.
¶ 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 Statutory Instrument 2013 No. 1981 ‑ The Large and Medium‑sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013.
Notes
1 Mark FitzPatrick was appointed to the Board on 17 July 2017.
2 Penny James stepped down from the Board on 30 September 2017. The remuneration above was paid in respect of her service as an Executive Director.
3 To facilitate Nic Nicandrou’s relocation to Hong Kong to take up his new role as Chief Executive, Prudential Corporation Asia, Nic’s benefits include relocation support being temporary
accommodation of £126,000 and tax and immigration advice of £33,000.
4 To facilitate her appointment as Chief Executive, M&G, in 2016 Anne Richards’s benefits include travel costs from Anne’s home in Edinburgh to London of £15,000.
5 Barry Stowe’s bonus figure excludes a contribution of £16,200 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 2017 pension benefits.
6 To facilitate his appointment as Group Chief Executive and move to the UK in 2015, Mike Wells’s benefits include £340,000 to cover mortgage interest and £37,000 to cover home
leave flights.
7 Tony Wilkey stepped down from the Board on 17 July 2017. The remuneration above was paid in respect of his service as an Executive Director. His benefits include £148,000 for
housing, £24,000 for home leave flights and a £235,000 Executive Director Location Allowance. Two of the LTIP releases relate to his previous role, prior to his service as an
Executive Director.
8 Barry Stowe, Tony Wilkey and, following his appointment as Chief Executive, Prudential Corporation Asia, Nic Nicandrou are paid in their local currency and exchange rate
fluctuations will therefore impact the reported sterling value.
134 Prudential plc Annual Report 2017
www.prudential.co.uk
Annual report on remuneration continued Table of 2016 Executive Director total remuneration (the ‘single figure’)
2016
salary
714
606
173
711
228
820
1,081
845
2016
taxable
benefits*
134
83
70
361
82
46
893
828
2016
total
bonus
1,271
962
920
1,236
1,368
5,229
2,151
1,440
Of which:
Amount
deferred
into
Prudential
shares†
Amount
paid in
cash
2016
LTIP
releases‡
2016
Other
payments
2016
pension
benefits§
Total 2016
remuneration
the ‘single
figure’¶
763
577
552
742
821
3,137
1,291
864
508
385
368
494
547
2,092
860
576
1,993
388
2,252
1,698
–
1,379
2,975
1,707
–
–
–
–
2,140
–
–
–
179
152
43
178
57
205
270
213
4,291
2,191
3,458
4,184
3,875
7,679
7,370
5,033
£000’s
John Foley1
Penny James
Michael McLintock2
Nic Nicandrou3
Anne Richards4
Barry Stowe5,8
Mike Wells6
Tony Wilkey7,8
Total
5,178
2,497
14,577
8,747
5,830
12,392
2,140
1,297
38,081
* 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 but no further conditions.
‡ In line with the regulations, the estimated value of PLTIP releases in 2016 has been recalculated based on the actual share/ADR price on the date awards are released, being
£16.63/$41.58.
§ 2016 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 Statutory Instrument 2013 No. 1981 ‑ The Large and Medium‑sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013.
Notes
1 John Foley was appointed to the Board on 19 January 2016. 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.
2 Michael McLintock stepped down from the Board on 6 June 2016. The remuneration above was paid in respect of his service as an Executive Director.
3 Nic Nicandrou’s benefits relate primarily to relocation support under a legacy relocation clause in his contract, being £156,892 to cover taxes due on stamp duty paid in 2015.
4 Anne Richards was appointed to the Board on 7 June 2016. The remuneration above was paid in respect of her service as an Executive Director. In order to facilitate Anne’s
appointment as Chief Executive, M&G, the Company agreed to replace the deferred bonus awards she forfeited on leaving Aberdeen Asset Management. The terms of the
replacement award are designed to replicate those of the forfeited awards and the value is set out in the ‘Other payments’ column. In addition, to support Anne’s appointment as Chief
Executive, M&G, the Company pays for accommodation in London and travel from Anne’s home in Edinburgh to London totalling £45,493 and the value is included in the ‘taxable
benefits’ column.
5 Barry Stowe’s bonus figure excludes a contribution of £11,738 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 2016 pension benefits.
6 To facilitate his move to the UK, Mike Wells’s benefits include relocation support including £330,680 to cover taxes due on stamp duty paid in 2015 and £339,624 to cover mortgage
interest. In addition, an amount of £497,748 was paid by the Company to meet a payment on account for US tax on these benefits which, as the tax will be payable in the UK, under the
UK and US double tax treaty this amount will ultimately be refunded. Mike’s benefits figure has been amended to include an additional £20,000 of home leave flights taken in 2016.
7 Tony Wilkey’s benefits include costs of £260,917 for housing and a £413,663 Executive Director Location Allowance. The LTIP releases relate to his previous role, prior to his service as
an Executive Director.
8 Barry Stowe and Tony Wilkey are paid in their local currency and exchange rate fluctuations will therefore impact the reported sterling value.
www.prudential.co.uk
Annual Report 2017 Prudential plc 135
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Remuneration in respect of performance in 2017
Base salary
Executive Directors’ salaries were reviewed in 2016 with changes effective from 1 January 2017. When the Committee took these
decisions it considered:
— The salary increases awarded to other employees, which vary across our business units, reflecting local market conditions;
— The performance and experience of each Executive Director;
— The relative size of each Executive Director’s role; and
— The performance of the Group.
As reported last year, after careful consideration by the Committee, all Executive Directors, other than the Group Chief Risk Officer,
received a salary increase of 2 per cent. The Group Chief Risk Officer received a salary increase of 5 per cent. The 2017 salary increase
budgets for other employees across our business units were between 2.5 per cent and 6 per cent. No changes were made to Executive
Directors’ maximum opportunities under either the annual incentive or the long‑term incentive plans.
To provide context for the market review, information was also drawn from the following market reference points:
Executive
John Foley
Penny James
Nic Nicandrou
Mark FitzPatrick
Anne Richards
Role
Benchmark(s) used to assess remuneration
Chief Executive, M&G Prudential
— FTSE 40
— International insurance companies
Group Chief Risk Officer
— FTSE 40
Chief Financial Officer
— FTSE 40
— International insurance companies
Chief Executive, M&G
— McLagan UK Investment Management Survey
— International insurance companies
Barry Stowe
Chairman & CEO, NABU
— Towers Watson US Financial Services Survey
— LOMA US Insurance Survey
Mike Wells
Group Chief Executive
— FTSE 40
Tony Wilkey
Nic Nicandrou
Executive Director
Mark FitzPatrick1
John Foley2
Penny James3
Nic Nicandrou4
Anne Richards5
Barry Stowe
Mike Wells
Tony Wilkey6
Chief Executive, Prudential
Corporation Asia
— International Insurance Companies
— Towers Watson Asian Insurance Survey
2016 salary
2017 salary
N/A
£750,000
£606,000
£711,000
£400,000
£730,000
£765,000
£637,000
HK$10,500,000
£400,000
US$1,111,000
US$1,134,000
£1,081,000
£1,103,000
HK$8,890,000
HK$9,070,000
Notes
1 Mark FitzPatrick was appointed Chief Financial Officer on 17 July 2017. The annualised 2017 salary above was paid in respect of his service as Chief Financial Officer.
2 John Foley was appointed Chief Executive, UK and Europe on 19 January 2016. The annualised 2016 salary above was paid in respect of his service as Chief Executive, UK and Europe.
3 Penny James stepped down from the Board on 30 September 2017.
4 Nic Nicandrou was appointed Chief Executive, Prudential Corporation Asia on 17 July 2017. The annualised 2017 salary above was paid in respect of his service as Chief Executive,
Prudential Corporation Asia.
5 Anne Richards was appointed Chief Executive, M&G on 7 June 2016. The annualised 2016 salary above was paid in respect of her service as Chief Executive, M&G.
6 Tony Wilkey stepped down from the Board on 17 July 2017.
136 Prudential plc Annual Report 2017
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Annual report on remuneration continued Annual bonus
2017 annual bonus opportunities
Executive Directors’ bonus opportunities, the weighting of performance measures for 2017 and the proportion of annual bonuses
deferred are set out below:
Executive Director
Mark FitzPatrick1
John Foley
Penny James2
Nic Nicandrou3
Anne Richards
Barry Stowe4
Mike Wells
Tony Wilkey5
Maximum
AIP opportunity
(% of salary) Deferral requirement
Group financial
measures
Weighting of measures
Business unit
financial/
functional
measures
Personal
objectives
175% 40% of total bonus
180% 40% of total bonus
160% 40% of total bonus
180% 40% of total bonus
600% 40% of total bonus
160% 40% of total bonus
200% 40% of total bonus
180% 40% of total bonus
80%
20%
–
20%
20%
80%
80%
20%
20%
–
20%
60%
100% (functional/personal)
20%
60%
20%
60%
20%
–
20%
–
20%
60%
Notes
1 Mark FitzPatrick was appointed to the Board on 17 July 2017. The maximum bonus opportunity shown represents his annual opportunity as an Executive Director. This was not
pro‑rated for the portion of the year for which he was an Executive Director, as Mark did not receive a 2017 bonus from his previous employer.
2 Penny James stepped down from the Board on 30 September 2017. The maximum bonus opportunity shown represents her annual opportunity as an Executive Director but no bonus
was paid.
3 Nic Nicandrou was Chief Financial Officer until his appointment as Chief Executive, Prudential Corporation Asia on 17 July 2017. The maximum bonus opportunity and performance
measures 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 received a pro‑rated AIP for the
portion of the year he was Chief Financial Officer.
4 Barry Stowe also receives 10 per cent of the Jackson bonus pool.
5 Tony Wilkey stepped down from the Board on 17 July 2017. 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.
2017 AIP performance measures and achievement
Target-setting process
For the financial AIP metrics, the performance ranges are set by the Remuneration Committee prior to, or at the beginning of, the
performance period based on the annual business plans approved by the Board. These reflect the ambitions of the Group and business
units, in the context of anticipated market conditions.
The Committee seeks advice from the Group Risk Committee on risk management considerations to be applied to remuneration
architecture and performance measures to ensure risk management culture and conduct is appropriately reflected in the design and
operation of Executive Directors’ remuneration.
In 2017, the AIP performance measures were simplified from seven to four measures and Executive Directors’ 2017 bonuses were
determined by the achievement of IFRS operating profit, operating free surplus, NBP EEV profit and cash flow, which are aligned to the
Group’s growth and cash generation focus. This reflected the Committee’s objective to simplify the AIP metrics.
As part of the continuing implementation of Solvency II, the weightings of the Group Chief Risk Officer’s AIP performance targets
(with effect from 2017) were changed so that the entire AIP outcome relates to a combination of functional and personal measures.
Financial performance
The Committee reviewed performance against the performance ranges at its meeting in March 2018. Of the bonus performance metrics,
the maximum targets were all exceeded other than Group IFRS operating profit, Savings & Retirement Solutions cash flow and IFRS
operating profit, and Prudential Corporation Asia operating free surplus generated and IFRS operating profit which were between plan
and maximum and Group NBP EEV profit and Prudential Corporation Asia NBP EEV profit which were between threshold and plan.
www.prudential.co.uk
Annual Report 2017 Prudential plc 137
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information The Group Remuneration Committee considered a report from the interim Group Chief Risk Officer which had been approved by the
Group Risk Committee. This report confirmed that the 2017 results were achieved within the Group’s and business units’ risk framework
and appetite. The interim 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 interim Group Chief Risk
Officer’s recommendations were taken into account by the Committee when determining AIP outcomes for Executive Directors.
The level of performance required for threshold, plan and maximum payment against the Group’s 2017 Annual Incentive Plan financial
measures and the results achieved are set out below.
2017 AIP measure
Group IFRS operating profit
Operating free surplus generated
Group Cash flow
NBP EEV profit
Weighting
Threshold
(£m)
35%
30%
20%
15%
3,967
3,090
(284)
3,339
Plan
(£m)
4,464
3,398
16
3,697
Maximum
(£m)
Achievement
(£m)
4,785
3,628
136
3,836
4,699
3,640
159
3,616
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.
Personal performance
As set out in our Directors’ remuneration policy, a proportion of the annual bonus for each Executive Director is based on the
achievement of personal objectives including:
— The executive meeting their individual conduct and customer measures;
— The executive’s contribution to Group strategy as a member of the Board; and
— Specific goals related to the business or function for which they are responsible and progress on major projects.
At its meeting in March 2018, the Committee concluded that there had been a high level of performance against these 2017 objectives,
as summarised below:
Business
Overview of objectives
2017 highlights
Group Head Office
Prudential
Corporation Asia
and Africa
Objectives included
developing relationships with
stakeholders, enhancing
external publications,
continued development of
executive bench strength and
leveraging digital opportunities
Objectives included leveraging
digital opportunities,
developing distribution
channels, continued
development of executive
bench strength, developing
Eastspring and growing the
Group’s Africa footprint
— Highly commended in the 2017 Building Public Trust in Corporate
Reporting Awards in the category for tax reporting;
— Developed executive bench strength and succession and emerging talent
to leverage high potential talent across the Group as demonstrated by the
appointment of the former Group Chief Financial Officer as Chief
Executive, Prudential Corporation Asia; and
— Won the Insurance category of Managements Today’s Britain’s Most
Admired Companies’ award.
— Delivered various customer experience enhancements including askPRU,
an insurance chatbot with real time information, and roll‑out of myDNA,
our DNA‑based health and nutrition programme that enables customers
to take a more personalised approach to their wellbeing;
— Launched PRU Fintegrate, an initiative that enables us to collaborate with
fintech start‑ups;
— Eastspring was chosen by IFC, part of the World Bank, as its first Asian
partner in a programme that mobilises funds from institutional investors
into projects in emerging markets; and
— Entered Nigeria, our fifth African market, by acquiring a majority stake in
Zenith Life and formed exclusive bancassurance partnerships with Zenith
Bank plc.
138 Prudential plc Annual Report 2017
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Annual report on remuneration continued Business
Overview of objectives
2017 highlights
North American
Business Unit
Objectives included leveraging
digital opportunities,
developing our product range
and focusing on core business
areas
— Launched Jackson’s The Financial Freedom Studio which aims to make
retirement and investment choices easier to understand;
— Introduced ‘Retire on Purpose’, a new platform with a focus on thoughtful
life planning as a crucial first step towards creating a comprehensive
financial plan;
M&G Prudential
Objectives included the merger
and successful integration of
the Prudential UK and M&G
businesses, leveraging digital
opportunities, developing our
range of products and
investment offerings, and
continued development of
executive bench strength
— Launched Perspective Advisory II and Elite Access Advisory to serve
advisers and distributors with a preference for advisory products, and
launched Private Wealth Shield, entering the Private Wealth and Trust
Market; and
— Through our subsidiary National Planning Holdings, sold our US
independent broker‑dealer network in order to focus on our core business.
— Announced the merger of M&G and Prudential UK to offer customers and
distributors wider and better choice and achieve cost savings;
— Entered a 10‑year partnership with Tata Consultancy Services, a global
leader in IT, business process and digital services, to enhance service for
our UK savings and retirement customers;
— Introduced myM&G, a new online direct‑to‑consumer investing platform,
with lower fund charges; and
— Launched our first open‑ended infrastructure fund of global listed
infrastructure companies, the M&G ESG Global High Yield Fund and six
further M&G funds on the new SICAV platform.
2017 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 Director’s
personal performance, the Committee determined the following 2017 AIP payments:
Executive Director
Role
Mark FitzPatrick2
John Foley
Penny James3
Nic Nicandrou4
Anne Richards
Barry Stowe4
Mike Wells
Tony Wilkey5
Chief Financial Officer
Chief Executive, M&G Prudential
Group Chief Risk Officer
Chief Financial Officer/
Chief Executive, PCA
Chief Executive, M&G
Chairman & CEO, NABU
Group Chief Executive
Chief Executive, PCA
2017 salary1
£730,000
£765,000
£637,000
£726,000/
HK$10,500,000
£400,000
US$1,134,000
£1,103,000
HK$9,070,000
Maximum
2017 AIP
2017 AIP payment
(% of maximum)
2017 AIP payment
175%
180%
160%
175%/
180%
600%
160%
200%
180%
94%
93%
0%
90%
100%
94%
94%
89%
£1,197,000
£1,283,000
£nil
£1,414,000
£2,400,000
£5,354,000
£2,072,000
£787,000
Notes
1 At 31 December 2017 or on stepping down from the Board if earlier.
2 As Mark FitzPatrick did not receive a bonus from his previous employer for 2017, his bonus was not pro‑rated.
3 Penny James stepped down from the Board on 30 September 2017 and no bonus was paid.
4
5 Tony Wilkey stepped down from the Board on 17 July 2017. The AIP shown above was paid in respect of his service as an Executive Director.
In addition to the Annual Incentive Plan, Barry Stowe also participates in the Jackson bonus pool (see below).
2017 Jackson bonus pool
In 2017, the Jackson bonus pool was determined by Jackson National Life Insurance’s profitability, capital adequacy, remittances to
Group, in‑force experience, ECap solvency ratio and credit rating. Across all these measures Jackson delivered strong performance,
and more detail on that performance is set out on pages 24 to 27. As a result of this performance the Committee determined that
Barry Stowe’s share of the bonus pool was US$5,199,580.
www.prudential.co.uk
Annual Report 2017 Prudential plc 139
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Disclosure of targets and achievement for the 2016 Annual Incentive Plan
The level of performance required for threshold, plan and maximum payment against the Group’s 2016 Annual Incentive Plan financial
measures and the results achieved are set out below.
2016 AIP measure
Group cash flow
Operating free surplus generated
Group Solvency II surplus
Group ECap surplus
NBP EEV profit
In‑force EEV profit
Group IFRS operating profit
Weighting Threshold (£m)
Plan (£m) Maximum (£m)
Achievement
(£m)
10%
25%
7.5%
7.5%
5%
10%
35%
(357)
2,719
9,400
15,551
2,674
1,682
3,483
(224)
3,244
11,900
18,551
2,949
1,912
3,733
(195)
3,394
12,900
20,051
3,009
2,002
3,908
35
3,566
12,483
22,470
3,088
2,409
4,256
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.
Update on performance against targets for awards made in 2016 and 2017 under the Prudential Long Term
Incentive Plan
As at 31 December 2017, Prudential’s TSR performance during the period 1 January 2016 and 31 December 2017 was ranked between
median and upper quartile and during the period 1 January 2017 to 31 December 2017 was ranked in the upper quartile.
Prudential’s Group IFRS operating profit performance between 1 January 2016 to 31 December 2017 was 5 per cent above the stretch
target established for 2016 PLTIP awards. The Group’s IFRS achievement between 1 January 2017 and 31 December 2017 was 2 per cent
above the stretch target adopted for 2017 PLTIP award.
Between 1 January 2017 and 31 December 2017, the Group also made good progress towards meeting the measures which form part of
the sustainability scorecard used for 2017 to 2019 PLTIP awards:
— Capital measure As at 31 December 2017, the Group’s Solvency II operating capital generation was above the plan level.
— Conduct measure During 2017, there were no significant conduct/culture/governance issues that resulted in significant capital
add‑ons or material fines.
— Diversity measure As at 31 December 2017, 25 per cent of our Leadership Team was female. This represented good progress
towards the target that 27 per cent of the Leadership Team be female by the end of 2019.
Remuneration in respect of performance periods ending in 2017
Long-term incentive plans with performance periods ending on 31 December 2017
Our long‑term incentive plans have stretching performance conditions that 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, including an assessment of
whether results were achieved within the Group and business units’ risk framework and appetite. The Directors’ remuneration policy
contains further details of the design of Prudential’s long‑term incentive plans.
Prudential Long Term Incentive Plan (PLTIP)
In 2015, all Executive Directors were granted awards under the PLTIP. The awards were subject to challenging targets. The weightings of
these measures are detailed in the table below.
Executive Director
John Foley
Barry Stowe
Mike Wells
Tony Wilkey
All other Executive Directors
Weighting of measures
Group TSR1
IFRS operating profit (Group or business unit)2
50%
50%
50%
50%
50%
50% (business unit target)
50% (business unit target)
50% (business unit and Group target)
50% (business unit target)
50% (Group target)
Notes
1 Group TSR is measured on a ranked basis over three years relative to peers.
2
IFRS operating profit is measured on a cumulative basis over three years.
3 Mike Wells, Barry Stowe and Tony Wilkey received additional awards following their change in role in 2015 and these awards had performance measures reflective of their new roles.
140 Prudential plc Annual Report 2017
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Annual report on remuneration continued 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. TSR is measured on a local currency basis since this has the benefit of simplicity and directness of
comparison. The peer group for the 2015 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
Following the merger of Standard Life and Aberdeen Asset Management during the year, the Remuneration Committee determined that
Standard Life would be retained in the peer group for the pre‑merger period and the combined entity would be included in the peer
group from the date of the merger for all outstanding PLTIP awards.
Prudential’s TSR performance during the performance period (1 January 2015 to 31 December 2017) was between the median and
upper quartile of the peer group (ranked 6th). The portion of the awards related to TSR that therefore vested was 91.67 per cent.
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 2015 to 2017 compared to the Group targets set in 2015:
Group
IFRS operating profit
2015-17 cumulative targets
Threshold
Plan
Maximum
2015-17
cumulative
achievement
£9,872m
£10,969m
£12,066m
£12,962m
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 the 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 the stretch target, and therefore vested at
87 per cent.
Details of 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.
Prudential Corporation Asia Long Term Incentive Plan (PCA LTIP)
Tony Wilkey holds PCA LTIP awards granted in 2014 and 2015. These PCA LTIP awards were granted before Tony was appointed to the
Board. One of these awards, granted in 2014, had performance conditions and one of these awards, granted in 2015, had no
performance conditions. Details of the performance conditions attached to the 2014 award and performance achieved are set out below:
Performance measure
Prudential Corporation Asia IFRS operating profit
Prudential Corporation Asia operating free surplus generated
Performance
target (to be
achieved by
31 December
2017)
Performance
achieved by
31 December
2017
Weighting
50%
50%
£1,826m
£900m
£1,855m
£1,029m
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Annual Report 2017 Prudential plc 141
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information LTIP vesting
The Committee considered a report from the interim Group Chief Risk Officer which had been approved by the Group Risk Committee.
This report confirmed that the financial results were achieved within the Group’s and business units’ risk framework and appetite. On the
basis of this report, and the performance of the Group and its business units described above, the Committee determined the vesting of
each Executive Director’s LTIP awards as set out below.
Executive Director
John Foley
Nic Nicandrou
Barry Stowe
Mike Wells
Tony Wilkey
Maximum value
of award at
full vesting1
Percentage of the
LTIP award vesting
Number of
shares/ADRs vesting2
Value of
shares vesting1
£2,481,758
£2,104,050
£3,405,243
£4,967,070
£3,058,597
95.8%
95.8%
95.8% and 89.3%
95.8%
100% and 89.3%
128,376
108,838
81,591
124,861
159,373
£2,377,524
£2,015,680
£3,109,433
£4,758,453
£2,951,588
Notes
1 The share price used to calculate the value of the LTIP awards with performance periods which ended on 31 December 2017 and vest in 2018 was the average share price/ADR price
for the three months up to 31 December 2017, being £18.52/$49.12.
2 The number of shares vesting includes accrued dividend shares.
3 Mike Wells, Barry Stowe and Tony Wilkey received additional awards following their change of role in 2015, and these awards had performance measures reflective of their new roles.
Pension entitlements
Pension provisions in 2017 were:
Executive Director
2017 pension arrangement
Life assurance provision
Barry Stowe
Tony Wilkey/Nic Nicandrou
UK‑based executives
Pension supplement of 25 per cent of
salary, part of which is paid as a
contribution to an approved US retirement
plan.
Pension supplement in lieu of pension of
25 per cent of salary and a HK$18,000
payment to the Hong Kong Mandatory
Provident Fund.
Pension contribution to defined
contribution plan and/or pension
supplement in lieu of pension of
25 per cent of salary.
Two times salary
Eight times salary
Up to four times salary plus a dependants’
pension
John Foley previously participated in a non‑contributory defined benefit scheme that was open at the time he joined the Company. The
scheme provided an accrual of 1/60ths of final pensionable earnings for each year of pensionable service. The normal retirement date is
60 years of age and during 2017 John elected to commence payment of his pension. John took a tax free cash sum of £103,551.06 and
from March 2017 received pension payments equivalent to £15,533 per annum, which increased to £15,636 per annum from 1 April
2017, in line with the Consumer Prices Index. The pension will continue to be subject to statutory increases in line with the Consumer
Prices Index.
142 Prudential plc Annual Report 2017
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Annual report on remuneration continued 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 vs. FTSE 100 and peer group average – total return per cent over nine years to December 2017
£800
£700
£600
£500
£400
£300
£200
£100
£713
£292
£246
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Prudential
FTSE 100
Peer group average
Note
The peer group average represents the average TSR performance of the peer group used for 2017 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
2016
2017
Group Chief Executive
Salary, pension and benefits
Annual bonus payment
(As % of maximum)
LTIP vesting
(As % of maximum)
Other payments
Group Chief Executive
‘single figure’ of total
remuneration
M Tucker1 T Thiam T Thiam T Thiam T Thiam T Thiam T Thiam T Thiam2 M Wells M Wells M Wells
1,872
2,072
(94%)
4,758
(95.8%)
–
613
704
(77.3%)
3,702
(100%)
–
2,244
2,151
(99.5%)
2,975
(70.8%)
–
1,992
1,244
(99.7%)
4,290
(100%)
–
1,411
2,056
(99.8%)
5,235
(100%)
–
1,458
2,122
(100%)
9,838
(100%)
–
1,373
2,000
(100%)
6,160
(100%)
–
1,189
1,570
(97%)
2,534
(100%)
–
1,241
1,570
(97%)
2,528
(100%)
–
1,013
841
(92%)
1,575
(100%)
308
286
354
(90%)
–
–
–
3,737
640
5,293
5,339
9,533
8,702
13,418
5,019
7,526
7,370
8,702
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.
www.prudential.co.uk
Annual Report 2017 Prudential plc 143
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Percentage change in remuneration
The table below sets out how the change in remuneration for the Group Chief Executive between 2016 and 2017 compared to a wider
employee comparator group:
Group Chief Executive
All UK employees
Salary
Benefits
2%
3%
(44.8)%
3.3%
Bonus
(3.7)%
6.3%
The employee comparator group used for the purpose of this analysis is all UK employees. This includes employees in the UK insurance
operations business, M&G and Group Head Office, and reflects the average change in pay for employees employed in both 2016 and
2017. 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 where the Group Chief Executive is employed.
Relative importance of spend on pay
The table below sets out the amounts payable in respect of 2016 and 2017 on all employee pay and dividends:
All employee pay (£m)1
Dividends (£m)
Note
1 All employee pay as taken from note B2.1 to the financial statements.
2016
1,885
1,122
2017
1,985
1,216
Percentage
change
5%
8.4%
Long-term incentives awarded in 2017
2017 share-based long-term incentive awards
As detailed in the Directors’ remuneration policy, approved by shareholders at the 2017 AGM, all long‑term incentive awards made to
Executive Directors in 2017 were granted under the PLTIP. The vesting of these awards will depend on:
— Relative TSR (25 per cent of award);
— Group or business unit IFRS operating profit (50 per cent of award); and
— Balanced scorecard of strategic measures (25 per cent of award).
As part of the continuing implementation of Solvency II, the weightings of the Group Chief Risk Officer’s LTIP performance targets
(with effect from 2017) were different to the other Executive Directors and were:
— Relative TSR (50 per cent of award);
— Group IFRS operating profit (20 per cent of award); and
— Balanced scorecard of strategic measures (30 per cent of award).
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. Following a comprehensive review of the peer group, supported by the Remuneration
Committee’s independent adviser and the Group’s Investor Relations team, three companies (Aflac, Munich Re and Swiss Re) were
removed for the 2017 awards because their products and geographic footprints are insufficiently similar to those of the Group.
TSR is measured on a local currency basis since this has the benefit of simplicity and directness of comparison.
The peer group for the 2017 awards is:
Aegon
Aviva
Manulife
Standard Life Aberdeen
AIA
AXA
MetLife
Sun Life Financial
AIG
Generali
Old Mutual
Zurich Insurance Group
Allianz
Legal & General
Prudential Financial
144 Prudential plc Annual Report 2017
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Annual report on remuneration continued Under the IFRS measure, 25 per cent of the award vests for meeting the threshold IFRS operating profit, set at the start of the
performance period increasing to full vesting for performance at or above the stretch level.
Under the balanced scorecard, performance is assessed for each of the four measures, at the end of the three‑year performance period.
Each of the measures has equal weighting and the 2017 measures are set out below.
Capital measure:
Cumulative three‑year ECap Group operating capital generation relative to plan, less cost of capital (based on the
capital position at the start of the performance period).
Vesting basis:
100 per cent vesting for achieving plan, otherwise 0 per cent vesting. The plan figure for this metric will be
published in the Annual Report for the final year of the performance period.
Capital measure:
Cumulative three‑year Solvency II Group operating capital generation (as captured in published disclosures)
relative to plan.
Vesting basis:
100 per cent vesting for achieving plan, otherwise 0 per cent vesting. The plan figure for this metric will be
published in the Annual Report for the final year of the performance period.
Conduct measure: Through appropriate management action, ensure there are no significant conduct/culture/governance issues
that result in significant capital add‑ons or material fines.
Vesting basis:
100 per cent for achieving the Group’s expectations, otherwise 0 per cent vesting.
Diversity measure: Percentage of the Leadership Team that is female at the end of 2019. The target for this metric will be based on
progress towards the goal that the Company set when it signed the Women in Finance Charter, specifically that
30 per cent of our Leadership Team will be female by the end of 2021. For this portion of PLTIP awards made in
2017 to vest, at least 27 per cent of our Leadership Team must be female by the end of 2019.
Vesting basis:
100 per cent vesting for achieving the target, otherwise 0 per cent vesting.
The table below shows the awards made to Executive Directors in 2017 under share‑based long‑term incentive plans and the
performance conditions attached to these awards:
Executive Director Role
Number
of shares
or ADRs
subject
to award*
Percentage
of awards
released
for
achieving
threshold
targets‡
Face value
of award†
Weighting of performance conditions
IFRS operating profit
End of
performance
period
Group
TSR
Balanced
scorecard
Group Asia
US
UK M&G
Mark FitzPatrick Chief Financial
101,360 £1,824,987
Officer
John Foley
Chief Executive,
114,177 £1,912,465
Penny James
Group Chief Risk
95,073 £1,592,473
M&G Prudential
Nic Nicandrou Chief Financial
108,357 £1,814,980
Officer
Officer/ Chief
Executive, PCA
Anne Richards Chief Executive,
107,461 £1,799,972
Barry Stowe
Chairman & CEO,
123,845 $5,216,351
M&G
Mike Wells
Tony Wilkey
NABU
Group Chief
Executive
Chief Executive,
PCA
263,401 £4,411,967
139,340 £2,333,945
25% 31 December
2019
25% 31 December
2019
25% 31 December
2019
25% 31 December
2019
25% 31 December
2019
25% 31 December
2019
25% 31 December
2019
25% 31 December
2019
25%
25%
50%
25%
25%
25%
25%
25%
25% 50%
25%
30% 20%
25% 50%
50%
25%
25%
50%
50%
25% 50%
25%
50%
* Awards over shares were awarded to all Executive Directors other than Barry Stowe 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, being £16.75 and an ADR price of $42.12 for all
Executive Directors other than Mark FitzPatrick and £18.005 for Mark FitzPatrick.
‡ The 2017 balanced scorecard is assessed on a binary basis. The percentage of awards released for achieving maximum targets is 100 per cent.
www.prudential.co.uk
Annual Report 2017 Prudential plc 145
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Buy-out award
As reported in the 2016 Annual report on remuneration, in order to facilitate Anne Richards’s appointment as Chief Executive, M&G,
the Company agreed to replace the deferred bonus awards she forfeited on leaving Aberdeen Asset Management. The terms of the
replacement award were designed to replicate those of the forfeited awards and are therefore not subject to performance conditions and
will accrue dividend equivalents. These awards entitle Anne to receive a cash amount equal to the market value of the specified notional
number of Prudential shares on the date of exercise, less an award price of 5p per share. The outstanding awards and the exercise periods
are detailed below.
Exercise period
1 December 2018 to 1 January 2019
1 December 2019 to 1 January 2020
1 December 2020 to 1 January 2021
Number of notional shares
25,078
25,078
13,426
In December 2017, Anne exercised the second tranche of this replacement award. The gross value of the award exercised (which
included dividend equivalents) was £747,671 and Anne used the net of tax value of £395,174 to buy 21,408 Prudential shares. Anne has
committed to use the net of tax value of all her outstanding awards to buy Prudential shares.
This buy‑out award was made under rule 9.4.2 of the UKLA Listing Rules as the award could not be effected under any of the Company’s
existing incentive plans. Anne is the sole participant in this arrangement and no further awards will be made to Anne under the
arrangement.
146 Prudential plc Annual Report 2017
www.prudential.co.uk
Annual report on remuneration continued Chairman and Non-executive Director remuneration in 2017
Chairman’s fees
The Chairman’s fee was reviewed by the Committee during 2017 and increased by 2 per cent to £734,000 with effect from 1 July 2017
in order to reflect inflation.
Non-executive Directors’ fees
The Non‑executive Directors’ fees were reviewed by the Board during 2017 and the basic fee was increased by 2 per cent to £97,000.
None of the fees for additional duties were increased:
Annual fees
Basic fee
Additional fees:
Audit Committee Chair
Audit Committee member
Remuneration Committee Chair
Remuneration Committee member
Risk Committee Chair
Risk Committee member
Nomination Committee member
Senior Independent Director
From
1 July 2016
(£)
From
1 July 2017
(£)
95,000
97,000
75,000
27,500
60,000
27,500
75,000
27,500
10,000
50,000
75,000
27,500
60,000
27,500
75,000
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 the Chairman and Non‑executive Directors are:
£000s
Chairman
Paul Manduca
Non-executive Directors
Howard Davies
Ann Godbehere
Alistair Johnston1
David Law
Kai Nargolwala2
Anthony Nightingale
Philip Remnant3
Alice Schroeder
Lord Turner
Thomas Watjen4
Total
2017 fees
2016 fees
2017 taxable
benefits*
2016 taxable
benefits*
Total 2017
remuneration:
the ‘single
figure’†
Total 2016
remuneration:
the ‘single
figure’†
727
209
79
–
176
151
166
211
124
140
59
710
202
205
47
122
150
165
210
122
122
–
122
121
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
849
209
79
–
176
151
166
211
124
140
59
831
202
205
47
122
150
165
210
122
122
–
2,042
2,055
122
121
2,164
2,176
* 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 Alistair Johnston stepped down from the Board on 19 May 2016.
2 Kai Nargolwala also received an annual fee of £250,000 (payable in HK$) in respect of his non‑executive chairmanship of Prudential Corporation Asia Limited with effect from
1 February 2016.
3 Philip Remnant also received an annual fee of £250,000 in respect of his non‑executive chairmanship of M&G Group Limited with effect from 1 April 2016.
4 Thomas Watjen joined the Board on 11 July 2017.
www.prudential.co.uk
Annual Report 2017 Prudential plc 147
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information 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 (SIP) and deferred annual incentive awards, detailed in the ‘Supplementary information’
section. It is only these shares that count towards the share ownership guidelines.
1 January 2017
(or on date of
appointment)
During 2017
31 December 2017
(or on date
of retirement)
Share ownership
guidelines
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
guidelines‡
(% of
salary/fee)
Beneficial
interest as a
percentage of
basic salary/
basic fees§
Chairman
Paul Manduca
Executive Directors
Mark FitzPatrick1
John Foley
Penny James2
Nic Nicandrou
Anne Richards
Barry Stowe3
Mike Wells4
Tony Wilkey5
Non-executive Directors
Howard Davies
Ann Godbehere6
David Law
Kaikhushru Nargolwala
Anthony Nightingale
Philip Remnant
Alice Schroeder7
Lord Turner
Tom Watjen8
42,500
–
–
42,500
–
42,500
–
249,965
41,572
304,138
31,439
265,878
544,534
120,528
9,049
15,914
6,904
70,000
30,000
6,916
8,500
5,500
–
81
154,770
47,365
134,338
54,922
227,178
243,195
101,428
229
–
2,162
–
20,000
–
–
1,052
5,500
–
154,619
13,376
146,167
–
210,710
125,106
147,537
–
–
–
–
–
–
–
–
–
81
250,116
75,561
292,309
86,361
282,346
662,623
74,419
9,278
15,914
9,066
70,000
50,000
6,916
8,500
6,552
5,500
101,360
381,325
236,049
349,310
153,367
686,398
835,625
454,170
101,441
631,441
311,610
641,619
239,728
968,744
1,498,248
528,589
–
–
–
–
–
–
–
–
–
9,278
15,914
9,066
70,000
50,000
6,916
8,500
6,552
5,500
100%
250%
250%
N/A
250%
250%
250%
400%
N/A
100%
N/A
100%
100%
100%
100%
100%
100%
100%
108%
0%
596%
N/A
510%
394%
585%
1095%
N/A
178%
N/A
174%
1343%
959%
133%
163%
126%
106%
* There were no changes of Directors’ interests in ordinary shares between 31 December 2017 and 13 March 2018, with the exception of the UK‑based Executive Directors due to their
participation in the monthly SIP. Mark FitzPatrick acquired a further 31 shares in the SIP, John Foley acquired a further 30 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 and increased again in 2017. 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. Where applicable, all Directors are in compliance with the share ownership guideline.
§ Based on the average closing price for the six months to 31 December 2017 (£18.23).
The Company and its Directors, Chief Executives and shareholders have been granted a partial exemption from the disclosure requirements under Part XV of the Securities and Futures
Ordinance (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 Stock Exchange of Hong Kong Limited any disclosure of interests notified to it in the United Kingdom.
Notes
1 Mark FitzPatrick was appointed to the Board on 17 July 2017. Total interest in shares is shown from this date.
2 Penny James stepped down from the Board on 30 September 2017. Total interest in shares is shown as at this date.
3 For the 1 January 2017 figure, Barry Stowe’s beneficial interest in shares is made up of 132,939 ADRs (representing 265,878 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 2017 figure the beneficial interest in shares is made up of 141,173 ADRs
(representing 282,346 ordinary shares).
4 For the 1 January 2017 figure, Mike Wells’ beneficial interest in shares is made up of 218,576 ADRs (representing 437,152 ordinary shares) and 107,382 ordinary shares. For the
31 December 2017 figure his beneficial interest in shares is made up of 249,811 ADRs (representing 499,622 ordinary shares) and 163,001 ordinary shares.
5 Tony Wilkey stepped down from the Board on 17 July 2017. Total interest in shares is shown as at this date.
6 Ann Godbehere stepped down from the Board on 18 May 2017. Total interest in shares is shown as at this date.
7 For the 1 January 2017 and 31 December 2017 figure, Alice Schroeder’s beneficial interest in shares is made up of 4,250 ADRs (representing 8,500 ordinary shares).
8 Tom Watjen was appointed to the Board on 11 July 2017. Total interest in shares is shown from this date. For the 31 December 2017 figure, Tom Watjen’s beneficial interest in shares is
made up of 2,750 ADRs (representing 5,500 ordinary shares).
9 James Turner, who joined the Board as Group Chief Risk Officer on 1 March 2018, has a total beneficial interest in 9,701 shares, awards over 82,976 shares subject to performance
conditions and an option over 1,237 shares in the UK Prudential Savings‑Related Share Option Scheme. There was no change in his share interests between 1 and 13 March 2018.
148 Prudential plc Annual Report 2017
www.prudential.co.uk
Annual report on remuneration continued
The bar chart below illustrates the Executive Directors’ shareholding as a percentage of base salary versus the share ownership guideline.
%
1,200
1,000
800
600
400
200
0
1,095
596
585
394
400
510
250
250
250
250
250
John Foley
Mark FitzPatrick
Anne Richards
Barry Stowe
Mike Wells
Nic Nicandrou
0
Share ownership guideline as % of salary
Beneficial interest as % of salary
Outstanding share options
The following table sets out the share options held by the Executive Directors in the UK Savings‑Related Share Option Scheme (SAYE)
as at the end of the period. Anne Richards holds options under her buy‑out arrangement, details of which were set out on page 146.
Date
of grant
Exercise
price
(pence)
Market
price at
31 Dec
2017
(pence)
Exercise period
Number of options
Beginning
Beginning
of period Granted Exercised Cancelled Forfeited
End
Lapsed
End of
period
Mark FitzPatrick
John Foley
John Foley
John Foley
Penny James
Nic Nicandrou
Nic Nicandrou
Anne Richards
Mike Wells
21 Sep 17
23 Sep 14
21 Sep 16
21 Sep 17
22 Sep 15
23 Sep 14
21 Sep 16
21 Sep 16
22 Sep 15
1,455 1,905.5 01 Dec 22 31 May 23
1,155 1,905.5 01 Dec 17 31 May 18
1,104 1,905.5 01 Dec 19 31 May 20
1,455 1,905.5 01 Dec 20 31 May 21
1,111 1,905.5 01 Dec 18 31 May 19
1,155 1,905.5 01 Dec 19 31 May 20
1,104 1,905.5 01 Dec 21 31 May 22
1,104 1,905.5 01 Dec 19 31 May 20
1,111 1,905.5 01 Dec 18 31 May 19
–
779
815
–
1,620
1,311
1,358
1,630
1,620
2,061
–
–
618
–
–
–
–
–
–
779
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,061
–
815
618
1,620
1,311
1,358
1,630
1,620
Notes
1 A gain of £5,139.84 was made by Directors in 2017 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 2017 were £19.15 and £15.32 respectively.
4 All exercise prices are shown to the nearest pence.
5 Penny James participated in the plan during her time as an Executive Director. The column above marked ‘End of period’ reflects Penny James’s position as at 30 September 2017, the
date at which she stepped down from the Board.
6 Following Nic Nicandrou’s appointment as Chief Executive of Prudential Corporation Asia on 17 July 2017, he was able to continue saving under his SAYE option contracts at that date
but is no longer eligible to participate in future SAYE grants.
www.prudential.co.uk
Annual Report 2017 Prudential plc 149
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Directors’ terms of employment and external appointments
Details of the service contracts of each Executive Director are outlined in the table below. The Directors’ remuneration policy contains
further details of the terms included in Executive Director service contracts.
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 2017
Fee received in the
period the Executive
Director was a
Group Director
17 May 2017
8 December 2010
27 April 2009
4 July 2016
18 October 2006
21 May 2015
12 months
12 months
12 months
12 months
12 months
12 months
12 months
12 months
12 months
12 months
12 months
12 months
–
–
–
–
–
–
–
–
–
–
–
–
Executive Directors
Mark FitzPatrick
John Foley
Nic Nicandrou
Anne Richards
Barry Stowe
Mike Wells
Directors served on the boards of educational, charitable and cultural organisations without receiving a fee for these services.
Details of changes to the Board of Directors during the year are set out in the Corporate governance report.
Letters of appointment of the Chairman and Non-executive Directors
Details of Non‑executive Directors’ individual appointments are outlined below. The Directors’ remuneration policy contains further
details on their letters of appointment.
Chairman/Non-executive Director
Chairman
Paul Manduca1
Non-executive Directors
Philip Remnant
Howard Davies
Ann Godbehere2
David Law
Kai Nargolwala
Anthony Nightingale
Alice Schroeder
Lord Turner
Thomas Watjen3
Notes
1 Paul Manduca was appointed as Chairman on 2 July 2012.
2 Ann Godbehere retired from the Board at the 2017 AGM.
3 Thomas Watjen joined the Board on 11 July 2017.
Appointment
by the Board
Initial election
by shareholders
at the AGM
Notice period
Expiry of the
current term of
appointment
15 October 2010
AGM 2011
12 months
AGM 2018
1 January 2013
15 October 2010
2 August 2007
15 September 2015
1 January 2012
1 June 2013
10 June 2013
15 September 2015
11 July 2017
AGM 2013
AGM 2011
AGM 2008
AGM 2016
AGM 2012
AGM 2014
AGM 2014
AGM 2016
AGM 2018
6 months
6 months
6 months
6 months
6 months
6 months
6 months
6 months
6 months
AGM 2019
AGM 2018
N/A
AGM 2019
AGM 2018
AGM 2020
AGM 2020
AGM 2019
AGM 2018
150 Prudential plc Annual Report 2017
www.prudential.co.uk
Annual report on remuneration continued 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 market place 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 paying for
travel, 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.
Mark FitzPatrick joined the Board during the year. As Mark did not need to relocate to enable him to assume his role and he had no
awards from his previous employer to replace, there were no specific arrangements required for his recruitment.
Nic Nicandrou changed Board role during the year. As this change resulted in Nic relocating to enable him to assume his new role,
relocation support in line with the approved Directors’ remuneration policy was provided. Details of this support are included in the
notes to the 2017 ‘single figure’ table.
Payments to past Directors and payments for loss of office
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 made to the Group.
Penny James
Penny James stepped down from the Board, and her employment ended, on 30 September 2017. 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 2017 ‘single figure’ table.
Penny did not receive a loss of office payment.
Penny’s deferred bonus awards will be released in accordance with the plan rules and remain subject to malus and clawback provisions.
The Committee determined that Penny should not receive a bonus in respect of the 2017 performance year. The Committee also
exercised its discretion in accordance with the approved Directors’ remuneration policy and determined that Penny should forfeit her
unvested PLTIP awards granted in 2015, 2016 and 2017.
Tony Wilkey
Tony Wilkey stepped down from the Board on 17 July 2017. 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 2017 ‘single figure’ table.
Tony’s employment with the Group will end on 17 July 2018 and between 18 July 2017 and 31 December 2017 he received £1,345,308 in
respect of salary, benefits and pension in accordance with his contract of employment. Tony did not receive a loss of office payment.
Tony’s deferred bonus awards will be released in accordance with the plan rules and remain subject to malus and clawback provisions.
Recognising his contribution to the Company’s success, the Committee determined that Tony should be awarded a bonus in respect of
the 2017 performance year which was calculated in the usual way and pro‑rated for service to 17 July 2017. 60 per cent of this bonus will
be paid in 2018 and 40 per cent will be deferred 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 Tony
should be allowed to retain his unvested PCA LTIP and PLTIP awards granted in 2014, 2015, 2016 and 2017. These awards will vest in
accordance with the original timetable, subject to the original performance conditions, remain subject to malus and clawback provisions,
and will be pro‑rated for service.
As referred to above, Tony holds PCA LTIP and PLTIP awards granted in 2014 and 2015. The two PCA LTIP awards were granted before
Tony was appointed to the Board: one of these awards, granted in 2014, had performance measures and one of these awards, granted in
2015, had no performance conditions.
www.prudential.co.uk
Annual Report 2017 Prudential plc 151
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information As set out in the section ‘Remuneration in respect of performance in 2017’ the performance conditions attached to Tony’s 2015 PLTIP
awards were partially met and 89.3 per cent of these awards will be released in 2018 and the performance conditions attached to Tony’s
2014 PCA Performance LTIP awards were met in full and 100 per cent of these awards will be released in 2018. The details of all Tony’s
LTIP releases are set out below.
Award
PCA LTIP
PCA LTIP with performance conditions
Prudential LTIP
Number of
shares vesting1
Value of
shares vesting2
42,183
68,806
48,384
£781,229
£1,274,287
£896,071
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 2017, being £18.52.
Michael McLintock
Michael McLintock’s employment with the Group ended on 31 July 2016. The 2016 Directors’ remuneration report provided details of
the remuneration arrangements that would apply to Michael after he left the Board. During the year, tax was paid by the Company in
2017 on certain non‑payroll benefits received by Michael in 2016 (and reported in the Annual report on remuneration for 2016), which
amounted to £7,496.
Michael holds a PLTIP award granted in 2015 and as set out in the section ‘Remuneration in respect of performance in 2017’ the
performance condition attached to Michael’s 2015 PLTIP awards was partially met and 91.67 per cent of these awards will be released in
2018. These awards were pro‑rated for service (16 of 36 months) and the details of the release are set out below.
Award
Prudential LTIP
Number of
shares vesting1
Value of
shares vesting2
15,557
£288,116
Notes
1 The number of shares vesting includes 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 2017, being £18.52.
Additionally, Michael holds phantom share awards granted under the 2015 M&G Executive Long‑Term Incentive. The share price of
those awards 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. These awards were pro‑rated for service (578 of 1,096 days) and M&G’s performance and
the resulting phantom share price are shown below:
Award
2015 M&G Executive LTIP
Three-year profit
growth of M&G
Three-year
investment
performance
2016 phantom
share price
Value of
awards vesting
12%
2nd quartile
£2.05
£1,277,875
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.
152 Prudential plc Annual Report 2017
www.prudential.co.uk
Annual report on remuneration continued Statement of voting at general meeting
At the 2017 Annual General Meeting, shareholders were asked to vote on the new Directors’ remuneration policy and the 2016
Directors’ remuneration report. Each of these resolutions 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
To approve the Directors’ remuneration policy
Votes
for
% of votes
cast
Votes
against
% of votes
cast
Total votes
cast
Votes
withheld
(2017 AGM)
1,773,691,171
90.71
181,582,497
9.29 1,955,273,668
45,820,585
To approve the Directors’ remuneration report
(2017 AGM)
1,754,440,188
88.86
219,921,823
11.14 1,974,362,011
26,736,043
Statement of implementation in 2018
Executive Directors
Executive Directors’ remuneration packages were reviewed in 2017 with changes effective from 1 January 2018. When the Committee
took these decisions, it considered the salary increases awarded to other employees in 2017 and the expected increases in 2018. The
external market reference points used to provide context to the Committee were identical to those used for 2017 salaries.
All Executive Directors received a salary increase of 2 per cent. The 2018 salary increase budgets for other employees across the Group’s
business units were between 2.5 per cent and 10 per cent. No changes have been made to executives’ maximum opportunities under
either the annual incentive or the long‑term incentive plans.
The Executive Directors’ bonus opportunity, performance measures and weightings will remain the same as in 2017. The Executive
Directors’ long‑term incentive awards will be made under the PLTIP and the opportunity, performance measures and weightings will
remain the same as 2017 other than:
— Following the merger of Standard Life and Aberdeen Asset Management, the combined entity of Standard Life Aberdeen will be
included in the relative TSR peer group; and
— Performance against the balanced scorecard measures in the scorecard used for the 2018 PLTIP awards will be assessed on a vesting
scale of threshold, target and maximum performance over a three‑year period rather than using the binary, meet/fail, approach used
for the 2017 PLTIP awards.
On 1 March 2018, the Company announced that James Turner had joined the Board as Group Chief Risk Officer. James’s basic salary will
be £625,000 per annum. He will have a maximum bonus opportunity of 160 per cent of base salary under the Annual Incentive Plan. In
accordance with the Solvency II remuneration requirements, James’s bonus will be assessed solely on functional and personal objectives.
Forty per cent of any bonus will be deferred into the Company’s shares for three years. Long‑term incentive awards, granted under the
Prudential LTIP, will have a face value on grant of 250 per cent of base salary. In accordance with the Solvency II remuneration
requirements, the vesting of James’s PLTIP awards will depend on TSR (50 per cent of award), Group IFRS operating profit (20 per cent of
award) and the sustainability scorecard (30 per cent of award). James’s service contract contains a notice provision under which either
party may terminate upon 12 months’ notice.
Chairman and Non-executive Directors
Fees for the Chairman and Non‑executive Directors were reviewed in 2017 with changes effective from 1 July 2017, as set out
on page 147. The next review will be effective 1 July 2018.
Signed on behalf of the Board of Directors
Anthony Nightingale, CMG SBS JP
Chair of the Remuneration Committee
14 March 2018
Paul Manduca
Chairman
14 March 2018
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Annual Report 2017 Prudential plc 153
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
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 2017
Conditional
awards in
2017
Market
price at
date of
award
Mark FitzPatrick PLTIP
2017
John Foley
Nic Nicandrou
Anne Richards
Barry Stowe1
Mike Wells2
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
2014
2014
2015
2016
2017
2014
2015
2016
2017
2016
2017
2014
2015
2015
2016
2017
2014
2015
2015
2016
2017
(number
of shares)
(number
of shares)
101,360
–
101,360
125,776
29,556
122,808
144,340
114,177
422,480
114,177
132,375
104,117
136,836
108,357
(pence)
1,828
1,317
1,342
1,672
1,279
1,672
1,317
1,672
1,279
1,672
Dividend
equivalents on
vested shares3
(number
of shares
released)
Rights
exercised
in 2017
Rights
lapsed
in 2017
Conditional
share awards
outstanding at
31 Dec 2017
Date of
end of
performance
period
(number of
shares)
101,360 31 Dec 19
–
–
–
101,360
7,972
1,872
89,093 36,683
20,935 8,621
– 31 Dec 16
– 31 Dec 16
122,808 31 Dec 17
144,340 31 Dec 18
114,177 31 Dec 19
9,844 110,028 45,304
381,325
8,390
93,768 38,607
– 31 Dec 16
104,117 31 Dec 17
136,836 31 Dec 18
108,357 31 Dec 19
373,328
108,357
8,390
93,768 38,607
349,310
45,906
107,461
1,358.5
1,672
45,906 31 Dec 18
107,461 31 Dec 19
45,906
107,461
–
–
–
153,367
114,824
113,940
50,668
274,100
247,690
553,532
247,690
238,954
209,222
30,132
332,870
263,401
1,317
1,672
1,611.5
1,279
1,672
1,317
1,672
1,611.5
1,279
1,672
7,034
78,462 36,362
– 31 Dec 16
113,940 31 Dec 17
50,668 31 Dec 17
274,100 31 Dec 18
247,690 31 Dec 19
7,034
78,462 36,362
686,398
15,178 169,262 69,692
– 31 Dec 16
209,222 31 Dec 17
30,132 31 Dec 17
332,870 31 Dec 18
263,401 31 Dec 19
811,178
263,401
15,178 169,262 69,692
835,625
Notes
1 The awards for Barry Stowe were made in ADRs (1 ADR = 2 ordinary shares). The figures in the table are represented in terms of ordinary shares.
2 The awards in 2014 and 2015 for Mike Wells were made in ADRs (1 ADR = 2 ordinary shares). The awards in 2016 and 2017 were made in ordinary shares. The figures in the table are
represented in terms of ordinary shares.
3 A dividend equivalent was accumulated on these awards.
Business-specific cash-based long-term incentive plans
Anne Richards
M&G Executive LTIP
Face value of
conditional
share awards
outstanding at
1 January 2017
£000
Payments
made in 2017
£000
Face value of
conditional
share awards
outstanding at
31 December
2017
£000
Date of end of
performance
period
Year of award
2016
1,200
–
1,200 31 Dec 2018
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.
154 Prudential plc Annual Report 2017
www.prudential.co.uk
Other share awards
The table below sets out Executive Directors’ deferred bonus share awards.
Year of
grant
Conditional
share awards
outstanding
at 1 Jan 2017
(number
of shares)
Conditionally
awarded
in 2017
(number
of shares)
Dividends
accumulated
in 2017
(number
of shares)
(note 3)
Conditional
share awards
outstanding
at 31 Dec
2017
(number
of shares)
Shares
released
in 2017
(number
of shares)
Date of end
of restricted
period
Date of
release
Market
price at
date of
award
Market
price at
date of
vesting or
release
(pence)
(pence)
John Foley
Deferred 2013 annual
incentive award
Deferred 2014 annual
incentive award
Deferred 2015 annual
incentive award
Deferred 2016 annual
incentive award
Nic Nicandrou
Deferred 2013 annual
incentive award
Deferred 2014 annual
incentive award
Deferred 2015 annual
incentive award
Deferred 2016 annual
incentive award
2014
2015
2016
2017
2014
2015
2016
2017
Anne Richards
Deferred 2016 annual
incentive award
2017
33,968
43,651
65,713
143,332
38,024
29,887
39,107
107,018
30,352
30,352
29,504
29,504
32,668
32,668
Barry Stowe (note 1)
Deferred 2013 annual
incentive award
Deferred 2014 annual
incentive award
Deferred 2015 annual
incentive award
Deferred 2016 annual
incentive award
Mike Wells (note 2)
Deferred 2013 annual
incentive award
Deferred 2014 annual
incentive award
Deferred 2015 annual
incentive award
Deferred 2016 annual
incentive award
2014
2015
32,950
29,046
2016
111,618
2017
173,614
134,534
134,534
2014
108,578
2015
120,686
2016
107,112
2017
336,376
51,371
51,371
33,968
– 31 Dec 16 03 Apr 17 1,317
1,653
1,132
1,705
787
44,783 31 Dec 17
67,418 31 Dec 18
31,139 31 Dec 19
1,672
1,279
1,672
3,624
33,968
143,340
38,024
– 31 Dec 16 03 Apr 17 1,317
1,653
775
1,014
765
30,662 31 Dec 17
40,121 31 Dec 18
30,269 31 Dec 19
1,672
1,279
1,672
2,554
38,024
101,052
846
846
754
2,900
3,494
7,148
3,136
2,778
1,332
33,514 31 Dec 19
1,672
33,514
32,950
– 31 Dec 16 03 Apr 17 1,317
1,653
29,800 31 Dec 17
114,518 31 Dec 18
138,028 31 Dec 19
1,672
1,279
1,672
32,950
282,346
108,578
– 31 Dec 16 03 Apr 17 1,317
1,653
123,822 31 Dec 17
109,890 31 Dec 18
52,703 31 Dec 19
1,672
1,279
1,672
7,246 108,578
286,415
Notes
1 The awards for Barry Stowe were made in ADRs (1 ADR = 2 ordinary shares). The figures in the table are represented in terms of ordinary shares.
2 The awards for Mike Wells in 2014 and 2015 were made in ADRs (1 ADR = 2 ordinary shares). The awards made in 2016 and 2017 were made in ordinary shares. The figures in the table
are represented in terms of ordinary shares.
3 A dividend equivalent was accumulated on these awards.
www.prudential.co.uk
Annual Report 2017 Prudential plc 155
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Supplementary information continued
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.
Since 2014 participants have been able to 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 ‘Outstanding share options’ table.
Share Incentive Plan (SIP)
UK‑based Executive Directors are also eligible to participate in the Company’s Share Incentive Plan (SIP). Since April 2014, all UK‑based
employees have been 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.
Mark FitzPatrick
John Foley
Nic Nicandrou1
Mike Wells
Year of
initial grant
Share
Incentive Plan
awards held
in Trust at
1 Jan 2017
(Number
of shares)
Partnership
shares
accumulated
in 2017
(Number
of shares)
Matching
shares
accumulated
in 2017
(Number
of shares)
Dividend
shares
accumulated
in 2017
(Number
of shares)
Share
Incentive Plan
awards held
in Trust at
31 Dec 2017
(Number
of shares)
2017
2014
2010
2015
–
433
1,644
270
65
104
63
104
16
26
16
26
–
13
43
8
81
576
1,766
408
Note
1 Following Nic Nicandrou’s appointment as Chief Executive of Prudential Corporation Asia on 17 July 2017, he is no longer eligible to participate in the SIP. However, while his shares
remain in the SIP Trust he will receive any dividends payable on these shares.
156 Prudential plc Annual Report 2017
www.prudential.co.uk
Cash-settled long-term incentive awards
This information has been prepared in line with the reporting requirements of the Hong Kong Stock Exchange and sets out Executive
Directors’ outstanding share awards and share options. For details of the cash‑settled long‑term incentive awards held by some
Executive Directors, please see our Annual report on remuneration.
Dilution
Releases from the Prudential Long Term Incentive Plan and the Prudential Agency Long Term Incentive Plan 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 2017 was 1.09 per cent of
the total share capital at the time. Deferred bonus awards 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 2017, two were Executive Directors whose emoluments are disclosed in this
report. The aggregate of the emoluments of the other three individuals for 2017 were as follows:
Base salaries, allowances and benefits in kind
Pension contributions
Performance related pay
Total
Their emoluments were within the following bands:
£7,800,001‑£7,900,000
£8,100,001‑£8,200,000
£11,700,001‑£11,800,000
2017
£000
3,381
129
24,236
27,746
Number of five highest
paid employees 2017
1
1
1
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Annual Report 2017 Prudential plc 157
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
158 Prudential plc Annual Report 2017
www.prudential.co.uk
05
Financial
statements
Index to Group IFRS financial statements
Parent company financial statements
Notes on the parent company financial statements
Statement of Directors’ responsibilities
Independent auditor’s report to Prudential plc
Page
160
305
307
314
315
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Annual Report 2017 Prudential plc 159
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Index to Group IFRS financial statements
Primary statements
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated statement of changes in equity: 2017
2016
Consolidated statement of financial position
Consolidated statement of cash flows
Section
Notes to the Primary statements
A
A1
A2
A3
Background and critical accounting policies
Basis of preparation and exchange rates
New accounting pronouncements in 2017
Accounting policies
Critical accounting policies, estimates and
judgements
New accounting pronouncements not yet
effective
A3.1
A3.2
B1.1
B1.2
B1.3
B1.4
B1.5
B1.6
B2.1
B2.2
B2.3
B2.4
C2.1
C2.2
C2.3
B
B1
B2
B3
B4
B5
B6
C
C1
C2
C3
B1.6(a) Asia
B1.6(b) US
B1.6(c) UK and Europe
Earnings performance
Analysis of performance by segment
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
Other investment return
Additional analysis of performance by segment
components
Acquisition costs and other expenditure
Staff and employment costs
Share‑based payment
Key management remuneration
Fees payable to the auditor
Effect of changes and other accounting matters
on insurance assets and liabilities
Tax charge
Earnings per share
Dividends
Balance sheet notes
Analysis of Group statement of financial
position by segment
Analysis of segment statement of financial
position by business type
Asia
US
UK and Europe
Assets and liabilities – classification and
measurement
Group assets and liabilities
Debt securities
Loans portfolio
Financial instruments – additional information
C3.1
C3.2
C3.3
C3.4
C3.4(a) Financial risk
C3.4(b) Derivatives and hedging
C3.4(c) Derecognition, collateral and offsetting
Page
161
162
163
164
165
166
Page
Section
C4
Policyholder liabilities and unallocated
Movement and duration of liabilities
C4.1
C4.1(a) Group overview
C4.1(b) Asia insurance operations
C4.1(c) US insurance operations
C4.1(d) UK and Europe insurance operations
C4.2
C4.2(a) Asia
C4.2(b) US
C4.2(c) UK and Europe
Products and determining contract liabilities
C5
C6
C7
C8
C9
C10
C11
C12
C13
C14
D
D1
D2
D3
D4
D5
D6
E
E1
Intangible assets
Goodwill
C5(a)
C5(b) Deferred acquisition costs and other intangible
C6.1
C6.2
C6.3
C7.1
C7.2
C7.3
C7.4
C7.5
C8.1
C8.2
assets
Borrowings
Core structural borrowings of shareholder‑
financed operations
Other borrowings
Maturity analysis
Risk and sensitivity analysis
Group overview
Asia insurance operations
US insurance operations
UK and Europe insurance operations
Asset management and other operations
Tax assets and liabilities
Deferred tax
Current tax
Defined benefit pension schemes
Share capital, share premium and own shares
Provisions
Capital
C12(a) Group objectives, policies and
processes for managing capital
Local capital regulations
Transferability of available capital
Property, plant and equipment
Investment properties
C12(b)
C12(c)
Other notes
Disposal of businesses
Contingencies and related obligations
Post balance sheet events
Related party transactions
Commitments
Investments in subsidiary undertakings, joint
ventures and associates
Further accounting policies
Other significant accounting policies
167
167
168
176
179
180
182
186
188
188
189
191
191
192
194
194
195
196
201
202
203
206
207
208
209
217
223
225
227
228
Page
230
233
235
237
239
242
248
253
254
257
258
258
259
261
262
267
269
270
271
271
277
278
278
279
281
281
282
283
283
284
285
285
285
298
160 Prudential plc Annual Report 2017
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 benefit and claims
Movement in unallocated surplus of with‑profits funds
Benefits and claims and movement in unallocated surplus of with‑profits funds,
net of reinsurance
Acquisition costs and other expenditure
Finance costs: interest on core structural borrowings of shareholder‑financed operations
Disposal of Korea life business:
Cumulative exchange gain recycled from other comprehensive income
Remeasurement adjustments
Gain on disposal of other businesses
Total charges, net of reinsurance and gain (loss) on disposal of businesses
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
Non‑controlling interests
Profit for the year
Earnings per share (in pence)
Note
2017 £m
2016 £m
B1.4
B1.4
B1.4
B1.4
B1.4
B2
D1
D1
B1.4
D6
B1.1
B4
B4
44,005
(2,062)
41,943
42,189
2,430
86,562
(71,854)
2,193
(2,871)
(72,532)
(10,165)
(425)
61
5
162
38,981
(2,020)
36,961
32,511
2,370
71,842
(60,948)
2,412
(830)
(59,366)
(8,848)
(360)
–
(238)
–
(82,894)
(68,812)
302
3,970
(674)
3,296
(1,580)
674
(906)
2,390
2,389
1
2,390
182
3,212
(937)
2,275
(1,291)
937
(354)
1,921
1,921
–
1,921
2017
2016
93.1p
93.0p
75.0p
75.0p
Based on profit attributable to the equity holders of the Company:
B5
Basic
Diluted
* 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 is not representative of pre‑tax profits attributable to shareholders. Profit before all taxes 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.
www.prudential.co.uk
Annual Report 2017 Prudential plc 161
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Consolidated statement of comprehensive income
Year ended 31 December
Profit for the year
Note
2017 £m
2016 £m
2,390
1,921
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 gain of sold Korea 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 gains arising during the year
Net gains (losses) included in the income statement on disposal and impairment
Total
Related change in amortisation of deferred acquisition costs
Related tax
A1
C3.2(c)
C5 (b)
C8
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
(404)
(61)
(5)
(470)
591
26
617
(76)
(55)
486
16
104
(15)
89
1,148
–
13
1,161
241
(269)
(28)
76
(17)
31
1,192
(107)
14
(93)
Other comprehensive income for the year, net of related tax
105
1,099
Total comprehensive income for the year
Attributable to:
Equity holders of the Company
Non‑controlling interests
Total comprehensive income for the year
2,495
3,020
2,494
1
2,495
3,020
–
3,020
162 Prudential plc Annual Report 2017
www.prudential.co.uk
Consolidated statement of changes in equity
Year ended 31 December 2017 £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
–
2,389
–
–
2,389
1
2,390
(470)
–
(470)
–
(470)
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 related tax
Total other comprehensive income (loss)
Total comprehensive income for the year
Dividends
Reserve movements in respect of
share‑based payments
Change in non‑controlling interests*
Share capital and share premium
New share capital subscribed
B6
C10
Treasury shares
Movement in own shares in respect of
share‑based payment plans
Movement in Prudential plc shares
purchased by unit trusts consolidated
under IFRS
Net increase (decrease) in equity
At beginning of year
At end of year
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
89
89
2,478
(1,159)
89
21
–
–
(15)
(9)
–
–
(470)
(470)
–
–
–
–
486
486
–
486
486
–
–
–
–
–
89
105
2,494
(1,159)
89
–
21
(15)
(9)
–
–
–
1
–
–
5
–
–
–
6
1
7
486
89
105
2,495
(1,159)
89
5
21
(15)
(9)
1,427
14,667
16,094
–
129
129
21
1,927
1,384
10,942
1,948
12,326
(470)
1,310
840
486
358
844
1,421
14,666
16,087
* Arising from the acquisition of the majority stake in Zenith Life of Nigeria in 2017.
www.prudential.co.uk
Annual Report 2017 Prudential plc 163
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Consolidated statement of changes in equity continued
Year ended 31 December 2016 £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 related 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
B6
C10
Treasury shares
Movement in own shares in respect of
share‑based payment plans
Movement in Prudential plc shares
purchased by unit trusts consolidated
under IFRS
Net increase in equity
At beginning of year
At end of year
–
1,921
–
–
1,921
–
1,921
–
1,161
–
1,161
–
1,161
–
–
–
–
–
–
–
–
1
–
–
–
–
–
–
–
–
–
12
–
–
–
(93)
(93)
1,828
(1,267)
(51)
–
2
(6)
–
–
1,161
1,161
–
–
–
–
–
31
31
–
31
31
–
–
–
–
–
(93)
1,099
3,020
(1,267)
(51)
13
2
(6)
–
–
–
–
–
–
–
–
–
–
1
1
31
(93)
1,099
3,020
(1,267)
(51)
13
2
(6)
1,711
12,956
14,667
1
128
129
12
1,915
506
10,436
1,927
10,942
1,161
149
1,310
31
327
358
1,711
12,955
14,666
164 Prudential plc Annual Report 2017
www.prudential.co.uk
Consolidated statement of financial position
31 December
Note
2017 £m
2016 £m
Assets
Goodwill
Deferred acquisition costs and other intangible assets
Property, plant and equipment
Reinsurers' share of insurance contract liabilities
Deferred tax assets
Current tax recoverable
Accrued investment income
Other debtors
Investment properties
Investment in joint ventures and associates accounted for using the equity method
Loans
Equity securities and portfolio holdings in unit trusts
Debt securities
Derivative assets
Other investments
Deposits
Assets held for sale
Cash and cash equivalents
Total assets
Equity
Shareholders' equity
Non‑controlling interests
Total equity
Liabilities
Insurance contract liabilities
Investment contract liabilities with discretionary participation features
Investment contract liabilities without discretionary participation features
Unallocated surplus of with‑profits funds
Core structural borrowings of shareholder‑financed operations
Operational borrowings attributable to shareholder‑financed operations
Borrowings attributable to with‑profits operations
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, deferred income and other liabilities
Provisions
Derivative liabilities
Liabilities held for sale
Total liabilities
Total equity and liabilities
C5(a)
C5(b)
C13
C4.1(a)(iv)
C8.1
C8.2
C1
C1
C14
D6
C3.3
C3.2
C3.4
C1
C4.1
C4.1
C4.1
C4.1
C6.1
C6.2
C6.2
C8.1
C8.2
C11
C3.4
C1
1,482
11,011
789
9,673
2,627
613
2,676
2,963
16,497
1,416
17,042
223,391
171,374
4,801
5,622
11,236
38
10,690
493,941
1,628
10,807
743
10,051
4,315
440
3,153
3,019
14,646
1,273
15,173
198,552
170,458
3,936
5,465
12,185
4,589
10,065
470,498
16,087
7
16,094
14,666
1
14,667
328,172
62,677
20,394
16,951
6,280
1,791
3,716
5,662
8,889
4,715
537
14,185
1,123
2,755
–
477,847
493,941
316,436
52,837
19,723
14,317
6,798
2,317
1,349
5,031
8,687
5,370
649
13,825
947
3,252
4,293
455,831
470,498
Included within equity securities and portfolio holdings in unit trusts, debt securities and other investments are £8,232 million (2016: £8,545 million) of lent securities and assets subject to
repurchase agreements.
The consolidated financial statements on pages 161 to 304 were approved by the Board of Directors on 14 March 2018.
They were signed on its behalf.
Paul Manduca
Chairman
Mike Wells
Group Chief Executive
Mark FitzPatrick
Chief Financial Officer
www.prudential.co.uk
Annual Report 2017 Prudential plc 165
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Consolidated statement of cash flows
Year ended 31 December
Note
2017 £m
2016 £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
Operating cash items:
Interest receipts
Dividend receipts
Tax paidnote (iv)
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 intangiblesnote (v)
Sale of businessesnote (v)
Net cash flows from investing activities
Cash flows from financing activities
Structural borrowings of the Group:
Shareholder‑financed operations:note (ii)
Issue of subordinated debt, net of costs
Redemption of subordinated debt
Interest paid
With‑profits operations:note (iii)
Interest paid
Equity capital:
Issues of ordinary share capital
Dividends paid
Net cash flows from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of exchange rate changes on cash and cash equivalents
Cash and cash equivalents at end of year
3,970
3,212
(49,771)
(968)
44,877
3,360
(8,994)
549
6,900
2,612
(915)
1,620
(134)
–
(351)
1,301
816
565
(751)
(369)
(9)
21
(1,159)
(1,702)
734
10,065
(109)
10,690
(37,824)
(2,490)
31,135
7,861
(9,749)
834
7,886
2,286
(950)
2,201
(348)
102
(303)
–
(549)
1,227
–
(335)
(9)
13
(1,267)
(371)
1,281
7,782
1,002
10,065
C13
C6.1
C6.2
Notes
(i)
(ii)
This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders.
Structural borrowings of shareholder‑financed operations exclude borrowings to support short‑term fixed income securities programmes, non‑recourse borrowings of investment
subsidiaries of shareholder‑financed operations and other borrowings of shareholder‑financed operations. Cash flows in respect of these borrowings are included within cash
flows from operating activities.
The changes in the carrying value of the structural borrowings of shareholder‑financed operations during 2017 are analysed as follows:
Cash movements £m
Non-cash movements £m
Balance at
1 Jan 2017
Issue
of debt
Redemption
of debt
Foreign
exchange
movement
Other
movements
Balance at
31 Dec 2017
Structural borrowings of shareholder‑financed
operations
6,798
565
(751)
(341)
9
6,280
(iii)
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. There is no change in respect of the carrying value of the
£100 million structural borrowings of the with‑profits operations during 2017. 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.
Tax paid includes £298 million (2016: £226 million) paid on profits taxable at policyholder rather than shareholder rates.
(iv)
(v) Net cash flows for corporate transactions are for distribution rights and acquisition and disposal of businesses (including private equity and other subsidiaries acquired by
with‑profits funds for investment purposes).
166 Prudential plc Annual Report 2017
www.prudential.co.uk
A Background and critical accounting policies
A1 Basis of preparation and exchange rates
Prudential plc (the Company) together with its subsidiaries (collectively, the Group or Prudential) is an international financial services
group. The Group has operations in Asia, the US, UK and Europe and Africa. Prudential offers a wide range of retail financial products
and services and asset management services throughout these territories. The retail financial products and services primarily include life
insurance, pensions and annuities as well as collective investment schemes.
Basis of preparation
These statements have been prepared in accordance with IFRS Standards 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 Standards
may differ from IFRS Standards issued by the IASB if, at any point in time, new or amended IFRS Standards have not been endorsed by
the EU. At 31 December 2017, there were no unendorsed standards effective for the two years ended 31 December 2017 which impact
the consolidated financial information of the Group. There were no differences between IFRS Standards endorsed by the EU and IFRS
Standards issued by the IASB in terms of their application to the Group. These statements have been prepared on a going concern basis.
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 305.
The Group IFRS accounting policies are the same as those applied for the year ended 31 December 2016 with the exception of the
adoption of the new and amended accounting standards as described in note A2.
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 2017
Average rate
for
2017
Closing
rate at
31 Dec 2016
Average rate
for
2016
10.57
18,353.44
5.47
1.81
8.81
86.34
30,719.60
44.09
1.35
10.04
17,249.38
5.54
1.78
8.71
83.90
29,279.71
43.71
1.29
9.58
16,647.30
5.54
1.79
8.59
83.86
28,136.99
44.25
1.24
10.52
18,026.11
5.61
1.87
8.99
91.02
30,292.79
47.80
1.35
Certain notes to the financial statements present 2016 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 2017 recognised in other comprehensive income is:
Asia operations*
US operations
Unallocated to a segment (other funds)†
2017 £m
2016 £m
(295)
(477)
307
(465)
785
853
(490)
1,148
* 2017 included the recycling of the cumulative exchange gain of the sold Korea life business of £61 million to the income statement.
† The exchange rate movement unallocated to a segment mainly reflects the translation of currency borrowings, issued by group holding companies, that have been designated as a net
investment hedge against the currency risk of the Group’s investment in Jackson.
A2 New accounting pronouncements in 2017
The IASB has issued the following new accounting pronouncements to be effective for 1 January 2017:
— Disclosure Initiative (Amendments to IAS 7, ‘Statement of Cash Flows’);
— Recognition of deferred tax assets for unrealised losses (Amendments to IAS 12, ‘Income Taxes’); and
— Annual improvements to IFRSs 2014 – 2016 cycle.
Other than the additional disclosure of the changes in structural borrowings during the year in the statement of cash flows, these
pronouncements have no effect on these financial statements.
www.prudential.co.uk
Annual Report 2017 Prudential plc 167
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information A3 Accounting policies
A3.1 Critical accounting policies, estimates and judgements
This note presents the critical accounting policies, accounting estimates and judgements applied in preparing the Group’s consolidated
financial statements. Other significant accounting policies are presented in note E1. All 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.
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. Below are set out those critical
accounting policies the application of which requires the Group to make critical estimates and judgements. Also set out are further critical
accounting policies affecting the presentation of the Group’s results and other items that require the application of critical estimates and
judgements.
(a) Critical accounting policies with linked critical estimates and judgements
Classification of insurance and investment contracts
IFRS 4 requires contracts written by
insurers to be classified as either
‘insurance’ contracts or ‘investment’
contracts. The classification of the contract
determines its accounting. Judgement is
applied in considering whether the material
features of a contract gives rise to the
transfer of significant insurance risk.
Impacts £436 billion of reported liabilities,
requiring classification.
Contracts that transfer significant insurance risk to the Group are classified as insurance
contracts. This judgement is made at the point of contract inception and is not revisited.
For the majority of the Group’s contracts classification is based on a readily identifiable
scenario that demonstrates a significant difference in cash flows if the covered event
occurs (as opposed to does not occur) reducing the level of judgement involved.
Contracts that transfer financial risk to the Group but not significant insurance risk are
classified as 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 that (a) are likely to
be a significant portion of the total contract benefits; (b) have amount or timing
contractually at the discretion of the insurer; and (c) are contractually based on asset or
fund performance, as discussed in IFRS 4. Insurance contracts and investment contracts
with discretionary participation features are accounted for under IFRS 4. Investment
contracts without such discretionary participation features are accounted for as financial
instruments under IAS 39.
Insurance
business units
Insurance contracts and
investment contracts with
discretionary participation
features
Investment contracts without
discretionary participation
features
Asia
US
— With‑profits contracts
— Non‑participating term
— Minor amounts for a number of
small categories of business
contracts
— Whole life contracts
— Unit‑linked policies
— Accident and health policies
— Variable annuity contracts
— Fixed annuity contracts
— Life insurance contracts
— Guaranteed investment
contracts (GICs)
— Minor amounts of ‘annuity
UK and Europe
— With‑profits contracts
— Bulk and individual annuity
business
— Non‑participating term
contracts
certain’ contracts
— Certain unit‑linked savings and
similar contracts
168 Prudential plc Annual Report 2017
www.prudential.co.uk
A Background and critical accounting policies continued Measurement of policyholder liabilities and unallocated surplus of with-profits
Due to their significance to the Group’s
business, the measurement of policyholder
liabilities and unallocated surplus of
with‑profits is a critical accounting policy.
The measurement basis of policyholder
liabilities is dependent upon the
classification of the contracts under IFRS 4
described above.
Impacts £436 billion of liabilities.
Measurement of insurance contract
liabilities and investment contracts
liabilities with discretionary participation
features.
Asia insurance operations
US insurance operations
IFRS 4 permits the continued usage of previously applied Generally Accepted Accounting
Practices (GAAP) for insurance contracts and investment contracts with discretionary
participating features.
A modified statutory basis of reporting was adopted by the Group on first time adoption of
IFRS in 2005. This was set out in the Statement of Recommended Practice issued by
Association of British Insurers (ABI SORP). An exception was for UK regulated with‑
profits funds which were measured under FRS 27 as discussed below.
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.
The policies applied in each business unit are noted below. When measuring policyholder
contract liabilities a number of assumptions are applied to estimate future amounts due to
or from the policyholder. The nature of assumption varies by product and among the most
significant are assumed rates of policyholders’ mortality, particularly in respect of
annuities sold in the UK, and policyholder behaviour, particularly in the US. Additional
details of valuation methodologies and assumptions applied for material product types are
discussed in note C4.2.
The policyholder liabilities for businesses in Asia are generally 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. In some operations, Taiwan
and India, US GAAP principles are applied.
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 and Europe insurance operations with the same features.
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 include the policyholder account balance.
For those investment contracts in the US with fixed and guaranteed terms, the Group uses
the amortised cost model to measure the liability. The US has no investment contracts
with discretionary participation features.
The sensitivity of US insurance operations to variations in key estimates and assumptions,
including policyholder behaviour, is discussed in note C7.3.
www.prudential.co.uk
Annual Report 2017 Prudential plc 169
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information A3 Accounting policies continued
A3.1 Critical accounting policies, estimates and judgements continued
Measurement of policyholder liabilities and unallocated surplus of with-profits continued
UK and Europe insurance operations
The UK regulated with‑profits funds’ liabilities are the realistic basis liabilities in accordance
with FRS 27. The realistic 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
charges and expenses. 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 shareholders’ share of future costs of bonuses is included within the liabilities for
unallocated surplus. Shareholders’ share of profit is recognised in line with the distribution
of bonuses to policyholders.
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.
The sensitivity of UK and Europe insurance operations to variations in key estimates and
assumptions, including annuitant mortality, is discussed in note C7.4.
Measurement of investment contracts
without discretionary participation features
liabilities.
Investment contracts without discretionary participation features are measured 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.
Measurement of unallocated surplus of
with‑profits funds.
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 in accordance
with IAS 18.
Investment contracts without fixed and guaranteed terms are classified as financial
instruments and 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.
Other investment contracts are measured at amortised cost.
Represents the excess of assets over policyholder liabilities that are determined in
accordance with the Group’s accounting policies and are based on local GAAP for the
Group’s with‑profits funds in the UK, Hong Kong and Malaysia that have yet to be
appropriated between policyholders and shareholders. The unallocated surplus is
recorded 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.
170 Prudential plc Annual Report 2017
www.prudential.co.uk
A Background and critical accounting policies continued Measurement of policyholder liabilities and unallocated surplus of with-profits continued
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.
Jackson’s liabilities for insurance contracts, which include those for separate accounts
(reflecting separate account assets), policyholder account values and guarantees
measured as described in note C4.2 and the associated deferred acquisition cost asset are
measured under US GAAP and liability adequacy testing is performed in this context.
Under US GAAP, most of Jackson’s products are accounted for under Accounting
Standards Codification Topic 944, Financial Services – Insurance of the Financial
Accounting Standards Board (ASC 944) 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
a grouped level of those contracts managed together.
(b) Further critical accounting policies
Measurement and presentation of derivatives and debt securities of US insurance operations
Jackson enters into derivative instruments 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. The key factors considered
in this assessment were the complexity of asset and liability matching in Jackson’s product
range and the difficulty and cost of applying the macro hedge provisions under IAS 39
(which are more suited to banking arrangements) to Jackson’s derivative book.
The Group has decided that, except for occasional circumstances, applying hedge
accounting using IAS 39 to derivative instruments held by Jackson would not improve the
relevance or reliability of the financial statements to such an extent that would justify the
difficulty and cost of applying these provisions. As a result of this decision, the total
income statement results are more volatile as the movements in the fair 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.
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. Further detail is provided in note B4. 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.
Jackson holds a number of derivative
instruments and debt securities. The
selection of the accounting approach for
these items significantly affects the
volatility of IFRS profit before tax.
£18,533 million of US income statement
investment return arises from such
derivatives and debt securities.
Presentation of results before tax
Profit before tax is a significant IFRS income
statement item. The Group has chosen to
present a measure of profit before tax
attributable to shareholders which
distinguishes between tax attributable to
policyholders and unallocated surplus and
tax borne by shareholders, to support
understanding of the performance of the
Group.
Profit before tax attributable to
shareholders is £3,296 million and
compares to profit before tax of
£3,970 million.
www.prudential.co.uk
Annual Report 2017 Prudential plc 171
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information A3 Accounting policies continued
A3.1 Critical accounting policies, estimates and judgements continued
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.
Total segmental operating profit is
£5,577 million and is shown in note B1.2.
The basis of calculation of operating profit 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.
Short‑term fluctuations in fair value 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 funds in the
UK, Hong Kong, Malaysia and Singapore, 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 policyholder liabilities
(including the unallocated surplus).
(c) Further critical estimates or judgements
Deferred acquisition costs for insurance contracts
The Group applies judgement in
determining qualifying costs that should be
capitalised (ie those costs of acquiring new
insurance business that meet the criteria
under the Group’s accounting policy for
deferred acquisition costs). It makes
estimates in projecting future profits/
margins to assess whether adjustments to
the carrying value or amortisation profile of
deferred acquisition cost assets are
necessary.
Except for acquisition costs of with‑profits contracts of the UK regulated with‑profits
funds, which are accounted for under FRS 27, 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. In general, this deferral is 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 deferred acquisition costs is measured and is
deemed impaired if the projected margins (which are estimated based on a number of
assumptions similar to those underlying policyholder liabilities) 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.
£9.2 billion of deferred acquisition costs as
per note C5(b).
Asia insurance operations
For those business units 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.
172 Prudential plc Annual Report 2017
www.prudential.co.uk
A Background and critical accounting policies continued Deferred acquisition costs for insurance contracts continued
US insurance operations
The most material estimates and assumptions applied in the measurement and
amortisation of deferred acquisition cost balances relate to the US insurance operations.
The Group’s US insurance operations apply FAS ASU 2010‑26 on ‘Accounting for
Costs Associated with Acquiring or Renewing Insurance Contracts’ and capitalise
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 experience, 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 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
assumed 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 long‑term investment return. For further details on current balances, assumptions and
sensitivity, refer to note C5 (b) and C7.3(iv).
To ensure that the methodology in extreme market movements produces future
expected returns that are realistic, 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.
Jackson makes certain adjustments to the deferred acquisition costs which are recognised
directly in other comprehensive income (‘shadow accounting’). If the 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 consistent with
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.
For UK regulated with‑profits funds where ‘grandfathered’ FRS 27 is applied, 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.
UK and Europe insurance operations
www.prudential.co.uk
Annual Report 2017 Prudential plc 173
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information A3 Accounting policies continued
A3.1 Critical accounting policies, estimates and judgements continued
Financial investments – Valuation
Financial investments held at fair value
represent £407.3 billion of the Group’s
total assets.
The Group holds the majority of its financial investments at fair value (either through profit
and loss or available‑for‑sale). Financial Investments held at amortised cost primarily
comprise loans and deposits.
The Group applies valuation techniques,
including the use of estimates, to
determine the balance recognised for
financial investments held at fair value.
Financial investments held at amortised
cost represent £12.2 billion of the Group’s
total assets.
Determination of fair value
The Group uses current bid prices to value its investments having quoted prices. Actively
traded investments without quoted prices are valued using prices provided by third
parties as described further in note C3.1. Financial investments measured at fair value are
classified into a three‑level hierarchy as described in note C3.1(b).
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. Details of the financial investments classified as ‘level 3’ to which valuation
techniques are applied, and the sensitivity of profit before tax to a change in these items’
valuation, are presented in note C3.1(d).
Determination of impaired value
In estimating the present value of future cash flows for determining the impaired value of
instruments held at amortised cost, 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.
In estimating any required impairment for US residential mortgage‑backed and other
asset‑backed securities held as available‑for‑sale, the expected value of future cash flows
is determined using a model, the key assumptions of which include how much of the
currently delinquent loans will eventually default and assumed loss severity. Further
details of the assumptions and estimates applied in assessing impairment of US available‑
for‑sale securities is given in note C3.2(g).
174 Prudential plc Annual Report 2017
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A Background and critical accounting policies continued Financial investments – Determining impairment in relation to financial assets
The Group applies judgement as to
whether evidence of an impairment in
value exists for financial investments
classified as ‘available‑for‑sale’ or
‘at amortised cost’.
If evidence for impairment exists, valuation
techniques, including estimates, are then
applied in determining the impaired value.
Affects £47.5 billion of assets.
For financial investments classified as ‘available‑for‑sale’ or ‘at amortised cost’, 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 impairment assets. The loss
comprises the effect of the expected loss of contractual cash flows and any additional
market‑price driven temporary reductions in values.
Available-for-sale securities
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 methodology and estimates used to determine
impairments of the available‑for‑sale securities of Jackson are described in note C3.2(g).
The majority of the US insurance operation’s debt securities portfolio is accounted for on
an available‑for‑sale basis. The consideration of evidence of impairment requires
management’s judgement. In making this determination a range of market and industry
indicators are considered including the severity and duration of the decline in fair value
and the financial condition and prospects of the issuer.
For US residential mortgage‑backed and other asset‑backed securities, all of which are
classified as available‑for‑sale, impairment is estimated using a model of expected future
cash flows. Key assumptions used in the model include assumptions about how much of
the currently delinquent loans will eventually default and assumed loss severity.
Assets held at amortised cost
Assets held at amortised cost are subject to impairment testing where appropriate under
IFRS requirements by comparing estimated future cash flows to the carrying value of the
asset. 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.
Reversal of impairment losses
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).
Intangible assets – Carrying value of distribution rights
The Group applies judgement when
considering whether indicators of
impairment exist for intangible assets
representing distribution rights.
Affects £1.5 billion of assets.
Distribution rights relate to fees paid under bancassurance partnership arrangements for
bank distribution of products for the term of the contractual agreement with the bank partner.
Distribution rights impairment testing is conducted when there is an indication of impairment.
To ensure any required impairment is recognised in the current period the Group monitors
a number of internal and external factors, including indications that the financial
performance of the arrangement is likely to be worse than originally expected and
changes in relevant legislation and regulatory requirements that could impact the Group’s
ability to continue to sell new business through the bancassurance channel, and then
applies judgement to assess whether these factors indicate impairment has occurred.
If an impairment has occurred, an impairment charge is recognised for the difference
between the carrying value and recoverable amount of the asset. The recoverable amount
is the greater of fair value less costs to sell and value in use. Value in use is calculated as the
present value of future expected cash flows from the asset or the cash generating unit to
which it is allocated.
www.prudential.co.uk
Annual Report 2017 Prudential plc 175
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information A3 Accounting policies continued
A3.2 New accounting pronouncements not yet effective
The following standards, interpretations and amendments have been issued but are not yet effective in 2017, 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
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 for
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, IFRS 15 in the context of Prudential’s business, applies to 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 provision
for investment management services. The IFRS 15 impact assessment performed included the review of the recognition of asset
management and performance fees of these contracts. The adoption of this standard in 2018 is not expected to result in a restatement
of the Group’s profit for the year or shareholders’ equity.
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 October 2017, the IASB issued two amendments to IFRS 9, to permit the measurement of debt instruments with prepayment
compensation features to be measured at amortised cost or fair value through other comprehensive income if certain conditions are met,
and to clarify that IFRS 9 applies to long‑term interests in joint ventures and associates. Both of these amendments that were issued
in October 2017 are effective for the annual periods beginning on or after 1 January 2019, but are not yet endorsed by the EU.
In September 2016, the IASB published Amendments to IFRS 4, ‘Applying IFRS 9 Financial Instruments with IFRS 4 Insurance
Contracts’ to address the temporary consequences of the different effective dates of IFRS 9 and IFRS 17, ‘Insurance Contracts’. The
amendments include an optional temporary exemption from applying IFRS 9 and the associated amendments until IFRS 17 comes into
effect in 2021. This temporary exemption is available to companies whose predominant activity is to issue insurance contracts based on
meeting the eligibility criteria as at 31 December 2015 as set out in the amendments. The Group met the eligibility criteria and will defer
the adoption of IFRS 9 to 1 January 2021.
When adopted IFRS 9 replaces the existing IAS 39, ’Financial Instruments – Recognition and Measurement’, and will affect the
following three areas:
— The classification and the measurement of financial assets and liabilities
Under IFRS 9, the classification of financial assets is redefined. Based on the business model in which the assets are held and their
contractual cash flow characteristics (whether the cash flows represent ‘solely payments of principal and interest’), financial assets are
classified into one of the following categories: amortised cost, fair value through other comprehensive income (FVOCI) and fair value
through profit or loss (FVTPL). An option is also available at initial recognition to irrevocably designate a financial asset as at FVTPL if
doing so eliminates or significantly reduces accounting mismatches.
At present a significant proportion (82 per cent) of the Group’s investments are valued at FVTPL and the Group’s current
expectation is that a significant proportion will continue to be designated as such under IFRS 9.
The existing IAS 39 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, required by IFRS 13, 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,
resulting in earlier recognition of credit losses compared to IAS 39. The impairment charge recognition under the new model is in three
stages:
– Stage 1 – at initial recognition, and for each subsequent reporting period when there has been no significant increase in credit risk
since initial recognition, recognise 12 month expected credit losses;
– Stage 2 – recognise lifetime expected credit losses if there has been a significant increase in credit risk since initial recognition; or
– Stage 3 – recognise incurred losses for credit‑impaired assets, similar to IAS 39.
This aspect is the most complex area of IFRS 9 to implement and will involve significant judgements and estimate processes.
— The hedge accounting requirements which are more closely aligned with the risk management activities of the Company.
No significant change to the Group’s hedge accounting is currently anticipated, but this remains under review.
176 Prudential plc Annual Report 2017
www.prudential.co.uk
A Background and critical accounting policies continued The Group is assessing the impact of IFRS 9 and implementing this standard in conjunction with the IFRS 17. Further details on IFRS 17 are
provided below. Adoption of IFRS 9 may result in reclassifying certain of the Group’s financial assets and hence lead to a change in the
measurement of those instruments or the reporting of their value. In addition, for any investments classified as amortised cost or FVOCI,
as noted above, the impairment provisioning approach is altered from the current IAS 39 approach. The Group is currently assessing the
scope of assets to which these requirements will apply. The Group does not currently apply hedge accounting for most of its derivate
programmes but will reconsider its approach in light of new requirements under the standard on adoption.
IFRS 16, ‘Leases’
In January 2016, the IASB published IFRS 16 ‘Leases’ 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 new standard brings most leases on‑balance
sheet for lessees under a single model, eliminating the distinction between operating and finance leases. For lessee accounting, this has
the effect of requiring most of the existing operating leases to be accounted for in a similar manner as finance leases under the existing
IAS 17, ‘Leases’. The only optional exemptions are for short‑term leases and leases of low‑value assets. Lessor accounting however
remains largely unchanged from IAS 17.
IFRS 16 applies primarily to operating leases of major properties occupied by the Group’s businesses where Prudential is a lessee.
Under IFRS 16, these leases will be brought onto the Group’s statement of financial position with a ‘right to use’ asset being established
and a corresponding liability representing the obligation to make lease payments. The current rental accrual charge in the income
statement will be replaced with a depreciation charge for the ‘right to use’ asset and an interest expense on the lease liability leading to a
more front‑loaded operating lease cost profile compared to IAS 17. The Group is currently sourcing the required information to
implement this new standard.
IFRS 16 permits transition to the new standard through a modified retrospective approach or a full retrospective approach. Under the
modified retrospective approach, as well as affording a number of simplifications the Group’s comparative information is not restated, but
there is an adjustment to retained earnings at the date of initial application (ie 1 January 2019). The Group is currently assessing the
impact of the modified retrospective approach before confirming the approach it intends to adopt. The ultimate impact of IFRS 16 on the
Group’s financial statements will be dependent on the leases that are in place and the related discount rate on the date of initial
application.
Accounting pronouncements not yet endorsed by the EU
IFRS 17, ‘Insurance Contracts’
In May 2017, the IASB issued IFRS 17 ‘Insurance Contracts’ to replace the existing IFRS 4 ‘Insurance Contracts’. The standard, which is
subject to endorsement in the EU and other territories, applies to annual periods beginning on or after 1 January 2021. Early application is
permitted; provided the entity also applies IFRS 9 and IFRS 15 on or before the date it first applies IFRS 17. The Group intends to adopt the
new standard on its mandatory effective date in 2021, alongside the adoption of IFRS 9 (see above).
IFRS 4 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. IFRS 17 replaces this with a new liability and revenue measurement model for all insurance contracts.
The new measurement model requires liabilities for insurance contracts to be recognised as the present value of future cash flows,
incorporating an explicit risk adjustment, and a contractual service margin (CSM) that is equal and opposite to any day‑one gain arising.
Losses are recognised directly into the income statement. The present value of future cash flows and the risk adjustment are updated at
each reporting date in order to reflect current conditions. The CSM is released to the income statement as profit over the coverage period
of the insurance contract, reflecting the delivery of services to the policyholder. Subsequent changes in non‑economic assumptions
applied to the valuation of insurance liabilities are recognised as an adjustment to the CSM, prospectively affecting the amounts released
to the statement of comprehensive income. For the purpose of the measurement insurance contracts are grouped together with
contracts of similar risk, profitability profile and issue year, with the measurement model applied at this group level.
IFRS 17 provides an adaptation of the measurement model designed to account for certain contracts with participating features, such
as UK style with‑profits contracts and unit‑linked or similar contracts, in which the policyholder will be paid a substantial share of the fair
value returns of a specified group of items and the return to the insurer effectively reflects a variable management fee. This adaptation –
the Variable Fee Approach (VFA) – allows the CSM to be adjusted for changes in economic experience and assumptions which reflect a
change in the overall future fee the insurer expects to receive as a result of managing the participating pool of assets.
IFRS 17 introduces a new measure of insurance revenue, based on the delivery of services to policyholders and excluding any
premiums related to the investment elements of policies, which will be significantly different from existing premium revenue measures,
currently reported in the income statement.
Retrospective application of the standard is required for determining the CSM for the opening balance sheet. However, if full
retrospective application for a group of insurance contracts is impracticable, then the entity is required to choose either a modified
retrospective approach or a fair value approach. Choosing the appropriate approach and hence determining the opening balance sheet is
one of the most critical activities in implementing the new standard, as the approach adopted will have a significant impact on the entity’s
results both on the initial impact on shareholders’ funds at IFRS 17 adoption and on the future profits to be earned on the in‑force
business at the date of transition.
www.prudential.co.uk
Annual Report 2017 Prudential plc 177
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information A3 Accounting policies continued
A3.2 New accounting pronouncements not yet effective continued
IFRS 17 Implementation Programme
The Group has commenced a Group‑wide programme to implement IFRS 17 and IFRS 9 (as discussed above).
The requirements of IFRS 17 are complex and will have the effect of introducing fundamental changes to the existing IFRS 4 insurance
accounting and require the application of significant judgement and new estimation techniques. As previously highlighted IFRS 9 could
require reclassification of investments and the introduction of new and complex impairment models. The effect of changes required to
the Group’s accounting policies as a result of implementing these standards are currently uncertain, but these changes can be expected
to, among other things, alter the timing of IFRS profit recognition. The implementation of this standard is also likely to involve significant
enhancements to IT, actuarial and finance systems of the Group, and so will have an impact on the Group’s expenses.
A Group‑wide Steering Committee, chaired by the Group Chief Financial Officer and with participation from group’s and business
units’ senior finance managers, provides oversight and strategic direction to the implementation programme. A number of sub‑
committees are also in place to provide governance over the technical interpretation and accounting policies selected, programme
management and design and delivery of the project.
The key responsibilities of the programme include setting a framework for Group‑wide accounting policies, determining additional
data requirements, assessing the level of IT and finance system changes as well as establishing an appropriate work plan for determining
the opening balance sheet. The work is at an early stage.
Other new accounting pronouncements
In addition to the above, the following new accounting pronouncements have also been issued and are not yet effective but the Group is
not expecting them to have a significant impact on the Group’s financial statements:
— Amendments to IFRS 2: Classification and measurement of share‑based payment transactions, issued in June 2016 and effective from
1 January 2018;
— IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration, issued in December 2016 and effective from
1 January 2018;
— Amendments to IAS 40, Transfers of Investment Property, issued in December 2016 and effective from 1 January 2018;
— IFRIC Interpretation 23 Uncertainty over Income Taxes, issued June 2017 and effective from 1 January 2019;
— Annual Improvements to IFRSs 2015‑2017 cycle; and
— Amendments to IAS 19: Plan Amendment, Curtailment or Settlement, issued on 7 February 2018 and effective from 1 January 2019.
178 Prudential plc Annual Report 2017
www.prudential.co.uk
A Background and critical accounting policies continued B Earnings performance
B1 Analysis of performance by segment
B1.1 Segment results – profit before tax
Asia
Insurance operations
Asset management
Total Asia
US
Jackson (US insurance operations)
Asset management
Total US
UK and Europe
UK and Europe insurance operations:
Long‑term business
General insurance commissionnote (i)
Total UK and Europe insurance operations
UK and Europe asset managementnote (vi)
Total UK and Europe
Total segment profit
Restructuring costs note (iii)
Other income and expenditure:
Investment return and other income
Interest payable on core structural borrowings
Corporate expenditurenote (ii)
Solvency II implementation costs
Total other income and expenditure
Interest received from tax settlement
Operating profit based on longer-term investment returns
Short‑term fluctuations in investment returns on
shareholder‑backed business
Amortisation of acquisition accounting adjustmentsnote (iv)
Profit (loss) attaching to disposal of businesses
Cumulative exchange gain on the sold Korea life business recycled from
other comprehensive income
Profit before tax
Tax charge attributable to shareholders' returns
Profit for the year
Attributable to:
Equity holders of the Company
Non‑controlling interests
Basic earnings per share (in pence)
2017 £m
2016* £m
%
AER
note (v)
CER
note (v)
2017 vs
2016 AER
note (v)
2017 vs
2016 CER
note (v)
1,799
176
1,975
2,214
10
2,224
861
17
878
500
1,378
5,577
1,503
141
1,644
1,571
149
1,720
2,052
(4)
2,156
(4)
2,048
2,152
20%
25%
20%
8%
350%
9%
15%
18%
15%
3%
350%
3%
799
29
828
425
799
29
828
425
1,253
4,945
1,253
5,125
8%
(41)%
8%
(41)%
6%
18%
10%
13%
6%
18%
10%
9%
(103)
(38)
(39)
(171)%
(164)%
11
(425)
(361)
–
(775)
28
(360)
(334)
(28)
(694)
28
(360)
(340)
(28)
(700)
–
43
43
4,699
4,256
4,429
(1,563)
(63)
162
(1,678)
(76)
(227)
(1,764)
(79)
(244)
61
–
–
3,296
2,275
2,342
(61)%
(18)%
(8)%
n/a
(12)%
n/a
10%
7%
17%
n/a
n/a
45%
(61)%
(18)%
(6)%
n/a
(11)%
n/a
6%
11%
20%
n/a
n/a
41%
(906)
(354)
(360)
(156)%
(152)%
2,390
1,921
1,982
24%
21%
2,389
1
1,921
–
1,982
–
24%
N/A
21%
N/A
2017
2016
%
AER
note (v)
CER
note (v)
2017 vs
2016 AER
note (v)
2017 vs
2016 CER
note (v)
Note
B3(a)
B3(b)
B3(c)
B1.2
D1
D1
B4
B5
Based on operating profit based on longer‑term investment returnsnote (vii)
Based on profit for the year
145.2p
93.1p
131.3p
75.0p
136.8p
77.4p
11%
24%
6%
20%
* The 2016 comparative results have been re‑presented from those previously published following the reassessment of the Group’s operating segments as described in note B1.3.
www.prudential.co.uk
Annual Report 2017 Prudential plc 179
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information B Earnings performance continued
B1 Analysis of performance by segment continued
B1.1 Segment results – profit before tax continued
Notes
(i)
General insurance commission represents the commission receivable net of expenses for Prudential‑branded general insurance products in connection with the arrangement to
transfer the UK general insurance business to Churchill in 2002.
Corporate expenditure as shown above is primarily for Group Head Office and Asia Regional Head Office.
(ii)
(iii) Restructuring costs are incurred primarily in UK and Europe and Asia and represent business transformation and integration costs.
(iv) Amortisation of acquisition accounting adjustments principally relate to the REALIC business of Jackson which was acquired in 2012.
(v)
For definitions of AER and CER refer to note A1. The difference between ‘Profit for the year attributable to shareholders’ in the prior year on an AER basis and a CER basis is
£61 million, arising from the retranslation of the prior year results of the Group’s foreign subsidiaries into GBP using the exchange rates applied to the equivalent current year results.
(vi) UK and Europe asset management 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 UK and Europe asset management operating profit based on longer‑term investment returns
2017 £m
2016 £m
1,027
7
(400)
(202)
432
15
53
500
900
23
(332)
(212)
379
13
33
425
(vii) Tax charges have been reflected as operating and non‑operating in the same way as for pre‑tax items. In 2017 a significant US tax reform package was enacted, and the effects of
which in the income statement have been treated as non‑operating. Further details are provided in note B4.
B1.2 Short-term fluctuations in investment returns on shareholder-backed business
Asia
US note (i)
UK and Europe note (ii)
Other operations note (iii)
Total
2017 £m
2016 £m
(1)
(1,568)
(14)
20
(1,563)
(225)
(1,455)
206
(204)
(1,678)
Notes
(i)
US 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 £462 million as
shown in note C5(b) (2016: £565 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
2017 £m
2016 £m
(1,490)
(36)
(73)
12
19
(1,568)
(1,587)
(126)
201
35
22
(1,455)
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 in note B1.3(c) below.
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’ US GAAP as described in note B1.3 (c);
– 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.
The net equity hedge result (net of related DAC) can be summarised as follows:
Fair value movements on equity hedge instruments1
Accounting value movements on the variable and fixed index annuity guarantee liabilities2
Fee assessments net of claim payments
Total
2017 £m
2016 £m
(1,871)
(99)
480
(1,490)
(1,786)
(188)
387
(1,587)
1
2
Held to manage equity exposures of the variable annuity guarantees and fixed index annuity options.
The accounting value movements on the variable and fixed index annuity guarantee liabilities reflect the impact of market movements and changes in economic and
actuarial assumptions. These actuarial assumptions changes include, amongst other items, a charge (net of related DAC) of £359 million for strengthening policyholder
utilisation and persistency rates offset by a benefit (net of related DAC) of £382 million from modelling refinements in the period, principally enhancements to how
Jackson’s own credit risk is incorporated in the fair valuation of these long‑term liabilities.
180 Prudential plc Annual Report 2017
www.prudential.co.uk
(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;
– Fair value movements on the Guaranteed Minimum Income Benefit (GMIB) reinsurance asset that are not matched by movements in the underlying GMIB liability, which is
not fair valued as explained in note B1.3; 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. Accounting mismatches arise because of differences between the measurement
basis and presentation of the derivatives, which are fair valued with movements recorded in the income statement, and the exposures they are intended to manage.
(c) Short‑term fluctuations related to debt securities
Short‑term fluctuations relating to debt securities
(Charges) credits in the year:
Losses on sales of impaired and deteriorating bonds
Defaults
Bond write‑downs
Recoveries/reversals
Total credits (charges) in the year
Less: Risk margin allowance deducted from operating profit based on longer‑term investment returnsnote
Interest‑related realised (losses) gains:
(Losses) 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
2017 £m
2016 £m
(3)
–
(2)
10
5
86
91
(43)
(140)
(183)
19
(73)
(94)
(4)
(35)
15
(118)
89
(29)
376
(135)
241
(11)
201
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 2017 is based on an average annual risk margin reserve of 21 basis points
(2016: 21 basis points) on average book values of US$55.3 billion (2016: US$56.4 billion) as shown below:
Moody’s rating category (or equivalent under
NAIC ratings of mortgage-backed securities)
A3 or higher
Baa1, 2 or 3
Ba1, 2 or 3
B1, 2 or 3
Below B3
Total
Average
book
value
US$m
27,277
26,626
1,046
318
23
55,290
2017
2016
RMR
Annual
expected loss
Average
book
value
RMR
Annual
expected loss
%
US$m
£m
US$m
%
US$m
0.12
0.22
1.03
2.70
3.78
0.21
(33)
(58)
(11)
(9)
(1)
(25)
(45)
(8)
(7)
(1)
29,051
25,964
1,051
312
40
(112)
(86)
56,418
0.12
0.24
1.07
2.95
3.81
0.21
(36)
(62)
(11)
(9)
(2)
(120)
£m
(27)
(46)
(8)
(7)
(1)
(89)
Related amortisation of deferred acquisition
costs (see below)
Risk margin reserve charge to operating profit
for longer‑term credit‑related losses
21
15
(91)
(71)
23
17
(97)
(72)
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 credit of £541 million for net unrealised gains on debt securities classified as available‑for‑sale net of related amortisation of deferred
acquisition costs (2016: credit of £48 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 C3.2(b).
(ii) UK and Europe operations
The negative short‑term fluctuations in investment returns for UK and Europe operations of £(14) million (2016: positive £206 million) include net unrealised movements on fixed
income assets supporting the capital of the shareholder‑backed annuity business.
(iii) Other operations
The positive short‑term fluctuations in investment returns for other operations of £20 million (2016: negative £(204) million) include unrealised value movements
on financial instruments.
www.prudential.co.uk
Annual Report 2017 Prudential plc 181
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
B Earnings performance continued
B1 Analysis of performance by segment continued
B1.3 Determining operating segments and performance measure of operating segments
Operating segments
The Group’s operating segments for financial reporting are defined and presented in accordance with IFRS 8, ‘Operating Segments’ on
the basis of the management reporting structure and its financial management information. Following the combination during the year
of the Group’s UK insurance business and M&G to form M&G Prudential, the Group has reassessed its operating segments.
Under the Group’s management and reporting structure its chief operating decision‑maker is the Group Executive Committee (GEC).
In the revised management structure, responsibility is delegated to the Chief Executive Officers of Prudential Corporation Asia, the
North American Business Unit and M&G Prudential for the day‑to‑day management of their business units (within the framework set
out in the Group Governance Manual). Financial management information used by the GEC has been revised to align with these three
business segments. These operating segments derive revenue from both long‑term insurance and asset management activities.
In the prior year, the operating segments of the Group were each of the insurance operations in Asia, US and UK, and the asset
management operations of Asia, US, M&G and Prudential Capital.
Operations which do not form part of any business unit are reported as ‘Unallocated to a segment’. These include Group Head Office
and Asia Regional Head Office costs. Following the formation of M&G Prudential certain minor operations which were previously
reported as ‘Unallocated to a segment’ are now included in the UK and Europe segment, reflecting the revised structure. Prudential
Capital and Africa operations do not form part of any operating segment under the revised structure, and their assets and liabilities and
loss before tax are not material to the overall financial position of the Group. Prudential Capital and Africa operations are therefore
reported as ‘Unallocated to a segment’.
Comparative segmental information for prior periods has been presented on a basis consistent with the current year.
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. This includes the impact of short‑term market effects
on the carrying value of Jackson’s guarantee liabilities and related derivatives as explained below.
— 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; and
— Profit/loss attaching to businesses that have been sold in the year including, where relevant, the recycling of the cumulative
translation gain or loss in respect of sold businesses.
Determination of operating profit based on longer-term investment returns 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 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, movements in liabilities for some types of business 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. For other types of Asia’s non‑participating business, expected longer‑term investment returns are
used to determine the movement in policyholder liabilities for determining operating results.
182 Prudential plc Annual Report 2017
www.prudential.co.uk
(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 unit‑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. 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.
Debt securities and loans
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 2017, the level of unamortised interest‑related realised gains and losses related to previously sold bonds for the
Group was a net gain of £855 million (2016: £969 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 separate accounts are principally relevant 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 derivatives 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, expected longer‑term investment returns 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.
Equity-type securities
For Asia insurance operations, investments in equity securities held for non‑linked shareholder‑backed operations amounted to
£1,759 million as at 31 December 2017 (2016: £1,405 million). The rates of return applied in 2017 ranged from 4.3 per cent to
17.2 per cent (2016: 3.2 per cent to 13.9 per cent) with the rates applied varying by business unit. These rates are broadly stable from
period to period but may be different between countries reflecting, for example, differing expectations of inflation in each business unit.
The assumptions are for the 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.
www.prudential.co.uk
Annual Report 2017 Prudential plc 183
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information B1 Analysis of performance by segment continued
B1.3 Determining operating segments and performance measure of operating segments continued
(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 (i):
— Fair value movements for equity‑based derivatives;
— Fair value movements for embedded derivatives for the ‘not for life’ portion of Guaranteed Minimum Withdrawal Benefit
(GMWB) and fixed index annuity business, and Guaranteed Minimum Income Benefit (GMIB) reinsurance (see below);
— Movements in the accounts carrying value of Guaranteed Minimum Death Benefit (GMDB), GMIB and the ‘for life’ portion of GMWB
liabilities (see below), 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 (ie they are relatively insensitive to the effect
of current period equity market and interest rate changes);
— 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 the ‘not for life’ portion of GMWB and fixed index annuity business
The ‘not for life’ portion of GMWB embedded derivative liabilities is measured under the US GAAP basis applied for IFRS in a manner
consistent with IAS 39 under which the projected future growth rate of the account balance is based on current swap rates (rather than
expected rates of return) with only a portion of the expected future guarantee fees included. Reserve value movements on these
liabilities are sensitive to changes to levels of equity markets, implied volatility and interest rates.
Embedded derivatives for variable annuity guarantee minimum income benefit
The GMIB liability, which is substantially 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. This accounting basis substantially does
not recognise the effects of market movements. 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 GMIB 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 other
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.
184 Prudential plc Annual Report 2017
www.prudential.co.uk
B Earnings performance continued (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.
Equity-type securities
As at 31 December 2017, the equity‑type securities for US insurance non‑separate account operations amounted to £946 million
(2016: £1,323 million). For these operations, the longer‑term rates of return for income and capital applied in the years indicated,
which reflect the combination of the average risk‑free rates over the year and appropriate risk premiums are as follows:
Equity‑type securities such as common and preferred stock and portfolio holdings in mutual funds
Other equity‑type securities such as investments in limited partnerships and private equity funds
6.1% to 6.5% 5.5% to 6.5%
8.1% to 8.5% 7.5% to 8.5%
2017
2016
(d) UK and Europe 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 shareholder‑backed annuity business within The Prudential Assurance Company Limited (PAC) 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 with 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 with
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 and Europe 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.
www.prudential.co.uk
Annual Report 2017 Prudential plc 185
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information B1 Analysis of performance by segment continued
B1.4 Segmental income statement
2017 £m
Asia
US
UK and
Europe
Total
segment
15,688
(656)
15,164
(352)
13,126
(1,050)
43,978
(2,058)
15,032
307
15,339
40
932
8,063
24,374
14,812
669
15,481
64
2,085
16,448
34,078
12,076
1,406
13,482
5
3,413
11,171
28,071
41,920
2,382
44,302
109
6,430
35,682
86,523
Unallo-
cated
to a
segment
(other
operations)
note (iii)
27
(4)
23
48
71
(109)
67
10
39
Group
total
44,005
(2,062)
41,943
2,430
44,373
–
6,497
35,692
86,562
(18,291)
(31,205)
(23,025)
(72,521)
(11)
(72,532)
(4,052)
–
(2,257)
(16)
(3,379)
–
(9,688)
(16)
(477)
(409)
(10,165)
(425)
61
5
–
–
–
162
–
–
–
61
5
162
–
–
–
61
5
162
Gross premium earned
Outward reinsurance
Earned premiums, net of reinsurance
Other income from external customers note (ii)
Total revenue from external customers note (v)
Intra‑group revenue
Interest income note (iv)
Other investment returnB1.5
Total revenue, net of reinsurance
Benefits and claims and movements in
unallocated surplus of with‑profits funds,
net of reinsurance
Acquisition costs and other operating
expenditureB2
Interest on core structural borrowings
Disposal of Korea life businessD1
Cumulative exchange gain on the sold
Korea life business recycled from other
comprehensive incomeD1
Remeasurement adjustments
Gain on disposal of other businessesD1
Total charges, net of reinsurance and gain (loss)
on disposal of businesses
(22,277)
(33,316)
(26,404)
(81,997)
(897)
(82,894)
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
181
2,278
(250)
2,028
–
762
–
762
121
302
–
302
1,788
(424)
1,364
4,828
(674)
4,154
(858)
–
(858)
3,970
(674)
3,296
Analysis of operating profit
Operating profit (loss) based on longer‑term
investment returns
Short‑term fluctuations in investment returns
on shareholder‑backed business
Amortisation of acquisition accounting
adjustments
Profit attaching to the disposal of businesses
Cumulative exchange gain on the sold Korea life
business recycled from other comprehensive
incomeD1
Profit (loss) before tax
1,975
2,224
1,378
5,577
(878)
4,699
(1)
(7)
–
61
2,028
(1,568)
(14)
(1,583)
20
(1,563)
(56)
162
–
762
–
–
–
1,364
(63)
162
61
4,154
–
–
–
(63)
162
61
(858)
3,296
186 Prudential plc Annual Report 2017
www.prudential.co.uk
B Earnings performance continued 2016* £m
Asia
US
UK and
Europe
Total
segment
14,006
(648)
13,358
253
13,611
27
875
2,042
16,555
14,685
(367)
14,318
684
15,002
53
2,151
5,461
22,667
10,290
(1,005)
9,285
1,346
10,631
4
4,517
17,578
32,730
38,981
(2,020)
36,961
2,283
39,244
84
7,543
25,081
71,952
Unallo-
cated
to a
segment
(other
operations)
note (iii)
–
–
–
87
87
(84)
104
(217)
(110)
Group
total
38,981
(2,020)
36,961
2,370
39,331
–
7,647
24,864
71,842
(11,442)
(20,214)
(27,710)
(59,366)
–
(59,366)
(3,684)
–
(238)
(1,913)
(15)
(2,813)
–
(8,410)
(15)
(438)
(345)
(8,848)
(360)
–
–
(238)
–
(238)
Gross premium earned
Outward reinsurance
Earned premiums, net of reinsurance
Other income from external customers note (ii)
Total revenue from external customers note (v)
Intra‑group revenue
Interest income note (iv)
Other investment returnB1.5
Total revenue, net of reinsurance
Benefits and claims and movements in
unallocated surplus of with‑profits funds, net
of reinsurance
Acquisition costs and other operating
expenditureB2
Interest on core structural borrowings
Remeasurement of carrying value of Korea life
business classified as held for saleD1
Total charges, net of reinsurance and gain (loss)
on disposal of business
(15,364)
(22,142)
(30,523)
(68,029)
(783)
(68,812)
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
148
1,339
(155)
1,184
–
525
–
525
34
182
–
182
2,241
(782)
4,105
(937)
(893)
–
3,212
(937)
1,459
3,168
(893)
2,275
Analysis of operating profit
Operating profit (loss) based on longer‑term
investment returns
Short‑term fluctuations in investment returns on
shareholder‑backed business
Amortisation of acquisition accounting
adjustments
Loss attaching to the held for sale Korea life
businessD1
Profit (loss) before tax
1,644
2,048
1,253
4,945
(689)
4,256
(225)
(1,455)
206
(1,474)
(204)
(1,678)
(8)
(227)
1,184
(68)
–
525
–
–
1,459
(76)
(227)
3,168
–
–
(893)
(76)
(227)
2,275
* The 2016 comparative results have been re‑presented from those previously published following the reassessment of the Group’s operating segments as described in note B1.3.
Notes
(i)
(ii) Other income from external customers includes £7 million (2016: £8 million) relating to financial instruments that are not held at fair value through profit or loss. These fees primarily
This measure is the formal profit (loss) before tax measure under IFRS but is not the result attributable to shareholders.
related to prepayment fees, late fees and syndication fees.
(iii) Unallocated to a segment includes central operations (Group and Asia Regional Head Offices and Group borrowings), Prudential Capital and Africa operations. In addition, this
column includes intra‑group eliminations, including the elimination of the intra‑group reinsurance contract between the UK with‑profits and Asia with‑profits operations.
Interest income includes £3 million (2016: £3 million) accrued in respect of impaired securities.
In Asia, revenue from external customers from no individual market exceeds 10 per cent of the Group total except for Hong Kong in 2017 (2016: no individual market exceeded
10 per cent except for Hong Kong). Total revenue from external customers of Hong Kong is £7,269 million (2016: £6,313 million).
(iv)
(v)
(vi) Due to the nature of the business of the Group, there is no reliance on any major customers.
www.prudential.co.uk
Annual Report 2017 Prudential plc 187
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information B1 Analysis of performance by segment continued
B1.5 Other investment return
Realised and unrealised gains on securities at fair value through profit or loss
Realised and unrealised (losses) on derivatives at fair value through profit or loss
Realised (losses) gains on available‑for‑sale securities, previously recognised in other comprehensive
income*
Realised gains on loans
Dividends
Other investment income
Other investment return
* Including impairment.
2017 £m
2016 £m
33,121
(1,624)
28,489
(7,050)
(26)
9
2,654
1,558
270
91
2,283
781
35,692
24,864
Realised gains and losses on the Group’s investments for 2017 recognised in the income statement amounted to a net gain of £5.7 billion
(2016: a net loss of £1.6 billion).
B1.6 Additional analysis of performance by segment components
B1.6(a) Asia
2017 £m
2016* £m
Insurance
Asset
management
Eliminations
Total
Total
13,358
253
13,611
27
875
2,042
Earned premiums, net of reinsurance
Other income from external customers
Total revenue from external customers
Intra‑group revenue
Interest income
Other investment return
Total revenue, net of reinsurance
15,032
95
15,127
–
930
8,060
24,117
–
212
212
148
2
3
365
–
–
–
(108)
–
–
(108)
15,032
307
15,339
40
932
8,063
24,374
16,555
Benefits and claims and movements in unallocated surplus of
with‑profits funds, net of reinsurance
Acquisition costs and other operating expenditure B2
Disposal of Korea life business: D1
Cumulative exchange gain recycled from other
comprehensive income
Remeasurement adjustments
Total charges, net of reinsurance and gain (loss) on disposal of
(18,291)
(3,911)
–
(249)
–
108
(18,291)
(4,052)
(11,442)
(3,684)
61
5
–
–
–
–
61
5
–
(238)
businesses
(22,136)
(249)
108
(22,277)
(15,364)
Share of profit from joint ventures and associates, net of related
tax
Profit before tax (being tax attributable to shareholders’ and
policyholders’ returns)
Tax charge attributable to policyholders’ returns
Profit before tax attributable to shareholders
Analysis of operating profit
Operating profit based on longer‑term investment returns
Short‑term fluctuations in investment returns on shareholder‑
backed business
Amortisation of acquisition accounting adjustments
Loss attaching to disposal of businesses
Cumulative exchange gain on the sold Korea life business D1
121
2,102
(250)
1,852
60
176
–
176
1,799
176
(1)
(7)
–
61
–
–
–
–
Profit before tax attributable to shareholders
1,852
176
–
–
–
–
–
–
–
–
–
–
181
148
2,278
(250)
2,028
1,339
(155)
1,184
1,975
1,644
(1)
(7)
–
61
(225)
(8)
(227)
–
2,028
1,184
* The 2016 comparative results have been re‑presented from those previously published following reassessment of the Group’s operating segments as described in note B1.3.
188 Prudential plc Annual Report 2017
www.prudential.co.uk
B Earnings performance continued B1.6(b) US
Earned premiums, net of reinsurance
Other income from external customers
Total revenue from external customers
Intra‑group revenue
Interest income
Other investment return
Total revenue, net of reinsurance
Benefits and claims
Interest on core structural borrowings
Acquisition costs and other operating expenditureB2
Gain on disposal of businessesD1
Total charges, net of reinsurance and gain on disposal
of businesses
Profit before tax
Analysis of operating profit
Operating profit based on longer‑term investment returns
Short‑term fluctuations in investment returns on shareholder‑
backed business
Amortisation of acquisition accounting adjustments
Profit attaching to the disposal of businesses
Profit before tax
2017 £m
2016* £m
Insurance
Asset
management†
Eliminations
Total
14,812
4
14,816
–
2,085
16,448
33,349
(31,205)
(16)
(1,538)
–
(32,759)
590
2,214
(1,568)
(56)
–
590
–
665
665
115
–
–
780
–
–
(770)
162
(608)
172
10
–
–
162
172
–
–
–
(51)
–
–
(51)
–
–
51
–
51
–
–
–
–
–
–
14,812
669
15,481
64
2,085
16,448
34,078
(31,205)
(16)
(2,257)
162
Total
14,318
684
15,002
53
2,151
5,461
22,667
(20,214)
(15)
(1,913)
–
(33,316)
(22,142)
762
525
2,224
2,048
(1,568)
(56)
162
762
(1,455)
(68)
–
525
*The 2016 comparative results have been re‑presented from those previously published following reassessment of the Group’s operating segments as described in note B1.3.
† The US total revenue includes asset management gross revenue of £780 million (2016: £785 million), including £542 million of NPH broker‑dealer fees (2016: £550 million), and asset
management gross charges of £770 million (2016: £789 million), including £542 million (2016: £550 million) of NPH broker‑dealer fees.
www.prudential.co.uk
Annual Report 2017 Prudential plc 189
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information B1 Analysis of performance by segment continued
B1.6 Additional analysis of performance by segment components continued
B1.6(c) UK and Europe
2017 £m
2016* £m
Insurance
Asset
management†
Eliminations
Total
Earned premiums, net of reinsurance
Other income from external customers
Total revenue from external customers
Intra‑group revenue
Interest income
Other investment return
Total revenue, net of reinsurance
Benefits and claims and movements in unallocated surplus of
with‑profits funds, net of reinsurance
Acquisition costs and other operating expenditureB2
Total charges, net of reinsurance
Share of profit from joint ventures and associates, net of
related tax
Profit before tax (being tax attributable to shareholders’ and
policyholders’ returns)
Tax charge attributable to policyholders’ returns
Profit before tax
Analysis of operating profit
Operating profit based on longer‑term investment returns
Short‑term fluctuations in investment returns on shareholder‑
backed business
Profit before tax
12,076
241
12,317
–
3,412
11,164
26,893
(23,025)
(2,692)
(25,717)
106
1,282
(424)
858
878
(20)
858
–
1,165
1,165
271
1
7
1,444
–
(953)
(953)
15
506
–
506
500
6
506
–
–
–
(266)
–
–
(266)
–
266
266
–
–
–
–
–
–
–
12,076
1,406
13,482
5
3,413
11,171
28,071
Total
9,285
1,346
10,631
4
4,517
17,578
32,730
(23,025)
(3,379)
(26,404)
(27,710)
(2,813)
(30,523)
121
34
1,788
(424)
1,364
1,378
(14)
1,364
2,241
(782)
1,459
1,253
206
1,459
* The 2016 comparative results have been re‑presented from those previously published following reassessment of the Group’s operating segments as described in note B1.3.
† The revenue for UK and Europe asset management of £1,087 million (2016: £956 million), comprising the amounts for asset management fee income, other income and performance‑
related fees shown in note B1.1(vi), is different to the amount of £1,444 million shown in the table above. This is because the £1,087 million (2016: £956 million) is after deducting
commissions which would have been included as charges in the table above. The difference in the presentation of commission is aligned with how management reviews the business.
For further information see note B1.1.
190 Prudential plc Annual Report 2017
www.prudential.co.uk
B Earnings performance continued B2 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
Total acquisition costs and other expenditure includes:
2017 £m
2016 £m
(3,712)
911
(6,380)
(984)
(10,165)
(3,687)
923
(5,522)
(562)
(8,848)
(a) Total depreciation and amortisation expense of £(288) million (2016: £(242) million) is included in ‘Administration costs and other
expenditure’ and relates primarily to amortisation of deferred acquisition costs of insurance contracts and asset management
contracts.
(b) The charge for non‑deferred acquisition costs and the amortisation of those costs that are deferred was £(2,801) million (2016:
£(2,764) million).These amounts comprise £(2,772) million and £(29) million for insurance and investment contracts respectively
(2016: £(2,734) million and £(30) million respectively).
(c) Movements in amounts attributable to external unit holders are in respect of those OEICs and unit trusts which are required to be
consolidated and comprise a charge of £(719) million (2016: £(485) million) for UK and Europe insurance operations and a charge of
£(265) million (2016: £(77) million) for Asia insurance operations.
(d) There were no fee expenses relating to financial liabilities held at amortised cost included in acquisition costs in 2017 and 2016.
(e) The segmental analysis of interest expense (other than interest expense in core structural borrowings) and depreciation and
amortisation included within total acquisition costs and other expenditure was as follows:
Asia:
Insurance
Asset management
US:
Insurance
Asset management
UK and Europe:
Insurance
Asset management
Total segment
Unallocated to a segment (other operations)
Group total
Other interest expense
Depreciation and amortisation
2017 £m
2016* £m
2017 £m
2016* £m
–
–
(116)
–
(85)
–
(201)
(39)
(240)
–
–
(56)
–
(102)
–
(158)
(27)
(185)
(230)
(3)
20
(7)
(59)
(7)
(286)
(2)
(288)
(201)
(2)
94
(3)
(121)
(7)
(240)
(2)
(242)
* The 2016 comparative results have been re‑presented from those previously published following reassessment of the Group’s operating segments as described in note B1.3.
B2.1 Staff and employment costs
The average number of staff employed by the Group during the year was:
Business operations:
Asia
US
UK and Europe*
Total
* The UK and Europe staff numbers include staff from central operations and Africa which are unallocated to a segment.
2017
2016
15,477
4,564
7,110
27,151
15,439
4,447
6,381
26,267
www.prudential.co.uk
Annual Report 2017 Prudential plc 191
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
B2 Acquisition costs and other expenditure continued
B2.1 Staff and employment costs continued
The costs of employment were:
Business operations:
Wages and salaries
Social security costs
Pension costs:
Defined benefit schemes*
Defined contribution schemes
Total
* The (credit) charge incorporates the effect of actuarial gains and losses.
2017 £m
2016 £m
1,774
129
(3)
85
1,985
1,483
110
213
79
1,885
B2.2 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 in operation include the Prudential Long Term Incentive Plan (PLTIP), Annual Incentive Plan (AIP), savings‑related share option
schemes, share purchase plans and deferred bonus plans. Some of these plans are participated in by Executive Directors, the details of
which are described in the Directors’ remuneration report. In addition, the following information is provided.
Share scheme
Description
Prudential
Corporation Asia
Long-Term
Incentive Plan
(PCA LTIP)
The PCA LTIP provides eligible employees with conditional awards. Awards are discretionary and on a
year‑by‑year basis determined by Prudential’s full year financial results and the employee’s contribution to
the business. Awards vest after three years subject to the employee being in employment. Vesting of awards
may also be subject to performance conditions. All awards are made in Prudential shares, or ADRs, except
for countries where share awards are not feasible due to securities and/or tax reasons, where awards will be
replaced by the cash value of the shares that would otherwise have vested.
Prudential Agency
Long-Term
Incentive Plan
Certain agents in Asia are eligible to be granted awards under the Prudential Agency Long‑Term Incentive Plan.
These awards are structured in a similar way to the PCA LTIP described above.
Restricted Share
Plan (RSP)
The Company operates the RSP for certain employees. Awards under this plan are discretionary, and the vesting
of awards may be subject to performance conditions. All awards are made in Prudential shares or ADRs.
Deferred bonus
plans
Savings-related
share option
schemes
Share purchase
plans
The Company operates a number of deferred bonus schemes including the Group Deferred Bonus Plan (GDBP),
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.
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.
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 are eligible to
participate in the Share Participation Plan. Staff based in Asia are eligible to participate in the Prudential
Corporation Asia All Employee Share Purchase Plan.
192 Prudential plc Annual Report 2017
www.prudential.co.uk
B Earnings performance 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 2017 and 2016:
Options outstanding under SAYE schemes
Awards outstanding under
incentive plans including
conditional options
2017
2016
2017
2016
Number
of options
millions
Weighted
average
exercise
price
£
Number
of options
millions
Weighted
average
exercise
price
£
Number of awards
millions
7.1
1.4
(1.7)
(0.1)
(0.2)
(0.1)
6.4
0.4
10.74
14.55
10.07
10.83
11.19
10.86
11.74
11.06
8.8
1.4
(2.0)
(0.1)
(0.8)
(0.2)
7.1
0.6
9.44
11.04
7.30
9.95
6.45
9.64
10.74
8.53
30.2
12.7
(7.3)
(1.3)
(0.1)
(0.6)
33.6
28.4
13.9
(10.5)
(1.5)
(0.1)
–
30.2
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 2017 was £17.51 compared to £13.56 for the
year ended 31 December 2016.
The following table provides a summary of the range of exercise prices for Prudential plc options outstanding at 31 December.
Number
outstanding
(millions)
Outstanding
Weighted average
remaining
contractual life
(years)
Exercisable
Weighted average
exercise prices
£
Number
exercisable
(millions)
Weighted average
exercise prices
£
2017
2016
2017
2016
2017
2016
2017
2016
2017
–
–
0.5
4.5
1.4
6.4
0.1
0.2
1.1
5.7
–
7.1
–
0.4
1.4
2.2
3.9
2.5
0.4
1.4
1.4
2.9
–
2.6
–
6.29
9.01
11.21
14.55
11.74
4.66
6.29
9.01
11.27
–
10.74
–
–
–
0.4
–
0.4
0.1
–
0.5
–
–
0.6
–
6.29
–
11.55
–
11.06
2016
4.66
6.29
9.01
–
–
8.53
Between £4 and £5
Between £6 and £7
Between £9 and £10
Between £11 and £12
Between £14 and £15
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 and awards, were determined by using the following
assumptions:
2017
2016
Prudential
LTIP/RSP (TSR)
SAYE
options
Other
awards
Prudential
LTIP (TSR)
SAYE
options
Other
awards
Dividend yield (%)
Expected volatility (%)
Risk‑free interest rate (%)
Expected option life (years)
Weighted average exercise price (£)
Weighted average share price at grant date (£)
Weighted average fair value at grant date (£)
–
23.17
0.62
–
–
16.80
8.30
2.85
20.15
0.56
3.49
14.55
17.74
3.29
–
–
–
–
–
–
16.12
–
29.36
0.12
–
–
12.82
4.41
3.19
25.41
0.15
3.70
11.04
13.94
3.05
–
–
–
–
–
–
12.57
www.prudential.co.uk
Annual Report 2017 Prudential plc 193
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information B2 Acquisition costs and other expenditure continued
B2.2 Share-based payment continued
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 those which have TSR performance conditions attached (some
Prudential LTIP and RSP awards) for which the Group uses a Monte Carlo model in order to allow for the impact of these 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 yields are determined as the average yield over a period of 12 months up to
and including the date of grant. For awards with a TSR condition, volatilities and correlations between Prudential and a basket of
15 competitor companies is required. For grants in 2017, the average volatility for the basket of competitors was 22.93 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 basket of competitors. 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
2017 £m
2016 £m
158
158
126
127
The group has no liabilities outstanding at the year‑end relating to awards which are settled in cash.
B2.3 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
2017 £m
2016 £m
17.9
1.3
14.1
33.3
20.7
1.3
18.7
40.7
The share‑based payments charge comprises £8.3 million (2016: £12.9 million), which is determined in accordance with IFRS 2,
‘Share‑based Payment’ (see note B2.2) and £5.8 million (2016: £5.8 million) of deferred share awards.
Total key management remuneration includes total Directors’ remuneration of £40.2 million (2016: £37.9 million) less LTIP releases of
£15.2 million (2016: £10.1 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.
B2.4 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
2017 £m
2016 £m
2.1
8.3
4.3
–
1.5
0.4
0.7
2.0
7.5
3.9
0.1
2.1
–
0.6
17.3
16.2
In addition, there were fees incurred by pension schemes of £0.1 million (2016: £0.1 million) for audit services and £nil million
(2016: £0.1 million) for other assurance services.
194 Prudential plc Annual Report 2017
www.prudential.co.uk
B Earnings performance continued B3 Effect of changes and other accounting matters on insurance assets and liabilities
The following matters are relevant to the determination of the 2017 results:
(a) Asia insurance operations
In 2017, the IFRS operating profit based on longer‑term investment returns for Asia insurance operations included a net credit of
£75 million (2016: £67 million) representing a small number of individually minor items.
(b) US insurance operations
Changes in the policyholder liabilities held for variable and fixed index annuity guarantees are reported as part of non‑operating profit
and are as described in note B1.2.
(c) UK and Europe 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. The credit risk allowance comprises an amount for long‑term best estimate defaults
and additional provisions for credit risk premium, the cost of downgrades and short‑term defaults.
The IFRS credit risk allowance made for the UK shareholder‑backed fixed and linked annuity business equated to 42 basis points at
31 December 2017 (2016: 43 basis points). The allowance represented 28 per cent of the bond spread over swap rates
(2016: 26 per cent).
The reserves for credit risk allowance at 31 December 2017 for the UK shareholder‑backed business were £1.6 billion
(2016: £1.7 billion).
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 2017, was a credit of £173 million (2016: credit of £16 million). This included, amongst other items, a benefit to
IFRS operating profit based on longer‑term investment returns of £204 million, relating to changes to annuitant mortality assumptions
primarily reflecting the adoption of the Continuous Mortality Investigation (CMI) 2015 model. Further information on changes to
mortality assumptions is given in note C4.1(d).
Longevity reinsurance and other management actions
A number of management actions were taken in 2017 to improve the solvency position of the UK and Europe insurance operations and
further mitigate market risk, which have generated combined profits of £276 million. Similar actions were also taken in 2016 and 2015.
Of this amount £31 million related to profit from an additional longevity reinsurance transactions covering £0.5 billion of annuity
liabilities on an IFRS basis, with the balance of £245 million reflecting the effect of repositioning the fixed income portfolio and other
actions.
The contribution to profit from similar longevity reinsurance and other management actions in 2016 was £332 million (of which
£197 million related to longevity reinsurance transactions covering £5.4 billion of IFRS annuity liabilities).
At 31 December 2017, longevity reinsurance covered £14.4 billion of IFRS annuity liabilities equivalent to 44 per cent of total annuity
liabilities (2016: £14.4 billion, 42 per cent).
With-profits sub-fund
For the with‑profits sub‑fund, the aggregate effect of assumption changes in 2017 was a net charge to unallocated surplus of £58 million
(2016: net charge of £78 million).
www.prudential.co.uk
Annual Report 2017 Prudential plc 195
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information B4 Tax charge
On 22 December 2017, a significant US tax reform package, the Tax Cuts and Jobs Act, was enacted into law effective from 1 January
2018. The tax reform package as a whole, which includes a reduction in the corporate income tax rate from 35 per cent to 21 per cent,
and a number of specific measures affecting US life insurers, is expected to be beneficial in the longer term. However in 2017 the changes
have had an adverse impact on the tax charge attributable to shareholders in the Group’s US operations and a benefit to policyholders in
the with‑profits fund of the UK and Europe operations, due to the requirement to remeasure deferred tax balances at the new 21 per cent
rate. The 2017 impacts on the Group’s income statement and on other comprehensive income of the US tax changes are set out below
and the impact on the balance sheet are set out in note C8.
(a) Total tax charge by nature of expense
The total tax charge in the income statement is as follows:
Tax charge
Attributable to shareholders:
Asia operations
US operations
UK and Europe
Other operations
Tax charge attributable to shareholders’ returns
Attributable to policyholders:
Asia operations
UK and Europe
Tax charge attributable to policyholders’ returns
Total tax charge
2017 £m
2016 £m
Current
tax
Deferred
tax
Total
Total
(164)
56
(302)
122
(288)
(92)
(316)
(408)
(696)
(89)
(564)
35
–
(618)
(157)
(109)
(266)
(884)
(253)
(508)
(267)
122
(906)
(249)
(425)
(674)
(256)
66
(275)
111
(354)
(155)
(782)
(937)
(1,580)
(1,291)
The principal reason for the increase in the tax charge attributable to shareholders’ returns is a £445 million deferred tax charge arising on
the remeasurement of the US net deferred tax assets from 35 per cent to 21 per cent. The principal reason for the decrease in the tax
charge attributable to policyholders’ returns is a smaller increase in deferred tax liabilities on unrealised gains on investments in the
with‑profits fund of UK and Europe compared to 2016, combined with a £92 million credit following the remeasurement of US net
deferred tax liabilities in the same with‑profits fund.
The reconciliation of the expected to actual tax charge attributable to shareholders is provided in (b) below. The tax charge
attributable to policyholders of £674 million above is equal to the profit before tax attributable to policyholders of £674 million. This is the
result of accounting for policyholder income after the deduction of expenses and movement on unallocated surpluses and on an after tax
basis.
196 Prudential plc Annual Report 2017
www.prudential.co.uk
B Earnings performance continued The total tax charge comprises:
Current tax expense:
Corporation tax
Adjustments in respect of prior years
Total current tax charge
Deferred tax arising from:
Origination and reversal of temporary differences
Impact of changes in local statutory tax rates
Credit in respect of a previously unrecognised tax loss, tax credit or temporary difference from a prior
period
Total deferred tax (charge) credit
Total tax charge
2017 £m
2016 £m
(746)
50
(696)
(531)
(353)
–
(884)
(1,464)
87
(1,377)
64
6
16
86
(1,580)
(1,291)
The reduction in the corporation tax expense from £1,464 million in 2016 to £746 million in 2017 principally relates to US operations
where a higher tax deduction arises in 2017 as compared to 2016 in respect of derivative losses.
The 2017 impact of changes in local statutory tax rates relates to the remeasurement of US deferred tax balances following US tax
reform attributable to both shareholders and policyholders.
The current tax charge of £696 million (2016: £1,377 million) includes £59 million (2016: £53 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 deferred tax (charge) credit arises as follows:
Short‑term temporary differences
Unrealised gains and losses on investments
Balances relating to investment and insurance contracts
Unused tax losses
Capital allowances
Deferred tax (charge) credit
2017 £m
2016 £m
(526)
(185)
(156)
(12)
(5)
(884)
573
(437)
(90)
36
4
86
The movement in the short‑term temporary differences from a credit in 2016 of £573 million to a charge in 2017 of £526 million principally
relates to the US operations due to the combination of the £445 million charge relating to the remeasurement of the deferred tax balances
following the US tax reform changes and a £695 million deferred tax charge relating to the amortisation of US operations derivative
losses, which are spread across three years for tax purposes. The unrealised gains and losses on investments charge is after including the
£92 million benefit from remeasurement of deferred tax balances on unrealised gains of US investments in the with‑profits funds of UK
and Europe operations.
In 2017, a tax charge of £75 million (2016: credit of £10 million) attributable to shareholders has been taken through other
comprehensive income. The 2017 charge includes a £190 million deferred tax charge primarily on unrealised gains on bonds held in the
US operations partly offset by £134 million benefit relating to the remeasurement of US net deferred tax liabilities on the bonds.
www.prudential.co.uk
Annual Report 2017 Prudential plc 197
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
B4 Tax charge continued
(b) Reconciliation of shareholder effective tax rate
In the reconciliation below, the expected tax rates reflect the corporation tax rates that are expected to apply to the taxable profit of the
relevant business. Where there are profits of more than one jurisdiction the expected tax rates reflect the corporation tax rates weighted
by reference to the amount of profit contributing to the aggregate business result.
Asia
operations
US
operations
UK and
Europe
Other*
operations
Total
attributable to
shareholders
Percentage
impact on ETR
2017 £m
Operating profit (loss) based on longer‑term
investment returns
Non‑operating profit (loss)
Profit (loss) before tax
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
1,975
53
2,028
21%
426
(64)
26
(92)
11
(52)
–
(10)
2,224
(1,462)
762
35%
267
(11)
6
(238)
17
–
–
–
Total
(181)
(226)
(15)
25
445
12
467
508
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 US tax reform
Adjustments in relation to business
disposals
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
* Other operations include restructuring costs.
(3)
19
–
(8)
8
253
276
(23)
14%
13%
12%
1,378
(14)
1,364
19%
259
(2)
13
(2)
(1)
(3)
–
6
11
(3)
–
–
–
(3)
(878)
20
(858)
19%
(163)
(14)
10
–
(5)
–
54
(1)
44
(3)
–
–
–
(3)
267
(122)
4,699
(1,403)
3,296
24%
789
(91)
55
(332)
22
(55)
54
(5)
23.9%
(2.8%)
1.7%
(10.1%)
0.7%
(1.7%)
1.6%
(0.1%)
(352)
(10.7%)
(24)
(0.7%)
44
445
4
469
906
1.3%
13.5%
0.1%
14.2%
27.4%
548
(40)
268
(1)
(121)
(1)
971
(65)
25%
24%
67%
19%
20%
20%
14%
13%
14%
21%
20%
27%
198 Prudential plc Annual Report 2017
www.prudential.co.uk
B Earnings performance continued The more significant reconciling items are explained below:
Income not taxable or taxable at concessionary rates
£26 million of the £64 million reconciling item in Asia operations is due to non‑taxable gains on domestic securities in Taiwan
(no equivalent amount in 2016) with the balance principally relating to income taxable at rates lower than the expected rates in
Malaysia and Singapore.
Items related to taxation of life insurance businesses
The £92 million reconciling item in Asia operations reflects where the basis of tax is not the accounting profits, primarily in:
— Hong Kong where the taxable profit is based on the net insurance premiums; and
— Indonesia and Philippines where investment income is subject to withholding tax at source and no further corporation tax.
It is higher than the 2016 adjustment of £20 million due to a larger proportion of profits attributable to Hong Kong.
The £238 million (full year 2016: £159 million) reconciling item in US operations reflects the impact of the dividend received deduction
on the taxation of profits from variable annuity business. US tax reform changes effective from 1 January 2018 are expected to reduce the
level of this deduction from 2018 onwards.
Effects of results of joint ventures and associates
The £55 million reconciling item arises from the accounting requirement for inclusion in the profit before tax of Prudential’s share of the
profits after tax from the joint ventures and associates, with no equivalent item included in Prudential’s tax charge.
Irrecoverable withholding taxes
The £54 million adverse reconciling items reflects withholding taxes on dividends paid by certain non‑UK subsidiaries, principally
Indonesia, to the UK. The dividends are exempt from UK tax and consequently the withholding tax cannot be offset against
UK tax payments.
Movements in provisions for open tax matters
The complexity of the tax laws and regulations that relate to our businesses means that from time to time we may disagree with tax
authorities on the technical interpretation of a particular area of tax law. This uncertainty means that in the normal course of business the
Group will have matters whereupon ultimate resolution of the uncertainty, the amount of profit subject to tax may be greater than the
amounts reflected in the Group’s submitted tax returns. The statement of financial position contains the following provisions in relation
to open tax matters:
At 1 January 2017
Movements in the current period included in:
Tax charge attributable to shareholders
Other movements*
At 31 December 2017
* Other movements include interest arising on open tax matters and amounts included in the Group’s share of profits from joint ventures and associates, net of related tax.
£m
(89)
(44)
(6)
(139)
www.prudential.co.uk
Annual Report 2017 Prudential plc 199
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information B4 Tax charge continued
Impact of US tax reform
As noted earlier, the reduction in the US corporate income tax rate from 35 per cent to 21 per cent from 1 January 2018 was substantively
enacted on 22 December 2017, giving rise to a £445 million unfavourable reconciling item in US operations relating to the remeasurement
of the net deferred tax asset attributable to shareholders. Separately, a £134 million benefit has been recognised in other comprehensive
income. Further detail on the impact of US tax reform is provided in note C8.
Asia
operations
US
operations
UK and
Europe
Other*
operations
Total
attributable to
shareholders
Percentage
impact on ETR
2016† £m
Operating profit (loss) based on longer‑term
investment returns
Non‑operating (loss) profit
Profit (loss) before tax
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
Write‑down of Korea life business
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
1,644
(460)
1,184
22%
260
2,048
(1,523)
525
35%
184
1,253
206
1,459
20%
292
(31)
20
(20)
(11)
(44)
–
3
(83)
1
20
–
58
79
256
(18)
8
(159)
–
–
–
–
(169)
(81)
–
–
–
(81)
(66)
(13)
10
(1)
2
(2)
–
–
(4)
(7)
–
(6)
–
(13)
(689)
(204)
(893)
20%
(179)
(5)
22
–
(14)
–
36
(7)
32
5
31
–
–
36
4,256
(1,981)
2,275
24%
557
(67)
60
(180)
(23)
(46)
36
(4)
(224)
24.4%
(2.9%)
2.6%
(7.9%)
(1.0%)
(2.0%)
1.6%
(0.1%)
(9.7%)
(82)
(3.6%)
51
(6)
58
21
2.2%
(0.2%)
2.5%
0.9%
275
(111)
354
15.6%
271
(15)
467
(533)
16%
15%
22%
23%
27%
(13)%
244
31
19%
21%
19%
(88)
(23)
894
(540)
13%
18%
12%
21%
22%
16%
* Other operations include restructuring costs.
† The 2016 comparative results have been re‑presented from those previously published following reassessment of the Group’s operating segments as described in note B1.3.
200 Prudential plc Annual Report 2017
www.prudential.co.uk
B Earnings performance continued
The 2016 expected and actual tax rates as shown include the impact of the re‑measurement loss on the held for sale Korea life business.
The 2016 tax rates for Asia operations and Group, excluding the impact of the held for sale Korea life business are as follows:
Expected tax rate on total profit
Actual tax rate:
Operating profit based on longer‑term investment returns
Total profit
B5 Earnings per share
Asia
operations
Attributable to
shareholders
22%
16%
18%
24%
21%
14%
2017
Non-
controlling
interests
Net of tax
and non-
controlling
interests
Basic
earnings
per share
Diluted
earnings
per share
£m
Pence
Pence
3,727
145.2p
145.1p
(991)
(38.6)p
(38.6)p
(43)
(1.7)p
(1.7)p
61
80
(445)
2.4p
3.1p
(17.3)p
93.1p
2.4p
3.1p
(17.3)p
93.0p
(1)
2,389
£m
(1)
–
–
–
–
–
Before
tax
B1.1
£m
Note
Tax
B4
£m
4,699
(971)
B1.2
(1,563)
572
20
–
(82)
(445)
(906)
(63)
61
162
–
3,296
Before
tax
B1.1
£m
Tax
B4
£m
4,256
(894)
(1,678)
519
(227)
(76)
2,275
(4)
25
(354)
2016
Non-
controlling
interests
Net of tax
and non-
controlling
interests
Basic
earnings
per share
Diluted
earnings
per share
£m
£m
Pence
Pence
–
–
–
–
–
3,362
131.3p
131.2p
(1,159)
(45.3)p
(45.2)p
(231)
(9.0)p
(9.0)p
(51)
1,921
(2.0)p
75.0p
(2.0)p
75.0p
Based on operating profit based on
longer‑term investment returns
Short‑term fluctuations in investment
returns on shareholder‑backed
business
Amortisation of acquisition accounting
adjustments
Cumulative exchange gain on the sold
Korea life business recycled from
other comprehensive income
Profit attaching to disposal of businesses
Impact of US tax reform
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
Loss attaching to held for sale Korea life
business
Amortisation of acquisition accounting
adjustments
Based on profit for the year
D1
D1
B4
Note
B1.2
D1
www.prudential.co.uk
Annual Report 2017 Prudential plc 201
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information B5 Earnings per share continued
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
B6 Dividends
2017
millions
2016
millions
2,567
6
(5)
2,568
2,560
7
(5)
2,562
Dividends relating to reporting year:
First interim ordinary dividend
Second interim ordinary dividend
Total
Dividends paid in reporting year:
Current year first interim ordinary dividend
Second interim ordinary dividend for prior year
Special dividend
Total
2017
2016
Pence
per share
14.50p
32.50p
47.00p
14.50p
30.57p
–
45.07p
£m
Pence
per share
375
841
1,216
373
786
–
1,159
12.93p
30.57p
43.50p
12.93p
26.47p
10.00p
49.40p
£m
333
789
1,122
332
679
256
1,267
Dividend per share
For the year ended 31 December 2016 the second interim ordinary dividend of 30.57 pence per ordinary share was paid to eligible
shareholders on 19 May 2017. The 2017 first interim ordinary dividend of 14.50 pence per ordinary share was paid to eligible
shareholders on 28 September 2017.
The second interim ordinary dividend for the year ended 31 December 2017 of 32.50 pence per ordinary share will be paid on
18 May 2018 in sterling to shareholders on the principal register and the Irish branch register at 6.00pm BST on 3 April 2018 (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
25 May 2018. The second interim ordinary dividend will be paid on or about 25 May 2018 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 13 March 2018. 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.
202 Prudential plc Annual Report 2017
www.prudential.co.uk
B Earnings performance continued
C Balance sheet notes
C1 Analysis of Group statement of financial position by segment
(a) Position as at 31 December 2017
2017 £m
By operating segment
Assets
Goodwill
Deferred acquisition costs and other intangible assets
Property, plant and equipment
Reinsurers’ share of insurance contract liabilities
Deferred tax assets
Current tax recoverable
Accrued investment income note (i)
Other debtors note (i)
Investment properties
Investment in joint ventures and associates accounted for
using the equity method
Loans
Equity securities and portfolio holdings in unit trusts
Debt securities
Derivative assets
Other investments
Deposits
Assets held for sale
Cash and cash equivalents note (ii)
Total assets
Total equity
Liabilities
Insurance contract liabilities
Investment contract liabilities with discretionary participation
features
Investment contract liabilities without discretionary
participation features
Unallocated surplus of with‑profits funds
Core structural borrowings of shareholder‑financed
operations
Operational borrowings attributable to shareholder‑financed
operations note (iv)
Borrowings attributable to with‑profits operations
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 deferred income and other liabilities note (iii)
Provisions
Derivative liabilities
Total liabilities
Total equity and liabilities
Note
C5(a)
C5(b)
C8.1
C8.2
D6
C3.3
C3.2
Asia
C2.1
US
C2.2
305
2,540
125
1,960
112
58
595
2,675
5
–
8,219
214
6,424
2,300
298
492
248
5
912
1,317
–
9,630
29,976 130,630
35,378
40,982
1,611
113
848
–
43
1,291
–
–
1,658
1,934
UK and
Europe
C2.3
1,177
210
447
2,521
157
244
1,558
3,118
16,487
504
5,986
62,670
92,707
2,954
4,774
9,540
38
5,808
Unallo-
cated
to a
segment
(other
opera-
tions)
note (v)
Elimin-
ation
of intra-
group
debtors
and
creditors
Group
total
1,482
11,011
789
9,673
2,627
613
2,676
2,963
16,497
–
–
–
(1,235)
–
(80)
–
(5,199)
–
1,416
–
–
17,042
– 223,391
– 171,374
4,801
–
5,622
–
11,236
–
38
–
10,690
–
–
42
3
3
58
93
31
2,121
–
–
109
115
2,307
123
–
362
–
1,290
84,900 197,998 210,900
6,657
(6,514) 493,941
5,926
5,248
8,245
(3,325)
–
16,094
C4.1
63,468 177,728
88,180
31
(1,235) 328,172
C4.1
C4.1
C4.1
C6.1
C6.2
C6.2
C8.1
C8.2
C11
C3.4
337
–
62,340
328
3,474
2,996
–
17,069
13,477
–
1
–
–
50
10
184
508
–
–
6,096
148
3,706
1,085
–
–
4,304
1,358
–
–
–
–
–
–
–
–
3,631
1,152
122
6,069
254
79
–
1,845
47
5,109
24
5
5,243
1,703
377
6,609
784
1,661
15
15
71
1,597
61
1,010
–
–
(80)
(5,199)
–
–
62,677
20,394
16,951
6,280
1,791
3,716
5,662
8,889
4,715
537
14,185
1,123
2,755
78,974 192,750 202,655
9,982
(6,514) 477,847
84,900 197,998 210,900
6,657
(6,514) 493,941
www.prudential.co.uk
Annual Report 2017 Prudential plc 203
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C Balance sheet notes continued
C1 Analysis of Group statement of financial position by segment continued
(b) Position as at 31 December 2016
2016* £m
By operating segment
Assets
Goodwill
Deferred acquisition costs and other intangible assets
Property, plant and equipment
Reinsurers’ share of insurance contract liabilities
Deferred tax assets
Current tax recoverable
Accrued investment income note (i)
Other debtors note (i)
Investment properties
Investment in joint ventures and associates accounted for
using the equity method
Loans
Equity securities and portfolio holdings in unit trusts
Debt securities
Derivative assets
Other investments
Deposits
Assets held for sale
Cash and cash equivalents note (ii)
Total assets
Total equity
Liabilities
Insurance contract liabilities
Investment contract liabilities with discretionary participation
features
Investment contract liabilities without discretionary
participation features
Unallocated surplus of with‑profits funds
Core structural borrowings of shareholder‑financed
operations
Operational borrowings attributable to shareholder‑financed
operations note (iv)
Borrowings attributable to with‑profits operations
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, deferred income and other liabilities note (iii)
Provisions
Derivative liabilities
Liabilities held for sale
Total liabilities
Total equity and liabilities
Note
C5(a)
C5(b)
C8.1
C8.2
D6
C3.3
C3.2
D1
Asia
C2.1
US
C2.2
306
2,319
124
1,539
107
29
549
2,662
5
16
8,327
247
7,224
3,979
101
628
304
6
–
825
1,303
9,735
23,599 120,747
40,745
36,546
834
47
992
–
49
1,425
–
3,863
1,135
2,157
UK and
Europe
C2.3
1,306
132
369
2,590
174
308
1,939
3,233
14,635
448
3,572
54,177
90,796
2,927
4,473
10,705
726
5,064
77,405 195,069 197,574
Unallo-
cated
to a
segment
(other
opera-
tions)
note (v)
Elimin-
ation
of intra-
group
debtors
and
creditors
–
29
3
–
55
2
37
2,130
–
–
563
29
2,371
128
–
6
–
1,709
7,062
–
–
–
–
–
–
–
(1,302)
–
–
–
(5,310)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Group
total
1,628
10,807
743
10,051
4,315
440
3,153
3,019
14,646
1,273
15,173
198,552
170,458
3,936
5,465
12,185
4,589
10,065
52,837
19,723
14,317
6,798
2,317
1,349
5,031
8,687
5,370
649
13,825
947
3,252
4,293
5,376
5,408
7,832
(3,949)
–
14,667
(6,612) 470,498
C4.1
54,417 174,328
88,993
(1,302) 316,436
C4.1
C4.1
C4.1
C6.1
C6.2
C6.2
C8.1
C8.2
C11
C3.4
D1
347
–
52,490
254
2,667
3,298
–
16,171
11,650
–
19
4
–
3,093
935
125
5,916
229
265
3,758
202
480
–
–
6,596
167
1,345
1,651
–
3,534
1,497
–
–
2,832
–
4,920
3
64
–
5,594
1,592
513
6,688
647
1,860
535
–
11
11
1,611
68
1,063
–
–
–
–
(5,310)
–
–
–
72,029 189,661 189,742
11,011
(6,612) 455,831
77,405 195,069 197,574
7,062
(6,612) 470,498
* The 2016 comparative results have been re‑presented from those previously published following reassessment of the Group’s operating segments as described in note B1.3.
204 Prudential plc Annual Report 2017
www.prudential.co.uk
Notes
(i)
Accrued investment income and other debtors
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
Analysed as:
Expected to be settled within one year
Expected to be settled after one year
Total accrued investment income and other debtors
(ii)
Cash and cash equivalents
Cash
Cash equivalents
Total cash and cash equivalents
Analysed as:
Held centrally and available for general use by the Group
Other funds not available for general use by the Group, including funds held for the benefit of policyholders
Total cash and cash equivalents
2017 £m
2016 £m
1,789
887
2,676
408
4
134
2,417
2,963
5,639
4,957
682
5,639
1,975
1,178
3,153
403
6
90
2,520
3,019
6,172
5,548
624
6,172
2017 £m
2016 £m
6,623
4,067
10,690
328
10,362
10,690
5,581
4,484
10,065
247
9,818
10,065
The Group’s cash and cash equivalents are held in the following currencies: pounds sterling 31 per cent, US dollars 28 per cent, Euro 24 per cent and other currencies 17 per cent
(2016: pounds sterling 38 per cent, US dollars 25 per cent, Euro 20 per cent and other currencies 17 per cent).
(iii) Accruals, deferred income and other liabilities
Accruals and deferred income
Other creditors
Creditors arising from direct insurance and reinsurance operations
Interest payable
Funds withheld under reinsurance of the REALIC business
Other items
Total accruals, deferred income and other liabilities
2017 £m
2016 £m
1,233
7,289
2,296
100
2,664
603
1,150
6,788
2,520
90
2,851
426
14,185
13,825
(iv) Operational borrowings attributable to shareholder‑financed operations within other operations, in respect of Prudential Capital’s short‑term fixed income security programme
Commercial paper
Medium Term Notes
Total Group debt represented by operational borrowings at Group level
(v) Unallocated to a segment includes central operations, Prudential Capital and Africa operations as per note B1.3.
2017 £m
2016 £m
485
600
1,085
1,052
599
1,651
www.prudential.co.uk
Annual Report 2017 Prudential plc 205
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
C Balance sheet notes continued
C2 Analysis of segment statement of financial position by business type
C2.1 Asia
31 Dec 2017 £m
Insurance
With-
profits
business
Unit-
linked
assets and
liabilities
Note
Other
business
Total
Asset
manage-
ment
Elimin-
ations
Assets
Goodwill
Deferred acquisition costs and other
intangible assets
Property, plant and equipment
Reinsurers’ share of insurance contract
liabilities
Deferred tax assets
Current tax recoverable
Accrued investment income
Other debtors
Investment properties
Investment in joint ventures and
associates accounted for using the
equity method
Loans
Equity securities and portfolio holdings
in unit trusts
Debt securities
Derivative assets
Deposits
Assets held for sale
Cash and cash equivalents
Total assets
Total equity
Liabilities
Insurance contract liabilities
Investment contract liabilities with
discretionary participation features
Investment contract liabilities without
discretionary participation features
Unallocated surplus of with‑profits
funds
Operational borrowings attributable to
shareholder‑financed operations
Borrowings attributable to with‑profits
operations
Net asset value attributable to unit
holders of consolidated unit trusts
and similar funds
Deferred tax liabilities
Current tax liabilities
Accruals, deferred income and other
liabilities
Provisions
Derivative liabilities
Liabilities held for sale
Total liabilities
Total equity and liabilities
–
45
86
76
–
1
230
1,823
–
–
725
14,995
24,432
82
246
–
632
–
–
–
–
–
2
53
169
–
244
244
2,490
36
1,884
102
55
277
648
5
2,535
122
1,960
102
58
560
2,640
5
–
–
768
592
768
1,317
13,199
3,507
5
511
–
287
1,759
13,043
26
499
–
822
29,953
40,982
113
1,256
–
1,741
43,373
17,733
23,250
84,356
–
–
5,525
5,525
33,861
15,935
13,672
63,468
C3.3
C3.2
D1
C4.1
C4.1
337
–
–
328
–
–
–
43
–
–
7
–
1,219
38
–
206
–
–
–
260
340
81
3,207
102
20
–
337
328
3,474
50
10
3,631
1,152
105
6,033
164
79
–
3,474
–
10
2,152
774
24
2,620
62
59
–
D1
61
5
3
–
10
–
35
67
–
144
–
23
–
–
35
–
193
576
401
–
–
–
–
–
–
–
–
17
68
90
–
–
175
576
31 Dec
2016* £m
Total
Total
305
306
–
–
–
–
–
–
–
(32)
–
2,540
125
1,960
112
58
595
2,675
5
–
–
–
–
–
–
–
–
912
1,317
29,976
40,982
113
1,291
–
1,934
(32) 84,900
5,926
2,319
124
1,539
107
29
549
2,662
5
825
1,303
23,599
36,546
47
1,425
3,863
2,157
77,405
5,376
–
–
–
–
–
–
–
–
–
–
(32)
–
–
–
63,468
54,417
337
328
347
254
3,474
2,667
50
10
3,631
1,152
122
6,069
254
79
–
19
4
3,093
935
125
5,916
229
265
3,758
43,373
17,733
17,725
78,831
43,373
17,733
23,250
84,356
(32) 78,974
(32) 84,900
72,029
77,405
* The 2016 comparative results have been re‑presented from those previously published following reassessment of the Group’s operating segments as described in note B1.3.
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’.
206 Prudential plc Annual Report 2017
www.prudential.co.uk
C2.2 US
31 Dec 2017 £m
31 Dec
2016* £m
Variable
annuity
separate
account
assets and
liabilities
Note
Insurance
Fixed
annuity,
GIC and
other
business
Asset
manage-
ment
Total
Elimin-
ations
Assets
Goodwill
Deferred acquisition costs and other intangible
assets
Property, plant and equipment
Reinsurers’ share of insurance contract liabilities
Deferred tax assets
Current tax recoverable
Accrued investment income
Other debtors
Investment properties
Loans
Equity securities and portfolio holdings in unit
trusts
Debt securities
Derivative assets
Other investments
Deposits
Cash and cash equivalents
Total assets
Total equity
C3.3
C3.2
Liabilities
Insurance contract liabilities
Investment contract liabilities without discretionary
participation features
C4.1
Core structural borrowings of shareholder‑financed
operations
Operational borrowings attributable to
shareholder‑financed operations
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, deferred income and other liabilities
Provisions
Derivative liabilities
Total liabilities
Total equity and liabilities
–
–
–
–
–
–
–
–
–
–
–
–
8,216
209
6,424
2,218
284
444
247
5
9,630
8,216
209
6,424
2,218
284
444
247
5
9,630
130,528
–
–
–
–
–
102 130,630
35,378
1,611
844
–
1,224
35,378
1,611
844
–
1,224
130,528
66,836 197,364
–
5,013
5,013
130,528
47,200 177,728
–
–
–
–
–
–
–
–
–
–
2,996
2,996
184
508
184
508
4,304
4,304
–
1,844
46
4,728
8
5
–
1,844
46
4,728
8
5
130,528
61,823 192,351
130,528
66,836 197,364
–
3
5
–
82
14
48
77
–
–
–
–
–
4
43
434
710
235
–
–
–
–
–
–
1
1
457
16
–
475
710
Total
Total
–
16
8,219
214
6,424
2,300
298
492
248
5
9,630
8,327
247
7,224
3,979
101
628
304
6
9,735
–
–
–
–
–
–
–
(76)
–
–
– 130,630
35,378
–
1,611
–
848
–
43
–
1,658
–
120,747
40,745
834
992
49
1,135
(76) 197,998
195,069
–
5,248
5,408
– 177,728
174,328
–
–
–
–
2,996
3,298
184
508
202
480
4,304
3,534
–
–
–
(76)
–
–
–
1,845
47
5,109
24
5
–
2,832
–
4,920
3
64
(76) 192,750
189,661
(76) 197,998
195,069
* The 2016 comparative results have been re‑presented from those previously published following reassessment of the Group’s operating segments as described in note B1.3.
www.prudential.co.uk
Annual Report 2017 Prudential plc 207
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C Balance sheet notes continued
C2 Analysis of segment statement of financial position by business type continued
C2.3 UK and Europe
31 Dec 2017 £m
31 Dec
2016* £m
Insurance
Other funds and
subsidiaries
Unit-
linked
assets and
liabilities
Annuity
and
other
long-term
business
With-
profits
sub-funds
note (i)
Note
Asset
manage-
ment
Elimin-
ations
Total
Total
Total
Assets
Goodwill
Deferred acquisition costs and other
intangible assets
Property, plant and equipment
Reinsurers’ share of insurance contract
liabilities
Deferred tax assets
Current tax recoverable
Accrued investment income
Other debtors
Investment properties
Investment in joint ventures and associates
accounted for using the equity method
Loans
Equity securities and portfolio holdings in
unit trusts
Debt securities
Derivative assets
Other investments
Deposits
Assets held for sale note (ii)
Cash and cash equivalents
Total assets
Total equity
–
24
1,153
24
100
406
1,269
70
63
892
1,553
14,153
464
4,268
47,173
50,661
2,420
4,744
7,167
38
4,096
C3.3
C3.2
–
–
–
133
–
–
107
76
682
–
–
103
37
1,119
64
181
553
624
1,652
–
1,718
15,369
6,711
8
11
1,139
–
693
9
35,335
526
1
1,234
–
576
203
443
2,521
134
244
1,552
2,253
16,487
464
5,986
62,551
92,707
2,954
4,756
9,540
38
5,365
7
4
–
23
–
6
941
–
40
–
119
–
–
18
–
–
443
139,561
24,929
43,732 208,222
–
–
6,344
6,344
2,754
1,901
Liabilities
Insurance contract liabilities
Investment contract liabilities with
discretionary participation features
Investment contract liabilities without
discretionary participation features
Unallocated surplus of with‑profits funds
Operational borrowings attributable to
shareholder‑financed operations
Borrowings attributable to with‑profits
operations
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 deferred income and other liabilities
Provisions
Derivative liabilities
Liabilities held for sale note (ii)
C4.1
48,894
6,097
33,189
88,180
C4.1
62,323
–
17
62,340
C4.1
C4.1
5
13,477
17,048
–
16
–
17,069
13,477
–
3,706
748
3,409
1,410
119
4,791
55
624
–
4
–
–
1,667
–
76
36
–
1
–
123
127
–
3,706
610
1,358
167
274
138
1,293
525
1,036
–
5,243
1,684
333
6,120
580
1,661
–
Total liabilities
139,561
24,929
37,388 201,878
–
–
–
–
21
–
–
–
19
44
565
204
–
–
853
–
–
–
–
–
–
–
(76)
–
–
–
–
–
–
–
–
–
–
1,177
1,306
210
447
2,521
157
244
1,558
3,118
16,487
504
5,986
62,670
92,707
2,954
4,774
9,540
38
5,808
132
369
2,590
174
308
1,939
3,233
14,635
448
3,572
54,177
90,796
2,927
4,473
10,705
726
5,064
(76) 210,900
197,574
–
–
–
–
–
–
–
–
8,245
7,832
88,180
88,993
62,340
52,490
17,069
13,477
16,171
11,650
148
167
3,706
1,345
1,358
1,497
–
–
–
(76)
–
–
–
5,243
1,703
377
6,609
784
1,661
–
5,594
1,592
513
6,688
647
1,860
535
(76) 202,655
189,742
Total equity and liabilities
139,561
24,929
43,732 208,222
2,754
(76) 210,900
197,574
* The 2016 comparative results have been re‑presented from those previously published following reassessment of the Group’s operating segments as described in note B1.3.
208 Prudential plc Annual Report 2017
www.prudential.co.uk
Notes
(i)
(ii)
Includes the Scottish Amicable Insurance Fund which, at 31 December 2017, have total assets and liabilities of £5,768 million (2016: £6,101 million). 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). The PAC with‑profits fund includes
£10.6 billion (2016: £11.2 billion) of non‑profits annuities liabilities.
The assets and liabilities held for sale for the UK and Europe insurance operations comprise the investment properties and consolidated venture investments of the PAC
with‑profits fund, for which the sales had been agreed but not yet completed at the year end.
C3 Assets and liabilities
C3.1 Group assets and liabilities – measurement
(a) Determination of fair value
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.
Other than the loans which have been designated at fair value through profit or loss, 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 discount
rate is updated for 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 below shows the assets and liabilities carried at fair value analysed by level of the IFRS 13 ‘Fair Value Measurement’ defined fair
value hierarchy. This hierarchy is based on the inputs to the fair value measurement and reflects the lowest level input that is significant to
that measurement.
www.prudential.co.uk
Annual Report 2017 Prudential plc 209
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C Balance sheet notes continued
C3 Assets and liabilities continued
C3.1 Group assets and liabilities – measurement continued
Financial instruments at fair value
Analysis of financial investments, net of derivative liabilities
by business type
With-profits
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
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 contract liabilities without discretionary participation features
held at fair value
Borrowings attributable to with‑profits operations
Net asset value attributable to unit holders of consolidated unit trusts and
similar funds
Other financial liabilities held at fair value
Total financial instruments at fair value
Percentage of total
31 Dec 2017 £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
–
57,347
29,143
68
(68)
86,490
60%
158,631
4,993
12
–
163,636
97%
–
2,105
21,443
7
–
23,555
25%
–
4,470
45,602
3,638
(615)
53,095
36%
457
5,226
4
(1)
5,686
3%
–
10
64,313
2,270
(1,559)
65,034
71%
–
218,083
55,579
87
(68)
–
4,937
115,141
5,912
(2,175)
273,681
123,815
–
–
(17,397)
–
(4,836)
–
268,845
72%
(3,640)
–
102,778
27%
2,023
351
348
3,540
–
6,262
4%
10
–
8
–
18
0%
2,814
10
306
876
(512)
3,494
4%
4,837
371
654
4,424
(512)
9,774
–
(1,887)
(413)
(3,031)
4,443
1%
2,023
62,168
75,093
7,246
(683)
145,847
100%
159,098
10,219
24
(1)
169,340
100%
2,814
2,125
86,062
3,153
(2,071)
92,083
100%
4,837
223,391
171,374
10,423
(2,755)
407,270
(17,397)
(1,887)
(8,889)
(3,031)
376,066
100%
210 Prudential plc Annual Report 2017
www.prudential.co.uk
Analysis of financial investments, net of derivative liabilities
by business type
With-profits
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
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 contract 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
31 Dec 2016 £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
–
45,181
26,227
58
(51)
71,415
56%
146,637
5,136
6
(4)
151,775
97%
–
1,966
21,896
–
(9)
23,853
25%
–
3,669
43,880
3,357
(1,025)
49,881
40%
374
4,462
8
(24)
4,820
3%
276
3
67,915
1,492
(1,623)
68,063
71%
27
690
690
3,443
–
4,850
4%
22
–
5
–
27
0%
2,672
10
252
1,032
(516)
3,450
4%
27
49,540
70,797
6,858
(1,076)
126,146
100%
147,033
9,598
19
(28)
156,622
100%
2,948
1,979
90,063
2,524
(2,148)
95,366
100%
–
193,784
53,259
64
(64)
276
4,046
116,257
4,857
(2,672)
247,043
122,764
2,699
722
942
4,480
(516)
8,327
2,975
198,552
170,458
9,401
(3,252)
378,134
–
(16,425)
–
(16,425)
(4,217)
–
242,826
70%
(3,587)
(385)
102,367
29%
(883)
(2,851)
4,593
1%
(8,687)
(3,236)
349,786
100%
All assets and liabilities held at fair value are classified as fair value through profit or loss, except for £35,293 million (2016: £40,645 million)
of debt securities classified as available‑for‑sale.
The Korea life business was classified as held for sale in 2016, with the sale completed in May 2017. The assets and liabilities held for
sale on the consolidated statement of financial position at 31 December 2016 in respect of Korea life business included a net financial
instruments balance of £3,200 million, primarily for equity securities and debt securities. Of this amount, £2,763 million was classified as
level 1 and £437 million as level 2.
www.prudential.co.uk
Annual Report 2017 Prudential plc 211
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C Balance sheet notes continued
C3 Assets and liabilities continued
C3.1 Group assets and liabilities – measurement continued
Investment properties at fair value
2017
2016
31 December £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
–
–
–
–
16,497
14,646
16,497
14,646
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.
31 Dec 2017 £m
Level 1
Level 2
Level 3
Quoted prices
(unadjusted) in
active markets
Valuation
based on
significant
observable
market inputs
Valuation
based on
significant
unobservable
market inputs
Total
fair
value
Total
carrying
value
Assets
Loans note (i)
Liabilities
Investment contract liabilities without discretionary
participation features
Core structural borrowings of shareholder‑financed
operations note (ii)
Operational borrowings attributable to shareholder‑financed
operations
Borrowings attributable to the with‑profits funds
Obligations under funding, securities lending and sale and
repurchase agreements
–
–
–
–
–
–
2,756
10,183
12,939
12,205
–
(3,032)
(3,032)
(2,997)
(7,023)
(1,788)
(1,761)
–
(7,023)
(6,280)
(3)
(71)
(1,791)
(1,832)
(1,791)
(1,829)
(1,410)
(4,318)
(5,728)
(5,662)
31 Dec 2016 £m
Level 1
Level 2
Level 3
Quoted prices
(unadjusted) in
active markets
Valuation
based on
significant
observable
market inputs
Valuation
based on
significant
unobservable
market inputs
Total
fair
value
Total
carrying
value
Assets
Loans note (i)
Liabilities
Investment contract liabilities without discretionary
participation features
Core structural borrowings of shareholder‑financed
operations note (ii)
Operational borrowings attributable to shareholder‑financed
operations
Borrowings attributable to the with‑profits funds
Obligations under funding, securities lending and sale and
repurchase agreements
–
–
–
–
–
–
4,062
8,846
12,908
12,198
–
(3,333)
(3,333)
(3,298)
(7,220)
(2,313)
(1,220)
–
(7,220)
(6,798)
(4)
(133)
(2,317)
(1,353)
(2,317)
(1,349)
(1,926)
(3,140)
(5,066)
(5,031)
Notes
(i)
(ii)
The carrying value of loans and receivables are reported net of allowance for loan losses of £28 million (2016: £15 million).
As at 31 December 2017, £312 million (2016: £306 million) of convertible bonds were included in debt securities and £1,311 million (2016: £1,455 million) were included in borrowings.
212 Prudential plc Annual Report 2017
www.prudential.co.uk
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. During 2017, the assumptions applied within the discounted cash flow model used to value the equity release mortgage
loans held by the UK insurance operations were refined to reflect developing market practice, including consideration of the Prudential
Regulation Authority’s industry wide review in this area and resulting guidance. This refinement incorporates inputs relevant to
determining the discount rate that are not market observable. As a result, these loans (£1,429 million at 31 December 2017) have been
transferred from level 2 to level 3 in the table above.
The fair value included for the subordinated and senior debt issued by the parent company is determined using quoted prices from
independent third parties.
(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 service 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 that 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 £115,141 million at 31 December 2017 (2016: £116,257 million), £13,910 million are valued
internally (2016: £12,708 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.
www.prudential.co.uk
Annual Report 2017 Prudential plc 213
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C Balance sheet notes continued
C3 Assets and liabilities continued
C3.1 Group assets and liabilities – measurement 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 2017 to that presented at 31 December 2017.
Financial instruments at fair value
£m
Total
(losses)/
gains
recorded
as other
compre-
hensive
income Purchases
Total
gains/
(losses) in
income
statement
Sales
Settled
Issued
Transfers
into
level 3
Transfers
out of
level 3
At
31 Dec
17
11
51
73
4
(235)
2,129
–
(311)
236
302
–
4,837
(5)
(11)
(133)
–
186
216
727
–
(468)
(522)
(725)
–
(6)
–
–
–
–
–
–
–
1
–
2
–
(70)
(22)
371
654
–
–
4,424
(512)
At
1 Jan
2,699
722
942
4,480
(516)
8,327
156
(384)
3,258
(1,715)
(317)
236
305
(92)
9,774
–
(13)
–
–
(883)
(2,851)
(559)
14
–
250
(13)
–
–
–
–
115
(1,989)
–
1,276
252
(234)
(311)
–
(385)
–
–
–
(1,887)
(413)
(3,031)
4,593
(402)
(134)
3,245
(1,715)
1,326
(2,298)
(80)
(92)
4,443
2,183
607
778
2
59
85
4,276
(353)
359
(163)
427
(20)
11
443
–
–
153
185
720
–
–
(123)
210
(133)
(75)
(1,002)
–
(9)
(37)
–
–
–
–
–
–
–
65
–
73
–
–
2,699
–
(5)
722
942
(389)
–
4,480
(516)
7,491
342
861
1,058
(1,210)
(169)
210
138
(394)
8,327
(1,036)
(2,347)
(18)
(4)
(2)
(457)
–
–
24
–
271
259
(122)
(302)
–
–
–
–
(883)
(2,851)
4,108
320
402
1,058
(1,186)
361
(214)
138
(394)
4,593
2017
Loans
Equity securities and portfolio
holdings in unit trusts
Debt securities
Other investments (including
derivative assets)
Derivative liabilities
Total financial investments,
net of derivative liabilities
Borrowings attributable to
with‑profits operations
Net asset value attributable to
unit holders of consolidated
unit trusts and similar funds
Other financial liabilities
Total financial instruments
at fair value
2016
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
214 Prudential plc Annual Report 2017
www.prudential.co.uk
Of the total net losses and gains in the income statement of £(402) million (2016: £320 million), £(139) million (2016: £242 million) relates
to net unrealised gains and losses of financial instruments still held at the end of the year, which can be analysed as follows:
Loans
Equity securities
Debt securities
Other investments
Derivative liabilities
Borrowings attributable to with‑profit operations
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
£m
2017 £m
2016 £m
20
(12)
(5)
(22)
4
(13)
(123)
12
(139)
–
8
71
182
–
–
(18)
(1)
242
At
1 Jan
14,646
13,422
Total
gains in
income
statement
415
273
Total
(losses)/
gains in
other
compre-
hensive
income
(21)
97
2017
2016
Purchases
2,048
1,527
Transfers
into
level 3
Transfers
out of
level 3
–
–
–
(41)
Sales
(591)
(632)
At
31 Dec
16,497
14,646
Of the total net losses and gains in the income statement of £415 million (2016: £273 million), £394 million (2016: £286 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 that 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 a significant
volume 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 2017, the Group held £4,443 million (2016: £4,593 million) of net financial instruments at fair value within level 3.
This represents 1 per cent (2016: 1 per cent) of the total fair valued financial assets net of fair valued financial liabilities.
The net financial instruments at fair value within level 3 at 31 December 2017 include £1,983 million of loans and a corresponding
£1,887 million of borrowings held by a subsidiary of the Group’s UK with‑profits fund, attaching to a portfolio of buy‑to‑let mortgages
and other loans financed largely by external third‑party (non‑recourse) borrowings (see note C3.3(c) for further details). The Group’s
exposure is limited to the investment held by the UK with‑profits fund, rather than to the individual loans and borrowings themselves.
The fair value movements of these loans and borrowings have no effect on shareholders’ profit and equity. The most significant
non‑observable inputs to the mortgage fair value are the level of future defaults and prepayments by the mortgage holders.
Also included within these amounts are loans of £2,512 million at 31 December 2017 (2016: £2,672 million), measured as the loan
outstanding balance, plus accrued investment income, attached to REALIC and held to back the liabilities for funds withheld under
reinsurance arrangements. The funds withheld liability of £2,664 million at 31 December 2017 (2016: £2,851 million) is also classified
within level 3, accounted for on a fair value basis being equivalent to the carrying value of the underlying assets.
www.prudential.co.uk
Annual Report 2017 Prudential plc 215
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C Balance sheet notes continued
C3 Assets and liabilities continued
C3.1 Group assets and liabilities – measurement continued
Excluding the loans and funds withheld liability under REALIC’s reinsurance arrangements as described above, which amounted to a net
liability of £(152) million (2016: £(179) million), the level 3 fair valued financial assets net of financial liabilities are £4,595 million (2016:
£4,772 million). Of this amount, a net asset of £117 million (2016: net asset of £72 million) is internally valued, representing less than
0.1 per cent of the total fair valued financial assets net of financial liabilities (2016: less than 0.1 per cent). Internal valuations are inherently
more subjective than external valuations. Included within these internally valued net asset/liability are:
(a) Debt securities of £500 million (2016: £422 million), which are 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 in both debt and equity securities of £217 million (2016: £956 million) which are valued
internally using discounted cash flows based on management information available for these investments. The significant
unobservable inputs include the determination of expected future cash flows on the investments being valued, determination of the
probability of counterparty default and prepayments and the selection of appropriate discount rates. The valuation is performed in
accordance with International Private Equity and Venture Capital Association Valuation guidelines. These investments were
principally held by consolidated investment funds that are managed on behalf of third parties.
(c) Equity release mortgage loans of £366 million (2016: £276 million classified as level 2) which are valued internally using the
discounted cash flow models. The inputs that are significant to the valuation of these investments are primarily the economic
assumptions, being the discount rate (risk‑free rate plus a liquidity premium) and property values. See below for the explanation of the
transfer of these investments from level 2 into level 3 during the year.
(d) Liabilities of £(403) million (2016: £(883) 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.
(e) Derivative liabilities of £(512) million (2016: £(516) million) which are valued internally using the discounted cash flow method in line
with standard market practices but are subject to independent assessment against external counterparties’ valuations.
(f) Other sundry individual financial investments of £81 million (2016: £93 million).
Of the internally valued net asset referred to above of £117 million (2016: net asset of £72 million):
(a) A net asset of £67 million (2016: £315 million) is 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 £(184) million (2016: £(243) million) is 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 decreased by 10 per cent, the change in
valuation would be £18 million (2016: £24 million), which would reduce shareholders’ equity by this amount before tax. All this
amount passes through the income statement substantially as part of short‑term fluctuations in investment returns outside of
operating profit.
Other assets at fair value – investment properties
The investment properties of the Group are principally held by the UK and Europe insurance operations that 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 that are
virtually identical to the 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 the year, the transfers between levels within the Group’s portfolio were primarily transfers from level 1 to level 2 of
£1,389 million and transfers from level 2 to level 1 of £411 million. These transfers which relate to equity securities and debt securities
arose to reflect the change in the observed valuation inputs and in certain cases, the change in the level of trading activities of the
securities.
In addition, in 2017, the transfers into level 3 were a net liability of £(80) million and the transfers out of level 3 were £92 million. The
transfers into level 3 include a transfer from level 2 of a net liability of £(83) million relating to the equity release mortgage loans of
£302 million and a corresponding liability of £(385) million held by the UK insurance operations that are carried at fair value through profit
or loss. During 2017, the assumptions used within the discounted cash flow model used to value these loans were refined to reflect
developing market practice, including consideration of the Prudential Regulation Authority’s industry‑wide review in this area and
resulting guidance. This refinement incorporates inputs relevant to determining the discount rate that are not market observable. As a
result, the loans were reclassified as level 3. There was no material difference in the fair value of these loans recognised in 2017, arising
from this change in the valuation model.
216 Prudential plc Annual Report 2017
www.prudential.co.uk
(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. In addition the Group has minimum standards for independent
price verification to ensure valuation accuracy is regularly independently verified. Adherence to this policy is monitored across the
business units.
C3.2 Debt securities
This note provides analysis of the Group’s debt securities, including asset‑backed securities and sovereign debt securities.
With the exception of certain debt securities for US insurance operations classified as ‘available‑for‑sale’ under IAS 39 as disclosed in
notes C3.2 (b) to (d) below, the Group’s debt securities are carried at fair value through profit or loss.
(a) Credit rating
Debt securities are analysed below according to external credit ratings issued, with equivalent ratings issued by different ratings
agencies grouped together. Standard & Poor’s ratings have been used where available, if this isn’t the case Moody’s and then Fitch have
been used as alternatives. In the table below, AAA is the highest possible rating. Investment grade financial assets are classified within
the range of AAA to BBB‑ ratings. Financial assets which fall outside this range are classified as below BBB‑. Debt securities with no
external credit rating are classified as ‘Other’.
AAA
AA+ to AA-
A+ to A-
BBB+ to BBB-
Below BBB-
Other
Total
2017 £m
Asia
With‑profits
Unit‑linked
Non‑linked shareholder‑
backed
US
Non‑linked shareholder‑
backed
UK and Europe
With‑profits
Unit‑linked
Non‑linked shareholder‑
backed
Other operations
Total debt securities
Asia
With‑profits
Unit‑linked
Non‑linked shareholder‑
backed
US
Non‑linked shareholder‑
backed
UK and Europe
With‑profits
Unit‑linked
Non‑linked shareholder‑
backed
Other operations
Total debt securities
2,504
528
10,641
103
990
2,925
3,846
510
3,226
3,234
1,429
2,970
368
6,492
670
5,118
742
17,412
6,352
9,378
2,732
11,005
1,264
44,400
9,578
12,311
11,666
1,308
9,625
182
12,856
1,793
3,267
67
1,810
372
1,879
1,000
2,877
91
258
36
2,397
565
24,432
3,507
1,053
13,043
5,769
35,378
7,392
117
6,062
16
50,661
6,711
35,335
2,307
39,941
37,927
8,323
23,371
171,374
AAA
AA+ to AA-
A+ to A-
BBB+ to BBB-
Below BBB-
Other
Total
2016 £m
3,183
448
1,082
445
5,740
461
4,238
830
16,427
8,522
112
2,435
7,932
9,746
2,660
10,371
1,190
42,968
3,560
525
2,864
2,996
1,321
2,388
10,609
13,950
10,679
1,158
10,558
242
40,195
12,798
1,699
4,515
97
39,764
1,887
494
1,680
1,009
3,289
212
397
10
8,978
1,713
421
21,861
3,321
915
11,364
6,800
6,684
87
5,504
2
40,745
48,936
6,277
35,583
2,371
22,126
170,458
The credit ratings, information or data contained in this report which are attributed and specifically provided by S&P, Moody’s and Fitch Solutions and their respective affiliates and
suppliers (‘Content Providers’) is referred to here as the ‘Content’. Reproduction of any Content in any form is prohibited except with the prior written permission of the relevant party.
The Content Providers do not guarantee the accuracy, adequacy, completeness, timeliness or availability of any Content and are not responsible for any errors or omissions (negligent or
otherwise), regardless of the cause, or for the results obtained from the use of such Content. The Content Providers expressly disclaim liability for any damages, costs, expenses, legal
fees, or losses (including lost income or lost profit and opportunity costs) in connection with any use of the Content. A reference to a particular investment or security, a rating or any
observation concerning an investment that is part of the Content is not a recommendation to buy, sell or hold any such investment or security, nor does it address the suitability of an
investment or security and should not be relied on as investment advice.
www.prudential.co.uk
Annual Report 2017 Prudential plc 217
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C Balance sheet notes continued
C3 Assets and liabilities continued
C3.2 Debt securities continued
Securities with credit ratings classified as ‘Other’ can be further analysed as follows:
Asia – non-linked shareholder-backed
Internally rated
Government bonds
Corporate bonds – rated as investment grade by local external ratings agencies
Other
Total Asia non‑linked shareholder‑backed
2017 £m
2016 £m
25
959
69
1,053
63
757
95
915
US
Implicit ratings of other US debt securities based on NAIC* valuations
(see below)
NAIC 1
NAIC 2
NAIC 3‑6
Total US
£m
Mortgage-
backed
securities
Other
securities
2017
total
2016
total
1,843
22
3
1,868
2,075
1,772
54
3,901
3,918
1,794
57
5,769
4,759
1,909
132
6,800
* 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.
UK and Europe
Internal ratings or unrated
AAA to A‑
BBB to B‑
Below B‑ or unrated
Total UK and Europe
2017 £m
2016 £m
7,994
3,141
2,436
6,939
3,257
2,079
13,571
12,275
In addition to the debt securities shown above, the assets held for sale on the consolidated statement of financial position at 31 December
2016 in respect of Korea life business included a debt securities balance of £652 million.
(b) Additional analysis of US insurance operations debt securities
Corporate and government security and commercial loans:
Government
Publicly traded and SEC Rule 144A securities*
Non‑SEC Rule 144A securities
Asset backed securities (see note (e))
Total US debt securities†
2017 £m
2016 £m
4,835
22,849
4,468
3,226
35,378
5,856
25,992
4,576
4,321
40,745
* 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
2017 £m
2016 £m
35,293
85
35,378
40,645
100
40,745
Realised gains and losses, including impairments, recorded in the income statement are as shown in note B1.2 of this report.
218 Prudential plc Annual Report 2017
www.prudential.co.uk
(c) Movements in unrealised gains and losses on Jackson available-for-sale securities
The movement in the statement of financial position value for debt securities classified as available‑for‑sale was from a net unrealised gain
of £676 million to a net unrealised gain of £1,205 million as analysed in the table below.
Assets fair valued at below book value
Book value*
Unrealised gain (loss)
Fair value (as included in statement of financial position)
Assets fair valued at or above book value
Book value*
Unrealised gain (loss)
Fair value (as included in statement of financial position)
Total
Book value*
Net unrealised gain (loss)
Fair value (as included in 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$1.2889: £1.00.
Foreign
exchange
translation
Changes in
unrealised
appreciation†
2017
2016
Reflected as part of movement
in other comprehensive income
£m
£m
£m
£m
6,325
(106)
6,219
27,763
1,311
29,074
34,088
1,205
35,293
33
536
(121)
81
(88)
617
14,617
(675)
13,942
25,352
1,351
26,703
39,969
676
40,645
(d) US debt securities classified as available-for-sale in an unrealised loss position
(i) 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:
2017 £m
2016 £m
Between 90% and 100%
Between 80% and 90%
Below 80%:
Residential mortgage‑backed securities – sub‑prime
Commercial mortgage‑backed securities
Other asset‑backed securities
Government bonds
Corporates
Fair
value
6,170
36
–
–
10
–
3
13
Unrealised
loss
Fair
value
Unrealised
loss
(95)
(6)
–
–
(4)
–
(1)
(5)
12,326
1,598
–
8
9
–
1
18
(405)
(259)
–
(3)
(8)
–
(11)
(675)
Total
6,219
(106)
13,942
(ii) 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
2017 £m
2016 £m
(7)
(41)
(39)
(19)
(106)
(7)
(118)
(510)
(40)
(675)
www.prudential.co.uk
Annual Report 2017 Prudential plc 219
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
C Balance sheet notes continued
C3 Assets and liabilities continued
C3.2 Debt securities continued
(iii) 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
(4)
(1)
–
(1)
–
(6)
Non-
investment
grade
2017 £m
Investment
grade
(31)
(4)
(49)
(6)
(10)
Total
(35)
(5)
(49)
(7)
(10)
(100)
(106)
Non-
investment
grade
2016 £m
Investment
grade
(3)
–
(4)
(2)
(2)
(11)
(599)
(2)
(27)
(1)
(35)
(664)
Total
(602)
(2)
(31)
(3)
(37)
(675)
Further, the following table shows the age analysis as at 31 December, of the securities whose fair values were below 80 per cent of the
book value:
Age analysis
Less than 3 months
3 months to 6 months
More than 6 months
2017 £m
2016 £m
Fair
value
Unrealised
loss
Fair
value
Unrealised
loss
2
1
10
13
–
(1)
(4)
(5)
1
–
17
18
–
–
(11)
(11)
(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
are as follows:
Shareholder-backed operations
Asia operations note (i)
US operations note (ii)
UK and Europe operations (2017: 34% AAA, 16% AA) note (iii)
Other operations note (iv)
With-profits operations
Asia operations note (i)
UK and Europe operations (2017: 58% AAA, 10% AA) note (iii)
Total
2017 £m
2016 £m
118
3,226
1,070
589
5,003
233
5,658
5,891
130
4,321
1,464
771
6,686
357
5,177
5,534
10,894
12,220
220 Prudential plc Annual Report 2017
www.prudential.co.uk
Notes
(i)
Asia operations
The Asia operations’ exposure to asset‑backed securities is primarily held by the with‑profits operations. Of the £233 million, 98 per cent (2016: 99 per cent) are investment grade.
(ii) US operations
US operations’ exposure to asset‑backed securities at 31 December comprises:
RMBS
Sub‑prime (2017: 2% AAA, 4% AA, 3% A)
Alt‑A (2017: 3% AAA, 3% A)
Prime including agency (2017: 70% AA, 4% A)
CMBS (2017: 82% AAA, 15% AA, 1% A)
CDO funds (2017: 49% AA, 31% A), including £nil exposure to sub‑prime
Other ABS (2017: 21% AAA, 14% AA, 50% A), including £96 million exposure to sub‑prime
Total
(iii) UK and Europe operations
2017 £m
2016 £m
112
126
440
1,579
28
941
3,226
180
177
675
2,234
50
1,005
4,321
The majority of holdings of the shareholder‑backed business are UK securities and relate to PAC’s annuity business. Of the holdings of the with‑profits operations, £1,913 million
(2016: £1,623 million) relates to exposure to the US markets with the remaining exposure being primarily to the UK market.
(iv) Other operations
Other operations’ exposure to asset‑backed securities is held by Prudential Capital with no sub‑prime exposure. Of the £589 million, 96 per cent (2016: 95 per cent) are graded
AAA.
(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 are analysed as follows:
Exposure to sovereign debts
Italy
Spain
France
Germany*
Other Eurozone
Total Eurozone
United Kingdom
United States†
Other, including Asia
Total
2017 £m
2016 £m
Shareholder-
backed
business
With-profits
funds
Shareholder-
backed
business
With-profits
funds
58
34
23
693
82
890
5,918
5,078
4,638
16,524
63
18
38
301
31
451
3,287
10,156
2,143
16,037
56
33
22
573
83
767
5,510
6,861
3,979
61
18
–
329
33
441
2,868
9,008
2,079
17,117
14,396
* Including bonds guaranteed by the federal government.
† The exposure to the United States sovereign debt comprises holdings of the US, UK and Europe and Asia insurance operations.
www.prudential.co.uk
Annual Report 2017 Prudential plc 221
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
C Balance sheet notes continued
C3 Assets and liabilities continued
C3.2 Debt securities continued
Exposure to bank debt securities
2017 £m
Senior debt
Subordinated debt
Shareholder-backed business
Covered
Senior
Italy
Spain
France
Germany
Netherlands
Other Eurozone
Total Eurozone
United Kingdom
United States
Other, including Asia
Total
With-profits funds
Italy
Spain
France
Germany
Netherlands
Other Eurozone
Total Eurozone
United Kingdom
United States
Other, including Asia
Total
–
42
28
30
–
15
115
695
–
17
827
–
–
9
120
–
–
129
859
–
532
1,520
–
26
41
–
65
–
132
374
2,457
652
3,615
31
16
213
24
188
27
499
592
2,205
1,256
4,552
Total
senior
debt
–
68
69
30
65
15
247
1,069
2,457
669
4,442
31
16
222
144
188
27
628
1,451
2,205
1,788
6,072
Tier 1
Tier 2
Total
sub-
ordinated
debt
–
–
17
87
6
–
110
313
162
494
1,079
–
–
64
36
11
–
111
487
313
743
–
–
7
87
6
–
100
308
161
401
970
–
–
64
36
6
–
106
484
296
453
1,339
1,654
–
–
10
–
–
–
10
5
1
93
109
–
–
–
–
5
–
5
3
17
290
315
2017
total
£m
–
68
86
117
71
15
357
1,382
2,619
1,163
5,521
31
16
286
180
199
27
739
1,938
2,518
2,531
7,726
2016
total
£m
32
170
166
124
50
19
561
1,174
2,684
1,018
5,437
62
213
213
114
202
31
835
1,396
2,229
1,992
6,452
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.
(g) Impairment of US available-for-sale debt securities and other financial assets
In accordance with the Group’s accounting policy set out in note A3.1, impairment reviews were performed for available‑for‑sale
securities and loans and receivables.
During the year ended 31 December 2017, net impairment credit of £1 million (2016: charge of £(44) million) were recognised for
available‑for‑sale securities and loans and receivables analysed as follows:
Available‑for‑sale debt securities held by Jackson
Loans and receivables*
Net credit (charge) 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.
2017 £m
2016 £m
8
(7)
1
(20)
(24)
(44)
222 Prudential plc Annual Report 2017
www.prudential.co.uk
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 2017, the Group realised gross losses on sales of available‑for‑sale securities of £155 million (2016: £152 million) with 97 per cent
(2016: 59 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 £155 million (2016: £152 million), £3 million
(2016: £94 million) relates to losses on sales of impaired and deteriorating securities.
The effect of changes in the key assumptions that underpin the assessment of whether impairment has taken place depends on the
factors described in note A3.1. 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 2017, the amount of gross unrealised losses for fixed maturity securities classified as available‑for‑sale under IFRS in an unrealised
loss position was £106 million (2016: £675 million). Note B1.2 provides further details on the impairment charges and unrealised losses of
Jackson’s available‑for‑sale securities.
C3.3 Loans portfolio
(a) Overview of 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 and Europe insurance operations as
this loan portfolio is managed and evaluated on a fair value basis; and
— Certain policy loans of the US insurance operations that are held to back liabilities for funds withheld under reinsurance arrangements
and are also accounted on a fair value basis.
The amounts included in the statement of financial position are analysed as follows:
Mortgage
loans*
Policy
loans†
Other
loans‡
Asia
With‑profits
Non‑linked shareholder‑backed
–
177
613
216
112
199
Total
725
592
Mortgage
loans*
Policy
loans†
Other
loans‡
–
179
577
226
113
208
Total
690
613
2017 £m
2016 £m
US
Non‑linked shareholder‑backed
UK and Europe
With‑profits
Non‑linked shareholder‑backed
Other operations
Total loans securities
6,236
3,394
–
9,630
6,055
3,680
–
9,735
2,441
1,681
–
4
–
–
10,535
4,227
1,823
37
109
2,280
4,268
1,718
109
17,042
668
1,642
–
8,544
6
–
–
4,489
1,218
38
563
2,140
1,892
1,680
563
15,173
* All mortgage loans are secured by properties.
† In the US £2,512 million (2016: £2,672 million) policy loans are backing liabilities for funds withheld under reinsurance arrangements and are accounted for at fair value through profit
or loss. All other policy loans are accounted for at amortised cost, less any impairment.
‡ Other loans held in UK with‑profits funds are commercial loans and comprise mainly syndicated loans. The majority of other loans in shareholder‑backed business in Asia are commercial
loans held by the Malaysia operation and which are all investment graded by two local rating agencies.
www.prudential.co.uk
Annual Report 2017 Prudential plc 223
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C Balance sheet notes continued
C3 Assets and liabilities continued
C3.3 Loans portfolio continued
(b) Additional information on US mortgage loans
In the US, mortgage loans are all commercial mortgage loans that are secured by the following property types: industrial, multi‑family
residential, suburban office, retail or hotel. The US insurance operations’ commercial mortgage loan portfolio does not include any
single‑family residential mortgage loans and is therefore not exposed to the same risk of defaults associated with residential sub‑prime
mortgage loans. The average loan size is £12.6 million (2016: £12.4 million). The portfolio has a current estimated average loan to value of
55 per cent (2016: 59 per cent).
At 31 December 2017, Jackson had no mortgage loans where the contractual terms of the agreements had been restructured
(2016: none).
(c) Additional information on UK mortgage loans
During 2017, the UK with‑profits fund invested in an entity that holds a portfolio of buy‑to‑let mortgage loans. The vehicle financed its
acquisitions through the issue of debt instruments, largely to external parties, securitised upon the loans acquired. These third‑party
borrowings have no recourse to any other assets of the Group and the Group’s exposure is limited to the amount invested by the UK with‑
profits fund.
By carrying value, 99.98 per cent of the £1,681 million (2016: 96.29 per cent of £1,642 million) mortgage loans held by the UK
shareholder‑backed business relates to lifetime (equity release) mortgage business which has an average loan to property value of
31 per cent (2016: 30 per cent).
(d) Loans held by other 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:
AA+ to AA‑
A+ to A‑
BBB+ to BBB‑
BB+ to BB‑
B and other
Total
2017 £m
2016 £m
14
–
–
95
–
109
29
100
248
185
1
563
224 Prudential plc Annual Report 2017
www.prudential.co.uk
C3.4 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.
Total
carrying
value
1 Year
or less
After 1
year to
5 years
After 5
years to
10 years
2017 £m
After 10
years to
15 years
After 15
years to
20 years
Over
20 years
No stated
maturity
Total
Financial liabilities
Core structural borrowings
of shareholder‑financed
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
Accruals, deferred income
and other liabilities
Net asset value attributable
to unit holders of
consolidated unit trusts
and similar funds
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
Accruals, deferred income
and other liabilities
Net asset value attributable
to unit holders of
consolidated unit trusts
and similar funds
6,280
473
784
1,350
1,389
576
3,324
3,160
11,056
1,791
1,130
3,716
905
597
922
5,662
5,662
–
14,185
10,088
469
69
32
–
68
–
29
–
85
–
29
–
–
1,796
1,810
104
3,831
–
–
–
5,662
106
320
3,267
14,403
8,889
8,889
–
–
–
40,523
27,147
2,772
1,519
1,503
–
711
–
–
8,889
5,454
6,531
45,637
Total
carrying
value
1 Year
or less
After 1
year to
5 years
After 5
years to
10 years
2016 £m
After 10
years to
15 years
After 15
years to
20 years
Over
20 years
No stated
maturity
Total
6,798
474
778
1,205
1,202
1,011
3,439
3,662
11,771
2,317
1,657
1,349
475
5,031
5,031
13,825
9,873
607
748
–
320
8,687
8,687
–
69
32
–
61
–
–
20
–
80
–
–
10
–
103
–
60
–
2,333
144
1,489
–
–
5,031
322
3,272
14,031
–
–
–
8,687
38,007
26,197
2,453
1,367
1,302
1,124
3,821
7,078
43,342
www.prudential.co.uk
Annual Report 2017 Prudential plc 225
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C Balance sheet notes continued
C3 Assets and liabilities continued
C3.4 Financial instruments – additional information continued
Maturity analysis of derivatives
The following table shows the gross and net derivative positions together with a maturity profile of the net derivative position:
2017
2016
Carrying value of net derivatives £m
Maturity profile of net derivative position £m
Derivative
assets
Derivative
liabilities
Net
derivative
position
4,801
3,936
(2,755)
2,046
(3,252)
684
1 year
or less
2,359
1,009
After 1
year to
3 years
After 3
years to
5 years
(16)
(14)
(9)
(7)
After 5
years
(1)
18
Total
2,333
1,006
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.
2017
2016
£bn
1 year
or less
8
6
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
29
24
27
23
19
16
13
11
14
9
Total
undis-
counted
value
110
89
Total
carrying
value
83
73
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 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 £12 billion (2016:
£11 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 provided 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 C3.4(b) below for derivative assets. The collateral in place in relation to derivatives is
described in note C3.4(c) below. Note C3.3 describes the security for these loans held by the Group. The Group’s exposure to credit risk
is further discussed in note C7 below.
Of the total loans and receivables held, £23 million (2016: £27 million) are past their due date but are not impaired. Of the total past
due but not impaired, £17 million are less than one year past their due date (2016: £20 million). The Group expects full recovery of these
loans and receivables.
Financial assets that would have been past due or impaired had the terms not been renegotiated amounted to £22 million
(2016: £27 million).
In addition, during 2017 and 2016 the Group did not take possession of any other collateral held as security.
Further details of collateral and pledges are provided in note C3.4(c) below.
226 Prudential plc Annual Report 2017
www.prudential.co.uk
(iii) Foreign exchange risk
As at 31 December 2017, the Group held 24 per cent (2016: 23 per cent) and 16 per cent (2016: 12 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, 52 per cent (2016: 52 per cent) are held by the PAC with‑profits fund, allowing the fund to obtain exposure
to foreign equity markets.
Of these financial liabilities, 28 per cent (2016: 28 per cent) are held by the PAC with‑profits fund, mainly relating to foreign
currency borrowings.
The exchange risks inherent in these exposures are mitigated through the use of derivatives, mainly forward currency contracts
(note C3.4(b) below).
The amount of exchange loss recognised in the income statement in 2017, except for those arising on financial instruments measured
at fair value through profit or loss, is £112 million (2016: £1,005 million gain). This constitutes £1 million gain (2016: £0.4 million gain)
on Medium Term Notes liabilities and £113 million of net loss (2016: £1,005 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.
Under Article 11 of the European Market Infrastructure Regulation on derivatives, central counterparties and trade repositories
(‘EMIR’) and Commission Delegated Regulation (EU) 2016/2251 supplementing EMIR, market participants transacting in non‑cleared
OTC derivatives are required to exchange collateral to cover variation and initial margin. However, trades between counterparties
belonging to the same group are exempt from these margin requirements subject to certain criteria.
Prudential Capital plc (Legal Entity Identifier reference (‘LEI’) CHW8NHK268SFPTV63Z64) has entered into such derivative
agreements with the following five entities in the Group. These counterparty pairings meet the criteria to be eligible for intra‑group
exemptions to the margin requirements and have been approved by the Financial Conduct Authority:
Counterparty
Legal Entity Identifier (LEI)
Relationship between parties
Type of
exemption
Aggregate notional
of OTC derivatives contract
£m
31 Dec 2017
Prudential plc
Prudential Holdings Limited
Prudential (US HoldCo 1) Limited
5493001Z3ZE83NG
K8Y12
549300JVAI8CZD4
HD451
549300JNYGDP2X
OLWR47
Prudential Corporation Holdings Limited 549300KDOPLFHA
Prudential Lifetime Mortgages Limited
W51H26
5493001GSK4HF84
IOB02
Part of the same group
holding company
Part of the same group
holding company
Part of the same group
holding company
Part of the same group
holding company
Part of the same group
holding company
Full
Full
Full
Full
Full
3,615
110
3,123
822
71
Derivatives 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 and Europe operations hold large amounts of interest‑rate sensitive investments that contain credit
risks on which a certain level of defaults is expected. These businesses have purchased some swaptions to manage the default risk on
certain underlying assets and hence reduce the amount of regulatory capital held to support the assets; and
— Some products, especially in the US, have guarantee features linked to equity indices. A mismatch between guaranteed product
liabilities and the performance of the underlying assets exposes the Group to equity index risk. In order to mitigate this risk, the
relevant business units purchase swaptions, equity options and futures to better match asset performance with liabilities under
equity‑indexed products.
www.prudential.co.uk
Annual Report 2017 Prudential plc 227
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C Balance sheet notes continued
C3 Assets and liabilities continued
C3.4 Financial instruments – additional information continued
Hedging
The Group has formally assessed and documented the effectiveness of the following net investment hedges under IAS 39. At
31 December 2017, the Group has designated perpetual subordinated capital securities totalling US$4.3 billion (2016: US$4.5 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 £3,140 million as at 31 December 2017 (2016: £3,644 million). The foreign exchange gain of £325 million
(2016: loss of £389 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. Typically, the value of collateral assets granted to the Group in these transactions is in excess
of the value of securities lent, with the excess determined by the quality of the collateral assets granted. Collateral requirements are
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 2017, the Group has £8,232 million (2016: £8,545 million) of lent securities and assets subject to repurchase
agreements, of which £8,182 million (2016: £8,113 million) related to the PAC with‑profits fund. The cash and securities collateral held or
pledged under such agreements were £8,733 million (2016: £9,086 million) of which £8,679 million (2016: £8,653 million) was held by
the PAC with‑profits fund.
At 31 December 2017, 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 £10,550 million
(2016: £9,319 million).
Collateral and pledges under derivative transactions
At 31 December 2017, the Group had pledged £2,302 million (2016: £1,853 million) for liabilities and held collateral of £3,958 million
(2016: £2,788 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.
Other collateral
At 31 December 2017, the Group had pledged collateral of £3,412 million (2016: £3,384 million) in respect of other transactions.
This principally arises from Jackson’s membership of the Federal Home Loan Bank of Indianapolis primarily for the purpose of
participating in the bank’s collateralised loan advance programme with short‑term and long‑term funding facilities.
228 Prudential plc Annual Report 2017
www.prudential.co.uk
Offsetting assets and liabilities
The Group’s derivative instruments, repurchase agreements and securities lending agreements are subject to master netting
arrangements and collateral arrangements. A master netting arrangement with a counterparty creates a right of offset for amounts due
to and due from that same counterparty that is enforceable in the event of a default or bankruptcy. The Group recognises amounts
subject to master netting arrangements on a gross basis within the consolidated balance sheets.
The following tables present the gross and net information about the Group’s financial instruments subject to master
netting arrangements:
Financial assets:
Derivative assets
Reverse repurchase agreements
Total financial assets
Financial liabilities:
Derivative liabilities
Securities lending and repurchase agreements
Total financial liabilities
Financial assets:
Derivative assets
Reverse repurchase agreements
Total financial assets
Financial liabilities:
Derivative liabilities
Securities lending and repurchase agreements
Total financial liabilities
Gross amount
included
in the
consolidated
statement of
financial
position
note (i)
4,718
10,280
14,998
(2,301)
(1,410)
(3,711)
Gross amount
included
in the
consolidated
statement of
financial
position
note (i)
31 Dec 2017 £m
Related amounts not offset in the consolidated
statement of financial position
Financial
instruments
note (ii)
Cash
collateral
Securities
collateral
note (iii)
Net amount
(946)
–
(946)
946
–
946
(2,641)
–
(2,641)
(984)
(10,270)
(11,254)
420
52
472
893
1,332
2,225
31 Dec 2016 £m
147
10
157
(42)
(26)
(68)
Related amounts not offset in the consolidated
statement of financial position
Financial
instruments
note (ii)
Cash
collateral
Securities
collateral
note (iii)
Net amount
3,869
9,132
13,001
(2,874)
(1,927)
(4,801)
(1,053)
–
(1,053)
1,053
–
1,053
(1,895)
–
(1,895)
698
97
795
(733)
(9,132)
(9,865)
1,028
1,830
2,858
188
–
188
(95)
–
(95)
Notes
(i)
(ii)
(iii)
The Group has not offset any of the amounts included in the consolidated statement of financial position.
Represents the amount that could be offset under master netting or similar arrangements where the Group does not satisfy the full criteria to offset on the consolidated statement
of financial position.
Excludes initial margin amounts for exchange‑traded derivatives.
In the tables above, the amounts of assets or liabilities included in the consolidated statement of financial position would be 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.
www.prudential.co.uk
Annual Report 2017 Prudential plc 229
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information 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
(a) Group overview
(i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds
At 1 January 2016
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 and associate‡
Reclassification of Korea life business as held for sale*
Net flows:
Premiums
Surrenders
Maturities/deaths
Net flows
Shareholders' transfers post‑tax
Investment‑related items and other movements
Foreign exchange translation differences
As at 31 December 2016/1 January 2017
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 and associate‡
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 2017
Comprising:
Insurance operations £m
Asia
note C4.1(b)
US
note C4.1(c)
UK and
Europe
note C4.1(d)
Total
48,778
138,913
152,893
340,584
41,255
138,913
142,350
322,518
2,553
4,970
(2,812)
9,639
(2,299)
(1,558)
5,782
(44)
2,005
9,075
–
–
–
14,766
(7,872)
(1,696)
5,198
–
5,690
27,825
10,543
–
–
11,129
(6,821)
(6,835)
(2,527)
(215)
18,626
527
13,096
4,970
(2,812)
35,534
(16,992)
(10,089)
8,453
(259)
26,321
37,427
62,784
177,626
169,304
409,714
53,716
177,626
157,654
388,996
2,667
6,401
11,863
(3,079)
(1,909)
6,875
(54)
8,182
(3,948)
–
–
15,219
(10,017)
(2,065)
3,137
–
16,251
(16,290)
11,650
–
14,810
(6,939)
(7,135)
736
(233)
11,146
113
14,317
6,401
41,892
(20,035)
(11,109)
10,748
(287)
35,579
(20,125)
73,839
180,724
181,066
435,629
– Policyholder liabilities on the consolidated statement of financial position§
(excludes £32 million classified as unallocated to a segment)
62,898
180,724
167,589
411,211
– Unallocated surplus of with-profits funds on the consolidated statement
of financial position
– Group's share of policyholder liabilities of joint ventures and associate‡
Average policyholder liability balances†
2017
2016
3,474
7,467
–
–
13,477
–
16,951
7,467
65,241
179,175
162,622
407,038
51,765
158,270
150,003
360,038
* The reclassification of Korea life business as held for sale reflects the value of policyholder liabilities held at 1 January 2016. No other amounts are shown within the 2016 analysis above in
respect of Korea.
† 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.
‡ The Group’s investment in joint ventures and associates 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 life businesses in China, India and of the Takaful business in Malaysia.
§ The policyholder liabilities of the Asia insurance operations of £62,898 million (2016: £53,716 million), shown in the table above, is after deducting the intra‑group reinsurance liabilities
ceded by the UK and Europe insurance operations of £1,235 million (2016: £1,302 million) to the Hong Kong with‑profits business. Including this amount, total Asia policyholder liabilities
are £64,133 million (2016: £55,018 million).
230 Prudential plc Annual Report 2017
www.prudential.co.uk
C Balance sheet notes 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 but exclude liabilities that have not been allocated to
a reporting segment. 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. Claims (surrenders, maturities and deaths) 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 2016
Reclassification of Korea life business as held for sale*
Net flows:
Premiums
Surrenders
Maturities/deaths
Net flows note (a)
Investment‑related items and other movements
Foreign exchange translation differences
At 31 December 2016/1 January 2017
Comprising:
– Policyholder liabilities on the consolidated statement of financial position
– Group's share of policyholder liabilities relating to joint ventures
and associate
Net flows:
Premiums
Surrenders
Maturities/deaths
Net flows note (a)
Investment‑related items and other movements
Foreign exchange translation differences
At 31 December 2017
Comprising:
Shareholder-backed business £m
Asia
US
27,844
(2,812)
138,913
–
4,749
(1,931)
(732)
2,086
1,116
4,617
14,766
(7,872)
(1,696)
5,198
5,690
27,825
UK and
Europe
52,824
–
1,842
(2,967)
(2,521)
(3,646)
6,980
–
Total
219,581
(2,812)
21,357
(12,770)
(4,949)
3,638
13,786
32,442
32,851
177,626
56,158
266,635
26,450
177,626
56,158
260,234
6,401
6,064
(2,755)
(1,008)
2,301
3,797
(1,547)
–
–
6,401
15,219
(10,017)
(2,065)
3,137
16,251
(16,290)
2,283
(2,433)
(2,571)
(2,721)
2,930
–
23,566
(15,205)
(5,644)
2,717
22,978
(17,837)
37,402
180,724
56,367
274,493
– Policyholder liabilities on the consolidated statement of financial position
(excludes £32 million classified as unallocated to a segment)
– Group's share of policyholder liabilities relating to joint ventures
29,935
180,724
56,367
267,026
and associate
7,467
–
–
7,467
* The reclassification of Korea life business as held for sale reflects the value of policyholder liabilities held at 1 January 2016. No other amounts are shown within the 2016 analysis above in
respect of Korea.
Note
(a)
Including net flows of the Group’s insurance joint ventures and associate.
www.prudential.co.uk
Annual Report 2017 Prudential plc 231
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C4 Policyholder liabilities and unallocated surplus continued
C4.1 Movement and duration of liabilities 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 2016
Income and expense included in the income statement and other comprehensive income
Foreign exchange translation differences
At 31 December 2016/1 January 2017
Income and expense included in the income statement and other comprehensive income
Foreign exchange translation differences
At 31 December 2017
(iv) Reinsurers’ share of insurance contract liabilities
Insurance contract liabilities
Gross
£m
260,753
20,210
35,472
316,435
31,142
(19,405)
328,172
Reinsurers’
share
£m
6,992
752
1,221
8,965
422
(667)
8,720
Unallocated
surplus of
with-profits
funds
£m
13,096
768
453
14,317
2,949
(315)
16,951
Insurance contract liabilities
Claims outstanding
Asia
1,912
48
1,960
US
5,672
752
6,424
UK and
Europe
Unallocated to
a segment
2017 £m
2016 £m
1,136
150
1,286
–
3
3
8,720
953
9,673
8,965
1,086
10,051
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 £9,673 million at 31 December 2017 (2016: £10,051 million), 80 per cent (2016: 85 per cent) were ceded by
the Group’s UK and Europe and US operations, of which 96 per cent (2016: 96 per cent) of the balance were from reinsurers with
Standard & Poor’s rating A‑ and above.
The reinsurance asset for Jackson as shown in the table above primarily relates to certain fully collateralised former REALIC business
retained by Swiss Re through 100 per cent reinsurance agreements. Apart from the reinsurance of REALIC business, the principal
reinsurance ceded by Jackson outside the Group is on term‑life insurance, direct and assumed accident and health business and GMIB
variable annuity guarantees. Net commissions received on ceded business and claims incurred ceded to external reinsurers totalled
£28 million and £526 million respectively during 2017 (2016: £38 million and £500 million respectively). There were no deferred gains or
losses on reinsurance contracts in either 2017 or 2016.
In each of 2017 and 2016, the Group’s UK and Europe 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 B3(c). The gains and losses
recognised in profit and loss for the other reinsurance contracts written in the year were immaterial.
232 Prudential plc Annual Report 2017
www.prudential.co.uk
C Balance sheet notes continued (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 2016
Comprising:
With-profits
business
£m
Unit-linked
liabilities
£m
20,934
15,966
Other
business
£m
11,878
Total
£m
48,778
– Policyholder liabilities on the consolidated statement of financial position
– Unallocated surplus of with-profits funds on the consolidated statement
18,381
13,355
9,519
41,255
of financial position
2,553
–
–
2,553
– Group’s share of policyholder liabilities relating to joint ventures
and associate‡
Reclassification of Korea life business as held for sale*
Premiums
New business
In‑force
Surrenders note (c)
Maturities/deaths
Net flows note (b)
Shareholders' transfers post‑tax
Investment‑related items and other movements
Foreign exchange translation differences note (a)
At 31 December 2016/1 January 2017
Comprising:
–
–
1,701
3,189
4,890
(368)
(826)
3,696
(44)
889
4,458
2,611
(2,187)
921
1,447
2,368
(1,641)
(78)
649
–
621
2,458
2,359
(625)
767
1,614
2,381
(290)
(654)
1,437
–
495
2,159
4,970
(2,812)
3,389
6,250
9,639
(2,299)
(1,558)
5,782
(44)
2,005
9,075
29,933
17,507
15,344
62,784
– Policyholder liabilities on the consolidated statement of financial position
– Unallocated surplus of with-profits funds on the consolidated statement
27,266
14,289
12,161
53,716
of financial position
2,667
–
–
2,667
– Group’s share of policyholder liabilities relating to joint ventures and
associate‡
Premiums
New business
In‑force
Surrenders note (c)
Maturities/deaths
Net flows note (b)
Shareholders' transfers post‑tax
Investment‑related items and other movements note (d)
Foreign exchange translation differences note (a)
At 31 December 2017 note (b)
Comprising:
–
3,218
3,183
6,401
1,143
4,656
5,799
(324)
(901)
4,574
(54)
4,385
(2,401)
1,298
1,637
2,935
(2,288)
(150)
497
–
2,830
(807)
999
2,130
3,129
(467)
(858)
1,804
–
967
(740)
3,440
8,423
11,863
(3,079)
(1,909)
6,875
(54)
8,182
(3,948)
36,437
20,027
17,375
73,839
– Policyholder liabilities on the consolidated statement of financial position§
– Unallocated surplus of with-profits funds on the consolidated statement
32,963
16,263
13,672
62,898
of financial position
3,474
–
–
3,474
– Group’s share of policyholder liabilities relating to joint ventures and
associate‡
Average policyholder liability balances†
2017
2016
–
3,764
3,703
7,467
30,115
22,823
18,767
15,643
16,359
13,299
65,241
51,765
www.prudential.co.uk
Annual Report 2017 Prudential plc 233
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C4 Policyholder liabilities and unallocated surplus continued
C4.1 Movement and duration of liabilities continued
* The reclassification of Korea life business as held for sale reflects the value of policyholder liabilities held at 1 January 2016. No other amounts are shown within the 2016 analysis above
in respect of Korea.
† Averages have been based on opening and closing balances and adjusted for acquisitions and disposals in the year and exclude unallocated surplus of with‑profits funds.
‡ The Group’s investment in joint ventures and associate are accounted for on an equity method basis and the Group’s share of the policyholder liabilities as shown above relate to the
life businesses in China, India and of the Takaful business in Malaysia.
§ The policyholder liabilities of the with‑profits business of £32,963 million, shown in the table above, is after deducting the intra‑group reinsurance liabilities ceded by UK and Europe
insurance operations of £1,235 million to the Hong Kong with‑profits business (2016: £1,302 million). Including this amount the Asia with‑profits policyholder liabilities are
£34,198 million.
Notes
(a) Movements in the year have been translated at the average exchange rates for the year. The closing balance has been translated at the closing spot rates as at the end of the year.
Differences upon retranslation are included in foreign exchange translation differences.
(b) Net flows have increased by £1,093 million to £6,875 million in 2017 predominantly reflecting continued growth of the in‑force book and increased flows from new business.
(c)
Investment‑related items and other movements for 2017 principally represent equity market gains and falls in bond yields during the year, in a number of business units with the
greatest impact being on with‑profits and unit‑linked business.
(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
2017 and 2016, 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
2017 £m
62,898
2016 £m
53,716
%
21
19
16
12
10
22
%
23
20
16
11
9
21
(iii) Summary policyholder liabilities (net of reinsurance) and unallocated surplus
At 31 December 2017, the policyholder liabilities and unallocated surplus for Asia operations excluding joint ventures and after deducting
intra‑group reinsurance liabilities ceded by UK and Europe of £66,372 million (2016: £56,383 million), net of external reinsurance of
£1,961 million (2016: £1,539 million), comprised the following:
Hong Kong
Indonesia
Malaysia
Singapore
Taiwan
Other operations
Total Asia operations
2017 £m
29,411
3,762
5,014
17,432
3,729
5,062
64,410
2016 £m
23,852
3,405
4,332
15,324
3,504
4,427
54,844
234 Prudential plc Annual Report 2017
www.prudential.co.uk
C Balance sheet notes continued (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 2016
Premiums
Surrenders
Maturities/deaths
Net flows note (b)
Transfers from general to separate account
Investment‑related items and other movements
Foreign exchange translation differences note (a)
At 31 December 2016/1 January 2017
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 2017
Average policyholder liability balances*
2017
2016
* Averages have been based on opening and closing balances.
Variable
annuity
separate
account
liabilities
£m
91,022
10,232
(5,036)
(803)
4,393
1,164
5,246
18,586
Fixed annuity,
GIC and other
business
£m
Total
£m
47,891
138,913
4,534
(2,836)
(893)
805
(1,164)
444
9,239
14,766
(7,872)
(1,696)
5,198
–
5,690
27,825
120,411
57,215
177,626
11,529
(6,997)
(1,026)
3,506
2,096
15,956
(11,441)
3,690
(3,020)
(1,039)
(369)
(2,096)
295
(4,849)
15,219
(10,017)
(2,065)
3,137
–
16,251
(16,290)
130,528
50,196
180,724
125,469
105,717
53,706
52,553
179,175
158,270
Notes
(a) Movements in the year have been translated at an average rate of US$1.29/£1.00 (2016: US$1.35/£1.00). The closing balances have been translated at closing rate of
US$1.35/£1.00 (2016: US$1.24/£1.00). Differences upon retranslation are included in foreign exchange translation differences.
(b) Net flows were £3,137 million in 2017, reflecting continued strong inflows into the variable annuity business.
(c)
Positive investment‑related items and other movements in variable annuity separate account liabilities of £15,956 million for 2017 primarily reflects the increases in equities and
bond values during the year. Fixed annuity, GIC and other business investment and other movements of £295 million primarily reflect the increase in guarantee reserve in the year.
www.prudential.co.uk
Annual Report 2017 Prudential plc 235
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C4 Policyholder liabilities and unallocated surplus continued
C4.1 Movement and duration of liabilities continued
(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 2017
and 2016:
2017 £m
2016 £m
Fixed annuity
and other
business
(including
GICs and
similar
contracts)
Variable
annuity
separate
account
liabilities
Fixed annuity
and other
business
(including
GICs and
similar
contracts)
Total
Variable
annuity
separate
account
liabilities
Total
Policyholder liabilities
50,196
130,528
180,724
57,215
120,411
177,626
2017 %
2016 %
Expected maturity:
0 to 5 years
5 to 10 years
10 to 15 years
15 to 20 years
20 to 25 years
Over 25 years
50
25
12
7
3
3
42
29
15
8
4
2
44
28
14
8
4
2
49
26
11
7
3
4
43
29
14
8
4
2
45
28
14
7
3
3
(iii) 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 note C4.2(b) as at 31 December 2017 and 2016:
Minimum guaranteed interest rate
> 0% – 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
2017
6,887
7,385
9,799
1,272
1,744
220
27,307
2016
7,765
8,718
11,249
1,456
1,954
247
31,389
2017
–
–
221
2,341
2,059
1,651
6,272
2016
–
–
243
2,675
2,333
1,839
7,090
236 Prudential plc Annual Report 2017
www.prudential.co.uk
C Balance sheet notes continued (d) UK and Europe 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 and Europe insurance operations
from the beginning of the year to the end of the year is as follows:
At 1 January 2016
Comprising:
– Policyholder liabilities
– Unallocated surplus of with-profits funds
Premiums
Surrenders
Maturities/deaths
Net flows note (a)
Shareholders' transfers post‑tax
Switches
Investment‑related items and other movements
Foreign exchange translation differences
At 31 December 2016/1 January 2017
Comprising:
– Policyholder liabilities
– Unallocated surplus of with-profits funds
Premiums
Surrenders
Maturities/deaths
Net flows note (a)
Shareholders' transfers post‑tax
Switches
Investment‑related items and other movements note (b)
Foreign exchange translation differences
At 31 December 2017
Comprising:
– Policyholder liabilities
– Unallocated surplus of with-profits funds
Average policyholder liability balances*
2017
2016
Shareholder-backed funds
and subsidiaries
With-profits
sub-funds†
£m
Unit-linked
liabilities
£m
Annuity
and other
long-term
business
£m
Total
£m
100,069
21,442
31,382
152,893
89,526
10,543
9,287
(3,854)
(4,314)
1,119
(215)
(152)
11,798
527
21,442
–
1,227
(2,889)
(583)
(2,245)
–
152
2,770
–
31,382
–
615
(78)
(1,938)
(1,401)
–
–
4,058
–
142,350
10,543
11,129
(6,821)
(6,835)
(2,527)
(215)
–
18,626
527
113,146
22,119
34,039
169,304
101,496
11,650
12,527
(4,506)
(4,564)
3,457
(233)
(192)
8,408
113
22,119
–
1,923
(2,342)
(612)
(1,031)
–
192
1,865
–
34,039
–
360
(91)
(1,959)
(1,690)
–
–
873
–
157,654
11,650
14,810
(6,939)
(7,135)
736
(233)
–
11,146
113
124,699
23,145
33,222
181,066
111,222
13,477
106,359
95,511
23,145
–
22,632
21,781
33,222
–
167,589
13,477
33,631
162,622
32,711
150,003
* Averages have been based on opening and closing balances and exclude unallocated surplus of with‑profits funds.
† Includes the Scottish Amicable Insurance Fund.
Notes
(a)
(b)
Net flows improved from negative £(2,527) million in 2016 to positive £736 million in 2017, 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 our withdrawal from this market in the UK.
The level of inflows/outflows for unit‑linked business remains subject to annual variation as it is driven by corporate pension schemes with transfers in or out from a small number
of schemes influencing the level of flows in the period.
Investment‑related items and other movements of £11,146 million principally comprise investment return attributable to policyholders earned in the period reflecting favourable
equity market movements.
www.prudential.co.uk
Annual Report 2017 Prudential plc 237
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C4 Policyholder liabilities and unallocated surplus continued
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 UK and Europe
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 2017 and 2016:
With-profits business
Insurance
contracts
Invest-
ment
contracts
Total
2017 £m
Annuity business
(insurance contracts)
Non-
profit
annuities
within
WPSF
Share-
holder-
backed
annuity
Other
Total
Total
Insurance
contracts
Invest-
ment
contracts
Total
Policyholder liabilities
38,285
62,328 100,613
10,609
32,572
43,181
6,714
17,081
23,795 167,589
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
33
23
16
11
7
10
37
27
17
10
4
5
36
25
17
10
5
7
31
24
17
11
7
10
2017 %
26
23
18
13
9
11
2016 £m
27
23
18
13
9
10
41
26
15
9
5
4
31
22
18
13
8
8
34
23
17
12
7
7
34
25
17
11
6
7
Policyholder liabilities
37,848
52,495
90,343
11,153
33,881
45,034
6,111
16,166
22,277
157,654
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
37
23
15
9
7
9
37
29
16
10
4
4
37
26
16
10
5
6
29
24
18
12
7
10
2016 %
25
22
18
14
9
12
26
23
18
13
9
11
40
23
12
7
4
14
34
23
17
12
7
7
37
23
15
10
6
9
34
25
17
11
6
7
— 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.
— Shareholder‑backed annuity business includes the ex‑PRIL and the legacy PAC shareholder annuity 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.
238 Prudential plc Annual Report 2017
www.prudential.co.uk
C Balance sheet notes continued (iii) Annuitant mortality
Mortality assumptions for UK annuity business are set in light of recent population and internal experience. The assumptions used are
based on standard population mortality tables (PCMA08/PCFA08 for males/females in 2017 and PCMA00/PCFA00 in 2016), with
an allowance for expected future mortality improvements. The standard population tables are adjusted to reflect the features of the
Company’s portfolio. For 2017 these portfolio‑specific adjustments have been revised so that adjustments are now applied on a per
policy basis, rather than across larger groupings, and therefore disclosure of broad percentage adjustments to the standard tables would
no longer appropriately reflect the methodology applied. Where annuities have been sold on an enhanced basis to impaired lives,
an adjustment is made for the additional expected mortality.
New mortality projection models are released regularly by the Continuous Mortality Investigation (CMI). The CMI 2015 model was
used to produce the 2017 results and the CMI 2014 model was used to produce the 2016 results, calibrated to reflect the Company’s
view of future mortality improvements. The tables and range of percentages used are summarised in the table below:
CMI Model, with calibration to reflect future mortality improvements
2017
CMI 2015
For males: with a long-term improvement rate of 2.25% pa
For females: with a long-term improvement rate of 2.00% pa
2016
CMI 2014
For males: with a long‑term improvement rate of 2.25% pa*
For females: with a long‑term improvement rate of 1.50% pa*
* In 2016, for both males and females, the initial rates of mortality improvement in the CMI model 2014 were uplifted by 0.25 per cent per annum.
For annuities in deferment, the tables used were AM92 – four years (males) and AF92 – four years (females) for 2017 and 2016.
C4.2 Products and determining contract liabilities
(a) Asia
Contract type Description
Material features
Determination of liabilities
With-profits
and
participating
contracts
Provides savings and/or 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 Company.
Participating products often offer a
guaranteed maturity or surrender
value. Declared regular bonus are
guaranteed once vested. Future
bonus rates and cash dividends
are not guaranteed. Market value
adjustments and surrender
penalties are used for certain
products where the law permits
such adjustments. Guarantees
are predominantly supported
by segregated life funds and
their estates.
With‑profits contracts are
predominantly sold in Hong Kong,
Malaysia and Singapore. 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.
In Taiwan and India, US GAAP is
applied for measuring insurance
assets and liabilities. The other Asia
operations principally adopt a gross
premium valuation method.
www.prudential.co.uk
Annual Report 2017 Prudential plc 239
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C4 Policyholder liabilities and unallocated surplus continued
C4.2 Products and determining contract liabilities continued
(a) Asia continued
Contract type Description
Material features
Determination of liabilities
Term, whole
life and
endowment
assurance
Non‑participating savings and/or
protection where the benefits are
guaranteed, or determined by
a set of defined market‑related
parameters.
These products often offer a
guaranteed maturity and surrender
value. 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 is
reflected within the guaranteed
maturity and surrender values.
Guarantees are borne by
shareholders.
Unit-linked
Combines savings with protection,
the cash value of the policy
depends on the value of the
underlying unitised funds.
The approach to determining the
contract liabilities is generally 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 with a suitable margin
for prudence. This is achieved either
through adding an explicit allowance
for assumptions to deviate from best
estimate or by applying an overlay
constraint so that no negative reserves
(ie where future premium inflows are
expected to exceed prudent future
claims and outflows) are derived at
an individual policyholder level or a
combination of both.
In Vietnam, the Company uses an
estimation basis aligned substantially
to that used by the countries applying
the gross premium valuation method.
For India and Taiwan, US GAAP is
applied for measuring insurance
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 attaching liabilities reflect the unit
value obligation driven by the value of
the investments of the unit fund.
Additional technical provisions are held
for guaranteed benefits beyond the
unit fund value using a gross premium
valuation method. These additional
provisions are recognised as a
component of other business liabilities.
240 Prudential plc Annual Report 2017
www.prudential.co.uk
C Balance sheet notes continued (a) Asia continued
Contract type Description
Material features
Determination of liabilities
Health and
protection
Health and protection features are
offered as supplements to the
products listed above or sold as
stand‑alone products. Protection
covers mortality or morbidity
benefits including health, disability,
critical illness and accident
coverage.
The determination of the liabilities of
health and protection contracts are
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 with a
suitable margin for prudence. This is
achieved either through adding an
explicit allowance for assumptions
to deviate from best estimate or by
applying an overlay constraint so that
no negative reserves (ie where future
premium inflows are expected to
exceed prudent future claims and
outflows) are derived at an individual
policyholder level or a combination
of both.
(b) US
Contract type Description
Material features
Determination of liabilities
Fixed interest
rate annuities
Fixed interest rate annuities are
primarily deferred annuity products
that are used for asset accumulation
in retirement planning and for
providing income in retirement.
At 31 December 2017, fixed interest
rate annuities accounted for
7 per cent (2016: 8 per cent)
of policy and contract liabilities
of Jackson.
Guaranteed minimum interest rate.
At 31 December 2017, Jackson had
fixed interest rate annuities totalling
£12.6 billion (2016: £14.2 billion)
in account value with minimum
guaranteed rates ranging from
1.0 per cent to 5.5 per cent and a
2.93 per cent average guaranteed
rate (2016: 1.0 per cent to
5.5 per cent and a 2.96 per cent
average guaranteed rate).
As explained in note A3.1 all of
Jackson’s insurance liabilities are based
on US GAAP. An overview of the
deferral and amortisation of acquisition
costs for Jackson is provided in
note C5(b).
With minor exceptions the following is
applied to most of Jackson’s contracts.
Contracts are accounted for as
investment contracts as defined for
US GAAP purposes by applying a
retrospective deposit method to
determine the liability for
policyholder benefits.
www.prudential.co.uk
Annual Report 2017 Prudential plc 241
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C4 Policyholder liabilities and unallocated surplus continued
C4.2 Products and determining contract liabilities continued
(b) US continued
Contract type Description
Material features
Determination of liabilities
Fixed interest
rate annuities
continued
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.
Approximately 60 per cent
(2016: 62 per cent) of the fixed
interest rate annuities Jackson
wrote in 2017 provide for a
(positive or negative) market value
adjustment (MVA) on surrender.
This formula‑based adjustment
approximates the change in value
that assets supporting the product
would realise as interest rates move.
This is then augmented by:
— Any amounts that have been
assessed to compensate the insurer
for services to be performed over
future periods (ie deferred income);
— Any amounts previously assessed
against policyholders that are
refundable on termination of the
contract; and
— Any probable future loss on the
contract (ie premium deficiency).
Capitalised acquisition costs and
deferred income for these contracts
are amortised over the life of the book
of contracts.
The present value of the estimated
gross profits is 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.
The interest guarantees are not
explicitly valued but are reflected as
they are earned in the current account
liability value.
242 Prudential plc Annual Report 2017
www.prudential.co.uk
C Balance sheet notes continued (b) US continued
Contract type Description
Material features
Determination of liabilities
The liability for policyholder benefits
that represent the guaranteed
minimum return is determined similarly
to the liabilities of the fixed interest
annuity above. The equity‑linked
return option within the contract is
treated as an embedded liability under
US GAAP and therefore this element of
the liability is recognised at fair value.
Fixed index
annuities
Fixed index annuities vary in
structure but are generally 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.
Fixed index annuities accounted
for 5 per cent (2016: 6 per cent)
of Jackson’s policy and contract
liabilities at 31 December 2017.
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.
Guaranteed minimum rates are
generally set at 1.0 to 3.0 per cent.
At 31 December 2017, Jackson had
fixed index annuities allocated to
indexed funds totalling £6.3 billion
(2016: £7.3 billion) in account value
with minimum guaranteed rates
on index accounts ranging from
1.0 per cent to 3.0 per cent and a
1.77 per cent average guaranteed
rate (2016: 1.0 per cent to
3.0 per cent and a 1.77 per cent
average guarantee rate).
Jackson offers an optional lifetime
income rider, which can be elected
for an additional fee.
Jackson also offers fixed
interest accounts on some
fixed index annuity products.
At 31 December 2017, fixed
interest accounts of fixed index
annuities totalled £2.5 billion
(2016: £2.6 billion) in account value.
Minimum guaranteed rates on
fixed interest accounts range from
1.0 per cent to 3.0 per cent and a
2.58 per cent average guaranteed
rate (2016: 1.0 per cent to
3.0 per cent and a 2.55 per cent
average guaranteed rate).
www.prudential.co.uk
Annual Report 2017 Prudential plc 243
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C4 Policyholder liabilities and unallocated surplus continued
C4.2 Products and determining contract liabilities continued
(b) US continued
Contract type Description
Material features
Determination of liabilities
The general principles for fixed annuity
and fixed index annuity also apply to
variable annuities.
The impact of any fixed account
interest guarantees is reflected as
they are earned in the current
account value.
Jackson regularly evaluates estimates
used and adjusts the benefit guarantee
liability balances, with a related charge
or credit to benefit expense if actual
experience or other evidence suggests
that earlier assumptions should
be revised.
Variable
annuities
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. At 31 December 2017,
variable annuities accounted for
77 per cent (2016: 74 per cent)
of Jackson’s policy and contract
liabilities.
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. Subject to benefit
guarantees, 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 2017, 5 per cent
(2016: 6 per cent) of variable annuity
funds were in fixed accounts.
Jackson had variable annuity
funds in fixed accounts totalling
£5.9 billion (2016: £7.3 billion) with
minimum guaranteed rates ranging
from 1.0 per cent to 3.0 per cent
and a 1.68 per cent average
guaranteed rate (2016: 1.0 per cent
to 3.0 per cent and a 1.64 per cent
average guaranteed rate).
Jackson offers a choice of
guaranteed benefit options
within its variable annuity product
portfolio, which can be elected for
additional fees. These guaranteed
benefits might be expressed as the
return of 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 that
contract anniversary.
Jackson hedges these risks using
derivative instruments as described
in note C7.3.
244 Prudential plc Annual Report 2017
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C Balance sheet notes continued (b) US continued
Contract type Description
Material features
Determination of liabilities
Variable
annuities
continued
The benefit guarantee types are
set out below:
Benefits that are payable in the
event of death (guaranteed
minimum death benefit).
Benefits that are payable upon the
depletion of funds (guaranteed
minimum withdrawal benefit).
The liability for Guaranteed Minimum
Death Benefit (GMDB) is 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 2017, these liabilities
were valued using a series of stochastic
investment performance scenarios, a
mean investment return of 7.4 per cent
(2016: 7.4 per cent) net of external
fund management fees, and
assumptions for policyholder
behaviour, mortality and expense that
are similar to those used in amortising
the capitalised acquisition costs.
The liability for the Guaranteed
Minimum Withdrawal Benefit
(GMWB) ‘for life’ portion is determined
similarly to GMDB above.
Guaranteed Minimum Withdrawal
Benefit ‘not for life’ features are
treated as embedded derivatives
under US GAAP. Therefore,
provisions for these benefits are
recognised at fair value.
Non‑performance risk is incorporated
into the fair value 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.
www.prudential.co.uk
Annual Report 2017 Prudential plc 245
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C4 Policyholder liabilities and unallocated surplus continued
C4.2 Products and determining contract liabilities continued
(b) US continued
Contract type Description
Material features
Determination of liabilities
Variable
annuities
continued
Life
insurance
Benefits that are payable at
annuitisation (guaranteed minimum
income benefit).
This feature is no longer offered and
existing coverage is substantially
reinsured, subject to deductibles
and annual claim limits.
Benefits that are payable at the end
of a specified period (guaranteed
minimum accumulation benefit).
This feature is no longer offered.
Excluding the business that is
subject to the retrocession treaties
at 31 December 2017, Jackson had
interest‑sensitive life business in
force with total account value of
£6.3 billion (2016: £7.1 billion), with
minimum guaranteed interest rates
ranging from 2.5 per cent to
6.0 per cent with a 4.67 per cent
average guaranteed rate
(2016: 2.5 per cent to 6.0 per cent
with a 4.66 per cent average
guaranteed rate).
The direct Guaranteed Minimum
Income Benefit (GMIB) liability is
determined by estimating the expected
value of the annuitisation benefits in
excess of the projected account
balance at the date of annuitisation and
recognising the excess ratably over the
life of the contract based on total
expected assessments.
Guaranteed Minimum Income Benefits
are reinsured, subject to a 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.
Volatility and non‑performance risk is
considered as per GMWB above.
Guaranteed Minimum Accumulation
Benefit (GMAB) are treated as
embedded derivatives under
US GAAP. Therefore, provisions for
these benefits are recognised at fair
value. Volatility and non‑performance
risk is considered as per GMWB above.
For term and 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 for
directly sold business and assumptions
at purchase for acquired business.
For universal life and variable universal
life a retrospective deposit method is
used to determine the liability for
policyholder benefits. This is then
augmented by additional liabilities to
account for no‑lapse guarantees,
profits followed by losses, contract
features such as persistency bonuses,
and cost of interest rate guarantees.
Life products include term life,
traditional life and interest‑sensitive
life (universal life and variable
universal life). Life insurance
products accounted for 9 per cent
(2016: 10 per cent) of Jackson’s
policy and contract liabilities at
31 December 2017. Jackson
discontinued new sales of life
insurance products in 2012.
Term life provides protection for a
defined period and a benefit that is
payable to a designated beneficiary
upon death of the insured.
Traditional life provides protection
for either a defined period or until
a stated age and includes a
predetermined cash value.
246 Prudential plc Annual Report 2017
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C Balance sheet notes continued (b) US continued
Contract type Description
Material features
Determination of liabilities
Life
insurance
continued
Institutional
products
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.
Institutional products are:
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 2017
institutional products accounted for
1 per cent of contract liabilities
(2016: 1 per cent).
Institutional products are classified
as investment contracts, and are
accounted for as financial liabilities.
The currency risk on contracts that
represent currency obligations other
than US dollars are hedged using
cross‑currency swaps.
GICs feature a lump sum
policyholder deposit on which
interest is paid at a rate fixed at
inception. Market value
adjustments are made to the
value of any early withdrawals.
Funding agreements feature either
lump sum or periodic policyholder
deposits. Interest is paid at a fixed
or index‑linked rate. Funding
agreements have a duration of
between one and 30 years. In 2017
and 2016 there were no funding
agreements terminable by the
policyholder with less than
90 days notice.
www.prudential.co.uk
Annual Report 2017 Prudential plc 247
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C4 Policyholder liabilities and unallocated surplus continued
C4.2 Products and determining contract liabilities continued
(c) UK and Europe
Contract type Description
Material features
Determination of liabilities
With-profits
contracts in
WPSF
With‑profits contracts provide
returns to policyholders through
bonuses that are ‘smoothed’.
There are two types of bonuses:
‘regular’ and ‘final’.
Regular 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,
reduced as appropriate for each
type of policy to allow for items
such as expenses, charges, tax
and shareholders’ transfers.
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.
A final bonus which is normally
declared annually, 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.
Regular bonuses are typically
declared once a year, and once
credited, are guaranteed in
accordance with the terms of the
particular product. Final bonuses
rates are guaranteed only until
the next bonus declaration.
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 in accordance with the
requirements of FRS 27.
For with‑profits business a market
consistent valuation is performed. 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.
The provisions have been determined
on a basis consistent with the detailed
methodology included in regulations
contained in the PRA’s previously issued
rules for the determination of reserves on
the PRA’s ‘realistic’ Peak 2 basis. Though no
longer in force for regulatory purposes, these
rules continue to be applied to determine
with‑profits contract liabilities in accordance
with IFRS 4. 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 under the UK regulated
with‑profits section.
Persistency assumptions are set based on the
results of the most recent experience analysis
looking at the experience over recent years of
the relevant business.
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. Expense
inflation assumptions are set consistent with
the economic basis and based on the inflation
swap spot curve.
The contract liabilities for with‑profits
business also require assumptions for
mortality. These are set based on the
results of recent experience analysis.
248 Prudential plc Annual Report 2017
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C Balance sheet notes continued (c) UK and Europe continued
Contract type Description
Material features
Determination of liabilities
PruFund
contracts
A range of with‑profits contracts
offering policyholders a choice
of investment profiles.
Unlike traditional with‑profits
contracts no regular or final
bonuses are declared. Policyholder
return is determined by an
Expected Growth Rate (EGR) which
is declared quarterly. A different
EGR is applied for each of the
different PruFund funds within the
range, each relating to the individual
asset mix of that fund. The relevant
EGR is applied to increase the unit
value of policyholder funds,
calculated daily.
In normal investment conditions the
EGR is expected to reflect PAC’s
view of how the funds will perform
over the longer term. An adjustment
is made to the smoothed unit value
if it moves outside of a specified
range relative to the value of the
underlying assets.
SAIF is a ring‑fenced with‑profits
sub‑fund of PAC. No new business
is written in SAIF, although regular
premiums are still being paid on
in‑force 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, 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.
SAIF
with-profits
As with‑profits contracts, the liability
for PruFund contracts are calculated
in accordance with the methodology
applied to other WPSF contracts,
as described above.
The process of determining
policyholder liabilities of SAIF is similar
to that for the with‑profits policies of
the WPSF.
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 £503 million was held in SAIF
at 31 December 2017
(2016: £571 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.
www.prudential.co.uk
Annual Report 2017 Prudential plc 249
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C4 Policyholder liabilities and unallocated surplus continued
C4.2 Products and determining contract liabilities continued
(c) UK and Europe continued
Contract type Description
Material features
Determination of liabilities
Annuities
– level, fixed
increase and
inflation-
linked
annuities
Level
Provide a fixed annuity payment
over the policyholder’s life.
Fixed increase
Provide for a regular annuity
payment which incorporates
automatic increases in annuity
payments by fixed amounts
over the policyholder’s life.
Inflation-linked
Provide for a regular annuity
payment to which an additional
amount is added periodically based
on the increase in the UK RPI.
With-profits
Written in the with‑profits fund,
these 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
with‑profits fund equity shares,
property and other investment
categories over time.
As per with‑profits products.
Annuity liabilities are calculated as the
expected future value of future annuity
payments and expenses discounted by
a valuation interest rate.
Key assumptions include:
Mortality
The mortality assumptions are set in
light of recent population and internal
experience. The assumptions used are
adjusted percentages of standard
actuarial mortality tables with an
allowance for future mortality
improvements, the effect of anti‑
selection and characteristics specific
to each individual policyholder.
Where annuities have been sold on an
enhanced basis to impaired lives an
additional age adjustment is made.
New mortality projection models are
released annually by the Continuous
Mortality Investigation (CMI). The CMI
2015 model was used to produce the
2017 results calibrated to reflect an
appropriate view of future mortality
improvements.
For annuities in payment, the mortality
tables used are set out in C4.1(d)(iii).
Expense
Maintenance 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. A margin for adverse deviation
is added to this amount. Expense
inflation assumptions are set consistent
with the economic basis and based on
the inflation swap spot curve.
250 Prudential plc Annual Report 2017
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C Balance sheet notes continued (c) UK and Europe continued
Contract type Description
Material features
Determination of liabilities
Annuities
– level, fixed
increase and
inflation-
linked
annuities
continued
Unit-linked
UK and Europe insurance
operations also have a book
of unit‑linked policies.
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.
Valuation interest rates
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 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.
Credit risk
For IFRS reporting, the results for UK
shareholder‑backed annuity business
are particularly sensitive to the
allowances made for credit risk on fixed
interest securities. Further details on
credit risk allowance are provided in
note B3(c).
For unit‑linked contracts the attaching
liability reflects the unit value
obligation and, in the case of policies
classified as insurance contracts,
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 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.
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.
www.prudential.co.uk
Annual Report 2017 Prudential plc 251
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C4 Policyholder liabilities and unallocated surplus continued
C4.2 Products and determining contract liabilities continued
Operation of the UK with-profits sub-funds
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, apportioned 90 per cent to its policyholders and 10 per cent to shareholders as surplus for distribution,
are determined via the annual actuarial valuation.
Application of significant judgement
Determining bonuses using the table described in the material features table above requires the PAC Board to apply significant
judgement in many respects, including in particular the following:
— Determining what constitutes fair treatment of customers;
— Smoothing of investment returns; and
— Determining at what level to set bonuses to ensure that they are competitive.
Key assumptions
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 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.
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 PPFM and the manner in
which conflicting rights have been addressed.
Determination of bonus rates
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 degree of smoothing is illustrated numerically by comparing in the following table the relatively ‘smoothed’ level of policyholder
bonuses declared as part of the surplus for distribution, with the more volatile movement in investment return and other items of income
and expenditure of the UK component of the PAC with‑profits fund for each year presented.
Net income of the fund:
Investment return
Claims incurred
Movement in policyholder liabilities
Add back policyholder bonuses for the year (as shown below)
Claims incurred and movement in policyholder liabilities
(including charge for provision for asset shares and excluding policyholder bonuses)
Earned premiums, net of reinsurance
Other income
Acquisition costs and other expenditure
Share of profits from investment joint ventures
Tax charge
Net income of the fund before movement in unallocated surplus
Movement in unallocated surplus
Surplus for distribution
Surplus for distribution allocated as follows:
– 90% policyholders' bonus (as shown above)
– 10% shareholders’ transfers
2017 £m
2016 £m
9,985
(8,449)
(10,011)
2,071
(16,389)
12,508
35
(1,732)
106
(440)
4,073
(1,769)
2,304
13,185
(7,410)
(11,824)
1,934
(17,300)
9,261
177
(1,288)
22
(739)
3,318
(1,169)
2,149
2,071
233
2,304
1,934
215
2,149
252 Prudential plc Annual Report 2017
www.prudential.co.uk
C Balance sheet notes continued C5 Intangible assets
C5(a) Goodwill
Cost
At beginning of year
Disposals/reclassifications to held for sale
Additional consideration paid on previously acquired business
Exchange differences
Net book amount at end of year
Goodwill comprises:
M&G
Other – attributable to shareholders
Goodwill – attributable to shareholders
Venture fund investments – attributable to with‑profits funds
Attributable to:
Shareholders With-profits
2017 £m
2016 £m
1,475
(16)
–
(1)
1,458
153
(139)
9
1
24
1,628
(155)
9
–
1,482
1,648
(56)
7
29
1,628
2017 £m
2016 £m
1,153
305
1,458
24
1,482
1,153
322
1,475
153
1,628
Other goodwill attributable to shareholders represents amounts allocated to entities in Asia and, until August 2017, the US operations.
These goodwill amounts are not individually material.
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
current in‑force business as determined using the EEV methodology. 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 methodology and assumptions underpinning the Group’s EEV basis of reporting
are included in the EEV basis supplementary information in this Annual Report.
Goodwill for venture fund investments is tested for impairment by comparing the business’s carrying value, including goodwill to
its recoverable amount (fair value less costs to sell).
M&G
The recoverable amount for the M&G business (which is now part of the UK and Europe operating segment) has been determined
by calculating the value in use of M&G Group Limited and its subsidiaries (considered to be a cash‑generating unit during 2017).
This has been calculated by aggregating the present value of future cash flows expected to be derived from the M&G business.
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, such as changes in global equity markets and trends in fund flows, are considered by management
in arriving at the expectations for the final projections for the plan;
The assumed growth rate on forecast cash flows beyond the terminal year of the plan after considering expected future and
past growth rates. A growth rate of 1.7 per cent (2016: 2.0 per cent) has been used to extrapolate beyond the plan period;
The risk discount rate. Differing discount rates have been applied in accordance with the nature of the individual component
businesses. For the most material component retail and institutional business, a risk discount rate of 12 per cent (2016: 12 per cent)
has been applied to post‑tax cash flows. The pre‑tax risk discount rate was 15 per cent (2016: 16 per cent); 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.
www.prudential.co.uk
Annual Report 2017 Prudential plc 253
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
C5 Intangible assets continued
C5(b) Deferred acquisition costs and other intangible assets
Deferred acquisition costs and other intangible assets attributable to shareholder
Deferred acquisition costs and other intangible assets attributable to with‑profits funds
Total of deferred acquisition costs and other intangible assets
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
2017 £m
10,866
145
11,011
2016 £m
10,755
52
10,807
2017 £m
2016 £m
9,170
63
9,233
36
1,597
1,633
9,114
64
9,178
43
1,534
1,577
Total of deferred acquisition costs and other intangible assets
10,866
10,755
2017 £m
2016 £m
Deferred acquisition costs
Asia
insurance
US
insurance
UK and
Europe
insurance
All
asset
management
PVIF and
other
intangibles*
Total
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 the US insurance operation's available‑
for‑sale securities recognised within other
comprehensive income†
Balance at 31 December
788
331
8,303
663
(133)
–
(133)
–
(40)
(403)
462
59
–
(752)
79
14
(10)
–
(10)
–
1
–
(76)
946
8,197
–
84
8
3
(5)
–
(5)
–
–
–
6
1,577
229
10,755
1,240
(158)
(7)
(165)
–
(8)
(709)
455
(254)
–
(799)
Total
8,422
1,179
(686)
557
(129)
(268)
1,475
–
(76)
76
1,633
10,866
10,755
* PVIF and other intangibles includes amounts in relation to software rights with additions of £38 million, amortisation of £32 million, foreign exchange losses of £5 million and a balance at
31 December 2017 of £67 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 the US
insurance operation’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 which are determined using an assumption for long‑term investment returns for the separate account of
7.4 per cent (2016: 7.4 per cent) (gross of asset management fees and other charges to policyholders, but net of external fund management fees). The amounts included in the income
statement 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 (see note C7.3 (iv)).
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.
254 Prudential plc Annual Report 2017
www.prudential.co.uk
C Balance sheet notes continued 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
2017 £m
2016 £m
8,208
278
(289)
8,197
7,844
696
(237)
8,303
* Consequent upon the positive unrealised valuation movement in 2017 of £617 million (2016: negative unrealised valuation movement of £28 million), there is a loss of £76 million (2016: a
gain of £76 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 2017, the cumulative shadow DAC balance as shown in the table above was negative £289 million
(2016: negative £237 million).
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 (which is used for moderating the effect of short‑term
volatility in investment returns) 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 2017, the DAC amortisation charge for operating profit was determined after including a credit for decelerated amortisation of
£86 million (2016: credit for decelerated amortisation of £93 million). The 2017 amount primarily reflects the impact of the positive
separate account performance, which is higher than the assumed level for the year.
The application of the mean reversion formula, (described in note A3.1) has the effect of dampening the impact of equity market
movements on DAC amortisation while the mean reversion assumption lies within the corridor. In 2018, it would take approximate
movements in separate account values of more than either negative 32 per cent or positive 37 per cent for the mean reversion assumption
to move outside the corridor.
Deferred acquisition costs and other intangible assets attributable to with-profits funds
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
Computer software and other intangibles attributable to with‑profits funds
2017 £m
2016 £m
–
145
145
2
50
52
www.prudential.co.uk
Annual Report 2017 Prudential plc 255
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C5 Intangible assets continued
(i) Deferred acquisition costs related to insurance and investment contracts
The movements in deferred acquisition costs relating to insurance and investment contracts are as follows:
DAC at 1 January
Additions
Amortisation
Exchange differences
Disposals and transfers
Change in shadow DAC related to movement in unrealised appreciation
of Jackson’s securities classified as available‑for‑sale
DAC at 31 December
2017 £m
2016 £m
Insurance
contracts
Investment
management
note
Insurance
contracts
Investment
management
note
9,114
1,000
(77)
(791)
–
(76)
9,170
64
11
(12)
–
–
–
63
6,948
954
(21)
1,408
(251)
76
9,114
74
3
(13)
–
–
–
64
Note
All of the additions are through internal development. The carrying amount of the balance comprises the following gross and accumulated amortisation amounts:
Gross amount
Accumulated amortisation
Net book amount
2017 £m
2016 £m
156
(93)
63
145
(81)
64
(ii) Present value of acquired in-force (PVIF) and other intangibles attributable to shareholders
2017 £m
Other intangibles
2016 £m
Other intangibles
PVIF
note (i)
Distribution
rights
note (ii)
Other
intangibles
(including
software)
note (iii)
Total
PVIF
note (i)
Distribution
rights
note (ii)
Other
intangibles
(including
software)
note (iii)
At 1 January
Cost
Accumulated amortisation
Additions
Amortisation charge
Disposals and transfers
Exchange differences and other movements
At 31 December
Comprising:
Cost
Accumulated amortisation
226
(183)
43
–
(7)
–
–
36
1,628
(196)
1,432
173
(121)
–
(3)
321
(219)
2,175
(598)
102
1,577
56
(37)
–
(5)
229
(165)
–
(8)
1,481
116
1,633
227
(191)
36
1,793
(312)
1,481
363
(247)
2,383
(750)
116
1,633
209
(164)
45
–
(8)
–
6
43
226
(183)
43
Total
1,874
(474)
1,400
222
(95)
(17)
67
1,387
(129)
1,258
172
(52)
(3)
57
278
(181)
97
50
(35)
(14)
4
1,432
102
1,577
1,628
(196)
1,432
321
(219)
2,175
(598)
102
1,577
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.
Software is amortised over its useful economic life, which generally represents the licence period of the software acquired.
(iii)
256 Prudential plc Annual Report 2017
www.prudential.co.uk
C Balance sheet notes continued
C6 Borrowings
C6.1 Core structural borrowings of shareholder-financed operations
Holding company operations: note (i)
US$1,000m 6.5% Notes (Tier 2) note (v)
US$250m 6.75% Notes (Tier 1) note (vi)
US$300m 6.5% Notes (Tier 1) note (vi)
US$700m 5.25% Notes (Tier 2)
US$550m 7.75% Notes (Tier 1) note (vi)
US$1,000m 5.25% Notes (Tier 2)
US$725m 4.375% Notes (Tier 2)
US$750m 4.875% Notes (Tier 2) note (iv)
Perpetual Subordinated Capital Securities
¤20m Medium Term Notes 2023 (Tier 2) note (vii)
£435m 6.125% Notes 2031 (Tier 2)
£400m 11.375% Notes 2039 (Tier 2)
£600m 5% Notes 2055 (Tier 2)
£700m 5.7% Notes 2063 (Tier 2)
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 (viii)
Total (per consolidated statement of financial position)
2017 £m
2016 £m
–
185
222
517
407
731
530
548
809
202
243
565
445
800
580
–
3,140
3,644
18
430
397
591
696
2,132
5,272
300
249
5,821
275
184
6,280
17
430
395
590
696
2,128
5,772
300
249
6,321
275
202
6,798
Notes
(i)
These debt tier classifications are consistent with the treatment of capital for regulatory purposes under the Solvency II regime.
The Group has designated all US$4,275 million (2016: US$4,525 million) of its US dollar denominated subordinated debt as a net investment hedge under IAS 39 to hedge the
(ii)
(iii)
(iv)
currency risks related to the net investment in Jackson.
The senior debt ranks above subordinated debt in the event of liquidation.
The Prudential Capital bank loan of £275 million is drawn at a cost of 12 month GBP LIBOR plus 0.33 per cent. The loan was renewed in December 2017 maturing on 20 December
2022 with an option to repay annually.
In October 2017, the Company issued core structural borrowings of US$750 million 4.875 per cent Tier 2 perpetual subordinated notes. The proceeds, net of costs, were
£565 million.
In December 2017, the Company repaid its US$1,000 million 6.5 per cent Tier 2 perpetual subordinated notes.
(v)
(vi) These borrowings can be converted, in whole or in part, at the Company’s option and subject to certain conditions, on any interest payment date, into one or more series of
Prudential preference shares.
(vii) The ¤20 million borrowings were issued at 20‑year Euro Constant Maturity Swap (capped at 6.5 per cent). These have been swapped into borrowings of £14 million with interest
payable at three‑month GBP LIBOR plus 1.2 per cent.
Jackson’s borrowings are unsecured and subordinated to all present and future indebtedness, policy claims and other creditor claims of Jackson.
(viii)
Prudential plc has 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 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, AA by Fitch and A+
by AM Best.
Prudential Assurance Co. Singapore (Pte) Ltd.’s (Prudential Singapore) financial strength is rated AA by Standard & Poor’s.
All ratings on Prudential and its subsidiaries have been reaffirmed on stable outlook. All ratings stated as at 13 March 2018.
www.prudential.co.uk
Annual Report 2017 Prudential plc 257
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
C6 Borrowings continued
C6.2 Other borrowings
(a) Operational borrowings attributable to shareholder-financed operations
Commercial Paper
Medium Term Notes 2018
Borrowings in respect of short‑term fixed income securities programmes
Bank loans and overdrafts
Obligations under finance leases
Other borrowings
Other borrowingsnote
Total
2017 £m
2016 £m
485
600
1,085
70
5
631
706
1,052
599
1,651
19
5
642
666
1,791
2,317
Note
Other borrowings mainly include senior debt issued through the Federal Home Loan Bank of Indianapolis (FHLB), secured by collateral posted with the FHLB by Jackson. In addition, other
borrowings 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.
(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
2017 £m
2016 £m
3,570
100
46
3,716
1,189
100
60
1,349
* 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 increase since
31 December 2016 primarily relates to the debt instruments issued by new consolidated securitisation entities backed by a portfolio of mortgage loans (see note C3.3(c) for further
details).
† 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
2017 £m
2016 £m
2017 £m
2016 £m
2017 £m
2016 £m
275
–
–
–
–
6,005
6,280
275
–
–
–
–
6,523
6,798
1,723
1
1
–
–
66
1,791
1,636
599
–
1
1
80
2,317
351
371
184
59
1
2,750
3,716
118
48
108
8
146
921
1,349
258 Prudential plc Annual Report 2017
www.prudential.co.uk
C Balance sheet notes continued 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 the ‘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 Risk
report referred to above.
The most significant items that the IFRS shareholders’ profit or loss and shareholders’ equity for the Group’s life assurance business
are 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.
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)
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
Currency risk
Net effect of market risk arising from incidence of guarantee
features and variability of asset management fees offset by
derivative hedging programme
Fixed index annuity
business
Derivative hedge
programme to the extent
not fully hedged against
liability
Incidence of equity
participation features
Fixed index annuities,
Fixed annuities and GIC
business
Credit risk
Interest rate risk
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
Mortality and
morbidity risk
Persistency risk
Investment performance
subject to smoothing
through declared
bonuses
Investment performance
through asset
management fees
Persistency risk
Risk that utilisation of
withdrawal benefits
or lapse levels differ
from those assumed
in pricing
Spread difference
between earned
rate and rate
credited
to policyholders
Lapse risk, but the
effects of extreme
events may be
mitigated
by the application of
market value
adjustments
www.prudential.co.uk
Annual Report 2017 Prudential plc 259
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C7 Risk and sensitivity analysis continued
C7.1 Group overview continued
Type of business
Market and credit risk
Insurance and lapse risk
Investments/derivatives
Liabilities/unallocated surplus Other exposure
UK and Europe 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
Credit risk for assets covering
liabilities and shareholder capital
Asset/liability mismatch risk
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
Investment performance
through asset
management fees
Persistency risk to
future shareholder
transfers
Persistency risk
Mortality experience
and assumptions for
longevity
Detailed analyses of sensitivity of IFRS basis profit or loss and shareholders’ equity to key market and other risks by business unit are
provided in notes C7.2, C7.3, C7.4 and C7.5. The sensitivity analyses provided show the effect on profit or loss and shareholders’ equity
to changes in the relevant risk variables, all of which are reasonably possible at the relevant balance sheet date. 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 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 benefits from diversification benefits achieved through the geographical spread of the Group’s operations and, within those
operations, through a broad mix of product types. 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 sensitivities below do not reflect that assets and liabilities are actively managed and may vary at the time any actual market
movement occurs. There are strategies in place to minimise the exposure to market fluctuations. For example, as market indices fluctuate,
Prudential would take certain actions including selling investments, changing investment portfolio allocation and adjusting bonuses
credited to policyholders. In addition, these analyses do not consider the effect of market changes on new business generated in the
future.
Other limitations on the sensitivities include: the use of hypothetical market movements to demonstrate potential risk that only
represent Prudential’s view of reasonably possible near‑term market changes and that cannot be predicted with any certainty; the
assumption that interest rates in all countries move identically; the assumption that all global currencies move in tandem with the US
dollar against pound sterling; and the lack of consideration of the inter‑relation of interest rates, equity markets and foreign currency
exchange rates.
260 Prudential plc Annual Report 2017
www.prudential.co.uk
C Balance sheet notes continued 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 the investment portfolio of the with‑profits funds 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
Interest rate risk
Excluding its with‑profits and unit‑linked businesses, the results of the Asia business are sensitive to the movements in interest rates.
For the purposes of analysing sensitivity to variations in interest rates, reference has been made to the movements in the 10‑year
government bond rates of the territories. At 31 December 2017, 10‑year government bond rates vary from territory to territory and
range from 1.0 per cent to 7.5 per cent (2016: 1.2 per cent to 8.1 per cent).
For the sensitivity analysis as shown in the table below, the reasonably possible interest rate movement used is 1 per cent
for all territories.
The estimated sensitivity to the decrease and increase in interest rates at 31 December 2017 and 2016 is as follows:
Profit before tax attributable to shareholders
Related deferred tax (where applicable)
Net effect on profit and shareholders’ equity
2017 £m
2016 £m
Decrease
of 1%
Increase
of 1%
Decrease
of 1%
Increase
of 1%
2
(7)
(5)
(443)
20
(423)
213
(41)
172
(509)
62
(447)
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‑backed business has limited exposure to equity and property investment (31 December 2017:
£1,764 million). Generally changes in equity and property investment values are not directly offset by movements in non‑linked
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 (including those held by the Group’s joint venture and associate businesses), which would be reflected in the short‑term
fluctuation component of the Group’s segmental analysis of profit before tax, at 31 December 2017 and 2016 is as follows:
Profit before tax attributable to shareholders
Related deferred tax (where applicable)
Net effect on profit and shareholders' equity
2017 £m
Decrease
2016 £m
Decrease
of 20%
of 10%
of 20%
of 10%
(478)
7
(471)
(239)
4
(235)
(386)
4
(382)
(192)
2
(190)
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.
www.prudential.co.uk
Annual Report 2017 Prudential plc 261
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C7 Risk and sensitivity analysis continued
C7.2 Asia insurance operations continued
Insurance risk
Many of the business units 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 £66 million (2016: £61 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.
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 2017, 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 insurance 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
2017 £m
2016 £m
2017 £m
2016 £m
(155)
(135)
(492)
(97)
(77)
(442)
189
165
601
118
94
540
C7.3 US insurance operations
Exposure and sensitivity of IFRS basis profit and shareholders’ equity to market and other risks
Jackson’s reported operating profit based on longer‑term investment returns is sensitive to market conditions, both with respect to
income earned on spread‑based products and indirectly with respect to income earned on variable annuity asset management fees.
Jackson’s main exposures to market risk are to interest rate risk and equity risk.
Jackson is exposed primarily to the following risks:
Risks
Risk of loss
Equity risk
— 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 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 sustained fall in interest rates especially if 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.
262 Prudential plc Annual Report 2017
www.prudential.co.uk
C Balance sheet notes continued 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, equity volatility, interest rates and credit spreads materially affect
the carrying value of derivatives that are used to manage the liabilities to policyholders and backing investment assets. Movements in
the carrying value of derivatives 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 mean that 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).
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 variable annuity guaranteed benefit features and reinsured Guaranteed
Minimum Income Benefit variable annuity features are similar to derivatives. Jackson does not account for such items 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.
The principal types of derivatives used by Jackson and their purpose are as follows:
Derivative
Purpose
Interest rate 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 to hedge
Jackson’s exposure to movements in interest rates.
Swaption contracts
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.
Treasury futures
contracts
Equity index futures
contracts and equity
index options
These derivatives are used to hedge Jackson’s exposure to movements in interest rates.
These derivatives (including various call and put options and options contingent on interest rates and currency
exchange rates) are used to hedge Jackson’s obligations associated with its issuance of certain VA guarantees.
Some of these annuities and guarantees contain embedded options that are fair valued for financial reporting
purposes.
Cross‑currency swaps 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.
Credit default swaps 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.
www.prudential.co.uk
Annual Report 2017 Prudential plc 263
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C7 Risk and sensitivity analysis continued
C7.3 US insurance operations continued
i Sensitivity to equity risk
At 31 December 2017 and 2016, 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 2017
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 2016
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
100,451
2,133
235
38
9,099
2,447
667
0-6%
0-6%
0-8%†
5,694
1,484
93,227
Minimum
return
0‑6%
0%
0‑5%†
0%
Account
value
£m
93,512
2,217
256
44
8,798
2,479
747
0‑6%
0‑6%
0‑8%†
5,309
1,595
85,402
Weighted
average
attained age
Period
until
expected
annuitisation
66.0 years
66.5 years
69.0 years
0.4 years
Weighted
average
attained age
Period
until
expected
annuitisation
65.6 years
66.0 years
68.7 years
0.5 years
Net
amount
at risk
£m
1,665
20
13
–
96
51
47
426
436
4,393
Net
amount
at risk
£m
2,483
39
22
–
346
125
83
699
595
9,293
* Amounts shown for GMWB comprise sums for the ‘not for life’ portion (where the guaranteed withdrawal base less the account value equals to the net amount at risk (NAR)), and a ‘for
life’ portion (where the NAR has been estimated as the present value of future expected benefit payment remaining after the amount of the ‘not for life’ guaranteed benefits is zero).
† Ranges shown based on simple interest. The upper limits of 5 per cent or 8 per cent simple interest are approximately equal to 4.1 per cent and 6 per cent respectively, on a compound
interest basis over a typical 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 guarantees are essentially fully reinsured.
264 Prudential plc Annual Report 2017
www.prudential.co.uk
C 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
2017 £m
2016 £m
80,843
13,976
19,852
681
73,430
15,044
17,441
994
115,352
106,909
As noted above, Jackson is exposed to equity risk through the options embedded in the fixed index annuity liabilities and 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 futures and options that hedge the risks inherent in these products,
while also considering the impact of rising and falling guaranteed benefit fees.
Due to the nature and the valuation under IFRS of the free‑standing derivatives and the variable annuity guarantee features, this
hedge, while highly effective on an economic basis, would not be completely mute in the financial reporting as the immediate impact of
equity market movements reset the free‑standing derivatives immediately while the hedged liabilities reset more slowly and fees are
recognised prospectively in the period in which they are earned.
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 2017, the estimated sensitivity of Jackson’s profit and shareholders’ equity to immediate increases and decreases in
equity markets is shown below. The sensitivities are shown net of related changes in DAC amortisation.
Pre‑tax profit, net of related changes in
amortisation of DAC
Related deferred tax effects
Net sensitivity of profit after tax and
shareholders’ equity
2017 £m
2016 £m
Decrease
Increase
Decrease
Increase
of 20%
of 10%
of 20%
of 10%
of 20%
of 10%
of 20%
of 10%
1,107
(233)
336
(71)
619
(130)
262
(55)
1,061
(371)
488
(171)
370
(129)
59
(21)
874
265
489
207
690
317
241
38
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 2017 and 2016.
www.prudential.co.uk
Annual Report 2017 Prudential plc 265
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C7 Risk and sensitivity analysis continued
C7.3 US insurance operations continued
ii Sensitivity to interest rate risk
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’s products is
not generally sensitive to interest rate risk. This position derives from the nature of the products and the US GAAP basis of measurement.
The GMWB features attached to variable annuity business (other than ‘for life’ components) are accounted for under US GAAP as
embedded derivatives which are fair‑valued and, therefore, will be sensitive to changes in interest rates.
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 2017 and 2016 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
2017 £m
2016 £m
Decrease
Increase
Decrease
Increase
of 2%
of 1%
of 1%
of 2%
of 2%
of 1%
of 1%
of 2%
(4,079)
857
(1,911)
401
1,373
(288)
2,533
(532)
(3,222)
(1,510)
1,085
2,001
(2,899)
1,015
(1,884)
(1,394)
488
(906)
1,065
(373)
2,004
(701)
692
1,303
3,063
(643)
1,700
(357)
(1,700)
357
(3,063)
643
3,364
(1,177)
1,883
(659)
(1,883)
659
(3,364)
1,177
Net effect
2,420
1,343
(1,343)
(2,420)
2,187
1,224
(1,224)
(2,187)
Total net effect on shareholders' equity
(802)
(167)
(258)
(419)
303
318
(532)
(884)
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 2017, the average and closing rates were US$1.29 (2016: US$1.35)
and US$1.35 (2016: US$1.24) to £1.00, respectively. A 10 per cent increase (weakening of the dollar) or decrease (strengthening of the
dollar) in these rates would reduce or increase profit before tax attributable to shareholders, profit for the year and shareholders’ equity
attributable to US insurance operations respectively as follows:
Profit before tax attributable to shareholders
Profit for the year
Shareholders’ equity attributable to US insurance operations
A 10% increase in US$:£
exchange rates
A 10% decrease in US$:£
exchange rates
2017 £m
2016 £m
2017 £m
2016 £m
(54)
(20)
(456)
(48)
(54)
(473)
66
24
557
59
66
578
266 Prudential plc Annual Report 2017
www.prudential.co.uk
C Balance sheet notes continued iv Other sensitivities
The total profit of Jackson is sensitive to market risk on the assets covering liabilities other than variable annuity business segregated in
the separate accounts.
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. 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.
For variable annuity business, an assumption made is the expected long‑term level of separate account returns, which for 2017 was
7.4 per cent (2016: 7.4 per cent). The impact of using this return is reflected in two principal ways, namely:
— Through the projected expected gross profits that 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 A3.1 above; and
— The required level of provision for claims for guaranteed minimum death, ‘for life’ withdrawal, and income benefits.
Jackson is sensitive to mortality risk, lapse risk and other types of policyholder behaviour, such as the utilisation of its GMWB product
features. Jackson’s persistency assumptions reflect a combination of recent experience for each relevant line of business and expert
judgement, especially where a lack of relevant and credible experience data exists. These assumptions vary by relevant factors, such as
product, policy duration, attained age and for variable annuity lapse assumptions, the extent to which guaranteed benefits are ‘in the
money’ relative to policy account values. Changes in these assumptions, which are assessed on an annual basis after considering recent
experience, could have a material impact on policyholder liabilities and therefore on profit before tax. See further information in note
B1.2.
In addition, in the absence of hedging, equity and interest rate movements can both cause a loss directly or 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.
C7.4 UK and Europe insurance operations
Exposure and sensitivity of IFRS basis profit and shareholders’ equity to market and other risks
The IFRS basis results of the UK and Europe insurance operations are most sensitive to the following factors:
— Asset/liability matching;
— Default rate experience;
— Mortality;
— Longevity assumptions; and
— The difference between the return on corporate bond and risk‑free rate for shareholder‑backed annuity business of The Prudential
Assurance Company Limited.
Further details are described below.
The IFRS operating profit based on longer‑term investment returns for UK and Europe 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
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 are currently one‑ninth of the cost of bonuses declared to with‑profits
policyholders. For certain unitised with‑profits products, such as the PruFund range of funds, the bonuses represent the policyholders’
net return based on the smoothed unit price of the selected investment fund. Investment performance is a key driver of bonuses
declared, and hence the shareholder results. Due to the ‘smoothed’ basis of bonus declaration, the sensitivity to short‑term investment
performance is relatively low. However, long‑term investment performance and persistency trends may affect future shareholder
transfers.
www.prudential.co.uk
Annual Report 2017 Prudential plc 267
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C7 Risk and sensitivity analysis continued
C7.4 UK and Europe insurance operations continued
Shareholder-backed annuity business
Profits from shareholder‑backed annuity business are most sensitive to:
— The extent to which the duration of the assets held closely matches the expected duration of the liabilities under the contracts;
— 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 £66 million (2016: £67 million). A
decrease in credit default assumptions of five basis points would increase pre‑tax profit by £198 million (2016: £200 million). A decrease
in renewal expenses (excluding asset management expenses) of 5 per cent would increase pre‑tax profit by £40 million (2016:
£41 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 £143 million (2016: £144 million). See C4.1(d)(iii) for further details on mortality assumptions.
Unit-linked and other business
Unit‑linked and other business represents a comparatively small proportion of the in‑force business of the UK and Europe 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 and Europe insurance
operations are, except annuity business, not generally exposed to interest rate risk. At 31 December 2017 annuity liabilities accounted for
98 per cent (2016: 98 per cent) of UK shareholder‑backed business liabilities. For annuity business, liabilities are exposed to interest rate
risk. However, the net exposure 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. Liabilities are measured differently under Solvency II reporting requirements than under IFRS resulting in an alteration
to the assets used to measure the IFRS annuity liabilities. As a result, IFRS has a different sensitivity to interest rate and credit risk than
under Solvency II.
The estimated sensitivity of the UK non‑linked shareholder‑backed business (principally annuities business) to a movement in interest
rates is as follows:
2017 £m
2016 £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
13,497
(9,426)
(658)
5,805
(4,210)
(254)
(4,659)
3,443
190
(8,541)
6,295
348
12,353
(10,023)
(396)
5,508
(4,466)
(177)
(4,527)
3,636
151
(8,313)
6,635
285
Net sensitivity of profit after tax and
shareholders’ equity
3,413
1,341
(1,026)
(1,898)
1,934
865
(740)
(1,393)
268 Prudential plc Annual Report 2017
www.prudential.co.uk
C Balance sheet notes continued In addition the shareholder‑backed portfolio of UK non‑linked insurance operations (covering policyholder liabilities and shareholders’
equity) includes equity securities and investment properties. Excluding any offsetting effects on the measurement of policyholder
liabilities, 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
2017 £m
2016 £m
A decrease
of 20%
A decrease
of 10%
A decrease
of 20%
A decrease
of 10%
(332)
57
(275)
(166)
28
(138)
(326)
66
(260)
(163)
33
(130)
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 £30 million and £53 million respectively (2016: £12 million and £47 million, respectively).
ii Sensitivities to other financial risks for asset management operations
The profits of asset management businesses are sensitive to the level of assets under management, as this significantly affects the value
of management fees earned by the business in the current and future periods. 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.
Other operations are sensitive to credit risk on the bridging loan portfolio of the Prudential Capital operation. Total debt securities
held at 31 December 2017 by Prudential Capital were £2,238 million (2016: £2,359 million). 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.
www.prudential.co.uk
Annual Report 2017 Prudential plc 269
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information 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:
Deferred tax assets
Unrealised losses or gains on investments
Balances relating to investment and insurance contracts
Short‑term temporary differences
Capital allowances
Unused tax losses
Total
Deferred tax liabilities
Unrealised losses or gains on investments
Balances relating to investment and insurance contracts
Short‑term temporary differences
Capital allowances
Total
2017 £m
Movement
through
other
comprehensive
income and
equity
Other
movements
including
foreign
currency
movements
Movement
in income
statement
(8)
–
(1,396)
(2)
(12)
(1,418)
(177)
(156)
870
(3)
534
–
–
(1)
–
–
(1)
(55)
–
(26)
–
(81)
(1)
–
(267)
–
(1)
(269)
18
14
186
(16)
202
At 1 Jan
23
1
4,196
16
79
4,315
(1,534)
(730)
(3,071)
(35)
(5,370)
At 31 Dec
14
1
2,532
14
66
2,627
(1,748)
(872)
(2,041)
(54)
(4,715)
Of the short‑term temporary differences of £2,532 million relating to deferred tax assets, £1,799 million relating to the US insurance
operations is expected to be recovered in line with the run off of the in‑force book, and the remaining balances of the £733 million are
expected to be recovered within 10 years.
The reduction in the US corporate income tax rate to 21 per cent from 1 January 2018 was substantively enacted on 22 December
2017. The remeasurement to 21 per cent reduced deferred tax assets subject to US taxation by £1,587 million and deferred tax liabilities
by £1,368 million. The £219 million net reduction was reflected partly in the income statement (£445 million charge attributable to
shareholders and £92 million benefit to policyholders) and partly through reserves in other comprehensive income (£134 million benefit).
The deferred tax balances at 31 December 2017 and 2016 arise in the following parts of the Group:
Asia operations
US operations
UK and Europe
Other operations
Total
Deferred tax assets
Deferred tax liabilities
2017 £m
2016* £m
2017 £m
2016* £m
112
2,300
157
58
2,627
107
3,979
174
55
4,315
(1,152)
(1,845)
(1,703)
(15)
(4,715)
(935)
(2,832)
(1,592)
(11)
(5,370)
* The 2016 comparative results have been re‑presented from those previously published for the reassessment of the Group’s operating segments as described in note B1.3.
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.
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.
For the 2017 full year results and financial position at 31 December 2017 the following tax benefits have not been recognised:
Capital losses
Trading losses
2017
2016
Tax benefit £m
Losses £bn
Tax benefit £m
Losses £bn
79
74
0.4
0.3
89
41
0.4
0.2
Of the unrecognised trading losses, losses of £41 million will expire within the next seven years, the rest have no expiry date.
270 Prudential plc Annual Report 2017
www.prudential.co.uk
C Balance sheet notes continued C8.2 Current tax
Of the £613 million (2016: £440 million) current tax recoverable, the majority is expected to be recovered in one year or less. The current
tax recoverable includes £112 million in relation to the ongoing litigation relating to the historic tax treatment of dividends received from
overseas portfolio investments of life insurance companies. The Prudential Assurance Company Limited (PAC) is the test case for this
litigation. In April 2016, the UK Court of Appeal found in PAC’s favour on all substantive points in the litigation. HM Revenue & Customs’
appeal against the Court of Appeal’s judgment was heard by the Supreme Court in February 2018. A decision is expected later in 2018.
The current tax liability of £537 million (2016: £649 million) includes £139 million (2016: £89 million) of provisions for uncertain tax
matters. Further detail is provided in note B4.
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 schemes 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 82 per cent (2016: 82 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 IAS 19 ‘Employee Benefits’ and IFRIC 14 ‘IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements
and their Interaction’, the Group is only able to recognise a surplus to the extent that it is able to access the surplus either through an
unconditional right of refund or through reduced future contributions relating to ongoing service of active members. The Group has
no unconditional right of refund to any surplus in PSPS. Accordingly, the PSPS surplus recognised is restricted to the present value of the
economic benefit to the Group from the difference between the estimated future ongoing contributions and the full future cost of service
for the active members. In contrast, the Group is able to access the surplus of SASPS and M&GGPS. Therefore, the amounts recognised
for these schemes are the IAS 19 valuation amount (either a surplus or deficit).
The Group asset/liability in respect of defined benefit pension schemes is as follows:
Underlying economic surplus
(deficit)
Less: unrecognised surplus
Economic surplus (deficit)
(including investment in
Prudential insurance
policies) note (iii)
Attributable to:
PAC with‑profits fund
Shareholder‑backed
operations
Consolidation adjustment
against policyholder
liabilities for investment
in Prudential insurance
policies
IAS 19 pension asset (liability)
on the Group statement of
financial position note (iv)
2017 £m
2016 £m
PSPS
note (i)
SASPS
note (ii)
M&GGPS
Other
schemes
Total
PSPS
note (i)
SASPS
note (ii)
M&GGPS
Other
schemes
Total
721
(485)
(137)
–
109
–
(1)
–
692
(485)
717
(558)
(237)
–
236
(137)
109
(1)
207
165
(55)
–
71
(82)
109
–
(1)
110
97
159
111
(237)
(95)
48
(142)
84
–
84
–
84
(1)
–
563
(558)
(1)
–
(1)
5
16
(11)
–
–
(151)
–
(151)
–
–
(134)
–
(134)
236
(137)
(42)
(1)
56
159
(237)
(50)
(1)
(129)
Notes
(i)
(ii)
(iii)
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 2017 and 2016.
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 2017, the PSPS pension asset of £236 million (2016: £159 million) and the other schemes’ pension liabilities of £180 million (2016: £288 million) are included within
‘Other debtors’ and ‘Provisions’ respectively on the consolidated statement of financial position.
www.prudential.co.uk
Annual Report 2017 Prudential plc 271
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C9 Defined benefit pension schemes continued
(a) Background and summary economic and IAS 19 financial positions continued
Triennial actuarial valuations
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. The actuarial valuation differs from the IAS 19
accounting basis valuation in a number of respects, including the discount rate assumption where IAS 19 prescribes a rate based on
high‑quality corporate bonds while a more ‘prudent’ assumption is used for the actuarial valuation.
The information on the latest completed actuarial valuation for the UK schemes is shown in the table below:
Last completed actuarial
5 April 2014*
31 March 2017
31 December 2014*
PSPS
SASPS
M&GGPS
valuation date
Valuation actuary, all Fellows
of the Institute and Faculty
of Actuaries
C G Singer
Towers Watson Limited
Jonathan Seed
Xafinity Consulting
Paul Belok
AON Hewitt Limited
Funding level at the last
107 per cent
75 per cent
99 per cent
valuation
Deficit funding arrangement
agreed with the Trustees
based on the last completed
valuation
No deficit funding required
from 1 January 2016
No deficit or other funding
required. Ongoing
contributions for active
members are at the minimum
level required under the
scheme rules (approximately
£6 million per annum
excluding expenses)
Deficit funding of
£26 million per annum
from 1 April 2017 until
31 March 2027, or earlier if the
scheme’s funding level
reaches 100 per cent before
this date. The deficit funding
will be reviewed every three
years at subsequent
valuations
* The triennial valuations for PSPS and M&GGPS as at 5 April 2017 and 31 December 2017 respectively are currently in progress.
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 per cent (108 per cent) 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 per cent (92 per cent) of the 2000 series rates (PNMA00/PNFA00).
Allowance for future improvements to post-retirement mortality
For males (females) up to 2009 100 per cent (75 per cent) of Medium Cohort subject to a minimum rate of improvement of 2.00 per cent
per annum (1.25 per cent per annum) 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 per cent per annum (1.50 per cent per annum), and minor scheme‑specific
calibrations.
272 Prudential plc Annual Report 2017
www.prudential.co.uk
C Balance sheet notes continued Risks to which the defined benefit schemes expose the Group
Responsibility of making good of any deficit that may arise in the schemes lies with the employers of the schemes, which are subsidiaries
of the Group. Accordingly, the pension schemes expose the Group to a number of risks and the most significant of which are interest rate
and investment risk, inflation risk and mortality risk.
Corporate governance
The Group’s UK pension schemes are established under trust and are subject to UK legal requirements; this includes being subject to
regulation by ‘The Pension Regulator’ in accordance with the Pension Act 1995. Each scheme has a corporate trustee to which some
directors are appointed by Group employers with the remaining directors nominated by members in accordance with UK legal
requirements. The trustees have the ultimate responsibility to ensure that the scheme is managed in accordance with the Trust Deed &
Rules. The trustees act in the best interests of the schemes beneficiaries; this includes taking appropriate account of each employer’s
legal obligation and financial ability to support the schemes, when setting investment strategy and when agreeing funding with the
employers. The employers’ contribution commitments are formally updated at each triennial valuation; between valuations funding
levels and employer strength continue to be monitored with the Trustees being able to bring forward the next triennial valuation if they
consider it appropriate to do so.
All of the Group’s three UK defined benefit pension schemes (PSPS, SASPS and M&GGPS) are final salary schemes, which are closed
to new entrants.
The Trustees of each scheme set the general investment policy and specify any restrictions on types of investment and the degrees
of divergence permitted from the benchmark, but delegate the responsibility for selection and realisation of specific investments to the
Investment Managers. The Trustees consult the Principal Employer, (eg The Prudential Assurance Company for PSPS), on the investment
principles, but the ultimate responsibility for the investment of the assets of the scheme lies with the Trustees.
The Trustees of each of the schemes manage 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.
For PSPS, a significant portion of the scheme assets are invested in liability matching assets such as bonds and gilts including
index‑linked gilts to partially hedge against inflation. In addition, PSPS has maintained a portfolio of interest rate and inflation swaps
to match more closely the duration and inflation profile of its assets to its liabilities.
SASPS and M&GGPS use very limited or no derivatives to manage their risks. The risks arising from these schemes are managed
through a diversified mix of investments. SASPS has invested in a mix of both return‑seeking assets, such as equities and property and
matching assets including a leveraged liability driven investment portfolio to reflect the liability profile of the scheme. A portion of the
M&GGPS assets is invested in index‑linked gilts and leveraged index‑linked gilts as part of its asset liability management. The mix of the
investments is kept under review by the Trustees of the respective schemes.
(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
2017 %
2016 %
2.5
3.1
3.1
2.1
2.5
2.5
2.5
3.1
2.6
3.2
3.2
2.2
2.5
2.5
2.5
3.2
* 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 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. This allowance
reflected the CMI’s 2014 mortality improvements model, with scheme‑specific calibrations. For immediate annuities in payment, in 2017
and 2016, a long‑term mortality improvement rate of 1.75 per cent per annum and 1.25 per cent per annum was applied for males and
females, respectively.
www.prudential.co.uk
Annual Report 2017 Prudential plc 273
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C9 Defined benefit pension schemes continued
(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 2017, M&GGPS held investments in Prudential insurance policies of £151 million (2016: £134 million).
Movements on the pension scheme surplus determined on the economic basis are as follows, with the effect of the application of
IFRIC 14 being shown separately:
All schemes
Underlying position (without the effect of IFRIC 14)
Surplus (deficit)
Less: amount attributable to PAC with‑profits fund
Shareholders' share:
Gross of tax surplus (deficit)
Related tax
Net of shareholders' tax
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
Related tax
Net of shareholders' tax
With the effect of IFRIC 14
Surplus (deficit)
Less: amount attributable to PAC with‑profits fund
Shareholders' share:
Gross of tax surplus (deficit)
Related tax
Net of shareholders' tax
2017 £m
Surplus
(deficit)
in schemes
at 1 Jan
2017
(Charge)
credit
to income
statement
Actuarial gains
and losses
in other
comprehensive
income
Contributions
paid
Surplus
(deficit)
in schemes at
31 Dec
2017
563
(425)
138
(27)
111
(558)
409
(149)
29
(120)
5
(16)
(11)
2
(9)
(40)
10
(30)
6
(24)
(14)
10
(4)
–
(4)
(54)
20
(34)
6
(28)
119
(39)
80
(15)
65
87
(56)
31
(6)
25
206
(95)
111
(21)
90
50
(19)
31
(6)
25
–
–
–
–
–
50
(19)
31
(6)
25
692
(473)
219
(42)
177
(485)
363
(122)
23
(99)
207
(110)
97
(19)
78
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†
2017
Other
schemes
£m
67
272
655
248
–
(6)
130
77
1,443
Total
£m
76
498
5,695
1,739
164
182
270
293
8,917
PSPS
£m
9
226
5,040
1,491
164
188
140
216
7,474
2016
Other
schemes
£m
85
368
550
196
6
(2)
109
67
1,379
Total
£m
103
661
5,961
1,365
150
250
180
336
9,006
PSPS
£m
18
293
5,411
1,169
144
252
71
269
7,627
%
1
6
63
20
2
2
3
3
100
%
1
7
66
15
2
3
2
4
100
* 89 per cent of the bonds are investment graded (2016: 93 per cent).
† 96 per cent of the total value of the scheme assets are derived from quoted prices in an active market (2016: 98 per cent). 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 2017 of £8,766 million (2016: £8,872 million) is different from the economic basis plan assets of
£8,917 million (2016: £9,006 million) as shown above due to the exclusion of investment in Prudential insurance policies, by M&GGPS as described above.
274 Prudential plc Annual Report 2017
www.prudential.co.uk
C 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
2017 £m
Net surplus (deficit), beginning
of year
Current 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)
Transfer into investment in
Prudential insurance policies
Plan
assets
Present
value
of benefit
obligations
note (i)
9,006
–
(8,443)
(46)
228
(8)
(479)
50
1
119
–
(214)
–
479
–
(1)
–
–
Net surplus (deficit), end of year
8,917
(8,225)
2016 £m
Net surplus (deficit), beginning
of year
Current 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)
Transfer into investment in
Prudential insurance policies
Net surplus (deficit), end of year
Notes
(i) Maturity profile of the benefit obligations
7,819
–
292
(5)
(350)
45
2
1,203
–
9,006
(6,858)
(34)
(254)
–
350
–
(2)
(1,645)
–
(8,443)
Net surplus
(deficit)
(without
the effect
of IFRIC 14)
Effect of
IFRIC 14
for
derecognition
of PSPS
surplus
Economic
basis net
surplus
(deficit)
Other
adjustments
including for
investments
in Prudential
insurance
policies
note (ii)
IAS 19
basis net
surplus
(deficit)
563
(46)
14
(8)
–
50
–
119
–
692
961
(34)
38
(5)
–
45
–
(442)
–
563
(558)
–
(14)
–
–
–
–
87
–
(485)
(800)
–
(32)
–
–
–
–
274
–
(558)
5
(46)
–
(8)
–
50
–
206
–
207
161
(34)
6
(5)
–
45
–
(168)
–
5
(134)
–
(3)
–
–
–
–
(6)
(8)
(151)
(77)
–
(3)
–
–
–
–
(13)
(41)
(134)
(129)
(46)
(3)
(8)
–
50
–
200
(8)
56
84
(34)
3
(5)
–
45
–
(181)
(41)
(129)
The weighted average duration of the benefit obligations of the schemes is 18.6 years (2016: 19.5 years).
The following table provides an expected maturity analysis of the undiscounted benefit obligations as at 31 December:
All schemes £m
2017
2016
1 year
or less
255
243
After
1 year
to 5 years
After
5 years
to 10 years
After
10 years
to 15 years
After
15 years
to 20 years
1,108
1,090
1,589
1,585
1,667
1,694
1,661
1,704
Over
20 years
7,889
8,508
Total
14,169
14,824
(ii)
(iii)
(iv)
The adjustments for investments in Prudential insurance policies are consolidation adjustments for intra‑group assets and liabilities with no impact to operating results.
Total employer contributions expected to be paid into the Group defined benefit schemes for the year ending 31 December 2018 amount to £50 million (2017: £45 million).
The actuarial gains and losses attributable to policyholders and shareholders as shown in the table above are analysed as follows:
Actuarial gains and losses
Return on the scheme assets less amount included in interest income
(Losses) on changes in demographic assumptions
(Losses) on changes in financial assumptions
Experience gains on scheme liabilities
Effect of derecognition of PSPS surplus
Consolidation adjustment for investments in Prudential insurance policies and other adjustments
2017 £m
2016 £m
119
(10)
(101)
111
119
87
(6)
200
1,203
(18)
(1,733)
106
(442)
274
(13)
(181)
www.prudential.co.uk
Annual Report 2017 Prudential plc 275
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
C9 Defined benefit pension schemes continued
(c) Estimated pension scheme surpluses and deficits continued
The losses of £1,733 million in 2016 on change in financial assumptions primarily reflect the effect of the decrease in the discount rate
used in determining the scheme liabilities from 3.8 per cent in 2015 to 2.6 per cent in 2016. These 2016 losses were partially offset by the
increase in the return on the scheme assets, which was greater than the amount included in interest income by £1,203 million.
(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 sensitivities are
calculated based on a change in one assumption with all other assumptions being held constant. As such, interdependencies between
the assumptions are excluded. The impact of the rate of inflation assumption sensitivity includes the impact of inflation on the rate of
increase in salaries and rate of increase of pensions in payment.
The sensitivities of the underlying pension scheme liabilities as shown below do 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 the financial position of PSPS and SASPS to the PAC with‑profits fund as described above.
Assumption applied
Impact of sensitivity on scheme liabilities on IAS 19 basis
Discount rate
2017
2.5%
2016
Sensitivity change in assumption
2017
2016
2.6% Decrease by 0.2%
Increase in scheme liabilities by:
PSPS
Other schemes
Discount rate
2.5%
2.6% Increase by 0.2%
Decrease in scheme liabilities by:
Rate of inflation
3.1%
2.1%
3.2% RPI: Decrease by 0.2%
2.2% CPI: Decrease by 0.2%
with consequent reduction in
salary increases
PSPS
Other schemes
Decrease in scheme liabilities by:
PSPS
Other schemes
Mortality rate
Increase life expectancy
Increase in scheme liabilities by:
by 1 year
PSPS
Other schemes
3.5%
5.4%
3.4%
4.9%
0.6%
3.9%
4.0%
3.8%
3.5%
5.3%
3.5%
5.0%
0.6%
4.1%
3.5%
3.7%
276 Prudential plc Annual Report 2017
www.prudential.co.uk
C Balance sheet notes continued C10 Share capital, share premium and own shares
Number of
ordinary shares
Issued shares of 5p each fully paid
At 1 January
Shares issued under share‑based schemes
2,581,061,573
6,113,872
At 31 December
2,587,175,445
2017
Share
capital
£m
129
–
129
Share
premium
£m
Number of
ordinary shares
1,927 2,572,454,958
8,606,615
21
1,948 2,581,061,573
2016
Share
capital
£m
128
1
129
Share
premium
£m
1,915
12
1,927
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 2017, there were options outstanding under save as you earn schemes to subscribe for shares as follows:
31 December 2017
31 December 2016
Number of
shares to
subscribe for
6,448,853
7,068,884
Share price range
from
629p
466p
to
Exercisable
by year
1,455p
1,155p
2023
2022
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 £250 million as at
31 December 2017 (2016: £226 million) is deducted from retained earnings. The Company has established trusts to facilitate the delivery
of shares under employee incentive plans. At 31 December 2017, 11.4 million (2016: 10.7 million) Prudential plc shares with a market
value of £218 million (2016: £175 million) were held in such trusts all of which are for employee incentive plans. The maximum number
of shares held during 2017 was 15.1 million which was in March 2017.
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
2017 share price
2016 share price
Number
of shares
62,388
65,706
70,139
3,090,167
55,744
182,780
51,984
55,857
51,226
136,563
53,951
53,519
3,930,024
Low
£
15.83
15.70
16.40
16.58
17.50
17.52
17.72
18.30
17.45
17.99
18.38
18.26
High
£
16.02
16.09
16.54
16.80
17.62
18.00
17.93
18.73
17.97
18.22
18.40
18.47
Cost
£
989,583
1,052,657
1,159,950
51,369,760
979,645
3,269,447
927,452
1,025,802
912,151
2,483,879
992,123
986,000
Number
of shares
67,625
79,077
735,361
84,848
2,272,344
576,386
84,883
73,602
173,166
71,253
69,976
71,626
66,148,449
4,360,147
Low
£
13.73
11.96
13.09
12.91
13.17
11.28
11.96
14.01
13.69
14.37
13.49
15.76
High
£
14.00
12.01
13.72
13.31
13.31
13.09
12.32
14.25
14.14
14.50
15.40
16.37
Cost
£
932,711
947,993
9,686,101
1,115,919
30,238,832
6,604,231
1,040,732
1,040,528
2,372,037
1,026,260
1,044,194
1,134,181
57,183,719
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 2017 was 6.4 million
(2016: 6.0 million) and the cost of acquiring these shares of £71 million (2016: £61 million) is included in the cost of own shares.
The market value of these shares as at 31 December 2017 was £121 million (2016: £97 million). During 2017, these funds made
net acquisitions of 372,029 Prudential shares (2016: net disposals of 77,423) for a net increase of £9.4 million to book cost
(2016: net increase of £7.9 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 2017 or 2016.
www.prudential.co.uk
Annual Report 2017 Prudential plc 277
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C11 Provisions
Provision in respect of defined benefit pension schemesC9
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
2017 £m
2016 £m
180
943
1,123
288
659
947
2017 £m
2016 £m
659
542
(9)
(239)
(10)
943
519
381
(53)
(222)
34
659
Other provisions comprise staff benefits provisions of £453 million (2016: £415 million) that are generally expected to be paid out within
the next three years, other provisions of £121 million (2016: £69 million) and a provision for review of past annuity sales after utilisation
during the year of £369 million (2016: £175 million). Prudential has agreed with the Financial Conduct Authority (FCA) to review
annuities sold without advice after 1 July 2008 to its contract‑based defined contribution pension customers. The review will examine
whether customers were given sufficient information about their potential eligibility to purchase an enhanced annuity, either from
Prudential or another pension provider. The FCA formally released its redress calculation methodology in early 2018 and accordingly
Prudential reassessed the provision held to cover the costs of undertaking the review and any potential redress. At 31 December 2017,
following this reassessment, the gross provision was increased to £400 million (2016: £175 million), excluding any utilisation during the
year. The ultimate amount that will be expended by the Group on the review, which is currently expected to be completed in 2019,
remains uncertain. Although the Group’s professional indemnity insurance is expected to mitigate the overall financial impact of this
review, with potential insurance recoveries of up to £175 million, no such recovery has been factored into the provision, in accordance
with the requirements of IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’.
C12 Capital
(a) Group objectives, policies and processes for managing capital
(i) Capital measure
The Group manages its Group Solvency II own funds as its measure of capital. At 31 December 2017 estimated Group Solvency II own
funds are £26.4 billion (2016: £24.8 billion).
(ii) External capital requirements
Solvency II is the Group’s consolidated capital regime. Solvency II is a risk‑based solvency framework required under the European
Solvency II Directive as implemented by the Prudential Regulatory Authority in the UK. The Solvency II surplus represents the
aggregated capital held by the Group less Solvency Capital Requirements.
(iii) Meeting of capital management objectives
The Group Solvency Capital Requirement has been met during 2017.
As well as holding sufficient capital to meet Solvency II requirements at Group level, the Group also closely manages the cash it holds
within its central holding companies so that it can:
a) Maintain flexibility, fund new opportunities and absorb shock events;
b) Fund dividends; and
c) Cover central costs and debt payments.
More details on holding company cash flows and balances are given in the section II(a) of the additional unaudited financial information.
While the Group at a consolidated level is subject to the Solvency II requirements, at a business unit level capital is defined by local
capital regulations and local business needs.
Each of the Group’s long‑term business operations is capitalised to a sufficiently strong level for its individual circumstances.
The Group manages its assets, liabilities and capital locally, in accordance with local regulatory requirements and reflecting the
different types of liabilities in each business. As a result of the diversity of products offered by Prudential and the different regulatory
regimes under which it operates, the Group employs differing methods of asset/liability and capital management, depending on the
business concerned.
278 Prudential plc Annual Report 2017
www.prudential.co.uk
C Balance sheet notes continued
Stochastic modelling of assets and liabilities is undertaken in the UK, US 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 Asia 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.
(b) Local capital regulations
(i) Asia insurance operations
The estimated capital position for Asia life insurance operations with reconciliation to shareholders’ equity is shown below:
IFRS shareholders' equity
Adjustments to regulatory basis
Unallocated surplus of with‑profits funds
Deferred acquisition costs, distribution rights and goodwill of non‑participating business
not recognised for regulatory reporting
Other adjustments
Total adjustments
Total available capital resources of life assurance businesses on local regulatory bases
The capital requirements of significant operations are:
2017 £m
2016 £m
5,524
4,992
3,474
2,667
(1,515)
2,411
4,370
9,894
(1,365)
1,628
2,930
7,922
China
A risk‑based capital, risk management and governance framework, known as the China Risk Oriented Solvency System (C‑ROSS),
applies in China. Under C‑ROSS, insurers are required to maintain a core solvency ratio (core capital over minimum capital) and a
comprehensive solvency ratio (actual capital over minimum capital) of not lower than 50 per cent and 100 per cent, respectively.
The actual capital is the difference between the admitted assets and admitted liabilities.
Hong Kong
The capital requirement varies by underlying risk and duration of liabilities, but is generally determined as a percentage of mathematical
reserves and capital at risk. Mathematical reserves are based on a best estimate basis with prudent margins for adverse deviations,
discounted at a valuation interest rate based on a blend between the risk‑adjusted portfolio yield and reinvestment rate.
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 100 per cent of solvency capital.
Malaysia
A risk‑based capital framework applies in Malaysia. 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. 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 S$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.
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Annual Report 2017 Prudential plc 279
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C12 Capital continued
(b) Local capital regulations continued
(ii) US insurance operations
The estimated capital position for Jackson with reconciliation to shareholders’ equity is shown below:
IFRS shareholders' equity
Adjustments to regulatory basis
Deferred acquisition costs, distribution rights and goodwill of non‑participating business
not recognised for regulatory reporting
Jackson surplus notes
Investment and policyholder liabilities valuation differences between IFRS and regulatory
basis for Jackson
Other adjustments
Total adjustments
Total available capital resources of life assurance businesses on local regulatory bases
2017 £m
2016 £m
5,013
5,204
(8,197)
184
5,325
818
(1,870)
3,143
(8,303)
202
6,657
535
(909)
4,295
In December 2017 a significant US tax reform package, The Tax Cuts and Jobs Act, was enacted into law effective from 1 January 2018.
These reforms led to a £628 million reduction in the level of statutory net admitted deferred tax assets.
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 after‑tax factors to various asset, premium and reserve items and a separate model‑based component for market
risk associated primarily with variable annuity products. The after‑tax factors were not adjusted to reflect the impact of US Tax Reform.
At 31 December 2017, 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 £355 million at 31 December 2017.
Under the equivalence provisions of Solvency II, Jackson is incorporated into the Group’s Solvency II position at a level equal to
available capital in excess of 250 per cent of the US local minimum risk‑based capital requirement level at which corrective action
commences.
(iii) UK and Europe insurance operations
Insurance operations in the UK and Europe are subject to Solvency II capital requirements on an individual basis. The UK solvency capital
requirement has been met during 2017.
(iv) Asset management operations – regulatory and other surplus
Certain asset management subsidiaries of the Group are subject to regulatory requirements. The movement in the year of the surplus
regulatory capital position of those subsidiaries, combined with the movement in the IFRS basis shareholders’ funds for unregulated asset
management operations, is as follows:
Regulatory and other surplus
Beginning of year
Gains during the year
Movement in capital requirement
Capital injection
Distributions made to the parent company
Exchange and other movements
End of year
Asset management operations
2017 £m
2016 £m
M&G
Prudential
US
Eastspring
Investments
Total
Total
405
401
(65)
–
(322)
–
419
205
43
–
6
–
(19)
235
204
142
(8)
–
(111)
(5)
222
814
586
(73)
6
(433)
(24)
876
733
469
(54)
–
(387)
53
814
280 Prudential plc Annual Report 2017
www.prudential.co.uk
C Balance sheet notes continued (c) Transferability of available capital
In the UK PAC is required to meet the Solvency II capital requirements as a company as a whole, ie covering both its ring‑fenced
with‑profits funds and non‑profit funds. Further, the surplus of the with‑profits funds is ring‑fenced from the shareholder balance sheet
with restrictions as to its distribution. Distributions from the with‑profits funds to shareholders continue to reflect the shareholders’
one‑ninth share of the cost of declared policyholders’ bonuses.
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 UK parent entities, provided the statutory insurance fund meets the local regulatory solvency targets.
Available capital of the non‑insurance business units is transferable after taking account of an appropriate level of operating capital,
based on local regulatory solvency targets, over and above base liabilities.
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
2017 £m
Tangible
assets
439
(88)
351
351
(8)
(22)
17
–
(43)
295
367
(72)
295
1,077
(685)
392
392
(14)
(94)
117
178
(85)
494
1,041
(547)
494
Group
occupied
property
2016 £m
Tangible
assets
480
(69)
411
411
50
(15)
15
–
(110)
351
439
(88)
351
1,387
(601)
786
786
52
(144)
333
–
(635)
392
1,077
(685)
392
Total
1,516
(773)
743
743
(22)
(116)
134
178
(128)
789
1,408
(619)
789
Total
1,867
(670)
1,197
1,197
102
(159)
348
–
(745)
743
1,516
(773)
743
* Arising on an acquisition made for venture fund purposes by the PAC with‑profits fund.
Tangible assets
Of the £494 million (2016: £392 million) of tangible assets, £360 million (2016: £247 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 £117 million (2016: £333 million) arose as follows: £41 million in UK and Europe, £19 million in US and
£55 million in Asia with the remaining balance of £2 million arising from unallocated corporate expenditure (2016: £251 million in UK and
Europe, £18 million in US and £62 million in Asia with the remaining balance of £2 million arising from unallocated corporate expenditure).
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Annual Report 2017 Prudential plc 281
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information 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 to held for sale assets
At 31 December
2017 £m
2016 £m
14,646
13,422
2,009
39
(591)
415
(21)
–
1,338
189
(632)
273
97
(41)
16,497
14,646
The 2017 income statement includes rental income from investment properties of £876 million (2016: £781 million) and direct operating
expenses including repairs and maintenance arising from these properties of £82 million (2016: £67 million).
Investment properties of £5,689 million (2016: £6,020 million) are held under finance leases. The present value of minimum lease
payments under these leases is £43 million (2016: £49 million) and 73 per cent (2016: 76 per cent) of lease payments are due in over five
years.
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
2017 £m
2016 £m
322
1,073
2,286
3,681
314
1,077
2,634
4,025
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 2017 are £1,527 million (2016: £2,238 million).
282 Prudential plc Annual Report 2017
www.prudential.co.uk
C Balance sheet notes continued D Other notes
D1 Disposal of businesses
On 18 May 2017, the Group announced that it had completed the sale of its life insurance subsidiary in Korea, PCA Life Insurance Co. Ltd.
to Mirae Asset Life Insurance Co. Ltd., following regulatory approvals. The transaction, announced on 10 November 2016, was for a
consideration of KRW170 billion (equivalent to £117 million at 17 May 2017 closing rate). The proceeds, net of £9 million of related
expenses, were £108 million.
On completion of the sale the cumulative foreign exchange translation gain of the Korea life business of £61 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 2017 as required by IAS 21. The adjustment has no net effect on shareholders’ equity. The net contribution from the
Korea life business to the 2017 profit after tax is the £61 million gain arising from the recycling of foreign exchange translation gains
previously recognised in other comprehensive income and other elements in various line items of £5 million.
The 2016 income statement recorded a charge for remeasurement of Korea life business classified as held for sale of £(238) million.
For 2016 the result for the year, including short‑term fluctuations in investment returns, together with the adjustment to the carrying
value gave rise to an aggregate loss of £(227) million. To facilitate comparisons of businesses retained by the Group, the supplementary
analysis of profit shown in note B1.1 shows separately the results of the Korea life business.
On 15 August 2017, the Group, through its subsidiary National Planning Holdings, Inc. (NPH) sold its US independent broker‑dealer
network to LPL Financial LLC. The initial consideration received was £252 million (US$325 million) resulting in a profit on disposal of
£162 million (US$209 million) before tax and after costs and net losses that have been incurred in the year.
D2 Contingencies and related obligations
Litigation and regulatory matters
In addition to the matters set out in note C11 in relation to the Financial Conduct Authority review of past annuity sales, the Group is
involved in various litigation and regulatory issues. These may from time to time include class actions involving Jackson. 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.
Guarantees
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.
The Group has provided other guarantees and commitments to third‑parties entered into in the normal course of business but the
Group does not consider that the amounts involved are significant.
Support for with-profits sub-funds by shareholders’ funds
PAC is liable to meet its obligations to with‑profits policyholders even if the assets of the with‑profits sub‑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 with‑profits sub‑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 with‑profits sub‑funds to provide financial support.
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Annual Report 2017 Prudential plc 283
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information D Other notes continued
D2 Contingencies and related obligations continued
Litigation and regulatory matters continued
Matters relating to with‑profits sub‑funds:
— Pension mis‑selling review – The UK insurance regulator required all UK life insurance companies to review sales of personal
pensions policies for potential mis‑selling. Offers to all cases were made by 30 June 2002. Costs arising from this review are met by
the excess assets of the PAC with‑profits sub‑fund and hence have not been charged to the asset shares used in the determination of
policyholder bonus rates. Prudential has given an assurance that these deductions from excess assets will not impact its bonus or
investment policy for policies within the with‑profits sub‑funds that were in force at 31 December 2003. This assurance does not
apply to new business since 1 January 2004. In the unlikely event that such deductions would affect the bonus or investment policy for
the relevant policies, Prudential has stated it would make available support to the sub‑fund from shareholder resources for as long as
the situation continued, so as to ensure that policyholders were not disadvantaged.
— Scottish Amicable Insurance sub‑fund – Policies within this sub‑fund (a with‑profits sub‑fund closed to new business) contain minimum
levels of guaranteed benefit to policyholders. Should the assets of the sub‑fund be inadequate to meet the guaranteed benefit
obligations of the policyholders of SAIF, the PAC with‑profits sub‑fund would be liable to cover any such deficiency in the first instance.
In addition, certain pensions products within this sub‑fund have guaranteed annuity rates at retirement, for which a provision of
£503 million was held within the sub‑fund (2016: £571 million).
— Guaranteed annuities – A provision for guaranteed annuity products of £53 million was held (2016: £62 million) in the PAC
with‑profits sub‑fund.
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. 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 regarding their solvency levels.
D3 Post balance sheet events
Dividends
The second interim ordinary dividend for the year ended 31 December 2017, that was approved by the Board of Directors after
31 December 2017 is described in note B6.
Intention to demerge the Group’s UK businesses
In March 2018, the Group announced its intention to demerge its UK and Europe business (‘M&G Prudential’) from Prudential plc,
resulting in two separately listed companies. In preparation for the UK demerger process, Prudential plc intends to transfer the legal
ownership of its Hong Kong insurance subsidiaries from The Prudential Assurance Company Limited (M&G Prudential’s UK regulated
insurance entity) to Prudential Corporation Asia Limited, which is expected to complete by the end of 2019.
Sale of £12.0 billion* UK annuity portfolio
In March 2018, M&G Prudential also announced the sale of £12.0 billion* of its shareholder annuity portfolio to Rothesay Life. Under the
terms of the agreement, M&G Prudential has reinsured £12.0 billion* of liabilities to Rothesay Life, which is expected to be followed by a
Part VII transfer of the portfolio by the end of 2019. Further details are set out in the CFO Report.
* Relates to £12.0 billion of IFRS shareholder annuity liabilities, valued as at 31 December 2017.
284 Prudential plc Annual Report 2017
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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 2017 and 2016, other transactions with directors were not deemed to be significant both by virtue of their size and in the
context of the directors’ financial positions. All of these transactions are on terms broadly equivalent to those that prevail in
arm’s length transactions.
Apart from these transactions with directors, no director had interests in shares, transactions or arrangements that require disclosure,
other than those given in the Directors’ remuneration report. Key management remuneration is disclosed in note B2.3.
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
2017 £m
2016 £m
113
284
118
56
123
107
209
96
60
115
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 2017 were £176 million (2016: £458 million).
At 31 December 2017, Jackson has unfunded commitments of £414 million (2016: £465 million) related to its investments in limited
partnerships and £214 million (2016: £201 million) related to commercial mortgage loans and other fixed maturities. These commitments
were entered into in the normal course of business and a material adverse impact on the operations is not expected to arise from them.
At 31 December 2017, UK and Europe’s insurance operations had unfunded commitments of £3,225 million (2016: £2,269 million) to
private equity and infrastructure funds. These commitments were entered into in the normal course of business and no material adverse
impact on the operations is expected to arise.
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.
M&G Prudential’s asset management company, M&G Investment Management Limited, 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, surplus and prior year
earnings. Dividends in excess of these limitations require prior regulatory approval.
The Group’s subsidiaries, joint ventures and associates 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.
For further details on local capital regulations in Asia please refer to note C12(b).
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Annual Report 2017 Prudential plc 285
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
D Other notes continued
D6 Investments in subsidiary undertakings, joint ventures and associates 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 until September 2016 in India with ICICI Bank (see below). 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.
The Group’s associates, which are also accounted for under the equity method, include PPM South Africa and from September 2016
the Indian insurance entity, see below. In addition, the Group has investments in Open‑Ended Investment Companies (OEICs), unit
trusts, funds holding collateralised debt obligations, property unit trusts and venture capital investments of the PAC with‑profits funds
where the Group has significant influence. As allowed under IAS 28, these investments are accounted for 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 £2.4 billion at 31 December 2017 (2016: £3.5 billion).
During 2016, following its listing and consequent amendments to the shareholder agreement, the Group ceased to exercise joint
control over the insurance business in India, therefore the investment was re‑classified as an associate, and continued to be accounted
for using the equity method.
The Group’s share of the profits (including short‑term fluctuations in investment returns), 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
Asia
US
UK and Europe
Insurance
Asset
management
Insurance
Asset
management
Insurance
Asset
management
Total
segment
Joint ventures and associates
2017 £m
2016 £m
196
106
302
Unallo-
cated
to a
segment
(other
operations)
161
21
182
Group
total
2017
Share of profits from
joint ventures and
associates, net of
related tax
2016
Share of profits from
joint ventures and
associates, net of
related tax
121
60
–
–
106
15
302
–
302
94
54
–
–
21
13
182
–
182
There is no other comprehensive income in the joint ventures and associates. There has 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.
286 Prudential plc Annual Report 2017
www.prudential.co.uk
Key to Classes of shares held
LBG
LPI
MI
NSB
OS
PI
PS
U
Limited by Guarantee
Limited Partnership Interest
Membership Interest
Non‑stock basis
Ordinary Shares
Partnership Interest
Preference Shares
Units
(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 of more than 20 per cent) along with the classes of shares held, the registered office address and
the country of incorporation and the effective percentage of equity owned at 31 December 2017 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 list below 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 of entity
M&G Group Limited
Prudential (US Holdco1) Limited
Prudential Capital Holding Company Limited
Prudential Corporation Asia Limited
Prudential Financial Services Limited
Prudential Group Holdings Limited
Prudential Property Services Limited
The Prudential Assurance Company Limited
Classes of
shares held
Proportion
held Registered office address and country of incorporation
OS
OS
OS
OS
OS
OS
OS
OS
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
100.00%
100.00% 13th Floor, One International Finance Centre, 1 Harbour View Street,
Central, Hong Kong
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
100.00%
100.00%
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 of entity
Allied Life Brokerage Agency, Inc
ANRP II (AIV VI FC), LP
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
Brier Capital LLC
Brooke (Holdco 1) Inc
Brooke Holdings (UK) (In liquidation)
Brooke Life Insurance Company
BWAT Retail Nominee (1) Limited
BWAT Retail Nominee (2) Limited
Calvin F1 GP Limited
Calvin F2 GP Limited
Canada Property (Trustee) No 1 Limited
Canada Property Holdings Limited
Canada Property Jersey No. 2 Trust
Canada Property Jersey Trust
Cardinal Distribution Park Management Limited
Carraway Guildford (Nominee A) Limited
Carraway Guildford (Nominee B) Limited
Carraway Guildford General Partner Limited
Carraway Guildford Investments Unit Trust
Carraway Guildford LP
Centaurus Retail LLP
Central Square Leeds Limited (In liquidation)
Centre Capital Non‑Qualified Investors IV AIV Orion, LP
Centre Capital Non‑Qualified Investors IV AIV‑ELS, LP
Classes of
shares held
OS
LPI
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
LPI
LPI
OS
LPI
LPI
Proportion
held Registered office address and country of incorporation
100.00% 400 East Court Avenue, Des Moines, IA 50309, USA
36.58% Cayman Corporate Centre, 27 Hospital Road, George Town, KY‑9008,
Cayman Islands
60.22% 27th Floor, Bank of China Tower, 1 Garden Road,
Central and Western District, Hong Kong
48.19% 12th Floor and 25th Floor, Citicorp Centre, 18 Whitfield Road,
Causeway Bay, Hong Kong
66.25%
56.35%
36.00% 27th Floor, Bank of China Tower, 1 Garden Road, Central and Western
District, Hong Kong
36.00% 12th Floor and 25th Floor, Citicorp Centre, 18 Whitfield Road,
Causeway Bay, Hong Kong
100.00% 1 Corporate Way, Lansing, MI 48951, USA
100.00% 1105 North Market Street, Suite 1300, Wilmington, DE 19801, USA
100.00% c/o Mazars LLP, 45 Church Street, Birmingham, B3 2RT, UK
100.00% 1 Corporate Way, Lansing, MI 48951, USA
50.00% Laurence Pountney Hill, London, EC4R 0HH, UK
50.00%
100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
100.00%
100.00% Lime Grove House, Green Street, St Helier, Jersey, JE1 2ST
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00% Lime Grove House, Green Street, St Helier, Jersey, JE1 2ST
100.00%
66.00% 5th Floor Cavendish House, 39 Waterloo Street, Birmingham, B2 5PP, UK
100.00% 13 Castle Street, St Helier, Jersey, JE4 5UT
100.00%
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00% 13 Castle Street, St Helier, Jersey, JE4 5UT
100.00% Lloyds Chambers, 1 Portsoken Street, London, E1 8HZ, UK
50.00% 40 Broadway, London, SW1H 0BU, UK
100.00% c/o Mazars LLP, 45 Church Street, Birmingham, B3 2RT, UK
76.80% 2711 Centreville Road, Suite 400, Wilmington, DE 19808, USA
76.53%
www.prudential.co.uk
Annual Report 2017 Prudential plc 287
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information D Other notes continued
D6 Investments in subsidiary undertakings, joint ventures and associates continued
Name of entity
Centre Capital Non‑Qualified Investors IV AIV‑RA, LP
Centre Capital Non‑Qualified Investors IV, LP
Centre Capital Non‑Qualified Investors V AIV‑ELS, LP
Centre Capital Non‑Qualified Investors V, LP
CEP IV‑A Chicago AIV, LP
CEP IV‑A CWV AIV, LP
CEP IV‑A Davenport AIV, LP
CEP IV‑A Indy AIV, LP
CEP IV‑A NMR AIV, LP
CEP IV‑A WBCT AIV, LP
CF Prudential European QIS Fund
CF Prudential Japanese QIS Fund
CF Prudential North American QIS Fund
CF Prudential Pacific Markets Trust Fund
CF Prudential UK Growth QIS Fund
CITIC‑CP Asset Management Co., Ltd.
CITIC‑Prudential Fund Management Co., Ltd.
CITIC‑Prudential Life Insurance Company Limited
Clairvest Equity Partners IV‑A LP
Cribbs Causeway JV Limited
Classes of
shares held
LPI
LPI
LPI
LPI
LPI
LPI
LPI
LPI
LPI
LPI
OS
OS
OS
OS
OS
MI
MI
MI
LPI
OS
Proportion
held Registered office address and country of incorporation
31.92% 2711 Centreville Road, Suite 400, Wilmington, DE 19808, USA
73.06%
73.16%
67.16%
31.92% 615 South Dupont Highway, Dover, DE 19901, USA
31.95% 850 New Burton Road, Suite 201, Dover, DE 19904, USA
31.92% 615 South Dupont Highway, Dover, DE 19901, USA
31.92%
31.92%
31.91%
97.68% 17 Rochester Row, London, SW1P 1QT, UK
97.64%
98.33% 135 Bishopsgate, London, EC2M 3UR, UK
97.96% Laurence Pountney Hill, London, EC4R 0HH, UK
94.27% 17 Rochester Row, London, SW1P 1QT, UK
26.95% No.128 North Zhangjiabang Road, Pudong District, Shanghai, China
49.00% Level 9, HSBC Building, Shanghai IFC, 8 Century Avenue, Pudong,
Shanghai, China
50.00% East Tower, World Financial Centre, No. 1 East Third Ring Middle Road,
Chaoyang District, Beijing, China
31.87% 22 St Clair Avenue East, Suite 1700, Toronto, ON M4T 2S3, Canada
50.00% 40 Broadway, London, SW1H 0BU, UK
Cribbs Causeway Merchants Association Limited
LBG
100.00% The Mall at Cribbs Causeway, Bristol, BS34 5DG, UK
Cribbs Mall Nominee (1) Limited
Curian Capital, LLC
Curian Clearing, LLC (Michigan)
Digital Infrastructure Investment Partners GP LLP
Digital Infrastructure Investment Partners GP1 Limited
Digital Infrastructure Investment Partners LP
Digital Infrastructure Investment Partners SLP GP LLP
Digital Infrastructure Investment Partners SLP GP1 Limited
Digital Infrastructure Investment Partners SLP GP2 Limited
Eastspring Al‑Wara’ Investments Berhad
Eastspring Asset Management Korea Co. Ltd.
Eastspring Infrastructure Debt Fund L.P.
Eastspring Investments ‑ Asian Local Bond Fund
Eastspring Investments ‑ Asian Smaller Companies Fund
Eastspring Investments ‑ Asian Total Return Bond Fund
Eastspring Investments ‑ Developed and Emerging Asia Equity Fund
Eastspring Investments ‑ Emerging Europe, Middle East and Africa Dynamic Fund
Eastspring Investments ‑ Global Emerging Markets Customized Equity Fund
Eastspring Investments ‑ Global Emerging Markets Dynamic Fund
Eastspring Investments ‑ Global Low Volatility Equity Fund
Eastspring Investments ‑ Global Technology Fund
Eastspring Investments ‑ Japan Equity Fund
Eastspring Investments ‑ Japan Fundamental Value Fund
Eastspring Investments ‑ Pan European Fund
Eastspring Investments ‑ US Equity Income Fund
Eastspring Investments ‑ US High Yield Bond Fund
Eastspring Investments ‑ US Total Return Bond Fund
Eastspring Investments (Hong Kong) Limited
OS
OS
OS
LPI
OS
LPI
LPI
OS
OS
OS
OS
PI
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00% 1 Corporate Way, Lansing, MI 48951, USA
100.00%
65.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
100.00%
100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
100.00% 16th Floor, Wisma Sime Darby, Jalan Raja Laut, 50350 Kuala Lumpur,
Malaysia
100.00% 15th Floor, Shinhan Investment Tower, 70 Yoidae‑ro, Youngdungpo‑gu,
Seoul 07325, Korea
100.00% PO Box 309, Ugland House, Grand Cayman, KY1‑1104, Cayman Islands
97.95% 26, Boulevard Royal, L‑2449, Luxembourg
99.69%
100.00%
100.00%
100.00%
99.90%
96.48%
99.57%
84.46%
85.13%
98.45%
56.25% 10 Marina Boulevard, #32‑01, Marina Bay Financial Centre,
Singapore 018983
100.00% 26, Boulevard Royal, L‑2449, Luxembourg
32.58%
100.00%
100.00% 13th Floor, One International Finance Centre, 1 Harbour View Street,
Central, Hong Kong
288 Prudential plc Annual Report 2017
www.prudential.co.uk
Key to Classes of shares held
LBG
LPI
MI
NSB
OS
PI
PS
U
Limited by Guarantee
Limited Partnership Interest
Membership Interest
Non‑stock basis
Ordinary Shares
Partnership Interest
Preference Shares
Units
Classes of
shares held
Proportion
held Registered office address and country of incorporation
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
MI
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
100.00% 26, Boulevard Royal, L‑2449, Luxembourg
100.00% 10 Marina Boulevard, #32‑01, Marina Bay Financial Centre, Tower 2,
Singapore 018983
99.93% 26, Boulevard Royal, L‑2449, Luxembourg
82.70%
90.17%
65.25%
83.03%
47.52%
36.37%
92.37%
95.47%
100.00% 16th Floor, Wisma Sime Darby, Jalan Raja Laut, 50350 Kuala Lumpur,
Malaysia
50.03% 26, Boulevard Royal, L‑2449, Luxembourg
97.21%
99.36%
100.00% 23rd Floor, Saigon Trade Center, 37 Ton Duc Thang Street, District 1,
Ho Chi Minh City, Vietnam
94.59% 26, Boulevard Royal, L‑2449, Luxembourg
99.99%
97.63%
100.00%
92.37%
99.86%
100.00% 874 Walker Road, Suite C, Dover, DE 19904, USA
100.00% Suite 450, 4th Floor, Barkly Wharf East, Le Caudan Waterfront,
Port Louis, Mauritius
81.09% 26, Boulevard Royal, L‑2449, Luxembourg
100.00% Suite 450, 4th Floor, Barkly Wharf East, Le Caudan Waterfront,
Port Louis, Mauritius
100.00%
89.29% 26, Boulevard Royal, L‑2449, Luxembourg
100.00% Marunouchi Park Building, 6‑1 Marunouchi 2‑chome, Chiyoda‑Ku,
Tokyo, Japan
100.00% Level 6, Precinct Building 5, Unit 5, Dubai International Financial Centre,
Dubai, United Arab Emirates
99.97% 26, Boulevard Royal, L‑2449, Luxembourg
100.00% 10 Marina Boulevard, #32‑01, Marina Bay Financial Centre, Tower 2,
Singapore 018983
100.00% 26, Boulevard Royal, L‑2449, Luxembourg
100.00%
99.95%
100.00%
28.34%
86.49%
92.09%
27.01%
99.72% 10 Marina Boulevard, #32‑01, Marina Bay Financial Centre,
Singapore 018983
90.97%
88.41% 26, Boulevard Royal, L‑2449, Luxembourg
100.00% PO Box 309, Ugland House, Grand Cayman, KY1‑1104, Cayman Islands
99.54% 4th Floor, No.1 Songzhi Road, Taipei 110, Taiwan
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
LBG
100.00% 1 Exchange Crescent, Conference Square, Edinburgh, EH3 8UL, UK
Name of entity
Eastspring Investments (Luxembourg) SA
Eastspring Investments (Singapore) Limited
Eastspring Investments Asia Pacific Equity Fund
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 Low Volatility Equity Fund
Eastspring Investments Asian Property Securities Fund
Eastspring Investments Berhad
Eastspring Investments China Equity Fund
Eastspring Investments Dragon Peacock Fund
Eastspring Investments European Investment 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 Multi Asset Income Plus Growth 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 Latin American Equity Fund
Eastspring Investments Limited
Eastspring Investments Limited (In liquidation)
Eastspring Investments North America Value Fund
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 US Bond Fund
Eastspring Investments US Corporate Bond Fund
Eastspring Investments US High Investment Grade Bond Fund
Eastspring Investments US Investment Grade Bond Fund
Eastspring Investments UT Singapore ASEAN Equity Fund
Eastspring Investments UT Singapore Select Bond Fund
Eastspring Investments World Value Equity Fund
Eastspring Real Assets Partners
Eastspring Securities Investment Trust Co., Ltd.
Edger Investments Limited
Edinburgh Park (Management) Limited
www.prudential.co.uk
Annual Report 2017 Prudential plc 289
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information D Other notes continued
D6 Investments in subsidiary undertakings, joint ventures and associates continued
Name of entity
Embankment GP Limited
Embankment Nominee 1 Limited
Embankment Nominee 2 Limited
Empire Holding SARL (In liquidation)
Euro Salas Properties Limited (In liquidation)
European Specialist Investment Funds –
M&G Total Return Credit Investment Fund
Falan GP Limited
Fashion Square ECO LP (In liquidation)
First Dakota, Inc
Five Hotel Holding, LLC
Foudry Properties Limited
Furnival Insurance Company PCC Limited
Genny GP Limited
Genny GP 2 Limited
Genny GP 1 LLP
George Digital GP Limited
George Digital GP 1 LLP
George Digital GP 2 Limited
GGE GP Limited
Green GP Limited
Greenpark (Reading) General Partner Limited
Greenpark (Reading) Nominee No. 1 Limited
GreenPark (Reading) Nominee No. 2 Limited
GS Twenty Two Limited
Hermitage Management, LLC
Holborn Bars Nominees Limited
Holtwood Limited
Hudson Seasons, LLC
Hyde Holdco 1 Limited
ICICI Prudential Asset Management Company Limited
ICICI Prudential Life Insurance Company Limited
ICICI Prudential Pension Funds Management Company Limited
ICICI Prudential Trust Limited
IFC Holdings, Inc
Infracapital (AIRI) GP Limited
Infracapital (Belmond) GP Limited
Infracapital (Bio) GP Limited
Infracapital (GC) GP Limited
Infracapital (IT PPP) GP Limited
Infracapital (Sense) GP Limited
Infracapital (TLSB) GP Limited
Infracapital (TLSB) SLP LP
Infracapital ABP GP Limited (In liquidation)
Infracapital CI II Limited
Infracapital DF II GP LLP
Infracapital DF II Limited
Infracapital Employee Feeder GP Limited
Infracapital Employee Feeder GP 1 LLP
Infracapital Employee Feeder GP 2 LLP
Classes of
shares held
Proportion
held Registered office address and country of incorporation
OS
OS
OS
OS
OS
OS
OS
LPI
OS
MI
OS
OS
OS
OS
LPI
OS
LPI
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
MI
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
LPI
OS
OS
LPI
OS
OS
LPI
LPI
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
100.00%
100.00% 5, rue Guillaume Kroll, L‑1882, Luxembourg
100.00% c/o Mazars LLP, 90 St. Vincent Street, Glasgow, G2 5UB, UK
30.75% 80, route d’Esch, L‑1470, Luxembourg
100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
100.00% 1209 Orange Street, Wilmington, DE 19801, USA
50.00% 314 East Thayer Avenue, Bismarck, ND 58501, USA
100.00% 208 South LaSalle Street, Suite 814, Chicago, IL 60604, USA
50.00% Clearwater Court, Vastern Road, Reading, RG1 8DB, UK
100.00% Third Floor, La Plaiderie Chambers, La Plaiderie, St Peter Port, Guernsey,
GY1 1WG
100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
100.00%
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
100.00%
100.00%
100.00%
100.00%
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
100.00%
100.00%
100.00% 1 Corporate Way, Lansing, MI 48951, USA
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00% International House, Castle Hill, Victoria Road, Douglas, IM2 4RB,
Isle of Man
100.00% 874 Walker Road, Suite C, Dover, DE 19904, USA
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
49.00% 12th Floor, Narain Manzil, 23, Barakhamba Road, New Delhi 110001,
India
25.83% ICICI PruLife Towers, 1089 Appasaheb Marathe Marg, Prabhadevi,
Mumbai 400025, India
25.83%
49.00% 12th Floor, Narain Manzil, 23, Barakhamba Road, New Delhi 110001,
India
100.00% 1209 Orange Street, Wilmington, DE 19801, USA
100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
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%
290 Prudential plc Annual Report 2017
www.prudential.co.uk
Key to Classes of shares held
LBG
LPI
MI
NSB
OS
PI
PS
U
Limited by Guarantee
Limited Partnership Interest
Membership Interest
Non‑stock basis
Ordinary Shares
Partnership Interest
Preference Shares
Units
Classes of
shares held
Proportion
held Registered office address and country of incorporation
OS
OS
OS
LPI
LPI
OS
OS
LPI
LPI
OS
OS
LPI
OS
OS
LPI
LPI
LPI
LPI
OS
LPI
OS
OS
LPI
LPI
OS
OS
LPI
OS
OS
LPI
LPI
OS
LPI
LPI
OS
OS
OS
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
100.00%
100.00%
100.00%
100.00%
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
26.52% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
100.00%
100.00%
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
100.00%
31.56%
100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
100.00%
100.00% 6, rue Eugène Ruppert, L‑245, Luxembourg
33.04% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
100.00%
100.00%
34.00%
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
62.22% Boundary House, 91‑93 Charterhouse Street, London, EC1M 6HR, UK
35.00%
100.00% 100 West 10th Street, Wilmington, DE 19801, USA
100.00% 208 South LaSalle Street, Chicago, IL 60604, USA
100.00% 314 East Thayer Avenue, Bismarck, ND 58501, USA
NSB
100.00% 1 Corporate Way, Lansing, MI 48951, USA
OS
OS
OS
OS
OS
OS
LPI
MI
OS
OS
OS
LPI
OS
OS
LPI
100.00% 1105 North Market Street, Suite 1300, Wilmington, DE 19801, USA
100.00% 1 Corporate Way, Lansing, MI 48951, USA
100.00% Cedar House, Hamilton, Bermuda
100.00% 1209 Orange Street, Wilmington, DE 19801, USA
100.00% 1 Corporate Way, Lansing, MI 48951, USA
100.00% 2900 Westchester Avenue, Suite 305, Purchase, NY 10577, USA
21.92% 1209 Orange Street, Wilmington, DE 19801, USA
100.00%
99.98% 53 Merrion Square South, Dublin 2, D02 PR63, Ireland
100.00% 5, rue Guillaume Kroll, L‑1882, Luxembourg
100.00% Montague House, Adelaide Road, Dublin 2, D02 K039, Ireland
100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
100.00%
100.00%
100.00%
Name of entity
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 DF GP LLP
Infracapital Greenfield Partners 1 SLP GP LLP
Infracapital Greenfield Partners 1 SLP GP1 Limited
Infracapital Greenfield Partners 1 SLP GP2 Limited
Infracapital Greenfield Partners I Employee Feeder GP LLP
Infracapital Greenfield Partners I GP 1 Limited
Infracapital Greenfield Partners I GP 2 Limited
Infracapital Greenfield Partners I GP LLP
Infracapital Greenfield Partners I LP
Infracapital Greenfield Partners I SLP2 GP LLP
Infracapital Greenfield Partners I Subholdings GP LLP
Infracapital Greenfield Partners I Subholdings GP1 Limited
Infracapital Long Term Income Partners GP LLP
Infracapital Long Term Income Partners GP 1 Limited (In liquidation)
Infracapital Long Term Income Partners GP 2 Limited (In liquidation)
Infracapital Partners II LP
Infracapital Partners II Subholdings GP LLP
Infracapital Partners II Subholdings GP1 Limited
Infracapital Partners III GP SARL
Infracapital Partners LP
Infracapital RF GP Limited
Infracapital Sisu GP Limited
Infracapital SLP II GP LLP
Infracapital SLP II LP
Infracapital SLP Limited
Innisfree M&G PPP LP
Innisfree M&G PPP LLP
INVEST Financial Corporation Insurance Agency Inc, of Delaware
INVEST Financial Corporation Insurance Agency Inc, of Illinois
Investment Centers of America, Inc
Jackson Charitable Foundation, Inc
Jackson Holdings, LLC
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, LP
JNL Strategic Income Fund, LLC
Lion Credit Opportunity Fund plc – Credit Opportunity Fund XV
LIPP SARL (In liquidation)
Livicos Limited
London Stone Investments F3 Employee Feeder GP LLP
London Stone Investments F3 I Limited
London Stone Investments F3 II Limited
London Stone Investments F3 SP GP LLP
www.prudential.co.uk
Annual Report 2017 Prudential plc 291
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information D Other notes continued
D6 Investments in subsidiary undertakings, joint ventures and associates continued
Name of entity
M&G (Guernsey) Limited
M&G (Lux) Investment Funds 1 ‑ M&G (Lux) Floating Rate High Yield Solution
M&G Alternatives Investment Management Limited
M&G Asia Property Fund
M&G Corporate Bond Fund
M&G Dividend Fund
M&G Episode Defensive Fund
M&G Episode Macro Fund
M&G European Credit Investment Fund
M&G European High Yield Credit Investment Fund
M&G European Property Fund SICAV‑FIS
M&G European Secured Property Income Fund
M&G European Select 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 Income Fund
M&G Global Corporate Bond Fund
M&G Global Credit Investment Fund
M&G Global Leaders Fund
M&G Global Select Fund
M&G IMPPP 1 Limited
M&G International Investments Limited
M&G International Investments Nominees Limited
M&G International Investments SA
M&G International Investments Switzerland AG
M&G Investment Funds (10) ‑ M&G Absolute Return Bond Fund
M&G Investment Funds (10) ‑ M&G Global Listed Infrastructure Fund
M&G Investment Management Limited
M&G Investments (Hong Kong) Limited
M&G Investments (Singapore) Pte. Ltd.
M&G Investments Japan Co., Ltd.
M&G Limited
M&G Luxembourg SA
M&G Managed Growth Fund
M&G Management Services Limited
M&G Nominees Limited
M&G Pan European Dividend Fund
M&G PFI 2018 GP LLP
M&G PFI 2018 GP1 Limited
M&G PFI 2018 GP2 Limited
M&G PFI Carry Partnership 2016 LP
M&G PFI Partnership 2018 LP
M&G Platform Nominees Limited
M&G Prudential Limited
M&G RE Espana 2016 S.L.
M&G Real Estate Asia Holding Company Pte. Ltd.
M&G Real Estate Asia Pte. Ltd.
M&G Real Estate Debt Fund LP
M&G Real Estate Funds Management SARL
Classes of
shares held
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
U
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
LPI
OS
OS
LPI
LPI
OS
OS
OS
OS
OS
LPI
OS
Proportion
held Registered office address and country of incorporation
100.00% Dorey Court, Admiral Park, St. Peter Port, Guernsey, GY1 2HT
93.99% 49, Avenue J.F. Kennedy, L‑1855, Luxembourg
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
54.49% 34‑38, Avenue de la Liberté, L‑1930, Luxembourg
25.71% Laurence Pountney Hill, London, EC4R 0HH, UK
55.09%
91.64%
22.83%
99.98% 80, route d’Esch, L‑1470, Luxembourg
100.00%
51.86% 34‑38, Avenue de la Liberté, L‑1930, Luxembourg
22.97%
39.97% Laurence Pountney Hill, London, EC4R 0HH, UK
71.25%
100.00%
100.00%
100.00% Walker House, 87 Mary Street, Grand Cayman, KY1‑9002,
Cayman Islands
45.22% Laurence Pountney Hill, London, EC4R 0HH, UK
31.25%
67.28% 80, route d’Esch, L‑1470, Luxembourg
24.91% Laurence Pountney Hill, London, EC4R 0HH, UK
20.09%
100.00%
100.00%
100.00%
100.00% 34‑38, Avenue de la Liberté, L‑1930, Luxembourg
100.00% Talstrasse 66, 8001 Zurich, Switzerland
50.23% Laurence Pountney Hill, London, EC4R 0HH, UK
64.83%
100.00%
100.00% 6th Floor, Alexandra House, 18 Chater Road, Central, Hong Kong
100.00% 10 Marina Boulevard, #32‑01, Marina Bay Financial Centre,
Singapore 018983
100.00% 3‑1 Toranomon, 4 Chome, Minato‑ku, Tokyo, Japan
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00% 34‑38, Avenue de la Liberté, L‑1930, Luxembourg
26.14% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
100.00%
25.74%
100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
25.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
100.00%
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
100.00% Plaza de Colon, Torre II, Planta 14, 28046, Madrid, Spain
100.00% 10 Marina Boulevard, #32‑01, Marina Bay Financial Centre,
Singapore 018983
100.00%
29.20% Dorey Court, Admiral Park, St. Peter Port, Guernsey, GY1 2HT
100.00% 34‑38, Avenue de la Liberté, L‑1930, Luxembourg
292 Prudential plc Annual Report 2017
www.prudential.co.uk
Key to Classes of shares held
LBG
LPI
MI
NSB
OS
PI
PS
U
Limited by Guarantee
Limited Partnership Interest
Membership Interest
Non‑stock basis
Ordinary Shares
Partnership Interest
Preference Shares
Units
Classes of
shares held
Proportion
held Registered office address and country of incorporation
OS
OS
OS
LPI
LPI
OS
OS
OS
OS
OS
LPI
OS
OS
OS
LPI
OS
LPI
OS
OS
OS
OS
OS
LPI
OS
OS
OS
OS
LPI
LPI
OS
OS
LPI
OS
OS
OS
LPI
OS
OS
OS
OS
OS
OS
LPI
OS
OS
OS
OS
OS
OS
100.00% 9th Floor, Shiroyama Trust Tower, 4‑3‑1 Toranomon, Minato‑ku, Tokyo,
105‑ 6009, Japan
100.00% 17th Floor, Kyobo Building 1, Jongno, Jongno ‑Gu, Seoul, Korea
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
100.00% Dorey Court, Admiral Park, St. Peter Port, Guernsey, GY1 2HT
100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
100.00% Third Floor, La Plaiderie Chambers, La Plaiderie, St Peter Port,
Guernsey, GY1 1WG
100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
28.00%
100.00%
100.00% Third Floor, La Plaiderie Chambers, La Plaiderie, St Peter Port,
Guernsey, GY1 1WG
100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
25.00%
100.00%
44.00%
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
100.00%
100.00%
100.00% 78 Sir John Rogerson’s Quay, Dublin 2, D02 RK57, Ireland
48.32% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
100.00%
100.00%
100.00%
100.00%
100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
50.00% 40 Broadway, London, SW1H 0BU, UK
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
45.00% Via Romagnosi 18/a, 00196 Roma, Italy
75.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00% 1999 Bryan Street, Suite 900, Dallas, TX 75201, USA
100.00% c/o Mazars LLP, 90 St. Vincent Street, Glasgow, G2 5UB, UK
21.07% 2711 Centreville Road, Suite 400, Wilmington, DE 19808, USA
99.00% 300 E Lombard Street, Baltimore, MD 21202, USA
100.00% 1209 Orange Street, Wilmington, DE 19801, USA
100.00%
100.00% 3 Rajanakarn Building, 20th Floor, South Sathorn Road,
Yannawa Subdistrict, Sathorn District, Bangkok, Thailand
51.00% Suite 1005, 10th Floor Wisma Hamzah‑Kwong Hing,
No. 1 Leboh Ampang, 50100 Kuala Lumpur, Malaysia
12.50% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00% 2711 Centreville Road, Suite 400, Wilmington, DE 19808, USA
100.00% Barratt House Cartwright Way, Bardon Hill, Coalville, Leicestershire,
LE67 1UF, UK
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00% 13th Floor, One International Finance Centre, 1 Harbour View Street,
Central, Hong Kong
99.79% 8th Floor, No.1 Songzhi Road, Taipei 11047, Taiwan
100.00% Unit Level 13(A), Main Office Tower, Financial Park Labuan,
Jalan Merdeka, 87000 Federal Territory of Labuan, Malaysia
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
Name of entity
M&G Real Estate Japan Co., Ltd.
M&G Real Estate Korea Co., Ltd.
M&G Real Estate Limited
M&G Real Estate UK Enhanced Value LP
M&G Real Estate UKEV (GP) LLP
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 II SLP LP
M&G RED III Employee Feeder GP Limited
M&G RED III GP Limited
M&G RED III SLP GP Limited
M&G RED III SLP LP
M&G RED SLP GP Limited
M&G RED SLP LP
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 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
M&G UKEV (SLP) General Partner LLP
M&G UKEV (SLP) LP
Manchester JV Limited
Manchester Nominee (1) Limited
MCF S.r.l
Minster Court Estate Management 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
North Sathorn Holdings Company Limited
Nova Sepadu Sdn. Bhd. (In liquidation)
Oaktree Business Park Limited
Old Kingsway, LP
Optimus Point Management Company Limited
Pacus (UK) Limited
PCA IP Services Limited
PCA Life Assurance Co. Ltd.
PCA Reinsurance Co. Ltd.
PGDS (UK One) Limited
www.prudential.co.uk
Annual Report 2017 Prudential plc 293
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information D Other notes continued
D6 Investments in subsidiary undertakings, joint ventures and associates continued
Name of entity
PGDS (US One), LLC
PGF Management Company (Ireland) Limited
PPM America Capital Partners II, LLC
PPM America Capital Partners III, LLC
PPM America Capital Partners IV, LLC
PPM America Capital Partners V, LLC
PPM America Capital Partners VI, 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 Private Equity Fund VI, LP
PPM America, Inc
PPM Capital (Holdings) Limited
PPM CLO 2018‑1 Ltd.
PPM Finance, Inc
PPM Holdings, Inc
PPM Loan Management Company LLC
PPM Loan Management Holding Company LLC
PPM Managers GP Limited
PPM Managers Partnership CI VII (A) LP
PPM Ventures (Asia) Limited (In liquidation)
PPMC First Nominees Limited
Prenetics Limited
Property Partners (Two Rivers) Limited
Pru Life Insurance Corporation of U.K.
Pru Limited
Prudence Foundation
Prudence Limited
Prudential (Cambodia) Life Assurance Plc
Prudential / M&G UKCF GP Limited
Prudential Africa Holdings Limited
Prudential Africa Services Limited
Prudential Assurance Company Singapore (Pte) Limited
Prudential Assurance Malaysia Berhad
Prudential Assurance Uganda Limited
Prudential BSN Takaful Berhad
Prudential Capital (Singapore) Pte. Ltd.
Prudential Capital plc
Prudential Corporate Pensions Trustee Limited
Prudential Corporation Australasia Holdings Pty Limited
Prudential Corporation Holdings Limited
Prudential Credit Opportunities 1 SARL
Prudential Credit Opportunities GP SARL
Prudential Credit Opportunities SCSP
Classes of
shares held
Proportion
held Registered office address and country of incorporation
OS
OS
MI
MI
MI
MI
MI
MI
LPI
LPI
LPI
LPI
LPI
LPI
OS
OS
PS
OS
OS
MI
MI
OS
LPI
OS
OS
PS
OS
OS
OS
LBG
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
100.00% 1209 Orange Street, Wilmington, DE 19801, USA
50.00% 5 George’s Dock, Dublin 1, D01 X8N7, Ireland
63.45% 874 Walker Road, Suite C, Dover, DE 19904, USA
60.50%
34.50%
34.00%
32.00%
52.50%
99.81%
99.81%
99.84%
99.60%
99.84%
99.85%
100.00%
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00% Queensgate House, South Church Street, George Town, Grand Cayman
KY1‑1102, Cayman Islands
100.00% 874 Walker Road, Suite C, Dover, DE 19904, USA
100.00%
100.00%
100.00%
100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
25.00%
100.00% Gloucester Tower, 15 Queens Road, Central, Hong Kong
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
15.00% 7th Floor, Prosperity Millennia Plaza, 663 King’s Road, North Point,
Hong Kong
50.00% Bow Bells House, 1 Bread Street, London, EC4M 9HH, UK
100.00% 9th Floor, Uptown Place Tower 1, 1 East 11th Drive, Uptown Bonifacio,
1634 Taguig City, Metro Manila, Philippines
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00% 13th Floor, One International Finance Centre, 1 Harbour View Street,
Central, Hong Kong
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00% 20th Floor, #445, Monivong Blvd, Boeung Prolit, 7 Makara,
Phnom Penh Tower, Phnom Penh, Cambodia
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
100.00% 5th Ngong Avenue, Nairobi, Kenya
100.00% 30 Cecil Street, #30‑01 Prudential Tower, Singapore 049712
51.00% Level 3, Menara Prudential, No. 10 Jalan Sultan Ismail,
50250 Kuala Lumpur, Malaysia
100.00% Kampala Road, Kampala, Uganda
49.00% Level 8A, Menara Prudential,
No. 10 Jalan Sultan Ismail, 50250 Kuala Lumpur, Malaysia
100.00% 10 Marina Boulevard, #32‑01, Marina Bay Financial Centre,
Singapore 018983
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
100.00% c/o Highgate Legal Pty Limited, 33 Lexington Drive, Bella Vista,
NSW 2153, Australia
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00% 1, Rue Hildegard von Bingen, L‑1282 Luxembourg
100.00%
100.00%
294 Prudential plc Annual Report 2017
www.prudential.co.uk
Key to Classes of shares held
LBG
LPI
MI
NSB
OS
PI
PS
U
Limited by Guarantee
Limited Partnership Interest
Membership Interest
Non‑stock basis
Ordinary Shares
Partnership Interest
Preference Shares
Units
Classes of
shares held
Proportion
held Registered office address and country of incorporation
OS
PS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
LPI
OS
OS
LPI
LPI
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
PS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
100.00%
100.00%
c/o Mazars LLP, 45 Church Street, Birmingham, B3 2RT, UK
100.00% Craigforth, Stirling, FK9 4UE, UK
100.00% IFSC, North Wall Quay, Dublin 1, D01 H104, Ireland
29.81% 17 Rochester Row, London, SW1P 1QT, UK
31.51%
36.60%
38.09%
35.42%
61.66%
42.94%
28.38%
31.01%
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00% c/o Mazars LLP, 90 St. Vincent Street, Glasgow, G2 5UB, UK
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
100.00% 59th Floor, One Island East, 18 Westlands Road, Quarry Bay, Hong Kong
100.00% Prudential House, Mumbai, India
100.00% Craigforth, Stirling, FK9 4UE, UK
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
100.00%
100.00%
100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
100.00%
100.00% Craigforth, Stirling, FK9 4UE, UK
100.00% 59th Floor, One Island East, 18 Westlands Road, Quarry Bay, Hong Kong
100.00% Montague House, Adelaide Road, Dublin 2, D02 K039, Ireland
100.00%
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00% 34‑38, Avenue de la Liberté, L‑1930, Luxembourg
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
100.00% Unit A, 6th Floor, Vientiane Plaza Hotel Office Building, Sailom Road,
Hatsady Neua Village, Chanthabouly District, Vientiane Capital, Lao PDR
99.93% 9/9 Sathorn Building, 20th– 27th Floor, South Sathorn Road, Yannawa,
Sahtorn, Bangkok 10120, Thailand
100.00% 5th Ngong Avenue, Nairobi, Kenya
100.00% Prudential House, Thabo Mbeki Road, Lusaka, Zambia
100.00% 35 North Street, Accra, Ghana
100.00%
100.00%
Craigforth, Stirling, FK9 4UE, UK
100.00% 1, Rue Hildegard von Bingen, L ‑ 1282 Luxembourg
100.00%
100.00%
100.00% Suite 450, 4th Floor, Barkly Wharf East, Le Caudan Waterfront,
Port Louis, Mauritius
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
100.00%
49.00% Prudential House, Thabo Mbeki Road, Lusaka, Zambia
100.00% 02‑670 Warszawa, Pulawska 182, Poland
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
Name of entity
Prudential Development Management Limited (In liquidation)
Prudential Distribution Limited
Prudential Dublin Investments Limited (In liquidation)
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 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 Global Services Private Limited
Prudential GP Limited
Prudential Greenfield GP LLP
Prudential Greenfield GP1 Limited
Prudential Greenfield GP2 Limited
Prudential Greenfield LP
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 Investment (Luxembourg) 2 SARL
Prudential Investments Limited
Prudential IP Services Limited
Prudential Life Assurance (Lao) Company Limited
Prudential Life Assurance (Thailand) Public Company Limited
Prudential Life Assurance Kenya Limited
Prudential Life Assurance Zambia Limited
Prudential Life Insurance Ghana Limited
Prudential Lifetime Mortgages Limited
Prudential Loan Investments 1 SARL
Prudential Loan Investments GP SARL
Prudential Loan Investments SCSp
Prudential Mauritius Holdings Limited
Prudential Mortgages Limited
Prudential Nominees Limited
Prudential Pensions Limited
Prudential Pensions Management Zambia Limited
Prudential Polska sp. z.o.o
Prudential Portfolio Management Group Limited
www.prudential.co.uk
Annual Report 2017 Prudential plc 295
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information D Other notes continued
D6 Investments in subsidiary undertakings, joint ventures and associates continued
Name of entity
Prudential Portfolio Managers (South Africa) (Pty) Limited
Classes of
shares held
Proportion
held Registered office address and country of incorporation
OS
A Class OS
49.99%
75.00%
PO Box 44813, Claremont 7735, South Africa
Prudential Portfolio Managers Limited
Prudential Properties Trusty Pty Limited
Prudential Property Holding Limited
Prudential Property Investment Managers Limited
Prudential Property Investments Limited
Prudential Protect Limited
Prudential Real Estate Investments 1 Limited
Prudential Real Estate Investments 2 Limited
Prudential Real Estate Investments 3 Limited
Prudential Retirement Income Limited (In liquidation)
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 Real Estate General Partner Limited
Prudential UK Real Estate LP
Prudential UK Real Estate Nominee 1 Limited
Prudential UK Real Estate Nominee 2 Limited
Prudential UK Services Limited
Prudential Unit Trusts Limited
Prudential Venture Managers Limited
Prudential Vietnam Assurance Private Limited
Prudential Vietnam Finance Company Limited
Prudential/M&G UK Companies Financing Fund LP
Prutec Limited
PT. Eastspring Investments Indonesia
PT. Prudential Life Assurance
PVFC Financial Limited
PVM Partnerships Limited
Randolph Street LP
REALIC of Jacksonville Plans, Inc
Reksa Dana Eastspring IDR Fixed Income Fund (NDEIFF)
Reksa Dana Eastspring Investments Cash Reserve
Reksa Dana Eastspring Investments IDR High Grade
Reksa Dana Eastspring Investments Value Discovery
Reksa Dana Eastspring Investments Yield Discovery
Reksa Dana Syariah Eastspring Syariah Equity Islamic Asia Pacific USD
Reksa Dana Syariah Eastspring Syariah Fixed Income Amanah
Rhodium Investment Fund
Rift GP 1 Limited
Rift GP 2 Limited
ROP, Inc
ScotAm Pension Trustees Limited
Scottish Amicable Finance plc
Scottish Amicable Holdings Limited
OS
OS
OS
OS
OS
PS
OS
OS
OS
OS
OS
PS
OS
PS
OS
OS
OS
OS
OS
OS
LPI
OS
OS
OS
OS
OS
OS
OS
LPI
OS
OS
OS
OS
OS
LPI
OS
OS
U
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00% Darling Park Tower 2, 201 Sussex Street, Sydney, NSW 2000, Australia
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
c/o Mazars LLP, 90 St. Vincent Street, Glasgow, G2 5UB, UK
100.00%
100.00%
Suite 1005, 10th Floor, Wisma Hamzah‑Kwong Hing,
No. 1 Leboh Ampang, 50100 Kuala Lumpur, Malaysia
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00% 1 Wallich Street, #19‑01 Guoco Tower, Singapore 078881
100.00% 30 Cecil Street, #30‑01 Prudential Tower, Singapore 049712
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
100.00%
100.00%
100.00%
100.00%
100.00% Craigforth, Stirling, FK9 4UE, UK
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
100.00% 25th Floor, Saigon Trade Centre, 37 Ton Duc Thang Street, District 1,
Ho Chi Minh City, Vietnam
100.00% 23rd Floor, Saigon Trade Centre, 37 Ton Duc Thang Street, District 1,
Ho Chi Minh City, Vietnam
34.42% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
99.95% 23rd Floor, Prudential Tower, JI. Jendral Sudirman Kav. 79, 12910,
Jakarta Selatan, Indonesia
94.62%
100.00% 13th Floor, One International Finance Centre, 1 Harbour View Street,
Central, Hong Kong
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00% 2711 Centreville Road, Suite 400, Wilmington, DE 19808, USA
100.00% 1999 Bryan Street, Suite 900, Dallas, TX 75201, USA
100.00% 23rd Floor, Prudential Tower, JI. Jendral Sudirman Kav. 79, 12910,
Jakarta Selatan, Indonesia
100.00%
44.09%
89.60%
79.21%
99.90%
96.82%
100.00% 10 Marina Boulevard, #32‑01, Marina Bay Financial Centre,
Singapore 018983
100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
100.00%
100.00% 1209 Orange Street, Wilmington, DE 19801, USA
100.00% Craigforth, Stirling, FK9 4UE, UK
100.00%
100.00%
296 Prudential plc Annual Report 2017
www.prudential.co.uk
Key to Classes of shares held
LBG
LPI
MI
NSB
OS
PI
PS
U
Limited by Guarantee
Limited Partnership Interest
Membership Interest
Non‑stock basis
Ordinary Shares
Partnership Interest
Preference Shares
Units
Name of entity
Classes of
shares held
Proportion
held Registered office address and country of incorporation
Scottish Amicable Life Assurance Society
No share capital
100.00% Craigforth, Stirling, FK9 4UE, UK
Scottish Amicable Pensions Investments Limited
Scotts Spazio Pte. Ltd.
Sealand (No 1) Limited
Sealand (No 2) Limited
Sectordate Limited
Selly Oak Shopping Park (General Partner) Limited
Selly Oak Shopping Park (Nominee 1) Limited
Selly Oak Shopping Park (Nominee 2) Limited
SII Investments, Inc
Silverfleet Capital 2004 LP
Silverfleet Capital 2005 LP
Silverfleet Capital 2006 LP
Silverfleet Capital 2008 LP
Silverfleet Capital 2009 LP
Silverfleet Capital 2011/12 LP
Silverfleet Capital II WPLF
Smithfield Limited
SM, LLC
Squire Capital I, LLC
Squire Capital II, LLC
Squire Reassurance Company II, Inc
Squire Reassurance Company, LLC
Sri Han Suria Sdn. Bhd.
St Edward Homes Limited
St Edwards Strand Partnership
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 Greenpark (Reading) LP
The Heights Management Company Limited
The Hub (Witton) Management Company Limited (In liquidation)
The St Edward Homes Partnership
The Strand Property Unit Trust
The Two Rivers Trust
Three Snowhill Birmingham SARL
Two Rivers LP
Two Snowhill Birmingham SARL
US Strategic Income Bond Fund D USD Acc
VFL International Life Company SPC, Ltd.
Warren Farm Office Village Limited (In liquidation)
Wessex Gate Limited
Westwacker Limited
Wynnefield Private Equity Partners I, LP
Wynnefield Private Equity Partners II, LP
Zenith‑Prudential Life Insurance Company Limited
OS
OS
OS
OS
OS
OS
OS
OS
OS
LPI
LPI
LPI
LPI
LPI
LPI
LPI
OS
LPI
MI
OS
OS
OS
100.00%
45.00% 30 Cecil Street, #23‑02, Prudential Tower, Singapore 049712
100.00% Lime Grove House, Green Street, St Helier, Jersey, JE1 2ST
100.00%
32.60% 5th Floor Cavendish House, 39 Waterloo Street, Birmingham, B2 5PP, UK
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
100.00%
100.00% 5555, Grande Market Drive, Appleton, WI 54912, USA
100.00% 1 Royal Plaza, St Peters Port, Guernsey, GY1 2HL
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00% 1209 Orange Street, Wilmington, DE 19801, USA
100.00% 1 Corporate Way, Lansing, MI 48951, USA
100.00%
100.00% 40600 Ann Arbor Road, East Suite 201, Plymouth, MI 48170, USA
100.00% 1 Corporate Way, Lansing, MI 48951, USA
OS
PS (A & B)
51.00%
100.00%
Suite 1005, 10th Floor Wisma Hamzah‑Kwong Hing,
No. 1 Leboh Ampang, 50100 Kuala Lumpur, Malaysia
OS
OS
OS
OS
OS
OS
OS
OS
LPI
OS
OS
OS
LPI
OS
OS
LPI
OS
OS
OS
OS
OS
OS
LPI
LPI
OS
50.00% Berkeley House, 19 Portsmouth Road, Cobham, Surrey, KT11 1JG, UK
50.00%
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00% 3 Rajanakarn Building, 20th Floor, South Sathorn Road, Yannawa
Subdistrict, Sathorn District, Bangkok, Thailand
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
99.93% 9/9 Sathorn Building, 25th Floor, South Sathorn Road, Yannawa, Sathorn,
Bangkok 10120, Thailand
50.00% Dorey Court, Admiral Park, St. Peter Port, Guernsey, GY1 2HT
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
50.00%
100.00%
49.95% Berkeley House, 19 Portsmouth Road, Cobham, Surrey, KT11 1JG, UK
50.00% Liberte house, 19‑23 La Motte Street, St Helier, Jersey, JE2 4SY
50.00%
100.00% 5, rue Guillaume Kroll, L‑1882, Luxembourg
50.00% Bow Bells House, 1 Bread Street, London, EC4M 9HH, UK
100.00% 5, rue Guillaume Kroll, L‑1882, Luxembourg
96.36% 26, Boulevard Royal, L‑2449, Luxembourg
100.00% 171 Elgin Avenue, Grand Cayman, Cayman Islands
100.00% c/o Mazars LLP, 45 Church Street, Birmingham, B3 2RT, UK
100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
100.00%
99.00% 1105 North Market Street, Suite 1300, Wilmington, DE 19801, USA
99.00% 1209 Orange Street, Wilmington, DE 19801, USA
51.00% Plot 280, Ajose Adeogun Street, Victoria Island, Nigeria
www.prudential.co.uk
Annual Report 2017 Prudential plc 297
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information E1 Other
Significant accounting policies
In addition to the critical accounting polices presented in note A3.1, the following detailed accounting policies are 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 change unless new accounting standards, interpretations or amendments are introduced by the IASB.
(a) 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 that the Group controls. The majority of the Group’s subsidiaries are corporate entities, but the Group’s
insurance operations also invest in a number of limited partnerships.
The Group performs a re‑assessment of consolidation whenever there is a change in the substance of the relationship between the
Group and an investee. Where the Group is deemed to control an entity it is treated as a subsidiary and its results, assets and liabilities
are consolidated. Where the Group holds a minority share in an entity, with no control over the entity, the investments are carried at fair
value through profit or loss within financial investments in the consolidated statement of financial position.
Entities consolidated by the Group include Qualifying Partnerships as defined under the UK Partnerships (Accounts) Regulations
2008 (the ‘Partnerships Act’). Some of these limited partnerships have taken advantage of the exemption under regulation 7 of the
Partnerships Act from the financial statements requirements. This is under regulations 4 to 6, on the basis that these limited partnerships
are dealt with on a consolidated basis in these financial statements.
(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. This
includes venture capital business, mutual funds and unit trusts and 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 that have been designed so that voting or similar rights are not the dominant factor in deciding who controls
the entity. Voting rights relate to administrative tasks. Relevant activities are directed by means of contractual arrangements. The Group
invests in structured entities such as:
— Open‑Ended Investment Companies (OEICs);
— Unit Trusts (UTs);
— Limited partnerships;
— 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.
— Where the entity is managed by a Group asset manager, and the Group’s ownership holding in the entity exceeds 50 per cent, the
Group is judged to have control over the entity.
— Where the entity is managed by a Group asset manager, and the Group’s ownership holding in the entity is between 20 per cent and
50 per cent, the facts and circumstances of the Group’s involvement in the entity are considered, including the rights to any fees
earned by the asset manager from the entity, in forming a judgement as to whether the Group has control over the entity.
— Where the entity is managed by a Group asset manager, and the Group’s ownership holding in the entity is less than 20 per cent, the
Group is judged to not have control over the entity.
— Where the entity is managed by an asset manager outside the Group, an assessment is made of whether the Group has existing rights
that gives it the ability to direct the current activities of the entity and therefore control 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.
298 Prudential plc Annual Report 2017
www.prudential.co.uk
E Further accounting policies 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 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.
Jackson’s separate account assets
These are investment vehicles that invest contract holders’ premiums in equity, fixed income, bonds and money market mutual funds.
The contract holder retains the underlying returns and the ownership risks related to the underlying investments. The shareholder’s
economic interest in separate accounts is limited to the administrative fees charged. The separate accounts are set up as separate
regulated entities governed by a Board of Governors or trustees for which the majority of the members are independent of Jackson or any
affiliated entity. The independent members are responsible for any decision making that impacts contract holders’ interest and govern
the operational activities of the entities’ advisers, including asset managers. 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.
Limited partnerships
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.
Other structured entities
The Group holds investments in mortgage‑backed securities, collateralised debt obligations and similar asset‑backed securities, the
majority of which are actively traded in a liquid market.
The Group consolidates the vehicles that hold the investments where the Group is deemed to control the vehicles. When assessing
control over the vehicles, the factors considered include the purpose and design of the vehicle, the Group’s exposure to the variability of
returns and the scope of the Group’s ability to direct the relevant activities of the vehicle including any kick‑out or removal rights that are
held by third parties. The outcome of the control assessment is dependent on the terms and conditions of the respective individual
arrangements.
The majority of such vehicles are not consolidated. In these cases 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
2017 £m
2016 £m
OEICs/UTs
Separate
account
assets
Other
structured
entities
OEICs/UTs
Separate
account
assets
Other
structured
entities
20,718 130,528
–
–
–
10,894
16,489
–
120,411
–
20,718 130,528
10,894
16,489
120,411
–
12,220
12,220
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 2017, 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.
www.prudential.co.uk
Annual Report 2017 Prudential plc 299
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information E1 Other continued
Significant accounting policies continued
(b) 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.
(c) Earned premiums, policy fees and claims paid
Premiums 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.
(d) 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.
(e) Financial investments other than instruments classified as long-term business contracts
(i) Investment classification
The Group holds financial investments in accordance with IAS 39, whereby subject to specific criteria, financial instruments are required
to be accounted for under one of the following categories:
— Financial assets and liabilities at fair value through profit 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.
Available‑for‑sale assets are subsequently measured at fair value. Interest income is recognised on an effective interest basis in the
income statement. 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. Except for
foreign exchange gains and losses on debt securities, 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. See note A3.1 for further details of
valuation of financial investments.
300 Prudential plc Annual Report 2017
www.prudential.co.uk
E Further accounting policies continued (ii) 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 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 2017 and 2016.
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’s derivative programme see note A3.1.
(iii) 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 measured in accordance with IAS 39.
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.
(iv) 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.
(v) 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.
(vi) 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.
www.prudential.co.uk
Annual Report 2017 Prudential plc 301
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information E1 Other continued
Significant accounting policies continued
(f) 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, following a reorganisation during
the year, is by business units Asia, US and UK and Europe. All business units contain both insurance and asset management operations.
Further information on the Group’s operating segments is provided in note B1.3.
(g) 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.
(h) 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.
(i) 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.
(j) 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.
302 Prudential plc Annual Report 2017
www.prudential.co.uk
E Further accounting policies continued (k) Tax
Prudential is subject to tax in numerous jurisdictions and the calculation of the total tax charge inherently involves a degree of estimation
and judgement. 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. 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, by providing for the single best estimate of the
most likely outcome or the weighted average expected value where there are multiple outcomes.
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.
(l) 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 charged to the income statement 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.
(m) 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. For further
details see note C5(a).
(n) 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 note A3.1(c). 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.
Impairment testing is conducted when there is an indication of impairment.
(o) 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.
(p) 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.
www.prudential.co.uk
Annual Report 2017 Prudential plc 303
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information E1 Other continued
Significant accounting policies continued
(q) Share capital
Shares are classified as equity when their terms do not create an obligation to transfer assets. 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.
(r) 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.
(s) 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.
304 Prudential plc Annual Report 2017
www.prudential.co.uk
E Further accounting policies continued Statement of financial position of the parent company
31 December
Fixed assets
Investments in subsidiary undertakings
Current assets
Debtors:
Amounts owed by subsidiary undertakings
Other debtors
Tax recoverable
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
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
Profit for the year
Note
2017 £m
2016 £m
5
6
7
8
8
6
9
8
8
8
10
10
11
10,798
10,859
4,732
5
40
5
71
143
4,996
(485)
(600)
(443)
(715)
(10)
(12)
(79)
(2,344)
2,652
13,450
(5,272)
(549)
–
(5,821)
7,629
129
1,948
5,552
7,629
5,798
11
44
4
48
24
5,929
(1,052)
–
(447)
(773)
(10)
(9)
(72)
(2,363)
3,566
14,425
(5,772)
(549)
(599)
(6,920)
7,505
129
1,927
5,449
7,505
1,235
840
The financial statements of the parent company on pages 305 to 313 were approved by the Board of Directors on
14 March 2018 and signed on its behalf.
Paul Manduca
Chairman
Mike Wells
Group Chief Executive
Mark FitzPatrick
Chief Financial Officer
www.prudential.co.uk
Annual Report 2017 Prudential plc 305
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Statement of changes in equity of the parent company
Balance at 1 January 2016
Total comprehensive income for the year
Profit for the year
Actuarial gains recognised in respect of the defined benefit 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 2016
Balance at 1 January 2017
Total comprehensive income for the year
Profit for the year
Actuarial gains recognised in respect of the defined benefit 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 2017
Share
capital
£m
128
Share
premium
£m
Profit and
loss account
£m
1,915
5,866
Total
equity
£m
7,909
840
4
844
13
6
(1,267)
(1,248)
7,505
–
–
–
12
–
–
12
1,927
840
4
844
–
6
(1,267)
(1,261)
5,449
1,927
5,449
7,505
–
–
–
21
–
–
21
1,235
28
1,263
–
(1)
(1,159)
(1,160)
5,552
1,235
28
1,263
21
(1)
(1,159)
(1,139)
7,629
129
1,948
–
–
–
1
–
–
1
129
129
–
–
–
–
–
–
–
306 Prudential plc Annual Report 2017
www.prudential.co.uk
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 operations in Asia, the US, UK and Europe and Africa. In Asia, the Group has operations in
Hong Kong, Indonesia, Malaysia, Singapore and other markets. In the US, the Group’s principal subsidiary is Jackson National Life
Insurance Company. In UK and Europe, the Group operates through its subsidiaries, primarily The Prudential Assurance Company
Limited and M&G Investment Management Limited. In August 2017 the Company announced that it was bringing together M&G
with Prudential’s UK and European savings and retirement business to form M&G Prudential.
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 (‘IFRS’) 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 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; and
— The effects of new but not yet effective IFRSs.
As the consolidated financial statements of the Group include the equivalent disclosures, the Company has also applied the exemptions
available under FRS 101 in respect of the following disclosures:
— IFRS 2 ‘Share Based Payments’ in respect of Group‑settled share‑based payments; and
— Disclosure required by IFRS 7 ‘Financial Instrument Disclosures’ and IFRS 13 ‘Fair Value Measurement’.
In 2017, the Company adopted Amendments to IAS 12, ‘Income Taxes’ (recognition of deferred tax assets) and Annual Improvements to
IFRSs 2014‑2016 Cycle. Their adoption had no material impact on the financial statements of the Company.
The accounting policies set out in note 3 below have, unless otherwise stated, been applied consistently to all periods presented in
these financial statements.
3 Significant accounting policies
Investments in subsidiary undertakings
Investments in subsidiary undertakings are shown at cost less impairment.
Amounts owed by subsidiary undertakings
Amounts owed by subsidiary undertakings are shown at cost, less provisions.
Derivatives
Derivative financial instruments are held to manage certain macro‑economic exposures. Derivative financial instruments are carried at
fair value with changes in fair value included in the profit and loss account.
Borrowings
Borrowings are initially recognised at fair value, net of transaction costs, and subsequently accounted for on an amortised cost basis using
the effective interest method. Under the effective interest method, the difference between the redemption value of the borrowing and
the initial proceeds, net of transaction costs, is amortised through the profit and loss account to the date of maturity or, for subordinated
debt, over the expected life of the instrument.
Dividends
Interim dividends are recorded in the period in which they are paid.
www.prudential.co.uk
Annual Report 2017 Prudential plc 307
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information 3 Significant accounting policies continued
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’). 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 7.
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 yield,
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.
308 Prudential plc Annual Report 2017
www.prudential.co.uk
Notes on the parent company financial statements continued 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 IFRS as issued by the IASB and endorsed by the EU. At 31 December 2017, there were no differences between FRS
101 and IFRS 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
2017 £m
2016 £m
1,235
1,155
2,390
840
1,081
1,921
2017 £m
2016 £m
7,629
8,458
7,505
7,161
16,087
14,666
* The ‘share 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 £1,685 million and £1,318 million for the years ended 31 December 2017 and 2016, 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 that would be eliminated on consolidation.
5 Investments in subsidiary undertakings
At 1 January
Liquidation of subsidiary undertakings
Other movements
At 31 December
2017 £m
2016 £m
10,859
–
(61)
10,798
12,514
(1,600)
(55)
10,859
The liquidation in 2016 related to a central finance subsidiary in order to simplify the Group’s corporate structure. Other movements
comprise £6 million (2016: £6 million) in respect of share‑based payments, reflecting the value of payments settled by the Company for
employees of its subsidiary undertakings, less £67 million (2016: £61 million) relating to cash received from subsidiaries in respect of
share awards.
Subsidiary undertakings of the Company at 31 December 2017 are listed in note D6 of the Group financial statements.
6 Derivative financial instruments
Cross‑currency swap
Inflation‑linked swap
Total
2017 £m
2016 £m
Fair value
assets
Fair value
liabilities
Fair value
assets
Fair value
liabilities
5
–
5
–
443
443
4
–
4
–
447
447
Derivative financial instruments are held to manage certain macro‑economic exposures. The change in fair value of the derivative
financial instruments of the Company was a gain before tax of £5 million (2016: loss of £122 million).
www.prudential.co.uk
Annual Report 2017 Prudential plc 309
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information 7 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 2017. 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, which was finalised in 2015. The triennial
valuation for the Scheme as at 5 April 2017 is ongoing and expected to be finalised in the second quarter of 2018. 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 2017, 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.
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†
31 Dec 2017 £m
31 Dec 2016 £m
Quoted
prices in
an active
market
Other
Total
Quoted
prices in
an active
market
Other
Total
9
216
5,040
1,430
156
–
188
192
7,231
–
10
–
61
8
140
–
24
243
9
226
5,040
1,491
164
140
188
216
7,474
(6,753)
721
(485)
236
71
7
284
5,411
1,125
142
–
252
269
7,490
11
9
–
44
2
71
–
–
137
18
293
5,411
1,169
144
71
252
269
7,627
(6,910)
717
(558)
159
48
* 93 per cent (2016: 96 per cent) of the bonds are investment graded.
† The surplus in the Scheme recognised in the balance sheet of the Company represents the amount that is recoverable through reduced future contributions and is net of the
apportionment to the PAC with‑profits fund.
310 Prudential plc Annual Report 2017
www.prudential.co.uk
Notes on the parent company financial statements continued The changes in the fair value of the underlying Scheme assets and the present value of the underlying benefit obligations are as follows:
Balance at 1 January
Current 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
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
Fair value of
Scheme assets
Present value
of benefit
obligations
note (i)
7,627
–
193
(6)
40
11
–
(391)
7,474
(6,910)
(26)
(175)
–
(33)
–
–
391
(6,753)
Fair value of
Scheme assets
Present value
of benefit
obligations
note (i)
6,727
–
250
(4)
949
11
1
(307)
7,627
(5,758)
(19)
(213)
–
(1,226)
–
(1)
307
(6,910)
2017 £m
Net surplus
without the
effect of
IFRIC 14
Effect of
IFRIC 14
for de-
recognition
of surplus
IAS 19
basis net
surplus
717
(26)
18
(6)
7
11
–
–
721
(558)
–
(14)
–
87
–
–
–
(485)
159
(26)
4
(6)
94
11
–
–
236
2016 £m
Net surplus
without the
effect of
IFRIC 14
Effect of
IFRIC 14
for de-
recognition
of surplus
IAS 19
basis net
surplus
969
(19)
37
(4)
(277)
11
–
–
717
(800)
–
(32)
–
274
–
–
–
(558)
169
(19)
5
(4)
(3)
11
–
–
159
Notes
(i)
The weighted average duration of the benefit obligations of the Scheme is 17 years (2016: 18 years). The following table provides an expected maturity analysis of the undiscounted
benefit obligations as at 31 December:
£m
2017
2016
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
238
227
1,030
1,013
1,445
1,439
1,452
1,474
1,375
1,407
5,554
5,930
Total
11,094
11,490
(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 on Scheme liabilities
Actuarial (losses) – demographic assumptions
Actuarial (losses) – financial assumptions
Total actuarial gains (losses) without the effect of IFRIC 14
Actuarial gains attributable to the Company before tax†
2017 £m
2016 £m
40
70
(10)
(93)
(33)
7
34
949
87
(32)
(1,281)
(1,226)
(277)
4
* The total return on Scheme assets in 2017 was a gain of £233 million (2016: £1,199 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 2017, the gains included a credit of £31 million (2016: £87 million) for the adjustment to the unrecognised portion of surplus. The gains after tax of £28 million
(2016: £4 million) are recorded in other comprehensive income.
(iii)
Employer contributions to be paid into the Scheme for the year ending 31 December 2018 are expected to amount to £10 million, comprising ongoing service contributions and expenses.
www.prudential.co.uk
Annual Report 2017 Prudential plc 311
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information 8 Borrowings
Core structural borrowings note (i)
Subordinated liabilities note (ii)
Debenture loans
Other borrowings: note (iii)
Commercial paper
Medium Term Notes 2018
Total borrowings
Borrowings are repayable as follows:
Within 1 year
Between 1 and 5 years
After 5 years
Core structural borrowings
Other borrowings
Total
2017 £m
2016 £m
2017 £m
2016 £m
2017 £m
2016 £m
5,272
549
5,821
–
–
5,772
549
6,321
–
–
5,821
6,321
–
–
5,821
5,821
–
–
6,321
6,321
–
–
–
485
600
1,085
1,085
–
–
1,085
–
–
–
1,052
599
1,651
1,052
599
–
1,651
5,272
549
5,821
485
600
6,906
1,085
–
5,821
6,906
5,772
549
6,321
1,052
599
7,972
1,052
599
6,321
7,972
Notes
(i)
(ii)
(iii)
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.
These borrowings support a short‑term fixed income securities programme.
9 Deferred tax liability
Deferred tax liability
Short‑term temporary differences related to pension scheme
Total
2017 £m
2016 £m
(12)
(12)
(9)
(9)
The reduction in the UK corporation tax rate to 17 per cent from 1 April 2020 was substantively enacted on 6 September 2016 and did not
have a material impact on the financial statements for the year ended 31 December 2017.
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 2017 is set
out in note C10 of the Group financial statements.
312 Prudential plc Annual Report 2017
www.prudential.co.uk
Notes on the parent company financial statements continued 11 Retained profit of the Company
Retained profit at 31 December 2017 amounted to £5,552 million (2016: £5,449 million). The retained profit includes distributable
reserves of £3,066 million and non‑distributable reserves of £2,486 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 in previous years and £81 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.
The retained profit of the Company is substantially generated from dividend income received from subsidiaries. The Group segmental
analysis illustrates the generation of profit across the Group (see note B1 of the Group financial statements). The Group and its
subsidiaries are subject to local regulatory minimum capital requirements, as set out in note C12 of the Group financial statements.
A number of the principal risks set out in the ’Report on the risks facing our business and how these are managed’ could impact the
generation of profit in the Group’s subsidiaries in the future and hence impact their ability to pay dividends in the future.
In determining the dividend payment in any year the directors follow the Group dividend policy described in the Chief Financial
Officer’s report section of this Annual Report. The directors consider the Company’s ability to pay current and future dividends twice
a year by reference to the Company’s business plan and certain stressed scenarios.
12 Other information
a
b
c
d
e
Information on directors’ remuneration is given in the directors’ remuneration report section of this Annual Report and note B2.3
of the Group financial statements.
Information on transactions of the directors with the Group is given in note D4 of the Group financial statements.
The Company employs no staff.
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts were £0.1 million (2016: £0.1 million) and for
other services were £0.1 million (2016: £0.1 million).
In certain instances, the Company has guaranteed that its subsidiaries will meet their obligations when they fall due for payment.
13 Post balance sheet events
The second interim ordinary dividend for the year ended 31 December 2017, which was approved by the Board of Directors after
31 December 2017, is described in note B6 of the Group financial statements.
Intention to demerge the Group’s UK businesses
In March 2018, the Group announced its intention to demerge its UK and Europe business (‘M&G Prudential’) from Prudential plc,
resulting in two separately listed companies. In preparation for the UK demerger process, Prudential plc intends to transfer the legal
ownership of its Hong Kong insurance subsidiaries from The Prudential Assurance Company Limited (M&G Prudential’s UK regulated
insurance entity) to Prudential Corporation Asia Limited, which is expected to complete by the end of 2019.
Sale of £12.0 billion* UK annuity portfolio
In March 2018, M&G Prudential also announced the sale of £12.0 billion* of its shareholder annuity portfolio to Rothesay Life. Under the
terms of the agreement, M&G Prudential has reinsured £12.0 billion* of liabilities to Rothesay Life, which is expected to be followed by a
Part VII transfer of the portfolio by the end of 2019. Further details are set out in the CFO report.
* Relates to £12.0 billion of IFRS shareholder annuity liabilities, valued as at 31 December 2017.
www.prudential.co.uk
Annual Report 2017 Prudential plc 313
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information 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
83 to 87 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.
314 Prudential plc Annual Report 2017
www.prudential.co.uk
Independent auditor’s report to the members of Prudential plc only
1 Our opinion is unmodified
We have audited the financial statements
of Prudential plc (‘the Group and parent
company’) for the year ended
31 December 2017 which comprise:
— The consolidated income statement,
consolidated statement of
comprehensive income, consolidated
statement of changes in equity,
consolidated statement of financial
position and consolidated statement
of cash flows, and the related notes,
including accounting policies in notes
A3 and E1; and
— The statement of financial position,
statement of changes in equity, and the
related notes, including the significant
accounting policies in note 3 of the
parent company financial statements.
In our opinion:
— The financial statements give a true and
fair view of the state of the Group’s and
of the parent company’s affairs as at
31 December 2017 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.
Basis for opinion
We conducted our audit in accordance
with International Standards on Auditing
(UK) (‘ISAs (UK)’) and applicable law. Our
responsibilities are described below. We
believe that the audit evidence we have
obtained is a sufficient and appropriate
basis for our opinion. Our audit opinion
is consistent with our report to the
audit committee.
We were appointed as auditor by the
shareholders in October 1999. The period
of total uninterrupted engagement is the
19 years ended 31 December 2017. We
have fulfilled our ethical responsibilities
under, and we remain independent of the
Group in accordance with, UK ethical
requirements including the Financial
Reporting Council (‘FRC’) Ethical Standard
as applied to listed public interest entities.
No non‑audit services prohibited by that
standard were provided.
2 Key audit matters: Our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements
and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those
which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the
engagement team. We summarise below the key audit matters, in decreasing order of audit significance, in arriving at our audit opinion
above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those
procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for the
purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that
opinion, and we do not provide a separate opinion on these matters.
Valuation of policyholder liabilities (2017: £411,243 million, 2016: £388,996 million).
The risk compared to the prior year is unchanged.
Refer to page 105 (Audit Committee report), page 168 (accounting policy) and pages 230 to 252 (financial disclosures)
The risk
Our response
The Group has significant policyholder liabilities representing
86 per cent of the Group’s total liabilities.
We used our own actuarial specialists to assist us in performing
our procedures in this area.
Subjective valuation
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,
including investment return, credit risk and associated discount
rates, and operating assumptions including mortality, morbidity,
expenses and persistency (including consideration of policyholder
behaviour) are the key inputs used to estimate these long‑term
liabilities, in addition to the appropriate design and calibration of
reserving models.
The specific application of these judgements to individual
components is explained below.
For the US component, the valuation of the guarantees in the
variable annuity (‘VA’) business is complex 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.
Our procedures included:
Methodology choice
We have assessed the methodology for selecting assumptions
and calculating the policyholder liabilities. This included:
— Applying our understanding of developments in the business
and the impact of changes in methodology on the selection of
assumptions;
— Comparing changes in methodology to our expectations
derived from market experience; and
— Evaluating the analysis of the movements in policyholder
liabilities during the year, including consideration of whether
the movements were in line with the methodology and
assumptions adopted.
www.prudential.co.uk
Annual Report 2017 Prudential plc 315
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Valuation of policyholder liabilities (2017: £411,243 million, 2016: £388,996 million).
The risk compared to the prior year is unchanged.
Refer to page 105 (Audit Committee report), page 168 (accounting policy) and pages 230 to 252 (financial disclosures)
The risk
Our response
For the UK component, the valuation of the policyholder liabilities
in relation to the annuity business requires significant judgement
over the setting of mortality, expenses and credit risk assumptions.
This includes the use of complex modelling in order to determine
the policyholder liabilities.
For the Asia component, the valuation of the policyholder liabilities
requires significant judgement over the setting of mortality and
morbidity assumptions.
Control operation
Our procedures included testing of the design, implementation
and operating effectiveness of key controls over the valuation
process including assessment and approval of the methods and
assumptions adopted over the calculation of policyholder liabilities
as well as appropriate access and change management controls
over the actuarial models.
Our procedures for the US component also included:
Historical comparison
— Assessing the assumptions relating to policyholder behaviour
by comparing to relevant company and industry historical
experience data.
Benchmarking assumptions and sector experience
— Assessing the assumptions for investment mix and projected
investment returns by comparing to company specific and
industry data and for future growth rates by comparing to
market trends and market volatility; and
— Utilising the results of our industry benchmarking of
assumptions and actuarial market practice to inform our
challenge of assumptions in relation to policyholder behaviour,
including the likely responses to projected changes in
investment performance.
Model evaluation
— Assessing the reserving models by considering the accuracy
of the cash flow projections including by reference to product
features. We have also assessed the impact of modelling
and assumption changes by inspecting pre‑ and post‑change
model runs and comparing the outcomes of the changes
to our expectations.
Our procedures for the UK component also included:
Historical comparison
— Evaluating the evidence used to prepare the mortality
experience investigation by reference to actual mortality
experience of the policyholders in order to assess whether
this supported the year‑end assumptions adopted; and
— Assessing whether the expense assumptions appropriately
reflect the expected future costs of administering the
underlying policies by analysing current year unit costs and
the likely impact of planned actions.
Benchmarking assumptions and sector experience
— Comparing mortality experience to industry data on current
mortality and expectations of future mortality improvements;
— Evaluating the credit risk assumptions by reference to
industry practice and our expectation derived from market
experience; and
— Used the results of our industry benchmarking of assumptions
and actuarial market practice to inform our challenge of the
assumptions in relation to the mortality, credit risk and
expense assumptions.
316 Prudential plc Annual Report 2017
www.prudential.co.uk
Independent auditor’s report to the members of Prudential plc only continued Valuation of policyholder liabilities (2017: £411,243 million, 2016: £388,996 million).
The risk compared to the prior year is unchanged.
Refer to page 105 (Audit Committee report), page 168 (accounting policy) and pages 230 to 252 (financial disclosures)
The risk
Our response
Model evaluation
— Evaluating the appropriateness of the calibration of the
Continuous Mortality Investigation model adopted based on
the analysis of the characteristics of the policyholder population
and actual mortality experience.
We used our own valuation models to perform an independent
recalculation of a sample of policyholder liabilities to ensure that
the selected model calibration has been appropriately
implemented.
Our procedures for the Asia component also included:
Historical comparison
— Evaluating the experience investigations in respect of the
mortality and morbidity assumptions by reference to actual
experience in order to assess whether this supported the
year‑end assumptions adopted.
Benchmarking assumptions
— Used the results of our industry benchmarking of assumptions
and actuarial market practice together with available industry
data to inform our challenge of the assumptions in the areas
noted above.
Model evaluation
— We have assessed the reserving models by checking the
accuracy of the cash flow projections including by reference
to product features. We have also assessed the impact of
modelling and assumption changes by inspecting pre‑ and
post‑change model runs and comparing the outcomes of the
changes to our expectations.
Assessing transparency
We considered whether the disclosures in relation to the
assumptions used in the valuation of policyholder liabilities
are compliant with the relevant accounting requirements and
appropriately represent the sensitivities of the liabilities to
alternative scenarios and inputs.
Our result
We found the valuation of policyholder liabilities to be acceptable
(2016: acceptable).
www.prudential.co.uk
Annual Report 2017 Prudential plc 317
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Valuation of investments (2017: £422,230 million, 2016: £393,584 million).
The risk compared to the prior year is unchanged.
Refer to page 105 (Audit Committee report), page 174 (accounting policy) and pages 209 to 229 (financial disclosures)
The risk
Our response
The Group’s investment portfolio represents 91 per cent of the
Group’s total assets.
We used our own valuation specialists in order to assist us in
performing our procedures in this area.
The portfolio of quoted investments and investments that are
valued primarily using observable inputs, make up 89 per cent
of the Group’s total assets (by value). We do not consider these
investments to be at a high risk of significant misstatement, or to be
subject to a significant level of judgement because they comprise
liquid, quoted investments. However, due to their materiality in the
context of the financial statements as a whole, they are considered
to be one of the areas which had the greatest effect on our overall
audit strategy and allocation of resources in planning and
completing our audit.
Subjective valuation
The area that involved significant audit effort and judgement in
2017 was the valuation of harder to value positions within the
financial investments portfolio representing 2 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.
The valuation of the portfolio involves judgement depending on
the observability of the inputs into the valuation and further
judgement in determining the appropriate valuation methodology
for harder to value investments where external pricing sources are
either not readily available or are unreliable.
Our procedures included:
Methodology choice
We assessed the appropriateness of the pricing methodologies
with reference to relevant accounting standards and the Group’s
own valuation guidelines as well as industry practice.
For quoted investments:
Tests of details
We performed independent price checks using external quoted
prices and by agreeing the observable inputs that were used in the
Group’s valuation techniques to external data.
For harder to value positions:
Control operation
We tested the design, implementation and operating effectiveness
of key controls over the valuation process, including the Group’s
review and approval of the estimates and assumptions used for the
valuation including key authorisation and data input controls.
Benchmarking assumptions
We assessed a sample of the valuation assumptions with reference
to the Group’s own valuation guidelines as well as industry
practice.
Tests of details
We performed an inspection of files for loan securities on a sample
basis by critically evaluating the performance of the loans and
comparing this to the carrying value held. This included examining
the existing and prospective investee company cash flows in order
to assess whether the loans could be serviced or refinancing may
be required, and to identify any potential impairment in relation to
the loans.
We critically evaluated the valuation assessment and resulting
conclusions in order to determine the appropriateness of the
valuations recorded. This included an evaluation of the valuation
assessment with reference to the Group’s valuation guidelines and
industry practice.
Assessing transparency
We assessed whether the disclosures in relation to the valuation of
investments are compliant with the relevant accounting
requirements and appropriately present the sensitivities in the
valuations based on alternative outcomes.
Our result
We found the valuation of investments to be acceptable
(2016: acceptable).
318 Prudential plc Annual Report 2017
www.prudential.co.uk
Independent auditor’s report to the members of Prudential plc only continued Recoverability and amortisation of deferred acquisition costs (‘DAC’) (2017: £9,233 million, 2016: £9,178 million).
The risk compared to the prior year is unchanged.
Refer to page 105 (Audit Committee report), page 172 (accounting policy) and pages 254 to 256 (financial disclosures)
The risk
Our response
DAC represents 2 per cent of the Group’s total assets. The DAC
associated with the US component, which represents 89 per cent
of the total DAC, involves the greatest judgement in terms of
measurement and recoverability.
Subjective valuation
DAC involves judgements in respect of the identification of the
acquisition costs that may be deferred, the appropriateness of
the deferral methodology adopted and the assessment of the
recoverability of the asset.
The amortisation and recoverability assessment of the DAC asset
in the US component 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; therefore there is a greater level of subjectivity involved
in relation to the US DAC.
We used our own actuarial specialists to assist us in performing
our audit procedures in this area.
Our procedures included:
Methodology choice
We evaluated the appropriateness of the deferral methodology
by reference to the requirements of relevant accounting standards.
Assessing application
We evaluated the judgements involved in determining whether
the costs incurred are deferred appropriately by reference to the
adopted deferral methodology.
Benchmarking assumptions and market experience
We provided challenge on the reasonableness of the selected
assumptions relating to projected investment return based on
our understanding of developments in the business and our
expectations derived from market experience. Our work
included comparing the projected investment returns against
the investment portfolio mix and market return data, and
corroborating the rationale for any key differences.
Historical comparison
We have also assessed 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. Our work included critically assessing the
judgements that determine the future profit profiles in the context
of actual historical experience as well as by reference to market
trends. We also compared the estimated future profits to the
carrying value of the DAC asset to assess recoverability.
Tests of detail
We verified the accuracy of the calculations performed including
the extent of the amortisation adjustment determined based on an
assessment of the future profit profiles.
Assessing transparency
We assessed whether the disclosures in relation to the valuation
and amortisation of DAC are compliant with the relevant
accounting requirements.
Our result
We found the valuation and amortisation of DAC to be acceptable
(2016: acceptable).
www.prudential.co.uk
Annual Report 2017 Prudential plc 319
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Determination of pension asset (restricted surplus) in respect of the defined benefit pension scheme
(Pension asset (restricted surplus) – 2017: £71 million, 2016: £48 million).
The risk relates to the parent company financial statements.
Refer to page 105 (Audit Committee Report), page 308 (accounting policy) and pages 271 to 276 (financial disclosures)
The risk
The parent company assumes a portion of the surplus of the
Group’s main defined benefit pension scheme.
We do not consider the amounts recognised on the parent
company balance sheet in respect of the defined benefit pension
scheme to be at a high risk of significant misstatement. However, in
the context of the parent company financial statements, we note
that the valuation of the defined benefit pension obligation and the
computation of the asset ceiling are the aspects of our audit of the
pension asset (restricted surplus) that had the greatest effect on
our overall audit strategy and allocation of resources in planning
and completing our audit given the number of assumptions
involved.
Subjective valuation
Where an entity does not have a right to a refund the asset ceiling
is determined by reference to the present value of the difference
between the estimated future service cost and the contributions
payable by the entity over the future working lives of the active
members. Assumptions are made over the future service costs.
The calculation of the defined benefit obligation requires the
determination of a number of assumptions and judgement is
required to determine the appropriateness of these. The most
significant assumptions include mortality and the inflation rate.
Our response
Our procedures included:
Methodology choice
We assessed, with the support of our pension specialists, the
methodology for selecting assumptions underpinning the
calculation of the defined benefit pension obligation and the
estimated future service cost including the consequent calculation
of the restricted surplus by reference to the relevant accounting
standards.
Tests of detail
We assessed the reasonableness of the mortality assumptions and
inflation rate by reference to entity specific data in respect of the
demographic characteristics of the population of pension scheme
members and factors such as salary inflation.
We also considered whether the movements in the defined benefit
pension obligation and the estimated future service cost, including
the consequential calculation of the restricted surplus, were
consistent with the changes made in the assumptions from the
prior year.
Benchmarking assumptions
We challenged, with the support of our own pension specialists,
the key assumptions applied, being the inflation and mortality
rates, against externally derived data.
Our result
We found the pension asset (restricted surplus) recognised in
respect of the defined benefit pension scheme to be acceptable
(2016: acceptable).
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 (2016: £350 million)
determined with reference to a benchmark
of IFRS shareholders’ equity (of which it
represents 2.2 per cent (2016: 2.4 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 consider that this is
the most appropriate measure for the size
of the business and that it provides a stable
measure year on year. 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.
IFRS shareholders’ equity
£16.09 billion (2016: £14.67 billion)
A
B
C
A £350 million
Group financial statements materiality
(2016: £350 million)
B £80 to £186 million
Range of materiality at 14 components
(2016: £80 to £186 million)
C £18 million
Misstatements reported to the Audit
Committee (2016: £18 million)
1
2
1 IFRS shareholders’ equity
2 Group materiality
320 Prudential plc Annual Report 2017
www.prudential.co.uk
Independent auditor’s report to the members of Prudential plc only continued Materiality for the parent company
financial statements as a whole was set at
£186 million (2016: £ 186 million),
determined with reference to a benchmark
of parent company’s net assets, of which it
represents 2.4 per cent (2016: 2.5 per cent).
We agreed to report to the Group audit
committee any corrected or uncorrected
identified misstatements exceeding
£18 million (2016: £18 million) in addition to
other identified misstatements that warrant
reporting on qualitative grounds.
We subjected the Group’s operations to
audits for group reporting purposes as
follows:
Of the 14 (2016: 15) reporting components
scoped in for the Group audit, we
subjected 10 (2016: 10) to full scope audits
for group reporting purposes and 4 (2016:
5) to an audit of account balances. The
latter were not individually financially
significant enough to require a full scope
audit for group reporting purposes, but did
present specific individual audit risks that
needed to be addressed.
The components subjected to full scope
audits included the parent company; the
insurance operations in the UK, US, Hong
Kong, Indonesia, Singapore, Malaysia, and
Thailand; and the fund management
operations of M&G and Eastspring
Singapore. Additionally, the components
subjected to an audit of account balances
included Prudential Capital and the
insurance operations in China, Taiwan and
Vietnam.
The account balances audited were
policyholder liabilities, investments and
deferred acquisition costs. For the
remaining operations, we performed
analysis 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:
Group revenue
Group profit before tax
2%
92%
3%
89%
94%
(2016 92%)
10%
86%
4%
90%
96%
(2016 94%)
Group total assets
Group shareholders’ equity
2%
91%
3%
87%
93%
(2016 90%)
6%
88%
4%
90%
94%
(2016 94%)
Full scope for Group audit purposes 2017
Audit of account balances 2017
Full scope for Group audit purposes 2016
Audit of account balances 2016
Residual components
www.prudential.co.uk
Annual Report 2017 Prudential plc 321
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information 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.
The Group audit team approved the
component materialities, which ranged
from £80 million to £186 million (2016:
unchanged) across the components,
having regard to the size and risk profile of
the Group. The work on 13 components
(2016: 14 components) was performed
by component auditors and work on the
remaining component, which was the
parent company, was performed by the
Group audit team.
The Group audit team visited 13
component locations, comprising: the
insurance operations in the UK, US, Hong
Kong, Indonesia, Singapore, Malaysia,
Thailand, Taiwan, Vietnam and China; the
fund management operations in M&G and
Eastspring Singapore; and Prudential
Capital. Video and telephone conference
meetings were also held with these
component auditors. At these visits and
telephone conference 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 inspected
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 and component audit teams, also
regularly attended Business Unit audit
committee meetings (these were held at a
regional level for Asia) and participated in
meetings with local components 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 We have nothing to report
on going concern
We are required to report to you if:
— We have anything material to add
or draw attention to in relation to the
Directors’ statement on page 120 to the
financial statements on the use of the
going concern basis of accounting with
no material uncertainties that may cast
significant doubt over the Group and
Company’s use of that basis for a period
of at least 12 months from the date of
approval of the financial statements; or
— The related statement under the Listing
Rules set out on page 120 is materially
inconsistent with our audit knowledge.
We have nothing to report in these
respects.
5 We have nothing to report
on the other information in the
Annual Report
The Directors are responsible for the
other information presented in the
Annual Report together with the financial
statements. Our opinion on the financial
statements does not cover the other
information and, accordingly, we do not
express an audit opinion or, except as
explicitly stated below, any form of
assurance conclusion thereon.
Our responsibility is to read the other
information and, in doing so, consider
whether, based on our financial statements
audit work, the information therein is
materially misstated or inconsistent with
the financial statements or our audit
knowledge. Based solely on that work we
have not identified material misstatements
in the other information.
Strategic report and Directors’ report
Based solely on our work on the other
information:
— We have not identified material
misstatements in the strategic report
and the Directors’ report;
— In our opinion the information given in
those reports for the financial year is
consistent with the financial statements;
and
— In our opinion those reports have been
prepared in accordance with the
Companies Act 2006.
Directors’ remuneration report
In our opinion the part of the Directors’
remuneration report to be audited has
been properly prepared in accordance
with the Companies Act 2006.
Disclosures of principal risks
and longer-term viability
Based on the knowledge we acquired
during our audit, we have nothing material
to add or draw attention to in relation to:
— The Directors’ confirmation within the
viability statement on page 62, that they
have carried out a robust assessment
of the principal risks facing the Group,
including those that would threaten its
business model, future performance,
solvency and liquidity;
— The principal risks disclosures on pages
50 to 63 describing these risks and
explaining how they are being managed
and mitigated; and
— The Directors’ explanation in the
viability statement of how they have
assessed the prospects of the Group,
over what period they have done so and
why they considered that period to be
appropriate, and their statement as to
whether they have a reasonable
expectation that the Group will be able
to continue in operation and meet its
liabilities as they fall due over the period
of their assessment, including any
related disclosures drawing attention
to any necessary qualifications
or assumptions.
Under the Listing Rules we are required to
review the viability statement. We have
nothing to report in this respect.
Corporate governance disclosures
We are required to report to you if:
— We have identified material
inconsistencies between the knowledge
we acquired during our financial
statements 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 section of the annual report
describing the work of the Audit
Committee does not appropriately
address matters communicated by
us to the Audit Committee.
322 Prudential plc Annual Report 2017
www.prudential.co.uk
Independent auditor’s report to the members of Prudential plc only continued We are required to report to you if the
Corporate Governance Statement does
not properly disclose a departure from
the 11 provisions of the UK Corporate
Governance Code specified by the Listing
Rules for our review.
We have nothing to report in respect
of above.
6 We have nothing to report in
respect of the matters on which we
are required to report by exception
Under the Companies Act 2006 we are
required to report to you if, in our opinion:
— Adequate accounting records have not
been kept by the parent company, or
returns adequate for our audit have not
been received from branches not visited
by us; or
— The parent company financial
statements and the part of the
Directors’ remuneration report to be
audited are not in agreement with the
accounting records and returns; or
— Certain disclosures of directors’
remuneration specified by law are not
made; or
— We have not received all the
information and explanations we
require for our audit.
We have nothing to report in
these respects.
7 Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement
set out on page 314, the Directors are
responsible for the preparation of the
financial statements including being
satisfied that they give a true and fair view.
They are also responsible for: such internal
control as they determine is necessary to
enable the preparation of financial
statements that are free from material
misstatement, whether due to fraud or
error; assessing the Group and Parent
Company’s ability to continue as a going
concern, disclosing, as applicable, matters
related to going concern; and using the
going concern basis of accounting unless
they either intend to liquidate the Group
or the parent Company or to cease
operations, or have no realistic alternative
but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable
assurance about whether the financial
statements as a whole are free from
material misstatement, whether due to
fraud, other irregularities, or error, and to
issue our opinion in an auditor’s report.
Reasonable assurance is a high level of
assurance, but does not guarantee that
an audit conducted in accordance with
ISAs (UK) will always detect a material
misstatement when it exists.
Misstatements can arise from fraud, other
irregularities or error and are considered
material if, individually or in aggregate,
they could reasonably be expected to
influence the economic decisions of
users taken on the basis of the financial
statements. The risk of not detecting a
material misstatement resulting from fraud
or other irregularities is higher than for one
resulting from error, as they may involve
collusion, forgery, intentional omissions,
misrepresentations, or the override of
internal control and may involve any area
of law and regulation not just those directly
affecting the financial statements.
A fuller description of our responsibilities
is provided on the FRC’s website at
www.frc.org.uk/auditorsresponsibilities
Irregularities – ability to detect
Our audit aimed to detect non‑compliance
with relevant laws and regulations
(irregularities) that could have a material
effect on the financial statements. We
identified relevant areas of laws and
regulations from our sector experience,
through discussion with the Directors
(as required by auditing standards) and
from inspection of the Group’s regulatory
and legal correspondence.
We had regard to laws and regulations in
areas that directly affect the financial
statements including financial reporting
(including related company legislation) and
taxation legislation. We considered the
extent of compliance with those laws and
regulations as part of our procedures on
the related financial statements items.
In addition we considered the impact of
laws and regulations in the specific areas of
regulatory capital recognising the financial
and regulated nature of the Group’s
activities. With the exception of any known
or possible non‑compliance, and as
required by auditing standards, our work
in respect of these was limited to enquiry
of the Directors and other management
and inspection of regulatory and legal
correspondence. We considered the effect
of any known or possible non‑compliance
in these areas as part of our procedures on
the related financial statements items.
We communicated identified laws and
regulations throughout our team and
remained alert to any indications of
non‑compliance throughout the audit.
This included communication from the
Group to component audit teams of
relevant laws and regulations identified
at Group level, with a request to report on
any indications of potential existence of
non‑compliance with relevant laws and
regulations (irregularities) in these areas,
or other areas directly identified by the
component teams.
As with any audit, there remained a higher
risk of non‑detection of irregularities, as
these may involve collusion, forgery,
intentional omissions, misrepresentations,
or the override of internal controls.
8 The purpose of our audit work
and to whom we owe our
responsibilities
This report is made solely to the Company’s
members, as a body, in accordance with
Chapter 3 of Part 16 of the Companies Act
2006. Our audit work has been undertaken
so that we might state to the Company’s
members those matters we are required to
state to them in an auditor’s report and for
no other purpose. To the fullest extent
permitted by law, we do not accept or
assume responsibility to anyone other
than the Company and the Company’s
members, as a body, for our audit work,
for this report, or for the opinions we
have formed.
Philip Smart
Senior Statutory Auditor
For and on behalf of KPMG LLP,
Statutory Auditor
Chartered Accountants
London
14 March 2018
www.prudential.co.uk
Annual Report 2017 Prudential plc 323
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information 324 Prudential plc Annual Report 2017
www.prudential.co.uk
06
European
Embedded
Value (EEV)
basis results
Index to EEV basis results
Page
326
www.prudential.co.uk
Annual Report 2017 Prudential plc 325
01 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
Post‑tax operating profit based on longer‑term investment returns
Post‑tax summarised consolidated income statement
Movement in shareholders’ equity
Summary statement of financial position
Notes on the EEV basis results
1
2
3
4
5
6
7
8
Basis of preparation
Results analysis by business area
Analysis of new business contribution
Operating profit from business in force
Short‑term fluctuations in investment returns
Effect of changes in economic assumptions
Impact of US tax reform
Net core structural borrowings of shareholder‑financed
9
10
11
12
13
14
15
16
17
18
operations
Reconciliation of movement in shareholders’ equity
Analysis of movement in net worth and value of
in‑force for long‑term business
Analysis of movement in free surplus
Expected transfer of value of in‑force business and
required capital to free surplus
Sensitivity of results to alternative assumptions
Methodology and accounting presentation
Assumptions
Insurance new business premiums
Disposal of businesses
Post balance sheet events
Statement of Directors’ responsibilities
Auditor’s report
Page
327
328
329
330
331
331
332
333
335
336
337
337
338
340
342
345
345
347
353
357
358
358
359
360
Description of EEV basis reporting
In broad terms, IFRS profit for long‑term business reflects the
aggregate of results on a traditional accounting basis. By contrast,
EEV is a way of reporting the value of the life insurance business.
The EEV basis results have been prepared in accordance with the
EEV Principles dated April 2016, issued by the European Insurance
CFO Forum. The EEV 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
14 and 15.
326 Prudential plc Annual Report 2017
www.prudential.co.uk
European Embedded Value (EEV) basis results
Post-tax operating profit based on longer-term investment returns
Asia operations
New business
Business in force
Long‑term business
Asset management
Total
US operations
New business
Business in force
Long‑term business
Asset management
Total
UK and Europe operations
New business
Business in force
Long‑term business
General insurance commission
Total insurance operations
Asset management
Total
Other income and expenditure note (i)
Restructuring costs note (ii)
Interest received from tax settlement
Operating profit based on longer-term investment returns
Analysed as profit (loss) from:
New business
Business in force
Long‑term business
Asset management and general insurance commission
Other results
Note
2017 £m
2016 £m
note (iii)
3
4
3
4
3
4
3
4
2,368
1,337
3,705
155
3,860
906
1,237
2,143
7
2,150
342
673
1,015
13
1,028
403
1,431
(746)
(97)
–
6,598
3,616
3,247
6,863
578
(843)
6,598
2,030
1,044
3,074
125
3,199
790
1,181
1,971
(3)
1,968
268
375
643
23
666
341
1,007
(682)
(32)
37
5,497
3,088
2,600
5,688
486
(677)
5,497
Notes
(i)
(ii)
(iii)
EEV basis other income and expenditure represents the post‑tax IFRS basis results for other operations (including Group and Asia Regional Head Office, holding company
borrowings, Africa operations and Prudential Capital) less the unwind of expected margins on the internal management of the assets of the covered business (as explained in
note 14(a)(vii)).
Restructuring costs comprise the post‑tax charge recognised on an IFRS basis and the additional amount recognised on an EEV basis for the shareholders’ share incurred by the
PAC with‑profits fund. The costs are primarily incurred in UK and Europe and Asia and represent business transformation and integration costs.
The comparative results have been prepared using previously reported average exchange rates for the year. The 2016 comparative results have been re‑presented from those
previously published following the reassessment of the Group’s operating segments as described in note B1.3 of the IFRS financial statements. This approach has been adopted
consistently throughout this supplementary information.
www.prudential.co.uk
Annual Report 2017 Prudential plc 327
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information European Embedded Value (EEV) basis results continued
Post-tax summarised consolidated income statement
Asia operations
US operations
UK and Europe operations
Other income and expenditure
Restructuring costs
Interest received from tax settlement
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 structural borrowings
Impact of US tax reform
Profit (loss) attaching to disposal of businesses
Total non‑operating profit (loss)
Profit for the year
Attributable to:
Equity holders of the Company
Non‑controlling interests
Basic earnings per share
Note
2017 £m
2016 £m
5
6
7
17
3,860
2,150
1,431
(746)
(97)
–
6,598
2,111
(102)
(326)
390
80
2,153
8,751
8,750
1
8,751
3,199
1,968
1,007
(682)
(32)
37
5,497
(507)
(60)
(4)
–
(410)
(981)
4,516
4,516
–
4,516
Based on post‑tax operating profit including longer‑term investment returns after non‑controlling interests
(in pence)
Based on post‑tax profit attributable to equity holders of the Company (in pence)
Weighted average number of shares (millions)
2017
2016
257.0p
340.9p
2,567
214.7p
176.4p
2,560
328 Prudential plc Annual Report 2017
www.prudential.co.uk
Movement in shareholders’ equity
Profit for the year attributable to equity holders of the Company
Items taken directly to equity:
Exchange movements on foreign operations and net investment hedges
External dividends
Mark to market value movements on Jackson assets backing surplus and required capital
Other reserve movements
Net increase in shareholders’ equity
Shareholders’ equity at beginning of year
Shareholders’ equity at end of year
Comprising:
Asia operations
US operations
UK and Europe operations
Other operations
Shareholders’ equity at end of year
Representing:
Net assets attributable to equity holders of the Company
excluding acquired goodwill, holding company net
borrowings and non‑controlling interests
Acquired goodwill
Holding company net borrowings at market value note 8
Note
2017 £m
2016 £m
8,750
4,516
(2,045)
(1,159)
40
144
5,730
38,968
44,698
9
9
9
4,211
(1,267)
(11)
(367)
7,082
31,886
38,968
Group
total
19,100
12,009
12,165
(4,306)
31 Dec 2017 £m
31 Dec 2016 £m
Long-term
business
operations
Asset
management
and other
operations
Long-term
business
operations
Asset
management
and other
operations
Group
total
21,592
13,492
13,627
(4,013)
401
235
1,914
(4,013)
21,191
13,257
11,713
–
46,161
18,717
11,805
10,320
–
40,842
383
204
1,845
(4,306)
(1,463)
44,698
(1,874)
38,968
45,917
244
–
46,161
1,562
1,214
(4,239)
47,479
1,458
(4,239)
(1,463)
44,698
40,597
245
–
40,842
948
1,230
(4,052)
41,545
1,475
(4,052)
(1,874)
38,968
www.prudential.co.uk
Annual Report 2017 Prudential plc 329
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information European Embedded Value (EEV) basis results continued
Summary statement of financial position
Total assets less liabilities, before deduction for insurance funds*
Less insurance funds:
Policyholder liabilities (net of reinsurers’ share) and unallocated surplus of with‑profits funds
Less shareholders’ accrued interest in the long‑term business
Total net assets attributable to equity holders of the Company
Share capital
Share premium
IFRS basis shareholders’ reserves
Total IFRS basis shareholders’ equity
Additional EEV basis retained profit
Total EEV basis shareholders’ equity
* Including liabilities in respect of insurance products classified as investment contracts under IFRS 4.
Net asset value per share
Note
31 Dec 2017
£m
31 Dec 2016
£m
434,608
407,928
(418,521)
28,611
(389,910)
(393,262)
24,302
(368,960)
44,698
38,968
129
1,948
14,010
16,087
28,611
44,698
129
1,927
12,610
14,666
24,302
38,968
9
9
9
9
9
Based on EEV basis shareholders’ equity of £44,698 million (2016: £38,968 million) (in pence)
Number of issued shares at year end (millions)
Annualised return on embedded value*
31 Dec 2017
31 Dec 2016
1,728p
2,587
1,510p
2,581
17%
17%
* Annualised return on embedded value is based on EEV post‑tax operating profit after non‑controlling interests, as a percentage of opening EEV basis shareholders’ equity.
The supplementary information on pages 327 to 358 was approved by the Board of Directors on 14 March 2018.
Paul Manduca
Chairman
Mike Wells
Group Chief Executive
Mark FitzPatrick
Chief Financial Officer
330 Prudential plc Annual Report 2017
www.prudential.co.uk
Notes on the EEV basis results
1 Basis of preparation
The EEV basis results have been prepared in accordance with the EEV Principles dated April 2016, issued by the European Insurance
CFO Forum. 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 reclassification of results to reflect the reassessment of the Group’s operating segments as described in the note in B1.3 of the IFRS
financial statements, the 2016 results have been derived from the EEV basis results supplement to the Company’s statutory accounts for
2016.
A detailed description of the EEV methodology and accounting presentation is provided in note 14.
2 Results analysis by business area
The 2016 comparative results are shown below on both actual exchange rates (AER) and constant exchange rates (CER) bases. The 2016
CER comparative results are translated at 2017 average exchange rates.
Annual premium equivalents (APE) note 16
Asia
US
UK and Europe
Group total
Post-tax operating profit
Asia operations
New business
Business in force
Long‑term business
Asset management
Total
US operations
New business
Business in force
Long‑term business
Asset management
Total
UK and Europe operations
New business
Business in force
Long‑term business
General insurance commission
Total insurance operations
Asset management
Total
2017 £m
2016 £m
% change
Note
3
3,805
1,662
1,491
6,958
AER
3,599
1,561
1,160
6,320
CER
3,773
1,641
1,160
6,574
AER
6%
6%
29%
10%
2017 £m
2016 £m
% change
Note
AER
CER
3
4
3
4
3
4
2,368
1,337
3,705
155
3,860
906
1,237
2,143
7
2,150
342
673
1,015
13
1,028
403
1,431
2,030
1,044
3,074
125
3,199
790
1,181
1,971
(3)
1,968
268
375
643
23
666
341
2,123
1,097
3,220
132
3,352
830
1,241
2,071
(4)
2,067
268
375
643
23
666
341
1,007
1,007
AER
17%
28%
21%
24%
21%
15%
5%
9%
333%
9%
28%
79%
58%
(43)%
54%
18%
42%
CER
1%
1%
29%
6%
CER
12%
22%
15%
17%
15%
9%
0%
3%
275%
4%
28%
79%
58%
(43)%
54%
18%
42%
Other income and expenditure
Restructuring costs
Interest received from tax settlement
Operating profit based on longer-term
investment returns
(746)
(97)
–
(682)
(32)
37
(688)
(32)
37
(9)%
(203)%
n/a
(8)%
(203)%
n/a
6,598
5,497
5,743
20%
15%
www.prudential.co.uk
Annual Report 2017 Prudential plc 331
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Notes on the EEV basis results continued
2 Results analysis by business area continued
Analysed as profit (loss) from:
New business
Business in force
Total long‑term business
Asset management and general insurance
commission
Other results
Post-tax profit
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 structural borrowings
Impact of US tax reform
Profit (loss) attaching to disposal of businesses
Total non‑operating profit (loss)
Profit for the year
Basic earnings per share
Note
3
4
2017 £m
2016 £m
% change
AER
CER
AER
CER
3,616
3,247
6,863
578
(843)
6,598
3,088
2,600
5,688
486
(677)
5,497
3,221
2,713
5,934
492
(683)
5,743
17%
25%
21%
19%
(25)%
20%
12%
20%
16%
17%
(23)%
15%
2017 £m
2016 £m
% change
Note
AER
CER
AER
CER
5
6
7
17
6,598
2,111
(102)
(326)
390
80
2,153
8,751
5,497
(507)
(60)
(4)
–
(410)
(981)
4,516
5,743
(567)
(54)
(4)
–
(445)
(1,070)
4,673
20%
15%
319%
94%
301%
87%
Based on post‑tax operating profit including longer‑term
investment returns after non‑controlling interests
(in pence)
Based on post‑tax profit attributable to equity holders of the
257.0p
214.7p
224.3p
Company (in pence)
340.9p
176.4p
182.5p
20%
93%
15%
87%
2017
2016
% change
AER
CER
AER
CER
3 Analysis of new business contribution
(i) Group summary for long-term business operations
Asia note (ii)
US
UK and Europe
Total
2017
Annual
premium
equivalents
(APE)
note 16
£m
Present value
of new
business
premiums
(PVNBP)
note 16
£m
3,805
1,662
1,491
6,958
20,405
16,622
13,784
50,811
New business
contribution
New business margin
APE
PVNBP
£m
2,368
906
342
3,616
%
62
55
23
52
%
11.6
5.5
2.5
7.1
332 Prudential plc Annual Report 2017
www.prudential.co.uk
Asia note (ii)
US
UK and Europe
Total
2016
Annual
premium
equivalents
(APE)
note 16
£m
Present value
of new
business
premiums
(PVNBP)
note 16
£m
3,599
1,561
1,160
6,320
19,271
15,608
10,513
45,392
New business
contribution
New business margin
APE
PVNBP
£m
2,030
790
268
3,088
%
56
51
23
49
%
10.5
5.1
2.5
6.8
Note
After allowing for foreign exchange effects of £133 million, the new business contribution increased by £395 million on a CER basis. This increase is driven by higher sales volumes
(a contribution of £188 million), a beneficial effect of changes in long‑term interest rates (£48 million) and pricing, product mix and other actions of £159 million. The £159 million impact
reflects the beneficial impact of our strategic emphasis on increasing sales from health and protection business in Asia, together with a positive £76 million effect arising in the US for the
impact of US tax reform (see note 7).
(ii) Asia new business contribution by business unit
2017 £m
2016 £m
China
Hong Kong
Indonesia
Taiwan
Other
Total Asia
4 Operating profit from business in force
(i) Group summary for long-term business operations
Unwind of discount and other expected returns
Effect of changes in operating assumptions
Experience variances and other items
Group total
Unwind of discount and other expected returns
Effect of changes in operating assumptions
Experience variances and other items
Group total
133
1,535
174
57
469
2,368
2017 £m
US
note (iii)
694
196
347
1,237
2016 £m
US
note (iii)
583
170
428
Asia
note (ii)
1,007
241
89
1,337
Asia
note (ii)
866
54
124
1,044
1,181
AER
63
1,363
175
31
398
2,030
UK and
Europe
note (iv)
465
195
13
673
UK and
Europe
note (iv)
445
25
(95)
375
Note
The movement in operating profit from business in force of £647 million from £2,600 million for 2016 to £3,247 million for 2017 comprises:
Movement in unwind of discount and other expected returns:
Effects of changes in:
Growth in opening value
Interest rates and other economic assumptions
Foreign exchange
Movement in effect of changes in operating assumptions, experience variances and other items (including foreign exchange of £45 million)
Net movement in operating profit from business in force
CER
65
1,427
183
35
413
2,123
Group
total
2,166
632
449
3,247
Group
total
1,894
249
457
2,600
£m
251
(47)
68
272
375
647
www.prudential.co.uk
Annual Report 2017 Prudential plc 333
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
Notes on the EEV basis results continued
4 Operating profit from business in force continued
(ii) Asia
Unwind of discount and other expected returns note (a)
Effect of changes in operating assumptions note (b)
Experience variances and other items note (c)
Total
2017 £m
2016 £m
1,007
241
89
1,337
866
54
124
1,044
Notes
(a)
(b)
(c)
The £141 million increase in unwind of discount and other expected returns to £1,007 million for 2017 is driven by the growth in the in‑force book, with offsetting effects arising
from foreign exchange (£38 million) and movements in long‑term interest rates and changes in other economic assumptions (£(38) million).
The effect of changes in operating assumptions of £241 million reflects the net benefit for EEV arising from the annual review of experience, together with the benefit of
management actions reflecting our ongoing focus on managing the in‑force book for value. It includes a £107 million benefit arising in China from adopting the principles for
embedded value reporting under the China Risk Oriented Solvency System (C‑ROSS) regime in 2017 (see note 14(a)(v)).
The £89 million effect of experience variances and other items in 2017 is driven by positive mortality and morbidity experiences in a number of business units, together with
positive persistency variances from participating and health and protection products, partially offset by unfavourable persistency variances on unit‑linked products. Experience
variances also include expense overruns where these are expected to be short‑lived, including businesses that are growing rapidly or are sub‑scale.
(iii) US
Unwind of discount and other expected returns note (a)
Effect of changes in operating assumptions note (b)
Experience variances and other items:
Spread experience variance
Amortisation of interest‑related realised gains and losses
Other note (c)
Total
2017 £m
2016 £m
694
196
71
91
185
347
583
170
119
88
221
428
1,237
1,181
Notes
(a)
The £111 million increase in unwind of discount and other expected returns to £694 million for 2017 represents a positive £87 million effect for the growth in the in‑force book
(after allowing for the benefit of US tax reform) and a net £24 million effect for foreign exchange and interest rate movements.
The effect of assumption changes of £196 million in 2017 mainly relates to assumption updates for persistency, mortality and policyholder utilisation.
(b)
(c) Other experience variances of £185 million in 2017 include the effects of positive mortality and persistency experience in the period, together with the benefit of tax credits relating
to the dividend received deduction for variable annuity business.
(iv) UK and Europe
Unwind of discount and other expected returns note (a)
Change in longevity assumptions basis note (b)
Reduction in corporate tax rate
Other items note (c)
Total
2017 £m
2016 £m
465
195
–
13
673
445
–
25
(95)
375
Notes
(a)
(b)
The £20 million increase in unwind of discount and other expected returns to £465 million for 2017 is mainly driven by the underlying growth in the in‑force book.
The £195 million relates to changes to annuitant mortality assumptions primarily reflecting the adoption of the Continuous Mortality Investigation 2015 model as the basis for future
mortality improvements.
(c) Other items comprise the following:
Longevity reinsurance
Impact of specific management actions to improve solvency position
Provision for cost of undertaking past non‑advised annuity sales review and potential redress note (d)
Other
2017 £m
2016 £m
(6)
127
(187)
79
13
(90)
110
(145)
30
(95)
(d)
In response to the findings of the FCA’s Thematic Review of Annuities Sales Practices, the UK business has agreed to review all internally vesting annuities sold without advice after
1 July 2008. The FCA formally released its redress calculation methodology in early 2018 and Prudential reassessed the provision held. Reflecting this, the UK 2017 result includes
a £(187) million (post‑tax) increase in the provision held for the estimated cost of the review and any appropriate customer redress. The provision held continues to exclude any
potential for insurance recoveries. For more information, see note B3 of the IFRS financial statements.
334 Prudential plc Annual Report 2017
www.prudential.co.uk
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 and Europe operations note (iv)
Other operations
Group total
(ii) Asia operations
The short‑term fluctuations in investment returns for Asia operations comprise:
Hong Kong
Singapore
Other
Total
2017 £m
2016 £m
887
582
621
21
2,111
(100)
(1,102)
876
(181)
(507)
2017 £m
2016 £m
531
126
230
887
(105)
52
(47)
(100)
Note
For 2017, the credit of £887 million mainly reflects unrealised gains on bonds driven by the decrease in bond yields across many of the business units (see note 15(i)), together with higher
equity returns than assumed for Hong Kong with‑profits business and higher investment returns than assumed in Singapore for with‑profits and unit‑linked businesses.
(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 year separate account return, net of related hedging activity
and other items note (b)
Total
2017 £m
2016 £m
(46)
(85)
628
582
(1,017)
(1,102)
Notes
(a)
(b)
The net result relating to fixed income securities reflects a number of offsetting items as follows:
– the impact on portfolio yields of changes in the asset portfolio in the year;
– the difference between actual realised gains and losses and the amortisation of interest‑related realised gains and losses that is recorded within operating profit; 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 difference between the actual growth in separate account asset values of 17.5 per cent and that assumed
of 5.9 per cent for the year (2016: actual growth of 8.9 per cent compared to assumed growth of 6.0 per cent); and
– related hedging activity arising from realised and unrealised gains and losses on equity‑related hedges and interest rate options, and other items.
(iv) UK and Europe operations
The short‑term fluctuations in investment returns for UK and Europe operations comprise:
Insurance operations:
Shareholder‑backed annuity business note (a)
With‑profits and other business note (b)
Asset management
Total
2017 £m
2016 £m
387
229
5
621
431
438
7
876
Notes
(a)
(b)
Short‑term fluctuations in investment returns for shareholder‑backed annuity business include:
– gains on surplus assets compared to the expected long‑term rate of return reflecting reductions in corporate bond and gilt yields; and
– the difference between actual and expected default experience.
The positive £229 million fluctuation in 2017 for with‑profits and other business represents the impact of achieving a 9 per cent pre‑tax return on the with‑profits fund (including
unallocated surplus) compared to the assumed rate of return of 5 per cent for the year (2016: achieved return of 14 per cent compared to assumed rate of 5 per cent), partially offset
by 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‑profit
transfers from movements in the UK equity market.
www.prudential.co.uk
Annual Report 2017 Prudential plc 335
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
Notes on the EEV basis results continued
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 for long-term business operations
Asia note (ii)
US note (iii)
UK and Europe note (iv)
Group total
(ii) Asia
The effect of changes in economic assumptions for Asia comprises:
Hong Kong
Indonesia
Malaysia
Singapore
Taiwan
Other
Total
2017 £m
2016 £m
(95)
(136)
129
(102)
70
45
(175)
(60)
2017 £m
2016 £m
(321)
81
59
131
(12)
(33)
(95)
85
46
(20)
(60)
12
7
70
Note
The negative effect in 2017 of £(95) million largely arises from movements in long‑term interest rates, driven by lower assumed fund
earned rates in Hong Kong, partially offset by profits arising from the beneficial impact of valuing future profits at lower discount rates in
Indonesia, Malaysia and Singapore (see note 15(i)). In addition, various changes to the basis of setting economic assumptions were made
with an overall impact of £5 million (see note 14(a)(viii), note 15(i) and note 15(iv)).
(iii) US
The effect of changes in economic assumptions for US comprises:
Variable annuity business
Fixed annuity and other general account business
Total
2017 £m
2016 £m
(101)
(35)
(136)
86
(41)
45
Note
For 2017, the charge of £(136) million mainly reflects the decrease in the assumed separate account return and reinvestment rates,
following the 10 basis points decrease in the US 10‑year treasury yield in the year, resulting in lower projected fee income and an increase
in projected benefit costs for variable annuity business. For fixed annuity and other general account business, the impact reflects the
effect on the present value of future projected spread income from the combined movement in interest rates and credit spreads.
(iv) UK and Europe
The effect of changes in economic assumptions for UK and Europe comprises:
Shareholder‑backed annuity business
With‑profits and other business
Total
2017 £m
2016 £m
28
101
129
(113)
(62)
(175)
Note
The credit of £129 million mainly reflects the movement in expected long‑term rates of return and risk discount rates as shown in note 15 (iii).
336 Prudential plc Annual Report 2017
www.prudential.co.uk
7 Impact of US tax reform
On 22 December 2017, a significant US tax reform package, The Tax Cuts and Jobs Act, was enacted into law effective from 1 January
2018. The tax reform package as a whole, which includes a reduction in the corporate income tax rate from 35 per cent to 21 per cent,
and a number of specific measures affecting US life insurers, results in a £390 million benefit in non‑operating profit. The positive impact
on an EEV basis represents the benefit of future profits being taxed at a lower rate, partially offset by a reduction in the net deferred tax
asset held in the balance sheet to reflect remeasurement at the new lower tax rate, together with a reduction in the benefit from the
dividend received deduction on taxable profits from variable annuity business.
In accordance with our usual methodology, the new business contribution and unwind of discount and other expected returns are
determined by applying operating and economic assumptions as at the end of the year, including the effect of US tax reform. This led to
an increase in new business profit of £76 million.
8 Net core structural borrowings of shareholder-financed operations
Holding company (including central finance
subsidiaries) cash and short‑term
investments
Central funds
Subordinated debt
Senior debt
Holding company net borrowings
Prudential Capital bank loan
Jackson surplus notes
Group total
31 Dec 2017 £m
Mark to
market
value
adjustment
IFRS
basis
EEV
basis at
market
value
31 Dec 2016 £m
Mark to
market
value
adjustment
IFRS
basis
(2,264)
–
(2,264)
(2,626)
5,272
549
5,821
3,557
275
184
4,016
515
167
682
682
–
61
743
5,787
716
6,503
4,239
275
245
4,759
5,772
549
6,321
3,695
275
202
4,172
–
182
175
357
357
–
65
422
EEV
basis at
market
value
(2,626)
5,954
724
6,678
4,052
275
267
4,594
Note
In October 2017, the Company issued core structural borrowings of US$750 million 4.875 per cent Tier 2 perpetual subordinated notes.
The proceeds, net of costs, were £565 million. In December 2017, the Company repaid its US$1,000 million 6.5 per cent Tier 2 perpetual
subordinated notes. The movement in IFRS basis core structural borrowings from 2016 to 2017 also includes foreign exchange effects.
www.prudential.co.uk
Annual Report 2017 Prudential plc 337
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Notes on the EEV basis results continued
9 Reconciliation of movement in shareholders’ equity
Operating profit (based on longer-term
investment returns)
Long‑term business:
New business note 3
Business in force note 4
Asset management and general insurance commission
Restructuring costs
Other results
Operating profit based on longer-term
investment returns
Non‑operating items
Non‑controlling interests
Profit for the year
Other items taken directly to equity:
Exchange movements on foreign operations and net
investment hedges
Intra‑group dividends and investment in operations note (ii)
External dividends
Mark to market value movements on Jackson assets backing
surplus and required capital
Other movements note (iii)
Net increase in shareholders’ equity
Shareholders’ equity at beginning of year
Shareholders’ equity at end of year
Representing:
IFRS basis shareholders’ equity:
Net assets (liabilities)
Goodwill
Total IFRS basis shareholders’ equity
Additional retained profit (loss) on an EEV basis
EEV basis shareholders’ equity
Balance at beginning of year:
IFRS basis shareholders’ equity:
Net assets (liabilities)
Goodwill
Total IFRS basis shareholders’ equity
Additional retained profit (loss) on an EEV basis
EEV basis shareholders’ equity
Asia
operations
note (i)
US
operations
2017 £m
UK and
Europe
operations
Other
operations
note (i)
Group
total
note (iv)
2,368
1,337
3,705
155
(14)
–
3,846
792
4,638
–
4,638
(1,192)
(842)
–
–
(111)
2,493
18,855
21,348
5,620
61
5,681
15,667
21,348
5,069
61
5,130
13,725
18,855
906
1,237
2,143
7
–
–
2,150
917
3,067
–
3,067
(1,159)
(466)
–
40
1
1,483
12,009
13,492
342
673
1,015
416
(73)
–
1,358
750
2,108
–
2,108
6
(678)
–
–
26
1,462
12,165
13,627
5,248
–
5,248
8,244
7,092
1,153
8,245
5,382
13,492
13,627
5,392
16
5,408
6,601
6,679
1,153
7,832
4,333
12,009
12,165
–
–
–
–
(10)
(746)
(756)
(306)
(1,062)
(1)
(1,063)
300
1,986
(1,159)
–
228
292
(4,061)
(3,769)
(3,331)
244
(3,087)
(682)
(3,769)
(3,949)
245
(3,704)
(357)
(4,061)
3,616
3,247
6,863
578
(97)
(746)
6,598
2,153
8,751
(1)
8,750
(2,045)
–
(1,159)
40
144
5,730
38,968
44,698
14,629
1,458
16,087
28,611
44,698
13,191
1,475
14,666
24,302
38,968
338 Prudential plc Annual Report 2017
www.prudential.co.uk
Notes
(i)
Other operations of £(3,769) million represents the shareholders’ equity of £(4,013) million as shown in the movement in shareholders’ equity and includes goodwill of £244 million
(2016: £245 million) related to Asia long‑term operations.
Intra‑group dividends represent dividends that have been declared in the year and investment in operations reflect increases in share capital. The amounts included in note 11 for
these items are as per the holding company cash flow at transaction rates. The difference primarily relates to intra‑group loans, foreign exchange and other non‑cash items.
(iii) Other movements include reserve movements in respect of the shareholders’ share of actuarial gains and losses on defined benefit pension schemes, share capital subscribed,
(ii)
share‑based payments and treasury shares and intra‑group transfers between operations which have no overall effect on the Group’s embedded value.
(iv) Group total EEV basis shareholders’ equity can be further analysed as follows:
31 Dec 2017 £m
31 Dec 2016 £m
Asset
management
and general
insurance
commission
Total
long-term
business
operations
note 10
Other
operations
Group
total
Total
long-term
business
operations
Asset
management
and general
insurance
commission
Other
operations
Group
total
16,624
2,550
(3,087)
16,087
15,938
2,432
(3,704)
14,666
29,293
45,917
–
(682)
2,550
(3,769)
28,611
44,698
24,659
40,597
–
2,432
(357)
(4,061)
24,302
38,968
Total IFRS basis shareholders’ equity
Additional retained profit (loss) on an EEV
basis note (v)
Total EEV basis shareholders’ equity
(v)
The additional retained loss on an EEV basis for other operations represents the mark to market value adjustment for holding company net borrowings of a cumulative charge of
£(682) million (2016: £(357) million), as shown in note 8.
www.prudential.co.uk
Annual Report 2017 Prudential plc 339
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Notes on the EEV basis results continued
10 Analysis of movement in net worth and value of in-force for long-term business
2017 £m
Free
surplus
Required
capital
Total
net worth
Group
Shareholders’ equity at beginning of year
New business contribution
Existing business – transfer to net worth
Expected return on existing business note 4
Changes in operating assumptions and
experience variances note 4
Restructuring costs
Operating profit based on longer-term
investment returns
Sale of Korea life business note 17
Other non‑operating items
Profit for the year
Exchange movements on foreign operations and
net investment hedges
Intra‑group dividends and investment in operations
Other movements
Shareholders’ equity at end of year
Asia
New business contribution
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
Sale of Korea life business note 17
Other non‑operating items
Profit for the year
US
New business contribution
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
Non‑operating items
Profit for the year
5,364
(913)
3,279
138
635
(38)
3,101
76
(426)
2,751
(274)
(1,535)
(64)
6,242
(484)
1,275
51
81
923
76
254
1,253
(254)
1,329
56
190
1,321
(1,247)
74
Value of
in-force
business
Total
embedded
value
24,937
3,829
(2,537)
1,827
40,597
3,616
–
2,166
563
(10)
1,081
(48)
3,672
–
2,601
6,273
(1,800)
–
–
6,815
–
2,426
9,241
(2,322)
(1,535)
(64)
10,296
700
(742)
201
(117)
–
42
(76)
251
217
(248)
–
–
15,660
(213)
2,537
339
518
(38)
3,143
–
(175)
2,968
(522)
(1,535)
(64)
10,265
16,507
29,410
45,917
152
(146)
48
151
205
(76)
137
266
304
(219)
53
12
150
(222)
(72)
(332)
1,129
99
232
1,128
–
391
1,519
50
1,110
109
202
1,471
(1,469)
2
2,700
(1,129)
908
98
2,577
–
401
2,978
856
(1,110)
585
341
672
2,358
3,030
2,368
–
1,007
330
3,705
–
792
4,497
906
–
694
543
2,143
889
3,032
340 Prudential plc Annual Report 2017
www.prudential.co.uk
UK and Europe
New business contribution
Existing business – transfer to net worth
Expected return on existing business note 4
Changes in operating assumptions and
experience variances note 4
Restructuring costs
Operating profit based on longer-term
investment returns
Non‑operating items
Profit for the year
2017 £m
Free
surplus
Required
capital
Total
net worth
Value of
in-force
business
Total
embedded
value
(175)
675
31
364
(38)
857
567
1,424
244
(377)
100
(280)
–
(313)
336
23
69
298
131
84
(38)
544
903
1,447
273
(298)
334
124
(10)
423
(158)
265
342
–
465
208
(48)
967
745
1,712
Note
The net value of in‑force business comprises the value of future margins from current in‑force business less the cost of holding required capital for long‑term business as shown below:
31 Dec 2017 £m
31 Dec 2016 £m
Value of in‑force business before deduction of
cost of capital and time value of guarantees
Cost of capital
Cost of time value of guarantees
Net value of in‑force business
Total net worth
Total embedded value note 9(iv)
17,539
(588)
(186)
16,765
4,182
20,947
10,486
(232)
(650)
9,604
3,653
Asia
US
Total
Asia
US
UK and
Europe
3,648
(607)
–
3,041
8,672
31,673
(1,427)
(836)
29,410
16,507
45,917
15,371
(477)
(87)
14,807
3,665
18,472
8,584
(319)
(911)
7,354
4,451
UK and
Europe
3,468
(692)
–
2,776
7,544
Total
27,423
(1,488)
(998)
24,937
15,660
40,597
13,257
11,713
11,805
10,320
www.prudential.co.uk
Annual Report 2017 Prudential plc 341
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Notes on the EEV basis results continued
11 Analysis of movement in free surplus
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. In Asia and US operations, assets deemed to be
inadmissible on local regulatory basis are included in net worth where considered fully recognisable on an EEV basis. Free surplus for
asset management operations and the UK general insurance commission is taken to be IFRS basis post‑tax earnings and shareholders’
equity, net of goodwill. Free surplus for other operations (including Group and Asia Regional Head Office, holding company borrowings,
Africa operations and Prudential Capital) is taken to be EEV basis post‑tax earnings and shareholders’ equity net of goodwill, with
subordinated debt recorded as free surplus to the extent that it is classified as available capital under Solvency II.
Free surplus for insurance and asset management operations and Group total free surplus, including other operations, are shown in
the tables below.
(i) Underlying free surplus generated – insurance and asset management operations
The 2016 comparative results are shown below on both actual exchange rates (AER) and constant exchange rates (CER) bases. The 2016
CER comparative results are translated at 2017 average exchange rates.
Asia operations
Underlying free surplus generated from in‑force life business
Investment in new business note (iii)(a)
Long‑term business
Asset management
Total
US operations
Underlying free surplus generated from in‑force life business
Investment in new business note (iii)(a)
Long‑term business
Asset management
Total
UK and Europe operations
Underlying free surplus generated from in‑force life business
Investment in new business note (iii)(a)
Long‑term business
General insurance commission
Asset management
Total
Underlying free surplus generated from insurance
and asset management operations before
restructuring costs
Restructuring costs
Underlying free surplus generated from insurance
and asset management operations
2017 £m
2016 £m
% change
AER
CER
AER
CER
1,407
(484)
923
155
1,078
1,575
(254)
1,321
7
1,328
1,070
(175)
895
13
403
1,210
(476)
734
125
859
1,866
(298)
1,568
(3)
1,565
923
(129)
794
23
341
1,273
(500)
773
132
905
1,961
(313)
1,648
(4)
1,644
923
(129)
794
23
341
1,311
1,158
1,158
16%
(2)%
26%
24%
25%
(16)%
15%
(16)%
333%
(15)%
16%
(36)%
13%
(43)%
18%
13%
11%
3%
19%
17%
19%
(20)%
19%
(20)%
275%
(19)%
16%
(36)%
13%
(43)%
18%
13%
3,717
(77)
3,582
(16)
3,707
(16)
4%
(381)%
0%
(381)%
3,640
3,566
3,691
2%
(1)%
342 Prudential plc Annual Report 2017
www.prudential.co.uk
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 items before
restructuring costs
Underlying free surplus generated from in‑force life business
before restructuring costs
Investment in new business note (iii)(a)
Total long‑term business
Asset management and general insurance commission
Restructuring costs
(ii) Underlying free surplus generated – Group total
Underlying free surplus generated from insurance and asset
management operations note (i)
Other income and expenditure
Interest received from tax settlement
Group total
(iii) Movement in free surplus
2017 £m
2016 £m
% change
AER
CER
AER
CER
3,417
3,159
3,278
8%
4%
635
840
879
(24)%
(28)%
4,052
(913)
3,139
578
(77)
3,640
3,999
(903)
3,096
486
(16)
3,566
4,157
(942)
3,215
492
(16)
3,691
1%
(1)%
1%
19%
(381)%
2%
(3)%
3%
(2)%
17%
(381)%
(1)%
2017 £m
2016 £m
% change
AER
CER
AER
CER
3,640
(756)
–
2,884
3,566
(681)
37
2,922
3,691
(687)
37
3,041
2%
(11)%
n/a
(1)%
(1)%
(10)%
n/a
(5)%
Underlying free surplus generated before
restructuring costs
Restructuring costs
Underlying free surplus generated notes (i)(ii)
Profit attaching to disposal of businesses note 17
Other non‑operating items note (b)
Net cash flows to parent company note (c)
External dividends
Exchange rate movements, timing differences
and other items note (d)
Net movement in free surplus
Balance at beginning of year
Balance at end of year
Asia
operations
US
operations
1,078
(14)
1,064
76
254
1,394
(645)
–
(421)
328
2,142
2,470
1,328
–
1,328
96
(1,299)
125
(475)
–
(140)
(490)
2,418
1,928
2017 £m
UK and
Europe
operations
Total
insurance
and asset
management
operations
Other
operations
Group
total
1,311
(63)
1,248
–
572
1,820
(668)
–
22
1,174
2,006
3,180
3,717
(77)
3,640
172
(473)
3,339
(1,788)
–
(539)
1,012
6,566
7,578
(746)
(10)
(756)
–
27
(729)
1,788
(1,159)
226
126
1,648
1,774
2,971
(87)
2,884
172
(446)
2,610
–
(1,159)
(313)
1,138
8,214
9,352
www.prudential.co.uk
Annual Report 2017 Prudential plc 343
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Notes on the EEV basis results continued
11 Analysis of movement in free surplus continued
(iii) Movement in free surplus continued
Underlying free surplus generated before
restructuring costs
Restructuring costs
Underlying free surplus generated notes (i)(ii)
Loss attaching to the sold Korea life business
Other non‑operating items note (b)
Net cash flows to parent company note (c)
External dividends
Exchange rate movements, timing differences
and other items note (d)
Net movement in free surplus
Balance at beginning of year
Balance at end of year
Asia
operations
US
operations
2016 £m
UK and
Europe
operations
Total
insurance
and asset
management
operations
Other
operations
Group
total
859
–
859
(86)
(91)
682
(516)
–
162
328
1,814
2,142
1,565
–
1,565
–
(770)
795
(420)
–
310
685
1,733
2,418
1,158
(16)
1,142
–
(64)
1,078
(782)
–
21
317
1,689
2,006
3,582
(16)
3,566
(86)
(925)
2,555
(1,718)
–
493
1,330
5,236
6,566
(628)
(16)
(644)
–
(214)
(858)
1,718
(1,267)
1,119
712
936
1,648
2,954
(32)
2,922
(86)
(1,139)
1,697
–
(1,267)
1,612
2,042
6,172
8,214
Notes
(a)
(b) Non‑operating items include short‑term fluctuations in investment returns and the effect of changes in economic assumptions for long‑term business operations and the effect of
Free surplus invested in new business primarily represents acquisition costs and amounts set aside for required capital.
business disposals. In addition, for 2017 this includes the impact of US tax reform.
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.
Exchange rate movements, timing differences and other items represent:
(c)
(d)
Exchange rate movements
Mark to market value movements on Jackson assets
backing surplus and required capital note 9
Other items note (e)
Exchange rate movements
Mark to market value movements on Jackson assets
backing surplus and required capital
Other items note (e)
Asia
operations
US
operations
(113)
–
(308)
(421)
(190)
40
10
(140)
Asia
operations
US
operations
338
–
(176)
162
368
(11)
(47)
310
2017 £m
UK and
Europe
operations
Total
insurance
and asset
management
operations
6
–
16
22
(297)
40
(282)
(539)
2016 £m
UK and
Europe
operations
Total
insurance
and asset
management
operations
10
–
11
21
716
(11)
(212)
493
Other
operations
(13)
–
239
226
Other
operations
48
–
1,071
1,119
Group
total
(310)
40
(43)
(313)
Group
total
764
(11)
859
1,612
(e) Other items include the effect of movements in subordinated debt for other operations, intra‑group loans and other intra‑group transfers between operations, non‑cash items.
344 Prudential plc Annual Report 2017
www.prudential.co.uk
12 Expected transfer of value of in-force business and required capital to free surplus
The discounted value of in‑force business and required capital for long‑term business operations can be reconciled to the 2017 and 2016
totals for the emergence of free surplus as follows:
Required capital note 10
Value of in‑force business (VIF) note 10
Add back: deduction for cost of time value of guarantees note 10
Free surplus generation from the sale of Korea life business
Other items*
Total long‑term business operations
2017 £m
2016 £m
10,265
29,410
836
–
(1,371)
39,140
10,296
24,937
998
(76)
(1,430)
34,725
* ‘Other items’ represent amounts incorporated into VIF where there is no definitive time frame for when the payments will be made or receipts received. In particular, other items include
the deduction of the shareholders’ interest in the with‑profits 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 EEV 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 for long‑term business
operations is modelled as emerging into free surplus over future years.
Asia
US
UK and Europe
Total
Asia
US
UK and Europe
Total
2017 £m
Expected period of conversion of future post-tax distributable earnings
and required capital flows to free surplus
1-5 years
6-10 years
11-15 years
16-20 years
21-40 years
40+ years
5,583
6,247
3,012
14,842
38%
3,638
3,993
2,066
9,697
25%
2,418
1,697
1,289
5,404
14%
1,655
401
899
2,955
7%
3,845
117
704
4,666
12%
1,553
–
23
1,576
4%
2016 £m
Expected period of conversion of future post-tax distributable earnings
and required capital flows to free surplus
1-5 years
6-10 years
11-15 years
16-20 years
21-40 years
40+ years
5,141
5,542
2,890
13,573
39%
3,331
3,203
1,931
8,465
25%
2,209
1,240
1,119
4,568
13%
1,515
372
901
2,788
8%
3,118
199
899
4,216
12%
1,079
–
36
1,115
3%
2017 total as
shown above
18,692
12,455
7,993
39,140
100%
2016 total as
shown above
16,393
10,556
7,776
34,725
100%
13 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 2017 and 31 December 2016 and the new business
contribution after the effect of required capital for 2017 and 2016 for long‑term business operations to:
— 1 per cent increase in the discount rates;
— 1 per cent increase in interest rates and risk discount rates, including consequential changes (assumed investment returns for all asset
classes, market values of fixed interest assets);
— 0.5 per cent decrease in interest rates and risk discount rates, including consequential changes (assumed investment returns for all
asset classes, market values of fixed interest assets);
— 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 in contrast to EEV basis required capital (for embedded value only); and
— 5 basis points increase in UK long‑term expected defaults.
In each sensitivity calculation, all other assumptions remain unchanged except where they are directly affected by the revised
economic conditions.
www.prudential.co.uk
Annual Report 2017 Prudential plc 345
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Notes on the EEV basis results continued
13 Sensitivity of results to alternative assumptions continued
(a) Sensitivity analysis – economic assumptions continued
New business contribution from long-term business operations
New business contribution note 3
Discount rates – 1% increase
Interest rates – 1% increase
Interest rates – 0.5% decrease
Equity/property yields – 1% rise
Long‑term expected defaults –
5 bps increase
2017 £m
2016 £m
US
906
(34)
124
(85)
130
–
UK and
Europe
342
(48)
44
(23)
52
(1)
Total
3,616
(559)
65
(167)
312
(1)
Asia
2,030
(375)
51
(30)
129
–
US
790
(43)
64
(49)
91
–
UK and
Europe
268
(32)
27
(15)
28
(2)
Total
3,088
(450)
142
(94)
248
(2)
Asia
2,368
(477)
(103)
(59)
130
–
Embedded value of long-term business operations
31 Dec 2017 £m
31 Dec 2016 £m
Asia
US
UK and
Europe
Total
Asia
US
UK and
Europe
Total
Shareholders’ equity note 10
20,947
13,257
11,713
45,917
18,472
11,805
10,320
40,597
Discount rates – 1% increase
Interest rates – 1% increase
Interest rates – 0.5% decrease
Equity/property yields – 1% rise
Equity/property market values –
10% fall
Statutory minimum capital
Long‑term expected defaults –
5 bps increase
(2,560)
(944)
121
873
(429)
169
(440)
26
(166)
896
(209)
158
(774)
(635)
384
425
(3,774)
(1,553)
339
2,194
(479)
–
(1,117)
327
(2,078)
(701)
248
771
(361)
150
(379)
(241)
25
653
(11)
223
(809)
(638)
369
314
(399)
–
(3,266)
(1,580)
642
1,738
(771)
373
–
–
(135)
(135)
–
–
(138)
(138)
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
assumptions 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, namely 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.
(b) Sensitivity analysis – non-economic assumptions
The tables below show the sensitivity of the embedded value as at 31 December 2017 and 31 December 2016 and the new business
contribution after the effect of required capital for 2017 and 2016 for long‑term business operations 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).
346 Prudential plc Annual Report 2017
www.prudential.co.uk
New business contribution from long-term business operations
New business contribution note 3
Maintenance expenses – 10% decrease
Lapse rates – 10% decrease
Mortality and morbidity – 5% decrease
Change representing effect on:
Life business
UK annuities
2017 £m
2016 £m
US
906
14
24
4
4
–
UK and
Europe
342
3
20
(2)
1
(3)
Total
3,616
55
177
71
74
(3)
Asia
2,030
33
132
57
57
–
US
790
10
26
4
4
–
UK and
Europe
268
3
11
(4)
–
(4)
Total
3,088
46
169
57
61
(4)
Asia
2,368
38
133
69
69
–
Embedded value of long-term business operations
31 Dec 2017 £m
31 Dec 2016 £m
Asia
US
UK and
Europe
Total
Asia
US
UK and
Europe
Total
Shareholders’ equity note 10
20,947
13,257
11,713
45,917
18,472
11,805
10,320
40,597
Maintenance expenses – 10% decrease
Lapse rates – 10% decrease
Mortality and morbidity – 5% decrease
Change representing effect on:
Life business
UK annuities
213
753
668
668
–
169
659
214
214
–
64
64
(442)
13
(455)
446
1,476
440
895
(455)
187
659
554
554
–
104
533
192
192
–
91
79
(302)
12
(314)
382
1,271
444
758
(314)
14 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 14(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 14(b)(i).
(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 and associate 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 asset management and other operations (including Group and Asia
Regional Head Office, holding company borrowings, Africa operations and Prudential Capital). Under the EEV Principles, the results for
covered business incorporate the projected margins of attaching internal asset management, as described in note 14(a)(vii).
The definition of long‑term business operations 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 Limited (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.
www.prudential.co.uk
Annual Report 2017 Prudential plc 347
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Notes on the EEV basis results continued
14 Methodology and accounting presentation continued
(a) Methodology continued
(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 15(vii). 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 and economic assumptions as
at the end of the year. 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 premiums and one‑tenth of single premiums. PVNBP is calculated as equalling single
premiums plus the present value of expected premiums of regular premium new 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 an IFRS basis.
However, in determining the movements on the additional shareholders’ interest, the basis for calculating the EEV result for Jackson
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.
(iii) Cost of capital
A charge is deducted from the embedded value for the cost of locked‑in required capital supporting the Group’s long‑term business.
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 post‑tax investment earnings 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
Subject to local market circumstances and regulatory requirements, the guarantee features described below in respect of UK and Europe
business broadly apply to similar types of participating contracts which are 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 (Jackson)
The principal financial options and guarantees in Jackson are associated with the fixed annuity (FA) 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 both years, 87 per cent of the account values on fixed annuities are
for policies with guarantees of 3 per cent or less, and the average guarantee rate is 2.6 per cent.
348 Prudential plc Annual Report 2017
www.prudential.co.uk
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 for which it contractually guarantees to the contract holder, subject to specific conditions, 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 upon depletion of funds
(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 policyholders’ value in the event of
poor equity market performance. Jackson hedges the GMWB and GMDB guarantees through the use of equity options and futures
contracts, and essentially fully reinsures the GMIB guarantees.
Jackson also issues fixed index annuities (FIA) 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 and Europe (M&G Prudential)
For covered business the only significant financial options and guarantees in M&G Prudential 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 of £53 million at 31 December 2017 (31 December 2016: £62 million) to honour guarantees on a small number of guaranteed
annuity option products.
The Group’s main exposure to guaranteed annuity options in M&G Prudential is through the non‑covered business of SAIF.
A provision of £503 million was held in SAIF at 31 December 2017 (31 December 2016: £571 million) to honour the guarantees.
As described in note 14(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’ funds.
Time value
The value of financial options and guarantees comprises two parts:
— The first part arises from a deterministic valuation on best estimate assumptions (the intrinsic value).
— The second 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 15(iv), (v) and (vi).
In deriving the time value of financial options and guarantees, management actions in response to emerging investment and fund
solvency conditions have been modelled. Management actions encompass, but are not confined to, investment allocation decisions,
levels of reversionary and terminal bonuses and credited rates. Bonus rates are projected from current levels and varied in accordance
with assumed management actions applying in the emerging investment and fund solvency conditions.
In all instances, the modelled actions are in accordance with approved local practice and therefore reflect the options actually
available to management. For the PAC with‑profits fund, the actions assumed are consistent with those set out in the Principles and
Practices of Financial Management which explains how regular and final bonus rates within the discretionary framework are determined,
subject to the general legislative requirements applicable.
(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 M&G Prudential, a portion of future shareholder transfers expected from the with‑profits
fund is recognised within net worth, together with the associated capital requirements.
For shareholder‑backed business, the following capital requirements for long‑term business operations apply:
— Asia: 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. For China operations, the level of required capital as at 31 December 2017 follows the approach for embedded value reporting
issued by the China Association of Actuaries (CAA), reflecting the C‑ROSS regime;
— US: the level of required capital has been set at 250 per cent of the risk‑based capital (RBC) required by the National Association of
Insurance Commissioners (NAIC) at the Company Action Level (CAL); and
— UK and Europe: the capital requirements are set at the Solvency II Solvency Capital Requirement (SCR) for shareholder‑backed
business as a whole.
www.prudential.co.uk
Annual Report 2017 Prudential plc 349
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Notes on the EEV basis results continued
14 Methodology and accounting presentation continued
(a) Methodology continued
(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 in‑force and new business 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 as included in ‘Other
operations’. 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 assets for
covered business.
(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.
For Asia and the US, the risk‑free rates are based on 10‑year local government bond yields.
For UK and Europe, the EEV risk‑free rate is based on the full term structure of interest rates, ie a yield curve, which is used to
determine the embedded value at the end of the reporting period.
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. In order to better reflect differences in relative market risk volatility inherent in each product group, Prudential
sets the risk discount rates to reflect the expected volatility associated with the cash flows for each product category in the embedded
value model, rather than at a Group level.
Since financial options and guarantees are explicitly valued under the EEV methodology, risk 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.
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
For Asia, 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.
350 Prudential plc Annual Report 2017
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US (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
(0.2 per cent for variable annuity business and 1.0 per cent for non‑variable annuity business for both years), as shown in note 15(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 short‑term 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 returns 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 and Europe (M&G Prudential)
(1) Shareholder-backed annuity business
For 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 liabilities, the future cash flows are discounted
using the swap yield curve plus an allowance for liquidity premium based on the Solvency II allowance for credit risk. The Solvency II
allowance is set by European Insurance and Occupational Pensions Authority (EIOPA) using a prudent assumption that all future
downgrades will be replaced annually, and allowing for the credit spread floor.
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 a best estimate credit risk allowance. The remaining
elements of prudence within the Solvency II allowance are incorporated into the risk margin included in the discount rate, shown in
note 15(iii).
(2) With-profits fund non-profit annuity business
For non‑profit annuity business 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 from the with‑profits fund, which are in turn discounted at the risk
discount rate applicable to all of the projected cash flows from the fund.
(3) With-profits fund holdings of debt securities
The with‑profits fund holds debt securities as part of its investment portfolio backing policyholder liabilities and unallocated surplus.
The assumed earned rate for with‑profit holdings of corporate bonds is defined as the risk‑free rate plus an assessment of the long‑term
spread over risk free, 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. An allowance for non‑diversifiable non‑market risks
is estimated as set out below:
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 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. The level of these allowances are reviewed and updated
based on an assessment of a range of pre‑defined emerging market risk indicators, as well as the Group’s exposure and experience in
the business units. During 2017, the China allowance for non‑market risk was reduced reflecting the growth in the size of the business,
increasing management exposure and experience in the country and an improvement in our risk assessment of the market. For the
Group’s US business and UK and Europe business, no additional allowance is necessary.
(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 exchange rates. The principal exchange rates are shown in note A1 of the IFRS financial statements.
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01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Notes on the EEV basis results continued
14 Methodology and accounting presentation continued
(a) Methodology continued
(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 period.
(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 the PAC non‑profit sub‑fund.
(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 14(b)(ii)) and incorporate the following:
— New business contribution, as defined in note 14(a)(ii);
— Unwind of discount on the value of in‑force business and other expected returns, as described in note 14(b)(iii);
— The impact of routine changes of estimates relating to operating assumptions, as described in note 14(b)(iv); and
— Operating experience variances, as described in note 14(b)(v).
Non‑operating results comprise the recurrent items of:
— Short‑term fluctuations in investment returns;
— The mark to market value movements on core structural borrowings; and
— The effect of changes in economic assumptions.
In addition, non‑operating results include the effect of the disposal of businesses (see note 17) and in 2017, the impact of US tax reform
(see note 7).
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.
(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 M&G Prudential, 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 14(b)(iii).
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 reserve 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‑period 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 business adjusted to reflect end‑of‑period projected rates of return with the excess or deficit of the actual
return recognised within non‑operating profit, together with 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 operating result
for the year.
(iii) Unwind of discount and other expected returns
The Group’s methodology in determining the unwind of discount and other expected returns is by reference to:
— The value of in‑force business at the beginning of the year (adjusted for the effect of current year 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 M&G Prudential is described below.
352 Prudential plc Annual Report 2017
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M&G Prudential
The unwind is determined by reference to an implied single risk discount rate. The EEV risk‑free rate is based on a yield curve (as set out
in note 14(a)(viii)), which is used to derive a single implied discount rate which, if this rate had been used, would reproduce the same
embedded value as that calculated by reference to the yield curve. The difference between the operating profit determined using the
single implied discount rate and that derived using the yield curve is included within non‑operating profit.
For with‑profits business, the opening value of in‑force is adjusted for the effect 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 2017 the shareholders’ interest in the smoothed surplus assets used for this purpose only
were £57 million lower (31 December 2016: £77 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 changes is delineated to show the effect on the opening value of in‑force as operating assumption
changes, with the experience variances subsequently being determined by reference to the end‑of‑year assumptions (see note 14(b)(v)).
(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. For M&G Prudential, the embedded
value incorporates Solvency II transitional measures, which are recalculated using management’s estimate of the impact of operating
and market conditions at the valuation date. The effect of changes in economic assumptions is after allowing for this recalculation.
15 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 risk‑free rates of return (defined below for each of
the Group’s insurance operations). 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 over
time 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.
(i) Asia notes (b)(c)
The risk‑free rates of return for Asia are defined as 10‑year government bond yields at the end of the year.
In order to reflect Prudential’s most recent assessment of the growth prospects of the region compared to other developed markets
and the historically strong relationship between long‑term economic growth and long‑term equity returns, in a number of Asia business
units, equity risk premiums were increased during 2017 by between 25 basis points and 75 basis points from those applied at 2016. The
related expected return on equity and risk discount rates have also been increased by equivalent amounts. In addition, for a few Asia
business units, expected long‑term inflation assumptions were revised during 2017 to better reflect central bank inflation targets and to
align with the currency of the underlying exposures.
China
Hong Kong notes (b)(d)
Indonesia
Malaysia note (d)
Philippines
Singapore note (d)
Taiwan
Thailand
Vietnam
Total weighted risk discount rate note (a)
Risk discount rate %
New business
In-force business
10-year government
bond yield %
Expected long-term
Inflation %
31 Dec
2017
31 Dec
2016
31 Dec
2017
31 Dec
2016
31 Dec
2017
31 Dec
2016
31 Dec
2017
31 Dec
2016
9.7
4.1
10.6
6.4
12.7
3.5
4.3
9.8
12.6
5.3
9.6
3.9
12.0
6.8
11.6
4.2
4.0
9.4
13.0
5.3
9.7
4.1
10.6
6.5
12.7
4.4
3.9
9.8
12.6
5.7
9.6
3.9
12.0
6.9
11.6
5.0
4.0
9.4
13.0
6.1
3.9
2.4
6.4
3.9
5.2
2.0
0.9
2.3
5.1
3.1
2.5
8.1
4.3
4.8
2.5
1.2
2.7
6.3
3.0
2.5
4.5
2.5
4.0
2.0
1.5
3.0
5.5
2.5
2.3
5.0
2.5
4.0
2.0
1.0
3.0
5.5
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Annual Report 2017 Prudential plc 353
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Notes on the EEV basis results continued
15 Assumptions continued
Principal economic assumptions continued
Notes
(a)
The weighted risk discount rates for Asia operations shown above have been determined by weighting each market’s risk discount rates by reference to the post‑tax EEV basis new
business contribution and the closing value of in‑force business. The changes in the risk discount rates for individual Asia business units reflect:
– the movements in 10‑year government bond yields;
– changes in product mix; and
– the effect of changes in the economic basis (see note 14(a)(viii) and above).
For Hong Kong the assumptions shown are for US dollar denominated business. For other business units, the assumptions are for local currency denominated business.
Equity risk premiums in Asia range from 4.0 per cent to 9.4 per cent (2016: 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 are:
(b)
(c)
(d)
Hong Kong
Malaysia
Singapore
(ii) US
The risk‑free rates of return for the US are defined as 10‑year treasury bond yield at the end of the year.
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 14(a)(viii)
Risk discount rate:
Variable annuity:
Risk discount rate
Additional allowance for credit risk included in risk discount rate note 14(a)(viii)
Non‑variable annuity:
Risk discount rate
Additional allowance for credit risk included in risk discount rate note 14(a)(viii)
Weighted average total:
New business
In‑force business
US 10‑year treasury bond yield
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)
31 Dec 2017 % 31 Dec 2016 %
6.4
10.4
8.5
6.5
10.2
8.5
31 Dec 2017 % 31 Dec 2016 %
1.50
1.25
1.75
1.50
0.50
0.19
6.8
0.2
4.1
1.0
6.7
6.5
2.4
6.4
3.0
4.0
18.0
1.25
1.25
1.50
1.50
0.50
0.21
6.9
0.2
4.1
1.0
6.8
6.5
2.5
6.5
3.0
4.0
18.0
* 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.
354 Prudential plc Annual Report 2017
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(iii) UK and Europe
The risk‑free rate is based on the full term structure of interest rates, ie a yield curve, which is used to determine the embedded value at
the end of the reporting period. These yield curves are used to derive pre‑tax expected long‑term nominal rates of investment return and
risk discount rates. For the purpose of determining the unwind of discount in the analysis of operating profit, these yield curves are used
to derive a single implied risk discount rate, as explained in note 14(a)(viii).
This single implied risk discount rate is shown, along with the 15‑year nominal rate of investment return and 15‑year rate of inflation
based on the yield curve.
Shareholder-backed annuity in-force business: note (a)
Risk discount rate
Pre‑tax expected 15‑year nominal rates of investment return note (c)
With-profits and other business:
Risk discount rate: note (b)
New business
In‑force business
Pre‑tax expected 15‑year nominal rates of investment return: note (c)
Overseas equities
Property
15‑year gilt yield
Corporate bonds
Expected 15‑year rate of inflation
Equity risk premium
31 Dec 2017 % 31 Dec 2016 %
4.0
2.6
4.7
4.8
4.5
2.8
4.7
4.9
6.2 to 10.1
4.4
1.6
3.4
3.5
4.0
6.2 to 9.4
4.5
1.7
3.5
3.6
4.0
Notes
(a)
(b)
(c)
For shareholder‑backed annuity business, the movements in the pre‑tax long‑term nominal rates of return and risk discount rates reflect the effect of changes in asset yields.
The risk discount rates for with‑profits and other business shown above represents a weighted average total of the rates applied to determine the present value of future cash flows,
including a portion of future with‑profits business shareholders’ transfers recognised in net worth.
The table below shows the pattern of the UK risk‑free Solvency II spot yield curve at the end of both years:
31 Dec 2017
31 Dec 2016
1 year
0.6%
0.4%
5 year
10 year
15 year
20 year
0.9%
0.7%
1.2%
1.1%
1.3%
1.3%
1.4%
1.3%
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 14(a)(iv).
(iv) Asia
— The stochastic cost of guarantees is primarily of significance for the Hong Kong, 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 M&G Prudential below; and
— The volatility of equity returns ranges from 18 per cent to 35 per cent, and the volatility of government bond yields ranges from
1.1 per cent to 2.0 per cent (2016: from 0.9 per cent to 2.3 per cent) following a number of modelling changes at full year 2017 in
respect of future bond returns.
(v) US (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; and
— The volatility of equity returns ranges from 18 per cent to 27 per cent for both years, and the standard deviation of interest rates
ranges from 2.5 per cent to 2.8 per cent (2016: from 2.3 per cent to 2.6 per cent).
(vi) UK and Europe (M&G Prudential)
— 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 return plus a mean‑reverting spread;
— Property returns are also modelled on a risk‑free return plus a risk premium with a stochastic process reflecting total property returns;
and
— The standard deviation of equities and property ranges from 14 per cent to 20 per cent (2016: from 15 per cent to 20 per cent).
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Annual Report 2017 Prudential plc 355
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
Notes on the EEV basis results continued
15 Assumptions continued
Operating assumptions
(vii) 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 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 actions to achieve the savings have been delivered. Expense overruns are reported where these are expected
to be short‑lived, including businesses that are growing rapidly or are sub‑scale.
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 restructuring costs; 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.
(viii) 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 14(a)(x).
The local statutory corporate tax rates applicable for the most significant operations for 2016 and 2017 are as follows:
Statutory corporate tax rates
%
Asia operations:
Hong Kong
Indonesia
Malaysia
Singapore
US operations*
UK operations
16.5 per cent on 5 per cent of premium income
25.0
24.0
17.0
2016 and 2017: 35.0; from 1 January 2018: 21.0
2016: 20.0; from 1 April 2017: 19.0; from 1 April 2020: 17.0
* The US tax reform changes included a reduction in the corporate income tax rate from 35 per cent to 21 per cent effective from 1 January 2018 (see note 7).
356 Prudential plc Annual Report 2017
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16 Insurance new business premiums note (i)
Asia
US
UK and Europe
Group total
Asia
Cambodia
Hong Kong
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
SE Asia operations including Hong Kong
China note (ii)
Taiwan
India note (iii)
Total
US
Variable annuities
Elite Access (variable annuity)
Fixed annuities
Fixed index annuities
Wholesale
Total
UK and Europe
Bonds
Corporate pensions
Individual pensions
Income drawdown
Other products
Total
Single premiums
Regular premiums
Annual premium
equivalents (APE)
note 14(a)(ii)
Present value of new
business premiums
(PVNBP)
note 14(a)(ii)
2017 £m
2016 £m
2017 £m
2016 £m
2017 £m
2016 £m
2017 £m
2016 £m
2,299
16,622
13,044
2,397
15,608
9,836
31,965
27,841
–
582
288
73
62
859
139
8
2,011
179
46
63
2,299
–
1,140
236
110
91
523
80
6
2,186
124
36
51
2,397
11,536
2,013
454
295
2,324
10,653
2,056
555
508
1,836
16,622
15,608
3,509
103
5,747
2,218
1,467
13,044
3,834
110
2,532
1,649
1,711
9,836
3,575
–
187
3,762
16
1,667
268
271
71
361
70
133
2,857
276
208
234
3,575
–
–
–
–
–
–
–
130
32
–
25
187
3,359
–
177
3,536
14
1,798
255
233
61
299
81
115
2,856
187
146
170
3,359
–
–
–
–
–
–
–
121
35
–
21
177
3,805
1,662
1,491
6,958
16
1,725
297
278
77
447
84
134
3,058
294
213
240
3,805
1,154
201
45
30
232
1,662
351
140
607
222
171
3,599
1,561
1,160
6,320
14
1,912
279
244
70
351
89
116
3,075
199
150
175
3,599
1,065
206
55
51
184
1,561
384
132
289
165
190
20,405
16,622
13,784
19,271
15,608
10,513
50,811
45,392
70
10,027
1,183
1,398
287
3,463
421
659
17,508
1,299
634
964
66
10,930
1,048
1,352
278
2,627
404
519
17,224
880
499
668
20,405
19,271
11,536
2,013
454
295
2,324
10,653
2,056
555
508
1,836
16,622
15,608
3,510
533
5,897
2,218
1,626
3,835
479
2,681
1,649
1,869
1,491
1,160
13,784
10,513
Group total
31,965
27,841
3,762
3,536
6,958
6,320
50,811
45,392
Notes
(i)
The tables shown above are provided as an indicative volume measure of transactions undertaken in the reporting period that have the potential to generate profits for
shareholders. The amounts shown are not, and not intended to be, reflective of premium income recorded in the IFRS income statement. A reconciliation of APE and gross earned
premiums on an IFRS basis is provided in note II(l) within the unaudited financial information.
(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.
www.prudential.co.uk
Annual Report 2017 Prudential plc 357
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
Notes on the EEV basis results continued
17 Disposal of businesses
On 18 May 2017, the Group announced it had completed the sale of its life insurance subsidiary in Korea, PCA Life Insurance, to
Mirae Asset Life Insurance for KRW 170 billion (£117 million at 17 May 2017 closing exchange rate) following regulatory approval.
The proceeds, net of £(9) million of related expenses, were £108 million. Upon disposal, £76 million of required capital was released
and a corresponding increase in free surplus was recognised. There were no other impacts on the 2017 results.
On 15 August 2017, the Group through its subsidiary National Planning Holdings, Inc. (NPH) sold its US independent broker‑dealer
network to LPL Financial LLC. The initial consideration received was £252 million (US$325 million) resulting in a post‑tax profit on
disposal of £80 million (US$103 million) after costs and net losses that have been incurred in the year.
18 Post balance sheet events
Intention to demerge the Group’s UK businesses
In March 2018, the Group announced its intention to demerge its UK & Europe business (‘M&G Prudential’) from Prudential plc, resulting
in two separately‑listed companies. In preparation for the UK demerger process, Prudential plc intends to transfer the legal ownership of
its Hong Kong insurance subsidiaries from The Prudential Assurance Company Limited (M&G Prudential’s UK regulated insurance
entity) to Prudential Corporation Asia Limited, which is expected to complete by the end of 2019.
Sale of £12.0 billion* UK annuity portfolio
In March 2018, M&G Prudential also announced the sale of £12.0 billion* of its shareholder annuity portfolio to Rothesay Life. Under the
terms of the agreement, M&G Prudential has reinsured £12.0 billion* of liabilities to Rothesay Life, which is expected to be followed by a
Part VII transfer of the portfolio by the end of 2019. Further details are set out in the CFO report.
* Relates to £12.0 billion of IFRS shareholder annuity liabilities, valued as at 31 December 2017.
358 Prudential plc Annual Report 2017
www.prudential.co.uk
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
European Embedded Value Principles dated April 2016 by the European Insurance CFO
Forum (‘the EEV Principles’) using the methodology and assumptions set out in the Notes
on the EEV basis results.
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.
www.prudential.co.uk
Annual Report 2017 Prudential plc 359
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information 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.
Philip Smart
for and on behalf of KPMG LLP
Chartered Accountants
London
14 March 2018
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 2017 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
2017 has been properly prepared, in all
material respects, in accordance with the
European Embedded Value Principles
dated April 2016 by the European
Insurance CFO Forum (‘the EEV Principles’)
using the methodology and assumptions
set out in the Notes on the EEV basis
results.
This report is made solely to the Company
in accordance with the terms of our
engagement. Our audit work has been
undertaken so that we might state to the
Company those matters we have been
engaged to state in this report and for no
other purpose. To the fullest extent
permitted by law, we do not accept or
assume responsibility to anyone other than
the Company for our audit work, for this
report, or for the opinions we have formed.
Respective responsibilities of
directors and auditor
As explained more fully in the Directors’
responsibilities statement set out on page
359, 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/
auditscopeukco2014a. 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.
360 Prudential plc Annual Report 2017
www.prudential.co.uk
07
Additional
information
Index to the additional unaudited financial information
Risk factors
Glossary
Shareholder information
How to contact us
Page
362
391
398
402
406
www.prudential.co.uk
Annual Report 2017 Prudential plc 361
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Index to the additional unaudited financial information
I
a
b
c
d
IFRS profit and loss information
Analysis of long‑term insurance business pre‑tax
IFRS operating profit based on longer‑term investment
returns by driver
Asia operations – analysis of IFRS operating profit by
business unit
Analysis of asset management operating profit based on
longer‑term investment returns
Contribution to UK life financial metrics from specific
management actions undertaken to position the balance
sheet more efficiently under the Solvency II regime
II Other information
a
b
c
d
e
f
g
Holding company cash flow
Funds under management
Return on IFRS shareholders’ funds
IFRS gearing ratio
IFRS shareholders’ funds per share
Solvency II capital position at 31 December 2017
Reconciliation of expected transfer of value of in‑force
business (VIF) and required capital to free surplus
Foreign currency source of key metrics
Option schemes
Selected historical financial information of Prudential
Reconciliation between IFRS and EEV shareholders’ funds
Reconciliation of APE new business sales to earned
premiums
h
i
j
k
l
m Calculation of return on embedded value
n
Calculation of EEV shareholders’ funds per share
Page
363
370
371
372
373
374
375
375
375
376
380
384
385
387
389
389
390
390
362 Prudential plc Annual Report 2017
www.prudential.co.uk
Additional unaudited financial information
I: IFRS profit and loss information
I(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 relevant
drivers. Details on the calculation of the Group’s average policyholder liability balances are given in note (iv) at the end of this section.
Spread income
Fee income
With‑profits
Insurance margin
Margin on revenues
Expenses:
Acquisition costs note (i)
Administration expenses
DAC adjustments note (v)
Expected return on shareholder assets
Longevity reinsurance and other management
actions to improve solvency
Changes in longevity assumption basis
Provision for review of past annuity sales
Long‑term business operating profit based on
Average
liability
note (iv)
88,908
166,839
136,474
Total
bps
note (ii)
125
156
25
6,958
261,114
(35)%
(88)
Asia
220
199
59
1,310
2,097
(1,489)
(959)
241
121
1,799
US
751
2,343
–
906
–
(876)
(1,174)
260
4
2,214
2017 £m
UK and
Europe
137
61
288
55
189
(68)
(164)
4
104
606
276
204
(225)
Total
1,108
2,603
347
2,271
2,286
(2,433)
(2,297)
505
229
4,619
276
204
(225)
longer‑term investment returns
1,799
2,214
861
4,874
See notes at the end of this section.
www.prudential.co.uk
Annual Report 2017 Prudential plc 363
01 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
I(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 (v)
Expected return on shareholder assets
Longevity reinsurance and other management
actions to improve solvency
Provision for review of past annuity sales
Long‑term business operating profit based on
longer‑term investment returns
See notes at the end of this section.
Spread income
Fee income
With‑profits
Insurance margin
Margin on revenues
Expenses:
Acquisition costs note (i)
Administration expenses
DAC adjustments note (v)
Expected return on shareholder assets
Longevity reinsurance and other management
actions to improve solvency
Provision for review of past annuity sales
Long‑term business operating profit based on
longer‑term investment returns
See notes at the end of this section.
Average
liability
note (iv)
83,054
139,451
118,334
Total
bps
note(ii)
141
156
27
6,320
229,477
(36)%
(85)
Average
liability
note (iv)
85,266
145,826
119,170
Total
bps
note (ii)
142
156
27
6,574
238,392
(36)%
(85)
2016 AER £m
Asia
US
UK and
Europe
192
174
48
1,040
1,919
(1,285)
(832)
148
99
1,503
802
1,942
–
888
–
(877)
(959)
244
12
2,052
177
59
269
63
207
(89)
(152)
(2)
110
642
332
(175)
Total
1,171
2,175
317
1,991
2,126
(2,251)
(1,943)
390
221
4,197
332
(175)
1,503
2,052
799
4,354
2016 CER £m
note (iii)
Asia
US
UK and
Europe
201
181
50
1,087
2,004
(1,343)
(866)
153
104
1,571
837
2,040
–
933
–
(921)
(1,007)
260
13
2,155
177
59
269
63
207
(89)
(152)
(2)
110
642
332
(175)
Total
1,215
2,280
319
2,083
2,211
(2,353)
(2,025)
411
227
4,368
332
(175)
1,571
2,155
799
4,525
364 Prudential plc Annual Report 2017
www.prudential.co.uk
Additional unaudited financial information continued Margin analysis of long-term insurance business – Asia
Long-term business
Spread income
Fee income
With‑profits
Insurance margin
Margin on revenues
Expenses:
2017
Average
liability
note (iv)
£m
16,359
18,767
30,115
Margin
note (ii)
bps
134
106
20
Profit
£m
220
199
59
1,310
2,097
Acquisition costs note (i)
Administration expenses
DAC adjustments note (v)
Expected return on shareholder assets
(1,489)
3,805
(959) 35,126
241
121
(39)%
(273)
Operating profit based on longer‑term
investment return
1,799
See notes at the end of this section.
Analysis of Asia operating profit drivers:
Asia
2016 AER
Average
liability
note (iv)
£m
13,299
15,643
22,823
Margin
note (ii)
bps
144
111
21
3,599
28,942
(36)%
(287)
Profit
£m
192
174
48
1,040
1,919
(1,285)
(832)
148
99
1,503
2016 CER
note (iii)
Average
liability
note (iv)
£m
13,980
16,475
23,659
Margin
note (ii)
bps
144
110
21
3,773
30,455
(36)%
(284)
Profit
£m
201
181
50
1,087
2,004
(1,343)
(866)
153
104
1,571
— Spread income has increased on a constant exchange rate basis by 9 per cent (AER: 15 per cent) to £220 million in 2017,
predominantly reflecting the growth of the Asia non‑linked policyholder liabilities.
— Fee income has increased by 10 per cent at constant exchange rates (AER: 14 per cent) to £199 million in 2017, broadly in line with
the increase in movement in average unit‑linked liabilities.
— Insurance margin has increased by 21 per cent to £1,310 million in 2017 on a constant exchange rate basis (AER: 26 per cent),
primarily reflecting the continued growth of the in‑force book, which contains a relatively high proportion of risk‑based products.
— Margin on revenues has increased by £93 million on a constant exchange rate basis from £2,004 million in 2016 to £2,097 million in
2017, primarily reflecting growth of the in‑force book and higher regular premium income recognised in the year.
— Acquisition costs have increased by 11 per cent at constant exchange rates (AER: 16 per cent) to £1,489 million, compared to the
1 per cent increase in APE sales, resulting in an increase in the acquisition costs ratio. The analysis above uses shareholder acquisition
costs as a proportion of total APE. If with‑profits sales were excluded from the denominator the acquisition cost ratio would become
66 per cent (2016: 70 per cent at CER), the decrease being the result of product and country mix.
— Administration expenses including renewal commissions have increased by 11 per cent at a constant exchange rate basis (AER:
15 per cent increase) in 2017 as the business continues to expand. On a constant exchange rate basis, the administration expense ratio
has decreased from 284 basis points in 2016 to 273 basis points in 2017, the result of changes in country and product mix.
www.prudential.co.uk
Annual Report 2017 Prudential plc 365
01 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
I(a) Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment
returns by driver continued
Margin analysis of long-term insurance business – US
2017
Average
liability
note (iv)
£m
Profit
£m
751
38,918
2,343 125,440
906
Margin
note (ii)
bps
193
187
(876)
1,662
(1,174) 169,725
(53)%
(69)
260
4
2,214
US
2016 AER
Average
liability
note (iv)
£m
Profit
£m
802
37,044
1,942 102,027
888
(877)
1,561
(959) 146,043
244
12
2,052
2016 CER
note (iii)
Average
liability
note (iv)
£m
Profit
£m
837
38,575
2,040 107,570
933
Margin
note (ii)
bps
217
190
Margin
note (ii)
bps
217
190
(56)%
(66)
(921)
1,641
(1,007) 153,445
(56)%
(66)
260
13
2,155
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 based on longer‑term
investment returns
See notes at the end of this section.
Analysis of US operating profit drivers:
— Spread income has decreased by 10 per cent at constant exchange rates (AER: decreased by 6 per cent) to £751 million during 2017.
The reported spread margin decreased to 193 basis points from 217 basis points in 2016, due to lower yields in the investment
portfolio. Spread income benefited from swap transactions previously entered into so that asset and liability duration can be more
closely matched. Excluding this effect, the spread margin would have been 144 basis points (2016 CER: 152 basis points and AER:
153 basis points).
— Fee income has increased by 15 per cent at constant exchange rates (AER: increased by 21 per cent) to £2,343 million during 2017,
primarily due to higher average separate account balances due to positive net flows from variable annuity business and market
appreciation during the year.
— Insurance margin represents operating profits from insurance risks, including variable annuity guarantees and other sundry items.
Insurance margin decreased to £906 million in 2017 from £933 million in 2016 on a constant exchange rate basis, with higher income
from the variable annuity guarantees being more than offset by a decline in the contribution from the closed books of business.
— Acquisition costs, which are commissions and expenses incurred to acquire new business, including those that are not deferrable,
have decreased by 5 per cent at a constant exchange rate basis, largely due to the continued increase in producers selecting
asset‑based commissions, which are paid upon policy anniversary dates and are treated as an administration expense in this analysis,
rather than front end commissions.
— Administration expenses increased to £1,174 million during 2017, compared to £1,007 million for 2016 at a constant exchange rate
(AER: £959 million), primarily as a result of higher asset based commissions. Excluding these asset‑based commissions, the resulting
administration expense ratio was relatively flat at 35 basis points (2016: 34 basis points at CER and AER).
366 Prudential plc Annual Report 2017
www.prudential.co.uk
Additional unaudited financial information continued 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
Analysis of pre-tax operating profit before and after acquisition costs and DAC adjustments
2017 £m
Acquisition costs
2016 AER £m
Acquisition costs
2016 CER £m
note (iii)
Acquisition costs
Other
operating
profits
Incurred Deferred
Total
Other
operating
profits
Incurred Deferred
Total
Other
operating
profits
Incurred Deferred
Total
2,830
2,830
2,685
2,685
2,816
2,816
(876)
663
(213)
(877)
678
(199)
(921)
716
(205)
Total
2,830
(876)
260
2,214
2,685
(877)
(489)
(489)
86
86
(527)
(527)
93
244
93
2,052
2,816
(921)
(554)
(554)
98
260
98
2,155
Analysis of operating profit based on longer-term investment returns for US operations by product
Spread business note (a)
Fee business note (b)
Life and other business note (c)
Total insurance operations
US asset management and broker‑dealer
Total US operations
2017 £m
2016 £m
%
317
1,788
109
2,214
10
2,224
AER
323
1,523
206
2,052
(4)
2,048
CER
339
1,601
216
2,156
(4)
2,152
2017
vs
2016
AER
(2)%
17%
(47)%
8%
350%
9%
2017
vs
2016
CER
(6)%
12%
(50)%
3%
350%
3%
The analysis of operating profit based on longer‑term investment returns for US operations by product represents the net profit
generated by each line of business after allocation of costs. Broadly:
a) Spread business is the net operating profit for fixed annuity, fixed indexed annuity and guaranteed investment contracts and
largely comprises spread income less costs.
b) Fee business represents profits from variable annuity products. As well as fee income, revenue for this product line includes
spread income from investments directed to the general account and other variable annuity fees included in insurance margin.
c) Life and other business includes the profits from the REALIC business and other closed life books. Revenue allocated to this
product line includes spread income and premiums and policy charges for life protection, which are included in insurance margin after
claim costs. Insurance margin forms the vast majority of revenue.
www.prudential.co.uk
Annual Report 2017 Prudential plc 367
01 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
I(a) Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment
returns by driver continued
Margin analysis of long-term insurance business – UK and Europe
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 shareholder assets
Longevity reinsurance and other management
actions to improve solvency
Changes in longevity assumption basis
Provision for review of past annuity sales
Operating profit based on longer‑term
investment returns
See notes at the end of this section.
Profit
£m
137
61
288
55
189
(68)
(164)
4
104
606
276
204
(225)
861
UK and Europe
2017
Average
liability
note (iv)
£m
33,631
22,632
106,359
Margin
note (ii)
bps
41
27
27
1,491
56,263
(5)%
(29)
2016
Average
liability
note (iv)
£m
32,711
21,781
95,511
Margin
note (ii)
bps
54
27
28
1,160
54,492
(8)%
(28)
Profit
£m
177
59
269
63
207
(89)
(152)
(2)
110
642
332
–
(175)
799
368 Prudential plc Annual Report 2017
www.prudential.co.uk
Additional unaudited financial information continued
Analysis of UK and Europe operating profit drivers:
— Spread income reduced from £177 million in 2016 to £137 million in 2017, mainly due to lower annuity sales. Spread income has two
components:
– A contribution from new annuity business which was lower at £9 million in 2017 compared to £41 million in 2016, reflecting our
effective withdrawal from this market.
– A contribution from in‑force annuity and other business, which was broadly in line with last year at £128 million (2016: £136 million),
equivalent to 38 basis points of average reserves (2016: 42 basis points).
— 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 39 bps
(2016: 40 bps).
— Margin on revenues represents premium charges for expenses of shareholder‑backed business and other sundry net income.
— Acquisition costs decreased from £89 million in 2016 to £68 million in 2017, equivalent to 5 per cent of total APE sales in 2017
(2016: 8 per cent). The ratio above expresses the percentage of shareholder acquisition costs as a percentage of total APE sales.
It is therefore impacted by the level of with‑profits business in the year. Acquisition costs expressed as a percentage of
shareholder‑backed APE sales remained broadly consistent at 38 per cent (2016: 37 per cent).
— The contribution from longevity reinsurance and other management actions to improve solvency during 2017 was £276 million
(2016: £332 million). Further explanation and analysis is provided in Additional unaudited financial information section I(d).
— The £204 million favourable longevity assumption changes reflect the adoption of the Continuous Mortality Investigation 2015
model. Further information on changes to mortality assumptions is given in note C4.1 (d).
— The 2017 increase in the provision for the cost of undertaking a review of past non‑advised annuity sales and related potential redress
of £225 million (2016: £175 million) is explained in note C11, ‘Provisions’.
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.
Notes to sources of earnings tables
(i)
(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 2016 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.
For UK and Europe 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 generally derived from month end balances throughout the year, as opposed to opening and closing balances only. The
average liabilities for fee income in Jackson have been calculated using daily balances instead of month end balances in order to provide a more meaningful analysis of the fee
income, which is charged on the daily account balance. Average liabilities for spread income are based on the general account liabilities to which spread income attaches. Average
liabilities used to calculate the administration expense margin exclude the REALIC liabilities reinsured to third parties prior to the acquisition by Jackson. Average liabilities are
adjusted for business acquisitions and disposals in the year.
The DAC adjustments contain a credit of £43 million in respect of joint ventures and an associate in 2017 (2016: AER credit of £28 million).
(iv)
(v)
www.prudential.co.uk
Annual Report 2017 Prudential plc 369
01 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
I(b) Asia operations – analysis of IFRS operating profit by business unit
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
Taiwan
Other
Non‑recurrent items note (ii)
Total insurance operations note (i)
Development expenses
Total long-term business operating profit
Asset management (Eastspring Investments)
Total Asia operations note (iii)
2017 £m
AER
2016 £m
CER
2016 £m
2016 AER
vs 2017
2016 CER
vs 2017
346
457
171
41
272
107
135
1,529
91
43
64
75
1,802
(3)
1,799
176
1,975
238
428
147
38
235
92
114
1,292
64
35
49
67
1,507
(4)
1,503
141
1,644
250
447
149
37
247
100
117
1,347
66
39
53
70
1,575
(4)
1,571
149
1,720
45%
7%
16%
8%
16%
16%
18%
18%
42%
23%
31%
12%
20%
25%
20%
25%
20%
38%
2%
15%
11%
10%
7%
15%
14%
38%
10%
21%
7%
14%
25%
15%
18%
15%
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*
Business in force
Non‑recurrent items note (ii)
Total
2017 £m
2016 £m
16
1,711
75
1,802
AER
(29)
1,469
67
1,507
CER
(30)
1,535
70
1,575
* The IFRS new business result corresponds to approximately 0.4 per cent of new business APE premiums for 2017 (2016: approximately (0.8) per cent of new business APE).
The new business result reflects the aggregate of the pre‑tax regulatory basis result to net worth after IFRS adjustments for deferral of acquisition costs and deferred income where
appropriate.
In 2017, the IFRS operating profit based on longer‑term investment returns for Asia insurance operations included a net credit of £75 million (2016: £67 million) representing a small
number of individually minor items.
(ii)
370 Prudential plc Annual Report 2017
www.prudential.co.uk
Additional unaudited financial information continued
I(c) Analysis of asset management operating profit based on longer-term investment returns
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†
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†
2017 £m
M&G
Prudential
asset
management
note (ii)
Eastspring
Investments
note (ii)
1,034
53
1,087
(602)
15
–
500
421
17
438
(238)
–
(24)
176
£275.9bn
37bps
58%
£128.4bn
33bps
56%
2016 £m
M&G
Prudential
asset
management
note (ii)
Eastspring
Investments
note (ii)
923
33
956
(544)
13
–
425
353
7
360
(198)
–
(21)
141
£250.4bn
37bps
59%
£109.0bn
32bps
56%
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 B1.6 of the IFRS financial statements, these amounts are netted and tax deducted and shown as a single amount.
(ii) M&G Prudential asset management and Eastspring Investments can be further analysed as follows:
2017
2016
2017
2016
M&G Prudential asset management
Operating income before performance-related fees
Margin
of FUM*
bps
85
86
Institu-
tional‡
£m
430
419
Margin
of FUM*
bps
21
22
Eastspring Investments
Operating income before performance-related fees
Margin
of FUM*
bps
57
58
Institu-
tional‡
£m
172
142
Margin
of FUM*
bps
20
20
Total
£m
1,034
923
Total
£m
421
353
Retail
£m
604
504
Retail
£m
249
211
Margin
of FUM*
bps
37
37
Margin
of FUM*
bps
33
32
* 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 that are managed by third parties outside 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.
www.prudential.co.uk
Annual Report 2017 Prudential plc 371
01 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
I(d) Contribution to UK life financial metrics from specific management actions undertaken to position the balance
sheet more efficiently under the Solvency II regime
In 2017, further management actions were taken to improve the solvency of the UK and Europe insurance operations and to mitigate
market risks. These actions included extending the reinsurance of longevity risk to cover a further £0.5 billion of IFRS annuity liabilities.
As at 31 December 2017, the total IFRS annuity liabilities subject to longevity reinsurance were £14.4 billion. Management actions also
repositioned the fixed income asset portfolio to improve the trade‑off between yield and credit risk.
The effect of these actions on the UK’s long‑term IFRS operating profit, underlying free surplus generation and EEV operating profit
before restructuring costs is shown in the tables below.
IFRS operating profit of UK long-term business*
Shareholder‑backed annuity new business
In‑force business:
Longevity reinsurance transactions
Other management actions to improve solvency
Changes in longevity assumption basis
Provision for the review of past annuity sales
With‑profits and other in‑force
Total
Underlying free surplus generation of UK long-term business*
Expected in‑force and return on net worth
Longevity reinsurance transactions
Other management actions to improve solvency
Changes in longevity assumption basis
Provision for the review of past annuity sales
Changes in operating assumptions and experience variances
Underlying free surplus generated from in‑force business
New business strain
Total
EEV post-tax operating profit of UK long-term business*
Unwind of discount and other expected return
Longevity reinsurance transactions
Other management actions to improve solvency
Changes in longevity assumption basis
Provision for the review of past annuity sales
Changes in operating assumptions and experience variances
Operating profit from in‑force business
New business profit
Total
* Before restructuring costs.
2017 £m
2016 £m
9
31
245
204
(225)
255
597
861
41
197
135
–
(175)
157
601
799
2017 £m
2016 £m
706
15
385
179
(187)
392
(28)
1,070
(175)
895
693
126
225
–
(145)
206
24
923
(129)
794
2017 £m
2016 £m
465
(6)
127
195
(187)
129
79
673
342
1,015
445
(90)
110
–
(145)
(125)
55
375
268
643
372 Prudential plc Annual Report 2017
www.prudential.co.uk
Additional unaudited financial information continued II Other information
II(a) Holding company cash flow*
Net cash remitted by business units:
Total Asia net remittances to the Group
US net remittances to the Group
UK and Europe net remittances to the Group
With‑profits remittance
Shareholder‑backed insurance business remittance
Asset management remittance
Other UK paid to the Group (including Prudential Capital)4
Total UK net remittances to the Group
Net remittances to the Group from business units1
Net interest paid
Tax received
Corporate activities
Total central outflows
Operating holding company cash flow before dividend
Dividend paid
Operating holding company cash flow after dividend*
Non‑operating net cash flow2
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 year3
2017 £m
2016 £m
645
475
215
105
323
25
668
1,788
(415)
152
(207)
(470)
1,318
(1,159)
159
(511)
(352)
2,626
(10)
2,264
516
420
215
85
290
192
782
1,718
(333)
132
(215)
(416)
1,302
(1,267)
35
335
370
2,173
83
2,626
* The holding company cash flow differs from the IFRS cash flow statement, which includes all cash flows in the period including those relating to both policyholder and shareholder funds.
The holding company cash flow is therefore a more meaningful indication of the Group’s central liquidity.
1
2
3
4
Net cash remittances comprise dividends and other transfers from business units that are reflective of emerging earnings and capital generation.
Non‑operating net cash flow principally relates to the repayment of subordinated debt net of the proceeds from that issued in the year, and payments for distribution rights and
acquisition of subsidiaries.
Including central finance subsidiaries.
2016 remittance principally represents the outcome of actions completed in that year that facilitated access to central resources previously held at intermediary, holding and other
companies.
www.prudential.co.uk
Annual Report 2017 Prudential plc 373
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
II Other information continued
II(b) Funds under management
(a) Summary
For our asset management businesses, funds managed on behalf of third parties are not recorded on the balance sheet. They are, however,
a driver of profitability. We therefore analyse the movement in the funds under management each period, focusing on those which are
external to the Group and those primarily held by the insurance businesses. The table below analyses, by segment, the funds of the Group
held in the statement of financial position and the external funds that are managed by Prudential’s asset management operations.
Business area:
Asia operations:
Internal funds
Eastspring Investments’ external funds
US operations – internal funds
M&G Prudential:
Internal funds, including PruFund‑backed products
External funds
Other operations
Total funds under management note
Note
Total funds under management comprise:
Total investments per the consolidated statement of financial position
External funds of M&G Prudential and Eastspring Investments (as analysed in no te b)
Internally managed funds held in joint ventures and other adjustments
Prudential Group funds under management
(b) Investment products – external funds under management
2017 £bn
2016 £bn
81.4
55.9
137.3
69.6
45.7
115.3
178.3
173.3
186.8
163.9
350.7
3.0
669.3
174.0
136.8
310.8
2.9
602.3
2017 £bn
2016 £bn
451.4
219.8
(1.9)
669.3
421.7
182.5
(1.9)
602.3
2017 £m
2016 £m
At 1 Jan
2017
Market
gross
inflows Redemptions
Market
and other
movements
At 31 Dec
2017
At 1 Jan
2016
Market
gross
inflows Redemptions
Market
and other
movements
At 31 Dec
2016
64,209
30,949
(19,906)
4,445
79,697
60,801
15,785
(22,038)
9,661
64,209
72,554
15,220
(8,926)
5,310
84,158
65,604
7,056
(8,893)
8,787
72,554
M&G Prudential
Wholesale/
Direct
M&G Prudential
Institutional
Total
M&G Prudential1 136,763
46,169
(28,832)
9,755 163,855
126,405
22,841
(30,931)
18,448 136,763
Eastspring
Investments
45,756 215,907
(211,271)
5,493
55,885
36,287 164,004
(161,766)
7,231
45,756
Total2
182,519 262,076
(240,103)
15,248 219,740
162,692 186,845
(192,697)
25,679 182,519
Notes
1
2
The results exclude contribution from PruFund products (net inflows of £9.0 billion in 2017; funds under management of £35.9 billion as at 31 December 2017, £24.7 billion as at
31 December 2016).
The £219.7 billion (2016: £182.5 billion) investment products comprise £210.4 billion (2016: £174.8 billion) plus Asia Money Market Funds of £9.3 billion (2016: £7.7 billion).
374 Prudential plc Annual Report 2017
www.prudential.co.uk
Additional unaudited financial information continued (c) M&G and Eastspring Investments – total funds under management
M&G, the asset management business of M&G Prudential and Eastspring Investments, the Group’s asset management business in Asia,
manage funds from external parties and also funds for the Group’s insurance operations. The table below analyses the total funds under
management managed by M&G and Eastspring Investments respectively.
External funds under management
Internal funds under management
Total funds under management
M&G
Eastspring
Investments
2017 £bn
2016 £bn
2017 £bn
note
2016 £bn
note
163.9
134.6
298.5
136.8
128.1
264.9
55.9
83.0
138.9
45.7
72.2
117.9
Note
The external funds under management for Eastspring Investments include Asia Money Market Funds at 31 December 2017 of £9.3 billion (2016: £7.7 billion).
II(c) Return on IFRS shareholders’ funds
Return on IFRS shareholders’ funds is calculated as operating profit based on longer‑term investment returns net of tax and non‑
controlling interests divided by opening shareholders’ funds. Operating profit based on longer‑term investment returns is reconciled to
IFRS profit before tax in note B1 to the IFRS financial statements.
Operating profit based on longer‑term investment returns, net of tax and non‑controlling
interests
Opening shareholders’ funds
Return on shareholders’ funds
Note
2017 £m
2016 £m
B5
3,727
14,666
25%
3,362
12,955
26%
II(d) IFRS gearing ratio
Gearing ratio is calculated as net core structural borrowings of shareholder‑financed operations divided by closing IFRS shareholders’
funds plus net core structural borrowings.
Core structural borrowings of shareholder‑financed operations
Less holding company cash and short‑term investments
Net core structural borrowings of shareholder-financed operations
Closing shareholders’ funds
Shareholders’ funds plus net core structural borrowings
Gearing ratio
Note
C6.1
II(a)
2017 £m
2016 £m
6,280
(2,264)
4,016
16,087
20,103
20%
6,798
(2,626)
4,172
14,666
18,838
22%
II(e) IFRS shareholders’ funds per share
IFRS shareholders’ funds per share is calculated as closing IFRS shareholders’ funds divided by the number of issued shares at the
balance sheet date.
Closing shareholders’ funds (£ million)
Number of issued shares at year end (millions)
Shareholders’ funds per share (pence)
2017
16,087
2,587
622
2016
14,666
2,581
568
www.prudential.co.uk
Annual Report 2017 Prudential plc 375
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information II Other information continued
II(f) Solvency II capital position at 31 December 2017
The estimated Group shareholder Solvency II surplus at 31 December 2017 was £13.3 billion, before allowing for payment of the 2017
second interim ordinary dividend and reflects approved regulatory transitional measures as at 31 December 2017.
Own Funds
Solvency Capital Requirement
Surplus
Solvency ratio
31 Dec
2017 £bn
31 Dec
2016 £bn
26.4
13.1
13.3
202%
24.8
12.3
12.5
201%
* The Group shareholder capital position excludes the contribution to Own Funds and the Solvency Capital Requirement from ring‑fenced with‑profit funds and staff pension schemes
in surplus. The solvency positions include management’s estimates of UK transitional measures reflecting operating and market conditions at each valuation date. An application to
recalculate the transitional measures as at 31 December 2017 has been approved by the Prudential Regulation Authority.
In accordance with Solvency II requirements, these results allow for:
— 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: represents Jackson’s local US Risk Based available capital less 100 per cent of the US Risk Based Capital requirement
(Company Action Level);
– Solvency Capital Requirement: represents 150 per cent of Jackson’s local US Risk Based Capital requirement (Company Action
Level); and
– No diversification benefits are taken into account between Jackson and the rest of the Group.
— Matching adjustment for UK annuities and volatility adjustment for US dollar denominated Hong Kong with‑profits business, based
on approvals from the Prudential Regulation Authority and calibrations published by the European Insurance and Occupational
Pensions Authority; and
— UK transitional measures, which have been recalculated using management’s estimate of the impact of operating and market
conditions at the valuation date. An application to recalculate the transitional measures as at 31 December 2017 has been approved by
the Prudential Regulation Authority and this recalculation will therefore be reflected in the formal regulatory Quantitative Reporting
Templates as at 31 December 2017.
The Group shareholder Solvency II capital position excludes:
— A portion of Solvency II surplus capital (£1.7 billion at 31 December 2017) relating to the Group’s Asian life operations, including
due to the Solvency II definition of ‘contract boundaries’, which prevents some expected future cash flows from being recognised;
— The contribution to Own Funds and the Solvency Capital Requirement from ring‑fenced with‑profits funds in surplus (representing
£4.8 billion of surplus capital from UK with‑profits funds at 31 December 2017) and from the shareholders’ share of the estate of
with‑profits funds; and
— The contribution to Own Funds and the Solvency Capital Requirement from pension funds in surplus.
It also excludes unrealised gains on certain derivative instruments taken out to protect Jackson against declines in long‑term interest
rates. At Jackson’s request, the Department of Insurance Financial Services renewed its approval to carry these instruments at book
value in the local statutory returns for the period 31 December 2017 to 1 October 2018. At 31 December 2017, this approval had
the effect of decreasing local statutory capital and surplus (and by extension Solvency II Own Funds and Solvency II surplus) by
£0.4 billion, net of tax. This arrangement reflects an elective long‑standing practice first put in place in 2009, which can be unwound
at Jackson’s discretion.
The 31 December 2017 Solvency II results above allow for the completion of the sale of the Korea life business and sale of the US
broker‑dealer network in 2017, which contributes £0.1 billion to the Group Solvency II surplus. The results also allow for the impact
of US tax reforms enacted in December 2017, which reduce the Group Solvency II surplus by £0.6 billion.
Further information on the Solvency II capital position for the Group and The Prudential Assurance Company Limited is published
annually in the Solvency and Financial Condition Reports. These were last published on the Group’s website on 18 May 2017.
376 Prudential plc Annual Report 2017
www.prudential.co.uk
Additional unaudited financial information continued Analysis of movement in Group capital position
A summary of the estimated movement in Group Solvency II surplus from £12.5 billion at year end 2016 to £13.3 billion at year end 2017 is
set out in the table below. The movement from the Group Solvency II surplus at 31 December 2015 to the Solvency II surplus at
31 December 2016 is included for comparison.
Analysis of movement in Group shareholder surplus
Estimated Solvency II surplus at beginning of period
Underlying operating experience
Management actions
Operating experience
Non‑operating experience (including market movements)
Other capital movements
Subordinated debt issuance / redemption
Foreign currency translation impacts
Dividends paid
Model changes
Estimated Solvency II surplus at end of period
Full year 2017 Full year 2016
Surplus £bn
Surplus £bn
12.5
3.2
0.4
3.6
(0.6)
(0.2)
(0.7)
(1.2)
(0.1)
13.3
9.7
2.3
0.4
2.7
(1.1)
1.2
1.6
(1.3)
(0.3)
12.5
The estimated movement in Group Solvency II surplus over 2017 is driven by:
— Operating experience of £3.6 billion: generated by in‑force business and new business written in 2017, after allowing for amortisation
of the UK transitional and the impact of one‑off management optimisations implemented over the period;
— Non-operating experience of £(0.6) billion: resulting mainly from the impact of US tax reform and market movements during 2017,
after allowing for the recalculation of the UK transitional at the valuation date;
— Other capital movements: comprising a loss from foreign currency translation, the net impact of debt raised offset by debt redeemed
during 2017 and a reduction in surplus from payment of dividends; and
— Model changes: reflecting minor calibration changes made to the internal model during 2017.
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
31 Dec 2017
31 Dec 2016
% of
undiversified
Solvency
Capital
Requirements
% of
diversified
Solvency
Capital
Requirements
% of
undiversified
Solvency
Capital
Requirements
% of
diversified
Solvency
Capital
Requirements
57%
14%
24%
13%
6%
26%
5%
14%
7%
11%
6%
71%
23%
38%
7%
3%
21%
2%
17%
2%
7%
1%
55%
12%
25%
13%
5%
28%
5%
16%
7%
11%
6%
68%
19%
41%
7%
1%
23%
2%
19%
2%
7%
2%
www.prudential.co.uk
Annual Report 2017 Prudential plc 377
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information II Other information continued
II(f) Solvency II capital position at 31 December 2017 continued
Reconciliation of IFRS equity to Group Solvency II Shareholder Own Funds
Reconciliation of IFRS equity to Group Solvency II Shareholder 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 net deferred tax liabilities resulting from liability valuation differences above
Other
Estimated Solvency II Shareholder Own Funds
31 Dec 2017
£bn
31 Dec 2016
£bn
16.1
(3.0)
(4.0)
5.8
(3.9)
5.3
12.1
(1.6)
(0.4)
26.4
14.7
(2.2)
(3.8)
6.3
(3.4)
4.0
10.5
(1.3)
0.0
24.8
The key items of the reconciliation as at 31 December 2017 are:
— £3.0 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 £0.8 billion, equivalent to the
value of 100 per cent of Risk Based Capital requirements (Company Action Level), as agreed with the Prudential Regulation Authority;
— £4.0 billion due to the removal of DAC, goodwill and intangibles from the IFRS balance sheet;
— £5.8 billion due to the addition of subordinated debt which is treated as available capital under Solvency II but as a liability under IFRS;
— £3.9 billion due to the inclusion of a risk margin for UK and Asia non‑hedgeable risks, net of £2.3 billion from transitional measures
(after allowing for recalculation of the transitional measures as at 31 December 2017) which are not applicable under IFRS;
— £5.3 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;
— £12.1 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;
— £1.6 billion due to the impact on the valuation of net deferred tax liabilities resulting from the liability 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
The estimated sensitivity of the Group shareholder Solvency II capital position to significant changes in market conditions is as follows:
Impact of market sensitivities
Base position
Impact of:
20% instantaneous fall in equity markets
40% fall in equity markets1
50 basis points reduction in interest rates2,3
100 basis points increase in interest rates3
100 basis points increase in credit spreads4
31 Dec 2017
31 Dec 2016
Surplus £bn
Ratio
Surplus £bn
13.3
0.7
(2.1)
(1.0)
1.2
(1.4)
202%
9%
(11)%
(14)%
21%
(6)%
12.5
0.0
(1.5)
(0.6)
1.0
(1.1)
Ratio
201%
3%
(7)%
(9)%
13%
(3)%
Notes
1
2
3
4
Where hedges are dynamic, rebalancing is allowed for by assuming an instantaneous 20 per cent fall followed by a further 20 per cent fall over a four‑week period.
Subject to a floor of zero.
Allowing for further transitional recalculation after the interest rate stress.
US Risk Based Capital solvency position included using a stress of 10 times expected credit defaults.
The Group believes it is positioned to withstand significant deteriorations in market conditions and we continue to use market hedges to
manage some of this exposure across the Group, where we believe the benefit of the protection outweighs the cost. The sensitivity
analysis above allows for predetermined management actions and those taken to date, but does not reflect all possible management
actions which could be taken in the future.
378 Prudential plc Annual Report 2017
www.prudential.co.uk
Additional unaudited financial information continued UK Solvency II capital position1,2
On the same basis as above, the estimated shareholder Solvency II surplus for The Prudential Assurance Company Limited (‘PAC’) and its
subsidaries2 at 31 December 2017 was £6.1 billion, after allowing for recalculation of transitional measures as at 31 December 2017. This
relates to shareholder‑backed business including future with‑profits shareholder transfers, but excludes the shareholders’ share of the
estate in line with Solvency II requirements.
Estimated UK shareholder Solvency II capital position*
Own funds
Solvency capital requirement
Surplus
Solvency ratio
31 Dec 2017
£bn
31 Dec 2016
£bn
14.0
7.9
6.1
178%
12.0
7.4
4.6
163%
* The UK shareholder capital position excludes the contribution to Own Funds and the Solvency Capital Requirement from ring‑fenced with‑profit funds and staff pension schemes in
surplus. The solvency positions include management’s estimate of UK transitional measures reflecting operating and market conditions at each valuation date. An application to
recalculate the transitional measures as at 31 December 2017 has been approved by the Prudential Regulation Authority.
While there is a large surplus in the UK with‑profits funds, this 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 2017 was £4.8 billion, after allowing for recalculation of transitional measures as at 31 December 2017.
Estimated UK with-profits Solvency II capital position*
Own funds
Solvency capital requirement
Surplus
Solvency ratio
31 Dec 2017
£bn
31 Dec 2016
£bn
9.6
4.8
4.8
201%
8.4
4.7
3.7
179%
* The solvency positions include management’s estimate of UK transitional measures reflecting operating and market conditions at each valuation date. An application to recalculate the
transitional measures as at 31 December 2017 has been approved by the Prudential Regulation Authority.
Reconciliation of UK with-profits IFRS unallocated surplus to Solvency II Own Funds1
A reconciliation between the IFRS unallocated surplus and Solvency II Own Funds for UK with‑profits business is as follows:
Reconciliation of UK with-profits funds
IFRS unallocated surplus of UK with‑profits funds
Adjustments from IFRS basis to Solvency II
Value of shareholder transfers
Risk margin (net of transitional)
Other valuation differences
Estimated Solvency II Own Funds
31 Dec 2017
£bn
31 Dec 2016
£bn
13.5
11.7
(2.7)
(0.7)
(0.5)
9.6
(2.3)
(0.7)
(0.3)
8.4
Annual regulatory reporting
The Group will publish its Solvency and Financial Condition Report and related quantitative templates no later than 17 June 2018. The
templates will require us to combine the Group shareholder solvency position with those of all other ring‑fenced funds across the Group.
In combining these solvency positions, the contribution to own funds from these ring‑fenced funds will be set equal to their aggregate
Solvency Capital Requirements, estimated at £6.6 billion (ie the solvency surplus in these ring‑fenced funds will not be captured in the
templates). There will be no impact on the reported Group Solvency II surplus.
Statement of independent review in respect of Solvency II Capital Position at 31 December 2017
The methodology, assumptions and overall result have been subject to examination by KPMG LLP.
Notes
1
2
The UK with‑profits capital position includes the PAC with‑profits sub‑fund, the Scottish Amicable Insurance Fund and the Defined Charge Participating Sub‑Fund.
The insurance subsidiaries of PAC are Prudential General Insurance Hong Kong Limited, Prudential Hong Kong Limited, Prudential International Assurance plc and Prudential
Pensions Limited.
www.prudential.co.uk
Annual Report 2017 Prudential plc 379
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information II Other information continued
II(g) 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 4 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 2017 results.
In addition to showing the amounts, both discounted and undiscounted, expected to be generated from all in‑force business at
31 December 2017, the tables also present the expected future free surplus to be generated from the investment made in new business
during 2017 over the same 40‑year period for long‑term business operations.
(i) Expected transfer of value of in-force business (VIF) and required capital to free surplus
Expected period of emergence
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038 to 2042
2043 to 2047
2048 to 2052
2053 to 2057
Undiscounted expected generation from
all in-force business*
Undiscounted expected generation from
new business written*
31 Dec 2017 £m
Asia
1,393
1,352
1,299
1,256
1,239
1,202
1,171
1,149
1,154
1,109
1,066
1,032
1,003
980
971
919
898
885
868
854
4,252
4,280
3,948
3,490
US
1,464
1,425
1,483
1,551
1,441
1,433
1,404
1,277
1,158
1,051
897
840
731
612
514
325
333
189
140
90
286
–
–
–
UK and
Europe
671
685
674
660
638
618
601
580
553
526
499
473
448
422
532
498
467
434
402
370
1,401
972
385
197
Total
3,528
3,462
3,456
3,467
3,318
3,253
3,176
3,006
2,865
2,686
2,462
2,345
2,182
2,014
2,017
1,742
1,698
1,508
1,410
1,314
5,939
5,252
4,333
3,687
Asia
197
182
181
162
164
139
142
136
131
141
121
125
116
117
134
112
113
112
111
120
581
719
737
714
US
226
113
124
155
129
65
73
179
154
138
125
114
99
89
78
51
32
29
23
21
–
–
–
–
UK and
Europe
36
38
40
43
48
44
40
39
39
38
36
32
31
30
30
28
26
25
23
22
83
76
9
5
Total
459
333
345
360
341
248
255
354
324
317
282
271
246
236
242
191
171
166
157
163
664
795
746
719
Total free surplus expected to emerge
in the next 40 years
37,770
18,644
13,706
70,120
5,507
2,017
861
8,385
* The analysis excludes amounts incorporated into VIF at 31 December 2017 where there is no definitive time frame for when the payments will be made or receipts received.
In particular, it excludes the value of the shareholders’ interest in the with‑profits estate. It also excludes any free surplus emerging after 2057.
The above amounts can be reconciled to the new business amounts as follows:
Undiscounted expected free surplus generation for years 2018 to 2057
Less: discount effect
Discounted expected free surplus generation for years 2018 to 2057
Discounted expected free surplus generation for years after 2057
Less: Free surplus investment in new business
Other items†
Post‑tax EEV new business profit for long‑term business operations
2017 £m
US
2,017
(689)
1,328
–
(254)
(168)
906
UK and
Europe
861
(339)
522
1
(175)
(6)
342
Total
8,385
(4,181)
4,204
443
(913)
(118)
3,616
Asia
5,507
(3,153)
2,354
442
(484)
56
2,368
† 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.
380 Prudential plc Annual Report 2017
www.prudential.co.uk
Additional unaudited financial information continued The undiscounted expected free surplus generation from all in‑force business at 31 December 2017 shown below can be
reconciled to the amount that was expected to be generated as at 31 December 2016 as follows:
Group
2016 expected free surplus generation for years
2017 to 2056
Less: Amounts expected to be realised in the
2017
£m
2018
£m
2019
£m
2020
£m
2021
£m
2022
£m
Other
£m
Total
£m
3,441
3,195
3,111
3,070
3,030
2,865
45,321
64,033
current year
(3,441)
–
–
–
–
–
–
(3,441)
Add: Expected free surplus to be generated in
year 2057*
Foreign exchange differences
New business
Operating movements
Non‑operating and other movements
2017 expected free surplus generation for years
2018 to 2057
Asia
2016 expected free surplus generation for years
2017 to 2056
Less: Amounts expected to be realised in the
–
–
–
–
–
–
–
(180)
459
(130)
184
–
(176)
333
(96)
290
–
(176)
345
(63)
280
–
(175)
360
(34)
286
–
(163)
341
(5)
280
578
(2,225)
6,547
578
(3,095)
8,385
2,668
3,660
3,528
3,462
3,456
3,467
3,318
52,889
70,120
2017
£m
2018
£m
2019
£m
2020
£m
2021
£m
2022
£m
Other
£m
Total
£m
1,320
1,247
1,202
1,167
1,142
1,122
27,080
34,280
current year
(1,320)
–
–
–
–
–
–
(1,320)
Add: Expected free surplus to be generated in
year 2057*
Foreign exchange differences
New business
Operating movements
Non‑operating and other movements
2017 expected free surplus generation for years
2018 to 2057
US
2016 expected free surplus generation for years
2017 to 2056
Less: Amounts expected to be realised in the
current year
Foreign exchange differences
New business
Operating movements
Non‑operating and other movements
2017 expected free surplus generation for years
2018 to 2057
UK and Europe
2016 expected free surplus generation for years
2017 to 2056
Less: Amounts expected to be realised in the
current year
Add: Expected free surplus to be generated in
year 2057*
New business
Operating movements
Non‑operating and other movements
2017 expected free surplus generation for years
2018 to 2057
* Excluding 2017 new business.
–
–
–
–
–
–
–
(69)
197
11
7
–
(66)
182
15
19
–
(65)
181
–
16
–
(64)
162
(8)
24
–
(63)
164
(17)
33
540
(1,511)
4,621
540
(1,838)
5,507
501
601
1,393
1,352
1,299
1,256
1,239
31,231
37,770
2017
£m
2018
£m
2019
£m
2020
£m
2021
£m
2022
£m
Other
£m
Total
£m
1,446
1,279
1,273
1,281
1,282
1,152
8,257
15,970
(1,446)
–
–
–
–
–
(111)
226
(72)
142
–
(110)
113
(48)
197
–
(111)
124
(8)
197
–
(111)
155
24
201
–
(100)
129
57
203
–
(714)
1,270
(1,446)
(1,257)
2,017
2,467
3,360
–
1,464
1,425
1,483
1,551
1,441
11,280
18,644
2017
£m
2018
£m
2019
£m
2020
£m
2021
£m
2022
£m
Other
£m
Total
£m
675
669
636
622
606
591
9,984
13,783
(675)
–
–
–
–
–
–
–
36
(69)
35
–
–
38
(63)
74
–
–
40
(55)
67
–
–
43
(50)
61
–
–
48
(45)
44
–
(675)
38
656
38
861
(300)
(301)
671
685
674
660
638
10,378
13,706
www.prudential.co.uk
Annual Report 2017 Prudential plc 381
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information II Other information continued
II(g) Reconciliation of expected transfer of value of in-force business (VIF) and required capital to free surplus
continued
At 31 December 2017, the total free surplus expected to be generated over the next five years (2018 to 2022 inclusive), using the same
assumptions and methodology as those underpinning our 2017 embedded value reporting was £17.2 billion, an increase of £1.4 billion
from the £15.8 billion expected over an equivalent period from the end of 2016.
This increase primarily reflects the new business written in 2017, which is expected to generate £1,838 million of free surplus over the
next five years.
At 31 December 2017, the total free surplus expected to be generated on an undiscounted basis in the next 40 years is £70.1 billion,
up from the £64.0 billion expected at the end of 2016, reflecting the effect of new business written across all three business operations of
£8.4 billion, a negative foreign exchange translation effect of £(3.1) billion and a £3.7 billion net effect reflecting operating, market
assumption changes and other items. In Asia, these include the effect of changes in operating assumptions reflecting the net benefit
arising from annual review of experience, together with the benefit of management actions. In the US, these mainly reflect the positive
effect from persistency assumption updates and increase in equity market returns, together with the benefits from US tax reform,
partially offset by lower future separate account return due to the decrease in interest rates. In the UK and Europe, these reflect the
impact of management actions which had the effect of accelerating the generation of future free surplus into 2017, partially offset by
higher than assumed investment returns on with‑profits funds. 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 2017 from life business in force before restructuring costs at the end of 2017 was
£4.1 billion including £0.6 billion of changes in operating assumptions and experience variances. This compares with the expected 2017
realisation at the end of 2016 of £3.4 billion. This can be analysed further as follows:
Transfer to free surplus in 2017
Expected return on free assets
Changes in operating assumptions and experience variances
Underlying free surplus generated from in-force life business before
restructuring costs in 2017
2017 free surplus expected to be generated at 31 December 2016
Asia
£m
1,275
51
81
1,407
1,320
US
£m
1,329
56
190
1,575
1,446
UK and
Europe
£m
675
31
364
1,070
675
Total
£m
3,279
138
635
4,052
3,441
382 Prudential plc Annual Report 2017
www.prudential.co.uk
Additional unaudited financial information continued
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
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038‑2042
2043‑2047
2048‑2052
2053‑2057
Discounted expected generation from
all in-force business
Discounted expected generation from
new business written
31 Dec 2017 £m
Asia
1,337
1,218
1,102
997
929
845
777
718
679
619
561
515
477
445
420
376
350
329
309
291
1,314
1,101
837
593
US
1,400
1,282
1,254
1,234
1,077
1,008
930
795
680
580
467
410
337
268
215
124
123
72
52
30
117
–
–
–
UK and
Europe
655
645
610
573
529
487
452
415
375
337
303
272
241
212
261
229
202
176
156
136
465
117
89
33
Total
3,392
3,145
2,966
2,804
2,535
2,340
2,159
1,928
1,734
1,536
1,331
1,197
1,055
925
896
729
675
577
517
457
1,896
1,218
926
626
Asia
188
161
150
127
121
98
96
86
78
80
64
62
55
52
56
45
44
42
39
42
180
192
166
130
US
220
103
107
124
99
46
51
112
89
75
64
54
44
37
31
24
16
14
10
8
–
–
–
–
UK and
Europe
35
36
38
39
41
36
32
30
28
25
22
20
18
16
15
13
12
10
9
7
30
7
2
1
Total
443
300
295
290
261
180
179
228
195
180
150
136
117
105
102
82
72
66
58
57
210
199
168
131
Total discounted free surplus expected
to emerge in the next 40 years
17,139
12,455
7,970
37,564
2,354
1,328
522
4,204
The above amounts can be reconciled to the Group’s EEV basis financial statements as follows:
Discounted expected generation from all in‑force business for years 2018 to 2057
Discounted expected generation from all in‑force business for years after 2057
Discounted expected generation from all in‑force business at 31 December 2017
Add: Free surplus of life operations held at 31 December 2017
Less: Time value of guarantees
Other non‑modelled items
Total EEV for long‑term business operations
31 Dec 2017
£m
37,564
1,576
39,140
6,242
(836)
1,371
45,917
www.prudential.co.uk
Annual Report 2017 Prudential plc 383
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information II Other information continued
II(h) 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:
2017 Free surplus and Group IFRS results
US dollar linked note (1)
Other Asia currencies
Total Asia
UK sterling notes (2)(3)
US dollar note (3)
Total
2017 Group EEV post-tax results
US dollar linked note (1)
Other Asia currencies
Total Asia
UK sterling notes (2)(3)
US dollar note (3)
Total
Underlying
free surplus
generated for
total insurance
and asset
management
operations
%
13%
17%
30%
34%
36%
Group IFRS
pre-tax
operating
profit
notes (2)(3)
%
Group IFRS
shareholders’
funds
notes (2)(3)
%
24%
18%
42%
11%
47%
21%
16%
37%
50%
13%
100%
100%
100%
New
business
profits
%
54%
12%
66%
9%
25%
Operating
profit
notes (2)(3)
%
Shareholders’
funds
notes (2)(3)
%
46%
12%
58%
9%
33%
37%
11%
48%
29%
23%
100%
100%
100%
Notes
(1) US dollar linked comprise the Hong Kong and Vietnam operations where the currencies are pegged to the US dollar and the Malaysia and Singapore operations where the
(2)
(3)
currencies are managed against a basket of currencies including the US dollar.
For operating profit and shareholders’ funds, UK sterling includes amounts in respect of M&G Prudential and other operations (including central operations, Africa operations
and Prudential Capital). Operating profit for central operations includes amounts for corporate expenditure for Group Head Office as well as Asia Regional Head Office which
is incurred in HK dollars.
For shareholders’ funds, the US dollar grouping includes US dollar denominated core structural borrowings. Sterling operating profits include all interest payable as sterling
denominated, reflecting interest rate currency swaps in place.
384 Prudential plc Annual Report 2017
www.prudential.co.uk
Additional unaudited financial information continued
II(i) 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 B2.2
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: 19 May 2021;
— Prudential International Assurance sharesave plan: 3 August 2019; and
— International savings‑related share option scheme for non‑employees 2012: 12 May 2022.
The weighted average share price of Prudential plc for the year ended 31 December 2017 was £17.51 (2016: £13.56).
Particulars of options granted to directors are included in the Directors’ remuneration report on page 123.
The closing price of the shares immediately before the date on which the options were granted during the year was £17.67.
The following analyses show the movement in options for each of the option schemes for the year ended 31 December 2017.
UK savings-related share option scheme
Date of grant
Exercise
price £
Beginning
End
Beginning
of year
Granted
Exercised Cancelled Forfeited
Lapsed
Exercise period
Number of options
16 Sep 11
21 Sep 12
20 Sep 13
20 Sep 13
23 Sep 14
23 Sep 14
22 Sep 15
22 Sep 15
21 Sep 16
21 Sep 16
21 Sep 17
21 Sep 17
4.66
6.29
9.01
9.01
11.55
11.55
11.11
11.11
11.04
11.04
14.55
14.55
01 Dec 16
01 Dec 17
01 Dec 16
01 Dec 18
01 Dec 17
01 Dec 19
01 Dec 18
01 Dec 20
01 Dec 19
01 Dec 21
01 Dec 20
01 Dec 22
31 May 17
31 May 18
31 May 17
31 May 19
31 May 18
31 May 20
31 May 19
31 May 21
31 May 20
31 May 22
31 May 21
31 May 23
36,006
119,886
73,812
70,258
759,088
390,761
933,241
223,807
719,147
164,428
–
–
–
–
–
–
–
–
–
–
– 817,979
– 138,385
(36,006)
(89,777)
(70,920)
(1,942)
(566,652)
(12,686)
(15,804)
(2,061)
(2,096)
(747)
–
–
(1,572)
–
–
–
(598)
–
(2,863)
(998)
(332)
(14,043) (14,379)
–
(2,007)
(1,894)
(1,184)
(7,655)
(2,097) (15,159)
(29,125) (20,724) (20,042)
(3,609)
(3,240)
(24,643) (18,455) (10,082)
(3,328)
(4,074)
(10,621)
–
(691)
(7,985)
–
–
(288)
(1,350)
End of
year
–
25,239
–
66,202
156,359
359,247
847,546
213,547
663,871
145,658
809,303
138,097
3,490,434 956,364
(798,691)
(90,225) (67,853) (64,960)
3,425,069
The total number of securities available for issue under the scheme is 3,425,069, which represents 0.132 per cent of the issued share
capital at 31 December 2017.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the
current period was £18.17.
The weighted average fair value of options granted under the plan in the period was £3.29.
www.prudential.co.uk
Annual Report 2017 Prudential plc 385
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information II Other information continued
II(i) Option schemes continued
International savings-related share option scheme
Exercise period
Number of options
Date of grant
Exercise
price £
Beginning
End
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
21 Sep 16
21 Sep 17
21 Sep 17
4.66
6.29
6.29
9.01
9.01
11.55
11.55
11.11
11.11
11.04
14.55
14.55
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
01 Dec 19
01 Dec 20
01 Dec 22
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
31 May 20
31 May 21
31 May 23
Beginning
of year
722
2,725
14,501
131,680
43,676
7,709
4,464
23,556
3,240
15,516
–
–
Granted
Exercised Cancelled Forfeited
Lapsed
–
–
–
–
–
–
–
–
–
–
12,542
3,298
(722)
(2,725)
(11,708)
(126,373)
(3,669)
(5,138)
–
–
–
–
–
–
–
–
(1,772)
(7)
(1,655)
–
–
–
–
–
–
–
–
–
(359)
(149)
–
(155)
–
–
–
–
–
–
–
–
–
(5,151)
–
(2)
–
–
–
–
–
–
End of
year
–
–
662
–
38,352
2,414
4,464
23,556
3,240
15,516
12,542
3,298
247,789
15,840
(150,335)
(3,434)
(663)
(5,153)
104,044
The total number of securities available for issue under the scheme is 104,044 which represents 0.004 per cent of the issued share capital
at 31 December 2017.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the
current period was £16.99.
The weighted average fair value of options granted under the plan in the period was £3.32.
Prudential International Assurance sharesave plan
There are no securities available for issue under the scheme at 31 December 2017.
Non-employee savings-related share option scheme
Date of grant
Exercise
price £
Beginning
End
Beginning
of year
Granted
Exercised Cancelled Forfeited
Lapsed
Exercise period
Number of options
16 Sep 11
21 Sep 12
20 Sep 13
20 Sep 13
23 Sep 14
23 Sep 14
22 Sep 15
22 Sep 15
21 Sep 16
21 Sep 16
21 Sep 17
21 Sep 17
4.66
6.29
9.01
9.01
11.55
11.55
11.11
11.11
11.04
11.04
14.55
14.55
01 Dec 16
01 Dec 17
01 Dec 16
01 Dec 18
01 Dec 17
01 Dec 19
01 Dec 18
01 Dec 20
01 Dec 19
01 Dec 21
01 Dec 20
01 Dec 22
31 May 17
31 May 18
31 May 17
31 May 19
31 May 18
31 May 20
31 May 19
31 May 21
31 May 20
31 May 22
31 May 21
31 May 23
29,936
28,001
346,321
406,850
596,435
502,793
480,825
405,994
334,276
199,230
–
–
–
–
–
–
–
–
–
–
– 268,279
– 174,763
(29,936)
(12,737)
(338,560)
(365)
(331,618)
(121)
(18,378)
– (25,456)
–
–
–
–
–
(7,761)
(4,992) (13,243)
(8,802)
(5,192)
(18,074) (10,287)
(8,370)
(815)
(815)
–
–
– (13,662)
(3,749)
–
–
–
(618)
–
(412)
–
3,330,661 443,042
(713,337)
(93,102) (47,524)
–
–
–
–
–
–
–
–
–
–
–
–
–
End of
year
–
15,264
–
388,250
237,637
472,145
452,343
383,962
329,712
198,415
267,661
174,351
2,919,740
The total number of securities available for issue under the scheme is 2,919,740 which represents 0.113 per cent of the issued share
capital at 31 December 2017.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the
current period was £17.67.
The weighted average fair value of options granted under the plan in the period was £3.41.
386 Prudential plc Annual Report 2017
www.prudential.co.uk
Additional unaudited financial information continued
II(j) 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
Profit (loss) attaching to disposal of businesses
Total charges, net of reinsurance and profit (loss) attaching to
Year ended 31 December
2017 £m
2016 £m
2015 £m
2014 £m
2013 £m
44,005
(2,062)
41,943
42,189
2,430
86,562
38,981
(2,020)
36,961
32,511
2,370
71,842
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
(72,532)
(10,165)
(59,366)
(8,848)
(29,656)
(8,208)
(50,169)
(6,752)
(43,154)
(6,861)
(425)
228
(360)
(238)
(312)
(46)
(341)
(13)
(305)
(120)
disposal of businesses
(82,894)
(68,812)
(38,222)
(57,275)
(50,440)
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 charges attributable to policyholders’ returns
Profit before tax attributable to shareholders
Tax charge 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
(in pence)
Interim ordinary dividend/final ordinary dividend
Special dividend
Supplementary IFRS income statement data
302
182
238
303
147
3,970
(674)
3,296
(906)
2,390
3,212
(937)
2,275
(354)
1,921
3,321
(173)
3,148
(569)
2,579
3,154
(540)
2,614
(398)
2,216
2,082
(447)
1,635
(289)
1,346
2017
2016
2015
2014
2013
93.1p
93.0p
45.07p
45.07p
–
75.0p
75.0p
49.40p
39.40p
10.00p
101.0p
100.9p
38.05p
38.05p
–
86.9p
86.8p
35.03p
35.03p
–
52.8p
52.7p
30.52p
30.52p
–
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 £m
2017
4,699
(1,403)
3,296
145.2p
2016
4,256
(1,981)
2,275
131.3p
2015
3,969
(821)
3,148
124.6p
2014
3,154
(540)
2,614
95.7p
2013
2,937
(1,302)
1,635
90.4p
www.prudential.co.uk
Annual Report 2017 Prudential plc 387
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information II Other information continued
II(j) 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)
2017
6,598
2,153
8,751
Year ended 31 December £m
2016
5,497
(981)
4,516
2015
4,840
(889)
3,951
2014
4,108
235
4,343
2013
4,224
134
4,358
257.0p
214.7p
189.6p
161.2p
165.8p
Year ended 31 December £m
2017
6,958
3,610
52%
2016
6,320
3,088
49%
2015
5,466
2,609
48%
2014*
4,514
2,104
47%
2013
4,310
2,057
48%
* 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
2017
2016
2015
2014
2013
Total assets
Total policyholder liabilities and unallocated surplus of
with‑profits funds
Core structural borrowings of shareholder‑financed operations
Total liabilities
Total equity
493,941
470,498
386,985
369,204
325,932
428,194
6,280
477,847
16,094
403,313
6,798
455,831
14,667
335,614
5,011
374,029
12,956
321,989
4,304
357,392
11,812
286,014
4,636
316,281
9,651
£m
Other data
As of and for the year ended 31 December
Funds under management note 3
EEV shareholders’ equity, excluding non‑controlling interests
Group shareholder Solvency II surplus note 4
Insurance Groups Directive capital surplus before final dividend
2017
669
45.0
13.4
n/a
2016
602
39.0
12.5
n/a
£bn
2015
509
32.4
9.7
5.5
2014
496
29.2
n/a
4.7
2013
443
24.9
n/a
5.1
Notes
1
2
3
4
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 the Group’s holdings, the costs arising from the domestication of the Hong Kong business,
profit (loss) attaching to the sale of Japan life and profit (loss) attaching to the held for sale Korea life business. 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 2017 surplus is estimated.
388 Prudential plc Annual Report 2017
www.prudential.co.uk
Additional unaudited financial information continued II(k) Reconciliation between IFRS and EEV shareholders’ funds
The table below shows the reconciliation of EEV shareholders’ funds and IFRS shareholders’ funds at the end of the year:
EEV shareholders’ funds
Less: Value of in‑force business of long‑term business note (a)
Deferred acquisition costs assigned zero value for EEV purposes
Other note (b)
IFRS shareholders’ funds
31 Dec 2017
£m
31 Dec 2016
£m
44,698
(29,410)
9,227
(8,428)
16,087
38,968
(24,937)
9,170
(8,535)
14,666
Notes
(a) The EEV shareholders’ funds comprises the present value of the shareholders’ interest in the value of in‑force business, net worth of long‑term business
operations and IFRS shareholders’ funds of asset management and other operations. The value of in‑force business reflects the present value of future
shareholder cash flows from long‑term in‑force business which are not captured as shareholders’ interest on an IFRS basis. Net worth represents the 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.
(b) Other adjustments represent asset and liability valuation differences between IFRS and the local regulatory reporting basis used to value net worth for
long‑term insurance operations. For the UK, this would be the difference between IFRS and Solvency II.
It also includes the mark to market of the Group’s core structural borrowings which are fair valued under EEV but not IFRS. The most significant valuation
differences relate to changes in the valuation of insurance liabilities. For example, in Jackson where IFRS liabilities are higher than the local regulatory basis as
they are principally based on policyholder account balances (with a deferred acquisition costs recognised as an asset) whereas the local regulatory basis used
for EEV is based on future cash flows due to the policyholder on a prudent basis with consideration of an expense allowance as applicable, but with no
separate deferred acquisition cost asset.
II(l) Reconciliation of APE new business sales to earned premiums
The Group reports APE new business sales as a measure of the new policies sold in the year. This differs from the IFRS measure of
premiums earned as shown below:
Annual premium equivalents as published
Adjustment to include 100% of single premiums on new business sold in the year note (a)
Premiums from in‑force business and other adjustments note (b)
Gross premiums earned
Outward reinsurance premiums
Earned premiums, net of reinsurance as shown in the IFRS financial statements
2017 £m
6,958
28,769
8,278
44,005
(2,062)
41,943
2016 £m
6,320
25,057
7,604
38,981
(2,020)
36,961
Notes
(a)
(b)
APE new business sales only include one tenth of single premiums, recorded on policies sold in the year. Gross premiums earned include 100 per cent of such premiums.
Other adjustments principally include amounts in respect of the following:
– Gross premiums earned include premiums from existing in‑force business as well as new business. The most significant amount is recorded in Asia, where a significant portion of
regular premium business is written. Asia in‑force premiums form the vast majority of the other adjustment amount;
– APE includes new policies written in the year which are classified as investment contracts without discretionary participation features under IFRS 4, arising mainly in Jackson for
guaranteed investment contracts and in M&G Prudential for certain unit‑linked savings and similar contracts. These are excluded from gross premiums earned and recorded as
deposits;
– APE new business sales are annualised while gross premiums earned are recorded only when revenues are due; and
– For the purpose of reporting APE new business sales, we include the Group’s share of amounts sold by the Group’s insurance joint ventures and associates. Under IFRS, joint
ventures and associates are equity accounted and so no amounts are included within gross premiums earned.
www.prudential.co.uk
Annual Report 2017 Prudential plc 389
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
II Other information continued
II(m) Calculation of return on embedded value
Return on embedded value is calculated as the EEV post‑tax operating profit based on longer‑term investment returns, as a percentage
of opening EEV basis shareholders’ funds.
Operating profit based on longer‑term investment returns (£ million)
Opening EEV basis shareholders' funds (£ million)
Return on embedded value
Note
2
9
2017
6,598
38,968
17%
2016
5,497
31,886
17%
II(n) Calculation of EEV shareholders’ funds per share
EEV shareholders’ funds per share is calculated as closing EEV shareholders’ funds divided by the number of issued shares at the balance
sheet date. EEV shareholders’ funds per share excluding goodwill attributable to shareholders is calculated in the same manner, except
goodwill attributable to shareholders is deducted from closing EEV shareholders’ funds.
Closing EEV shareholders' funds (£ million)
Less: Goodwill attributable to shareholders (£ million)
Closing EEV shareholders' funds excluding goodwill attributable to shareholders (£ million)
Number of issued shares at year end (millions)
Shareholders' funds per share (in pence)
Shareholders' funds per share excluding goodwill attributable to shareholders
(in pence)
Note
31 Dec 2017
31 Dec 2016
9
9
44,698
(1,458)
43,240
2,587
1,728p
38,968
(1,475)
37,493
2,581
1,510p
1,671p
1,453p
390 Prudential plc Annual Report 2017
www.prudential.co.uk
Additional unaudited financial information continued 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 ‘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
Uncertainty, fluctuations or negative
trends in international economic and
investment climates could have a material
adverse effect on Prudential’s business and
profitability. Prudential operates in a
macroeconomic and global financial market
environment that presents significant
uncertainties and potential challenges, For
example, government interest rates remain
low in the US, the UK and some Asian
countries in which Prudential operates.
Global financial markets are subject to
uncertainty and volatility created by a
variety of factors. These factors include the
reduction in accommodative monetary
policies in the US, the UK and other
jurisdictions together with its impact on the
valuation of all asset classes, effects on
interest rates and the risk of disorderly
repricing of inflation expectations and
global bond yields, concerns over
sovereign debt, a general slowing in world
growth, the increased level of geopolitical
risk and policy‑related uncertainty and
potentially negative socio‑political events.
The adverse effects of such factors could
be felt principally through the following
items:
— Reduced investment returns arising on
the Group’s portfolios including
impairment of debt securities and loans,
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, and/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;
challenges related to market fluctuations
and general economic conditions may
continue to emerge.
— 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 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 becoming more 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, which also adds to
uncertainty over the accessibility of
financial resources and may reduce
capital resources as valuations decline.
This could occur where external capital
is unavailable at sustainable cost,
increased liquid assets are required to
be held as collateral under derivative
transactions or redemption restrictions
are placed on Prudential’s investments
in illiquid funds. In addition, significant
redemption requests could also be
made on Prudential’s issued funds and
while this may not have a direct impact
on the Group’s liquidity, it could result in
reputational damage to Prudential. The
potential impact of increased illiquidity
is more uncertain than for other risks
such as interest rate or credit risk.
In general, 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
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 premium and claim 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 premium and claim values
over a sustained period, this could have a
material adverse effect on Prudential’s
reported profit.
In the US, Jackson 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.
Jackson uses a derivative hedging
programme to reduce its exposure to
market risks arising on these guarantees.
There could be market circumstances
where the derivatives that Jackson enters
into to hedge its market risks may not cover
its exposures under the guarantees. The
cost of the guarantees that remain unhedged
will also affect Prudential’s results.
In addition, 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 the economic or local regulatory
results that may be less significant under
IFRS reporting.
Also, in the US, fluctuations in prevailing
interest rates can affect results from
www.prudential.co.uk
Annual Report 2017 Prudential plc 391
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Jackson which has a significant spread
based business, with the significant
proportion 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.
On 29 March 2017 the UK submitted the
formal notification of its intention to
withdraw from the EU pursuant to Article
50 of the Treaty on the European Union, as
amended. Following submission of this
notification, the UK has a maximum period
of two years to negotiate the terms of its
withdrawal from the EU. If no formal
withdrawal agreement is reached between
the UK and the EU, then it is expected the
UK’s membership of the EU will
automatically terminate two years after the
submission of the notification of the UK’s
intention to withdraw from the EU. The
UK’s decision to leave the EU will have
political, legal and economic ramifications
for both the UK and the EU, although these
are expected to be more pronounced for
the UK. The Group has several UK
domiciled operations, including
M&G Prudential, and these may be
impacted by a UK withdrawal from the EU.
The outcome of the negotiations on the
UK’s withdrawal and any subsequent
negotiations on trade and access to the
country’s major trading markets, including
the single EU market, is currently unknown.
As a result, there is ongoing uncertainty
over the terms under which the UK will
leave the EU, whether any transitional
arrangements will be agreed between the
UK and the EU, the possibility of a lengthy
period before negotiations are concluded,
and the potential for a disorderly exit by the
UK without a negotiated agreement. This
uncertainty may increase volatility in the
markets where the Group operates and
create the potential for a general downturn
in economic activity and for further or
prolonged interest rate reductions in some
jurisdictions due to monetary easing and
investor sentiment.
A significant part of the profit from
M&G Prudential’s 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
Investing in sovereign debt creates
exposure to the direct or indirect
consequences of political, social or
economic changes (including changes in
governments, heads of state 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
adversely affected, as might counterparty
relationships between financial institutions.
If a sovereign were to default on its
obligations, or adopted policies that
devalued or otherwise altered the
currencies in which its obligations were
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 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
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 that Prudential has in
managing its business.
392 Prudential plc Annual Report 2017
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Risk factors continued 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),
capital control measures on companies
and individuals, regulation or regulatory
interpretation applying to companies in the
financial services and insurance industries
in any of the markets in which Prudential
operates, or decisions taken by regulators
in connection with their supervision of
members of the Group, which in some
circumstances may be applied
retrospectively, may adversely affect
Prudential. The adverse impact from
these changes may affect Prudential’s
product range, distribution channels,
competitiveness, profitability, capital
requirements, risk management
approaches, corporate or governance
structure and, consequently, reported
results and financing requirements.
Also, regulators in jurisdictions in
which Prudential operates may impose
requirements affecting the allocation of
capital and liquidity between different
business units in the Group, whether on
a geographic, legal entity, product line or
other basis. Regulators may change the
level of capital required to be held by
individual businesses or could introduce
possible changes in the regulatory
framework for pension arrangements and
policies, the regulation of selling practices
and solvency requirements. Furthermore,
as a result of interventions by governments
following recent financial and global
economic conditions, there may continue
to be changes 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.
Recent shifts in the focus of some national
governments toward more protectionist
or restrictive economic and trade policies
could impact on the degree and nature
of regulatory changes and Prudential’s
competitive position in some geographic
markets. This could take effect, for
example, through increased friction in
cross‑border trade or measures favouring
local enterprises such as changes to the
maximum level of non‑domestic ownership
by foreign companies.
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 began a review in late 2016 of
some aspects of the Solvency II legislation,
which is expected to continue until 2021
and covers, among other things, a review
of the Long Term Guarantee measures.
Prudential applied for, and has been
granted approval by the UK Prudential
Regulation Authority to use the following
measures when calculating its Solvency II
capital requirements: the use of an internal
model, the ‘matching adjustment’ for UK
annuities, the ‘volatility adjustment’ for
selected US Dollar‑denominated business,
and UK transitional measures. Prudential
also has permission to use ‘deduction and
aggregation’ as the method by which the
contribution of the Group’s US insurance
entities to the Group’s solvency is
calculated, which in effect recognises
surplus in US insurance entities in excess of
250 per cent of local US Risk Based Capital
requirements. There is a risk that in the
future changes are required to be made
to the approved internal model and these
related applications which could have a
material impact on the Group Solvency II
capital position. Where internal model
changes are subject to regulatory approval,
there is a risk that the approval is delayed or
not given. In such circumstances, changes
in our risk profile would not be able to be
appropriately reflected in our internal
model, which could have a material impact
on the Group’s Solvency II capital position.
The UK’s decision to leave the EU could
result in significant changes to the legal and
regulatory regime under which the Group
operates, the nature and extent of which
are uncertain while the outcome of
negotiations regarding the UK’s withdrawal
from the EU and the extent and terms of
any future access to the single EU market
remains unknown.
Currently there are also a number of other
global regulatory developments which
could impact Prudential’s businesses 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),
the Insurance Capital Standard (ICS) being
developed by the International Association
of Insurance Supervisors (IAIS), the
Markets in Financial Instruments Directive
(the ‘MiFID II Directive’), which recently
came into force in the EU and the EU
General Data Protection Regulation that
comes into force in May 2018. In addition,
regulators in a number of jurisdictions in
which the Group operates are further
developing local capital regimes; this
includes potential future developments
in Solvency II in the UK (as referred to
above), National Association of Insurance
Commissioners’ reforms in the US
including any implications from the
recently enacted US tax reform legislation
and amendments to certain local statutory
regimes in some territories in Asia. There
remains a high degree of uncertainty over
the potential impact of these changes on
the Group.
The Dodd‑Frank Act provides for a
comprehensive overhaul of the financial
services industry within the US including
reforms to financial services entities,
products and markets. The full impact
of the Dodd‑Frank Act on Prudential’s
businesses remains unclear, 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. There is also potential
uncertainty surrounding future changes to
the Dodd‑Frank Act under the current US
administration.
Prudential’s designation as a G‑SII was
reaffirmed on 21 November 2016. As a
result of this designation, Prudential is
subject to additional regulatory
requirements, including a requirement to
submit enhanced risk management plans
(such as a Group‑wide Recovery Plan, a
Systemic Risk Management Plan and a
Liquidity Risk Management Plan) to a Crisis
Management Group (CMG) comprised of
an international panel of regulators.
The G‑SII regime also introduces capital
requirements in the form of a Higher Loss
Absorption (HLA) requirement. While this
requirement was initially intended to come
into force in 2019, this has now been
postponed to 2022. The HLA is also now
intended to be based on the ICS. The IAIS
has announced that the implementation
of ICS will be conducted in two phases –
a five‑year monitoring phase followed
by an implementation phase. During the
monitoring phase, Internationally Active
Insurance Groups, for which Prudential
satisfies the criteria, will be required to
report on compliance with the ICS to the
group‑wide supervisor on a confidential
basis, although these results will not be
used as a basis to trigger supervisory
www.prudential.co.uk
Annual Report 2017 Prudential plc 393
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information action. The Common Framework
(ComFrame) for the Supervision of
Internationally Active Insurance Groups
will more generally 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.
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 in which 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, under
its standard IFRS 4 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 May 2017, the
IASB published its replacement standard
on insurance accounting (IFRS 17,
‘Insurance Contracts’), which will have the
effect of introducing fundamental changes
to the statutory reporting of insurance
entities that prepare accounts according to
IFRS from 2021. The European Union will
apply its usual process for assessing
whether the standard meets the necessary
criteria for endorsement. The Group is
reviewing the complex requirements of
this standard and considering its potential
impact. The effect of changes required
to the Group’s accounting policies as a
result of implementing the new standard is
currently uncertain, but these changes can
be expected to, amongst other things, alter
the timing of IFRS profit recognition. The
implementation of this standard is also
likely to require significant enhancements
to IT, actuarial and finance systems of the
Group, and so will have an increase on the
Group’s expenses.
Any changes or modification of IFRS
accounting policies may require a change
in the way in which future results will
be determined and/or a retrospective
adjustment of reported results to
ensure consistency.
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. Such actions
may relate to the application of current
regulations for example the Financial
Conduct Authority’s (FCA) principles and
conduct of business rules or the failure to
implement new regulations. 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 pensions 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.
Current regulatory actions include the
UK business’s undertaking to the FCA to
review annuities sold without advice after
1 July 2008 to its contract‑based defined
contribution pension customers. This will
result in the UK business being required
to provide redress to certain such
customers, the ultimate amount of which
remains uncertain.
Regulators may also focus on 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 (subjecting the
person or entity to certain regulatory
requirements, such as those adopted
by the US Department of Labor (DoL).
Elements of the DoL fiduciary duty rules,
including the impartial conduct standards,
became effective on 9 June 2017 but
applicability of the remaining components
of the rules has been delayed until 1 July
2019. 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.
Litigation, disputes and regulatory
investigations may adversely affect
Prudential’s profitability and
financial condition
Prudential is, and may in the future be,
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
respects 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 imposed and
the inherent unpredictability of litigation
and disputes, it is possible that an adverse
outcome could 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, the ability to
respond to developing demographic trends,
customer appetite for certain savings
products and technological advances.
In some of its markets, Prudential faces
competitors that are larger, have greater
394 Prudential plc Annual Report 2017
www.prudential.co.uk
Risk factors continued 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
include global life insurers such as Allianz,
AXA, and Manulife together with regional
insurers such as AIA and Great Eastern,
and multinational asset managers such as
Franklin Templeton, HSBC Global Asset
Management, J.P. Morgan Asset
Management and Schroders. In most
markets, there are also local companies
that have a material market presence.
M&G Prudential’s principal competitors
include many of the major retail financial
services companies and fund management
companies including, in particular, Aviva,
Janus Henderson, Jupiter, Legal & General,
Schroders and Standard Life Aberdeen.
Jackson’s competitors in the US include
major stock and mutual insurance
companies, mutual fund organisations,
banks and other financial services
companies such as Aegon, AIG, Allianz,
AXA Financial Inc., Brighthouse, Lincoln
Financial Group, MetLife and
Prudential Financial.
Prudential believes competition will
intensify across all regions in response
to consumer demand, digital and other
technological advances, the need for
economies of scale and the consequential
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.
All ratings above are stated as at
13 March 2018.
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
(from both Prudential and its outsourcing
partners) of direct or indirect loss resulting
from inadequate or failed internal and
external processes, systems or human
error, the effects of natural or man‑made
catastrophic events (such as natural
disasters, pandemics, cyber‑attacks,
acts of terrorism, civil unrest and other
catastrophes) or from other external
events. Exposure to such events could
disrupt Prudential’s systems and
operations significantly, which may result
in financial loss and reputational damage.
Prudential’s business is dependent on
processing a large number of transactions
across numerous and diverse products,
and it employs a large number of models,
and user developed applications, some of
which are complex, in its processes. The
long‑term nature of much of the Group’s
business also means that accurate records
have to be maintained for significant
periods. Further, Prudential operates in an
extensive and evolving legal and regulated
environment which adds to the operational
complexity of its business processes
and controls.
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.
As part of the implementation of its
business strategies, Prudential has
commenced a number of change initiatives
to be established across the Group, some of
which are interconnected and/or of large
scale, that may have material financial and
reputational implications if such initiatives
fail (either wholly or in part) to meet their
objectives and could place strain on the
operational capacity of the Group. These
initiatives include the combination of M&G
and Prudential UK & Europe, the proposed
demerger of M&G Prudential and the
intended sale of part of the UK annuity
portfolio. In addition, Prudential outsources
several operations, including a significant
part of its 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, models and
processes incorporate controls designed to
manage and mitigate the operational and
model 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 and model risk incidents do
happen periodically and no system or
process can entirely prevent them although
there have not been any material 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 security 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
customers and business partners. Similarly,
any weakness in administration systems
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Annual Report 2017 Prudential plc 395
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information (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.
The proposed demerger of
M&G Prudential carries with it
execution risk and will require
significant management attention
The proposed demerger of
M&G Prudential (Prudential’s UK
business), is subject to a number of factors
(including prevailing market conditions,
transfer of the Hong Kong business from
The Prudential Assurance Company
Limited to Prudential Corporation Asia
Limited and approvals from regulators and
shareholders). Therefore there can be no
certainty as to the timing of the demerger,
or that it will be completed as proposed (or
at all). Further, if the proposed demerger is
completed, there can be no assurance that
either Prudential plc or M&G Prudential
will realise the anticipated benefits of the
transaction, or that the proposed demerger
will not adversely affect the trading value
or liquidity of the shares of either or both of
the two businesses. In addition, preparing
for and implementing the proposed
demerger is expected to require significant
time from management, which may divert
management’s attention from other
aspects of Prudential’s business.
Attempts by third parties to
access or disrupt Prudential’s
IT systems could result in loss of
trust from Prudential’s customers,
reputational damage and
financial loss
Prudential and its business partners are
increasingly exposed to the risk that
third parties may attempt to disrupt the
availability, confidentiality and integrity
of its IT systems, which could result in
disruption to key operations, make it
difficult to recover critical services, damage
assets and compromise the integrity and
security of data (both corporate and
customer). This could result in loss of trust
from Prudential’s customers, reputational
damage and direct or indirect financial
loss. The cyber‑security threat continues
to evolve globally in sophistication and
potential significance. Prudential’s
increasing market profile, growing
customer interest in interacting with their
insurance providers and asset managers
through the internet and social media,
improved brand awareness and the
classification of Prudential as a G‑SII could
also increase the likelihood of Prudential
being considered a target by cyber
criminals. Further, there have been recent
changes to the threat landscape and the
risk from untargeted but sophisticated
and automated attacks has increased.
Developments in data protection
worldwide (such as the EU General Data
Protection Regulation that comes into
force in May 2018) may also increase the
financial and reputational implications for
Prudential following a significant breach of
its (or its third‑party suppliers’) IT systems.
To date, 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. However, it has
been, and likely will continue to be, subject
to potential damage from 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 which may
have material adverse consequential
effects on Prudential’s business and
financial position.
The failure to understand and
respond effectively to the impacts
of transitional and physical risks
associated with climate change
could adversely affect Prudential’s
results of operations and its
long-term strategy
Climate change poses potentially
significant risks to Prudential and its
customers, not only from the physical
impacts of climate change, driven by
specific climate‑related events such as
natural disasters, but also from the
transition risks, associated with the shift
to a low‑carbon economy.
The climate risk landscape continues to
evolve and is moving up the agenda of
many regulators, governments, non‑
governmental organisations and investors.
For example, the Financial Stability Board
(FSB’s) Task Force for Climate‑related
Disclosures recommendations were
published in 2017 to provide a voluntary
framework on corporate climate‑related
financial disclosures following the FSB’s
concern that there may be systemic
risk in the financial system related to
climate change.
Global commitments to limit climate
change were recently agreed and
governmental and corporate efforts to
transition to a low‑carbon economy in the
coming decades could have an adverse
impact on global investment assets. In
particular, there is a risk that this transition
including the related changes to
technology, policies and regulations and
the speed of their implementation, could
result in some sectors (such as but not
limited to the fossil fuel industry) facing
significantly higher costs and a disorderly
adjustment to their asset values. This
could lead to an adverse impact on the
value and the future performance of the
investment assets of the Group if climate
considerations are not effectively
integrated into investment decisions and
fiduciary and stewardship duties. Where
Prudential’s investment horizons are long
term, the relevant assets are potentially
more exposed to the long‑term impact
of climate change.
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
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
396 Prudential plc Annual Report 2017
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Risk factors continued Prudential’s Articles of
Association contain an exclusive
jurisdiction provision
Under Prudential’s Articles of Association,
certain legal proceedings may only be
brought in the courts of England and
Wales. This applies to legal proceedings
by a shareholder (in its capacity as such)
against Prudential and/or its Directors
and/or its professional service providers.
It also applies to legal proceedings
between Prudential and its Directors and/
or Prudential and Prudential’s professional
service providers that arise in connection
with legal proceedings between the
shareholder and such professional
service provider. This provision could
make it difficult for US and other
non‑UK shareholders to enforce
their shareholder rights.
Changes in tax legislation may
result in adverse tax consequences
Tax rules, including those relating to the
insurance industry, and their interpretation
may change, possibly with retrospective
effect, in any of the jurisdictions in which
Prudential operates. Significant tax
disputes with tax authorities, and any
change in the tax status of any member of
the Group or in taxation legislation or its
scope or interpretation could affect
Prudential’s financial condition and results
of operations.
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, 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 and other similar
arrangements. For such Group operations,
management control is exercised in
conjunction with other participants. The
level of control exercisable by the Group
depends on the terms of the contractual
agreements, in particular, the allocation of
control among, and continued cooperation
between, the participants. In addition, the
level of control exercisable by the Group
could also be subject to changes in the
maximum level of non‑domestic ownership
imposed on foreign companies in certain
jurisdictions. Prudential may face financial,
reputational and other exposure (including
regulatory censure) in the event that any
of its partners fails to meet its obligations
under the arrangements, 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 therefore
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.
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 relevant to a number
of lines of business in the Group, especially
for Jackson’s portfolio of variable annuities.
Prudential’s persistency assumptions
reflect a combination of recent past
experience for each relevant line of
business and expert judgement, especially
where a lack of relevant and credible
experience data exists. Any expected
change in future persistency is also
reflected in the assumption. If actual levels
of future persistency are significantly
different than assumed, the Group’s results
of operations could be adversely affected.
Furthermore, Jackson’s variable annuity
products are sensitive to other types of
policyholder behaviour, such as the
take‑up of its GMWB product features.
In addition, Prudential’s business may be
adversely affected by 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 historically
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, which are subject to the
risks discussed elsewhere in this
‘Risk Factors’ section.
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.
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Annual Report 2017 Prudential plc 397
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Glossary
AER
Actual Exchange Rates are actual historical
exchange rates for the specific accounting
period, being the average rates over the
period for the income statement and the
closing rates for the balance sheet at the
balance sheet date.
Annual premium equivalent or APE
A measure of new business activity that is
calculated as the sum of annualised regular
premiums from new business plus
10 per cent of single premiums on new
business written during the period.
Asset backed security
A security whose value and income
payments are derived from and
collateralised (or ‘backed’) by a specified
pool of underlying assets. The pool of
assets is typically a group of small and
illiquid assets that are unable to be sold
individually.
Available for sale (AFS)
Securities that have been acquired neither
for short‑term sale nor to be held to
maturity. AFS securities are measured at
fair value on the statement of financial
position with unrealised gains and losses
being booked in Other Comprehensive
Income instead of the income statement.
Back book of business
The insurance policies sold in past periods
that are still in‑force and hence are still
recorded on the insurer’s balance sheet.
Bonuses
Bonuses refer to the non‑guaranteed
benefit added to participating life insurance
policies and are the way in which
policyholders receive their share of the
profits of the policies. There are normally
two types of bonus;
— Regular bonus – expected to be added
every year during the term of the policy.
It is not guaranteed that a regular bonus
will be added each year, but once it is
added, it cannot be reversed, also
known as annual or reversionary bonus;
and
— Final bonus – an additional bonus
expected to be paid when policyholders
take money from the policies. If
investment return has been low over
the lifetime of the policy, a final bonus
may not be paid. Final bonuses may
vary and are not guaranteed.
Cash surrender value
The amount of cash available to a policy
holder on the surrender of or withdrawal
from a life insurance policy or annuity
contract.
CER
Constant Exchange Rate – Prudential plc
reports its results at both actual exchange
rates (AER) to reflect actual results and also
constant exchange rates (CER) so as to
eliminate the impact from exchange
translation. CER results are calculated by
translating prior year results using current
period foreign currency exchange rates ie
current period average rates for the income
statements and current period closing rate
for the balance sheet.
Closed-book life insurance business
A ‘closed book’ is essentially a group of
insurance policies that are no longer sold,
but are still featured on the books of a life
insurer as a premium‑paying policy. The
insurance company has ‘closed the books’
on new sales of these products which will
remain in run‑off until the policies expire
and all claims are settled.
Core structural borrowings
Borrowings which Prudential considers to
form part of its core capital structure and
exclude operational borrowings.
Credit risk
The risk of loss if another party fails to meet
its obligations, or fails to do so in a timely
fashion.
Currency risk
The risk that asset or liability values, cash
flows, income or expenses will be affected
by changes in exchange rates. Also
referred to as foreign exchange risk.
Deferred acquisition costs or DAC
Acquisition costs are expenses of an
insurer which are incurred in connection
with the acquisition of new insurance
contracts or the renewal of existing
insurance policies. They include
commissions and other variable sales
inducements and the direct costs of issuing
the policy, such as underwriting and other
policy issue expenses. Typically, under
IFRS, an element of acquisition costs are
deferred ie not expensed in the year
incurred, and instead amortised in the
income statement in line with the
emergence of surpluses on the related
contracts.
Deferred annuities
Annuities or pensions due to be paid from a
future date or when the policyholder
reaches a specified age.
Discretionary participation features
or DPF
A contractual right to receive, as a
supplement to guaranteed benefits,
additional benefits:
— That are likely to be a significant portion
of the total contractual benefits;
— Whose amount or timing is
contractually at the discretion of the
issuer; and
— That are contractually based on asset,
fund, company or other entity
performance.
Dividend cover
Dividend cover is calculated as operating
profit after tax on an IFRS basis, divided by
the current year interim dividend plus the
proposed final dividend.
Endowment product
An ordinary individual life insurance
product that provides the insured party
with various guaranteed benefits if it
survives specific maturity dates or periods
stated in the policy. Upon the death of the
insured party within the coverage period, a
designated beneficiary receives the face
value of the policy.
European Embedded Value or EEV
Financial results that are prepared on a
supplementary basis to the Group’s
consolidated IFRS results and which are
prepared in accordance with a set of
Principles issued by the Chief Financial
Officers Forum of European Insurance
Companies in May 2004 and expanded by
the Additional Guidance of EEV
Disclosures published in October 2005.
The principles are designed to capture the
value of the new business sold in the period
and of the business in force.
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.
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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
holders’ account and, periodically, interest
is credited to the contract holders’ account
and administrative charges are deducted,
as appropriate. An annual minimum
interest rate may be guaranteed, although
actual interest credited may be higher and
is linked to an equity index over its indexed
option period.
Funds under management
These comprise funds of the Group held
in the statement of financial position and
external funds that are managed by
Prudential asset management operations.
Group free surplus
Group free surplus at the end of the period
comprises free surplus for the insurance
businesses, representing the excess of
the net worth over the required capital
included in the EEV results, and IFRS
net assets for the asset management
businesses excluding goodwill. The
free surplus generated during the period
comprises the movement in this balance
excluding foreign exchange, capital, and
other reserve movements. Specifically,
it includes amounts maturing from the
in‑force operations during the period
less the investment in new business,
the effect of market movements and
other one‑off items.
Guaranteed annuities
Policies that pay out a fixed amount of
benefit for a defined period.
Guaranteed investment contract
(GIC) (US)
An investment contract between an
insurance company and an institutional
investor, which provides a stated rate of
return on deposits over a specified period
of time. They typically provide for partial or
total withdrawals at book value if needed
for certain liquidity needs of the plan.
Guaranteed minimum accumulation
benefit (GMAB) (US)
A guarantee that ensures that the contract
value of a variable annuity contract will be
at least equal to a certain minimum amount
after a specified number of years.
Guaranteed minimum death
benefit (GMDB) (US)
The basic death benefit offered under
variable annuity contracts, which specifies
that if the owner dies before annuity
income payments begin, the beneficiary
will receive a payment equal to the greater
of the contract value or purchase payments
less withdrawals.
Guaranteed minimum income
benefit (GMIB) (US)
A guarantee that ensures, under certain
conditions, that the owner may annuitise
the variable annuity contract based on the
greater of (a) the actual account value or (b)
a pay‑out base equal to premiums credited
with some interest rate, or the maximum
anniversary value of the account prior to
annuitisation.
Guaranteed minimum withdrawal
benefit (GMWB) (US)
A guarantee in a variable annuity that
promises that the owner may make annual
withdrawals of a defined amount for the life
of the owner or until the total guaranteed
amount is recovered, regardless of market
performance or the actual account balance.
Health and protection
These comprise health and personal
accident insurance products, which
provide morbidity or sickness benefits and
include health, disability, critical illness and
accident coverage. Health and protection
products are sold both as standalone
policies and as riders that can be attached
to life insurance products. Health and
protection riders are presented together
with ordinary individual life insurance
products for purposes of disclosure of
financial information.
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 Moodys. 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.
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Annual Report 2017 Prudential plc 399
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Glossary continued
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.
Open ended investment company
(OEIC)
A collective investment fund structured as
a limited company in which investors can
buy and sell shares.
Operational borrowings
Borrowings which arise in the normal
course of the business.
Participating funds
Distinct portfolios where the policyholders
have a contractual right to receive at the
discretion of the insurer additional benefits
based on factors such as the performance
of a pool of assets held within the fund, as
a supplement to any guaranteed benefits.
The insurer may either have discretion as
to the timing of the allocation of those
benefits to participating policyholders or
may have discretion as to the timing and
the amount of the additional benefits. For
Prudential the most significant participating
funds are with‑profits funds for business
written in the UK, Hong Kong, Malaysia
and Singapore.
Participating policies or
participating business
Contracts of insurance where the
policyholders have a contractual right to
receive, at the discretion of the insurer,
additional benefits based on factors such
as investment performance, as a
supplement to any guaranteed benefits.
This is also referred to as with‑profits
business.
Payback period
Payback period is the time in which the
initial ‘cash’ outflow of investment is
expected to be recovered from the ‘cash’
inflows generated by the investment. We
measure cash outflow by our investment
of free surplus in new business sales. The
payback period equals the time taken for
this business to generate free surplus to
cover this investment. Payback periods
are measured on an undiscounted basis.
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.
Market value reduction (MVR)
A reduction applied to the payment on
with‑profits bonds when policyholders
surrender in adverse market conditions.
Money Market Fund (MMF)
An MMF is an open‑ended mutual fund
that invests in short‑term debt securities
such as US treasury bills and commercial
paper. The purpose of an MMF is to
provide investors with a safe place to invest
easily accessible cash‑equivalent assets
characterised as a low‑risk, low‑return
investment.
Mortality rate
Rate of death, varying by such parameters
as age, gender, and health, used in pricing
and computing liabilities for future
policyholders of life and annuity products,
which contain mortality risks.
Net premiums
Life insurance premiums, net of
reinsurance ceded to third‑party
reinsurers.
Net worth
Net assets for EEV reporting purposes that
reflect the regulatory basis position,
sometimes with adjustments to achieve
consistency with the IFRS treatment of
certain items.
New business margin
The value of new business on an EEV basis
expressed as a percentage of the present
value of new business premiums expected
to be received from the new business.
New business profit
The profits, calculated in accordance with
European Embedded Value Principles,
from business sold in the financial reporting
period under consideration.
Non-participating business
A life insurance policy where the
policyholder is not entitled to a share of the
company’s profits and surplus, but receives
certain guaranteed benefits. Also known
as non‑profit in the UK. Examples include
pure risk policies (eg fixed annuities, term
insurance, critical illness) and unit‑linked
insurance contracts.
Prudential Regulation Authority
or PRA
The PRA is a UK regulatory body
responsible for prudential regulation and
supervision of banks, building societies,
credit unions, insurers and major
investment firms.
Regular premium product
A life insurance product with regular
periodic premium payments.
Rider
A supplemental plan that can be attached
to a basic insurance policy, with payment
of additional premium.
Risk margin reserve (RMR) charge
An RMR is included within operating profit
based on longer‑term investment returns
and represents a charge for long‑term
expected defaults of debt securities,
determined by reference to the credit
quality of the portfolio.
Scottish Amicable Insurance Fund
(SAIF)
SAIF is a ring‑fenced sub‑fund of the
Prudential Assurance Company’s
long‑term fund following the acquisition of
the mutually owned Scottish Amicable Life
Assurance Society in 1997. The fund is
solely for the benefit of policyholders of
SAIF. Shareholders of Prudential plc have
no interest in the profits of this fund
although they are entitled to asset
management fees on this business.
Separate account
A separate account is a pool of investments
held by an insurance company not in or
‘separate’ from its general account.
The returns from the separate account
generally accrue to the policyholder.
A separate account allows an investor to
choose an investment category according
to his individual risk tolerance, and desire
for performance.
Single premiums
Single premium policies of insurance are
those that require only a single lump sum
payment from the policyholder.
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.
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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.
Universal life
An insurance product where the customer
pays flexible premiums, subject to specified
limits, which are accumulated in an account
and are credited with interest (at a rate
either set by the insurer or reflecting
returns on a pool of matching assets). The
customer may vary the death benefit and
the contract may permit the customer to
withdraw the account balance, typically
subject to a surrender charge.
Variable annuity (VA) (US)
An annuity whose value is determined by
the performance of underlying investment
options that frequently includes securities.
A variable annuity’s value is not guaranteed
and will fluctuate, depending on the value
of its underlying investments. The holder
of a variable annuity assumes the
investment risk and the funds backing a
variable annuity are held in the insurance
companies separate account. VAs are
similar to unit‑linked annuities in the UK.
Whole of life
A type of life insurance policy that provides
lifetime protection; premiums must usually
be paid for life. The sum assured is paid out
whenever death occurs. Commonly used
for estate planning purposes.
With-profits funds
See ‘participating funds’ above.
Yield
A measure of the income received from an
investment compared to the price paid for
the investment. Normally expressed as a
percentage.
Surrender
The termination of a life insurance policy or
annuity contract at the request of the
policyholder after which the policyholder
receives the cash surrender value, if any, of
the contract.
Surrender charge or surrender fee
The fee charged to a policyholder when a
life insurance policy or annuity contract is
surrendered for its cash surrender value
prior to the end of the surrender charge
period.
Takaful
Insurance that is compliant with Islamic
principles.
Time value of options and
guarantees
The value of financial options and
guarantees comprises two parts, the
intrinsic value and the time value. The
intrinsic value is given by a deterministic
valuation on best estimate assumptions.
The time value is the additional value
arising from the variability of economic
outcomes in the future.
Total shareholder return (TSR)
TSR represents the growth in the value of a
share plus the value of dividends paid,
assuming that the dividends are reinvested
in the Company’s shares on the ex‑
dividend date.
Unallocated surplus
Unallocated surplus is recorded wholly as a
liability and represents the excess of assets
over policyholder liabilities for Prudential’s
with‑profits funds. The balance retained in
the unallocated surplus represents
cumulative income arising on the with‑
profits business that has not been allocated
to policyholders or shareholders.
Unit-linked products or unit-linked
contracts
See ‘investment‑linked products or
contracts’ above.
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01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Shareholder information
Communication with shareholders
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 2018 Annual General Meeting (AGM)
will be held in the Churchill Auditorium at
The QEII Centre, Broad Sanctuary,
Westminster, London SW1P 3EE on
17 May 2018 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 2017 AGM, including the
major items discussed at the meeting and
the results of the voting, can be found on
the Company’s website.
In accordance with relevant legislation,
shareholders holding 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 AGM.
Company constitution
Prudential is governed by the Companies
Act 2006, other applicable legislation and
regulations, and provisions in its Articles.
Any change to the Articles must be
approved by special resolution of the
shareholders. There were no changes to
the constitutional documents during 2017.
The current Memorandum and Articles are
available on the Company’s website.
Share capital
Issued share capital
The issued share capital as at 31 December
2017 consisted of 2,587,175,445 (2016:
2,581,061,573) ordinary shares of 5 pence
each, all fully paid up and listed on the
London Stock Exchange and the Hong
Kong Stock Exchange. As at 31 December
2017, there were 48,086 (2016: 48,534)
accounts on the register. Further
information can be found in note C10 on
page 277.
Prudential also maintains secondary
listings on the New York Stock Exchange
(in the form of American Depositary
Receipts which are referenced to ordinary
shares on the main UK register) and the
Singapore Stock Exchange.
Prudential has maintained a sufficiency of
public float throughout the reporting
period as required by the Hong Kong
Listing Rules.
Analysis of shareholder accounts as at 31 December 2017
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
Number of
shares
% of total
number of
shares
285
149
544
1,514
1,661
10,561
33,372
48,086
0.59
0.31
1.13
3.15
3.45
21.96
69.41
100
2,266,393,270
105,678,252
125,935,925
45,754,585
11,504,150
23,172,639
8,736,624
2,587,175,445
87.60
4.08
4.87
1.77
0.44
0.90
0.34
100
Major shareholders
The following notifications have been
disclosed under the Financial Conduct
Authority’s (FCA) Disclosure Guidance
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 2017
Capital Group Companies, Inc.
BlackRock, Inc
Norges Bank
% of total
voting rights
9.87
5.08
3.99
As at 14 March 2018, no notifications have
been received since the year end.
Rights and obligations
The rights and obligations attaching to the
Company’s shares are set out in full in the
Articles. 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 14 March 2018, Trustees held
0.48 per cent of the issued share capital
under the various plans in operation.
Rights to dividends under the various
schemes are set out on pages 123 to 157.
402 Prudential plc Annual Report 2017
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, of which
a defined number may be issued without
pre‑emption. Disapplication of statutory
pre‑emption procedures is also sought for
rights issues. The existing authorities to
issue shares and to do so without observing
pre‑emption rights are due to expire at the
end of this year’s AGM. Relevant
resolutions to authorise share capital
issuances will be put to shareholders at the
AGM on 17 May 2018.
Details of shares issued during 2017 and
2016 are given in note C10 on page 277.
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 AGM in 2017. This existing authority is
due to expire at the end of this year’s AGM
and a special resolution to renew the
authority will be put to shareholders at the
AGM on 17 May 2018.
Shareholders
registered on
the UK register
and Hong Kong
and Irish branch
registers
29 March 2018
Holders of US
American
Depository
Receipts
Shareholders with
ordinary shares
standing to the
credit of their CDP
securities accounts
–
29 March 2018
3 April 2018
3 April 2018
3 April 2018
18 May 2018
On or about
25 May 2018
On or about
25 May 2018
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 any 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 FCA and the Hong Kong Stock
Exchange, as well as under the rules of
some of the Group’s employee share plans.
All Directors are required to hold a
minimum number of shares under
guidelines approved by the Board, which
they would also be expected to retain as
described on page 148 of the Directors’
remuneration report.
Dividend information
2017 second interim dividend
Ex‑dividend date
Record date
Payment date
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.
www.prudential.co.uk
Annual Report 2017 Prudential plc 403
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information 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, UK.
Irish branch register
Link Asset Services, Link Registrars Limited,
PO Box 7117, Dublin 2, Ireland.
Hong Kong branch register
Singapore register
ADRs
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.
JPMorgan Chase Bank N.A, PO Box 64504, St. Paul,
MN 55164‑0854, USA.
Tel 0371 384 2035
Textel 0371 384 2255
(for hard of hearing).
Lines are open from 8.30am to 5.30pm
(UK), Monday to Friday.
International shareholders
Tel +44 121 415 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
404 Prudential plc Annual Report 2017
www.prudential.co.uk
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
shares. For telephone sales call 0345 603
7037 between 8.00am 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/investors/
shareholder‑information/forms or
from Equiniti. Further information
about ShareGift may be obtained on
+44 (0)20 7930 3737 or from
www.ShareGift.org
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/investors/
shareholder‑information/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 at
www.shareview.co.uk/4/Info/Portfolio/
default/en/home/shareholders/Pages/
ReinvestDividends.aspx
Electronic communications
Shareholders are encouraged to elect to
receive shareholder documents
electronically by registering with
Shareview at www.shareview.co.uk
This will save on printing and distribution
costs, and create environmental benefits.
Shareholders who have registered will be
sent an email notification whenever
shareholder documents are available on
the Company’s website and a link will be
provided to that information. When
registering, shareholders will need their
shareholder reference number which can
be found on their share certificate or proxy
form. The option to receive shareholder
documents electronically is not available to
shareholders holding shares through CDP.
Please contact Equiniti if you require any
assistance or further information.
www.prudential.co.uk
Annual Report 2017 Prudential plc 405
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Shareholder contacts
Tel +44 (0)20 7548 3300
Email: investor.relations@prudential.co.uk
UK Register private
shareholder enquiries
Tel 0371 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 2776
Email: media.relations@prudential.co.uk
How to contact us
Prudential plc
Laurence Pountney Hill
London EC4R 0HH
Tel +44 (0)20 7220 7588
www.prudential.co.uk
Board
Paul Manduca
Chairman
Executive Directors
Mike Wells
Group Chief Executive
Mark FitzPatrick
Chief Financial Officer
John Foley
Chief Executive of M&G Prudential
Nic Nicandrou
Chief Executive of
Prudential Corporation Asia
Anne Richards
Deputy Chief Executive of
M&G Prudential and
Chief Executive of M&G
Barry Stowe
Chairman and Chief Executive Officer
of North American Business Unit
James Turner
Group Chief Risk Officer
Non-executive Directors
Philip Remnant
Senior Independent Director
Sir Howard Davies
David Law
Kai Nargolwala
Anthony Nightingale
Alice Schroeder
Lord Turner
Tom Watjen
Group Executive Committee
Julian Adams
Group Regulatory and
Government Relations 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
Business units
M&G Prudential
12 Arthur Street
London EC4R 9AQ
www.pru.co.uk
Tel +44 (0)800 000 000
www.mandg.co.uk
Tel +44 (0)800 328 3192
John Foley
Chief Executive of M&G Prudential
Anne Richards
Deputy Chief Executive of
M&G Prudential and
Chief Executive of M&G
Prudential Corporation Asia
13th Floor
One International Finance Centre
1 Harbour View Street
Central
Hong Kong
Tel +852 2918 6300
www.prudentialcorporation‑asia.com
Nic Nicandrou
Chief Executive of
Prudential Corporation Asia
Jackson National Life
Insurance Company
1 Corporate Way
Lansing
Michigan 48951
USA
Tel +1 517 381 5500
www.jackson.com
Barry Stowe
Chairman and Chief Executive Officer
of North American Business Unit
406 Prudential plc Annual Report 2017
www.prudential.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
Principal place of business
in Hong Kong
13th Floor
One International Finance Centre
1 Harbour View Street
Central
Hong Kong
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.
www.prudential.co.uk
Annual Report 2017 Prudential plc 407
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information 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, the timing, costs and
successful implementation of the demerger
described herein; the future trading value
of the shares of Prudential plc and the
trading value and liquidity of the to‑be‑
listed M&G Prudential business following
such demerger; 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
political, legal and economic effects of the
UK’s decision to leave the European Union;
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 internal
projects and other strategic actions failing
to meet their objectives; disruption to the
availability, confidentiality or integrity of
Prudential’s IT systems (or those of its
suppliers); 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
and regulatory actions, investigations and
disputes. These and other important
factors may, for example, result in changes
to assumptions used for determining
results of operations or re‑estimations of
reserves for future policy benefits. Further
discussion of these and other important
factors that could cause Prudential’s actual
future financial condition or performance
or other indicated results to differ, possibly
materially, from those anticipated in
Prudential’s forward‑looking statements
can be found under the ‘Risk factors’
heading in this document and the annual
report and the ‘Risk factors’ heading of
Prudential’s most recent annual report on
Form 20‑F filed with the US 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.
408 Prudential plc Annual Report 2017
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 over 26 million 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.
1848
Prudential is established as Prudential
Mutual Assurance, Investment and Loan
Association in Hatton Garden, London,
offering loans and life assurance to
professional people.
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.
1871
The Company becomes one of the first
in the City to employ women. Calculating
machines are also introduced, bringing
efficiencies to the processing of an
increasing volume of business.
1879
Prudential moves into Holborn Bars, a
purpose‑built office complex designed by
Alfred Waterhouse. The building becomes
a London landmark, and remains part of
Prudential’s property portfolio to this day.
1912
Following the National Insurance Act,
Prudential works with the government
to run Approved Societies, providing
sickness and unemployment benefits
to five million people.
1923
Prudential’s first overseas life branch is
established in India, with the first policy
being sold to a tea planter in Assam.
1924
Prudential shares are floated on the
London Stock Exchange.
1949
The ‘Man from the Pru’ advertising
campaign is launched.
1986
Prudential acquires Jackson National Life
Insurance in the United States.
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.
1999
Prudential acquires M&G, pioneer of unit
trusts in the UK and a leading provider of
investment products.
2000
Prudential plc is listed on the New York
Stock Exchange. Prudential becomes the
first UK life insurer to enter the Mainland
China market through its joint venture with
CITIC Group.
2010
Prudential plc is listed on stock exchanges
in Hong Kong and Singapore.
2014
Prudential acquires businesses in Ghana and
Kenya, marking its entry into the fast‑growing
African life insurance industry.
2017
M&G and Prudential UK & Europe combine
to form M&G Prudential, a leading savings
and investments business ideally positioned
to target growing customer demand for
comprehensive financial solutions.
2018
Prudential plc announces its intention to
demerge its UK and Europe business,
M&G Prudential, resulting in two separately
listed companies, with different investment
characteristics and opportunities.
www.prudentialhistory. co.uk
Adding more to life:
The founding of Prudential
The Prudential Mutual Assurance,
Investment and Loan Association was
formed on 30 May 1848, in a room at
12 Hatton Garden, London (the premises
of Hanslip and Manning solicitors).
The Company’s leather‑bound Deed
of Settlement lists the first shareholders
and directors, and outlines the Company’s
purpose – to offer life assurance and
loans to the middle classes. Shareholders
including lawyers, doctors, a wine
merchant and a number of ‘gentlemen’
accounted for the first 1,530 shares in
the Company.
Prudential’s first policies were issued
in 1849. The Company’s first annual
report, published in 1850, stated that:
‘the Directors are pleased to think that
they might infix habits of Prudence
among many individuals’, focusing on
customers such as ‘the clergyman
who requires advances for the erection
of his parsonage and the officer who
seeks the price of his commission’.
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7
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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