Prudential plc - FY16 Results - EEV

RNS Number : 3356Z
Prudential PLC
14 March 2017
 

European Embedded Value (EEV) Basis Results

 

Post-tax operating profit based on longer-term investment returns

 

Results analysis by business area

 




2016 £m

2015 £m



Note


notes (iii),(vi)

Asia operations




New business

4

2,030

1,482

Business in force

5

1,044

798

Long-term business


3,074

2,280

Eastspring Investments


125

101

Total


3,199

2,381

US operations




New business

4

790

809

Business in force

5

1,181

999

Long-term business


1,971

1,808

Broker-dealer and asset management


(3)

7

Total


1,968

1,815

UK operationsnote (iv)




New business:note (v)





Excluding UK bulk annuities

4

268

201


UK bulk annuities


-

117




268

318

Business in force

5

375

545

Long-term business


643

863

General insurance commission


23

22

Total UK insurance operations


666

885

M&G


341

358

Prudential Capital


22

18

Total


1,029

1,261

Other income and expenditurenote (i)


(679)

(566)

Solvency II and restructuring costsnote (ii)


(57)

(51)

Interest received from tax settlement


37

-

Operating profit based on longer-term investment returns


5,497

4,840






Analysed as profit (loss) from:




New business:note (v)





Excluding UK bulk annuities

4

3,088

2,492


UK bulk annuities


-

117




3,088

2,609

Business in force

5

2,600

2,342

Long-term business


5,688

4,951

Asset management and general insurance commission


508

506

Other results


(699)

(617)



5,497

4,840

 

Notes

(i)     EEV basis other income and expenditure represents the post-tax IFRS basis result less the unwind of expected margins on the internal management of the assets of the covered business (as explained in note 14(a)(vii)).

(ii)    Solvency II and restructuring costs comprise the net-of-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.

(iii)   The comparative results have been prepared using previously reported average exchange rates for the year.

(iv)   The EEV basis results have been prepared in accordance with the amended EEV Principles dated April 2016, prepared by the CFO Forum of major European insurers. The 2016 results for UK insurance operations have been prepared to reflect the Solvency II regime. The 2015 results for UK insurance operations were prepared reflecting the Solvency I basis being the regime applicable for the year. There is no change to the basis of preparation for Asia and US operations.

(v)   Following Prudential's withdrawal from the UK bulk annuity market, the 2015 comparative results for UK bulk annuities new business have been presented separately.

(vi)   The Group agreed in November 2016 to sell, subject to regulatory approval, its life business in Korea. Accordingly, the presentation of the 2015 comparative EEV basis results and related notes have been adjusted from those previously published for the reclassification of the result attributable to the held for sale Korea life business, as described in note 17. This approach has been adopted consistently throughout this supplementary information.

 

 

POST-TAX SUMMARISED CONSOLIDATED INCOME STATEMENT









Note

2016 £m

2015* £m

Asia operations


3,199

2,381

US operations


1,968

1,815

UK operations**


1,029

1,261

Other income and expenditure


(679)

(566)

Solvency II and restructuring costs


(57)

(51)

Interest received on tax settlement


37

-

Operating profit based on longer-term investment returns


5,497

4,840

Short-term fluctuations in investment returns

6

(507)

(1,215)

Effect of changes in economic assumptions

7

(60)

66

Mark to market value movements on core borrowings


(4)

221

Loss attaching to the held for sale Korea life business

17

(410)

39

Total non-operating results


(981)

(889)

Profit for the year attributable to equity holders of the Company


4,516

3,951

 

*       The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details).

**     The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflected the Solvency I basis being the regime applicable for the year.

 

Basic earnings per share










2016

2015

Based on post-tax operating profit including longer-term investment returns (in pence)*


214.7p

189.6p

Based on post-tax profit attributable to equity holders of the Company (in pence)


176.4p

154.8p

Average number of shares (millions)


2,560

2,553

 

*       The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details).



MOVEMENT IN SHAREHOLDERS' EQUITY













Note

2016 £m

2015 £m

Profit for the year attributable to equity shareholders


4,516

3,951

Items taken directly to equity:





Exchange movements on foreign operations and net investment hedges

9

4,211

244


External dividends

9

(1,267)

(974)


Mark to market value movements on Jackson assets backing surplus and required capital

9

(11)

(76)


Other movements

9

(367)

53

Net increase in shareholders' equity

9

7,082

3,198

Shareholders' equity at beginning of year





As previously reported

9

32,359

29,161


Effect of implementation of Solvency II on 1 January 2016*

2

(473)

-





31,886

29,161

Shareholders' equity at end of year

9

38,968

32,359

 

Comprising: 

31 Dec 2016 £m


31 Dec 2015 £m



Long-term

business operations

Asset

management

and other operations  

Total      


Long-term

business

operations

Asset

management

and other operations  

Total     

Asia operations

18,717

383

19,100


13,876

306

14,182

US operations

11,805

204

12,009


9,487

182

9,669

UK insurance operations*

10,307

25

10,332


9,647

22

9,669

M&G

-

1,820

1,820


-

1,774

1,774

Prudential Capital

-

22

22


-

70

70

Other operations

-

(4,315)

(4,315)


-

(3,005)

(3,005)

Shareholders' equity at end of year

40,829

(1,861)

38,968


33,010

(651)

32,359










Representing:








Net assets excluding acquired goodwill and









holding company net borrowings

40,584

961

41,545


32,777

866

33,643

Acquired goodwill

245

1,230

1,475


233

1,230

1,463

Holding company net borrowings at market valuenote 8

-

(4,052)

(4,052)


-

(2,747)

(2,747)


40,829

(1,861)

38,968


33,010

(651)

32,359

 

*       The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflected the Solvency I basis being the regime applicable for the year.

 

 

SUMMARY STATEMENT OF FINANCIAL POSITION










Note

31 Dec 2016 £m

31 Dec 2015 £m

Total assets less liabilities, before deduction for insurance funds*


407,928

340,666

Less insurance funds:**





Policyholder liabilities (net of reinsurers' share) and unallocated surplus






of with-profits funds


(393,262)

(327,711)


Less shareholders' accrued interest in the long-term business

9

24,302

19,404





(368,960)

(308,307)

Total net assets

9

38,968

32,359







Share capital


129

128

Share premium


1,927

1,915

IFRS basis shareholders' reserves


12,610

10,912

Total IFRS basis shareholders' equity

9

14,666

12,955

Additional EEV basis retained profit***

9

24,302

19,404

Total EEV basis shareholders' equity (excluding non-controlling interests)

9

38,968

32,359

 

*       Following its classification as held for sale, Korea life business is included in total assets at a carrying value of £105 million (see note 17 for details).

**     Including liabilities in respect of insurance products classified as investment contracts under IFRS 4.

***    The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for

        details). The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year.

 

Net asset value per share










31 Dec 2016

31 Dec 2015

Based on EEV basis shareholders' equity of £38,968 million (2015: £32,359 million) (in pence)**


1,510p

1,258p

Number of issued shares at year end (millions)


2,581 

2,572 





Annualised return on embedded value*


17%

17%

 

*       Annualised return on embedded value is based on EEV post-tax operating profit, as a percentage of opening EEV basis shareholders' equity.

**     The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year.

 

 

Notes on the EEV basis results

 

1Basis of preparation

 

The EEV basis results have been prepared in accordance with the EEV Principles dated April 2016, prepared by the European Insurance CFO Forum. There is no change to the EEV methodology. The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime, as discussed in note 2 below. The 2015 comparative results for UK insurance operations were prepared reflecting the Solvency I basis, being the regime applicable for the year. There is no change to the basis of preparation for Asia and the US operations. 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. The auditors have reported on the 2016 EEV basis results supplement to the Company's statutory accounts for 2016. Their report was (i) unqualified, and (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report. Except for the change in presentation of the results of the operating and non-operating results for Asia operations to show separately the contribution from the held for sale Korea life business (see note 17 for details), the 2015 results have been derived from the EEV basis results supplement to the Company's statutory accounts for 2015. The supplement included an unqualified audit report from the auditors.

 

A detailed description of the EEV methodology and accounting presentation is provided in note 14.

 

 

2  Effect of Solvency II implementation on EEV basis results on 1 January 2016

 

The Solvency II framework is effective from 1 January 2016. For our operations in Asia and the US there is no impact on the EEV results since Solvency II does not act as the local constraint on the ability to distribute profits to the Group. The embedded value for these businesses will continue to be driven by local regulatory and target capital requirements. For the UK insurance operations, Solvency II has an impact on the EEV results as it changes the local regulatory valuation of net worth and capital requirements, affecting the components of the EEV.

 

The impact of Solvency II on EEV shareholders' equity on 1 January 2016 is shown below:

 

Total EEV basis shareholders' equity

£m

As reported at 31 December 2015

32,359

Opening adjustment at 1 January 2016 for long-term business operations



Effect of implementation of Solvency II on net worthnote (a)

2,760


Effect of implementation of Solvency II on net value of in-force business (VIF)note (b)

(3,233)



(473)

Group total shareholders' equity as at 1 January 2016note (c)

31,886

 

Notes

(a)   The Solvency II framework requires technical provisions to be valued on a best estimate basis and capital requirements to be risk-based. It also requires the establishment of a risk margin (which for business in force at 31 December 2015 can be broadly offset by transitional measures). As a result of applying this framework the EEV net worth increased by £2,760 million reflecting the release of the prudent regulatory margins previously included under Solvency I, and also from the recognition within net worth of a portion of future shareholder transfers expected from the with-profits fund. The higher net worth incorporated increases in required capital reflecting the higher solvency capital requirements of the new regime.

(b)   The net value of in-force business (VIF) is correspondingly impacted as follows:

the release of prudent regulatory margins and recognition of a portion of future with-profits business shareholders' transfers within net worth lead to a corresponding reduction in the VIF;

the run-off of the risk margin, net of transitional measures, is now captured in VIF; and

the cost of capital deducted from the gross VIF increases as a result of the higher Solvency II capital requirements.

The overall impact of these changes was to reduce the value of in-force by £(3,233) million.

(c)   At 1 January 2016 the effect of these changes was a net reduction in EEV shareholders' equity of £(473) million.

 

The impact of Solvency II in 2016 for UK insurance operations is estimated to have reduced total operating profit from new and in-force business by £(39) million. 

 

 

3  Results analysis by business area

 

The 2015 comparative results are shown below on both actual exchange rates (AER) and constant exchange rates (CER) bases. The 2015 CER comparative results are translated at 2016 average exchange rates.

 

Annual premium equivalents (APE)note 16



2016 £m


2015* £m


% change


Note



AER

CER


AER

CER

Asia operations


3,599


2,712

3,020


33%

19%

US operations


1,561


1,729

1,950


(10)%

(20)%

UK retail operations***


1,160


874

874


33%

33%

Group total excluding UK bulk annuities

4

6,320


5,315

5,844


19%

8%

UK bulk annuities***


-


151

151


(100)%

(100)%

Group total


6,320


5,466

5,995


16%

5%

 

Post-tax operating profit











2016 £m


2015* £m


% change


Note



AER

CER


AER

CER

Asia operations









New business

4

2,030


1,482

1,660


37%

22%

Business in force

5

1,044


798

895


31%

17%

Long-term business


3,074


2,280

2,555


35%

20%

Eastspring Investments


125


101

112


24%

12%

Total


3,199


2,381

2,667


34%

20%

US operations









New business

4

790


809

913


(2)%

(13)%

Business in force

5

1,181


999

1,127


18%

5%

Long-term business


1,971


1,808

2,040


9%

(3)%

Broker-dealer and asset management


(3)


7

8


(143)%

(138)%

Total


1,968


1,815

2,048


8%

(4)%

UK operations









New business***










UK retail operations

4

268


201

201


33%

33%


UK bulk annuities


-


117

117


(100)%

(100)%



268


318

318


(16)%

(16)%

Business in force

5

375


545

545


(31)%

(31)%

Long-term business**


643


863

863


(25)%

(25)%

General insurance commission


23


22

22


5%

5%

Total UK insurance operations**


666


885

885


(25)%

(25)%

M&G


341


358

358


(5)%

(5)%

Prudential Capital


22


18

18


22%

22%

Total**


1,029


1,261

1,261


(18)%

(18)%

Other income and expenditure


(679)


(566)

(566)


(20)%

(20)%

Solvency II and restructuring costs


(57)


(51)

(51)


(12)%

(12)%

Interest received on tax settlement


37


-

-


n/a

n/a

Operating profit based on










longer-term investment returns**


5,497


4,840

5,359


14%

3%










Analysed as profit (loss) from:









New business:***










Life operations excluding UK bulk annuities

4

3,088


2,492

2,774


24%

11%


UK bulk annuities


-


117

117


(100)%

(100)%



3,088


2,609

2,891


18%

7%

Business in force

5

2,600


2,342

2,567


11%

1%

Total long-term business**


5,688


4,951

5,458


15%

4%

Asset management and general insurance










commission


508


506

518


0%

(2)%

Other results


(699)


(617)

(617)


(13)%

(13)%

Operating profit based on










longer-term investment returns**


5,497


4,840

5,359


14%

3%

 

Post-tax profit










2016 £m


2015* £m


% change


Note



AER

CER


AER

CER

Operating profit based on longer-term










investment returns**


5,497


4,840

5,359


14%

3%

Short-term fluctuations in investment returns

 6

(507)


(1,215)

(1,343)


58%

62%

Effect of changes in economic assumptions

 7

(60)


66

66


(191)%

(191)%

Mark to market value movements on










core borrowings


(4)


221

220


(102)%

(102)%

(Loss) profit attaching to the held for sale










Korea life business

17

(410)


39

42


n/a

n/a

Total non-operating loss


(981)


(889)

(1,015)


(10)%

3%

Profit for the year attributable to










shareholders


4,516


3,951

4,344


14%

4%

 

Basic earnings per share (in pence)











2016


2015


% change





AER

CER


AER

CER

Based on post-tax operating profit










including longer-term investment returns*,**


214.7p


189.6p

209.9p


13%

2%

Based on post-tax profit**


176.4p


154.8p

170.2p


14%

4%

 

*       The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details).

**     The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year.

***    Following Prudential's withdrawal from the UK bulk annuity market, the 2015 comparative results for UK bulk annuities new business have been presented separately.

 

 

4  Analysis of new business contribution

 

(i)    Group summary









2016


Annual premium

and contribution

equivalents (APE)

Present value

of new business

premiums (PVNBP)

New business

contribution


New business margin





APE

PVNBP


£m

£m

£m


%

%


note 16

note 16

note




Asia operationsnote (ii)

3,599

19,271

2,030


56

10.5

US operations

1,561

15,608

790


51

5.1

UK insurance operations**

1,160

10,513

268


23

2.5

Group total

6,320

45,392

3,088


49

6.8









2015*


Annual premium

and contribution

equivalents (APE)

Present value

of new business

premiums (PVNBP)

New business

contribution


New business margin





APE

PVNBP


£m

£m

£m


%

%


note 16

note 16

note




Asia operationsnote (ii)

2,712

14,428

1,482


55

10.3

US operations

1,729

17,286

809


47

4.7

UK retail operations**,***

874

7,561

201


23

2.7

Total excluding UK bulk annuities

5,315

39,275

2,492


47

6.3

UK bulk annuities***

151

1,508

117


77

7.8

Group total

5,466

40,783

2,609


48

6.4

 

*       The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details).

**     The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year.

***    Following Prudential's withdrawal from the UK bulk annuity market, the 2015 comparative results for UK bulk annuities new business have been presented separately.

 

Note

The increase in new business contribution of £596 million from £2,492 million for 2015 (excluding the contributions from UK bulk annuities) to £3,088 million for 2016 comprises an increase on a CER basis of £314 million and an increase of £282 million for foreign exchange effects. The increase of £314 million on a CER basis comprises a contribution of £226 million for higher retail sales volumes in 2016, a £17 million effect of movement in long-term interest rates, generated by the active basis of setting economic assumptions (analysed as Asia £14 million, US £13 million and UK £(10) million), and a £71 million impact of pricing, product and other actions.

 

(ii)  Asia operations - new business contribution by territory


2016 £m


2015* £m

  



AER

CER

China

63


30

32

Hong Kong

1,363


835

941

Indonesia

175


229

260

Taiwan

31


28

31

Other

398


360

396

Total Asia operations

2,030


1,482

1,660

 

*       The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details).

 

 

5 Operating profit from business in force

 

(i)   Group summary







2016 £m


Asia

operations

US

operations

UK

insurance

operations

Total


note (ii)

note (iii)

note (iv)

note

Unwind of discount and other expected returns

866

583

445

1,894

Effect of changes in operating assumptions

54

170

25

249

Experience variances and other items

124

428

(95)

457

Total

1,044

1,181

375

2,600







2015* £m


Asia

operations*

US

operations

UK

insurance

operations**

Total


note (ii)

note (iii)

note (iv)

note

Unwind of discount and other expected returns

725

472

488

1,685

Effect of changes in operating assumptions

12

115

55

182

Experience variances and other items

61

412

2

475

Total

798

999

545

2,342

 

*       The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details).

**     The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflected the Solvency I basis being the regime applicable for the year.

 

Note

The movement in operating profit from business in force of £258 million from £2,342 million for 2015 to £2,600 million for 2016 comprises:




£m

Movement in unwind of discount and other expected returns:



Effects of changes in:




Growth in opening value

126



Interest rates

(28)



Foreign exchange

141



Implementation of Solvency II on 1 January 2016

(30)




209

Movement in effect of changes in operating assumptions, experience variances and other items (including foreign exchange of £84 million)

49

Net movement in operating profit from business in force

258

 

(ii)  Asia operations



2016 £m

2015* £m

Unwind of discount and other expected returnsnote (a)

866

725

Effect of changes in operating assumptions:




Mortality and morbidity

33

63


Persistency and withdrawalsnote (b)

(47)

(46)


Expense

15

(1)


Othernote (c) 

53

(4)



54

12

Experience variances and other items:




Mortality and morbiditynote (d) 

71

54


Persistency and withdrawalsnote (e) 

52

17


Expensenote (f)

(23)

(32)


Other

24

22



124

61

Total Asia operations

1,044

798

 

*       The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details).

 

Notes

(a)   The increase in unwind of discount and other expected returns of £141 million from £725 million for 2015 to £866 million for 2016 comprises a positive £61 million impact for the growth in the opening in-force value, a positive £81 million foreign exchange effect and a net £(1) million effect for movements in long-term interest rates.

(b)   The 2016 charge of £(47) million (2015: £(46) million) for persistency assumption changes comprises positive and negative contributions from our various operations, with positive persistency updates on health and protection products being more than offset by negative effects for unit-linked business.

(c)   The 2016 credit of £53 million for other assumption changes reflects a number of offsetting items, including modelling improvements and those arising from asset allocation changes in a number of territories.

(d)   The positive mortality and morbidity experience variance in 2016 of £71 million (2015: £54 million) mainly reflects better than expected experience in a number of territories.

(e)   The positive £52 million for persistency and withdrawals experience in 2016 (2015: £17 million) comprises positive and negative contributions from various operations, with positive persistency experience on health and protection products which more than offsets negative experience on unit-linked products.

(f)    The negative expense experience variance in 2016 of £(23) million (2015: £(32) million) principally arises in operations which are currently sub-scale (China, Malaysia Takaful and Taiwan).

 

(iii) US operations



2016 £m

2015 £m

Unwind of discount and other expected returnsnote (a)

583

472

Effect of changes in operating assumptionsnote (b)

170

115

Experience variances and other items:




Spread experience variancenote (c)

119

149


Amortisation of interest-related realised gains and lossesnote (d)

88

70


Othernote (e)

221

193



428

412

Total US operations

1,181

999

 

Notes                                                                                                                                         

(a)   The increase in unwind of discount and other expected returns of £111 million from £472 million for 2015 to £583 million for 2016 comprises a positive £40 million effect for the underlying growth in the in-force book, a positive £60 million foreign exchange effect and an £11 million impact of the 20 basis points increase in the US 10-year treasury yield during the year.

(b)   The 2016 credit of £170 million comprises assumption updates for mortality, persistency and expense, together with an increase in the assumed level of tax relief reflecting recent experience.

(c)   The spread assumption for Jackson is determined on a longer-term basis, net of provision for defaults (see note 15(ii)). The spread experience variance in 2016 of £119 million (2015: £149 million) includes the positive effect of transactions previously undertaken to more closely match the overall asset and liability duration. The reduction compared to the prior year reflects the effects of declining yields in the portfolio caused by the prolonged low interest rate environment.

(d)   The amortisation of interest-related gains and losses reflects the fact that when bonds that are neither impaired nor deteriorating are sold and reinvested there will be a consequent change in the investment yield. The realised gain or loss is amortised into the result over the period when the bonds would have otherwise matured to better reflect the long-term returns included in operating profits.

(e)   Other experience variances of £221 million in 2016 (2015: £193 million) include the effects of positive persistency experience and other variances.

 

(iv)   UK insurance operations


2016 £m

2015* £m

Unwind of discount and other expected returnsnote (a)

445

488

Reduction in future UK corporate tax ratenote (b)

25

55

Othernote (c)

(95)

2

Total UK insurance operations

375

545

 

*       The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflected the Solvency I basis being the regime applicable for the year.

 

Notes

(a)   The decrease in unwind of discount and expected returns of £(43)million from 2015 of £488 million to £445 million for 2016 comprises a positive £25 million effect for the underlying growth in the in-force book, more than offset by a £(38) million effect driven by the 70 basis points decrease in the 15-year gilt yield during the year and a negative £(30) million representing the net effect of adopting the Solvency II regime.

(b)   The credit of £25 million (2015: £55 million) for the reduction in UK corporate tax rate reflects the beneficial effect of applying a lower corporation tax rate (see note 15) to future life profits from in-force business in the UK.

(c)   Other items comprise the following:



2016 £m

2015 £m


Longevity reinsurance

(90)

(134)


Impact of specific management actions to improve solvency positionnote (d)

110

75


Provision for cost of undertaking past non-advised annuity sales review and potential redressnote (e)

(145)

-


Other itemsnote (f)

30

61



(95)

2

 

(d)   The 2016 benefit of £110 million (2015: £75 million) arises from the specific management actions to improve solvency, including the effect of repositioning the fixed income asset portfolio.

(e)   In response to the findings of the FCA's Thematic Review of Annuities Sales Practices, the UK business will review all internally vesting annuities sold without advice after 1 July 2008. Reflecting this, the UK 2016 result includes a provision of £145 million (post-tax) for the estimated cost of the review and any appropriate customer redress, but excludes any potential for insurance recoveries. 

(f)    The 2016 credit of £30 million (2015: £61 million) comprises assumption updates and experience variances for mortality, expense, persistency and other items.

 

 

6 Short-term fluctuations in investment returns

 

Short-term fluctuations in investment returns included in profit for the year arise as follows:

 

(i)   Group summary


2016 £m

2015* £m

Asia operationsnote (ii)

(100)

(213)

US operationsnote (iii)

(1,102)

(753)

UK insurance operationsnote (iv)

869

(194)

Other operationsnote (v)

(174)

(55)

Total

(507)

(1,215)

 

*       The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details).

 

(ii)   Asia operations

The short-term fluctuations in investment returns for Asia operations comprise:


2016 £m

2015* £m

Hong Kong

(105)

(144)

Singapore

52

(104)

Other

(47)

35

Total Asia operationsnote

(100)

(213)

 

*       The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details).

 

Note

For 2016, the charge of £(100) million mainly reflects the impact of interest rate movements on bonds and other investment returns, with losses due to increased long-term interest rates in Hong Kong, partly offset by gains in Singapore (as shown in note 15(i)).

 

(iii)  US operations

The short-term fluctuations in investment returns for US operations comprise:



2016 £m

2015 £m

Investment return related experience on fixed income securitiesnote (a)

(85)

(17)

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 itemsnote (b)

(1,017)

(736)

Total US operations

(1,102)

(753)

 

Notes

(a)   The charge relating to fixed income securities comprises the following elements:

-      the impact on portfolio yields of changes in the asset portfolio in the year;

-      the excess of actual realised gains and losses over the amortisation of interest-related realised gains and losses recorded in the profit and loss account; and

-      credit experience (versus the longer-term assumption).

(b)   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 in the current year of 8.9 per cent and that assumed at the start of the year 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 insurance operations

The short-term fluctuations in investment returns for UK insurance operations comprise:


2016 £m

2015* £m

Shareholder-backed annuity businessnote (a)

431

(88)

With-profits and other businessnote (b)

438

(106)

Total UK insurance operations

869

(194)

 

*       The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflected the Solvency I basis being the regime applicable for the year.

 

Notes

(a)   Short-term fluctuations in investment returns for shareholder-backed annuity business comprise:

-      gains (losses) on surplus assets compared to the expected long-term rate of return reflecting reductions (increases) in corporate bond and gilt yields;

-      the difference between actual and expected default experience; and

-      the effect of mismatching for assets and liabilities of different durations.

(b)   The £438 million fluctuations in 2016 for with-profits and other business represent the impact of achieving a 13.6 per cent pre-tax return on the with-profits fund (including unallocated surplus) compared to the assumed rate of return of 5.0 per cent (2015: total return of 3.1 per cent compared to assumed rate of 5.4 per cent), together with 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.

 

(v) Other operations

Short-term fluctuations in investment returns for other operations of negative £(174) million (2015: negative £(55) million) include unrealised value movements on investments held outside of the main life operations.

 

 

7  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


2016 £m

2015* £m

Asia operationsnote (ii)

70

(139)

US operationsnote (iii)

45

109

UK insurance operationsnote (iv)

(175)

96

Total

(60)

66

 

*       The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details).

 

(ii)   Asia operations

The effect of changes in economic assumptions for Asia operations comprises:


2016 £m

2015* £m

Hong Kong

85

100

Indonesia

46

(15)

Malaysia

(20)

(30)

Singapore

(60)

(50)

Taiwan

12

(97)

Other

7

(47)

Total Asia operationsnote

70

(139)

 

*       The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details).

 

Note

The positive effect for 2016 of £70 million largely arises from the movements in long-term interest rates (see note 15(i)). Non-operating profits arise from higher interest rates and hence fund earned rates in Hong Kong, together with the beneficial impact of valuing future health and protection profits at lower discount rates in Indonesia. Losses arise from a fall in interest rates in Singapore and a higher discount rate in Malaysia.

 

(iii)  US operations

The effect of changes in economic assumptions for US operations comprises:


2016 £m

2015 £m

Variable annuity business

86

104

Fixed annuity and other general account business

(41)

5

Total US operationsnote

45

109

 

Note

For 2016, the credit of £45 million mainly reflects the increase in the assumed separate account return and reinvestment rates for variable annuity business, following the 20 basis points increase in the US 10-year treasury yield, resulting in higher projected fee income and a decrease in projected benefit costs. For fixed annuity and other general account business, the impact reflects the effect on the present value of future projected spread income of applying a higher discount rate on the opening value of the in-force book.

 

(iv)  UK insurance operations

The effect of changes in economic assumptions for UK insurance operations comprises:


2016 £m

2015* £m

Shareholder-backed annuity businessnote (a)

(113)

(56)

With-profits and other businessnote (b)

(62)

152

Total UK insurance operations

(175)

96

 

*       The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflected the Solvency I basis being the regime applicable for the year.

 

Notes

(a)   For shareholder-backed annuity business the overall negative effect of £(113) million for 2016 (2015: £(56) million) reflects an increase in the cost of capital, driven by the lower interest rates, partially offset by the change in the present value of projected spread income arising mainly from the adoption of lower risk discount rates as shown in note 15(iii).

(b)   The charge of £(62) million for 2016 (2015: credit of £152 million) reflects the net effect of changes in expected future fund earned rates and risk discount rates (as shown in note 15(iii)).

 

 

8 Net core structural borrowings of shareholder-financed operations

 


31 Dec 2016 £m


31 Dec 2015 £m


IFRS

basis

Mark to

market

value

adjustment

EEV

basis at

market

value


IFRS

basis

Mark to

market

value

adjustment

EEV

basis at

market

value

Holding company (including central finance subsidiaries)









cash and short-term investments

(2,626)

-

(2,626)


(2,173)

-

(2,173)

Central fundsnote









Subordinated debt

5,772

182

5,954


4,018

211

4,229


Senior debt

549

175

724


549

142

691


6,321

357

6,678


4,567

353

4,920

Holding company net borrowings

3,695

357

4,052


2,394

353

2,747

Prudential Capital bank loan

275

-

275


275

-

275

Jackson surplus notes

202

65

267


169

55

224

Net core structural borrowings of shareholder-financed operations

4,172

422

4,594


2,838

408

3,246

 

Note

In June 2016, the Company issued core structural borrowings of US$1,000 million 5.25 per cent Tier 2 perpetual subordinated notes. The proceeds net of costs were £681 million. In September 2016, the Company issued core structural borrowings of US$725 million 4.38 per cent Tier 2 perpetual subordinated notes. The proceeds net of costs were £546 million. The movement in IFRS basis core structural borrowings from 2015 to 2016 also includes foreign exchange effects.

 

 

9  Reconciliation of movement in shareholders' equity

 



2016 £m


Long-term business operations

Asset management and UK general insurance commission

Other operations

Group

Total


Asia operations

US

operations

UK

insurance operations*

Total

long-term business

operations





note (i)





note (i)


Operating profit based on longer-term









investment returns:








Long-term business:









New businessnote 4

2,030

790

268

3,088

-

-

3,088


Business in forcenote 5

1,044

1,181

375

2,600

-

-

2,600


3,074

1,971

643

5,688


-

5,688

Asset management and general









insurance commission

-

-

-

-

508

-

508

Other results

-

-

(33)

(33)

-

(666)

(699)

Post-tax operating profit

3,074

1,971

610

5,655

508

(666)

5,497

Loss attaching to the held for sale









Korea life businessnote 17

(395)

-

-

(395)

-

(15)

(410)

Other non-operating (loss) profit

(30)

(1,057)

694

(393)

(38)

(140)

(571)

Profit for the year

2,649

914

1,304

4,867

470

(821)

4,516

Other items taken directly to equity:








Exchange movements on foreign operations

   and net investment hedges

2,714

1,878

-

4,592

83

(464)

4,211

Intra-group dividends and investment in









operationsnote (ii)

(594)

(388)

(281)

(1,263)

(462)

1,725

-

External dividends

-

-

-


-

(1,267)

(1,267)

Mark to market value movements on Jackson









assets backing surplus and required capital

-

(11)

-

(11)

-

-

(11)

Other movementsnote (iii)

(6)

(75)

(169)

(250)

9

(126)

(367)

Net increase in shareholders' equity

4,763

2,318

854

7,935

100

(953)

7,082

Shareholders' equity at beginning of year:









As previously reported

13,643

9,487

9,647

32,777

2,354

(2,772)

32,359


Effect of implementation of Solvency IInote 2

-

-

(473)

(473)

-

-

(473)


Other opening adjustmentsnote (v)

66

-

279

345

-

(345)

-


13,709

9,487

9,453

32,649

2,354

(3,117)

31,886

Shareholders' equity at end of year

18,472

11,805

10,307

40,584

2,454

(4,070)

38,968









Representing:








Statutory IFRS basis shareholders' equity:









Net assets (liabilities)

4,747

5,204

5,974

15,925

1,224

(3,958)

13,191


Goodwill

-

-

-

-

1,230

245

1,475

Total IFRS basis shareholders' equity

4,747

5,204

5,974

15,925

2,454

(3,713)

14,666

Additional retained profit (loss) on an









EEV basisnote (iv)

13,725

6,601

4,333

24,659

-

(357)

24,302

EEV basis shareholders' equity

18,472

11,805

10,307

40,584

2,454

(4,070)

38,968









Balance at beginning of year:*








Statutory IFRS basis shareholders' equity:









Net assets (liabilities)

3,789

4,154

5,397

13,340

1,124

(2,972)

11,492


Goodwill

-

-

-

-

1,230

233

1,463

Total IFRS basis shareholders' equity

3,789

4,154

5,397

13,340

2,354

(2,739)

12,955

Additional retained profit (loss) on an









EEV basisnote (iv)

9,920

5,333

4,056

19,309

-

(378)

18,931

EEV basis shareholders' equity

13,709

9,487

9,453

32,649

2,354

(3,117)

31,886

 

*       The balance at the beginning of the year has been presented after the adjustments for the impact of Solvency II for UK insurance operations at 1 January 2016 (see note 2 for details), together with the effect of a classification change (see note (v) below).

 

Notes

(i)     Other operations of £(4,070) million represents the shareholders' equity of £(4,315) million for other operations as shown in the movement in shareholders' equity and includes goodwill of £245 million (2015: £233 million) related to Asia long-term operations.

(ii)    Intra-group dividends represent dividends that have been declared in the year and investments 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, share-based payments and treasury shares.

(iv)   The additional retained loss on an EEV basis for Other operations primarily represents the mark to market value adjustment for holding company net borrowings of a charge of £(357) million (2015: £(353) million), as shown in note 8.

(v)   Other opening adjustments represents the effect of a classification change of £345 million from Other operations to UK insurance operations of £279 million and to Asia insurance operations of £66 million in order to align with Solvency II segmental reporting, which has no overall effect on the Group's EEV.

 

 

10 Analysis of movement in net worth and value of in-force for long-term business

 



2016 £m








Total







Value of

long-term



Free

Required

Total net


in-force

business



surplus

capital

 worth


business

operations



note  11




note


Group







Shareholders' equity at beginning of year:








As previously reported

5,642

4,704

10,346


22,431

32,777


Opening adjustments*

(1,473)

4,578

3,105


(3,233)

(128)



4,169

9,282

13,451


19,198

32,649

New business contribution

(903)

595

(308)


3,396

3,088

Existing business - transfer to net worth

3,060

(637)

2,423


(2,423)

-

Expected return on existing businessnote 5

99

193

292


1,602

1,894

Changes in operating assumptions and experience variancesnote 5

857

(231)

626


80

706

Solvency II and restructuring costs

(33)

-

(33)


-

(33)

Post-tax operating profit

3,080

(80)

3,000


2,655

5,655

Loss attaching to held for sale Korea life businessnote 9

(86)

-

(86)


(309)

(395)

Other non-operating items

(932)

505

(427)


34

(393)

Profit for the year from long-term business

2,062

425

2,487


2,380

4,867

Exchange movements on foreign operations and








net investment hedges

633

589

1,222


3,370

4,592

Intra-group dividends and investment in operations

(1,263)

-

(1,263)


-

(1,263)

Other movements

(250)

-

(250)


(11)

(261)

Shareholders' equity at end of year*

5,351

10,296

15,647


24,937

40,584









Asia operations







New business contribution

(476)

139

(337)


2,367

2,030

Existing business - transfer to net worth

1,157

(92)

1,065


(1,065)

-

Expected return on existing businessnote 5

39

54

93


773

866

Changes in operating assumptions and experience variancesnote 5

14

94

108


70

178

Post-tax operating profit

734

195

929


2,145

3,074

Loss attaching to held for sale Korea life businessnote 9

(86)

-

(86)


(309)

(395)

Other non-operating items

(91)

29

(62)


32

(30)

Profit for the year from long-term business

557

224

781


1,868

2,649









US operations







New business contribution

(298)

324

26


764

790

Existing business - transfer to net worth

1,223

(213)

1,010


(1,010)

-

Expected return on existing businessnote 5

47

53

100


483

583

Changes in operating assumptions and experience variancesnote 5

596

5

601


(3)

598

Post-tax operating profit

1,568

169

1,737


234

1,971

Non-operating items

(770)

(108)

(878)


(179)

(1,057)

Profit for the year from long-term business

798

61

859


55

914









UK insurance operations







New business contribution

(129)

132

3


265

268

Existing business - transfer to net worth

680

(332)

348


(348)

-

Expected return on existing businessnote 5

13

86

99


346

445

Changes in operating assumptions and experience variancesnote 5

247

(330)

(83)


13

(70)

Solvency II and restructuring costs

(33)

-

(33)


-

(33)

Post-tax operating profit

778

(444)

334


276

610

Non-operating items

(71)

584

513


181

694

Profit for the year from long-term business

707

140

847


457

1,304

 

*       Opening adjustments represent the impact of implementation of Solvency II for UK insurance operations at 1 January 2016 (see note 2 for details), together with the effect of a classification change, as discussed in note 9(v).

 

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 as shown below:



31 Dec 2016 £m


31 Dec 2015 £m



Asia

operations

US

operations

UK

insurance

operations

Total

long-term

business

operations


Asia

operations

US

operations

UK

insurance

operations*

Total

long-term

business

operations

Value of in-force business before











deduction of cost of capital and











time value of guarantees

15,371

8,584

3,468

27,423


11,280

7,355

3,043

21,678

Cost of capital

(477)

(319)

(692)

(1,488)


(438)

(229)

(713)

(1,380)

Cost of time value of guarantees

(87)

(911)

-

(998)


(88)

(1,012)

-

(1,100)

Net value of in-force business

14,807

7,354

2,776

24,937


10,754

6,114

2,330

19,198

Total net worth

3,665

4,451

7,531

15,647


2,955

3,373

7,123

13,451

Total embedded valuenote 9

18,472

11,805

10,307

40,584


13,709

9,487

9,453

32,649

 

*       The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results in the table above are presented after the adjustments for the impact of Solvency II for UK insurance operations at 1 January 2016, together with the effect of a classification change, as discussed in note 9(v).

 

 

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. 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 is taken to be EEV basis post-tax earnings and shareholders' equity for central operations, 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 2015 comparative results are shown below on both actual exchange rates (AER) and constant exchange rates (CER) bases. The 2015 CER comparative results are translated at 2016 average exchange rates.

 


2016 £m


2015* £m


% change




AER

CER


AER

CER

Asia operations








Underlying free surplus generated from









in-force life business

1,210


951

1,064


27%

14%

Investment in new businessnote (iii)(a)

(476)


(386)

(426)


(23)%

(12)%

Long-term business

734


565

638


30%

15%

Eastspring Investmentsnote (iii)(b)

125


101

112


24%

12%

Total

859


666

750


29%

15%

US operations








Underlying free surplus generated from









in-force life business

1,866


1,426

1,608


31%

16%

Investment in new businessnote (iii)(a)

(298)


(267)

(301)


(12)%

1%

Long-term business

1,568


1,159

1,307


35%

20%

Broker-dealer and asset managementnote (iii)(b)

(3)


7

8


(143)%

(138)%

Total

1,565


1,166

1,315


34%

19%

UK insurance operations








Underlying free surplus generated from









in-force life business

907


878

878


3%

3%

Investment in new businessnote (iii)(a)

(129)


(65)

(65)


(98)%

(98)%

Long-term business**

778


813

813


(4)%

(4)%

General insurance commissionnote (iii)(b)

23


22

22


5%

5%

Total

801


835

835


(4)%

(4)%

M&G

341


358

358


(5)%

(5)%

Prudential Capital

22


18

18


22%

22%

Underlying free surplus generated from









insurance and asset management operations

3,588


3,043

3,276


18%

10%









Representing:








Long-term business:








Expected in-force cash flows (including









expected return on net assets)

3,159


2,693

2,941


17%

7%

Effects of changes in operating assumptions,









experience variances and other items

824


562

609


47%

35%

Underlying free surplus generated from









in-force life business

3,983


3,255

3,550


22%

12%

Investment in new businessnote (iii)(a)

(903)


(718)

(792)


(26)%

(14)%

Total long-term business*,**

3,080


2,537

2,758


21%

12%

Asset management and general insurance









commissionnote (iii)(b)

508


506

518


0%

(2)%


3,588


3,043

3,276


18%

10%

 

*       The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details).

**     The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflected the Solvency I basis being the regime applicable for the year.

 

(ii)   Underlying free surplus generated - total Group

 



2016 £m


2015* £m


% change





AER

CER


AER

CER

Underlying free surplus generated from









insurance and asset management operationsnote (i)

3,588


3,043

3,276


18%

10%

Other income and expenditure net of restructuring









and Solvency II costsnote (iii)(b)

(703)


(588)

(588)


(20)%

(20)%

Interest received on tax settlement

37


-

-


n/a

n/a

Group total underlying free surplus generated, including









other operations

2,922


2,455

2,688


19%

9%

 

*       The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details).

 

(iii)  Movement in free surplus - long-term business and asset management operations

 


2016 £m


 Long-term business

Asset management and UK general insurance commission

Total insurance and asset management operations


Central

and other

operations

Group

total


note 10

note (b)



note (b)


Underlying free surplus generated

3,080

508

3,588


(666)

2,922

Loss attaching to held for sale Korea life businessnote 10

(86)

-

(86)


-

(86)

Other non-operating itemsnote (c)

(932)

(38)

(970)


(169)

(1,139)


2,062

470

2,532


(835)

1,697

Net cash flows to parent companynote (d)

(1,236)

(482)

(1,718)


1,718

-

External dividends



-


(1,267)

(1,267)

Exchange rate movements, timing differences and








other itemsnote (e)

356

112

468


1,144

1,612

Net movement in free surplus

1,182

100

1,282


760

2,042

Balance at 1 January 2016:








Balance at beginning of year

5,642

1,124

6,766


1,224

7,990


Opening adjustments*

(1,473)

-

(1,473)


(345)

(1,818)


4,169

1,124

5,293


879

6,172

Balance at end of year

5,351

1,224

6,575


1,639

8,214








Representing:








Asia operations



2,142


-

2,142


US operations



2,418


-

2,418


UK operations



2,015


-

2,015


Other operations



-


1,639

1,639




6,575


1,639

8,214








Balance at 1 January 2016:*








Asia operations



1,814


-

1,814


US operations



1,733


-

1,733


UK operations



1,746


-

1,746


Other operations



-


879

879




5,293


879

6,172

 

*       Opening adjustments represent the impact of implementation of Solvency II at 1 January 2016 (see note 2 for details), together with the effect of a reclassification between long-term business and other operations, as discussed in note 9(v). Balance at 1January 2016 has been presented after the opening adjustments.

 

 



2015* £m


 Long-term business

Asset management and UK general insurance commission

Total insurance and asset management operations


Central

and other

operations

Group

total



note (b)



note (b)


Underlying free surplus generated

2,537

506

3,043


(588)

2,455

Disposal of Japan life business

23

-

23


-

23

Results of the held for sale Korea life businessnote 17

15

-

15


-

15

Other non-operating itemsnote (c)

(415)

(53)

(468)


29

(439)


2,160

453

2,613


(559)

2,054

Net cash flows to parent companynote (d)

(1,271)

(354)

(1,625)


1,625

-

External dividends

-

-

-


(974)

(974)

Exchange rate movements, timing differences and








other itemsnote (e)

560

159

719


(307)

412

Net movement in free surplus

1,449

258

1,707


(215)

1,492

Balance at beginning of year

4,193

866

5,059


1,439

6,498

Balance at end of year

5,642

1,124

6,766


1,224

7,990

 

*       The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details).

 

Notes

(a)   Free surplus invested in new business represents amounts set aside for required capital and acquisition costs.

(b)   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 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.

(c)   Non-operating items are principally short-term fluctuations in investment returns and the effect of changes in economic assumptions for long-term business operations.

(d)   Net cash flows to parent company for long-term business operations reflect the flows as included in the holding company cash flow at transaction rates.

(e)   Exchange rate movements, timing differences and other items represent:




2016 £m




Long-term

business

Asset management and UK general insurance commission

Total

insurance and asset management operations


Central

and other

operations

Group

total


Exchange rate movements

633

83

716


48

764


Mark to market value movements on Jackson assets









backing surplus and required capitalnote 9

(11)

-

(11)


-

(11)


Other itemsnote (f)

(266)

29

(237)


1,096

859




356

112

468


1,144

1,612













2015 £m




Long-term

business

Asset management and UK general insurance commission

Total

insurance and asset management operations


Central

and other

operations

Group

total


Exchange rate movements

67

3

70


10

80


Mark to market value movements on Jackson assets









backing surplus and required capital

(76)

-

(76)


-

(76)


Other itemsnote (f)

569

156

725


(317)

408




560

159

719


(307)

412

 

(f)    Other items include the movements in subordinated debt for Other operations, together with the effect of intra-group loans and other non-cash items. The 2015 results also included the effect of a classification change of £702 million from Other operations to UK insurance operations in order to align with Solvency II segmental reporting, with no overall effect on the Group's EEV.

 

 

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 can be reconciled to the 2016 and 2015 totals for the emergence of free surplus as follows:

 


2016 £m

2015* £m

Required capitalnote 10

10,296

9,282

Value of in-force business (VIF)note 10

24,937

19,198

Add back: deduction for cost of time value of guaranteesnote 10

998

1,100

Expected free surplus generation from the sale of Korea life businessnote 17

(76)

-

Other itemsnote

(1,430)

(1,714)

Total

34,725

27,866

 

*       In order to show the cash flows for UK insurance operations on a comparable basis, the 2015 comparative results for UK insurance operations reflect the impact of the implementation of Solvency II at 1 January 2016 (see note 2 for details).

 

Note

'Other items' represent amounts incorporated into VIF where there is no definitive timeframe for when the payments will be made or receipts received. In particular, other items include the deduction of the shareholders' interest in the estate, the value of which is derived by increasing final bonus rates so as to exhaust the estate over the lifetime of the in-force with-profits business. This is an assumption to give an appropriate valuation. To be conservative this item is excluded from the expected free surplus generation profile below.

 

Cash flows are projected on a deterministic basis and are discounted at the appropriate risk discount rate. The modelled cash flows use the same methodology underpinning the Group's 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 is modelled as emerging into free surplus over future years.

 



2016 £m



Expected period of conversion of future post-tax distributable earnings

and required capital flows to free surplus


2016 Total as

shown above

1-5 years

6-10 years

11-15 years

16-20 years

21-40 years

40+ years

Asia operations*

16,393

5,141

3,331

2,209

1,515

3,118

1,079

US operations

10,556

5,542

3,203

1,240

372

199

-

UK insurance operations

7,776

2,890

1,931

1,119

901

899

36

Total

34,725

13,573

8,465

4,568

2,788

4,216

1,115


100%

39%

25%

13%

8%

12%

3%

                                                                                                                                                                                                              

*       Asia operations exclude the cash flows in respect of the held for sale Korea life business.











2015 £m



Expected period of conversion of future post-tax distributable earnings

and required capital flows to free surplus


2015 Total as

shown above

1-5 years

6-10 years

11-15 years

16-20 years

21-40 years

40+ years

Asia operations

11,858

3,916

2,552

1,669

1,115

2,055

551

US operations

8,740

4,361

2,752

1,129

383

115

-

UK insurance operations**

7,268

2,446

1,812

1,198

866

920

26

Total**

27,866

10,723

7,116

3,996

2,364

3,090

577


100%

38%

26%

14%

9%

11%

2%

 

**     In order to show the cash flows for UK insurance operations on a comparable basis, the 2015 comparative results for UK insurance operations reflect the impact of the implementation of Solvency II at 1 January 2016 (see note 2 for details).

 

 

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 2016 and 31 December 2015 and the new business contribution after the effect of required capital for 2016 and 2015 to:

 

-    1 per cent increase in the discount rates;

-    1 per cent increase in interest rates, including all consequential changes (assumed investment returns for all asset classes, market values of fixed interest assets, risk discount rates);

-    0.5 per cent decrease in interest rates* (1 per cent decrease for 2015), including all consequential changes (assumed investment returns for all asset classes, market values of fixed interest assets, risk discount rates);

-    1 per cent rise in equity and property yields;

-    10 per cent fall in market value of equity and property assets (embedded value only);

-    The statutory minimum capital level by contrast to EEV basis required capital for (embedded value only); and

-    5 basis points increase in UK long-term expected defaults.

 

*       To reflect the current level of low interest rates, the sensitivity of new business contribution and embedded value to a 0.5 per cent reduction in interest rates is shown for 2016.

 

In each sensitivity calculation, all other assumptions remain unchanged except where they are directly affected by the revised economic conditions.

 

New business contribution





















2016 £m


2015 £m


Asia operations

US operations

UK insurance operations

Total

long-term

business

operations


Asia operations*

US operations

UK insurance operations**

Total

long-term

business

operations

New business contributionnote 4

2,030

790

268

3,088


1,482

809

318

2,609

Discount rates - 1% increase

(375)

(43)

(32)

(450)


(254)

(38)

(40)

(332)

Interest rates - 1% increase

51

64

27

142


30

80

7

117

Interest rates - 1% decrease

-

-

-

-


(78)

(127)

(9)

(214)

Interest rates - 0.5% decrease

(30)

(49)

(15)

(94)


-

-

-

-

Equity/property yields - 1% rise

129

91

28

248


71

95

20

186

Long-term expected defaults - 5 bps increase

-

-

(2)

(2)


-

-

(8)

(8)

 

*       In order to show the Asia long-term business on a comparable basis, the 2015 comparatives for new business contribution have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details).

**     The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year.

 

Embedded value of long-term business operations

















31 Dec 2016 £m


31 Dec 2015 £m


Asia

operations

US

operations

UK

insurance

operations

Total

long-term

business

operations


Asia

operations

US

operations

UK

insurance

operations*

 Total

long-term

business

operations

Shareholders' equitynote 9

18,472

11,805

10,307

40,584


13,643

9,487

9,647

32,777

Discount rates - 1% increase

 (2,078)

 (379)

 (809)

 (3,266)


 (1,448)

 (271)

 (586)

 (2,305)

Interest rates - 1% increase

 (701)

 (241)

 (638)

 (1,580)


 (380)

 (46)

 (328)

 (754)

Interest rates - 1% decrease

-

-

-

-


132

 (93)

426

465

Interest rates - 0.5% decrease

248

25

369

642


-

-

-

-

Equity/property yields - 1% rise

771

653

314

1,738


506

514

271

 1,291

Equity/property market values - 10% fall

 (361)

 (11)

 (399)

 (771)


 (246)

 (411)

 (373)

 (1,030)

Statutory minimum capital

150

223

-

373


148

162

4

314

Long-term expected defaults - 5 bps increase

-

-

 (138)

 (138)


-

-

 (141)

 (141)

 

*       The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year.

 

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. These are for the effect of economic assumption changes and short-term fluctuations in investment returns. In addition to the sensitivity effects shown above, the other components of the profit for the following year would be calculated by reference to the altered assumptions, for example new business contribution and unwind of discount, together with the effect of other changes such as altered corporate bond spreads. In addition for changes in interest rates, the effect shown above for Jackson would also be recorded within the fair value movements on assets backing surplus and required capital, which are taken directly to shareholders' equity.

 

(b)   Sensitivity analysis - non-economic assumptions

 

The tables below show the sensitivity of the embedded value as at 31 December 2016 and 31 December 2015 and the new business contribution after the effect of required capital for 2016 and 2015 to:

 

-    10 per cent proportionate decrease in maintenance expenses (a 10 per cent sensitivity on a base assumption of £10 per annum would represent an expense assumption of £9 per annum);

-    10 per cent proportionate decrease in lapse rates (a 10 per cent sensitivity on a base assumption of 5 per cent would represent a lapse rate of 4.5 per cent per annum); and

-    5 per cent proportionate decrease in base mortality and morbidity rates (ie increased longevity).

 

New business contribution





















2016 £m


2015 £m



Asia operations

US

operations

UK

insurance

operations

Total

long-term

business

operations


Asia operations*

US

operations

UK

insurance

operations**

Total

long-term

business

operations

New business contributionnote 4

2,030

790

268

3,088


1,482

809

318

2,609

Maintenance expenses - 10% decrease

33

10

3

46


27

8

2

37

Lapse rates - 10% decrease

132

26

11

169


104

25

9

138

Mortality and morbidity - 5% decrease

57

4

(4)

57


49

1

(13)

37

Change representing effect on:











Life business

57

4

-

61


49

1

1

51


UK annuities

-

-

(4)

(4)


-

-

(14)

(14)

 

*       In order to show the Asia long-term business on a comparable basis, the 2015 comparatives for new business contribution have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details).

**     The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year.

 

Embedded value of long-term business operations





















31 Dec 2016 £m


31 Dec 2015 £m



Asia

operations

US

operations

UK

insurance

operations

Total

long-term

business

operations


Asia

operations

US

operations

UK

insurance

operations*

Total

long-term

business

operations

Shareholders' equitynote 9

18,472

11,805

10,307

40,584


13,643

9,487

9,647

32,777

Maintenance expenses - 10% decrease

187

104

91

382


153

80

68

301

Lapse rates - 10% decrease

659

533

79

1,271


508

394

75

977

Mortality and morbidity - 5% decrease

554

192

(302)

444


449

172

(299)

322

Change representing effect on:











Life business

554

192

12

758


449

172

11

632


UK annuities

-

-

(314)

(314)


-

-

(310)

(310)

 

*       The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year.

 

 

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. 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 (PAC) long-term fund, established by a Court-Approved Scheme of Arrangement in October 1997. SAIF is closed to new business and the assets and liabilities of the fund are wholly attributable to the policyholders of the fund.

-       the presentational treatment of the Group's principal defined benefit pension scheme, the Prudential Staff Pension Scheme (PSPS). The partial recognition of the surplus for PSPS is recognised in 'Other' operations.

 

A small amount of UK group pensions business is also not modelled for EEV reporting purposes.

 

(ii)   Valuation of in-force and new business

The embedded value results are prepared incorporating best estimate assumptions about all relevant factors including levels of future investment returns, expenses, persistency, mortality and morbidity, as described in note 15. These assumptions are used to project future cash flows. The present value of the future cash flows is then calculated using a discount rate which reflects both the time value of money and the non-diversifiable risks associated with the cash flows that are not otherwise allowed for.

 

New business

In determining the EEV basis value of new business, premiums are included in projected cash flows on the same basis of

distinguishing annual and single premium business as set out for statutory basis reporting.

 

New business premiums reflect those premiums attaching to covered business, including premiums for contracts classified as investment products for IFRS basis reporting. New business premiums for regular premium products are shown on an annualised basis. Internal vesting business is classified as new business where the contracts include an open market option.

 

The post-tax contribution from new business represents profits determined by applying operating assumptions as at the end of the year.

 

For UK immediate annuity business and single premium Universal Life products in Asia, primarily in Singapore, the new business contribution is determined by applying economic assumptions reflecting point-of-sale market conditions. This is consistent with how the business is priced as crediting rates are linked to yields on specific assets and the yield is locked in when the assets are purchased at the point of sale of the policy. For other business within the Group, end-of-year economic assumptions are used.

 

New business profitability is a key metric for the Group's management of the development of the business. In addition, post-tax new business margins are shown by reference to annual premium equivalents (APE) and the present value of new business premiums (PVNBP). These margins are calculated as the percentage of the value of new business profit to APE and PVNBP. APE is calculated as the aggregate of regular 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 operations

Subject to local market circumstances and regulatory requirements, the guarantee features described below in respect of UK business broadly apply to similar types of participating contracts principally written in Hong Kong, Singapore and Malaysia. Participating products have both guaranteed and non-guaranteed elements.

 

There are also various non-participating long-term products with guarantees. The principal guarantees are those for whole-of-life contracts with floor levels of policyholder benefits that accrue at rates set at inception and do not vary subsequently with market conditions.

 

US operations (Jackson)

The principal financial options and guarantees in Jackson are associated with the fixed annuity (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 2016, 87 per cent (2015: 87 per cent) of the account values on fixed annuities are for policies with guarantees of 3 per cent or less. The average guarantee rate is 2.6 per cent (2015: 2.6 per cent).

 

Fixed annuities also present a risk that policyholders will exercise their option to surrender their contracts in periods of rapidly rising interest rates, possibly requiring Jackson to liquidate assets at an inopportune time.

 

Jackson issues VA contracts where it contractually guarantees to the contract holder either: a) return of no less than total deposits made to the contract adjusted for any partial withdrawals; b) total deposits made to the contract adjusted for any partial withdrawals plus a minimum return; or c) the highest contract value on a specified anniversary date adjusted for any withdrawals following the specified contract anniversary. These guarantees include benefits that are payable 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 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 insurance operations

For covered business, the only significant financial options and guarantees in the UK insurance operations arise in the with-profits fund.

 

With-profits products provide returns to policyholders through bonuses that are smoothed. There are two types of bonuses - annual and final. Annual bonuses are declared once a year and, once credited, are guaranteed in accordance with the terms of the particular product. Unlike annual bonuses, final bonuses are guaranteed only until the next bonus declaration. The PAC with-profits fund also held a provision on the Solvency II basis of £62 million at 31 December 2016 (Pillar I Peak 2 basis at 31 December 2015: £47 million) to honour guarantees on a small number of guaranteed annuity option products.

 

The Group's main exposure to guaranteed annuity options in the UK is through the non-covered business of SAIF. A provision on the Solvency II basis of £571 million was held in SAIF at 31 December 2016 (Pillar I Peak 2 basis at 31 December 2015: £412 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. Following the implementation of Solvency II which became effective on 1 January 2016, 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 apply:

 

-    Asia operations: the level of required capital has been set to an amount at least equal to the higher of local statutory requirements and the internal target;

-    US operations: the level of required capital has been set at 250 per cent of the risk-based capital (RBC) required by the National Association of Insurance Commissioners (NAIC) at the Company Action Level (CAL); and

-    UK insurance operations: the capital requirements are set at the Solvency II Solvency Capital Requirement (SCR) for shareholder-backed business as a whole; for 2015, the capital requirements were set to an amount at least equal to the higher of Solvency I Pillar I and Pillar II requirements for shareholder-backed business as a whole.

 

(vi)  With-profits business and the treatment of the estate

The proportion of surplus allocated to shareholders from the PAC with-profits fund has been based on the present level of 10 per cent. The value attributed to the shareholders' interest in the estate is derived by increasing final bonus rates (and related shareholder transfers) so as to exhaust the estate over the lifetime of the in-force with-profits business. In any scenarios where the total assets of the life fund are insufficient to meet policyholder claims in full, the excess cost is fully attributed to shareholders. Similar principles apply, where appropriate, for other with-profits funds of the Group's Asia operations.

 

(vii) Internal asset management

The 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. 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 US operations, the risk-free rates are based on 10-year local government bond yields.

 

For UK insurance operations, following the implementation of Solvency II on 1 January 2016, the EEV risk-free rate is based on the full term structure of interest rates, ie a yield curve, rather than using a flat 15-year gilt yield (as for 2015). This yield curve 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. Prudential has selected a granular approach to better reflect differences in market risk inherent in each product group. The risk discount rate so derived does not reflect an overall Group market beta but instead reflects the expected volatility associated with the cash flows for each product category in the embedded value model.

 

Since financial options and guarantees are explicitly valued under the EEV methodology, discount rates under EEV are set excluding the effect of these product features.

 

The risk margin represents the aggregate of the allowance for market risk, additional allowance for credit risk where appropriate, and allowance for non-diversifiable non-market risk. No allowance is required for non-market risks where these are assumed to be fully diversifiable.

 

Market risk allowance

The allowance for market risk represents the beta multiplied by an equity risk premium. Except for UK shareholder-backed annuity business (as explained below) such an approach has been used for the Group's businesses.

 

The beta of a portfolio or product measures its relative market risk. The risk discount rates reflect the market risk inherent in each product group and hence the volatility of product cash flows. These are determined by considering how the profits from each product are affected by changes in expected returns on various asset classes. By converting this into a relative rate of return it is possible to derive a product-specific beta.

 

Product level betas reflect the most recent product mix to produce appropriate betas and risk discount rates for each major product grouping.

 

Additional credit risk allowance

The Group's methodology is to allow appropriately for credit risk. The allowance for total credit risk is to cover:

 

-    expected long-term defaults;

-    credit risk premium (to reflect the volatility in downgrade and default levels); and

-    short-term downgrades and defaults.

 

These allowances are initially reflected in determining best estimate returns and through the market risk allowance described above. However, for those businesses largely backed by holdings of debt securities these allowances in the projected returns and market risk allowances may not be sufficient and an additional allowance may be appropriate.

 

The practical application of the allowance for credit risk varies depending upon the type of business as described below:

 

Asia operations

For Asia operations, the allowance for credit risk incorporated in the projected rates of return and the market risk allowance are sufficient. Accordingly, no additional allowance for credit risk is required.

 

The projected rates of return for holdings of corporate bonds comprise the risk-free rate plus an assessment of long-term spread over the risk-free rate.

 

US operations (Jackson)

For Jackson business, the allowance for long-term defaults is reflected in the risk margin reserve (RMR) charge which is deducted in determining the projected spread margin between the earned rate on the investments and the policyholder crediting rate.

 

The risk discount rate incorporates an additional allowance for credit risk premium and short-term downgrades and defaults as shown in note 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 credit risk not reflected in the RMR long-term default assumptions, and how much is liquidity premium (which is the premium required by investors to compensate for the risk of longer-term investments which cannot be easily converted into cash, and converted at the fair market value). In assessing this effect, consideration has been given to a number of approaches to estimating the liquidity premium by considering recent statistical data; and

-    Policyholder benefits for Jackson fixed annuity business are not fixed. It is possible in adverse economic scenarios to pass on a component of credit losses to policyholders (subject to guarantee features) through lower investment return rates credited to policyholders. Consequently, it is only necessary to allow for the balance of the credit risk in the risk discount rate.

 

The level of the additional allowance is assessed at each reporting period to take account of prevailing credit conditions and as the business in-force alters over time. The additional allowance for variable annuity business has been set at one-fifth of the non-variable annuity business to reflect the proportion of the allocated holdings of general account debt securities.

 

The level of allowance differs from that for UK annuity business for investment portfolio differences and to take account of the management actions available in adverse economic scenarios to reduce crediting rates to policyholders, subject to guarantee features of the products.

 

UK operations

(1) Shareholder-backed annuity business

For Prudential's UK shareholder-backed annuity business, Prudential has used a market consistent embedded value (MCEV) approach to derive an implied risk discount rate which is then applied to the projected best estimate cash flows.

 

In the annuity MCEV calculations, as the assets are generally held to maturity to match 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 14(iii).

 

In 2015, the allowance for liquidity premium was based on Prudential's assessment of the expected return on the assets backing the annuity liabilities after allowing for expected long-term defaults, a credit risk premium, an allowance for a 1-notch downgrade of the asset portfolio subject to credit risk; and an allowance for short-term downgrades and defaults.

 

(2) With-profits fund non-profit annuity business

For UK non-profit annuity business including that attributable to the PAC with-profits fund, the basis for determining the aggregate allowance for credit risk is consistent with that applied for UK shareholder-backed annuity business (as described above). The allowance for credit risk for this business is taken into account in determining the projected cash flows to the with-profits fund, which are in turn discounted at the risk discount rate applicable to all of the projected cash flows of the fund.

 

(3) With-profits fund holdings of debt securities

The UK with-profits fund holds debt securities as part of its investment portfolio backing policyholder liabilities and unallocated surplus. The assumed earned rate for with-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. Finance theory cannot be used to determine the appropriate component of beta for non-diversifiable non-market risks since there is no observable risk premium associated with it that is akin to the equity risk premium. Recognising this, a pragmatic approach has been applied.

 

A base level allowance of 50 basis points is applied to cover the non-diversifiable non-market risks associated with the Group's businesses. For the Group's 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. For the Group's US business and UK business, no additional allowance is necessary.

 

In 2015, for UK shareholder-backed annuity business, a further allowance of 50 basis points was used to reflect the longevity risk, which is covered by the solvency capital requirements following the implementation of Solvency II from 1 January 2016.

 

(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.

 

(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) below) 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) below;

-    the impact of routine changes of estimates relating to operating assumptions, as described in note 14(b)(iv) below; and

-    operating experience variances, as described in note 14(b)(v) below.

 

Non-operating results comprise the recurrent items of:

 

-    short-term fluctuations in investment returns;

-    the mark to market value movements on core borrowings; and

-    the effect of changes in economic assumptions.

 

In addition, non-operating profit also includes the effect of adjustment to the carrying value of the held for sale Korea life business in 2016 and a reclassification of the result attributable to the held for sale Korea life business in both years (see note 17 for details).

 

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 UK operations, where assets backing the liabilities and unallocated surplus are subject to market volatility, asset values at the beginning of the reporting period are adjusted to remove the effects of short-term market movements as explained in note 14(b)(iii) below.

 

For the purpose of determining the long-term returns for debt securities of US operations for FA and other general account business, a risk margin charge is included which reflects the expected long-term rate of default based on the credit quality of the portfolio. For Jackson, interest-related realised gains and losses are amortised to the operating results over the maturity period of the sold bonds and for equity-related investments, a long-term rate of return is assumed, which reflects the aggregation of end-of-period risk-free rates and equity risk premium. For US VA 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 the related hedging activity.

     

For UK annuity business, rebalancing of the asset portfolio backing the liabilities to policyholders may, from time to time, take place to align it more closely with the internal benchmark of credit quality that management applies. Such rebalancing will result in a change in the projected yield on the asset portfolio and the allowance for default risk. The net effect of these changes is included in the operating result for the year.

 

(iii)  Unwind of discount and other expected returns

The unwind of discount and other expected returns is determined by reference to:

 

-   the value of in-force business at the beginning of the year (adjusted for the effect of current year economic and operating assumption changes); and

-   required capital and surplus assets.

 

UK operations

In applying this general approach, the unwind of discount included in operating profit is determined by reference to the following:

 

-   The unwind is determined by reference to an implied single risk discount rate for 2016. Following the implementation of Solvency II the EEV risk-free rate is based on a yield curve (as set out in note 14a(viii) above), 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 2016, the shareholders' interest in the smoothed surplus assets used for this purpose only were £77 million lower (31 December 2015: £58 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-period assumptions (see note 14(b)(v) below).

 

(v)   Operating experience variances

Operating profit includes the effect of experience variances on non-economic assumptions, such as persistency, mortality and morbidity, expenses and other factors, which are calculated with reference to the end-of-period 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 UK insurance operations, the effect is after allowing for the recalculation of transitional measures on technical provisions.

 

 

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 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 operationsnotes (b), (c)

The risk-free rates of return for Asia operations are defined as 10-year government bond yields at the end of the year.

 


Risk discount rate %


10-year government

bond yield %


Expected

long-term Inflation %


New business


In-force business




31 Dec

31 Dec


31 Dec

31 Dec


31 Dec

31 Dec


31 Dec

31 Dec


2016

2015


2016

2015


2016

2015


2016

2015

China

9.6

9.4


9.6

9.4


3.1

2.9


2.5

2.5

Hong Kongnotes (b), (d)

3.9

3.7


3.9

3.7


2.5

2.3


2.3

2.3

Indonesia

12.0

12.8


12.0

12.8


8.1

8.9


5.0

5.0

Malaysianote (d)

6.8

6.6


6.9

6.7


4.3

4.2


2.5

2.5

Philippines

11.6

11.3


11.6

11.3


4.8

4.6


4.0

4.0

Singaporenote (d)

4.2

4.3


5.0

5.1


2.5

2.6


2.0

2.0

Taiwan

4.0

4.0


4.0

3.9


1.2

1.0


1.0

1.0

Thailand

9.4

9.3


9.4

9.3


2.7

2.5


3.0

3.0

Vietnam

13.0

13.8


13.0

13.8


6.3

7.1


5.5

5.5

Total weighted risk discount ratenote (a)

5.3

5.9


6.1

6.4







 

Notes

(a)   The weighted risk discount rates for Asia operations shown above have been determined by weighting each country's risk discount rates by reference to the 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 territories reflect the movements in 10-year government bond yields, together with the effects of movements in the allowance for market risk and changes in product mix.

(b)   For Hong Kong the assumptions shown are for US dollar denominated business. For other territories, the assumptions are for local currency denominated business.

(c)   Equity risk premiums in Asia range from 3.5 per cent to 8.7 per cent (2015: from 3.5 per cent to 8.6 per cent).

(d)   The mean equity return assumptions for the most significant equity holdings of the Asia operations are:

 



31 Dec 2016 %

31 Dec 2015 %


Hong Kong

6.5

6.3


Malaysia

10.2

10.2


Singapore

8.5

8.6

 

(ii)   US operations

The risk-free rates of return for US operations are defined as 10-year treasury bond yield at the end of the year.

 




31 Dec 2016 %

31 Dec 2015 %

Assumed new business spread margins:*




Fixed annuity business:**





January to June issues 

1.25

1.25



July to December issues

1.25

1.50


Fixed index annuity business:





January to June issues 

1.50

1.50



July to December issues

1.50

1.75


Institutional business

0.50

0.70

Allowance for long-term defaults included in projected spreadnote 14(a)(viii)

0.21

0.24

Risk discount rate:




Variable annuity:





Risk discount rate

6.9

6.8



Additional allowance for credit risk included in risk discount ratenote 14(a)(viii)

0.2

0.2


Non-variable annuity:





Risk discount rate

4.1

3.9



Additional allowance for credit risk included in risk discount ratenote 14(a)(viii)

1.0

1.0


Weighted average total:





New business

6.8

6.7



In-force business

6.5

6.2

US 10-year treasury bond yield

2.5

2.3

Pre-tax expected long-term nominal rate of return for US equities

6.5

6.3

Expected long-term rate of inflation

3.0

2.8

Equity risk premium

4.0

4.0

S&P equity return volatilitynote (v)

18.0

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.

 

(iii)  UK insurance operations

Effective from 1 January 2016, following the implementation of Solvency II, 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. For 2016, 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).

 

For 2015, risk-free rates of return and risk discount rates were based on a flat 15-year gilt yield at the end of the year.

 

The key economic assumptions are shown below for both years, for 2016 the single implied risk discount rate is shown, along with the 15-year nominal rate of return based on the yield curve. For 2015 the long-term nominal rates of return are shown.







31 Dec 2016 %

31 Dec 2015 %

Shareholder-backed annuity business:note (a)



Risk discount rate:




New business

3.9

5.7


In-force business

4.5

7.4

Pre-tax expected 15-year / long-term nominal rates of investment return:note (b)




New business

3.0

3.5


In-force business

2.8

3.5

With-profits and other business:



Risk discount rate:*




New business

4.7

5.6


In-force business

4.9

5.7

Pre-tax expected 15-year / long-term nominal rates of investment return:note (b)




Overseas equities

6.2 to 9.4

6.3 to 9.4


Property

4.5

5.2


15-year gilt yield

1.7

2.4


Corporate bonds

3.5

4.1

Expected 15-year / long-term rate of inflation

3.6

3.1

Equity risk premium

4.0

4.0

 

*       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

 

Notes

(a)   For shareholder-backed annuity business, the movements in the pre-tax long-term nominal rates of return and risk discount rates for new and in-force businesses reflect the effect of changes in asset yields (based on average yields for new business).

(b)   The table below shows the pattern of the UK risk-free Solvency II spot yield curve at the end of 31 December 2016:

 





31 Dec 2016



Year


1

5

10

15

20

Risk-free rate (%)


0.4

0.7

1.1

1.3

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 operations

 

-    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 UK insurance operations below.

-    The volatility of equity returns ranges from 18 per cent to 35 per cent, and the volatility of government bond yields ranges from 0.9 per cent to 2.3 per cent for both years.

 

(v)   US operations (Jackson)

 

-    Interest rates and equity returns are projected using a log-normal generator reflecting historical market data.

-    Corporate bond returns are based on treasury yields plus a spread that reflects current market conditions.

-    The volatility of equity returns ranges from 18 per cent to 27 per cent for both years, and the standard deviation of interest rates ranges from 2.3 per cent to 2.6 per cent (2015: from 2.2 per cent to 2.5 per cent).

 

(vi)  UK insurance operations

 

-    Interest rates are projected using a stochastic interest rate model calibrated to the current market yields.

-    Equity returns are assumed to follow a log-normal distribution.

-    The corporate bond return is calculated based on a risk-free 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.

-    The standard deviation of equities and property ranges from 15 per cent to 20 per cent for both years.

 

Operating assumptions

 

Best estimate assumptions

Best estimate assumptions are used for the cash flow projections, where best estimate is defined as the mean of the distribution of future possible outcomes. The assumptions are reviewed actively and changes are made when evidence exists that material changes in future experience are reasonably certain.

 

Assumptions required in the calculation of the value of options and guarantees, for example relating to volatilities and correlations, or dynamic algorithms linking liabilities to assets, have been set equal to the best estimates and, wherever material and practical, reflect any dynamic relationships between the assumptions and the stochastic variables.

 

Demographic assumptions

Persistency, mortality and morbidity assumptions are based on an analysis of recent experience, but also reflect expected future experience. Where relevant, when calculating the time value of financial options and guarantees, policyholder withdrawal rates vary in line with the emerging investment conditions according to management's expectations.

 

Expense assumptions

Expense levels, including those of service companies that support the Group's long-term business operations, are based on internal expense analysis investigations and are appropriately allocated to acquisition of new business and renewal of in-force business. Exceptional expenses are identified and reported separately. For mature business, it is Prudential's policy not to take credit for future cost reduction programmes until the savings have been delivered. For businesses which are currently sub-scale (China, Malaysia Takaful and Taiwan), expense overruns are reported where these are expected to be short-lived.

 

For Asia operations, the expenses comprise costs borne directly and recharged costs from the Asia regional head office, that are attributable to covered business. The assumed future expenses for these operations also include projections of these future recharges. Development expenses are charged as incurred.

 

Corporate expenditure, which is included in other income and expenditure, comprises:

-    expenditure for Group head office, to the extent not allocated to the PAC with-profits funds, together with Solvency II implementation and restructuring costs, which are charged to the EEV basis results as incurred; and

-    expenditure of the Asia regional head office that is not allocated to the covered business or asset management operations which is charged as incurred. These costs are primarily for corporate related activities and are included within corporate expenditure.

 

Tax rates

The assumed long-term effective tax rates for operations reflect the incidence of taxable profits and losses in the projected cash flows as explained in note 14(a)(x).

 

The local standard corporate tax rates applicable for the most significant operations for 2016 and 2015 are as follows:

 

Standard corporate tax rates


%

Asia operations:



Hong Kong

 

16.5 per cent on 5 per cent of premium income

Indonesia


25.0

        Malaysia 


2015: 25.0; from 2016: 24.0

Singapore


17.0

US operations


35.0

UK operations*


2015: 20.0; from 2017: 19.0; from 2020: 17.0

 

*       The Finance Bill included a reduction in the UK corporate tax rate from 18 per cent to 17 per cent effective from 1 April 2020. The impact of this reduction on the UK in-force business is shown in note 5(iv)(b).

 

 

16 New business premiums and contributionsnote (i)

 

 

Single premiums


Regular premiums


Annual premium and contribution equivalents (APE)

 

 Present value of new business premiums (PVNBP)*

 

 

 

 

 

 

 

 

 

note 14(a)(ii)

 

note 14(a)(ii)

 

2016 £m


2015 £m


2016 £m


2015 £m


2016 £m


2015 £m

 

2016 £m


2015 £m

Group insurance operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asia**

2,397


1,938


3,359


2,518


3,599


2,712

 

19,271


14,428

US

15,608


 17,286


-


 -  


1,561


 1,729

 

15,608


 17,286

UK***

9,836


 6,955


177


 179


1,160


 874

 

10,513


 7,561

Group total excluding UK bulk annuities**

27,841


26,179


3,536


2,697


6,320


5,315

 

45,392


39,275

UK bulk annuities***

-


 1,508


-


 -  


-


 151

 

-


 1,508

Group total**

27,841


27,687


3,536


2,697


6,320


5,466

 

45,392


40,783

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asia insurance operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cambodia

 -  


 -  


14


 8


14


 8

 

66


 38

Hong Kong

1,140


 546


1,798


 1,158


1,912


 1,213

 

10,930


 7,007

Indonesia

236


 230


255


 303


279


 326

 

1,048


 1,224

Malaysia

110


 100


233


 201


244


 211

 

1,352


 1,208

Philippines

91


 146


61


 44


70


 59

 

278


 287

Singapore

523


 454


299


 264


351


 309

 

2,627


 2,230

Thailand

80


 69


81


 88


89


 95

 

404


 422

Vietnam

6


 6


115


 82


116


 83

 

519


 343

SE Asia operations including

    Hong Kong

2,186


 1,551


2,856


 2,148


3,075


 2,304

 

17,224


 12,759

Chinanote (ii)

124


 308


187


 111


199


 142

 

880


 739

Taiwan

36


 45


146


 127


150


 131

 

499


 442

Indianote (iii)

51


 34


170


 132


175


 135

 

668


 488

Total Asia insurance operations**

2,397


1,938


3,359


 2,518


3,599


 2,712

 

19,271


14,428











 



US insurance operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable annuities

10,653


 11,977


 -  


 -  


1,065


 1,198

 

10,653


 11,977

Elite Access (variable annuity)

2,056


 3,144


 -  


 -  


206


 314

 

2,056


 3,144

Fixed annuities

555


 477


 -  


 -  


55


 48

 

555


 477

Fixed index annuities

508


 458


 -  


 -  


51


 46

 

508


 458

Wholesale

1,836


 1,230


 -  


 -  


184


 123

 

1,836


 1,230

Total US insurance operations

15,608


 17,286


-


 -  


1,561


 1,729

 

15,608


 17,286


 











 

 



UK and Europe insurance operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individual annuities

546


 565


 -  


 -  


55


 57

 

546


 565

Bonds

3,834


 3,327


 -  


 -  


384


 333

 

3,835


 3,328

Corporate pensions

110


 175


121


 135


132


 152

 

479


 600

Individual pensions

2,532


 1,185


35


 32


289


 150

 

2,681


 1,295

Income drawdown

1,649


 1,024


 -  


 -  


165


 102

 

1,649


 1,024

Other products

1,165


 679


21


 12


135


 80

 

1,323


 749

Total Retail

9,836


 6,955


177


 179


1,160


 874

 

10,513


 7,561

Wholesale

-


 1,508


-


 -  


-


 151

 

-


 1,508

Total UK and Europe insurance

     operations

9,836


 8,463


177


 179


1,160


 1,025

 

10,513


 9,069


 











 

 



Group total**

27,841


27,687


3,536


2,697


6,320


5,466

 

45,392


40,783


 











 

 



Group total excluding UK bulk annuities**

27,841


26,179


3,536


2,697


6,320


5,315

 

45,392


39,275

 

*       For 2016, the risk discount rates used to calculate PVNBP for UK insurance operations are on a basis that reflects the Solvency II regime effective on 1 January  2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year.

**     The new business premiums and contributions exclude the results attributable to the held for sale Korea life business (see note 17 for details). The 2015 comparatives have been similarly adjusted.

***    Following Prudential's withdrawal from the UK bulk annuity market, the 2015 comparative results for UK bulk annuities new business have been presented separately.

 

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 E within the EEV 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.

 

 

17 Agreement to sell Korea life business

 

In November 2016, the Group reached an agreement to sell the life insurance subsidiary in Korea, PCA Life Insurance, to Mirae Asset Life Insurance for KRW 170 billion (£114 million at 31 December 2016 closing exchange rate). Completion of the transaction is subject to regulatory approval.

 

Consistent with the classification of the business as held for sale for IFRS reporting, the EEV carrying value has been set to £105 million at 31 December 2016, representing the estimated proceeds, net of £9 million of related expenses.

 

In order to facilitate comparisons of the Group's retained businesses, the EEV basis operating profit excludes the contribution from the Korea life business. The 2015 comparative results have been similarly adjusted. For 2016, the post-tax result for the year of £5 million, including short-term fluctuations in investment returns and the effect of changes in economic assumptions, together with the £(415) million adjustment to the carrying value have given rise to an aggregate loss of £(410) million. The 2015 amount of £39 million represents the previously reported profit after tax for this business.

 

The tables below show the results of the held for sale Korea life business which were included in the Group's results for half year 2016 and full year 2015.

 

EEV post-tax results






Half year 2016 £m

Full year 2015 £m

Operating profit




New business contribution


3

8

Profit from business in force


3

33



6

41

Non-operating loss


(17)

(2)

Total profit after tax


(11)

39





Underlying free surplus generated




New business contribution


(9)

(27)

Profit from business in force


3

34



(6)

7

Non-operating profit


17

8

Total free surplus generated


11

15






 

New business premiums and contributions








Single premiums

£m

Regular premiums

£m

Annual premium and contribution equivalents (APE)

£m

Present value of new business premiums (PVNBP)

£m

Half year 2016


42

46

50

276

Full year 2015


182

123

141

780

 

 

Additional EEV financial information*

 

A   New Business

 

BASIS OF PREPARATION

 

The format of the schedules is consistent with the distinction between insurance and investment products as applied for previous financial reporting periods. With the exception of some US institutional business, products categorised as 'insurance' refer to those classified as contracts of long-term insurance business for regulatory reporting purposes, ie falling within one of the classes of insurance specified in part II of Schedule 1 to the Regulated Activities Order under Prudential Regulation Authority regulations.

 

The details shown for insurance products include contributions for contracts that are classified under IFRS 4 'Insurance Contracts' as not containing significant insurance risk. These products are described as investment contracts or other financial instruments under IFRS. Contracts included in this category are primarily certain unit-linked and similar contracts written in UK Insurance Operations, and Guaranteed Investment Contracts and similar funding agreements written in US Operations.

 

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. New business premiums reflect those premiums attaching to covered business, including premiums for contracts designed as investment products for IFRS reporting.

 

Investment products referred to in the tables for funds under management are unit trusts, mutual funds and similar types of retail fund management arrangements. These are unrelated to insurance products that are classified as investment contracts under IFRS 4, as described in the preceding paragraph, although similar IFRS recognition and measurement principles apply to the acquisition costs and fees attaching to this type of business.

 

Post-tax New Business Profit has been determined using the European Embedded Value (EEV) methodology set out in our EEV basis results supplement. The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016. The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year.

 

In determining the EEV basis value of new business written in the period policies incept, 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.

 

Annual premium equivalent (APE) sales are subject to rounding.

 

*       The additional financial information is not covered by the KPMG independent audit opinion.

 

Notes to Schedules A(i) to A(v)

 

(1)   Prudential plc reports its results using both actual exchange rates (AER) and constant exchange rates (CER) so as to eliminate the impact of exchange translation.


Average rate**


Closing rate

Local Currency: £

2016

2015

% appreciation (depreciation) of local currency against GBP


31 Dec 2016

31 Dec 2015

% appreciation (depreciation) of local currency against GBP

China

8.99

9.61

7%


8.59

9.57

11%

Hong Kong

10.52

11.85

13%


9.58

11.42

19%

Indonesia

18,026.11

20,476.93

14%


16,647.30

20,317.71

22%

Malaysia

5.61

5.97

6%


5.54

6.33

14%

Singapore

1.87

2.10

12%


1.79

2.09

17%

Thailand

47.80

52.38

10%


44.25

53.04

20%

US

1.35

1.53

13%


1.24

1.47

19%

Vietnam

30,292.79

33,509.21

11%


28,136.99

33,140.64

18%

 

**     Average rate is for the 12 month period to 31 December.

 

(1a)   Insurance new business for overseas operations are converted using the year-to-date average exchange rate applicable at the time (AER). The sterling results for the second half of the year represent the difference between the year-to-date reported sterling results at the year end and the results for the first half of the year. The second half results therefore include the true up between the first half and full year average exchange rates applied to the first half sales.

(1b)   Insurance new business for overseas operations for 2015 has been calculated using constant exchange rates (CER).

(2)      Annual Equivalents, calculated as regular new business contributions plus 10 per cent of single new business contributions, are subject to rounding. Present value of new business premiums (PVNBPs) are calculated as equalling single premiums plus the present value of expected premiums of new regular premium business. In determining the present value, allowance is made for lapses and other assumptions applied in determining the EEV new business profit. For 2016, the risk discount rates used to calculate PVNBP for UK insurance operations are on a basis that reflects the Solvency II regime effective on 1 January 2016. The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year.

(3)      Balance includes segregated and pooled pension funds, private finance assets and other institutional clients. Other movements reflect the net flows arising from the cash component of a tactical asset allocation fund managed by PPM South Africa.

(4)      New business in India is included at Prudential's 26 per cent interest in the India life operation.

(5)      Balance Sheet figures have been calculated at the closing exchange rate.

(6)      New business in China is included at Prudential's 50 per cent interest in the China life operation.

(7)      Mandatory Provident Fund (MPF) product sales in Hong Kong are included at Prudential's 36 per cent interest in Hong Kong MPF operation.

(8)      Investment flows for the period exclude year-to-date Eastspring Money Market Funds (MMF) gross inflows of £146,711 million (2015: £89,553 million) and net inflows of £403 million (2015: net inflows £1,066 million).

(9)      Total Group Investment Operations funds under management exclude MMF funds under management of £7,714 million at 31 December 2016 (31 December 2015: £6,006 million).

(10)   The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016. The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year.

(11)   Following Prudential's withdrawal  from the UK bulk annuity market, the 2015 comparative results for UK bulk annuities new business have been presented separately.

(12)   The 2015 comparatives for Asia insurance operations have been adjusted to exclude the contribution from the held for sale Korea life business (APE sales of £141 million, PVNBP of £780 million, and new business contribution of £8 million).

 

Schedule A(i) New Business Insurance Operations (Actual Exchange Rates)

 


Single premium

Regular premium

Annual Equivalents

PVNBP


2016

2015


2016

2015


2016

2015


2016

2015



YTD

YTD

+/- (%)

YTD

YTD

+/- (%)

YTD

YTD

+/- (%)

YTD

YTD

+/- (%)


£m

£m


£m

£m


£m

£m


£m

£m


Group Insurance Operations













Asia(1a) (12)

2,397

1,938

24%

3,359

2,518

33%

3,599

2,712

33%

19,271

14,428

34%

US(1a)

15,608

17,286

(10)%

-

-

-

1,561

1,729

(10)%

15,608

17,286

(10)%

UK retail(11)

9,836

6,955

41%

177

179

(1)%

1,160

874

33%

10,513

7,561

39%

Group total excluding UK

    bulk annuities(12)

27,841

26,179

6%

3,536

2,697

31%

6,320

5,315

19%

45,392

39,275

16%

UK bulk annuities(11)

-

1,508

(100)%

-

-

-

-

151

(100)%

-

1,508

(100)%

Group Total(12)

27,841

27,687

1%

3,536

2,697

31%

6,320

5,466

16%

45,392

40,783

11%














Asia Insurance Operations(1a)













Cambodia

-

-

-

14

8

75%

14

8

75%

66

38

74%

Hong Kong

1,140

546

109%

1,798

1,158

55%

1,912

1,213

58%

10,930

7,007

56%

Indonesia

236

230

3%

255

303

(16)%

279

326

(14)%

1,048

1,224

(14)%

Malaysia

110

100

10%

233

201

16%

244

211

16%

1,352

1,208

12%

Philippines

91

146

(38)%

61

44

39%

70

59

19%

278

287

(3)%

Singapore

523

454

15%

299

264

13%

351

309

14%

2,627

2,230

18%

Thailand

80

69

16%

81

88

(8)%

89

95

(6)%

404

422

(4)%

Vietnam

6

6

-

115

82

40%

116

83

40%

519

343

51%

SE Asia Operations

    including Hong Kong

2,186

1,551

41%

2,856

2,148

33%

3,075

2,304

33%

17,224

12,759

35%

China(6)

124

308

(60)%

187

111

68%

199

142

40%

880

739

19%

Taiwan

36

45

(20)%

146

127

15%

150

131

15%

499

442

13%

India(4)

51

34

50%

170

132

29%

175

135

30%

668

488

37%

Total Asia Insurance

   Operations(12)

2,397

1,938

24%

3,359

2,518

33%

3,599

2,712

33%

19,271

14,428

34%














US Insurance Operations(1a)













Variable annuities

10,653

11,977

(11)%

-

-

-

1,065

1,198

(11)%

10,653

11,977

(11)%

Elite Access (variable annuity)

2,056

3,144

(35)%

-

-

-

206

314

(34)%

2,056

3,144

(35)%

Fixed annuities

555

477

16%

-

-

-

55

48

15%

555

477

16%

Fixed index annuities

508

458

11%

-

-

-

51

46

11%

508

458

11%

Wholesale

1,836

1,230

49%

-

-

-

184

123

50%

1,836

1,230

49%

Total US Insurance

    Operations

15,608

17,286

(10)%

-

-

-

1,561

1,729

(10)%

15,608

17,286

(10)%














UK & Europe Insurance

    Operations













Individual annuities

546

565

(3)%

 -  

 -  

-

55

57

(4)%

546

565

(3)%

Bonds

3,834

3,327

15%

 -  

 -  

-

384

333

15%

3,835

3,328

15%

Corporate pensions

110

175

(37)%

121

135

(10)%

132

152

(13)%

479

600

(20)%

Individual pensions

2,532

1,185

114%

35

32

9%

289

150

93%

2,681

1,295

107%

Income drawdown

1,649

1,024

61%

 -  

 -  

-

165

102

62%

1,649

1,024

61%

Other products

1,165

679

72%

21

12

75%

135

80

69%

1,323

749

77%

Total UK Retail

9,836

6,955

41%

177

179

(1)%

1,160

874

33%

10,513

7,561

39%

UK bulk annuities

-

1,508

(100)%

 -  

 -  

-

-

151

(100)%

-

1,508

(100)%

Total UK & Europe Insurance

    Operations

9,836

8,463

16%

177

179

(1)%

1,160

1,025

13%

10,513

9,069

16%














Group Total(12)

27,841

27,687

1%

3,536

2,697

31%

6,320

5,466

16%

45,392

40,783

11%














Group total excluding UK

    bulk annuities(11) (12)

27,841

26,179

6%

3,536

2,697

31%

6,320

5,315

19%

45,392

39,275

16%

 

Schedule A(ii) New Business Insurance Operations (Constant Exchange Rates)

 

Note:      In schedule A(ii) constant exchange rates (CER) have been used to calculate insurance new business for overseas operations for 2015.

 


Single premium

Regular premium

Annual Equivalents

PVNBP


2016

2015


2016

2015


2016

2015


2016

2015



YTD

YTD

+/- (%)

YTD

YTD

+/- (%)

YTD

YTD

+/- (%)

YTD

YTD

+/- (%)


£m

£m


£m

£m


£m

£m


£m

£m


Group Insurance Operations













Asia(1a) (1b) (12)

2,397

2,150

11%

3,359

2,805

20%

3,599

3,020

19%

19,271

16,081

20%

US(1a) (1b)

15,608

19,499

(20)%

-

-

-

1,561

1,950

(20)%

15,608

19,499

(20)%

UK retail(11)

9,836

6,955

41%

177

179

(1)%

1,160

874

33%

10,513

7,561

39%

Group total excluding UK

    bulk annuities(11) (12)

27,841

28,604

(3)%

3,536

2,984

18%

6,320

5,844

8%

45,392

43,141

5%

UK bulk annuities

-

1,508

(100)%

-

-

-

-

151

(100)%

-

1,508

(100)%

Group Total(12)

27,841

30,112

(8)%

3,536

2,984

18%

6,320

5,995

5%

45,392

44,649

2%














Asia Insurance Operations(1a) (1b)













Cambodia

 -  

 -  

-

14

8

75%

14

8

75%

66

43

53%

Hong Kong

1,140

616

85%

1,798

1,306

38%

1,912

1,368

40%

10,930

7,895

38%

Indonesia

236

262

(10)%

255

345

(26)%

279

371

(25)%

1,048

1,391

(25)%

Malaysia

110

106

4%

233

214

9%

244

225

8%

1,352

1,287

5%

Philippines

91

158

(42)%

61

48

27%

70

63

11%

278

311

(11)%

Singapore

523

510

3%

299

296

1%

351

347

1%

2,627

2,507

5%

Thailand

80

76

5%

81

96

(16)%

89

103

(14)%

404

462

(13)%

Vietnam

6

6

-

115

91

26%

116

92

26%

519

379

37%

SE Asia Operations

    including Hong Kong

2,186

1,734

26%

2,856

2,404

19%

3,075

2,577

19%

17,224

14,275

21%

China(6)

124

329

(62)%

187

119

57%

199

152

31%

880

789

12%

Taiwan

36

50

(28)%

146

141

4%

150

146

3%

499

491

2%

India(4)

51

37

38%

170

141

21%

175

145

21%

668

526

27%

Total Asia Insurance

   Operations(12)

2,397

2,150

11%

3,359

2,805

20%

3,599

3,020

19%

19,271

16,081

20%














US Insurance Operations(1a) (1b)













Variable annuities

10,653

13,512

(21)%

 -  

 -  

-

1,065

1,351

(21)%

10,653

13,512

(21)%

Elite Access (variable annuity)

2,056

3,547

(42)%

 -  

 -  

-

206

355

(42)%

2,056

3,547

(42)%

Fixed annuities

555

538

3%

 -  

 -  

-

55

54

2%

555

538

3%

Fixed index annuities

508

517

(2)%

 -  

 -  

-

51

52

(2)%

508

517

(2)%

Wholesale

1,836

1,385

33%

 -  

 -  

-

184

138

33%

1,836

1,385

33%

Total US Insurance

    Operations

15,608

19,499

(20)%

-

-

-

1,561

1,950

(20)%

15,608

19,499

(20)%














UK & Europe Insurance

    Operations













Individual annuities

546

565

(3)%

 -  

 -  

-

55

57

(4)%

546

565

(3)%

Bonds

3,834

3,327

15%

 -  

 -  

-

384

333

15%

3,835

3,328

15%

Corporate pensions

110

175

(37)%

121

135

(10)%

132

152

(13)%

479

600

(20)%

Individual pensions

2,532

1,185

114%

35

32

9%

289

150

93%

2,681

1,295

107%

Income drawdown

1,649

1,024

61%

 -  

 -  

-

165

102

62%

1,649

1,024

61%

Other products

1,165

679

72%

21

12

75%

135

80

69%

1,323

749

77%

Total UK Retail

9,836

6,955

41%

177

179

(1)%

1,160

874

33%

10,513

7,561

39%

UK bulk annuities

-

1,508

(100)%

-

 -  

-

-

151

(100)%

-

1,508

(100)%

Total UK & Europe Insurance

    Operations

9,836

8,463

16%

177

179

(1)%

1,160

1,025

13%

10,513

9,069

16%














Group Total(12)

27,841

30,112

(8)%

3,536

2,984

18%

6,320

5,995

5%

45,392

44,649

2%














Group total excluding UK

    bulk annuities(11) (12)

27,841

28,604

(3)%

3,536

2,984

18%

6,320

5,844

8%

45,392

43,141

5%

 

Schedule A(iii) Total Insurance New Business APE (Actual and Constant Exchange Rates)

 

Note: In schedule A(iii) amounts for the first half (H1) and second half (H2) of 2015 are presented on both actual exchange rate (AER) and constant exchange rate (CER).

 

 


AER

CER


2015

2016

2015

2016


H1

H2

H1

H2

H1

H2

H1

H2


£m

£m

£m

£m

£m

£m

£m

£m

Group Insurance Operations









Asia(1a) (12)

1,292

1,420

1,605

1,994

1,408

1,612

1,700

1,899

US(1a)

857

872

782

779

965

985

827

734

UK retail(11)

393

481

593

567

393

481

593

567

Group total excluding UK bulk annuities(11) (12)

2,542

2,773

2,980

3,340

2,766

3,078

3,120

3,200

UK bulk annuities

117

34

-

-

117

34

-

-

Group Total(12)

2,659

2,807

2,980

3,340

2,883

3,112

3,120

3,200










Asia Insurance Operations(1a)









Cambodia

3

5

6

8

4

4

6

8

Hong Kong

519

694

868

1,044

582

786

919

993

Indonesia

183

143

125

154

200

171

133

146

Malaysia

105

106

109

135

104

121

115

129

Philippines

29

30

30

40

31

32

32

38

Singapore

153

156

142

209

168

179

151

200

Thailand

48

47

43

46

50

53

46

43

Vietnam

34

49

44

72

37

55

46

70

SE Asia Operations including Hong Kong

1,074

1,230

1,367

1,708

1,176

1,401

1,448

1,627

China(6)

89

53

109

90

94

58

114

85

Taiwan

61

70

56

94

66

80

61

89

India(4)

68

67

73

102

72

73

77

98

Total Asia Insurance Operations(12)

1,292

1,420

1,605

1,994

1,408

1,612

1,700

1,899










US Insurance Operations(1a)









Variable annuities

606

592

500

565

682

669

529

536

Elite Access (variable annuity)

166

148

99

107

187

168

104

102

Fixed annuities

23

25

28

27

27

27

30

25

Fixed index annuities

21

25

28

23

24

28

30

21

Wholesale

41

82

127

57

45

93

134

50

Total US Insurance Operations

857

872

782

779

965

985

827

734










UK & Europe Insurance Operations









Individual annuities

28

29

33

22

28

29

33

22

Bonds

156

177

196

188

156

177

196

188

Corporate pensions

76

76

74

58

76

76

74

58

Individual pensions

62

88

134

155

62

88

134

155

Income drawdown

39

63

81

84

39

63

81

84

Other products

32

48

75

60

32

48

75

60

Total UK Retail

393

481

593

567

393

481

593

567

UK bulk annuities

117

34

-

-

117

34

-

-

Total UK & Europe Insurance Operations

510

515

593

567

510

515

593

567










Group Total(12)

2,659

2,807

2,980

3,340

2,883

3,112

3,120

3,200










Group total excluding UK bulk annuities(11) (12)

2,542

2,773

2,980

3,340

2,766

3,078

3,120

3,200

 

Schedule A(iv) Investment Operations (Actual Exchange Rates)

 












2015



2016




H1

H2



H1

H2




£m

£m



£m

£m


Group Investment Operations









Opening FUM


162,380

163,488



156,686

162,384


Net Flows:(8)


2,186

(3,223)



(7,378)

1,123


    - Gross Inflows


32,078

22,392



15,894

24,239


    - Redemptions


(29,892)

(25,615)



(23,272)

(23,116)


Other Movements


(1,078)

(3,579)



13,076

11,298


Total Group Investment Operations(9)


163,488

156,686



162,384

174,805











M&G









Retail









Opening FUM


74,289

69,158



60,801

59,217


Net Flows:


(3,418)

(7,440)



(6,122)

(131)


    - Gross Inflows


14,264

6,836



6,160

9,625


    - Redemptions


(17,682)

(14,276)



(12,282)

(9,756)


Other Movements


(1,713)

(917)



4,538

5,123


Closing FUM


69,158

60,801



59,217

64,209











Comprising amounts for:









   UK


38,701

35,738



34,308

35,208


   Europe (excluding UK)


28,726

23,524



23,020

26,905


   South Africa


1,731

1,539



1,889

2,096




69,158

60,801



59,217

64,209











Institutional(3)









Opening FUM


62,758

64,242



65,604

70,439


Net Flows:


1,043

2,807



(844)

(993)


    - Gross Inflows


6,161

6,365



3,571

3,485


    - Redemptions


(5,118)

(3,558)



(4,415)

(4,478)


Other Movements


441

(1,445)



5,679

3,108


Closing FUM


64,242

65,604



70,439

72,554











Total M&G Investment Operations


133,400

126,405



129,656

136,763











PPM South Africa FUM included in Total M&G


5,108

4,365



5,354

6,047











Eastspring - excluding MMF(8)









Third Party Retail(7)









Opening FUM


21,893

26,017



25,541

27,155


Net Flows:


4,235

616



(787)

1,237


    - Gross Inflows


11,089

8,165



5,650

9,875


    - Redemptions


(6,854)

(7,549)



(6,437)

(8,638)


Other Movements


(111)

(1,092)



2,401

2,401


Closing FUM(5)


26,017

25,541



27,155

30,793











Third Party Institutional Mandates









Opening FUM


3,440

4,071



4,740

5,573


Net Flows:


326

794



375

1,010


    - Gross Inflows


564

1,026



513

1,254


    - Redemptions


(238)

(232)



(138)

(244)


Other Movements


305

(125)



458

666


Closing FUM(5)


4,071

4,740



5,573

7,249











Total Eastspring Investment Operations


30,088

30,281



32,728

38,042


 

Schedule A(v) Total Insurance New Business Profit (Actual and Constant Exchange Rates)

 

Note:      In schedule A(v) amounts for half year (HY) and full year (FY) 2015 and 2016 are presented on both actual exchange rates (AER) and constant exchange rates (CER) basis.

 


AER

CER


2015

2016

2015

2016


HY

FY

HY

FY

HY

FY

HY

FY


£m

£m

£m

£m

£m

£m

£m

£m

New Business Profit(1a) (b)









Total Asia Insurance Operations(12)

660

1,482

821

2,030

723

1,660

869

2,030

Total US Insurance Operations

371

809

311

790

417

913

329

790

Total UK retail(10) (11)

80

201

125

268

80

201

125

268

Group total excluding UK bulk annuities(10) (11) (12)

1,111

2,492

1,257

3,088

1,220

2,774

1,323

3,088

UK bulk annuities

75

117

-

-

75

117

-

-

Group Total(12)

1,186

2,609

1,257

3,088

1,295

2,891

1,323

3,088










Annual Equivalent(1a) (b) (2)









Total Asia Insurance Operations(12)

1,292

2,712

1,605

3,599

1,408

3,020

1,698

3,599

Total US Insurance Operations

857

1,729

782

1,561

965

1,950

827

1,561

Total UK retail(11)

393

874

593

1,160

393

874

593

1,160

Group total excluding UK bulk annuities(11) (12)

2,542

5,315

2,980

6,320

2,766

5,844

3,118

6,320

UK bulk annuities

117

151

-

-

117

151

-

-

Group Total(12)

2,659

5,466

2,980

6,320

2,883

5,995

3,118

6,320










New Business Margin (NBP as % of APE)









Total Asia Insurance Operations(12)

51%

55%

51%

56%

51%

55%

51%

56%

Total US Insurance Operations

43%

47%

40%

51%

43%

47%

40%

51%

Total UK retail(10) (11)

20%

23%

21%

23%

20%

23%

21%

23%

Group total excluding UK bulk annuities(10) (11) (12)

44%

47%

42%

49%

44%

47%

42%

49%

UK bulk annuities

64%

77%

N/A

N/A

64%

77%

N/A

N/A

Group Total

45%

48%

42%

49%

45%

48%

42%

49%










PVNBP(1a) (b) (2)









Total Asia Insurance Operations(12)

6,942

14,428

8,679

19,271

7,579

16,081

9,178

19,271

Total US Insurance Operations

8,574

17,286

7,816

15,608

9,645

19,499

8,268

15,608

Total UK retail(10) (11)

3,355

7,561

5,267

10,513

3,355

7,561

5,267

10,513

Group total excluding UK bulk annuities(10) (11) (12)

18,871

39,275

21,762

45,392

20,579

43,141

22,713

45,392

UK bulk annuities

1,169

1,508

-

-

1,169

1,508

-

-

Group Total(12)

20,040

40,783

21,762

45,392

21,748

44,649

22,713

45,392










New Business Margin (NBP as % of PVNBP)









Total Asia Insurance Operations(12)

9.5%

10.3%

9.5%

10.5%

9.5%

10.3%

9.5%

10.5%

Total US Insurance Operations

4.3%

4.7%

4.0%

5.1%

4.3%

4.7%

4.0%

5.1%

Total UK retail(10) (11)

2.4%

2.7%

2.4%

2.5%

2.4%

2.7%

2.4%

2.5%

Group total excluding UK bulk annuities(10) (11) (12)

5.9%

6.3%

5.8%

6.8%

5.9%

6.4%

5.8%

6.8%

UK bulk annuities

6.4%

7.8%

N/A

N/A

6.4%

7.8%

N/A

N/A

Group Total

5.9%

6.4%

5.8%

6.8%

6.0%

6.5%

5.8%

6.8%

 

 

B Reconciliation of expected transfer of value of in-force business and required capital to free surplus

 

The tables below show how the value of in-force business (VIF) generated by the in-force long-term business and the associated required capital is modelled as emerging into free surplus over the next 40 years. Although a small amount (less than 3 per cent) of the Group's embedded value emerges after this date, analysis of cash flows emerging in the years shown in the tables is considered most meaningful. The modelled cash flows use the same methodology underpinning the Group's embedded value reporting and so are subject to the same assumptions and sensitivities used to prepare our 2016 results.

 

In addition to showing the amounts, both discounted and undiscounted, expected to be generated from all in-force business at 31 December 2016, the tables also present the expected future free surplus to be generated from the investment made in new business during 2016 over the same 40-year period.

 

(i) Expected transfer of value of in-force business (VIF) and required capital to free surplus






2016 £m



Undiscounted expected generation from

all in-force business at 31 December*


Undiscounted expected generation from

new business written*

Expected period of emergence

Asia**

US

UK

Total


Asia**

US

UK

Total

2017

1,320

1,446

675

3,441


188

270

27

485

2018

1,247

1,279

669

3,195


157

116

29

302

2019

1,202

1,273

636

3,111


170

123

29

322

2020

1,167

1,281

622

3,070


158

136

31

325

2021

1,142

1,282

606

3,030


170

151

33

354

2022

1,122

1,152

591

2,865


148

84

30

262

2023

1,122

1,116

576

2,814


159

79

29

267

2024

1,098

1,067

557

2,722


154

165

29

348

2025

1,076

914

534

2,524


148

144

28

320

2026

1,050

865

508

2,423


160

159

27

346

2027

1,001

708

486

2,195


137

110

24

271

2028

991

597

451

2,039


142

100

23

265

2029

958

547

434

1,939


135

82

22

239

2030

940

424

409

1,773


132

72

21

225

2031

921

351

381

1,653


146

70

20

236

2032

879

321

490

1,690


130

53

18

201

2033

859

215

465

1,539


130

36

18

184

2034

834

162

438

1,434


127

35

17

179

2035

821

153

413

1,387


123

31

16

170

2036

805

118

392

1,315


130

30

15

175

2037-2041

3,905

699

1,542

6,146


621

55

65

741

2042-2046

3,564

-

1,053

4,617


607

-

66

673

2047-2051

3,257

-

554

3,811


593

-

14

607

2052-2056

2,999

-

301

3,300


585

-

8

593

Total free surplus expected to











emerge in the next 40 years

34,280

15,970

13,783

64,033


5,350

2,101

639

8,090

 

*       The analysis excludes amounts incorporated into VIF at 31 December 2016 where there is no definitive timeframe for when the payments will be made or receipts received. In particular, it excludes the value of the shareholders' interest in the estate. It also excludes any free surplus emerging after 2056.

**     Asia operations exclude the cash flows in respect of the held for sale Korea life business.

 

The above amounts can be reconciled to the new business amounts as follows:








2016 £m



Asia

US

UK

Total

Undiscounted expected free surplus generation for years 2017 to 2056

5,350

2,101

639

8,090

Less: discount effect

(2,968)

(746)

(259)

(3,973)

Discounted expected free surplus generation for years 2017 to 2056

2,382

1,355

380

4,117

Discounted expected free surplus generation for years 2056+

292

-

1

293

Less: Free surplus investment in new business

(476)

(298)

(129)

(903)

Other items***

(168)

(267)

16

(419)

Post-tax EEV new business profit

2,030

790

268

3,088

 

***    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.

 

The undiscounted expected free surplus generation from all in-force business at 31 December 2016 shown below can be reconciled to the amount that was expected to be generated as at 31 December 2015 as follows:

 

Group

2016

2017

2018

2019

2020

2021


Other


Total



£m

£m

£m

£m

£m

£m


£m


£m

2015 expected free surplus generation

   for years 2016 to 2055:

   As previously published

2,621

2,463

2,383

2,378

2,388

2,369


36,173


50,775

Effect of Solvency II implementation**

46

55

49

45

43

48


1,350


1,636



2,667

2,518

2,432

2,423

2,431

2,417


37,523


52,411

Less: Amounts expected to be realised

   in the current year

(2,667)

-

-

-

-

-


-


(2,667)

Less: Contribution from the held for sale Korea life business***

-

(40)

(40)

(37)

(35)

(33)


(537)


(722)

Add: Expected free surplus to be

   generated in year 2056*

-

-

-

-

-

-


394


394

Foreign exchange differences

-

370

355

350

354

346


5,023


6,798

New business

-

485

302

322

326

354


6,304


8,093

Operating movements

-

11

18

(16)

5

(36)


(521)


(274)

Non-operating and other movements

-

97

128

69

(11)

(18)



2016 expected free surplus generation

   for years 2017 to 2056

-

3,441

3,195

3,111

3,070

3,030


48,186


64,033

 

Asia

2016

2017

2018

2019

2020

2021


Other


Total



£m

£m

£m

£m

£m

£m


£m


£m

2015 expected free surplus generation   

   for years 2016 to 2055

1,015

962

926

905

871

889


20,640


26,208

Less: Amounts expected to be realised

   in the current year

(1,015)

-

-

-

-

-


-


(1,015)

Less: Contribution from the held for sale Korea life business***

-

(40)

(40)

(37)

(35)

(33)


(537)


(722)

Add: Expected free surplus to be

    generated in year 2056*

-

-

-

-

-

-


358


358

Foreign exchange differences

-

179

172

163

158

157


3,737


4,566

New business

-

188

157

170

158

170


4,507


5,350

Operating movements

-

33

34

8

24

(23)


(503)


(465)

Non-operating and other movements

-

(2)

(2)

(7)

(9)

(18)



2016 expected free surplus generation

   for years 2017 to 2056

-

1,320

1,247

1,202

1,167

1,142


28,202


34,280













US

2016

2017

2018

2019

2020

2021


Other


Total



£m

£m

£m

£m

£m

£m


£m


£m

2015 expected free surplus generation

   for years 2016 to 2055

1,120

991

951

970

1,018

982


6,665


12,697

Less: Amounts expected to be realised

   in the current year

(1,120)

-

-

-

-

-


-


(1,120)

Foreign exchange differences

-

191

183

187

196

189


1,286


2,232

New business

-

270

116

123

136

151


1,305


2,101

Operating movements

-

(5)

(5)

(15)

(15)

(7)


153


60

Non-operating and other movements

-

(1)

34

8

(54)

(33)



2016 expected free surplus generation

   for years 2017 to 2056

-

1,446

1,279

1,273

1,281

1,282


9,409


15,970













UK

2016

2017

2018

2019

2020

2021


Other


Total



£m

£m

£m

£m

£m

£m


£m


£m

2015 expected free surplus generation

   for years 2016 to 2055:

   As previously published

486

510

506

503

499

498


8,868


11,870

Effect of Solvency II implementation**

46

55

49

45

43

48


1,350


1,636



532

565

555

548

542

546


10,218


13,506

Less: Amounts expected to be realised

   in the current year

(532)

-

-

-

-

-


-


(532)

Add: Expected free surplus to be

   generated in year 2056*

-

-

-

-

-

-


36


36

New business

-

27

29

29

31

33


490


639

Operating movements

-

(17)

(11)

(9)

(4)

(6)


(169)


134

Non-operating and other movements

-

100

96

68

53

33



2016 expected free surplus generation

   for years 2017 to 2056

-

675

669

636

622

606


10,575


13,783

 

*       Excluding 2016 new business.

**     In order to show the cash flows for UK insurance operations on a comparable basis, the 2015 comparative results for UK insurance operations reflect the impact of the implementation of Solvency II at 1 January 2016 (see note 2 for details).

***    The contribution from the Korea life business has been removed from expected free surplus generation following its reclassification as held for sale.

 

At 31 December 2016, the total free surplus expected to be generated over the next five years (2017 to 2021 inclusive), using the same assumptions and methodology as those underpinning our 2016 embedded value reporting was £15.8 billion, an increase of £3.3 billion from the £12.5 billion expected over an equivalent period from the end of 2015, after allowing for the effect of the implementation of Solvency II on the opening balance sheet.

 

This increase primarily reflects the new business written in 2016, which is expected to generate £1,788 million of free surplus over the next five years.

 

At 31 December 2016, the total free surplus expected to be generated on an undiscounted basis in the next 40 years is £64.0 billion, up from the £52.4 billion expected at the end of 2015, after allowing for the effect of the implementation of Solvency II on the opening balance sheet, reflecting the effect of new business written across all three business operations of £8.1 billion and a positive foreign exchange translation effect of £6.8 billion. These positive effects have been offset by the negative impact of £(0.7) billion for the removal of the contribution from the Korea life business following its reclassification as held for sale and a £(0.3) billion net effect reflecting operating, market assumption changes and other items. In Asia, these include the negative impact from movements in long-term interest rates and other regular operating assumption changes. In the US, these mainly reflect the positive effect of higher future separate account growth due to the increase in interest rates and the impact of an increase in equity market returns in 2016, partially offset by the negative effect from the acceleration of free surplus from the contingent financing of specific US statutory reserves. In the UK, these mainly arise from the positive effect of higher than assumed investment returns on with-profits funds, partially offset by the negative effect of longevity reinsurance transactions entered into during the year. The longevity reinsurance transactions executed this year had the effect of accelerating the generation of future free surplus into 2016. 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 2016 from life business in force at the end of 2016 was £4.0 billion including £0.8 billion of changes in operating assumptions and experience variances. This compares with the expected 2016 realisation at the end of 2015 of £2.7 billion. This can be analysed further as follows:


Asia

US

UK

Total


£m

£m

£m

£m

Transfer to free surplus in 2016

1,157

1,223

680

3,060

Expected return on free assets

39

47

13

99

Changes in operating assumptions and

    experience variances

14

596

214

824

Underlying free surplus generated from

     in-force life business in 2016

1,210

1,866

907

3,983






2016 free surplus expected to be generated at

    31 December 2015

1,015

1,120

532

2,667












The equivalent discounted amounts of the undiscounted expected transfers from in-force business and required capital into free surplus shown previously are as follows:



2016 £m



Discounted expected generation from all

in-force business at 31 December


Discounted expected generation from

long-term 2015 new business written

Expected period of emergence

Asia

US

UK

Total


Asia

US

Total

2017

1,262

1,371

659

3,292


180

261

26

467

2018

1,113

1,141

628

2,882


137

105

27

269

2019

1,007

1,069

572

2,648


141

105

27

273

2020

916

1,009

535

2,460


124

108

28

260

2021

843

952

496

2,291


127

116

28

271

2022

769

803

458

2,030


104

60

25

189

2023

724

734

423

1,881


107

52

23

182

2024

664

658

387

1,709


99

101

21

221

2025

612

531

349

1,492


89

83

19

191

2026

562

477

314

1,353


91

90

17

198

2027

508

365

282

1,155


73

56

15

144

2028

476

292

245

1,013


72

48

14

134

2029

436

251

222

909


65

36

12

113

2030

408

185

197

790


60

30

11

101

2031

381

147

173

701


63

28

10

101

2032

346

131

218

695


55

19

9

83

2033

322

80

197

599


52

12

8

72

2034

299

61

178

538


49

11

7

67

2035

282

57

160

499


46

9

6

61

2036

266

43

148

457


47

8

6

61

2037-2041

1,154

199

515

1,868


203

17

24

244

2042-2046

853

-

197

1,050


163

-

12

175

2047-2051

638

-

129

767


131

-

3

134

2052-2056

473

-

58

531


104

-

2

106

Total discounted free surplus expected to emerge in the next 40 years

15,314

10,556

7,740

33,610


2,382

1,355

380

4,117

 

The above amounts can be reconciled to the Group's financial statements as follows:



2016 £m

Discounted expected generation from all in-force business for years 2017 to 2056

33,610

Discounted expected generation from all in-force business for years after 2056

1,115

Discounted expected generation from all in-force business at 31 December 2016

34,725

Add: Free surplus of life operations held at 31 December 2016

5,351

Less: Time value of guarantees

(998)

Expected free surplus generation from the sale of Korea life business

76

Other non-modelled items

1,430

Total EEV for life operations

40,584

 

(ii)  Expected emergence of risk margin release and amortisation of transitional

 

The 31 December 2016 Solvency II own funds included £2.5 billion of transitional relief (recalculated at the valuation date), the majority of which relates to UK annuity business in force on 1 January 2016, established to substantially mitigate the impact of recognising the related risk margin on transition to Solvency II. The following table sets out the expected UK annuity business risk margin release net of the related transitional amortisation over the next fifteen years.

 



2016 £m



Undiscounted expected generation from all in-force business at 31 December



Shareholder-backed annuity business

Other*

Total UK

Expected period of emergence

Risk margin

release

Amortisation of

transitional

2017

163

(116)

628

675

2018

153

(116)

632

669

2019

143

(116)

609

636

2020

141

(116)

597

622

2021

136

(116)

586

606

2022

134

(116)

573

591

2023

132

(116)

560

576

2024

127

(116)

546

557

2025

122

(116)

528

534

2026

117

(116)

507

508

2027

114

(116)

488

486

2028

104

(116)

463

451

2029

102

(116)

448

434

2030

97

(116)

428

409

2031

91

(116)

406

381

UK free surplus expected to emerge by 2031

1,876

(1,740)

7,999

8,135

Total UK free surplus expected to emerge

from 2032 to 2056



5,648

Total UK free surplus expected to emerge

in the next 40 years (note B(i))



13,783

 

*       Including other UK business lines and other cash flows from annuity business.

 

The UK annuity risk margin release and related transitional amortisation, together with associated tax reconcile to the amounts shown in the Group Solvency II balance sheet (note II(c) of the IFRS additional unaudited financial information) as follows:

 


Risk margin release

£bn

Amortisation of transitional

£bn

Annuity in-force business:



- Risk margin release less amortisation of transitional expected to emerge by 2031

1.9

(1.7)

- Risk margin release expected to emerge after 2031 and gross up for tax

1.1

(0.4)


3.0

(2.1)

Risk margin release and transitional for other business operations (pre-tax)

2.9

(0.4)

Total (pre-tax)

5.9

(2.5)

 

 

C Foreign currency source of key metrics

 

The tables below show the Group's key free surplus, IFRS and EEV metrics analysis by contribution by currency group:

 

Free surplus and IFRS 2016 results




 

Underlying free surplus generated for total insurance and asset management operations

Pre-tax

operating profit

Shareholders'

funds


%

%

%


note (2)

notes (2),(3),(4)

notes (2),(3),(4)

US$ linkednote(1)

15

21

19

Other Asia currencies

9

17

17

Total Asia

24

38

36

UK sterlingnotes (3),(4)

32

14

51

US$ note (4)

44

48

13

Total

100

100

100

 

EEV 2016 results





 Post-tax new

business profits

Post-tax

operating profit

Shareholders'

funds


%

%

%



notes (2),(3),(4)

notes (2),(3),(4)

US$ linkednote (1)

55

46

36

Other Asia currencies

10

12

13

Total Asia

65

58

49

UK sterlingnotes (3),(4)

9

6

29

US$note (4)

26

36

22

Total

100

100

100

 

Notes

(1)  US$ linked comprising the Hong Kong and Vietnam operations where the currencies are pegged to the US dollar and the Malaysia and Singapore operations where the currencies are managed against a basket of currencies including the US dollar.

(2)           Includes long-term, asset management business and other businesses.

(3)           For operating profit and shareholders' funds, UK sterling includes amounts in respect of central operations as well as UK insurance operations and M&G.

(4)           For shareholders' funds, the US$ grouping includes US$ denominated core structural borrowings. Sterling operating profits include all interest payable as sterling denominated, reflecting interest rate currency swaps in place.

 

 

D 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:

 


31 Dec 2016 £m

31 Dec 2015 £m

EEV shareholders' funds

38,968

32,359

Less: Value of in-force business of long-term businessnote (a)

(24,937)

(22,431)

Deferred acquisition costs assigned zero value for EEV purposes

9,170

7,010

Othernotes (b),(c)

(8,535)

(3,983)

IFRS shareholders' funds

14,666

12,955

 

Notes

(a)   The EEV shareholders' funds comprises the present value of the shareholders' interest in the value 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. It also includes the mark to market of the Group's core 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.

(c)   The 2016 EEV results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime, effective from 1 January 2016. The 2015 EEV results for UK insurance operations were prepared on a basis reflecting the Solvency I regime. As noted in (b) above, "other adjustments" represent asset and liability valuation differences between IFRS and the local regulatory basis used to value net worth for long-term insurance operations. At 31 December 2016 for the UK this would be the difference between IFRS and Solvency II, and at 31 December 2015 the difference between IFRS and Solvency I.

 

 

E Reconciliation of APE new business sales to earned premiums

 

The Group reports annual premium equivalent (APE) new business sales as a measure of the new policies sold in the period. This differs to the IFRS measure of premiums earned as shown below:

 


2016 £m

2015 £m

Annual premium equivalents (APE) as published

6,320

5,466

Adjustment to include 100% of single premiums on new business sold in the periodnote (a)

25,057

24,918

Contribution from the held for sale Korea life business

192

305

Premiums from in-force business and other adjustmentsnote (b)

7,412

5,974

Gross premiums earned

38,981

36,663

Outward reinsurance premiums

(2,020)

(1,157)

Earned premiums, net of reinsurance as shown in the IFRS financial statements

36,961

35,506

 

Notes

(a)   APE new business sales only include one tenth of single premiums, recorded on policies sold in the period. Gross premiums earned include 100 per cent of such premiums.

(b)   Other adjustments principally include amounts in respect of the following:

Gross premiums earned includes 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 period which are classified as investment contracts without discretionary participation features under IFRS 4, arising mainly in Jackson for guaranteed investment contracts and in the UK 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. Under IFRS, joint ventures are equity accounted and so no amounts are included within gross premiums earned.

 


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