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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Prudential Plc | LSE:PRU | London | Ordinary Share | GB0007099541 | ORD 5P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| -8.40 | -1.04% | 801.40 | 800.20 | 800.60 | 816.80 | 799.80 | 812.80 | 5,082,691 | 16:35:15 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Life Insurance | 8.02B | 2.29B | 0.8640 | 9.27 | 21.42B |
From Apr 2020 to Apr 2025
TIDMPRU
RNS Number : 4713R
Prudential PLC
09 March 2016
IFRS Disclosure and Additional Unaudited Financial Information
Prudential plc 2015 results
International Financial Reporting Standards (IFRS) basis results
CONSOLIDATED INCOME STATEMENT
Hot Features
Premium
Year ended 31 December Note 2015 GBPm 2014 GBPm
------------------------------------------------------------------------------------- ----- --------- ---------
Gross premiums earned 36,663 32,832
Outward reinsurance premiums (1,157) (799)
------------------------------------------------------------------------------------- ----- --------- ---------
Earned premiums, net of reinsurance 35,506 32,033
Investment return 3,304 25,787
Other income 2,495 2,306
------------------------------------------------------------------------------------- ----- --------- ---------
Total revenue, net of reinsurance 41,305 60,126
------------------------------------------------------------------------------------- ----- --------- ---------
Benefits and claims (30,547) (50,736)
Outward reinsurers' share of benefit and claims 1,389 631
Movement in unallocated surplus of with-profits funds (498) (64)
------------------------------------------------------------------------------------- ----- --------- ---------
Benefits and claims and movement in unallocated surplus of with-profits funds,
net of reinsurance (29,656) (50,169)
Acquisition costs and other expenditure B3 (8,208) (6,752)
Finance costs: interest on core structural borrowings of shareholder-financed
operations (312) (341)
Disposal of Japan life business:
Cumulative exchange loss recycled from other comprehensive income D1 (46) -
Remeasurement adjustments D1 - (13)
------------------------------------------------------------------------------------ ----- --------- ---------
Total charges, net of reinsurance (38,222) (57,275)
------------------------------------------------------------------------------------- ----- --------- ---------
Share of profits from joint ventures and associates, net of related tax 238 303
------------------------------------------------------------------------------------- ----- --------- ---------
Profit before tax (being tax attributable to shareholders' and policyholders'
returns)* 3,321 3,154
Less tax charge attributable to policyholders' returns (173) (540)
------------------------------------------------------------------------------------- ----- --------- ---------
Profit before tax attributable to shareholders B1.1 3,148 2,614
--------- ---------
Total tax charge attributable to policyholders and shareholders B5 (742) (938)
Adjustment to remove tax charge attributable to policyholders' returns 173 540
--------- ---------
Tax charge attributable to shareholders' returns B5 (569) (398)
------------------------------------------------------------------------------------- ----- --------- ---------
Profit for the year attributable to equity holders of the Company 2,579 2,216
------------------------------------------------------------------------------------- ----- --------- ---------
Earnings per share (in pence) 2015 2014
-------------------------------------------------------------------- --- ------ -----
Based on profit attributable to the equity holders of the Company: B6
Basic 101.0p 86.9p
Diluted 100.9p 86.8p
------------------------------------------------------------------------- ------ -----
Dividends per share (in pence) 2015 2014
------------------------------------------------ --- ------ ------
Dividends relating to reporting year: B7
Interim dividend 12.31p 11.19p
Second interim dividend / Final dividend 26.47p 25.74p
Special dividend 10.00p
---------------------------------------------------- ------ ------
Total 48.78p 36.93p
------------------------------------------------ --- ------ ------
Dividends declared and paid in reporting year: B7
Current year interim dividend 12.31p 11.19p
Final dividend for prior year 25.74p 23.84p
---------------------------------------------------- ------ ------
Total 38.05p 35.03p
------------------------------------------------ --- ------ ------
* This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders.
This is principally because the corporate taxes of the Group include those on the income of consolidated with-profits and unit-linked funds that, through adjustments to benefits, are borne by policyholders. These amounts are required to be included in the tax charge of the Company under IAS 12. Consequently, the profit before all taxes measure (which is determined after deducting the cost of policyholder benefits and movements in the liability for unallocated surplus of the PAC with-profits fund after adjusting for taxes borne by policyholders) is not representative of pre-tax profits attributable to shareholders.
International Financial Reporting Standards (IFRS) Basis Results
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended 31 December Note 2015 GBPm 2014 GBPm
------------------------------------------------------------------------------------ -------- --------- ---------
Profit for the year 2,579 2,216
Other comprehensive income:
Items that may be reclassified subsequently to profit or loss
Exchange movements on foreign operations and net investment hedges:
Exchange movements arising during the year 68 215
Cumulative exchange loss of Japan life business recycled through profit or loss 46 -
Related tax 4 5
--------------------------------------------------------------------------------------------- --------- ---------
118 220
-------------------------------------------------------------------------------------------- --------- ---------
Net unrealised valuation movements on securities of US insurance operations
classified as
available-for-sale:
Net unrealised holding (losses) gains arising during the year (1,256) 1,039
Less: net gains included in the income statement on disposal and impairment (49) (83)
--------------------------------------------------------------------------------------------- --------- ---------
Total C3.3 (1,305) 956
----------------------------------------------------------------------------------- -------- --------- ---------
Related change in amortisation of deferred acquisition costs C5.1(b) 337 (87)
Related tax 339 (304)
--------------------------------------------------------------------------------------------- --------- ---------
(629) 565
-------------------------------------------------------------------------------------------- --------- ---------
Total (511) 785
-------- --------- ---------
Items that will not be reclassified to profit or loss
Shareholders' share of actuarial gains and losses on defined benefit pension
schemes:
(MORE TO FOLLOW) Dow Jones Newswires
March 09, 2016 03:15 ET (08:15 GMT)
Gross 27 (12)
Related tax (5) 2
--------------------------------------------------------------------------------------------- --------- ---------
22 (10)
-------------------------------------------------------------------------------------------- --------- ---------
Other comprehensive (loss) income for the year, net of related tax (489) 775
------------------------------------------------------------------------------------ -------- --------- ---------
Total comprehensive income for the year attributable to the equity holders of the
Company 2,090 2,991
------------------------------------------------------------------------------------ -------- --------- ---------
International Financial Reporting Standards (IFRS) Basis Results
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Year ended 31 December 2015 GBPm
-------------- ----- -------- ----------------------------------------------------------------------------------
Available
-for-sale Non-
Share Share Retained Translation securities Shareholders' controlling Total
capital premium earnings reserve reserves equity interests equity
Note note C10 note C10
-------------- ----- -------- -------- --------- ----------- ----------- ------------- ----------- -------
Reserves
Profit for the
year - - 2,579 - - 2,579 - 2,579
Other
comprehensive
income:
Exchange movements on
foreign operations
and net investment
hedges, net of
related tax - - - 118 - 118 - 118
Net unrealised
valuation movements,
net of related
change in
amortisation of
deferred acquisition
costs and related
tax - - - - (629) (629) - (629)
Shareholders' share
of actuarial
gains and losses on
defined benefit
pension schemes, net
of tax - - 22 - - 22 - 22
--------------------- -------- -------- --------- ----------- ----------- ------------- ----------- -------
Total other
comprehensive
(loss) income - - 22 118 (629) (489) - (489)
--------------- ----- -------- -------- --------- ----------- ----------- ------------- ----------- -------
Total
comprehensive
income for the
year - - 2,601 118 (629) 2,090 - 2,090
Dividends B7 - - (974) - - (974) - (974)
Reserve
movements in
respect of
share-based
payments - - 39 - - 39 - 39
Share capital
and share
premium
New share
capital
subscribed C10 - 7 - - - 7 - 7
Treasury shares
Movement in own
shares in
respect of
share-based
payment plans - - (38) - - (38) - (38)
Movement in
Prudential plc
shares
purchased by
unit trusts
consolidated
under IFRS - - 20 - - 20 - 20
--------------- ----- -------- -------- --------- ----------- ----------- ------------- ----------- -------
Net increase in
equity - 7 1,648 118 (629) 1,144 - 1,144
At beginning of
year 128 1,908 8,788 31 956 11,811 1 11,812
----- -------- -------- --------- ----------- ----------- ------------- ----------- -------
At end of year 128 1,915 10,436 149 327 12,955 1 12,956
--------------- ----- -------- -------- --------- ----------- ----------- ------------- ----------- -------
International Financial Reporting Standards (IFRS) Basis Results
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Year ended 31 December 2014 GBPm
-------------- ----- -------- ----------------------------------------------------------------------------------
Available
-for-sale Non-
Share Share Retained Translation securities Shareholders' controlling Total
capital premium earnings reserve reserves equity interests equity
Note note C10 note C10
-------------- ----- -------- -------- --------- ----------- ---------- -------------- ----------- -------
Reserves
Profit for the
year - - 2,216 - - 2,216 - 2,216
Other
comprehensive
income:
Exchange movements on
foreign operations
and net investment
hedges, net of
related tax - - - 220 - 220 - 220
Net unrealised
valuation movements,
net of related
change in
amortisation of
deferred acquisition
costs and related
tax - - - - 565 565 - 565
Shareholders' share
of actuarial
gains and losses on
defined benefit
pension schemes, net
of tax - - (10) - - (10) - (10)
--------------------- -------- -------- --------- ----------- ---------- -------------- ----------- -------
Total other
comprehensive
(loss) income - - (10) 220 565 775 - 775
--------------- ----- -------- -------- --------- ----------- ---------- -------------- ----------- -------
Total
comprehensive
income for the
year - - 2,206 220 565 2,991 - 2,991
Dividends B7 - - (895) - - (895) - (895)
Reserve
movements in
respect of
share-based
payments - - 106 - - 106 - 106
Share capital
and share
premium
New share
capital
subscribed C10 - 13 - - - 13 - 13
Treasury shares
Movement in own
shares in
respect of
share-based
payment plans - - (48) - - (48) - (48)
Movement in
Prudential plc
shares
purchased by
unit trusts
consolidated
under IFRS - - (6) - - (6) - (6)
--------------- ----- -------- -------- --------- ----------- ---------- -------------- ----------- -------
Net increase in
equity - 13 1,363 220 565 2,161 - 2,161
At beginning of
year 128 1,895 7,425 (189) 391 9,650 1 9,651
----- -------- -------- --------- ----------- ---------- -------------- ----------- -------
At end of year 128 1,908 8,788 31 956 11,811 1 11,812
--------------- ----- -------- -------- --------- ----------- ---------- -------------- ----------- -------
International Financial Reporting Standards (IFRS) Basis Results
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
31 December Note 2015 GBPm 2014 GBPm -------------------------------------------------------------------------------- -------- --------- --------- Assets Intangible assets attributable to shareholders: Goodwill C5.1(a) 1,463 1,463 Deferred acquisition costs and other intangible assets C5.1(b) 8,422 7,261 ------------------------------------------------------------------------------- -------- --------- --------- Total 9,885 8,724 ------------------------------------------------------------------------------- -------- --------- --------- Intangible assets attributable to with-profits funds: Goodwill in respect of acquired subsidiaries for venture fund and other
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March 09, 2016 03:15 ET (08:15 GMT)
investment purposes 185 186
Deferred acquisition costs and other intangible assets 50 61
------------------------------------------------------------------------------- -------- --------- ---------
Total 235 247
------------------------------------------------------------------------------- -------- --------- ---------
Total intangible assets 10,120 8,971
-------------------------------------------------------------------------------- -------- --------- ---------
Other non-investment and non-cash assets:
Property, plant and equipment 1,197 978
Reinsurers' share of insurance contract liabilities 7,903 7,167
Deferred tax assets C8 2,819 2,765
Current tax recoverable 477 117
Accrued investment income 2,751 2,667
Other debtors 1,955 1,852
------------------------------------------------------------------------------- -------- --------- ---------
Total 17,102 15,546
------------------------------------------------------------------------------- -------- --------- ---------
Investments of long-term business and other operations:
Investment properties 13,422 12,764
Investment in joint ventures and associates accounted for using the equity
method 1,034 1,017
Financial investments:*
Loans C3.4 12,958 12,841
Equity securities and portfolio holdings in unit trusts 157,453 144,862
Debt securities C3.3 147,671 145,251
Other investments 7,353 7,623
Deposits 12,088 13,096
------------------------------------------------------------------------------ -------- --------- ---------
Total 351,979 337,454
------------------------------------------------------------------------------ -------- --------- ---------
Assets held for sale D1 2 824
Cash and cash equivalents 7,782 6,409
-------- --------- ---------
Total assets C1,C3.1 386,985 369,204
-------------------------------------------------------------------------------- -------- --------- ---------
* Included within financial investments are GBP5,995 million (2014: GBP4,578 million) of lent securities.
International Financial Reporting Standards (IFRS) Basis Results
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
31 December Note 2015 GBPm 2014 GBPm ------------------------------------------------------------------------------------ -------- --------- --------- Equity and liabilities Equity Shareholders' equity 12,955 11,811 Non-controlling interests 1 1 ------------------------------------------------------------------------------------ -------- --------- --------- Total equity 12,956 11,812 ------------------------------------------------------------------------------------ -------- --------- --------- Liabilities Policyholder liabilities and unallocated surplus of with-profits funds: Insurance contract liabilities 260,753 250,038 Investment contract liabilities with discretionary participation features 42,959 39,277 Investment contract liabilities without discretionary participation features 18,806 20,224 Unallocated surplus of with-profits funds 13,096 12,450 --------------------------------------------------------------------------------------------- --------- --------- Total C4 335,614 321,989 ----------------------------------------------------------------------------------- -------- --------- --------- Core structural borrowings of shareholder-financed operations: Subordinated debt 4,018 3,320 Other 993 984 --------------------------------------------------------------------------------------------- --------- --------- Total C6.1 5,011 4,304 ----------------------------------------------------------------------------------- -------- --------- --------- Other borrowings: Operational borrowings attributable to shareholder-financed operations C6.2(a) 1,960 2,263 Borrowings attributable to with-profits operations C6.2(b) 1,332 1,093 Other non-insurance liabilities: Obligations under funding, securities lending and sale and repurchase agreements 3,765 2,347 Net asset value attributable to unit holders of consolidated unit trusts and similar funds 7,873 7,357 Deferred tax liabilities C8 4,010 4,291 Current tax liabilities C8 325 617 Accruals and deferred income 952 947 Other creditors 4,876 4,262 Provisions 604 724 Derivative liabilities 3,119 2,323 Other liabilities 4,588 4,105 --------------------------------------------------------------------------------------------- --------- --------- Total 30,112 26,973 --------------------------------------------------------------------------------------------- --------- --------- Liabilities held for sale - 770 ------------------------------------------------------------------------------------ -------- --------- --------- Total liabilities C1,C3.1 374,029 357,392 ------------------------------------------------------------------------------------ -------- --------- --------- Total equity and liabilities 386,985 369,204 ------------------------------------------------------------------------------------ -------- --------- ---------
International Financial Reporting Standards (IFRS) Basis Results
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended 31 December Note 2015 GBPm 2014 GBPm ------------------------------------------------------------------------------------- ----- --------- --------- Cash flows from operating activities Profit before tax (being tax attributable to shareholders' and policyholders' returns)note (i) 3,321 3,154 Non-cash movements in operating assets and liabilities reflected in profit before tax: Investments (6,814) (30,746) Other non-investment and non-cash assets (1,063) (1,521) Policyholder liabilities (including unallocated surplus) 6,067 27,292 Other liabilities (including operational borrowings) 1,761 3,797 Interest income and expense and dividend income included in result before tax (8,726) (8,315)
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March 09, 2016 03:15 ET (08:15 GMT)
Other non-cash itemsnote (ii) 234 174
Operating cash items:
Interest receipts 7,316 7,155
Dividend receipts 1,777 1,559
Tax paid (1,340) (721)
------------------------------------------------------------------------------------ ----- --------- ---------
Net cash flows from operating activities 2,533 1,828
------------------------------------------------------------------------------------- ----- --------- ---------
Cash flows from investing activities
Purchases of property, plant and equipment (256) (172)
Proceeds from disposal of property, plant and equipment 30 10
Acquisition of subsidiaries and intangibles (286) (535)
Sale of businesses 43 152
----- --------- ---------
Net cash flows from investing activities (469) (545)
------------------------------------------------------------------------------------- ----- --------- ---------
Cash flows from financing activities
Structural borrowings of the Group:
Shareholder-financed operations:note (iii) C6.1
Issue of subordinated debt, net of costs 590 -
Redemption of subordinated debt - (445)
Interest paid (288) (330)
With-profits operations:note (iv) C6.2
Interest paid (9) (9)
Equity capital:
Issues of ordinary share capital 7 13
Dividends paid (974) (895)
------------------------------------------------------------------------------------- ----- --------- ---------
Net cash flows from financing activities (674) (1,666)
------------------------------------------------------------------------------------- ----- --------- ---------
Net increase (decrease) in cash and cash equivalents 1,390 (383)
Cash and cash equivalents at beginning of year 6,409 6,785
Effect of exchange rate changes on cash and cash equivalents (17) 7
------------------------------------------------------------------------------------- ----- --------- ---------
Cash and cash equivalents at end of year 7,782 6,409
------------------------------------------------------------------------------------- ----- --------- ---------
Notes
(i) This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders.
(ii) Other non-cash items consist of the adjustment of non-cash items to profit before tax.
(iii) Structural borrowings of shareholder-financed operations exclude borrowings to support short-term fixed income securities programmes, non-recourse borrowings of investment subsidiaries of shareholder-financed operations and other borrowings of shareholder-financed operations. Cash flows in respect of these borrowings are included within cash flows from operating activities.
(iv) Interest paid on structural borrowings of with-profits operations relate solely to the GBP100 million 8.5 per cent undated subordinated guaranteed bonds, which contribute to the solvency base of the Scottish Amicable Insurance Fund (SAIF), a ring-fenced sub-fund of the PAC with-profits fund. Cash flows in respect of other borrowings of with-profits funds, which principally relate to consolidated investment funds, are included within cash flows from operating activities.
International Financial Reporting Standards (IFRS) Basis Results
NOTES
A BACKGROUND A1 Basis of preparation and exchange rates
These statements have been prepared in accordance with IFRS as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU) as required by EU law (IAS Regulation EC1606/2032). EU-endorsed IFRS may differ from IFRS issued by the IASB if, at any point in time, new or amended IFRS have not been endorsed by the EU. At 31 December 2015, there were no unendorsed standards effective for the two years ended 31 December 2015 affecting the consolidated financial information of the Group and there were no differences between IFRS endorsed by the EU and IFRS issued by the IASB in terms of their application to the Group.
Except for the adoption of the new and amended accounting standards for Group IFRS reporting as described in note A2, the accounting policies applied by the Group in determining the IFRS basis results in this report are the same as those previously applied in the Group's consolidated financial statements for the year ended 31 December 2014.
Exchange rates
The exchange rates applied for balances and transactions in currency other than the presentational currency of the Group, pounds sterling (GBP) were:
Closing Average rate Closing Average rate
rate at for rate at for
31 Dec 2015 2015 31 Dec 2014 2014
-------------------- ------------ ------------ ------------ ------------
Local currency: GBP
Hong Kong 11.42 11.85 12.09 12.78
Indonesia 20,317.71 20,476.93 19,311.31 19,538.56
Malaysia 6.33 5.97 5.45 5.39
Singapore 2.09 2.10 2.07 2.09
China 9.57 9.61 9.67 10.15
India 97.51 98.08 98.42 100.53
Vietnam 33,140.64 33,509.21 33,348.46 34,924.62
Thailand 53.04 52.38 51.30 53.51
US 1.47 1.53 1.56 1.65
-------------------- ------------ ------------ ------------ ------------
Certain notes to the financial statements present 2014 comparative information at Constant Exchange Rates (CER), in addition to the reporting at Actual Exchange Rates (AER) used throughout the consolidated financial statements. AER are actual historical exchange rates for the specific accounting period, being the average rates over the period for the income statement and the closing rates for the balance sheet at the balance sheet date. CER results are calculated by translating prior period results using the current period foreign exchange rate ie current period average rates for the income statement and current period closing rates for the balance sheet.
The financial information set out in this announcement does not constitute the Company's statutory accounts for the years ended 31 December 2015 or 2014 but is derived from those accounts. The auditors have reported on the 2015 statutory accounts. Statutory accounts for 2014 have been delivered to the registrar of companies, and those for 2015 will be delivered following the Company's Annual General Meeting. Their report was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.
A2 Adoption of new accounting pronouncements in 2015
The Group has adopted the Annual improvements to the IFRS's 2011-2013 cycle which were effective in 2015
Except for a change to the presentation of the Prudential Capital business as a separate reporting segment, as described in note B1.3, consideration of these improvements has had no impact on the financial statements of the Group.
B EARNINGS PERFORMANCE
B1 Analysis of performance by segment
B1.1 Segment results - profit before tax
2015 GBPm 2014 GBPm %
--------- ---------------------- ----------------------
2015 vs 2015 vs
Note AER CER 2014 AER 2014 CER
note (vii) note (vii) note (vii) note (vii)
-------------------------------------------- ------ --------- ---------- ---------- ---------- ----------
Asia operations
Asia insurance operations 1,209 1,050 1,040 15% 16%
Eastspring Investments 115 90 91 28% 26%
------ --------- ---------- ---------- ---------- ----------
(MORE TO FOLLOW) Dow Jones Newswires
March 09, 2016 03:15 ET (08:15 GMT)
Total Asia operations 1,324 1,140 1,131 16% 17%
--------------------------------------------- ------ --------- ---------- ---------- ---------- ----------
US operations
Jackson (US insurance operations) 1,691 1,431 1,543 18% 10%
Broker-dealer and asset management 11 12 13 (8)% (15)%
--------------------------------------------- ------ --------- ---------- ---------- ---------- ----------
Total US operations 1,702 1,443 1,556 18% 9%
--------------------------------------------- ------ --------- ---------- ---------- ---------- ----------
UK operations
UK insurance operations: B4(b)
Long-term business* 1,167 729 729 60% 60%
General insurance commission note (i) 28 24 24 17% 17%
---------------------------------------------------- --------- ---------- ---------- ---------- ----------
Total UK insurance operations 1,195 753 753 59% 59%
M&G B2 442 446 446 (1)% (1)%
Prudential Capital 19 42 42 (55)% (55)%
--------------------------------------------- ------ --------- ---------- ---------- ---------- ----------
Total UK operations 1,656 1,241 1,241 33% 33%
--------------------------------------------- ------ --------- ---------- ---------- ---------- ----------
Total segment profit 4,682 3,824 3,928 22% 19%
--------------------------------------------- ------ --------- ---------- ---------- ---------- ----------
Other income and expenditure
Investment return and other income 14 15 15 (7)% (7)%
Interest payable on core structural
borrowings (312) (341) (341) 9% 9%
Corporate expenditurenote (ii) (319) (293) (293) (9)% (9)%
------ --------- ---------- ---------- ---------- ----------
Total (617) (619) (619) - % - %
--------------------------------------------- ------ --------- ---------- ---------- ---------- ----------
Solvency II implementation costs (43) (28) (28) (54)% (54)%
Restructuring costs note (iii) (15) (14) (14) (7)% (7)%
Results of the sold PruHealth and PruProtect
businesses* - 23 23 n/a n/a
--------------------------------------------- ------ --------- ---------- ---------- ---------- ----------
Operating profit based on longer-term
investment returns 4,007 3,186 3,290 26% 22%
Short-term fluctuations in investment returns
on
shareholder-backed business B1.2 (737) (574) (650) (28)% (13)%
Amortisation of acquisition accounting
adjustmentsnote (iv) (76) (79) (85) 4% 11%
Gain on sale of PruHealth and PruProtect
businessesnote (v) - 86 86 n/a n/a
Cumulative exchange loss on the sold Japan
life business
recycled from other comprehensive income (46) - - n/a n/a
Costs of domestication of Hong Kong
branchnote (vi) - (5) (5) n/a n/a
--------------------------------------------- ------ --------- ---------- ---------- ---------- ----------
Profit before tax attributable to
shareholders 3,148 2,614 2,636 20% 19%
--------------------------------------------- ------ --------- ---------- ---------- ---------- ----------
2015 2014 %
--------- ---------------------- ----------------------
2015 vs 2015 vs
AER CER 2014 AER 2014 CER
Basic earnings per share (in pence) B6 note (vii) note (vii) note (vii) note (vii)
--------------------------------------------- ------ --------- ---------- ---------- ---------- ----------
Based on operating profit based on
longer-term investment returns 125.8p 96.6p 99.5p 30% 26%
Based on profit for the year 101.0p 86.9p 87.9p 16% 15%
--------------------------------------------- ------ --------- ---------- ---------- ---------- ----------
* In order to show the UK long-term business on a comparable basis, the 2014 comparative results exclude the contribution from the sold PruHealth and PruProtect businesses.
Notes
(i) The Group's UK insurance operations transferred its general insurance business to Churchill in 2002. General insurance commission represents the commission receivable net of expenses for Prudential-branded general insurance products as part of this arrangement, which terminates at the end of 2016.
(ii) Corporate expenditure as shown above is for Group Head Office and Asia Regional Head Office.
(iii) Restructuring costs are incurred in the UK and represent one-off business development expenses.
(iv) Amortisation of acquisition accounting adjustments principally relate to the acquired REALIC business of Jackson.
(v) In November 2014, PAC completed the sale of its 25 per cent equity stake in the PruHealth and PruProtect businesses to Discovery Group Europe Limited.
(vi) On 1 January 2014, the Hong Kong branch of the Prudential Assurance Company Limited was transferred to separate subsidiaries established in Hong Kong.
(vii) For definitions of AER and CER refer to note A1.
B1.2 Short-term fluctuations in investment returns on shareholder-backed business
2015 GBPm 2014 GBPm
-------------------------- --------- ---------
Insurance operations:
Asia note (i) (119) 178
US note (ii) (424) (1,103)
UK note (iii) (120) 464
Other operationsnote (iv) (74) (113)
--------- ---------
Total (737) (574)
--------------------------- --------- ---------
Notes
(i) Asia insurance operations
In Asia, the negative short-term fluctuations of GBP(119) million (2014: positive GBP178 million) primarily reflect net unrealised movements on bond holdings following rises in bond yields across the region during the year.
(ii) US insurance operations
The short-term fluctuations in investment returns for US insurance operations are reported net of related credit for amortisation of deferred acquisition costs, of GBP93 million as shown in note C5.1(b) (2014: GBP653 million) and comprise amounts in respect of the following items:
2015 GBPm 2014 GBPm
-------------------------------------------------------- --------- ---------
Net equity hedge resultnote (a) (504) (1,574)
Other than equity-related derivativesnote (b) 29 391
Debt securities note (c) 1 47
Equity-type investments: actual less longer-term return 19 16
Other items 31 17
--------- ---------
Total (424) (1,103)
--------------------------------------------------------- --------- ---------
Notes
(a) Net equity hedge result
The purpose of the inclusion of this item in short-term fluctuations in investment returns is to segregate the amount included in pre-tax profit that relates to the accounting effect of market movements on both the measured value of guarantees in Jackson's variable annuity and fixed index annuity products and on the related derivatives used to manage the exposures inherent in these guarantees. As the Group applies US GAAP for the measured value of the product guarantees this item also includes asymmetric impacts where the measurement bases of the liabilities and associated derivatives used to manage the Jackson annuity business differ as described below.
The result comprises the net effect of:
- The accounting value movements on the variable and fixed index annuity guarantee liabilities; - Adjustments in respect of fee assessments and claim payments; - Fair value movements on free standing equity derivatives; and
- Related changes to DAC amortisation in accordance with the policy that DAC is amortised in line with emergence of margins,.
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Movements in the accounting values of the variable annuity guarantee liabilities include those for:
- The Guaranteed Minimum Death Benefit (GMDB), and the 'for life' portion of Guaranteed Minimum Withdrawal Benefit (GMWB) guarantees which are valued under the US GAAP insurance measurement basis applied for IFRS in a way that is substantially less sensitive to the effect of equity market and interest rate changes. These represent the majority of the guarantees offered by Jackson; and
- The 'not for life' portion of GMWB embedded derivative liabilities which are required to be fair valued. Fair value movements on these liabilities include the effects of changes to levels of equity markets, implied volatility and interest rates.
The free-standing equity derivatives are held to manage equity exposures of the variable annuity guarantees and fixed index annuity embedded options.
The net equity hedge result therefore includes significant accounting mismatches and other factors that detract from the presentation of an economic result. These other factors include:
- The variable annuity guarantees and fixed index annuity embedded options being only partially fair valued under 'grandfathered' GAAP;
- The interest rate exposure being managed through the other than equity-related derivative programme explained in note (b) below; and
- Jackson's management of its economic exposures for a number of other factors that are treated differently in the accounting frameworks such as future fees and assumed volatility levels.
(b) Other than equity-related derivatives
The fluctuations for this item comprise the net effect of:
- Fair value movements on free standing, other than equity-related derivatives; - Accounting effects of the Guaranteed Minimum Income Benefit (GMIB) reinsurance; and - Related amortisation of DAC.
The free-standing, other than equity-related derivatives, are held to manage interest rate exposures and durations within the general account and the variable annuity guarantees and fixed index annuity embedded options described in note (a) above.
The direct Guaranteed Minimum Income Benefit (GMIB) liability is valued using the US GAAP measurement basis applied for IFRS reporting in a way that substantially does not recognise the effects of market movements. Reinsurance arrangements are in place so as to essentially fully insulate Jackson from the GMIB exposure. Notwithstanding that the liability is essentially fully reinsured, as the reinsurance asset is net settled, it is deemed a derivative under IAS 39 which requires fair valuation.
The fluctuations for this item therefore include significant accounting mismatches caused by:
- The fair value movements booked in the income statement on the derivative programme being in respect of the management of interest rate exposures of the variable and fixed index annuity business, as well as the fixed annuity business guarantees and durations within the general account;
- Fair value movements on Jackson's debt securities of the general account which are recorded in other comprehensive income rather than the income statement; and
- The mixed measurement model that applies for the GMIB and its reinsurance.
(c) Short-term fluctuations related to debt securities
2015 GBPm 2014 GBPm
--------------------------------------------------------------------------------------------- --------- ---------
Short-term fluctuations relating to debt securities
Credits (charges) in the year:
Losses on sales of impaired and deteriorating bonds (54) (5)
Bond write downs (37) (4)
Recoveries / reversals 18 19
--------------------------------------------------------------------------------------------- --------- ---------
Total (charges) credits in the year (73) 10
Less: Risk margin allowance deducted from operating profit based on longer-term investment
returns(note) 83 78
--------- ---------
10 88
--------------------------------------------------------------------------------------------- --------- ---------
Interest-related realised gains:
Arising in the year 102 63
Less: Amortisation of gains and losses arising in current and prior years to operating profit
based on longer-term investment returns (108) (87)
--------------------------------------------------------------------------------------------- --------- ---------
(6) (24)
--------------------------------------------------------------------------------------------- --------- ---------
Related amortisation of deferred acquisition costs (3) (17)
---------------------------------------------------------------------------------------------- --------- ---------
Total short-term fluctuations related to debt securities 1 47
---------------------------------------------------------------------------------------------- --------- ---------
Note
The debt securities of Jackson are held in the general account of the business. Realised gains and losses are recorded in the income statement with normalised returns included in operating profit with variations from year to year included in the short-term fluctuations category. The risk margin reserve charge for longer-term credit-related losses included in operating profit based on longer-term investment returns of Jackson for 2015 is based on an average annual risk margin reserve of 23 basis points (2014: 24 basis points) on average book values of US$54.6 billion (2014: US$54.5 billion) as shown below:
2015 2014
-------------------------------------------- --------------------------------------
Moody's rating
category
(or equivalent under
NAIC ratings of Average Average
mortgage-backed book book
securities) value RMR Annual expected loss value RMR Annual expected loss
------------ ------ ---------------------- -------- ---- ----------------------
US$m % US$m GBPm US$m % US$m GBPm
---------------------- ------------ ------ ------------ -------- -------- ---- ------------ --------
A3 or higher 28,185 0.13 (37) (24) 27,912 0.12 (34) (21)
Baa1, 2 or 3 24,768 0.25 (62) (40) 24,714 0.25 (62) (38)
Ba1, 2 or 3 1,257 1.17 (15) (10) 1,390 1.23 (17) (10)
B1, 2 or 3 388 3.08 (12) (8) 385 3.04 (12) (7)
Below B3 35 3.70 (1) (1) 92 3.70 (4) (2)
---------------------- ------------ ------ ------------ -------- -------- ---- ------------ --------
Total 54,633 0.23 (127) (83) 54,493 0.24 (129) (78)
---------------------- ------------ ------ ------------ -------- -------- ---- ------------ --------
Related amortisation of deferred acquisition
costs (see below) 24 16 25 15
------------ -------- ------------ --------
Risk margin reserve charge to operating
profit for longer-term credit related
losses (103) (67) (104) (63)
------------ -------- ------------ --------
Consistent with the basis of measurement of insurance assets and liabilities for Jackson's IFRS results, the charges and credits to operating profits based on longer-term investment returns are partially offset by related amortisation of deferred acquisition costs.
In addition to the accounting for realised gains and losses described above for Jackson general account debt securities, included within the statement of other comprehensive income is a pre-tax charge for unrealised losses on debt securities classified as available-for-sale net of related change in amortisation of deferred acquisition costs of GBP(968) million (2014: net unrealised gains of GBP869 million). Temporary market value movements do not reflect defaults or impairments. Additional details of the movement in the value of the Jackson portfolio are included in note C3.3(b).
(iii) UK insurance operations
The negative short-term fluctuations in investment returns for UK insurance operations of GBP(120) million (2014: positive GBP464 million) include net unrealised movements on fixed income assets supporting the capital of the shareholder-backed annuity business, reflecting the rise in bond yields since the end of 2014.
(iv) Other
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The negative short-term fluctuations in investment returns for other operations of GBP(74) million (2014: negative GBP(113) million) include unrealised value movements on investments and foreign exchange items.
(v) Default losses
The Group did not experience any default losses on its shareholder-backed debt securities portfolio in 2015 or 2014.
B1.3 Determining operating segments and performance measure of operating segments
Operating segments
The Group's operating segments, determined in accordance with IFRS 8 'Operating Segments', are as follows:
Insurance operations: Asset management operations:
---------------------- -----------------------------------------------
* Eastspring Investments
* Asia
---------------------- -----------------------------------------------
* US (Jackson) * US broker-dealer and asset management
---------------------- -----------------------------------------------
* M&G
* UK
---------------------- -----------------------------------------------
* Prudential Capital
---------------------- -----------------------------------------------
The Group's operating segments are also its reportable segments for the purposes of internal management reporting. Prior to 2015, the Group incorporated Prudential Capital into the M&G operating segment for the purposes of segment reporting. To better reflect the economic characteristics of the two businesses, the Group has in 2015 made a change to present Prudential Capital as a separate reportable segment rather than aggregating this segment within M&G.
Performance measure
The performance measure of operating segments utilised by the Company is IFRS operating profit attributable to shareholders based on longer-term investment returns, as described below. This measurement basis distinguishes operating profit based on long-term investment returns from other constituents of the total profit as follows:
- Short-term fluctuations in investment returns on shareholder-backed business*; - Gain on the sale of the Group's stake in the PruHealth and PruProtect businesses in 2014;
- Amortisation of acquisition accounting adjustments arising on the purchase of business. This comprises principally the charge for the adjustments arising on the purchase of REALIC in 2012;
- The recycling of the cumulative exchange translation loss on the sold Japan life business from other comprehensive income to the income statement in 2015. See note D1 for further details; and
- The costs associated with the domestication of the Hong Kong branch which became effective on 1 January 2014.
Segment results that are reported to the Group Executive Committee include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items are mainly in relation to the Group Head Office and the Asia Regional Head Office.
* Including the impact of short-term market effects on the carrying value of Jackson guarantee liabilities and related derivatives as explained below.
Determination of operating profit based on longer-term investment return for investment and liability movements:
(a) General principles (i) UK style with-profits business
The operating profit based on longer-term returns reflects the statutory transfer gross of attributable tax. Value movements in the underlying assets of the with-profits funds do not affect directly the determination of operating profit.
(ii) Unit-linked business
The policyholder unit liabilities are directly reflective of the underlying asset value movements. Accordingly, the operating results based on longer-term investment returns reflect the current period value movements in both the unit liabilities and the backing assets.
(iii) US variable annuity and fixed index annuity business
This business has guarantee liabilities which are measured on a combination of fair value and other US GAAP derived principles. These liabilities are subject to an extensive derivative programme to manage equity and, with those of the general account, interest rate exposures. The principles for determination of the operating profit and short-term fluctuations are necessarily bespoke, as discussed in section (c) below.
(iv) Business where policyholder liabilities are sensitive to market conditions
Under IFRS, the degree to which the carrying values of liabilities to policyholders are sensitive to current market conditions varies between territories depending upon the nature of the 'grandfathered' measurement basis. In general, in those instances where the liabilities are particularly sensitive to routine changes in market conditions, the accounting basis is such that the impact of market movements on the assets and liabilities is broadly equivalent in the income statement, and operating profit based on longer-term investments returns is not distorted. In these circumstances, there is no need for the movement in the liability to be bifurcated between the elements that relate to longer-term market conditions and short-term effects.
However, some types of business movements in liabilities do require bifurcation to ensure that at the net level (ie after allocated investment return and charge for policyholder benefits) the operating result reflects longer-term market returns.
Examples of where such bifurcation is necessary are in Hong Kong and for UK shareholder-backed annuity business, as explained in sections b(i) and d(i), respectively.
(v) Other shareholder-financed business
The measurement of operating profit based on longer-term investment returns reflects the particular features of long-term insurance business where assets and liabilities are held for the long-term and for which the accounting basis for insurance liabilities under current IFRS is not generally conducive to demonstrating trends in underlying performance of life businesses exclusive of the effects of short-term fluctuations in market conditions. In determining the profit on this basis, the following key elements are applied to the results of the Group's shareholder-financed operations.
Except in the case of assets backing liabilities which are directly matched (such as linked business) or closely correlated with value movements (as discussed below) operating profit based on longer-term investment returns for shareholder-financed business is determined on the basis of expected longer-term investment returns.
Debt, equity-type securities and loans
Longer-term investment returns comprise actual income receivable for the period (interest/dividend income) and for both debt and equity-type securities longer-term capital returns.
In principle, for debt securities and loans, the longer-term capital returns comprise two elements:
- Risk margin reserve based charge for the expected level of defaults for the period, which is determined by reference to the credit quality of the portfolio. The difference between impairment losses in the reporting period and the risk margin reserve charge to the operating result is reflected in short-term fluctuations in investment returns; and
- The amortisation of interest-related realised gains and losses to operating results based on longer-term investment returns to the date when sold bonds would have otherwise matured.
At 31 December 2015, the level of unamortised interest-related realised gains and losses related to previously sold bonds for the Group was a net gain of GBP567 million (2014: GBP467 million).
Equity type securities
For equity-type securities, the longer-term rates of return are estimates of the long-term trend investment returns for income and capital having regard to past performance, current trends and future expectations. Equity-type securities held for shareholder-financed operations other than the UK annuity business, unit-linked and US variable annuity are of significance for the US and Asia insurance operations. Different rates apply to different categories of equity-type securities.
Derivative value movements
Generally, derivative value movements are excluded from operating results based on longer-term investment returns (unless those derivative value movements broadly offset changes in the accounting value of other assets and liabilities included in operating profit). The principal example of non-equity based derivatives (for example interest rate swaps and swaptions) whose value movements are excluded from operating profit arises in Jackson, as discussed below in section (c).
(b) Asia insurance operations (i) Business where policyholder liabilities are sensitive to market conditions
For certain Asia non-participating business, for example in Hong Kong, the economic features are more akin to asset management products with policyholder liabilities reflecting asset shares over the contract term. For these products, the charge for policyholder benefits in the operating results should reflect the asset share feature rather than volatile movements that would otherwise be reflected if the local regulatory basis (also applied for IFRS basis) was used.
For certain other types of non-participating business, longer-term interest rates are used to determine the movement in policyholder liabilities for determining operating results.
(ii) Other Asia shareholder-financed business
Debt securities
For this business the realised gains and losses are principally interest related. Accordingly, all realised gains and losses to date for these operations are being amortised over the period to the date those securities would otherwise have matured, with no explicit risk margin reserve charge.
Equity-type securities
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For Asia insurance operations, investments in equity securities held for non-linked shareholder-financed operations amounted to GBP840 million as at 31 December 2015 (2014: GBP932 million). The rates of return applied in the years 2015 and 2014 ranged from 2.73 per cent to 13.75 per cent with the rates applied varying by territory. These rates are determined after consideration by the Group's in-house economists of long-term expected real government bond returns, equity risk premium and long-term inflation. These rates are broadly stable from period to period but may be different between countries reflecting, for example, differing expectations of inflation in each territory. The assumptions are for returns expected to apply in equilibrium conditions. The assumed rates of return do not reflect any cyclical variability in economic performance and are not set by reference to prevailing asset valuations.
The longer-term investment returns for the Asia insurance joint ventures accounted for using the equity method are determined on a similar basis as the other Asia insurance operations described above.
(c) US Insurance operations (i) Separate account business
For such business the policyholder unit liabilities are directly reflective of the asset value movements. Accordingly, the operating results based on longer-term investment returns reflect the current period value movements in unit liabilities and the backing assets.
(ii) US variable and fixed index annuity business
The following value movements for Jackson's variable and fixed index annuity business are excluded from operating profit based on longer-term investment returns. See note B1.2 note (ii):
- Fair value movements for equity-based derivatives;
- Fair value movements for embedded derivatives for the 'not for life' portion of Guaranteed Minimum Withdrawal Benefit and fixed index annuity business, and Guaranteed Minimum Income Benefit reinsurance (see below);
- Movements in the accounts carrying value of Guaranteed Minimum Death Benefit and the 'for life' portion of Guaranteed Minimum Withdrawal Benefits and Guaranteed Minimum Income Benefit liabilities, for which, under the 'grandfathered' US GAAP applied under IFRS for Jackson's insurance assets and liabilities, the measurement basis gives rise to a muted impact of current period market movements;
- A portion of the fee assessments as well as claim payments, in respect of guarantee liabilities; and
- Related amortisation of deferred acquisition costs for each of the above items.
Embedded derivatives for variable annuity guarantee minimum income benefit
The Guaranteed Minimum Income Benefit liability, which is essentially fully reinsured, subject to a deductible and annual claim limits, is accounted for in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Subtopic 944-80 Financial Services - Insurance - Separate Accounts (formerly SOP 03-1) under IFRS using 'grandfathered' US GAAP. As the corresponding reinsurance asset is net settled, it is considered to be a derivative under IAS 39, 'Financial Instruments: Recognition and Measurement', and the asset is therefore recognised at fair value. As the Guaranteed Minimum Income Benefit is economically reinsured, the mark to market element of the reinsurance asset is included as a component of short-term fluctuations in investment returns.
(iii) Other derivative value movements
The principal example of non-equity based derivatives (for example, interest rate swaps and swaptions) whose value movements are excluded from operating profit, arises in Jackson. Non-equity based derivatives are primarily held by Jackson as part of a broadly-based hedging programme for features of Jackson's bond portfolio (for which value movements are booked in the statement of comprehensive income rather than the income statement), product liabilities (for which US GAAP accounting as 'grandfathered' under IFRS 4 does not fully reflect the economic features being hedged), and the interest rate exposure attaching to equity-based embedded derivatives.
(iv) Other US shareholder-financed business
Debt securities
Jackson is the shareholder-backed operation for which the distinction between impairment losses and interest-related realised gains and losses is in practice relevant to a significant extent. Jackson has used the ratings by Nationally Recognised Statistical Ratings Organisations (NRSRO) or ratings resulting from the regulatory ratings detail issued by the National Association of Insurance Commissioners (NAIC) developed by external third parties such as BlackRock Solutions to determine the average annual risk margin reserve to apply to debt securities held to back general account business. Debt securities held to back separate account and reinsurance funds withheld are not subject to risk margin reserve charge. Further details of the risk margin reserve charge, as well as the amortisation of interest-related realised gains and losses, for Jackson are shown in note B1.2.
Equity-type securities
As at 31 December 2015, the equity-type securities for US insurance non-separate account operations amounted to GBP1,004 million (2014: GBP1,094 million). For these operations, the longer-term rates of return for income and capital applied in 2015 and 2014, which reflect the combination of the average risk-free rates over the period and appropriate risk premiums are as follows:
2015 2014
------------------------------------------------------------------------------------------ ------------ ------------
Equity-type securities such as common and preferred stock and portfolio holdings in mutual
funds 5.7% to 6.4% 6.2% to 6.7%
Other equity-type securities such as investments in limited partnerships and private
equity
funds 7.7% to 8.4% 8.2% to 8.7%
------------------------------------------------------------------------------------------ ------------ ------------
(d) UK Insurance operations
(i) Shareholder-backed annuity business
For this business, policyholder liabilities are determined by reference to current interest rates. The value movements of the assets covering liabilities are closely correlated with the related change in liabilities. Accordingly, asset value movements are recorded within the 'operating results based on longer-term investment returns'. Policyholder liabilities include a margin for credit risk. Variations between actual and best estimate expected impairments are recorded as a component of short-term fluctuations in investment returns.
The operating result based on longer-term investment returns reflects the impact of value movements on policyholder liabilities for annuity business in PRIL and the PAC non-profit sub-fund after adjustments to allocate the following elements of the movement to the category of 'short-term fluctuations in investment returns':
- The impact on credit risk provisioning of actual upgrades and downgrades during the period; - Credit experience compared to assumptions; and - Short-term value movements on assets backing the capital of the business.
Credit experience reflects the impact of defaults and other similar experience, such as asset exchanges arising from debt restructuring by issuers that include effectively an element of permanent impairment of the security held. Positive or negative experience compared to assumptions is included within short-term fluctuations in investment returns without further adjustment. The effects of other changes to credit risk provisioning are included in the operating result, as is the net effect of changes to the valuation rate of interest due to portfolio rebalancing to align more closely with management benchmark.
(ii) Non-linked shareholder-financed business
For debt securities backing non-linked shareholder-financed business of the UK insurance operations (other than the annuity business) the realised gains and losses are principally interest related. Accordingly, all realised gains and losses to date for these operations are being amortised over the period to the date those securities would otherwise have matured, with no explicit risk margin reserve charge.
(e) Fund management and other non-insurance businesses
For these businesses, the particular features applicable for life assurance noted above do not apply. For these businesses it is inappropriate to include returns in the operating result on the basis described above. Instead, it is appropriate to generally include realised gains and losses in the operating result with temporary unrealised gains and losses being included in short-term fluctuations. In some instances it may also be appropriate to amortise realised gains and losses on derivatives and other financial instruments to operating results over a time period that reflects the underlying economic substance of the arrangements.
B2 Profit before tax - asset management operations
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The profit included in the income statement in respect of asset management operations for the year is as follows:
2015 GBPm 2014 GBPm
----- ---------- ------------------- ------- ---------
Prudential Eastspring
M&G Capital US Investments Total Total
----------------------------------------------------- ----- ---------- ----- ------------ ------- ---------
Revenue (excluding NPH broker-dealer fees) 1,237 54 321 352 1,964 2,008
NPH broker-dealer feesnote (i) - - 522 - 522 503
------------------------------------------------------ ----- ---------- ----- ------------ ------- ---------
Gross revenue 1,237 54 843 352 2,486 2,511
------------------------------------------------------ ----- ---------- ----- ------------ ------- ---------
Charges (excluding NPH broker-dealer fees) (810) (99) (310) (278) (1,497) (1,477)
NPH broker-dealer feesnote (i) - - (522) - (522) (503)
------------------------------------------------------ ----- ---------- ----- ------------ ------- ---------
Gross charges (810) (99) (832) (278) (2,019) (1,980)
------------------------------------------------------ ----- ---------- ----- ------------ ------- ---------
Share of profit from joint ventures and associates,
net of related tax 14 - - 41 55 42
------------------------------------------------------ ----- ---------- ----- ------------ ------- ---------
Profit before tax 441 (45) 11 115 522 573
------------------------------------------------------ ----- ---------- ----- ------------ ------- ---------
Comprising:
Operating profit based on longer-term investment
returnsnote (ii) 442 19 11 115 587 590
Short-term fluctuations in investment returns (1) (64) - - (65) (17)
----- ---------- ----- ------------ ------- ---------
Profit before tax 441 (45) 11 115 522 573
------------------------------------------------------ ----- ---------- ----- ------------ ------- ---------
Notes
(i) The segment revenue of the Group's asset management operations includes:
NPH broker-dealer fees which represent commissions received that are then paid on to the writing brokers on sales of investment products. To reflect their commercial nature the amounts are also wholly reflected as charges within the income statement. After allowing for these charges, there is no effect on profit from this item. The presentation in the table above shows separately the amounts attributable to this item so that the underlying revenue and charges can be seen.
(ii) M&G operating profit based on longer-term investment returns:
2015 GBPm 2014 GBPm
------------------------------------------------------------------- --------- ---------
Asset management fee income 934 953
Other income 5 1
Staff costs (293) (351)
Other costs (240) (203)
-------------------------------------------------------------------- --------- ---------
Underlying profit before performance-related fees 406 400
Share of associate results 14 13
Performance-related fees 22 33
-------------------------------------------------------------------- --------- ---------
Total M&G operating profit based on longer-term investment returns 442 446
-------------------------------------------------------------------- --------- ---------
The revenue for M&G of GBP961 million (2014: GBP987 million), comprising the amounts for asset management fee income, other income and performance-related fees shown above, is different to the amount of GBP1,237 million shown in the main table of this note. This is because the GBP961 million (2014: GBP987 million) is after deducting commissions which would have been included as charges in the main table. The difference in the presentation of commission is aligned with how management reviews the business.
B3 Acquisition costs and other expenditure
2015 GBPm 2014 GBPm
-------------------------------------------------------------------------------------------- --------- ---------
Acquisition costs incurred for insurance policies (3,275) (2,668)
Acquisition costs deferred less amortisation of acquisition costs 431 916
Administration costs and other expenditure (4,746) (4,486)
Movements in amounts attributable to external unit holders of consolidated investment funds (618) (514)
-------------------------------------------------------------------------------------------- --------- ---------
Total acquisition costs and other expenditure (8,208) (6,752)
-------------------------------------------------------------------------------------------- --------- ---------
B4 Effect of changes and other accounting features on insurance assets and liabilities
The following features are of relevance to the determination of the 2015 results:
(a) Asia insurance operations
In 2015, the IFRS operating profit based on longer-term investment returns for Asia insurance operations included a profit of GBP62 million (2014: GBP49 million) representing a number of non-recurring items, none of which are individually significant.
(b) UK insurance operations
Annuity business
Allowance for credit risk
For IFRS reporting, the results for UK shareholder-backed annuity business are particularly sensitive to the allowances made for credit risk. The allowance is reflected in the deduction from the valuation rate of interest for discounting projected future annuity payments to policyholders that would have otherwise applied. Credit risk allowance comprises (i) an amount for long-term best estimate defaults, and (ii) additional provisions for credit risk premium, downgrade resilience and short-term defaults.
The weighted components of the bond spread over swap rates for shareholder-backed fixed and linked annuity business for PRIL, the principal company which writes the UK's shareholder-backed business, based on the asset mix at these dates are shown below.
31 Dec 2015 (bps) 31 Dec 2014 (bps)
----------------------------- -----------------------------
Pillar 1 Pillar 1
regulatory regulatory
basis Adjustment IFRS basis Adjustment IFRS
--------------------------------------- ----------- ---------- ---- ----------- ---------- ----
Bond spread over swap rates note (i) 171 - 171 143 - 143
--------------------------------------- ----------- ---------- ---- ----------- ---------- ----
Credit risk allowance:
Long-term expected defaults note (ii) 13 - 13 14 - 14
Additional provisionsnote (iii) 42 (12) 30 44 (12) 32
-------------------------------------- ----------- ---------- ---- ----------- ---------- ----
Total credit risk allowance 55 (12) 43 58 (12) 46
--------------------------------------- ----------- ---------- ---- ----------- ---------- ----
Liquidity premium 116 12 128 85 12 97
--------------------------------------- ----------- ---------- ---- ----------- ---------- ----
Notes
(i) Bond spread over swap rates reflect market observed data.
(ii) Long-term expected defaults are derived by applying Moody's data from 1970 to 2009 and the definition of the credit rating used is the second highest credit rating published by Moody's, Standard & Poor's and Fitch.
(iii) Additional provisions comprise credit risk premium, which is derived from Moody's data from 1970 to 2009, an allowance for a one-notch downgrade of the portfolio subject to credit risk and an additional allowance for short-term defaults.
The prudent Pillar 1 regulatory basis reflects the overriding objective of maintaining sufficient provisions and capital to ensure payments to policyholders can be made. The approach for IFRS aims to establish liabilities that are closer to 'best estimate'.
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Movement in the credit risk allowance for PRIL
The movement during 2015 of the average basis points allowance for PRIL on Pillar 1 regulatory and IFRS bases are as follows:
Pillar 1
Regulatory
basis IFRS
Total (bps) Total (bps)
---------------------------------------------------- ----------- -----------
Total allowance for credit risk at 31 December 2014 58 46
Credit rating changes 2 1
Asset trading (2) (2)
Other effects (including for new business) (3) (2)
---------------------------------------------------- ----------- -----------
Total allowance for credit risk at 31 December 2015 55 43
---------------------------------------------------- ----------- -----------
Overall, the movement has led to the credit allowance for Pillar 1 purposes to be 32 per cent (2014: 41 per cent) of the bond spread over swap rates. For IFRS purposes it represents 25 per cent (2014: 32 per cent) of the bond spread over swap rates.
The reserves for credit risk allowance at 31 December 2015 for the UK shareholder annuity fund were as follows:
Pillar 1 Regulatory
basis IFRS
Total GBPbn Total GBPbn
------------------------ ------------------- -----------
PRIL 1.9 1.5
PAC non-profit sub-fund 0.2 0.1
------------------------ ------------------- -----------
Total 31 December 2015 2.1 1.6
------------------------ ------------------- -----------
Total 31 December 2014 2.2 1.7
------------------------ ------------------- -----------
Other assumption changes
For the shareholder-backed business, in addition to the movement in the credit risk allowance discussed above, the net effect of routine changes to assumptions in 2015, was a credit of GBP31 million (2014: GBP28 million).
Other one-off transactions
During 2015 the UK insurance operations entered into additional longevity reinsurance transactions to extend total coverage from GBP2.3 billion of annuity liabilities at the start of the year to GBP8.7 billion at the end of 2015 (on a Pillar 1 basis). Overall these transactions generated profit of GBP231 million (2014: GBP30 million). Of the GBP231 million, GBP170 million relates to transactions undertaken in the second half of 2015 covering GBP4.8 billion of annuity liabilities (on a Pillar 1 basis). These transactions together with other specific management actions undertaken to position the balance sheet more efficiently under the new Solvency II regime, gave rise to IFRS operating profit in the second of 2015 of GBP339 million in total, which is not expected to recur in future periods.
B5 Tax charge (a) Total tax charge by nature of expense
The total tax charge in the income statement is as follows:
2015 GBPm 2014 GBPm
------------------------ ---------
Current Deferred
Tax charge tax tax Total Total
-------------------------- ------- -------- ----- ---------
UK tax (218) 69 (149) (578)
Overseas tax (516) (77) (593) (360)
-------------------------- ------- -------- ----- ---------
Total tax (charge) credit (734) (8) (742) (938)
-------------------------- ------- -------- ----- ---------
The current tax charge of GBP734 million includes GBP35 million (2014: GBP37 million) in respect of the tax charge for the Hong Kong operation. The Hong Kong current tax charge is calculated as 16.5 per cent for all periods on either (i) 5 per cent of the net insurance premium or (ii) the estimated assessable profits, depending on the nature of the business written.
The total tax charge comprises tax attributable to policyholders and unallocated surplus of with-profits funds, unit-linked policies and shareholders as shown below:
2015 GBPm 2014 GBPm
------------------------ ---------
Current Deferred
Tax charge tax tax Total Total
---------------------------------------- ------- -------- ----- ---------
Tax charge to policyholders' returns (188) 15 (173) (540)
Tax charge attributable to shareholders (546) (23) (569) (398)
---------------------------------------- ------- -------- ----- ---------
Total tax (charge) credit (734) (8) (742) (938)
---------------------------------------- ------- -------- ----- ---------
The principal reason for the decrease in the tax charge attributable to policyholders' returns is a reduction in the current tax owing to a significant decrease on investment returns in the second half of the year in the with-profits life fund in the UK insurance operations.
(b) Reconciliation of effective tax rate
Reconciliation of tax charge on profit attributable to shareholders
2015 GBPm
---------------------------------------------------------
Asia US UK
insurance insurance Insurance Other
operations operations operations operations Total
-------------------------------------------------------- ----------- ----------- ----------- ----------- -----
Operating profit based on longer-term investment returns 1,209 1,691 1,195 (88) 4,007
Non-operating profit (173) (492) (120) (74) (859)
--------------------------------------------------------- ----------- ----------- ----------- ----------- -----
Profit (loss) before tax attributable to shareholders 1,036 1,199 1,075 (162) 3,148
--------------------------------------------------------- ----------- ----------- ----------- ----------- -----
Expected tax rate* 24% 35% 20% 20% 27%
Tax at the expected rate 249 420 215 (32) 852
Effects of recurring tax reconciliation items:
Income not taxable or taxable at concessionary rates (42) (10) (2) (9) (63)
Deductions not allowable for tax purposes 15 5 7 6 33
Items related to taxation of life insurance businesses (20) (113) - - (133)
Deferred tax adjustments 10 - - (11) (1)
Effect of results of joint ventures and associates (37) - - (13) (50)
Irrecoverable withholding taxes - - - 28 28
Other (4) (1) 6 2 3
-------------------------------------------------------- ----------- ----------- ----------- ----------- -----
Total (78) (119) 11 3 (183)
Effects of non-recurring tax reconciliation items:
Adjustments to tax charge in relation to prior years 5 (65) (7) - (67)
Movements in provisions for open tax matters (6) - - (5) (11)
Impact of changes in local statutory tax rates (5) - (16) (1) (22)
-------------------------------------------------------- ----------- ----------- ----------- ----------- -----
Total (6) (65) (23) (6) (100)
Total actual tax charge/(credit) 165 236 203 (35) 569
--------------------------------------------------------- ----------- ----------- ----------- ----------- -----
Analysed into:
Tax on operating profit based on longer-term investment
returns 180 408 227 (19) 796
Tax on non-operating profit (15) (172) (24) (16) (227)
--------------------------------------------------------- ----------- ----------- ----------- ----------- -----
Actual tax rate:
Operating profit based on longer-term investment returns
Including non-recurring tax reconciling items 15% 24% 19% 22% 20%
Excluding non-recurring tax reconciling items 15% 28% 21% 15% 22%
Total profit 16% 20% 19% 22% 18%
--------------------------------------------------------- ----------- ----------- ----------- ----------- -----
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2014 GBPm
---------------------------------------------------------
Asia US UK
insurance insurance Insurance Other
operations operations operations operations Total
-------------------------------------------------------- ----------- ----------- ----------- ----------- -----
Operating profit based on longer-term investment returns 1,050 1,431 753 (48) 3,186
Non-operating profit 170 (1,174) 545 (113) (572)
--------------------------------------------------------- ----------- ----------- ----------- ----------- -----
Profit (loss) before tax attributable to shareholders 1,220 257 1,298 (161) 2,614
--------------------------------------------------------- ----------- ----------- ----------- ----------- -----
Expected tax rate* 22% 35% 21% 22% 23%
Tax at the expected rate 268 90 273 (35) 596
Effects of recurring tax reconciliation items:
Income not taxable or taxable at concessionary rates (17) (6) - (2) (25)
Deductions not allowable for tax purposes 13 - 7 9 29
Items related to taxation of life insurance businesses (44) (76) - - (120)
Deferred tax adjustments (8) - (7) (11) (26)
Effect of results of joint ventures and associates (40) - (8) (10) (58)
Irrecoverable withholding taxes - - - 27 27
Other (4) 1 (4) 7 -
-------------------------------------------------------- ----------- ----------- ----------- ----------- -----
Total (100) (81) (12) 20 (173)
Effects of non-recurring tax reconciliation items:
Adjustments to tax charge in relation to prior years (2) (1) 3 (7) (7)
Movements in provisions for open tax matters 7 - - (26) (19)
Impact of changes in local statutory tax rates (1) - 2 - 1
-------------------------------------------------------- ----------- ----------- ----------- ----------- -----
Total 4 (1) 5 (33) (25)
Total actual tax charge/(credit) 172 8 266 (48) 398
--------------------------------------------------------- ----------- ----------- ----------- ----------- -----
Analysed into:
Tax on operating profit based on longer-term investment
returns 171 419 163 (29) 724
Tax on non-operating profit 1 (411) 103 (19) (326)
--------------------------------------------------------- ----------- ----------- ----------- ----------- -----
Actual tax rate:
Operating profit based on longer-term investment returns
Including non-recurring tax reconciling items 16% 29% 22% 60% 23%
Excluding non-recurring tax reconciling items 16% 29% 21% (8)% 24%
Total profit 14% 3% 21% 30% 15%
--------------------------------------------------------- ----------- ----------- ----------- ----------- -----
* The expected tax rates (rounded to the nearest whole percentage) reflect the corporation tax rates generally applied to taxable profit of the relevant country jurisdictions. For Asia operations the expected tax rates reflect the corporation tax rates weighted by reference to the source of profit of operations contributing to the aggregate business result. The expected tax rate for Other operations reflects the mix of business between UK and overseas non-insurance operations, which are taxed at a variety of rates. The rates will fluctuate from year to year dependent on the mix of profit.
In order to show the UK insurance business on a comparable basis, the full year 2014 comparatives exclude the contribution from the sold PruHealth and PruProtect businesses from the UK insurance operations and show it in the column for Other operations.
B6 Earnings per share
2015
------------------------------------------------------- ----- -------------------------------------------------
Basic Diluted
Before earnings earnings
tax Tax Net of tax per share per share
Note B1.1 B5
GBPm GBPm GBPm Pence Pence
------------------------------------------------------- ----- ------ ----- ---------- ---------- ----------
Based on operating profit based on longer-term
investment returns 4,007 (796) 3,211 125.8p 125.6p
Short-term fluctuations in investment returns on
shareholder-backed business B1.2 (737) 202 (535) (21.0)p (20.9)p
Cumulative exchange loss on the sold Japan life business
recycled from other comprehensive
income D1 (46) - (46) (1.8)p (1.8)p
Amortisation of acquisition accounting adjustments (76) 25 (51) (2.0)p (2.0)p
----- ------ ----- ---------- ---------- ----------
Based on profit for the year 3,148 (569) 2,579 101.0p 100.9p
-------------------------------------------------------- ----- ------ ----- ---------- ---------- ----------
2014
------------------------------------------------------- ----- -------------------------------------------------
Basic Diluted
Before earnings earnings
tax Tax Net of tax per share per share
Note B1.1 B5
GBPm GBPm GBPm Pence Pence
------------------------------------------------------- ----- ------ ----- ---------- ---------- ----------
Based on operating profit based on longer-term
investment returns 3,186 (724) 2,462 96.6p 96.5p
Short-term fluctuations in investment returns on
shareholder-backed business B1.2 (574) 299 (275) (10.8)p (10.8)p
Gain on sale of PruHealth and PruProtect 86 - 86 3.4p 3.4p
Amortisation of acquisition accounting adjustments (79) 26 (53) (2.1)p (2.1)p
Costs of domestication of Hong Kong branch (5) 1 (4) (0.2)p (0.2)p
-------------------------------------------------------- ----- ------ ----- ---------- ---------- ----------
Based on profit for the year 2,614 (398) 2,216 86.9p 86.8p
-------------------------------------------------------- ----- ------ ----- ---------- ---------- ----------
Earnings per share are calculated based on earnings attributable to ordinary shareholders, after related tax and non-controlling interests.
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The weighted average number of shares for calculating earnings per share, which excludes those held in employee share trusts and consolidated unit trusts and OEICs, is set out as below:
2015 2014
Weighted average number of shares for calculation of: (millions) (millions)
------------------------------------------------------------------------------------ ---------- ----------
Basic earnings per share 2,553 2,549
Shares under option at end of year 9 9
Number of shares that would have been issued at fair value on assumed option price (6) (6)
----------------------------------------------------------------------------------- ---------- ----------
Diluted earnings per share 2,556 2,552
----------------------------------------------------------------------------------- ---------- ----------
B7 Dividends
2015 2014
---------------------- ---------------------
Pence per share GBPm Pence per share GBPm
------------------------------------------------ --------------- ----- --------------- ----
Dividends relating to reporting year:
Interim dividend 12.31p 315 11.19p 287
Second interim dividend / Final dividend 26.47p 681 25.74p 658
Special dividend 10.00p 257
----------------------------------------------- --------------- ----- --------------- ----
Total 48.78p 1,253 36.93p 945
------------------------------------------------ --------------- ----- --------------- ----
Dividends declared and paid in reporting year:
Current year interim dividend 12.31p 315 11.19p 285
Final dividend for prior year 25.74p 659 23.84p 610
----------------------------------------------- --------------- ----- --------------- ----
Total 38.05p 974 35.03p 895
------------------------------------------------ --------------- ----- --------------- ----
Dividend per share
Interim and special dividends are recorded in the period in which they are paid. Final dividends are recorded in the period in which they are approved by shareholders. The final dividend for the year ended 31 December 2014 of 25.74 pence per ordinary share was paid to eligible shareholders on 21 May 2015 and the 2015 interim dividend of 12.31 pence per ordinary share was paid to eligible shareholders on 25 September 2015. From 2016, Prudential will make twice-yearly interim dividend payments to replace final / interim dividend.
The second interim ordinary and special dividend for the year ended 31 December 2015 of 26.47 pence and 10.00 pence per ordinary share respectively will be paid on 20 May 2016 in sterling to shareholders on the principal register and the Irish branch register at 6.00pm BST on 29 March 2016 (Record Date), and in Hong Kong dollars to shareholders on the Hong Kong branch register at 4.30pm Hong Kong time on the Record Date (HK Shareholders). Holders of US American Depositary Receipts (US Shareholders) will be paid their dividends in US dollars on or about 27 May 2016. The second interim ordinary and special dividend will be paid on or about 27 May 2016 in Singapore dollars to shareholders with shares standing to the credit of their securities accounts with The Central Depository (Pte.) Limited (CDP) at 5.00pm Singapore time on the Record Date (SG Shareholders). The dividend payable to the HK Shareholders will be translated using the exchange rate quoted by the WM Company at the close of business on 8 March 2016. The exchange rate at which the dividend payable to the SG Shareholders will be translated into Singapore dollars, will be determined by CDP.
Shareholders on the principal register and Irish branch register will be able to participate in a Dividend Reinvestment Plan.
C BALANCE SHEET NOTES C1 Analysis of Group position by segment and business type
To explain the assets, liabilities and capital of the Group's businesses more comprehensively, it is appropriate to provide analyses of the Group's statement of financial position by operating segment and type of business.
C1.1 Group statement of financial position - analysis by segment
2014
2015 GBPm GBPm
-------- ------------------------------------------------------------------------------ -------
Insurance operations
------------------------
Unallo- Elimin-
cated ation
to a of intra-
Asset segment group
Total manage- (central debtors 31 Dec 31 Dec
insurance ment opera- and Group Group
Note Asia US UK operations operations tions) creditors Total Total
By operating
segment C2.1 C2.2 C2.3 C2.4
----------------- -------- ------ ------- ------- ---------- ---------- -------- --------- ------- -------
Assets
Intangible assets
attributable to
shareholders:
Goodwill C5.1(a) 233 - - 233 1,230 - - 1,463 1,463
Deferred
acquisition
costs and other
intangible
assets C5.1(b) 2,103 6,168 83 8,354 21 47 - 8,422 7,261
---------------- -------- ------ ------- ------- ---------- ---------- -------- --------- ------- -------
Total 2,336 6,168 83 8,587 1,251 47 - 9,885 8,724
----------------- -------- ------ ------- ------- ---------- ---------- -------- --------- ------- -------
Intangible assets
attributable to
with-profits
funds:
Goodwill in
respect of
acquired
subsidiaries
for venture
fund and other
investment
purposes - - 185 185 - - - 185 186
Deferred
acquisition
costs and other
intangible
assets 42 - 8 50 - - - 50 61
---------------- -------- ------ ------- ------- ---------- ---------- -------- --------- ------- -------
Total 42 - 193 235 - - - 235 247
---------------- -------- ------ ------- ------- ---------- ---------- -------- --------- ------- -------
Total 2,378 6,168 276 8,822 1,251 47 - 10,120 8,971
----------------- -------- ------ ------- ------- ---------- ---------- -------- --------- ------- -------
Deferred tax
assets C8.1 66 2,448 132 2,646 140 33 - 2,819 2,765
Other
non-investment
and non-cash
assets 3,621 7,205 7,209 18,035 1,504 4,886 (10,142) 14,283 12,781
Investments of
long-term
business and
other operations:
Investment
properties 5 5 13,412 13,422 - - - 13,422 12,764
Investments in
joint ventures
and associates
accounted for
using the
equity method 475 - 434 909 125 - - 1,034 1,017
Loans C3.4 1,084 7,418 3,571 12,073 885 - - 12,958 12,841
Equity securities and
portfolio holdings in
unit trusts 18,532 91,216 47,593 157,341 85 27 - 157,453 144,862
Debt securities C3.3 28,292 34,071 83,101 145,464 2,204 3 - 147,671 145,251
Other investments 57 1,715 5,486 7,258 94 1 - 7,353 7,623
Deposits 773 - 11,226 11,999 89 - - 12,088 13,096
------------------------- ------ ------- ------- ---------- ---------- -------- --------- ------- -------
Total
investments 49,218 134,425 164,823 348,466 3,482 31 - 351,979 337,454
---------------- -------- ------ ------- ------- ---------- ---------- -------- --------- ------- -------
Assets held for
sale - - 2 2 - - - 2 824
Cash and cash
equivalents 2,064 1,405 2,880 6,349 1,054 379 - 7,782 6,409
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----------------- -------- ------ ------- ------- ---------- ---------- -------- --------- ------- -------
Total assets C3.1 57,347 151,651 175,322 384,320 7,431 5,376 (10,142) 386,985 369,204
----------------- -------- ------ ------- ------- ---------- ---------- -------- --------- ------- -------
2014
2015 GBPm GBPm
------ ------- ------- ----------- ---------- -------- --------- ------- -------
Insurance operations
------------------------
Unallo- Elimin-
cated ation
to a of intra-
Asset segment group
Total manage (central debtors 31 Dec 31 Dec
insurance ment opera- and Group Group
By operating segment Note Asia US UK operations operations tions) creditors Total Total
C2.1 C2.2 C2.3 C2.4
--------------------- -------- ------ ------- ------- ----------- ---------- -------- --------- ------- -------
Equity and liabilities
Equity
Shareholders' equity 3,956 4,154 5,140 13,250 2,332 (2,627) - 12,955 11,811
Non-controlling
interests 1 - - 1 - - - 1 1
---------------------- -------- ------ ------- ------- ----------- ---------- -------- --------- ------- -------
Total equity 3,957 4,154 5,140 13,251 2,332 (2,627) - 12,956 11,812
---------------------- -------- ------ ------- ------- ----------- ---------- -------- --------- ------- -------
Liabilities
Policyholder
liabilities and
unallocated surplus of
with-profits funds:
Insurance contract liabilities 42,084 136,129 83,801 262,014 - - (1,261) 260,753 250,038
Investment contract liabilities
with discretionary
participation features 251 - 42,708 42,959 - - - 42,959 39,277
Investment contract liabilities
without discretionary
participation features 181 2,784 15,841 18,806 - - - 18,806 20,224
Unallocated surplus of
with-profits funds 2,553 - 10,543 13,096 - - - 13,096 12,450
------------------------------- ------ ------- ------- ----------- ---------- -------- --------- ------- -------
Total policyholder
liabilities and
unallocated surplus
of with-profits funds C4.1(a) 45,069 138,913 152,893 336,875 - - (1,261) 335,614 321,989
---------------------- -------- ------ ------- ------- ----------- ---------- -------- --------- ------- -------
Core structural
borrowings of
shareholder-financed
operations:
Subordinated debt - - - - - 4,018 - 4,018 3,320
Other - 169 - 169 275 549 - 993 984
---------------------- -------- ------ ------- ------- ----------- ---------- -------- --------- ------- -------
Total C6.1 - 169 - 169 275 4,567 - 5,011 4,304
---------------------- -------- ------ ------- ------- ----------- ---------- -------- --------- ------- -------
Operational borrowings
attributable to
shareholder-financed
operations C6.2 - 66 179 245 10 1,705 - 1,960 2,263
Borrowings
attributable to
with-profits
operations C6.2 - - 1,332 1,332 - - - 1,332 1,093
Other non-insurance
liabilities:
Obligations under funding,
securities lending and sale
and repurchase agreements - 1,914 1,651 3,565 200 - - 3,765 2,347
Net asset value attributable to
unit holders of consolidated
unit trusts and similar funds 2,802 22 5,049 7,873 - - - 7,873 7,357
Deferred tax
liabilities C8.1 734 2,086 1,162 3,982 17 11 - 4,010 4,291
Current tax liabilities 50 3 203 256 50 19 - 325 617
Accruals and deferred income 136 - 447 583 300 69 - 952 947
Other creditors 3,266 1,022 4,591 8,879 3,695 1,183 (8,881) 4,876 4,262
Provisions 119 6 158 283 244 77 - 604 724
Derivative liabilities 140 249 2,125 2,514 283 322 - 3,119 2,323
Other liabilities 1,074 3,047 392 4,513 25 50 - 4,588 4,105
------------------------------- ------ ------- ------- ----------- ---------- -------- --------- ------- -------
Total 8,321 8,349 15,778 32,448 4,814 1,731 (8,881) 30,112 26,973
------------------------------- ------ ------- ------- ----------- ---------- -------- --------- ------- -------
Liabilities held for
sale D1 - - - - - - - - 770
---------------------- -------- ------ ------- ------- ----------- ---------- -------- --------- ------- -------
Total liabilities C3.1 53,390 147,497 170,182 371,069 5,099 8,003 (10,142) 374,029 357,392
-------- ------ ------- ------- ----------- ---------- -------- --------- ------- -------
Total equity and
liabilities 57,347 151,651 175,322 384,320 7,431 5,376 (10,142) 386,985 369,204
---------------------- -------- ------ ------- ------- ----------- ---------- -------- --------- ------- -------
C1.2 Group statement of financial position - analysis by business type
31 Dec
2014
31 Dec 2015 GBPm GBPm
---------------------------------------------------------------- ------- -------
Policyholder Shareholder-backed business
------------- --------------------------------------
Unallo- Elimin-
cated ations
Unit- Asset to a of Intra-
linked manage- segment group
and Non- ment (central debtors
Participating variable linked opera- opera- and Group Group
Note funds annuity business tions tions) creditors Total Total
--------------------- -------- ------------- -------- -------- ------- --------- --------- ------- -------
Assets
Intangible assets
attributable to
shareholders:
Goodwill C5.1(a) - - 233 1,230 - - 1,463 1,463
Deferred acquisition
costs and other
intangible assets C5.1(b) - - 8,354 21 47 - 8,422 7,261
---------------------- -------- ------------- -------- -------- ------- --------- --------- ------- -------
Total - - 8,587 1,251 47 - 9,885 8,724
---------------------- -------- ------------- -------- -------- ------- --------- --------- ------- -------
Intangible assets
attributable to
with-profits funds:
In respect of acquired
subsidiaries for
venture fund and
other investment
purposes 185 - - - - - 185 186
Deferred acquisition
costs and other
intangible assets 50 - - - - - 50 61
---------------------- -------- ------------- -------- -------- ------- --------- --------- ------- -------
Total 235 - - - - - 235 247
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---------------------- -------- ------------- -------- -------- ------- --------- --------- ------- -------
Total 235 - 8,587 1,251 47 - 10,120 8,971
----------------------- -------- ------------- -------- -------- ------- --------- --------- ------- -------
Deferred tax assets C8.1 83 1 2,562 140 33 - 2,819 2,765
Other non-investment
and non-cash assets 3,649 578 11,174 1,504 4,886 (7,508) 14,283 12,781
Investments of
long-term business and
other operations:
Investment properties 11,115 705 1,602 - - - 13,422 12,764
Investments in joint
ventures and
associates accounted
for using the equity
method 434 - 475 125 - - 1,034 1,017
Financial investments:
Loans C3.4 2,599 - 9,474 885 - - 12,958 12,841
Equity securities and portfolio
holdings in unit trusts 39,195 117,067 1,079 85 27 - 157,453 144,862
Debt securities C3.3 60,870 9,290 75,304 2,204 3 - 147,671 145,251
Other investments 5,045 29 2,184 94 1 - 7,353 7,623
Deposits 8,970 1,049 1,980 89 - - 12,088 13,096
------------------------------- ------------- -------- -------- ------- --------- --------- ------- -------
Total investments 128,228 128,140 92,098 3,482 31 - 351,979 337,454
----------------------- -------- ------------- -------- -------- ------- --------- --------- ------- -------
Assets held for sale 2 - - - - - 2 824
Cash and cash
equivalents 2,623 829 2,897 1,054 379 - 7,782 6,409
----------------------- -------- ------------- -------- -------- ------- --------- --------- ------- -------
Total assets 134,820 129,548 117,318 7,431 5,376 (7,508) 386,985 369,204
----------------------- -------- ------------- -------- -------- ------- --------- --------- ------- -------
Equity and liabilities
Equity
Shareholders' equity - - 13,250 2,332 (2,627) - 12,955 11,811
Non-controlling
interests - - 1 - - - 1 1
-------- ------------- -------- -------- ------- --------- --------- ------- -------
Total equity - - 13,251 2,332 (2,627) - 12,956 11,812
----------------------- -------- ------------- -------- -------- ------- --------- --------- ------- -------
Liabilities
Policyholder
liabilities and
unallocated surplus of
with-profits funds:
Contract liabilities
(including amounts in
respect of contracts
classified as
investment contracts
under IFRS 4) 107,907 125,819 88,792 - - - 322,518 309,539
Unallocated surplus of
with-profits funds 13,096 - - - - - 13,096 12,450
-------- ------------- -------- -------- ------- --------- --------- ------- -------
Total policyholder
liabilities and
unallocated surplus of
with-profits funds C4.1(a) 121,003 125,819 88,792 - - - 335,614 321,989
----------------------- -------- ------------- -------- -------- ------- --------- --------- ------- -------
Core structural
borrowings of
shareholder-financed
operations:
Subordinated debt - - - - 4,018 - 4,018 3,320
Other - - 169 275 549 - 993 984
-------- ------------- -------- -------- ------- --------- --------- ------- -------
Total C6.1 - - 169 275 4,567 - 5,011 4,304
----------------------- -------- ------------- -------- -------- ------- --------- --------- ------- -------
Operational borrowings
attributable to
shareholder-financed
operations C6.2(a) - 4 241 10 1,705 - 1,960 2,263
Borrowings attributable
to with-profits
operations C6.2(b) 1,332 - - - - - 1,332 1,093
Deferred tax
liabilities C8.1 1,326 27 2,629 17 11 - 4,010 4,291
Other non-insurance
liabilities 11,159 3,698 12,236 4,797 1,720 (7,508) 26,102 22,682
Liabilities held for
sale D1 - - - - - - - 770
----------------------- -------- ------------- -------- -------- ------- --------- --------- ------- -------
Total liabilities 134,820 129,548 104,067 5,099 8,003 (7,508) 374,029 357,392
----------------------- -------- ------------- -------- -------- ------- --------- --------- ------- -------
Total equity and
liabilities 134,820 129,548 117,318 7,431 5,376 (7,508) 386,985 369,204
----------------------- -------- ------------- -------- -------- ------- --------- --------- ------- -------
C2 Analysis of segment position by business type
To show the statement of financial position by reference to the differing degrees of policyholder and shareholder economic interest of the different types of business, the analysis below is structured to show the assets and liabilities of each segment by business type.
C2.1 Asia insurance operations
31 Dec
31 Dec 2015 GBPm 2014 GBPm
--------------------------------------------- ----------
Unit-linked
With-profits assets and Other
business liabilities business Total Total
Note note
----------------------------------------- -------- ------------ ------------ --------- ------ ----------
Assets
Intangible assets attributable to
shareholders:
Goodwill - - 233 233 233
Deferred acquisition costs and other
intangible assets - - 2,103 2,103 1,911
-------- ------------ ------------ --------- ------ ----------
Total - - 2,336 2,336 2,144
------------------------------------------ -------- ------------ ------------ --------- ------ ----------
Intangible assets attributable to
with-profits funds:
Deferred acquisition costs and other
intangible assets 42 - - 42 54
Deferred tax assets - 1 65 66 84
Other non-investment and non-cash assets 1,981 207 1,433 3,621 3,111
Investments of long-term business and other
operations:
Investment properties - - 5 5 -
Investments in joint ventures and
associates accounted for using the equity
method - - 475 475 374
Financial investments:
Loans C3.4 540 - 544 1,084 1,014
Equity securities and portfolio holdings in unit
trusts 6,861 10,831 840 18,532 19,200
Debt securities C3.3 16,335 2,809 9,148 28,292 23,629
Other investments 28 16 13 57 48
Deposits 188 214 371 773 769
--------------------------------------------------- ------------ ------------ --------- ------ ----------
Total investments 23,952 13,870 11,396 49,218 45,034
------------------------------------------ -------- ------------ ------------ --------- ------ ----------
Assets held for sale - - - - 819
Cash and cash equivalents 863 363 838 2,064 1,684
------------------------------------------- -------- ------------ ------------ --------- ------ ----------
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Total assets 26,838 14,441 16,068 57,347 52,930
------------------------------------------- -------- ------------ ------------ --------- ------ ----------
Equity and liabilities
Equity
Shareholders' equity - - 3,956 3,956 3,548
Non-controlling interests - - 1 1 1
-------- ------------ ------------ --------- ------ ----------
Total equity - - 3,957 3,957 3,549
------------------------------------------- -------- ------------ ------------ --------- ------ ----------
Liabilities
Policyholder liabilities and unallocated
surplus of with-profits funds:
Contract liabilities (including amounts in
respect of contracts classified as
investment contracts
under IFRS 4) 19,642 13,355 9,519 42,516 40,068
Unallocated surplus of with-profits funds 2,553 - - 2,553 2,102
------------------------------------------ -------- ------------ ------------ --------- ------ ----------
Total C4.1(b) 22,195 13,355 9,519 45,069 42,170
------------------------------------------ -------- ------------ ------------ --------- ------ ----------
Deferred tax liabilities 474 27 233 734 719
Other non-insurance liabilities 4,169 1,059 2,359 7,587 5,722
Liabilities held for sale - - - - 770
------------------------------------------- -------- ------------ ------------ --------- ------ ----------
Total liabilities 26,838 14,441 12,111 53,390 49,381
------------------------------------------- -------- ------------ ------------ --------- ------ ----------
Total equity and liabilities 26,838 14,441 16,068 57,347 52,930
------------------------------------------- -------- ------------ ------------ --------- ------ ----------
Note
The statement of financial position for with-profits business comprises the with-profits assets and liabilities of the Hong Kong, Malaysia and Singapore operations. Assets and liabilities of other participating business are included in the column for 'Other business'.
C2.2 US insurance operations
31 Dec
31 Dec 2015 GBPm 2014 GBPm
------------------------------------------ ----------
Variable annuity
separate account Fixed annuity,
assets and GIC and other
liabilities business Total Total
Note note (i) note (i)
------------------------------------------ -------- ----------------- -------------- ------- ----------
Assets
Intangible assets attributable to
shareholders:
Deferred acquisition costs and other
intangibles - 6,168 6,168 5,197
-------- ----------------- -------------- ------- ----------
Total - 6,168 6,168 5,197
------------------------------------------- -------- ----------------- -------------- ------- ----------
Deferred tax assets - 2,448 2,448 2,343
Other non-investment and non-cash assetsnote
(ii) - 7,205 7,205 6,617
Investments of long-term business and other
operations:
Investment properties - 5 5 28
Financial investments:
Loans C3.4 - 7,418 7,418 6,719
Equity securities and portfolio holdings in unit
trustsnote (iii) 91,022 194 91,216 82,081
Debt securities C3.3 - 34,071 34,071 32,980
Other investmentsnote (iv) - 1,715 1,715 1,670
Total investments 91,022 43,403 134,425 123,478
------------------------------------------- -------- ----------------- -------------- ------- ----------
Cash and cash equivalents - 1,405 1,405 904
-------------------------------------------- -------- ----------------- -------------- ------- ----------
Total assets 91,022 60,629 151,651 138,539
-------------------------------------------- -------- ----------------- -------------- ------- ----------
Equity and liabilities
Equity
Shareholders' equitynote (v) - 4,154 4,154 4,067
Total equity - 4,154 4,154 4,067
-------------------------------------------- -------- ----------------- -------------- ------- ----------
Liabilities
Policyholder liabilities:
Contract liabilities (including amounts in
respect of contracts classified as
investment contracts
under IFRS 4) 91,022 47,891 138,913 126,746
------------------------------------------- -------- ----------------- -------------- ------- ----------
Total C4.1(c) 91,022 47,891 138,913 126,746
-------------------------------------------- -------- ----------------- -------------- ------- ----------
Core structural borrowings of
shareholder-financed operations - 169 169 160
Operational borrowings attributable to
shareholder-financed operations - 66 66 179
Deferred tax liabilities - 2,086 2,086 2,308
Other non-insurance liabilities - 6,263 6,263 5,079
-------------------------------------------- -------- ----------------- -------------- ------- ----------
Total liabilities 91,022 56,475 147,497 134,472
-------------------------------------------- -------- ----------------- -------------- ------- ----------
Total equity and liabilities 91,022 60,629 151,651 138,539
-------------------------------------------- -------- ----------------- -------------- ------- ----------
Notes
(i) These amounts are for separate account assets and liabilities for all variable annuity products comprising those with and without guarantees. Assets and liabilities attaching to variable annuity business that are not held in the separate account, eg, in respect of guarantees are shown within other business.
(ii) Included within other non-investment and non-cash assets of GBP7,205 million (2014: GBP6,617 million) were balances of GBP6,211 million (2014: GBP5,979 million) for reinsurers' share of insurance contract liabilities. Of the GBP6,211 million as at 31 December 2015, GBP5,388 million related to the reinsurance ceded by the REALIC business (2014: GBP5,174 million). Jackson holds collateral for certain of these reinsurance arrangements with a corresponding funds withheld liability. As of 31 December 2015, the funds withheld liability of GBP2,347 million (2014: GBP2,201 million) was recorded within other non-insurance liabilities.
(iii) Equity securities and portfolio holdings in unit trusts include investments in mutual funds, the majority of which are equity-based.
(iv) Other investments comprise:
2015 GBPm 2014 GBPm
--------------------------------------------- --------- ---------
Derivative assets* 905 916
Partnerships in investment pools and other** 810 754
--------- ---------
1,715 1,670
--------------------------------------------- --------- ---------
* After taking account of the derivative liabilities of GBP249 million (2014: GBP251 million), which are included in other non-insurance liabilities, the derivative position for US operations is a net asset of GBP656 million (2014: GBP665 million).
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** Partnerships in investment pools and other comprise primarily investments in limited partnerships. These include interests in the PPM America Private Equity Fund and diversified investments in 162 (2014: 164) other partnerships by independent money managers that generally invest in various equities and fixed income loans and securities.
(v) Changes in shareholders' equity:
2015 GBPm 2014 GBPm
--------------------------------------------------------------------------------------- --------- ---------
Operating profit based on longer-term investment returns (B1.1) 1,691 1,431
Short-term fluctuations in investment returns (B1.2) (424) (1,103)
Amortisation of acquisition accounting adjustments arising from the purchase of REALIC (68) (71)
----------------------------------------------------------------------------------------- --------- ---------
Profit before shareholder tax 1,199 257
Tax (B5) (236) (8)
--------- ---------
Profit for the year 963 249
----------------------------------------------------------------------------------------- --------- ---------
2015 GBPm 2014 GBPm
--------------------------------------------------------------------------------------- --------- ---------
Profit for the year (as above) 963 249
Items recognised in other comprehensive income:
Exchange movements 230 235
Unrealised valuation movements on securities classified as available-for sale:
Unrealised holding (losses) gains arising during the year (1,256) 1,039
Less: net gains included in the income statement on disposal and impairment (49) (83)
--------------------------------------------------------------------------------------- --------- ---------
Total unrealised valuation movements (1,305) 956
Related change in amortisation of deferred acquisition costs C5.1(b) 337 (87)
Related tax 339 (304)
--------------------------------------------------------------------------------------- --------- ---------
Total other comprehensive (loss) income (399) 800
----------------------------------------------------------------------------------------- --------- ---------
Total comprehensive income for the year 564 1,049
Dividends, interest payments to central companies and other movements (477) (428)
----------------------------------------------------------------------------------------- --------- ---------
Net increase in equity 87 621
Shareholders' equity at beginning of year 4,067 3,446
--------- ---------
Shareholders' equity at end of year 4,154 4,067
----------------------------------------------------------------------------------------- --------- ---------
C2.3 UK insurance operations
Of the total investments of GBP165 billion in UK insurance operations, GBP104 billion of investments are held by Scottish Amicable Insurance Fund and the PAC with-profits sub-fund. Shareholders are exposed only indirectly to value movements on these assets.
31 Dec 2014
31 Dec 2015 GBPm GBPm
---------------------------------------------------------------- -------------
Other funds and subsidiaries
--------------------------------
Annuity
Scottish PAC and
Amicable with Unit-linked other
Insurance -profits assets and long-term
Fund sub-fund liabilities business Total Total Total
By operating
segment Note note (i) note (ii)
------------------ ----- ---------- --------- ------------ ---------- ------ ------- -------------
Assets
Intangible assets
attributable to
shareholders:
Deferred
acquisition
costs and other
intangible
assets - - - 83 83 83 86
----------------- ----- ---------- --------- ------------ ---------- ------ ------- -------------
Total - - - 83 83 83 86
------------------ ----- ---------- --------- ------------ ---------- ------ ------- -------------
Intangible assets
attributable to
with-profits
funds:
In respect of
acquired
subsidiaries for
venture fund and
other investment
purposes - 185 - - - 185 186
Deferred
acquisition
costs - 8 - - - 8 7
----------------- ----- ---------- --------- ------------ ---------- ------ ------- -------------
Total - 193 - - - 193 193
----------------- ----- ---------- --------- ------------ ---------- ------ ------- -------------
Total - 193 - 83 83 276 279
------------------ ----- ---------- --------- ------------ ---------- ------ ------- -------------
Deferred tax
assets 1 82 - 49 49 132 132
Other
non-investment
and non-cash
assets 171 4,131 371 2,536 2,907 7,209 6,826
Investments of
long-term business
and other
operations:
Investment
properties 358 10,757 705 1,592 2,297 13,412 12,736
Investments in
joint ventures
and associates
accounted for
using the equity
method - 434 - - - 434 536
Financial
investments:
Loans C3.4 61 1,998 - 1,512 1,512 3,571 4,254
Equity securities and
portfolio holdings in
unit trusts 2,530 29,804 15,214 45 15,259 47,593 43,468
Debt securities C3.3 2,331 42,204 6,481 32,085 38,566 83,101 86,349
Other investmentsnote
(iii) 210 4,807 13 456 469 5,486 5,782
Deposits 399 8,383 835 1,609 2,444 11,226 12,253
----------------------- ---------- --------- ------------ ---------- ------ ------- -------------
Total investments 5,889 98,387 23,248 37,299 60,547 164,823 165,378
----------------- ----- ---------- --------- ------------ ---------- ------ ------- -------------
Properties held
for sale - 2 - - - 2 5
Cash and cash
equivalents 169 1,591 466 654 1,120 2,880 2,457
------------------ ----- ---------- --------- ------------ ---------- ------ ------- -------------
Total assets 6,230 104,386 24,085 40,621 64,706 175,322 175,077
------------------ ----- ---------- --------- ------------ ---------- ------ ------- -------------
31 Dec
2014
31 Dec 2015 GBPm GBPm
---------------------------------------------------------------- -------
Other funds and subsidiaries
------------------------------
Scottish Annuity
Amicable PAC Unit-linked and other
Insurance with-profits assets and long-term
Fund sub-fund liabilities business Total Total Total
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note
Note note (i) note (ii) (iv)
------------------------ -------- --------- ------------ ----------- --------- ------ ------- -------
Equity and liabilities
Equity
Shareholders' equity - - - 5,140 5,140 5,140 3,804
Total equity - - - 5,140 5,140 5,140 3,804
------------------------- -------- --------- ------------ ----------- --------- ------ ------- -------
Liabilities
Policyholder liabilities
and unallocated surplus
of with-profits funds:
Contract liabilities (including
amounts in respect of contracts
classified as investment
contracts
under
IFRS 4) 5,919 83,607 21,442 31,382 52,824 142,350 144,088
Unallocated surplus of
with-profits funds (reflecting
application of 'realistic' basis
provisions
for UK regulated with-profits
funds) - 10,543 - - - 10,543 10,348
---------------------------------- --------- ------------ ----------- --------- ------ ------- -------
Total C4.1(d) 5,919 94,150 21,442 31,382 52,824 152,893 154,436
------------------------- -------- --------- ------------ ----------- --------- ------ ------- -------
Operational borrowings
attributable to
shareholder-financed
operations - - 4 175 179 179 74
Borrowings attributable
to with-profits funds 12 1,320 - - - 1,332 1,093
Deferred tax liabilities 31 821 - 310 310 1,162 1,228
Other non-insurance
liabilities 268 8,095 2,639 3,614 6,253 14,616 14,442
------------------------- -------- --------- ------------ ----------- --------- ------ ------- -------
Total liabilities 6,230 104,386 24,085 35,481 59,566 170,182 171,273
------------------------- -------- --------- ------------ ----------- --------- ------ ------- -------
Total equity and
liabilities 6,230 104,386 24,085 40,621 64,706 175,322 175,077
------------------------- -------- --------- ------------ ----------- --------- ------ ------- -------
Notes
(i) The fund is solely for the benefit of policyholders of SAIF. Shareholders have no interest in the profits of this fund although they are entitled to asset management fees on this business. SAIF is a separate sub-fund within the PAC long-term business fund.
(ii) The PAC with-profits sub-fund (WPSF) mainly contains with-profits business but it also contains some non-profit business (unit-linked, term assurances and annuities). Included in the PAC with-profits fund is GBP10.8 billion (2014: GBP11.7 billion) of non-profits annuities liabilities. The WPSF's profits are apportioned 90 per cent to its policyholders and 10 per cent to shareholders as surplus for distribution is determined via the annual actuarial valuation. For the purposes of this table and subsequent explanation, references to the WPSF also include, for convenience, the amounts attaching to the Defined Charges Participating Sub-fund which comprises 4 per cent of the total assets of the WPSF and includes the with-profits annuity business transferred to Prudential from the Equitable Life Assurance Society on 1 December 2007 (with assets of approximately GBP1.7 billion). Profits to shareholders on this with-profits annuity business emerge on a 'charges less expenses' basis and policyholders are entitled to 100 per cent of the investment earnings.
(iii) Other investments comprise:
2015 GBPm 2014 GBPm
--------------------------------------------- --------- ---------
Derivative assets* 1,930 2,344
Partnerships in investment pools and other** 3,556 3,438
--------------------------------------------- --------- ---------
5,486 5,782
--------------------------------------------- --------- ---------
* After taking account of derivative liabilities of GBP2,125 million (2014: GBP1,381 million), which are also included in the statement of financial position, the overall derivative position was a net liability of GBP195 million (2014: net asset of GBP963 million).
** Partnerships in investment pools and other comprise mainly investments held by the PAC with-profits fund. These investments are primarily investments in limited partnerships and additionally, investments in property funds.
(iv) The shareholders' equity at 31 December 2015 includes the effect of a classification change of GBP702 million from Other operations to UK insurance operations in order to align with Solvency II segmental reporting, with no overall effect on the Group's shareholders' equity.
C2.4 Asset management operations
31 Dec 2015 GBPm 31 Dec 2014 GBPm
--------------------------------------------- ----------------
Prudential Eastspring
M&G Capital US Investments Total Total
Note
----------------------------------------- ----- ----- ---------- --- ------------ ------- ----------------
Assets
Intangible assets:
Goodwill 1,153 - 16 61 1,230 1,230
Deferred acquisition costs and other intangible
assets 16 - 3 2 21 21
------------------------------------------------ ----- ---------- --- ------------ ------- ----------------
Total 1,169 - 19 63 1,251 1,251
------------------------------------------ ----- ----- ---------- --- ------------ ------- ----------------
Other non-investment and non-cash assets 715 614 236 79 1,644 1,605
Investments in joint ventures and
associates accounted for using the equity
method 29 - - 96 125 107
Financial investments:
Loans C3.4 - 885 - - 885 854
Equity securities and portfolio holdings in unit
trusts 70 - - 15 85 79
Debt securities C3.3 - 2,204 - - 2,204 2,293
Other investments 15 74 5 - 94 121
Deposits - - 50 39 89 74
------------------------------------------------ ----- ---------- --- ------------ ------- ----------------
Total investments 114 3,163 55 150 3,482 3,528
------------------------------------------ ----- ----- ---------- --- ------------ ------- ----------------
Cash and cash equivalents 430 415 79 130 1,054 1,044
------------------------------------------ ----- ----- ---------- --- ------------ ------- ----------------
Total assets 2,428 4,192 389 422 7,431 7,428
------------------------------------------ ----- ----- ---------- --- ------------ ------- ----------------
Equity and liabilities
Equity
Shareholders' equity 1,774 70 182 306 2,332 2,077
----- ----- ---------- --- ------------ ------- ----------------
Total equity 1,774 70 182 306 2,332 2,077
------------------------------------------ ----- ----- ---------- --- ------------ ------- ----------------
Liabilities
Core structural borrowing of
shareholder-financed operations - 275 - - 275 275
Operational borrowings attributable to
shareholder-financed operations 10 - - - 10 6
Intra-group debt represented by
operational borrowings at Group level
note (i) - 1,705 - - 1,705 2,004
Other non-insurance liabilitiesnote (ii) 644 2,142 207 116 3,109 3,066
----- ----- ---------- --- ------------ ------- ----------------
Total liabilities 654 4,122 207 116 5,099 5,351
------------------------------------------ ----- ----- ---------- --- ------------ ------- ----------------
Total equity and liabilities 2,428 4,192 389 422 7,431 7,428
------------------------------------------ ----- ----- ---------- --- ------------ ------- ----------------
Notes
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(i) Intra-group debt represented by operational borrowings at Group level, which are in respect of Prudential Capital's short-term fixed income security programme and comprise:
2015 GBPm 2014 GBPm
---------------------------------------------------------------------------- --------- ---------
Commercial Paper 1,107 1,704
Medium Term Notes 598 300
---------------------------------------------------------------------------- --------- ---------
Total intra-group debt represented by operational borrowings at Group level 1,705 2,004
---------------------------------------------------------------------------- --------- ---------
(ii) Other non-insurance liabilities consist primarily of intra-group balances, derivative liabilities and other creditors.
C3 Assets and Liabilities - classification and measurement C3.1 Group assets and liabilities - classification
The classification of the Group's assets and liabilities, and its corresponding accounting carrying values reflect the requirements of IFRS. For financial investments, the basis of valuation reflects the Group's application of IAS 39 'Financial Instruments: Recognition and Measurement' as described further below. Where assets and liabilities have been valued at fair value or measured on a different basis but fair value is disclosed, the Group has followed the principles under IFRS 13 'Fair Value Measurement'. The basis applied is summarised below:
31 December 2015 GBPm 31 December 2014 GBPm
------------------------------------------------------------- -------------------------------------------------------------
Cost/ Cost/
amortised amortised
cost/ Fair cost/ Fair
IFRS 4 Total value, IFRS 4 Total value,
basis carrying where basis carrying where
At fair value value value applicable At fair value value value applicable
note (i) note (i)
------- ------------------- --------- -------- ---------- ------- ------------------- --------- -------- ----------
Through Through
profit profit
Assets or loss Available-for-sale or loss Available-for-sale
----------------- ------- ------------------- --------- -------- ---------- ------- ------------------- --------- -------- ----------
Intangible assets
attributable to
shareholders:
Goodwill - - 1,463 1,463 - - 1,463 1,463
Deferred
acquisition
costs and other
intangible
assets - - 8,422 8,422 - - 7,261 7,261
---------------- ------- ------------------- --------- -------- ------- ------------------- --------- --------
Total - - 9,885 9,885 - - 8,724 8,724
---------------- ------- ------------------- --------- -------- ------- ------------------- --------- --------
Intangible assets
attributable to
with-profits
funds:
In respect of
acquired
subsidiaries
for venture
fund and other
investment
purposes - - 185 185 - - 186 186
Deferred
acquisition
costs and other
intangible
assets - - 50 50 - - 61 61
---------------- ------- ------------------- --------- -------- ------- ------------------- --------- --------
Total - - 235 235 - - 247 247
---------------- ------- ------------------- --------- -------- ------- ------------------- --------- --------
Total intangible
assets - - 10,120 10,120 - - 8,971 8,971
----------------- ------- ------------------- --------- -------- ------- ------------------- --------- --------
Other
non-investment
and non-cash
assets:
Property, plant
and equipment - - 1,197 1,197 - - 978 978
Reinsurers'
share of
insurance
contract
liabilities - - 7,903 7,903 - - 7,167 7,167
Deferred tax
assets - - 2,819 2,819 - - 2,765 2,765
Current tax
recoverable - - 477 477 - - 117 117
Accrued
investment
income - - 2,751 2,751 2,751 - - 2,667 2,667 2,667
Other debtors - - 1,955 1,955 1,955 - - 1,852 1,852 1,852
---------------- ------- ------------------- --------- -------- ------- ------------------- --------- --------
Total - - 17,102 17,102 - - 15,546 15,546
---------------- ------- ------------------- --------- -------- ------- ------------------- --------- --------
Investments of
long-term
business and
other
operations:note
(ii)
Investment
properties 13,422 - - 13,422 13,422 12,764 - - 12,764 12,764
Investments
accounted for
using the
equity method - - 1,034 1,034 - - 1,017 1,017
Loans 2,438 - 10,520 12,958 13,482 2,291 - 10,550 12,841 13,548
Equity
securities and
portfolio
holdings in
unit trusts 157,453 - - 157,453 157,453 144,862 - - 144,862 144,862
Debt securities 113,687 33,984 - 147,671 147,671 112,354 32,897 - 145,251 145,251
Other
investments 7,353 - - 7,353 7,353 7,623 - - 7,623 7,623
Deposits - - 12,088 12,088 12,088 - - 13,096 13,096 13,096
---------------- ------- ------------------- --------- -------- ------- ------------------- --------- --------
Total
investments 294,353 33,984 23,642 351,979 279,894 32,897 24,663 337,454
---------------- ------- ------------------- --------- -------- ------- ------------------- --------- --------
Assets held for
sale 2 - - 2 2 824 - - 824 824
Cash and cash
equivalents - - 7,782 7,782 7,782 - - 6,409 6,409 6,409
----------------- ------- ------------------- --------- -------- ------- ------------------- --------- --------
Total assets 294,355 33,984 58,646 386,985 280,718 32,897 55,589 369,204
----------------- ------- ------------------- --------- -------- ------- ------------------- --------- --------
2015 GBPm 2014 GBPm
------------------------------------------------------------- -------------------------------------------------------------
Cost/ Cost/
amortised amortised
cost/ Fair cost/ Fair
IFRS 4 Total value, IFRS 4 Total value,
basis carrying where basis carrying where
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At fair value value value applicable At fair value value value applicable
--------- -------- ---------- --------- -------- ----------
Through Through
profit profit
or loss Available-for-sale or loss Available-for-sale
--------------------- ------- ------------------- --------- -------- ---------- ------- ------------------- --------- -------- ----------
Liabilities
Policyholder
liabilities and
unallocated surplus of
with-profits funds:
Insurance contract
liabilities - - 260,622 260,622 - - 250,038 250,038
Investment contract
liabilities with
discretionary
participation
features note (iii) - - 42,959 42,959 - - 39,277 39,277
Investment contract
liabilities without
discretionary
participation
features 16,022 - 2,784 18,806 18,842 17,554 - 2,670 20,224 20,211
Unallocated surplus
of with-profits
funds - - 13,227 13,227 - - 12,450 12,450
--------------------- ------- ------------------- --------- -------- ------- ------------------- --------- --------
Total 16,022 - 319,592 335,614 17,554 - 304,435 321,989
--------------------- ------- ------------------- --------- -------- ------- ------------------- --------- --------
Core structural
borrowings of
shareholder-financed
operations - - 5,011 5,011 5,419 - - 4,304 4,304 4,925
Other borrowings:
Operational
borrowings
attributable to
shareholder-financed
operations - - 1,960 1,960 1,960 - - 2,263 2,263 2,263
Borrowings
attributable to
with-profits
operations - - 1,332 1,332 1,344 - - 1,093 1,093 1,108
Other non-insurance
liabilities:
Obligations under
funding, securities
lending and sale and
repurchase
agreements - - 3,765 3,765 3,775 - - 2,347 2,347 2,361
Net asset value
attributable to unit
holders of
consolidated unit
trusts and similar
funds 7,873 - - 7,873 7,873 7,357 - - 7,357 7,357
Deferred tax
liabilities - - 4,010 4,010 - - 4,291 4,291
Current tax
liabilities - - 325 325 - - 617 617
Accruals and deferred
income - - 952 952 - - 947 947
Other creditors 322 - 4,554 4,876 4,876 327 - 3,935 4,262 4,262
Provisions - - 604 604 - - 724 724
Derivative
liabilities 3,119 - - 3,119 3,119 2,323 - - 2,323 2,323
Other liabilities 2,347 - 2,241 4,588 4,588 2,201 - 1,904 4,105 4,105
--------------------- ------- ------------------- --------- -------- ------- ------------------- --------- --------
Total 13,661 - 16,451 30,112 12,208 - 14,765 26,973
--------------------- ------- ------------------- --------- -------- ------- ------------------- --------- --------
Liabilities held for
sale - - - - 770 - - 770 770
---------------------- ------- ------------------- --------- -------- ------- ------------------- --------- --------
Total liabilities 29,683 - 344,346 374,029 30,532 - 326,860 357,392
---------------------- ------- ------------------- --------- -------- ------- ------------------- --------- --------
Notes
(i) Assets carried at cost or amortised cost are subject to impairment testing where appropriate under IFRS requirements. This category also includes assets which are valued by reference to specific IFRS standards such as reinsurers' share of insurance contract liabilities, deferred tax assets and investments accounted for under the equity method.
(ii) Realised gains and losses on the Group's investments for 2015 recognised in the income statement amounted to a net gain of GBP3.0 billion (2014: GBP2.9 billion).
(iii) The carrying value of investment contracts with discretionary participation features is on IFRS 4 basis. It is impractical to determine the fair value of these contracts due to the lack of a reliable basis to measure participation features.
C3.2 Group assets and liabilities - measurement (a) Determination of fair value
The fair values of the assets and liabilities of the Group as shown in this note have been determined on the following bases.
The fair values of the financial instruments for which fair valuation is required under IFRS are determined by the use of current market bid prices for exchange-quoted investments or by using quotations from independent third parties such as brokers and pricing services or by using appropriate valuation techniques.
The estimated fair value of derivative financial instruments reflects the estimated amount the Group would receive or pay in an arm's length transaction. This amount is determined using quoted prices if exchange listed, quotations from independent third parties or valued internally using standard market practices.
The loans and receivables have been shown net of provisions for impairment. The fair value of loans have been estimated from discounted cash flows expected to be received. The rate of discount used was the market rate of interest where applicable.
The fair value of investment properties is based on market values as assessed by professionally qualified external valuers or by the Group's qualified surveyors.
The fair value of the subordinated and senior debt issued by the parent company is determined using quoted prices from independent third parties.
The fair value of financial liabilities (other than derivative financial instruments) is determined using discounted cash flows of the amounts expected to be paid.
(b) Fair value measurement hierarchy of Group assets and liabilities
Assets and liabilities carried at fair value on the statement of financial position
The table below shows the assets and liabilities carried at fair value analysed by level of the IFRS 13 'Fair Value Measurement' defined fair value hierarchy. This hierarchy is based on the inputs to the fair value measurement and reflects the lowest level input that is significant to that measurement.
Financial instruments at fair value
31 Dec 2015 GBPm
--------------------------------------------------------------
Level 1 Level 2 Level 3 Total
------------------ --------------- --------------- --------
Valuation based Valuation based
Quoted prices on significant on significant
(unadjusted) observable unobservable
in active markets market inputs market inputs
---------------------------------------------------- ------------------ --------------- --------------- --------
Analysis of financial investments, net of derivative
liabilities by business type
With-profits
Equity securities and portfolio holdings in unit
trusts 35,441 3,200 554 39,195
Debt securities 20,312 40,033 525 60,870
Other investments (including derivative assets) 85 1,589 3,371 5,045
Derivative liabilities (110) (1,526) - (1,636)
---------------------------------------------------- ------------------ --------------- --------------- --------
Total financial investments, net of derivative
liabilities 55,728 43,296 4,450 103,474
Percentage of total 54% 42% 4% 100%
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---------------------------------------------------- ------------------ --------------- --------------- --------
Unit-linked and variable annuity separate account
Equity securities and portfolio holdings in unit
trusts 116,691 354 22 117,067
Debt securities 4,350 4,940 - 9,290
Other investments (including derivative assets) 5 20 4 29
Derivative liabilities (2) (16) - (18)
------------------ --------------- --------------- --------
Total financial investments, net of derivative
liabilities 121,044 5,298 26 126,368
Percentage of total 96% 4% 0% 100%
---------------------------------------------------- ------------------ --------------- --------------- --------
Non-linked shareholder-backed
Loans - 255 2,183 2,438
Equity securities and portfolio holdings in unit
trusts 1,150 10 31 1,191
Debt securities 17,767 59,491 253 77,511
Other investments (including derivative assets) - 1,378 901 2,279
Derivative liabilities - (1,112) (353) (1,465)
---------------------------------------------------- ------------------ --------------- --------------- --------
Total financial investments, net of derivative
liabilities 18,917 60,022 3,015 81,954
Percentage of total 23% 73% 4% 100%
---------------------------------------------------- ------------------ --------------- --------------- --------
Group total analysis, including other financial
liabilities held at fair value
---------------------------------------------------- ------------------ --------------- --------------- --------
Group total
Loans* - 255 2,183 2,438
Equity securities and portfolio holdings in unit
trusts 153,282 3,564 607 157,453
Debt securities 42,429 104,464 778 147,671
Other investments (including derivative assets) 90 2,987 4,276 7,353
Derivative liabilities (112) (2,654) (353) (3,119)
---------------------------------------------------- ------------------ --------------- --------------- --------
Total financial investments, net of derivative
liabilities 195,689 108,616 7,491 311,796
Investment contracts liabilities without
discretionary participation features held at fair
value - (16,022) - (16,022)
Net asset value attributable to unit holders of
consolidated unit trusts and similar funds (5,782) (1,055) (1,036) (7,873)
Other financial liabilities held at fair value - (322) (2,347) (2,669)
---------------------------------------------------- ------------------ --------------- --------------- --------
Total financial instruments at fair value 189,907 91,217 4,108 285,232
Percentage of total 67% 32% 1% 100%
---------------------------------------------------- ------------------ --------------- --------------- --------
*Loans in the above table are those classified as fair value through profit and loss in note C3.1.
31 Dec 2014 GBPm
--------------------------------------------------------------
Level 1 Level 2 Level 3 Total
------------------ --------------- --------------- --------
Valuation based Valuation based
Quoted prices on significant on significant
(unadjusted) observable unobservable
in active markets market inputs market inputs
---------------------------------------------------- ------------------ --------------- --------------- --------
Analysis of financial investments, net of derivative
liabilities by business type
With-profits
Equity securities and portfolio holdings in unit
trusts 31,136 2,832 694 34,662
Debt securities 16,415 42,576 582 59,573
Other investments (including derivative assets) 96 1,997 3,252 5,345
Derivative liabilities (72) (1,024) - (1,096)
---------------------------------------------------- ------------------ --------------- --------------- --------
Total financial investments, net of derivative
liabilities 47,575 46,381 4,528 98,484
Percentage of total 48% 47% 5% 100%
---------------------------------------------------- ------------------ --------------- --------------- --------
Unit-linked and variable annuity separate account
Equity securities and portfolio holdings in unit
trusts 108,392 336 21 108,749
Debt securities 4,509 6,375 11 10,895
Other investments (including derivative assets) 4 29 - 33
Derivative liabilities (10) (12) - (22)
------------------ --------------- --------------- --------
Total financial investments, net of derivative
liabilities 112,895 6,728 32 119,655
Percentage of total 94% 6% 0% 100%
---------------------------------------------------- ------------------ --------------- --------------- --------
Non-linked shareholder-backed
Loans - 266 2,025 2,291
Equity securities and portfolio holdings in unit
trusts 1,303 116 32 1,451
Debt securities 15,806 58,780 197 74,783
Other investments (including derivative assets) - 1,469 776 2,245
Derivative liabilities - (867) (338) (1,205)
---------------------------------------------------- ------------------ --------------- --------------- --------
Total financial investments, net of derivative
liabilities 17,109 59,764 2,692 79,565
Percentage of total 22% 75% 3% 100%
---------------------------------------------------- ------------------ --------------- --------------- --------
Group total analysis, including other financial
liabilities held at fair value
---------------------------------------------------- ------------------ --------------- --------------- --------
Group total
Loans* - 266 2,025 2,291
Equity securities and portfolio holdings in unit
trusts 140,831 3,284 747 144,862
Debt securities 36,730 107,731 790 145,251
Other investments (including derivative assets) 100 3,495 4,028 7,623
Derivative liabilities (82) (1,903) (338) (2,323)
---------------------------------------------------- ------------------ --------------- --------------- --------
Total financial investments, net of derivative
liabilities 177,579 112,873 7,252 297,704
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Investment contracts liabilities without discretionary participation features held at fair value - (17,554) - (17,554) Net asset value attributable to unit holders of consolidated unit trusts and similar funds (5,395) (671) (1,291) (7,357) Other financial liabilities held at fair value - (327) (2,201) (2,528) ---------------------------------------------------- ------------------ --------------- --------------- -------- Total financial instruments at fair value 172,184 94,321 3,760 270,265 Percentage of total 64% 35% 1% 100% ---------------------------------------------------- ------------------ --------------- --------------- --------
*Loans in the above table are those classified as fair value through profit or loss in note C3.1.
In addition to the financial instruments shown above, the assets and liabilities held for sale on the consolidated statement of financial position at 31 December 2014 in respect of Japan life business included a net financial instruments balance of GBP844 million, primarily for equity securities and debt securities. Of this amount, GBP814 million was classified as level 1 and GBP30 million as level 2.
Investment properties at
fair value
GBPm
-----------------------------------------------------------------------------------------
Level 1 Level 2 Level 3 Total
------------------------- ------------------------- -------------------------- -------
Quoted prices Valuation based on Valuation based on
(unadjusted) in active significant observable significant
markets market inputs unobservable market inputs
--------------------------- ------------------------- ------------------------- -------------------------- -------
2015 - - 13,422 13,422
2014 - - 12,764 12,764
--------------------------- ------------------------- ------------------------- -------------------------- -------
(c) Valuation approach for level 2 fair valued assets and liabilities
A significant proportion of the Group's level 2 assets are corporate bonds, structured securities and other non-national government debt securities. These assets, in line with market practice, are generally valued using independent pricing services or third-party broker quotes. These valuations are determined using independent external quotations from multiple sources and are subject to a number of monitoring controls, such as monthly price variances, stale price reviews and variance analysis on prices achieved on subsequent trades.
Pricing services, where available, are used to obtain the third-party broker quotes. Where pricing services providers are used, a single valuation is obtained and applied.
When prices are not available from pricing services, quotes are sourced directly from brokers. Prudential seeks to obtain a number of quotes from different brokers so as to obtain the most comprehensive information available on their executability. Where quotes are sourced directly from brokers, the price used in the valuation is normally selected from one of the quotes based on a number of factors, including the timeliness and regularity of the quotes and the accuracy of the quotes considering the spreads provided. The selected quote is the one which best represents an executable quote for the security at the measurement date.
Generally, no adjustment is made to the prices obtained from independent third parties. Adjustment is made in only limited circumstances, where it is determined that the third-party valuations obtained do not reflect fair value (eg either because the value is stale and/or the values are extremely diverse in range). These are usually securities which are distressed or that could be subject to a debt restructure or where reliable market prices are no longer available due to an inactive market or market dislocation. In these instances, prices are derived using internal valuation techniques including those as described below in this note with the objective of arriving at a fair value measurement which reflects the price at which an orderly transaction would take place between market participants on the measurement date. The techniques used require a number of assumptions relating to variables such as credit risk and interest rates. Examples of such variables include an average credit spread based on the corporate bond universe and the relevant duration of the asset being valued. Prudential determines the input assumptions based on the best available information at the measurement dates. Securities valued in such manner are classified as level 3 where these significant inputs are not based on observable market data.
Of the total level 2 debt securities of GBP104,464 million at 31 December 2015 (2014: GBP107,731 million), GBP10,331 million are valued internally (2014: GBP10,093 million). The majority of such securities are valued using matrix pricing, which is based on assessing the credit quality of the underlying borrower to derive a suitable discount rate relative to government securities of a comparable duration. Under matrix pricing, the debt securities are priced taking the credit spreads on comparable quoted public debt securities and applying these to the equivalent debt instruments factoring in a specified liquidity premium. The majority of the parameters used in this valuation technique are readily observable in the market and, therefore, are not subject to interpretation.
(d) Fair value measurements for level 3 fair valued assets and liabilities
Valuation approach for level 3 fair valued assets and liabilities
Financial instruments at fair value
Investments valued using valuation techniques include financial investments which by their nature do not have an externally quoted price based on regular trades, and financial investments for which markets are no longer active as a result of market conditions eg market illiquidity. The valuation techniques used include comparison to recent arm's length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option adjusted spread models and, if applicable, enterprise valuation. These techniques may include a number of assumptions relating to variables such as credit risk and interest rates. Changes in assumptions relating to these variables could positively or negatively impact the reported fair value of these instruments. When determining the inputs into the valuation techniques used priority is given to publicly available prices from independent sources when available, but overall the source of pricing is chosen with the objective of arriving at a fair value measurement which reflects the price at which an orderly transaction would take place between market participants on the measurement date.
The fair value estimates are made at a specific point in time, based upon available market information and judgements about the financial instruments, including estimates of the timing and amount of expected future cash flows and the credit standing of counterparties. Such estimates do not reflect any premium or discount that could result from offering for sale at one time the Group's entire holdings of a particular financial instrument, nor do they consider the tax impact of the realisation of unrealised gains or losses from selling the financial instrument being fair valued. In some cases the disclosed value cannot be realised in immediate settlement of the financial instrument.
In accordance with the Group's risk management framework, the estimated fair value of derivative financial instruments valued internally using standard market practices are subject to assessment against external counterparties' valuations.
At 31 December 2015, the Group held GBP4,108 million (2014: GBP3,760 million) of net financial instruments at fair value within level 3. This represents 1 per cent (2014: 1 per cent) of the total fair valued financial assets net of fair valued financial liabilities.
Included within these amounts were loans of GBP2,183 million at 31 December 2015 (2014: GBP2,025 million), measured as the loan outstanding balance, attached to REALIC and held to back the liabilities for funds withheld under reinsurance arrangements. The funds withheld liability of GBP2,347 million at 31 December 2015 (2014: GBP2,201 million) was also classified within level 3, accounted for on a fair value basis being equivalent to the carrying value of the underlying assets.
Excluding the loans and funds withheld liability under REALIC's reinsurance arrangements as described above, which amounted to a net liability of GBP(164) million (2014: GBP(176) million), the level 3 fair valued financial assets net of financial liabilities were GBP4,272 million (2014: GBP3,936 million). Of this amount, a net liability of GBP(77) million (2014: net asset of GBP11 million) were internally valued, representing less than 0.1 per cent of the total fair valued financial assets net of financial liabilities (2014: less than 0.1 per cent). Internal valuations are inherently more subjective than external valuations. Included within these internally valued net asset/liability were:
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March 09, 2016 03:15 ET (08:15 GMT)
(a) Debt securities of GBP381 million (2014: GBP298 million), which were either valued on a discounted cash flow method with an internally developed discount rate or on external prices adjusted to reflect the specific known conditions relating to these securities (eg distressed securities or securities which were being restructured).
(b) Private equity and venture investments of GBP852 million (2014: GBP1,002 million) which were valued internally based on management information available for these investments. These investments were principally held by consolidated investment funds which are managed on behalf of third parties.
(c) Liabilities of GBP(1,013) million (2014: GBP(1,269) million) for the net asset value attributable to external unit holders in respect of the consolidated investment funds, which are non-recourse to the Group. These liabilities are valued by reference to the underlying assets.
(d) Derivative liabilities of GBP(353) million (2014: GBP(23) million) which are valued internally using standard market practices but are subject to independent assessment against external counterparties' valuations.
(e) Other sundry individual financial investments of GBP56 million (2014: GBP3 million).
Of the internally valued net liability referred to above of GBP(77) million (2014: net asset of GBP11 million):
(a) A net asset of GBP29 million (2014: net liability of GBP(133) million) was held by the Group's participating funds and therefore shareholders' profit and equity are not impacted by movements in the valuation of these financial instruments.
(b) A net liability of GBP(106) million (2014: net asset of GBP144 million) was held to support non-linked shareholder-backed business. If the value of all the level 3 instruments held to support non-linked shareholder-backed business valued internally was varied downwards by 10 per cent, the change in valuation would be GBP11 million (2014: GBP14 million), which would reduce shareholders' equity by this amount before tax. Of this amount, a decrease of GBP10 million (2014: a decrease of GBP13 million) would pass through the income statement substantially as part of short-term fluctuations in investment returns outside of operating profit and a GBP1 million decrease (2014: a decrease of GBP1 million) would be included as part of other comprehensive income, being unrealised movements on assets classified as available-for-sale.
Other assets at fair value - investment properties
The investment properties of the Group are principally held by the UK insurance operations which are externally valued by professionally qualified external valuers using the Royal Institution of Chartered Surveyors (RICS) valuation standards. An 'income capitalisation' technique is predominantly applied for these properties. This technique calculates the value through the yield and rental value depending on factors such as the lease length, building quality, covenant and location. The variables used are compared to recent transactions with similar features to those of the Group's investment properties. As the comparisons are not with properties which are virtually identical to Group's investment properties, adjustments are made by the valuers where appropriate to the variables used. Changes in assumptions relating to these variables could positively or negatively impact the reported fair value of the properties.
(e) Transfers into and transfers out of levels
The Group's policy is to recognise transfers into and transfers out of levels as of the end of each half year reporting period except for material transfers which are recognised as of the date of the event or change in circumstances that caused the transfer.
During 2015, the transfers between levels within the Group's portfolio were primarily transfers from level 1 to level 2 of GBP648 million and transfers from level 2 to level 1 of GBP283 million. These transfers which relate to equity securities and debt securities arose to reflect the change in the observability of the inputs used in valuing these securities.
In addition, in 2015, the transfers into level 3 were GBP136 million and the transfers out of level 3 were GBP92 million. These transfers were between levels 3 and 2 and primarily for equity securities and debt securities.
(f) Valuation processes applied by the Group
The Group's valuation policies, procedures and analyses for instruments categorised as level 3 are overseen by Business Unit committees as part of the Group's wider financial reporting governance processes. The procedures undertaken include approval of valuation methodologies, verification processes, and resolution of significant or complex valuation issues. In undertaking these activities the Group makes use of the extensive expertise of its asset management functions.
C3.3 Debt securities
This note provides analysis of the Group's debt securities, including asset-backed securities and sovereign debt securities, by segment.
Debt securities are carried at fair value. The amounts included in the statement of financial position are analysed as follows, with further information relating to the credit quality of the Group's debt securities at 31 December 2015 provided in the notes below.
2015 GBPm 2014 GBPm
------------------------- --------- ---------
Insurance operations:
Asia note (a) 28,292 23,629
US note (b) 34,071 32,980
UK note (c) 83,101 86,349
Other operationsnote (d) 2,207 2,293
-------------------------- --------- ---------
Total 147,671 145,251
-------------------------- --------- ---------
In the tables below, with the exception of some mortgage-backed securities, Standard & Poor's (S&P) ratings have been used where available. For securities where S&P ratings are not immediately available, those produced by Moody's and then Fitch have been used as an alternative.
(a) Asia insurance operations
2015 GBPm 2014 GBPm
-------------------------------------------- ---------
With-profits Unit-linked Other
business assets business Total Total
----------------------- ------------ ----------- --------- ------ ---------
S&P - AAA 831 30 178 1,039 962
S&P - AA+ to AA- 5,997 395 1,228 7,620 6,332
S&P - A+ to A- 1,872 341 1,701 3,914 3,922
S&P - BBB+ to BBB- 1,872 734 1,527 4,133 3,545
S&P - Other 1,778 192 1,213 3,183 1,839
----------------------- ------------ ----------- --------- ------ ---------
12,350 1,692 5,847 19,889 16,600
----------------------- ------------ ----------- --------- ------ ---------
Moody's - Aaa 558 184 290 1,032 1,282
Moody's - Aa1 to Aa3 173 9 1,310 1,492 1,141
Moody's - A1 to A3 497 68 178 743 366
Moody's - Baa1 to Baa3 324 285 181 790 585
Moody's - Other 79 10 9 98 68
----------------------- ------------ ----------- --------- ------ ---------
1,631 556 1,968 4,155 3,442
----------------------- ------------ ----------- --------- ------ ---------
Fitch 861 162 389 1,412 1,009
Other 1,493 399 944 2,836 2,578
----------------------- ------------ ----------- --------- ------ ---------
Total debt securities 16,335 2,809 9,148 28,292 23,629
----------------------- ------------ ----------- --------- ------ ---------
In addition to the debt securities shown above, the assets held for sale on the consolidated statement of financial position at 31 December 2014 in respect of Japan life business included a debt securities balance of GBP351 million.
The following table analyses debt securities of 'Other business' which are not externally rated by S&P, Moody's or Fitch.
2015 GBPm 2014 GBPm
----------------- --------- ---------
Government bonds 162 174
Corporate bonds* 481 654
Other 301 134
--------- ---------
944 962
----------------- --------- ---------
* Rated as investment grade by local external ratings agencies.
(b) US insurance operations
(i) Overview
2015 GBPm 2014 GBPm
-------------------------------------------------------- --------- ---------
Corporate and government security and commercial loans:
Government 4,242 3,972
Publicly traded and SEC Rule 144A securities* 21,776 20,745
Non-SEC Rule 144A securities 3,733 3,745
-------------------------------------------------------- --------- ---------
Total 29,751 28,462
Residential mortgage-backed securities (RMBS) 1,284 1,567
Commercial mortgage-backed securities (CMBS) 2,403 2,343
Other debt securities 633 608
--------------------------------------------------------- --------- ---------
Total US debt securities 34,071 32,980
--------------------------------------------------------- --------- ---------
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* A 1990 SEC rule that facilitates the resale of privately placed securities under Rule 144A that are without SEC registration to qualified institutional investors. The rule was designed to develop a more liquid and efficient institutional resale market for unregistered securities.
Debt securities for US operations included in the statement of financial position comprise:
2015 GBPm 2014 GBPm
------------------------------------------------------------------------------------- --------- ---------
Available-for-sale 33,984 32,897
Fair value through profit or loss:
Securities held to back liabilities for funds withheld under reinsurance arrangement 87 83
------------------------------------------------------------------------------------- --------- ---------
34,071 32,980
------------------------------------------------------------------------------------- --------- ---------
(ii) Valuation basis, presentation of gains and losses and securities in an unrealised loss position
Under IAS 39, unless categorised as 'held to maturity' or 'loans and receivables', debt securities are required to be fair valued. Where available, quoted market prices are used. However, where securities do not have an externally quoted price based on regular trades or where markets for the securities are no longer active as a result of market conditions, IAS 39 requires that valuation techniques be applied. IFRS 13 requires classification of the fair values applied by the Group into a three-level hierarchy. At 31 December 2015, 0.1 per cent of Jackson's debt securities were classified as level 3 (31 December 2014: 0.1 per cent) comprising of fair values where there are significant inputs which are not based on observable market data.
Except for certain assets covering liabilities that are measured at fair value, the debt securities of the US insurance operations are classified as available-for-sale. Unless impaired, fair value movements are recognised in other comprehensive income. Realised gains and losses, including impairments, recorded in the income statement are as shown in note B1.2 of this report.
Movements in unrealised gains and losses on available-for-sale securities
There was a movement in the statement of financial position value for debt securities classified as available-for-sale from a net unrealised gain of GBP1,840 million to a net unrealised gain of GBP592 million as analysed in the table below. This decrease reflects the effects of increasing long-term interest rates and credit spreads.
Changes in Foreign
unrealised exchange
2015 appreciation** translation 2014
--------------------------------- --------------------------
Reflected as part of movement in other comprehensive income
GBPm GBPm GBPm GBPm
------------------------------------ ------ --------------------------------- -------------------------- ------
Assets fair valued at below book
value
Book value* 13,163 5,899
Unrealised loss (673) (464) (29) (180)
------------------------------------ ------ ------
Fair value (as included in statement
of financial position) 12,490 5,719
------------------------------------ ------ ------
Assets fair valued at or above book
value
Book value* 20,229 25,158
Unrealised gain 1,265 (841) 86 2,020
------------------------------------ ------ ------
Fair value (as included in statement
of financial position) 21,494 27,178
------------------------------------ ------ ------
Total
Book value* 33,392 31,057
Net unrealised gain 592 (1,305) 57 1,840
------------------------------------ ------ ------
Fair value (as included in the
footnote above in the overview
table and the statement of
financial
position) 33,984 32,897
------------------------------------ ------ ------
* Book value represents cost/amortised cost of the debt securities.
** Translated at the average rate of US$1.4739: GBP1.00.
Debt securities classified as available-for-sale in an unrealised loss position
(a) Fair value of securities as a percentage of book value
The following table shows the fair value of the debt securities in a gross unrealised loss position for various percentages of book value:
2015 GBPm 2014 GBPm
------------------ ------------------
Fair Unrealised Fair Unrealised
value loss value loss
--------------------------------------------------- ------ ---------- ------ ----------
Between 90% and 100% 11,058 (320) 5,429 (124)
Between 80% and 90% 902 (144) 245 (37)
Below 80%:
------ ---------- ------ ----------
Residential mortgage-backed securities - sub-prime 4 (1) 4 (1)
Commercial mortgage-backed securities - - 10 (3)
Other asset-backed securities 9 (7) 9 (6)
Corporates 517 (201) 22 (9)
------ ---------- ------ ----------
530 (209) 45 (19)
--------------------------------------------------- ------ ---------- ------ ----------
Total 12,490 (673) 5,719 (180)
---------------------------------------------------- ------ ---------- ------ ----------
(b) Unrealised losses by maturity of security
2015 GBPm 2014 GBPm
------------------------------------------ --------- ---------
1 year to 5 years (51) (5)
5 years to 10 years (334) (90)
More than 10 years (247) (54)
Mortgage-backed and other debt securities (41) (31)
------------------------------------------ --------- ---------
Total (673) (180)
------------------------------------------ --------- ---------
(c) Age analysis of unrealised losses for the periods indicated
The following table shows the age analysis of all the unrealised losses in the portfolio by reference to the length of time the securities have been in an unrealised loss position:
2015 GBPm 2014 GBPm
------------------------------ ------------------------------
Non- Non-
investment Investment investment Investment
grade grade Total grade grade Total
------------------- ----------- ---------- ----- ----------- ---------- -----
Less than 6 months (13) (148) (161) (18) (46) (64)
6 months to 1 year (17) (332) (349) (1) (1) (2)
1 year to 2 years (16) (63) (79) (6) (51) (57)
2 years to 3 years (3) (38) (41) (1) (36) (37)
More than 3 years (3) (40) (43) (7) (13) (20)
------------------- ----------- ---------- ----- ----------- ---------- -----
Total (52) (621) (673) (33) (147) (180)
------------------- ----------- ---------- ----- ----------- ---------- -----
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Further, the following table shows the age analysis as at 31 December 2015, of the securities whose fair values were below 80 per cent of the book value:
2015 GBPm 2014 GBPm
------------------ ------------------
Fair Unrealised Fair Unrealised
Age analysis value loss value loss
--------------------- ------ ---------- ------ ----------
Less than 3 months 450 (165) 17 (7)
3 months to 6 months 64 (34) 3 (1)
More than 6 months 16 (10) 25 (11)
--------------------- ------ ---------- ------ ----------
530 (209) 45 (19)
--------------------- ------ ---------- ------ ----------
(iii) Ratings
The following table summarises the securities detailed above by rating using S&P, Moody's, Fitch and implicit ratings of mortgage-backed securities based on National Association of Insurance Commissioners (NAIC) valuations.
2015 GBPm 2014 GBPm
-------------------------------------------------------------- --------- ---------
S&P - AAA 196 164
S&P - AA+ to AA- 5,512 6,067
S&P - A+ to A- 8,592 8,640
S&P - BBB+ to BBB- 11,378 10,308
S&P - Other 817 1,016
--------------------------------------------------------------- --------- ---------
26,495 26,195
-------------------------------------------------------------- --------- ---------
Moody's - Aaa 963 84
Moody's - Aa1 to Aa3 41 29
Moody's - A1 to A3 49 27
Moody's - Baa1 to Baa3 88 72
Moody's - Other 13 8
--------------------------------------------------------------- --------- ---------
1,154 220
-------------------------------------------------------------- --------- ---------
Implicit ratings of MBS based on NAIC* valuations (see below)
NAIC 1 2,746 2,786
NAIC 2 45 85
NAIC 3-6 17 58
-------------------------------------------------------------- --------- ---------
2,808 2,929
-------------------------------------------------------------- --------- ---------
Fitch 345 300
Other ** 3,269 3,336
--------------------------------------------------------------- --------- ---------
Total debt securities (see overview table in note (i) above) 34,071 32,980
--------------------------------------------------------------- --------- ---------
* The Securities Valuation Office of the NAIC classifies debt securities into six quality categories ranging from Class 1 (the highest) to Class 6 (the lowest). Performing securities are designated as Classes 1 to 5 and securities in or near default are designated Class 6.
** The amounts within 'Other' which are not rated by S&P, Moody's nor Fitch, nor are MBS securities using the revised regulatory ratings, have the following NAIC classifications:
2015 GBPm 2014 GBPm
--------- --------- ---------
NAIC 1 1,588 1,322
NAIC 2 1,549 1,890
NAIC 3-6 132 124
--------- --------- ---------
3,269 3,336
--------- --------- ---------
For some mortgage-backed securities within Jackson, the table above includes these securities using the regulatory ratings detail issued by the NAIC. These regulatory ratings levels were established by an external third party, BlackRock Solutions.
(c) UK insurance operations
2015 GBPm
------------------------------------------------------------------
Other funds and subsidiaries UK insurance operations
--------------------------------- -------------------------
Scottish Other
Amicable annuity and
Insurance PAC with-profits Unit-linked long-term 2015 2014
Fund fund assets PRIL business Total Total
GBPm GBPm
------------------- ---------- ------------------- ----------- ------ ------------ ------------ -----------
S&P - AAA 216 4,067 984 3,779 531 9,577 9,376
S&P - AA+ to AA- 454 5,627 853 3,990 518 11,442 11,249
S&P - A+ to A- 514 7,937 1,049 6,239 700 16,439 21,491
S&P - BBB+ to BBB- 618 10,953 1,888 3,912 717 18,088 16,741
S&P - Other 140 2,277 244 269 60 2,990 2,867
------------------- ---------- ------------------- ----------- ------ ------------ ------------ -----------
1,942 30,861 5,018 18,189 2,526 58,536 61,724
------------------- ---------- ------------------- ----------- ------ ------------ ------------ -----------
Moody's - Aaa 31 1,230 106 399 51 1,817 2,063
Moody's - Aa1 to
Aa3 67 2,159 989 3,611 901 7,727 7,129
Moody's - A1 to A3 51 921 112 1,466 188 2,738 2,686
Moody's - Baa1 to
Baa3 29 569 100 304 29 1,031 1,376
Moody's - Other 7 244 10 57 - 318 436
------------------- ---------- ------------------- ----------- ------ ------------ ------------ -----------
185 5,123 1,317 5,837 1,169 13,631 13,690
------------------- ---------- ------------------- ----------- ------ ------------ ------------ -----------
Fitch 12 323 43 160 14 552 848
Other 192 5,897 103 3,839 351 10,382 10,087
------------------- ---------- ------------------- ----------- ------ ------------ ------------ -----------
Total debt
securities 2,331 42,204 6,481 28,025 4,060 83,101 86,349
------------------- ---------- ------------------- ----------- ------ ------------ ------------ -----------
Where no external ratings are available, internal ratings produced by the Group's asset management operation, which are prepared on the Company's assessment of a comparable basis to external ratings, are used where possible. The GBP10,382 million total debt securities held at 31 December 2015 (2014: GBP10,087 million) which are not externally rated are either internally rated or unrated. These are analysed as follows:
2015 GBPm 2014 GBPm
----------------------------- --------- ---------
Internal ratings or unrated:
AAA to A- 5,570 4,917
BBB to B- 3,234 3,755
Below B- or unrated 1,578 1,415
----------------------------- --------- ---------
Total 10,382 10,087
----------------------------- --------- ---------
The majority of unrated debt security investments were held in SAIF and the PAC with-profits fund and relate to convertible debt and other investments which are not covered by ratings analysts nor have an internal rating attributed to them. Of the GBP4,190 million for PRIL and other annuity and long-term business investments for non-linked shareholder-backed business which are not externally rated, GBP1,256 million were internally rated AA+ to AA-, GBP1,808 million A+ to A-, GBP988 million BBB+ to BBB-, GBP60 million BB+ to BB- and GBP78 million that were internally rated B+ and below or unrated.
(d) Other operations
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The debt securities are principally held by Prudential Capital.
2015 GBPm 2014 GBPm
--------- ---------
AAA to A- by S&P or equivalent ratings 2,090 2,056
Other 117 237
----------------------------------------- --------- ---------
Total 2,207 2,293
----------------------------------------- --------- ---------
(e) Asset-backed securities
The Group's holdings in Asset-Backed Securities (ABS), which comprise Residential Mortgage-Backed Securities (RMBS), Commercial Mortgage-Backed Securities (CMBS), Collateralised Debt Obligations (CDO) funds and other asset-backed securities, at 31 December 2015 is as follows:
2015 GBPm 2014 GBPm
---------------------------------------------------------- --------- ---------
Shareholder-backed operations:
Asia insurance operations note (i) 111 104
US insurance operations note (ii) 4,320 4,518
UK insurance operations (2015: 21% AAA, 40% AA)note (iii) 1,531 1,864
Asset management operationsnote (iv) 911 875
---------------------------------------------------------- --------- ---------
6,873 7,361
---------------------------------------------------------- --------- ---------
With-profits operations:
Asia insurance operations note (i) 262 228
UK insurance operations (2015: 52% AAA, 20% AA)note (iii) 4,600 5,126
---------------------------------------------------------- --------- ---------
4,862 5,354
---------------------------------------------------------- --------- ---------
Total 11,735 12,715
---------------------------------------------------------- --------- ---------
Notes
(i) Asia insurance operations
The Asia insurance operations' exposure to asset-backed securities is primarily held by the with-profits operations. Of the GBP262 million, 84 per cent (31 December 2014: 99 per cent) are investment grade.
(ii) US insurance operations
US insurance operations' exposure to asset-backed securities at 31 December 2015 comprises:
2015 GBPm 2014 GBPm
---------------------------------------------------------------------------------------- --------- ---------
RMBS
RMBS Sub-prime (2015: 4% AAA, 13% AA, 7% A) 191 235
Alt-A (2015: 1% AA, 3% A) 191 244
Prime including agency (2015: 77% AA, 2% A) 902 1,088
CMBS (2015: 57% AAA, 24% AA, 16% A) 2,403 2,343
CDO funds (2015: 44% AAA, 2% AA, 23% A), including GBPnil exposure to sub-prime 52 53
Other ABS (2015: 24% AAA, 12% AA, 54% A), including GBP69 million exposure to sub-prime 581 555
--------- ---------
Total 4,320 4,518
----------------------------------------------------------------------------------------- --------- ---------
(iii) UK insurance operations
The majority of holdings of the shareholder-backed business relates to the UK market and primarily relates to investments held by PRIL. Of the holdings of the with-profits operations, GBP1,140 million (2014: GBP1,333 million) relates to exposure to the US markets with the remaining exposure being primarily to the UK market.
(iv) Asset management operations
Asset management operations' exposure to asset-backed securities is held by Prudential Capital with no sub-prime exposure. Of the GBP911 million, 95 per cent (2014: 89 per cent) are graded AAA.
(f) Group sovereign debt and bank debt exposure
The Group exposures held by the shareholder-backed business and with-profits funds in sovereign debts and bank debt securities at 31 December 2015 are analysed as follows:
Exposure to sovereign debts
2015 GBPm 2014 GBPm
-------------------------------- --------------------------------
Shareholder-backed With-profits Shareholder-backed With-profits
business funds business funds
------------------------------------- ------------------ ------------ ------------------ ------------
Italy 55 60 62 61
Spain 1 17 1 18
France 19 - 20 -
Germany* 409 358 388 336
Other Eurozone (principally Belgium) 62 44 5 29
------------------------------------- ------------------ ------------ ------------------ ------------
Total Eurozone 546 479 476 444
United Kingdom 4,997 1,802 4,104 2,065
United States** 3,911 6,893 3,607 5,771
Other, predominantly Asia 3,368 1,737 2,787 1,714
------------------------------------- ------------------ ------------ ------------------ ------------
Total 12,822 10,911 10,974 9,994
------------------------------------- ------------------ ------------ ------------------ ------------
* Including bonds guaranteed by the federal government.
** The exposure to the United States sovereign debt comprises holdings of Jackson, the UK and Asia insurance operations.
Exposure to bank debt securities
2015 GBPm
-------------------------------------------------------
Senior debt Subordinated debt
------------------------ -----------------------------
Total Total 2015 2014
senior subordinated Total Total
Shareholder-backed business Covered Senior debt Tier 1 Tier 2 debt GBPm GBPm
---------------------------- ------- ------ ------- ------ ------ ------------- ------ ------
Italy - 30 30 - - - 30 31
Spain 143 11 154 - - - 154 133
France 26 126 152 8 66 74 226 249
Germany 66 4 70 - 60 60 130 111
Netherlands - 31 31 - - - 31 124
Other Eurozone - 20 20 - 11 11 31 53
---------------------------- ------- ------ ------- ------ ------ ------------- ------ ------
Total Eurozone 235 222 457 8 137 145 602 701
United Kingdom 423 157 580 6 371 377 957 1,296
United States - 2,227 2,227 4 226 230 2,457 2,484
Other, predominantly Asia 19 333 352 53 313 366 718 735
---------------------------- ------- ------ ------- ------ ------ ------------- ------ ------
Total 677 2,939 3,616 71 1,047 1,118 4,734 5,216
---------------------------- ------- ------ ------- ------ ------ ------------- ------ ------
With-profits funds
Italy - 57 57 - - - 57 67
Spain 156 26 182 - - - 182 186
France 9 179 188 - 62 62 250 206
Germany 94 17 111 - - - 111 128
Netherlands - 200 200 5 - 5 205 195
Other Eurozone - 35 35 - - - 35 24
---------------------------- ------- ------ ------- ------ ------ ------------- ------ ------
Total Eurozone 259 514 773 5 62 67 840 806
United Kingdom 545 289 834 27 490 517 1,351 1,561
United States - 1,414 1,414 141 241 382 1,796 2,064
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Other, predominantly Asia 257 888 1,145 189 322 511 1,656 1,396 ---------------------------- ------- ------ ------- ------ ------ ------------- ------ ------ Total 1,061 3,105 4,166 362 1,115 1,477 5,643 5,827 ---------------------------- ------- ------ ------- ------ ------ ------------- ------ ------
The tables above exclude assets held to cover linked liabilities and those of the consolidated unit trusts and similar funds. In addition, the tables above exclude the proportionate share of sovereign debt holdings of the Group's joint venture operations.
C3.4 Loans portfolio
Loans are accounted for at amortised cost net of impairment except for:
- Certain mortgage loans which have been designated at fair value through profit or loss of the UK insurance operations as this loan portfolio is managed and evaluated on a fair value basis; and
- Certain policy loans of the US insurance operations which are held to back liabilities for funds withheld under reinsurance arrangement and are also accounted on a fair value basis. See note (b).
The amounts included in the statement of financial position are analysed as follows:
2015 GBPm 2014 GBPm
------------------------------------ --------- ---------
Insurance operations:
Asianote (a) 1,084 1,014
USnote (b) 7,418 6,719
UKnote (c) 3,571 4,254
Asset management operationsnote (d) 885 854
--------- ---------
Total 12,958 12,841
------------------------------------- --------- ---------
(a) Asia insurance operations
The loans of the Group's Asia insurance operations comprise:
2015 GBPm 2014 GBPm
-------------------------------------- --------- ---------
Mortgage loans(++) 130 88
Policy loans(++) 721 672
Other loans(++++) 233 254
-------------------------------------- --------- ---------
Total Asia insurance operations loans 1,084 1,014
-------------------------------------- --------- ---------
(++) The mortgage and policy loans are secured by properties and life insurance policies respectively.
(++++) The majority of the other loans are commercial loans held by the Malaysia operation and which are all investment graded by two local rating agencies.
(b) US insurance operations
The loans of the Group's US insurance operations comprise:
2015 GBPm 2014 GBPm
------------------------------------------- --------------------------------------------
Loans backing Loans backing
liabilities for funds liabilities for funds
withheld Other loans Total withheld Other loans Total
------------------------- ----------------------- ----------- ----- ------------------------ ----------- -----
Mortgage loans - 4,367 4,367 - 3,847 3,847
Policy loans 2,183 868 3,051 2,025 847 2,872
Total US insurance
operations loans 2,183 5,235 7,418 2,025 4,694 6,719
------------------------- ----------------------- ----------- ----- ------------------------ ----------- -----
All of the mortgage loans are commercial mortgage loans which are collateralised by properties. The property types are industrial, multi-family residential, suburban office, retail and hotel.
The policy loans are fully secured by individual life insurance policies or annuity policies. Policy loans backing liabilities for funds withheld under reinsurance arrangements are accounted for at fair value through profit or loss. All other policy loans are accounted for at amortised cost, less any impairment.
The US insurance operations' commercial mortgage loan portfolio does not include any single-family residential mortgage loans and is therefore not exposed to the risk of defaults associated with residential sub-prime mortgage loans. The average loan size is GBP8.6 million (2014: GBP7.2 million). The portfolio has a current estimated average loan to value of 45 per cent (2014: 59 per cent).
At 31 December 2015, Jackson had mortgage loans with a carrying value of GBPnil (2014: GBP13 million) where the contractual terms of the agreements had been restructured.
(c) UK insurance operations
The loans of the Group's UK insurance operations comprise:
2015 GBPm 2014 GBPm
--------------------------------------------- --------- ---------
SAIF and PAC WPSF
Mortgage loans 727 1,145
Policy loans 8 10
Other loans(++) 1,324 1,510
--------------------------------------------- --------- ---------
Total SAIF and PAC WPSF loans 2,059 2,665
--------------------------------------------- --------- ---------
Shareholder-backed operations
Mortgage loans 1,508 1,585
Other loans 4 4
--------------------------------------------- --------- ---------
Total loans of shareholder-backed operations 1,512 1,589
--------------------------------------------- --------- ---------
Total UK insurance operations loans 3,571 4,254
---------------------------------------------- --------- ---------
The mortgage loans are collateralised by properties. By carrying value, 78 per cent of the GBP1,508 million held for shareholder-backed business relates to lifetime (equity release) mortgage business which has an average loan to property value of 30 per cent.
(++) Other loans held by the PAC with-profits fund are all commercial loans and comprise mainly syndicated loans.
(d) Asset management operations
These relate to loans and receivables managed by Prudential Capital. These assets are generally secured but most have no external credit ratings. Internal ratings prepared by the Group's asset management operations, as part of the risk management process, are:
2015 GBPm 2014 GBPm
---------------------------------------- --------- ---------
Loans and receivables internal ratings:
AAA - 101
A+ to A- 157 161
BBB+ to BBB- 607 244
BB+ to BB- 119 49
B and other 2 299
---------------------------------------- --------- ---------
Total 885 854
----------------------------------------- --------- ---------
C4 Policyholder liabilities and unallocated surplus
The note provides information of policyholder liabilities and unallocated surplus of with-profits funds held on the Group's statement of financial position:
C4.1 Movement and duration of liabilities C4.1(a) Group overview
(i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds
Insurance operations GBPm
--------------------------------------------------
Asia US UK Total
note C4.1(b) note C4.1(c) note C4.1(d)
--------------------------------------------------------------- ------------ ------------ ------------ --------
At 1 January 2014 35,146 107,411 146,616 289,173
---------------------------------------------------------------- ------------ ------------ ------------ --------
Comprising:
------------ ------------ ------------ --------
- Policyholder liabilities on the consolidated statement of
financial position 31,910 107,411 134,632 273,953
- Unallocated surplus of with-profits funds on the consolidated
statement of financial position 77 - 11,984 12,061
- Group's share of policyholder liabilities of joint
ventures(--) 3,159 - - 3,159
--------------------------------------------------------------- ------------ ------------ ------------ --------
Reallocation of unallocated surplus for the domestication of the
Hong Kong branch(*) 1,690 - (1,690) -
Net flows:
Premiums 7,058 15,492 7,902 30,452
Surrenders (2,425) (5,922) (5,656) (14,003)
Maturities/Deaths (1,259) (1,307) (6,756) (9,322)
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--------------------------------------------------------------- ------------ ------------ ------------ --------
Net flows 3,374 8,263 (4,510) 7,127
Shareholders' transfers post tax (40) - (200) (240)
Investment-related items and other movements 3,480 3,712 14,310 21,502
Foreign exchange translation differences 1,372 7,360 (90) 8,642
------------ ------------ ------------ --------
As at 31 December 2014 / 1 January 2015 45,022 126,746 154,436 326,204
---------------------------------------------------------------- ------------ ------------ ------------ --------
Comprising:
------------ ------------ ------------ --------
- Policyholder liabilities on the consolidated statement of
financial position 38,705 126,746 144,088 309,539
- Unallocated surplus of with-profits funds on the consolidated
statement of financial position 2,102 - 10,348 12,450
- Group's share of policyholder liabilities of joint
ventures(--) 4,215 - - 4,215
--------------------------------------------------------------- ------------ ------------ ------------ --------
Net flows:
Premiums 7,784 16,699 9,692 34,175
Surrenders (2,550) (6,759) (6,363) (15,672)
Maturities/Deaths (1,265) (1,464) (6,991) (9,720)
--------------------------------------------------------------- ------------ ------------ ------------ --------
Net flows 3,969 8,476 (3,662) 8,783
Shareholders' transfers post tax (43) - (214) (257)
Investment-related items and other movements (364) (3,824) 2,319 (1,869)
Foreign exchange translation differences 194 7,515 14 7,723
---------------------------------------------------------------- ------------ ------------ ------------ --------
At 31 December 2015 48,778 138,913 152,893 340,584
Comprising:
------------ ------------ ------------ --------
- Policyholder liabilities on the consolidated statement of
financial position 41,255 138,913 142,350 322,518
- Unallocated surplus of with-profits funds on the consolidated
statement of financial position 2,553 - 10,543 13,096
- Group's share of policyholder liabilities of joint
ventures(--) 4,970 - - 4,970
--------------------------------------------------------------- ------------ ------------ ------------ --------
Average policyholder liability balances
2015 44,573 132,830 143,219 320,622
2014 38,993 117,079 139,362 295,434
--------------------------------------------------------------- ------------ ------------ ------------ --------
* On 1 January 2014, following consultation with the policyholders of PAC and regulators and court approval, the Hong Kong branch of PAC was transferred to separate subsidiaries established in Hong Kong. From this date, the unallocated surplus of the Hong Kong with-profits business is reported within the Asia insurance operations segment.
Averages have been based on opening and closing balances and adjusted for acquisitions, disposals and corporate transactions in the year and exclude unallocated surplus of with-profits funds.
(--) The Group's investment in joint ventures are accounted for on an equity method basis in the Group's balance sheet. The Group's share of the policyholder liabilities as shown above relate to the joint venture life businesses in China, India and of the Takaful business in Malaysia.
The policyholder liabilities of the Asia insurance operations of GBP41,255 million (2014: GBP38,705 million), shown in the table above, is after deducting the intra-group reinsurance liabilities ceded by the UK insurance operations of GBP1,261 million (2014: GBP1,363 million) to the Hong Kong with-profits business. Including this amount total Asia policyholder liabilities are GBP42,516 million (2014: GBP40,068 million).
The items above represent the amount attributable to changes in policyholder liabilities and unallocated surplus of with-profits funds as a result of each of the components listed. The policyholder liabilities shown include investment contracts without discretionary participation features (as defined in IFRS 4) and their full movement in the year. The items above are shown gross of external reinsurance.
The analysis includes the impact of premiums, claims and investment movements on policyholders' liabilities. The impact does not represent premiums, claims and investment movements as reported in the income statement. For example, the premiums shown above will exclude any deductions for fees/charges and claims represent the policyholder liabilities provision released rather than the claim amount paid to the policyholder.
(ii) Analysis of movements in policyholder liabilities for shareholder-backed business
Shareholder-backed business GBPm
--------------------------------------
Asia US UK Total
---------------------------------------------------------------------------- -------- --------- ------- --------
At 1 January 2014 21,931 107,411 50,779 180,121
Net flows:
Premiums 4,799 15,492 4,951 25,242
Surrenders (2,218) (5,922) (3,149) (11,289)
Maturities/Deaths (644) (1,307) (2,412) (4,363)
--------------------------------------------------------------------------- -------- --------- ------- --------
Net flowsnote (a) 1,937 8,263 (610) 9,590
Investment-related items and other movements 1,859 3,712 4,840 10,411
Foreign exchange translation differences 683 7,360 - 8,043
---------------------------------------------------------------------------- -------- --------- ------- --------
At 31 December 2014 / 1 January 2015 26,410 126,746 55,009 208,165
---------------------------------------------------------------------------- -------- --------- ------- --------
Comprising:
---------------------------------------------------------------------------- -------- --------- ------- --------
- Policyholder liabilities on the consolidated statement of financial
position 22,195 126,746 55,009 203,950
- Group's share of policyholder liabilities relating to joint ventures 4,215 - - 4,215
--------------------------------------------------------------------------- -------- --------- ------- --------
At 1 January 2015 26,410 126,746 55,009 208,165
Net flows:
Premiums 4,793 16,699 3,146 24,638
Surrenders (2,308) (6,759) (3,227) (12,294)
Maturities/Deaths (618) (1,464) (2,613) (4,695)
--------------------------------------------------------------------------- -------- --------- ------- --------
Net flowsnote (a) 1,867 8,476 (2,694) 7,649
Investment-related items and other movements (121) (3,824) 509 (3,436)
Foreign exchange translation differences (312) 7,515 - 7,203
---------------------------------------------------------------------------- -------- --------- ------- --------
At 31 December 2015note (b) 27,844 138,913 52,824 219,581
---------------------------------------------------------------------------- -------- --------- ------- --------
Comprising:
---------------------------------------------------------------------------- -------- --------- ------- --------
- Policyholder liabilities on the consolidated statement of financial
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position 22,874 138,913 52,824 214,611 - Group's share of policyholder liabilities relating to joint ventures 4,970 - - 4,970 --------------------------------------------------------------------------- -------- --------- ------- --------
Notes
(a) Including net flows of the Group's insurance joint ventures.
(b) Policyholder liabilities relating to shareholder-backed business grew by GBP11.4 billion from GBP208.2 billion at 31 December 2014 to GBP219.6 billion at 31 December 2015. The increase reflects positive net flows (premiums net of upfront charges less surrenders, withdrawals, maturities and deaths) of GBP7.6 billion in 2015 (2014: GBP9.6 billion), driven by strong inflows of GBP8.5 billion in the US and GBP1.9 billion in Asia, together with a positive GBP7.2 billion increase from foreign exchange effects following a strengthening of the US dollar.
C4.1(b) Asia insurance operations
(i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds
A reconciliation of the total policyholder liabilities and unallocated surplus of with-profits funds of Asia insurance operations from the beginning of the year to the end of the year is as follows:
With-profits Unit-linked Other
business liabilities business Total
GBPm GBPm GBPm GBPm
------------------------------------------------------------------- ------------ ------------ --------- -------
At 1 January 2014 13,215 13,765 8,166 35,146
Comprising:
------------ ------------ --------- -------
- Policyholder liabilities on the consolidated statement of
financial position 13,138 11,918 6,854 31,910
- Unallocated surplus of with-profits funds on the consolidated
statement of financial position 77 - - 77
- Group's share of policyholder liabilities relating to joint
ventures(++) - 1,847 1,312 3,159
------------------------------------------------------------------- ------------ ------------ --------- -------
Reallocation of unallocated surplus for the domestication of the
Hong Kong branchnote (b) 1,690 - - 1,690
Premiums
New business 425 1,337 997 2,759
In-force 1,834 1,375 1,090 4,299
------------------------------------------------------------------- ------------ ------------ --------- -------
2,259 2,712 2,087 7,058
Surrenders note (d) (207) (1,939) (279) (2,425)
Maturities/Deaths (615) (40) (604) (1,259)
-------------------------------------------------------------------- ------------ ------------ --------- -------
Net flows note (c) 1,437 733 1,204 3,374
Shareholders' transfers post tax (40) - - (40)
Investment-related items and other movements note (e) 1,621 1,336 523 3,480
Foreign exchange translation differences note (a) 689 375 308 1,372
------------ ------------ --------- -------
At 31 December 2014 / 1 January 2015 18,612 16,209 10,201 45,022
-------------------------------------------------------------------- ------------ ------------ --------- -------
Comprising:
------------ ------------ --------- -------
- Policyholder liabilities on the consolidated statement of
financial position 16,510 13,874 8,321 38,705
- Unallocated surplus of with-profits funds on the consolidated
statement of financial position 2,102 - - 2,102
- Group's share of policyholder liabilities relating to joint
ventures(++) - 2,335 1,880 4,215
------------------------------------------------------------------- ------------ ------------ --------- -------
Premiums
New business 812 1,322 781 2,915
In-force 2,179 1,496 1,194 4,869
------------------------------------------------------------------- ------------ ------------ --------- -------
2,991 2,818 1,975 7,784
Surrenders note (d) (242) (2,043) (265) (2,550)
Maturities/Deaths (647) (88) (530) (1,265)
-------------------------------------------------------------------- ------------ ------------ --------- -------
Net flows note (c) 2,102 687 1,180 3,969
Shareholders' transfers post tax (43) - - (43)
Investment-related items and other movements note (e) (243) (536) 415 (364)
Foreign exchange translation differencesnote (a) 506 (394) 82 194
------------ ------------ --------- -------
At 31 December 2015note (c) 20,934 15,966 11,878 48,778
-------------------------------------------------------------------- ------------ ------------ --------- -------
Comprising:
------------ ------------ --------- -------
- Policyholder liabilities on the consolidated statement of
financial position(--) 18,381 13,355 9,519 41,255
- Unallocated surplus of with-profits funds on the consolidated
statement of financial position 2,553 - - 2,553
- Group's share of policyholder liabilities relating to joint
ventures(++) - 2,611 2,359 4,970
------------------------------------------------------------------- ------------ ------------ --------- -------
Average policyholder liability balances
2015 17,446 16,088 11,039 44,573
2014 14,823 14,987 9,183 38,993
------------------------------------------------------------------- ------------ ------------ --------- -------
Averages have been based on opening and closing balances and adjusted for acquisitions and disposals in the year and exclude unallocated surplus of with-profits funds.
(++) The Group's investment in joint ventures are accounted for on an equity method basis and the Group's share of the policyholder liabilities as shown above relate to the joint venture life businesses in China, India and of the Takaful business in Malaysia.
(--) The policyholder liabilities of the with-profits business of GBP18,381 million, shown in the table above, is after deducting the intra-group reinsurance liabilities ceded by the UK insurance operations of GBP1,261 million to the Hong Kong with-profits business (2014: GBP1,363 million). Including this amount the Asia with-profits policyholder liabilities are GBP19,642 million.
Notes
(a) Movements in the year have been translated at the average exchange rates for the year ended 31 December 2015. The closing balance has been translated at the closing spot rates as at 31 December 2015. Differences upon retranslation are included in foreign exchange translation differences.
(b) On 1 January 2014, following consultation with the policyholders of PAC and regulators and court approval, the Hong Kong branch of PAC was transferred to separate subsidiaries established in Hong Kong. From this date the unallocated surplus of the Hong Kong with-profits business is reported within the Asia insurance operations segment.
(c) Net flows have increased by GBP595 million to GBP3,969 million in 2015 compared with GBP3,374 million in 2014 reflecting increased flows from new business and growth in the in-force books.
(d) The rate of surrenders for shareholder-backed business (expressed as a percentage of opening liabilities) was 8.7 per cent in 2015, lower than the 10.1 per cent recorded in 2014 (based on opening liabilities).
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(e) Investment-related items and other movements for 2015 principally represents unrealised losses on bonds and equities, following rising bond yields and lower Asian equity markets in 2015.
(ii) Duration of liabilities
The table below shows the carrying value of policyholder liabilities and the maturity profile of the cash flows on a discounted basis for 2015 and 2014, taking account of expected future premiums and investment returns:
2015 GBPm 2014 GBPm
------------------------- --------- ---------
Policyholder liabilities 41,255 38,705
-------------------------- --------- ---------
Expected maturity: %%
0 to 5 years 23 23
5 to 10 years 20 20
10 to 15 years 17 17
15 to 20 years 12 12
20 to 25 years 99
Over 25 years 19 19
------------------------- --------- ---------
C4.1(c) US insurance operations
(i) Analysis of movements in policyholder liabilities
A reconciliation of the total policyholder liabilities of US insurance operations from the beginning of the year to the end of the year is as follows:
US insurance operations
Variable
annuity
separate Fixed annuity,
account GIC and other
liabilities business Total
GBPm GBPm GBPm
------------------------------------------------------ ------------ -------------- -------
At 1 January 2014 65,681 41,730 107,411
Premiums 12,220 3,272 15,492
Surrenders (3,699) (2,223) (5,922)
Maturities/Deaths (547) (760) (1,307)
------------------------------------------------------- ------------ -------------- -------
Net flows note (b) 7,974 289 8,263
Transfers from general to separate account 1,395 (1,395) -
Investment-related items and other movements note (c) 1,963 1,749 3,712
Foreign exchange translation differences note (a) 4,728 2,632 7,360
------------ -------------- -------
At 31 December 2014 / 1 January 2015 81,741 45,005 126,746
------------------------------------------------------- ------------ -------------- -------
Premiums 12,899 3,800 16,699
Surrenders (4,357) (2,402) (6,759)
Maturities/Deaths (655) (809) (1,464)
------------------------------------------------------- ------------ -------------- -------
Net flows note (b) 7,887 589 8,476
Transfers from general to separate account 847 (847) -
Investment-related items and other movements note (c) (4,351) 527 (3,824)
Foreign exchange translation differences note (a) 4,898 2,617 7,515
------------------------------------------------------- ------------ -------------- -------
At 31 December 2015 91,022 47,891 138,913
------------------------------------------------------- ------------ -------------- -------
Average policyholder liability balances*
2015 86,382 46,448 132,830
2014 73,711 43,368 117,079
------------------------------------------------------ ------------ -------------- -------
* Averages have been based on opening and closing balances.
Notes
(a) Movements in the year have been translated at an average rate of US$1.53/GBP1.00 (2014: US$1.65/GBP1.00). The closing balances have been translated at closing rate of US$1.47/GBP1.00 (2014: US$1.56/GBP1.00). Differences upon retranslation are included in foreign exchange translation differences.
(b) Net flows for the year were GBP8,476 million compared with GBP8,263 million in 2014, reflecting continued strong in-flows into the variable annuity business.
(c) Negative investment-related items and other movements in variable annuity separate account liabilities of GBP4,351 million for 2015 primarily reflects the decreases in equities and bond values during the year. Fixed annuity, GIC and other business investment and other movements of GBP527 million primarily reflect the increase in interest credited to the policyholder accounts in the year and an increase in other guarantee reserves.
(ii) Duration of liabilities
The table below shows the carrying value of policyholder liabilities and maturity profile of the cash flows on a discounted basis for 2015 and 2014:
2015 2014
------------------------------------------- ------------------------- -------- -------
Fixed annuity and other Fixed annuity and other
business (including GICs Variable business (including GICs Variable
and similar contracts) annuity Total and similar contracts) annuity Total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------- ------------------------ -------- ------- ------------------------- -------- -------
Policyholder liabilities 47,891 91,022 138,913 45,005 81,741 126,746
------------------------- ------------------------ -------- ------- ------------------------- -------- -------
%% % % %%
------------------------- ------------------------ ------- ------- ------------------------ -------- ------
Expected maturity:
0 to 5 years 48 43 44 46 48 47
5 to 10 years 26 28 28 27 29 29
10 to 15 years 12 15 14 12 13 13
15 to 20 years 78 8 7 66
20 to 25 years 44 4 4 33
Over 25 years 32 2 4 12
------------------------- ------------------------ ------- ------- ------------------------ -------- ------
C4.1(d) UK insurance operations
(i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds
A reconciliation of the total policyholder liabilities and unallocated surplus of with-profits funds of UK insurance operations from the beginning of the year to the end of the year is as follows:
Shareholder-backed funds and subsidiaries
-------------------------------------------
Annuity
and other
SAIF and PAC with-profits long-term
sub-fund Unit-linked liabilities business Total
GBPm GBPm GBPm GBPm
------------------------------ ----------------------------- ----------------------------- ------------ -------
At 1 January 2014 95,837 23,652 27,127 146,616
Comprising:
----------------------------- ----------------------------- ------------ -------
- Policyholder liabilities 83,853 23,652 27,127 134,632
- Unallocated surplus of
with-profits funds 11,984 - - 11,984
------------------------------ ----------------------------- ----------------------------- ------------ -------
Reallocation of unallocated
surplus for the domestication
of the Hong Kong branchnote
(a) (1,690) - - (1,690)
Premiums 2,951 1,405 3,546 7,902
Surrenders (2,507) (2,934) (215) (5,656)
Maturities/Deaths (4,344) (587) (1,825) (6,756)
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------------------------------- ----------------------------- ----------------------------- ------------ -------
Net flows note (b) (3,900) (2,116) 1,506 (4,510)
Shareholders' transfers post
tax (200) - - (200)
Switches (167) 167 - -
Investment-related items and
other movements 9,637 1,597 3,076 14,310
Foreign exchange translation
differences (90) - - (90)
------------------------------- ----------------------------- ----------------------------- ------------ -------
At 31 December 2014 / 1 January
2015 99,427 23,300 31,709 154,436
------------------------------- ----------------------------- ----------------------------- ------------ -------
Comprising:
----------------------------- ----------------------------- ------------ -------
- Policyholder liabilities 89,079 23,300 31,709 144,088
- Unallocated surplus of
with-profits funds 10,348 - - 10,348
------------------------------ ----------------------------- ----------------------------- ------------ -------
Premiums 6,546 1,115 2,031 9,692
Surrenders (3,136) (3,168) (59) (6,363)
Maturities/Deaths (4,378) (573) (2,040) (6,991)
------------------------------- ----------------------------- ----------------------------- ------------ -------
Net flows note (b) (968) (2,626) (68) (3,662)
Shareholders' transfers post
tax (214) - - (214)
Switches (189) 189 - -
Investment-related items and
other movements note (c) 1,999 579 (259) 2,319
Foreign exchange translation
differences 14 - - 14
------------------------------- ----------------------------- ----------------------------- ------------ -------
At 31 December 2015 100,069 21,442 31,382 152,893
------------------------------- ----------------------------- ----------------------------- ------------ -------
Comprising:
----------------------------- ----------------------------- ------------ -------
- Policyholder liabilities 89,526 21,442 31,382 142,350
- Unallocated surplus of
with-profits funds 10,543 - - 10,543
------------------------------ ----------------------------- ----------------------------- ------------ -------
Average policyholder liability
balances*
2015 89,303 22,371 31,545 143,219
2014 86,467 23,476 29,419 139,362
------------------------------ ----------------------------- ----------------------------- ------------ -------
*Averages have been based on opening and closing balances and exclude unallocated surplus of with-profits funds.
Notes
(a) On 1 January 2014, following consultation with the policyholders of PAC and regulators and court approval, the Hong Kong branch of PAC was transferred to separate subsidiaries established in Hong Kong. From this date the unallocated surplus of the Hong Kong with-profits business is reported within the Asia insurance operations segment.
(b) Net outflows improved from GBP4,510 million in 2014 to GBP3,662 million in 2015, due primarily to higher premium flows into our with-profits funds following increased sales into with-profits savings and retirement products. This has been offset by lower premiums into our annuity business following the introduction of pension freedoms and lower level of bulks. The levels of inflows/outflows for unit-linked business is driven by corporate pension schemes with transfers in or out from only a small number of schemes influencing the level of flows in the year.
(c) Investment-related items and other movements of GBP2,319 million mainly reflects investment return earned in the year, attributable to policyholders.
(ii) Duration of liabilities
The following tables show the carrying value of the policyholder liabilities and the maturity profile of the cash flows, on a discounted basis for 2015 and 2014, for insurance contracts, as defined by IFRS:
2015 GBPm
--------------------------------------------------------------------------------------------------------
Annuity business
With-profits business (Insurance contracts) Other Total
------------------------------ ---------------------------- -------------------------------- --------
Non-profit
annuities
Insurance Investment within Insurance Investments
contracts contracts Total WPSF PRIL Total contracts contracts Total
------------- --------- ---------- ------- ---------- ------- ------- --------- ------------ ------- --------
Policyholder
liabilities 35,962 42,736 78,698 10,828 22,092 32,920 14,919 15,813 30,732 142,350
------------- --------- ---------- ------- ---------- ------- ------- --------- ------------ ------- --------
2015 %
------------- --------------------------------------------------------------------------------------------------------
Expected
maturity:
0 to 5 years 40 40 40 33 25 27 37 36 37 36
5 to 10 years 23 27 25 25 21 23 25 23 24 24
10 to 15
years 14 17 16 18 18 18 15 17 16 16
15 to 20
years 9 10 10 11 14 13 9 12 10 11
20 to 25
years 6 4 5 6 10 9 6 6 6 6
over 25 years 8 2 4 7 12 10 8 6 7 7
------------- --------- ---------- ------- ---------- ------- ------- --------- ------------ ------- --------
2014 GBPm
------------- --------------------------------------------------------------------------------------------------------
Policyholder
liabilities 38,287 39,084 77,371 11,708 22,186 33,894 15,474 17,349 32,823 144,088
------------- --------- ---------- ------- ---------- ------- ------- --------- ------------ ------- --------
2014 %
------------- --------------------------------------------------------------------------------------------------------
Expected
maturity:
0 to 5 years 40 39 39 31 25 27 37 36 36 36
5 to 10 years 24 26 25 25 22 23 25 22 24 24
10 to 15
years 14 17 16 18 18 18 16 16 16 17
15 to 20
years 9 11 10 11 14 13 10 11 11 11
20 to 25
years 6 5 5 7 9 9 5 8 6 6
over 25 years 7 2 5 8 12 10 7 7 7 6
------------- --------- ---------- ------- ---------- ------- ------- --------- ------------ ------- --------
- The cash flow projections of expected benefit payments used in the maturity profile table above are from value of in-force business and exclude the value of future new business, including future vesting of internal pension contracts.
- Benefit payments do not reflect the pattern of bonuses and shareholder transfers in respect of the with-profits business.
- Investment contracts under 'Other' comprise certain unit-linked and similar contracts accounted for under IAS 39 and IAS 18.
- For business with no maturity term included within the contracts, for example with-profits investment bonds such as Prudence Bonds, an assumption is made as to likely duration based on prior experience.
C5 Intangible assets
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C5.1 Intangible assets attributable to shareholders
(a) Goodwill attributable to shareholders
2015 GBPm 2014 GBPm
-------------------------------------------------------------- --------- ---------
Cost
At beginning of year 1,583 1,581
Disposal of Japan life business (120) -
Additional consideration paid on previously acquired business 2 -
Exchange differences (2) 2
-------------------------------------------------------------- --------- ---------
At end of year 1,463 1,583
Aggregate impairment - (120)
-------------------------------------------------------------- --------- ---------
Net book amount at end of year 1,463 1,463
-------------------------------------------------------------- --------- ---------
Goodwill attributable to shareholders comprises:
2015 GBPm 2014 GBPm
------ --------- ---------
M&G 1,153 1,153
Other 310 310
------ --------- ---------
1,463 1,463
------ --------- ---------
Other goodwill represents amounts allocated to entities in Asia and the US operations. These goodwill amounts are not individually material.
The aggregate goodwill impairment of GBP120 million at 31 December 2014 related to the goodwill held by the Japan life business, prior to its sale in February 2015.
(b) Deferred acquisition costs and other intangible assets attributable to shareholders
The deferred acquisition costs and other intangible assets attributable to shareholders comprise:
2015 GBPm 2014 GBPm
------------------------------------------------------------------------------------------------ --------- ---------
Deferred acquisition costs related to insurance contracts as classified under IFRS 4 6,948 5,840
Deferred acquisition costs related to investment management contracts, including life assurance
contracts classified as financial instruments and investment management contracts under IFRS
4 74 87
------------------------------------------------------------------------------------------------ --------- ---------
7,022 5,927
------------------------------------------------------------------------------------------------ --------- ---------
Present value of acquired in-force policies for insurance contracts as classified under IFRS
4 (PVIF) 45 59
Distribution rights and other intangibles 1,355 1,275
------------------------------------------------------------------------------------------------ --------- ---------
1,400 1,334
------------------------------------------------------------------------------------------------ --------- ---------
Total of deferred acquisition costs and other intangible assets 8,422 7,261
------------------------------------------------------------------------------------------------ --------- ---------
2015 GBPm 2014 GBPm
-------------------------------------------------------- ---------
Deferred acquisition costs
--------------------------------
PVIF and
Asset other
Asia US UK management intangibles(1) Total Total
---------------------------------------- ------ ----- ---- ----------- --------------- ----- ---------
Balance at 1 January 650 5,177 83 17 1,334 7,261 5,295
Additions 265 734 10 - 181 1,190 1,768
Amortisation to the income statement:(2)
------ ----- ---- ----------- --------------- ----- ---------
Operating profit (138) (516) (12) (5) (91) (762) (696)
Non-operating profit - 93 - - - 93 653
------ ----- ---- ----------- --------------- ----- ---------
(138) (423) (12) (5) (91) (669) (43)
Disposals and transfers - - - - (8) (8) (6)
Exchange differences and other movements 4 323 - - (16) 311 334
Amortisation of DAC related to net
unrealised valuation movements on
Jackson's available-for-sale
securities recognised within other
comprehensive income(2) - 337 - - - 337 (87)
------ ----- ---- ----------- --------------- ----- ---------
Balance at 31 December 781 6,148 81 12 1,400 8,422 7,261
----------------------------------------- ------ ----- ---- ----------- --------------- ----- ---------
(1) PVIF and other intangibles includes amounts in relation to software rights with additions of GBP34 million, amortisation of GBP29 million and a balance at 31 December 2015 of GBP71 million.
(2) Under the Group' application of IFRS 4, US GAAP is used for measuring the insurance assets and liabilities of its US and certain Asia operations. Under US GAAP, most of Jackson's products are accounted for under Accounting Standard no. 97 of the Financial Accounting Standards Board (FAS 97) whereby deferred acquisition costs are amortised in line with the emergence of actual and expected gross profits. The amounts included in the income statements and Other Comprehensive Income affect the pattern of profit emergence and thus the DAC amortisation attaching. DAC amortisation is allocated to the operating and non-operating components of the Group's supplementary analysis of profit and Other Comprehensive Income by reference to the underlying items.
Note
PVIF and other intangibles comprise PVIF, distribution rights and other intangibles such as software rights. Distribution rights relate to amounts that have been paid or have become unconditionally due for payment as a result of past events in respect of bancassurance partnership arrangements in Asia. These agreements allow for bank distribution of Prudential's insurance products for a fixed period of time.
US insurance operations
The DAC amount in respect of US insurance operations comprises amounts in respect of:
2015 GBPm 2014 GBPm
----------------------------------------------------------------------------------- --------- ---------
Variable annuity business 5,713 5,002
Other business 703 759
Cumulative shadow DAC (for unrealised gains booked in other comprehensive income)* (268) (584)
----------------------------------------------------------------------------------- --------- ---------
Total DAC for US operations 6,148 5,177
----------------------------------------------------------------------------------- --------- ---------
* Consequent upon the negative unrealised valuation movement in 2015 of GBP1,305 million (2014: positive unrealised valuation movement of GBP956 million), there is a gain of GBP337 million (2014: a charge of GBP87 million) for altered shadow DAC amortisation booked within other comprehensive income. These adjustments reflect movement from period to period, in the changes to the pattern of reported gross profits that would have occurred if the assets reflected in the statement of financial position had been sold, crystallising the unrealised gains and losses, and the proceeds reinvested at the yields currently available in the market. At 31 December 2015, the cumulative shadow DAC balance as shown in the table above was negative GBP268 million (2014: negative GBP584 million).
Overview of the deferral and amortisation of acquisition costs for Jackson
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Under IFRS 4, the Group applies 'grandfathered' US GAAP for measuring the insurance assets and liabilities of Jackson. In the case of Jackson term business, acquisition costs are deferred and amortised in line with expected premiums. For annuity and interest-sensitive life business, acquisition costs are deferred and amortised in line with a combination of historical and future expected gross profits on the relevant contracts. For fixed and fixed index annuity and interest-sensitive life business, the key assumption is the long-term spread between the earned rate on investments and the rate credited to policyholders, which is based on an annual spread analysis. Expected gross profits also depend on mortality assumptions, assumed unit costs and terminations other than deaths (including the related charges), all of which are based on a combination of actual experience of Jackson, industry experience and future expectations. A detailed analysis of actual mortality, lapse and expense experience is performed using internally developed experience studies.
Acquisition costs for Jackson's variable annuity products are also amortised in line with the emergence of profits. The measurement of amortisation depends on historical and expected future gross profits which include fees (including those for guaranteed minimum death, income, or withdrawal benefits) as well as components related to mortality, lapse and expense.
Mean reversion technique
For variable annuity products, under US GAAP (as 'grandfathered' under IFRS 4) Jackson applies a mean reversion technique for its amortisation of deferred acquisition costs against projected gross profits. This technique is applied with the objective of adjusting the amortisation of deferred acquisition costs that would otherwise be highly volatile due to fluctuations in the level of future gross profits arising from changes in equity market levels. The mean reversion technique achieves this objective by applying a dynamic adjustment to the assumption for short-term future investment returns. Under the mean reversion technique applied by Jackson, the projected level of return for each of the next five years is adjusted from period to period so that in combination with the actual rates of return for the preceding three years, including the current period, the 7.4 per cent long-term annual return (gross of asset management fees and other charges to policyholders, but net of external fund management fees) is realised on average over the entire eight-year period. Projected returns after the mean reversion period revert back to the 7.4 per cent assumption.
However, to ensure that the methodology does not over anticipate a reversion to the long-term level of returns following adverse markets, the mean reversion technique has a cap and floor feature whereby the projected returns in each of the next five years can be no more than 15 per cent per annum and no less than 0 per cent per annum (both gross of asset management fees and other charges to policyholders, but net of external fund management fees) in each year.
Sensitivity of amortisation charge
The amortisation charge to the income statement is reflected in both operating profit and short-term fluctuations in investment returns. The amortisation charge to the operating profit in a reporting period comprises:
(i) A core amount that reflects a relatively stable proportion of underlying premiums or profit; and
(ii) An element of acceleration or deceleration arising from market movements differing from expectations.
In periods where the cap and floor feature of the mean reversion technique are not relevant, the technique operates to dampen the second element above. Nevertheless, extreme market movements can cause material acceleration or deceleration of amortisation in spite of this dampening effect.
Furthermore, in those periods where the cap or floor is relevant, the mean reversion technique provides no further dampening and additional volatility may result.
In 2015, the DAC amortisation charge for operating profit was determined after including a charge for accelerated amortisation of GBP2 million (2014: charge for accelerated amortisation of GBP13 million). The 2015 amount primarily reflects the offsetting impacts of the separate account performance of negative 2 per cent, which is lower than the assumed level for the year, and the effect of releasing the 2012 fund returns of 11 per cent from the mean reversion formula.
As noted above, the application of the mean reversion formula has the effect of dampening the impact of equity market movements on DAC amortisation while the mean reversion assumption lies within the corridor. In 2016, it would take approximate movements in separate account values of more than either negative 17 per cent or positive 67 per cent for the mean reversion assumption to move outside the corridor.
C6 Borrowings
C6.1 Core structural borrowings of shareholder-financed operations
2015 GBPm 2014 GBPm
--------------------------------------------------------- --------- ---------
Holding company operations:
Perpetual Subordinated Capital Securitiesnote (i) 1,895 1,789
Subordinated Notesnote (iv) 2,123 1,531
---------------------------------------------------------- --------- ---------
Subordinated debt total 4,018 3,320
Senior debt:note (ii)
GBP300m 6.875% Bonds 2023 300 300
GBP250m 5.875% Bonds 2029 249 249
--------------------------------------------------------- --------- ---------
Holding company total 4,567 3,869
Prudential Capital bank loannote (iii) 275 275
Jackson US$250m 8.15% Surplus Notes 2027 169 160
--------- ---------
Total (per consolidated statement of financial position) 5,011 4,304
----------------------------------------------------------- --------- ---------
Notes
(i) The Group has designated all US$2.8 billion (2014: US$2.8 billion) of its subordinated debt as a net investment hedge under IAS 39 to hedge the currency risks related to the net investment in Jackson.
(ii) The senior debt ranks above subordinated debt in the event of liquidation.
(iii) The Prudential Capital bank loan of GBP275 million has been made in two tranches: a GBP160 million loan maturing on 20 December 2017 and a GBP115 million loan also maturing on 20 December 2017. These two tranches are currently drawn at a cost of 12 month LIBOR plus 0.40 per cent.
(iv) In June 2015, the company issued core structural borrowings of GBP600 million 5.00 per cent subordinated notes due in 2055. The proceeds net of discount adjustment and costs, were GBP590 million.
C6.2 Other borrowings
(a) Operational borrowings attributable to shareholder-financed operations
2015 GBPm 2014 GBPm
-------------------------------------------------------------------------------- --------- ---------
Borrowings in respect of short-term fixed income securities programmesnote (ii) 1,705 2,004
Non-recourse borrowings of US operations - 19
Other borrowings note (iii) 255 240
--------------------------------------------------------------------------------- --------- ---------
Totalnote (i) 1,960 2,263
--------------------------------------------------------------------------------- --------- ---------
Notes
(i) In addition to the debt listed above, GBP200 million Floating Rate Notes were issued by Prudential plc in October 2015 which will mature in October 2016. These Notes have been wholly subscribed to a Group subsidiary and accordingly have been eliminated on consolidation in the Group financial statements. These Notes were originally issued in October 2008 and have been reissued upon their maturity.
(ii) In January and November 2015, the Company issued GBP300 million Medium Term Notes which will mature in January 2018 and November 2018 respectively. The proceeds, net of costs, were GBP299 million for the January 2015 issue and GBP299 million for the November 2015 issue.
(iii) Other borrowings mainly include amounts whose repayment to the lender is contingent upon future surplus emerging from certain contracts specified under the arrangement. If insufficient surplus emerges on those contracts, there is no recourse to other assets of the Group and the liability is not payable to the degree of shortfall. In addition, other borrowings include senior debt issued through the Federal Home Loan Bank of Indianapolis (FHLB), secured by collateral posted with the FHLB by Jackson.
(b) Borrowings attributable to with-profits operations
2015 GBPm 2014 GBPm
------------------------------------------------------------------------------------ --------- ---------
Non-recourse borrowings of consolidated investment funds* 1,158 924
GBP100m 8.5% undated subordinated guaranteed bonds of Scottish Amicable Finance plc 100 100
Other borrowings (predominantly obligations under finance leases) 74 69
------------------------------------------------------------------------------------ --------- ---------
Total 1,332 1,093
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------------------------------------------------------------------------------------ --------- ---------
* In all instances the holders of the debt instruments issued by these subsidiaries and funds do not have recourse beyond the assets of these subsidiaries and funds.
The interests of the holders of the bonds issued by Scottish Amicable Finance plc, a subsidiary of the Scottish Amicable Insurance Fund, are subordinated to the entitlements of the policyholders of that fund.
C7 Risk and sensitivity analysis C7.1 Group overview
The Group's risk framework and the management of the risk including those attached to the Group's financial statements including financial assets, financial liabilities and insurance liabilities, together with the inter-relationship with the management of capital have been included in the Group Chief Risk Officer's Report on the risks facing our business and how these are managed.
The financial and insurance assets and liabilities on the Group's balance sheet are, to varying degrees, subject to market and insurance risk and other changes of experience assumptions that may have a material effect on IFRS basis profit or loss and shareholders' equity. The market and insurance risks, including how they affect Group's operations and how these are managed are discussed in the Group Chief Risk Officer's report.
The most significant items for which the IFRS shareholders' profit or loss and shareholders' equity for the Group's life assurance business is sensitive to, are shown in the following tables. The distinction between direct and indirect exposure is not intended to indicate the relative size of the sensitivity.
Insurance and lapse
Type of business Market and credit risk risk
------------------- -------------------------------------------------------------------------- ----------------------
Liabilities /
Investments/derivatives unallocated surplus Other exposure
---------------------------- --------------------- -------------------
Asia insurance operations (see also section C7.2)
Mortality and
All business Currency risk morbidity risk
Persistency risk
------------------- ------------------------------------------------ --------------------
Investment
performance subject
to smoothing
With-profits Net neutral direct exposure (indirect exposure through declared
business only) bonuses
Investment
performance through
Unit-linked Net neutral direct exposure (indirect exposure asset management
business only) fees
------------------- --------------------------------------------------- ------------------- ----------------------
Non-participating
business Asset/liability mismatch risk
---------------------------------------------------
Interest rates for
those
operations where the
basis of insurance
liabilities is
sensitive to current
Credit risk market movements
Interest rate and price
risk
------------------- -------------------------- ------------------- ------------------- ----------------------
US insurance operations (see also section C7.3)
All business Currency risk Persistency risk
------------------- --------------------------------------------------- ----------------------
Net effect of market risk arising from incidence of
guarantee features and variability of
Variable annuity asset management fees offset by derivative hedging
business programme
------------------- --------------------------------------------------- ------------------- ----------------------
Derivative hedge
programme to the extent
Fixed index annuity not fully hedged against Incidence of equity
business liability participation features
------------------- -------------------------- ----------------------- -------------------
Credit risk
Interest rate risk
Profit and loss and
shareholders' equity are
volatile for these risks
as
they affect the values of
derivatives and embedded
derivatives and impairment
losses. In addition,
shareholders' equity is
volatile for the incidence
of
these risks on unrealised Lapse risk, but the
appreciation of fixed Spread difference effects of extreme
Fixed index income securities between earned events are mitigated
annuities, Fixed classified rate and rate by the application of
annuities and GIC as available-for-sale credited market value
business under IAS 39 to policyholders adjustments
------------------- -------------------------- ------------------- ------------------- ----------------------
UK insurance operations (see also section C7.4)
Investment
performance subject
to smoothing Persistency risk to
With-profits Net neutral direct exposure (indirect exposure through declared future shareholder
business only) bonuses transfers
Net neutral direct exposure (indirect exposure Asset management
SAIF sub-fund only) fees earned by M&G
Investment
performance through
Unit-linked Net neutral direct exposure (indirect exposure asset management
business only) fees Persistency risk
------------------- --------------------------------------------------- ------------------- ----------------------
Asset/liability mismatch risk
---------------------------------------------------
Credit risk for assets Mortality experience
Shareholder-backed covering liabilities and and assumptions for
annuity business shareholder capital longevity
Interest rate risk for
assets in excess of
liabilities ie assets
representing shareholder
capital
------------------- ---------------------------- ------------------- ------------------- ----------------------
Detailed analyses of sensitivity of IFRS basis profit or loss and shareholders' equity to key market and other risks by business unit are provided in notes C7.2, C7.3, C7.4 and C7.5. The sensitivity analyses provided show the effect on profit or loss and shareholders' equity to changes in the relevant risk variables, all of which are reasonably possible at the relevant balance sheet date. In the equity risk sensitivity analysis shown below, the Group has considered the impact of an instantaneous 20 per cent fall in equity markets. If equity markets were to fall by more than 20 per cent, the Group believes that this would not be an instantaneous fall but rather this would be expected to occur over a period of time during which the Group would be able to put mitigating management actions in place. In addition, the equity risk sensitivity analysis provided assumed that all equity indices fall by the same percentage.
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Impact of diversification on risk exposure
The Group enjoys significant diversification benefits achieved through the geographical spread of the Group's operations and, within those operations through a broad mix of product types. This arises because not all risk scenarios are likely to happen at the same time and across all geographic regions. Relevant correlation factors include:
Correlation across geographic regions:
- Financial risk factors; and - Non-financial risk factors.
Correlation across risk factors:
- Longevity risk; - Expenses; - Persistency; and - Other risks.
The effect of Group diversification across the Group's life businesses is to significantly reduce the aggregate standalone volatility risk to IFRS operating profit based on longer-term investment returns. The effect is almost wholly explained by the correlations across risk types, in particular mortality and longevity risk.
C7.2 Asia insurance operations
Exposure and sensitivity of IFRS basis profit and shareholders' equity to market and other risks
The Asia operations sell with-profits and unit-linked policies and, although the with-profits business generally has a lower terminal bonus element than in the UK, the investment portfolio still contains a proportion of equities. Non-participating business is largely backed by debt securities or deposits. The Group's exposure to market risk arising from its Asia operations is therefore at modest levels. This reflects the fact that the Asia operations have a balanced portfolio of with-profits, unit-linked and other types of business.
In Asia, adverse persistency experience can impact the IFRS profitability of certain types of business written in the region. This risk is managed at a business unit level through regular monitoring of experience and the implementation of management actions as necessary. These actions could include product enhancements, increased management focus on premium collection as well as other customer retention efforts. The potential financial impact of lapses is often mitigated through the specific features of the products, eg surrender charges, or through the availability of premium holiday or partial withdrawal policy features.
In summary, for Asia operations, the operating profit based on longer-term investment returns is mainly affected by the impact of market levels on unit-linked persistency, and other insurance risks. At the total IFRS profit level the Asia result is affected by short-term value movements on the asset portfolio for non-linked shareholder-backed business.
i Sensitivity to risks other than foreign exchange risk
With-profits business
Similar principles to those explained for UK with-profits business in C7.4 apply to profit emergence for the Asia with-profits business. Correspondingly, the profit emergence reflects bonus declaration and is relatively insensitive to period by period fluctuations in insurance risk or interest rate movements.
Unit-linked business
As for the UK insurance operations, for unit-linked business, the main factor affecting the profit and shareholders' equity of the Asia operations is investment performance through asset management fees. The sensitivity of profits and shareholders' equity to changes in insurance risk, interest rate risk and credit risk are not material.
Other business
Interest rate risk
Excluding its with-profits and unit-linked businesses, the results of the Asia business are sensitive to the vagaries of routine movements in interest rates.
For the purposes of analysing sensitivity to variations in interest rates, reference has been made to the movements in the 10-year government bond rates of the territories. At 31 December 2015, 10-year government bond rates vary from territory to territory and range from 1.0 per cent to 8.9 per cent (2014: 1.6 per cent to 8.0 per cent).
For the sensitivity analysis as shown in the table below, the reasonably possible interest rate movement used is one per cent for all territories.
The estimated sensitivity to the decrease and increase in interest rates at 31 December 2015 and 2014 is as follows:
2015 GBPm 2014 GBPm
------------------ ------------------
Decrease Increase Decrease Increase
of 1% of 1% of 1% of 1%
----------------------------------------------- -------- -------- -------- --------
Profit before tax attributable to shareholders 185 (339) (54) (137)
Related deferred tax (where applicable) (34) 59 (5) 24
------------------------------------------------ -------- -------- -------- --------
Net effect on profit and shareholders' equity 151 (280) (59) (113)
------------------------------------------------ -------- -------- -------- --------
The pre-tax impacts, if they arose, would mostly be recorded within the category short-term fluctuations in investments returns in the Group's segmental analysis of profit before tax.
The degree of sensitivity of the results of the non-linked shareholder-backed business of the Asia operations to movements in interest rates depends upon the degree to which the liabilities under the 'grandfathered' IFRS 4 measurement basis reflects market interest rates from period to period. For example for those countries, such as those applying US GAAP, the results can be more sensitive as the effect of interest rate movements on the backing investments may not be offset by liability movements.
In addition, the degree of sensitivity of the results shown in the table above is dependent on the interest rate level at that point of time. The low interest rates in certain countries have had an adverse impact on the degree of sensitivity to a decrease in interest rates.
An additional factor to the direction of the sensitivity of the Asia operations as a whole is movement in the country mix.
Equity price risk
The non-linked shareholder business has limited exposure to equity and property investment (31 December 2015: GBP840 million). Generally changes in equity and property investment values are not directly offset by movements in policyholder liabilities.
The estimated sensitivity to a 10 per cent and 20 per cent change in equity and property prices for shareholder-backed Asia other business, which would be reflected in the short-term fluctuation component of the Group's segmental analysis of profit before tax, at 31 December 2015 and 2014 would be as follows:
2015 GBPm 2014 GBPm
-------------- --------------
Decrease Decrease
-------------- --------------
of 20% of 10% of 20% of 10%
----------------------------------------------- ------ ------ ------ ------
Profit before tax attributable to shareholders (169) (85) (187) (93)
Related deferred tax (where applicable) 21 10 23 11
----------------------------------------------- ------ ------ ------ ------
Net effect on profit and shareholders' equity (148) (75) (164) (82)
----------------------------------------------- ------ ------ ------ ------
A 10 or 20 per cent increase in their value would have an approximately equal and opposite effect on profit and shareholders' equity to the sensitivities shown above. The market risk sensitivities shown above reflect the impact of temporary market movements and, therefore, the primary effect of such movements would, in the Group's segmental analysis of profits, be included within the short-term fluctuations in investment returns.
Insurance risk
Many of the territories in Asia are exposed to mortality/morbidity risk and provision is made within policyholder liabilities on a prudent regulatory basis to cover the potential exposure. If these prudent assumptions were strengthened by 5 per cent then it is estimated that post tax profit and shareholders' equity would be decreased by approximately GBP43 million (2014: GBP40 million). Mortality and morbidity has a symmetrical effect on the portfolio and any weakening of these assumptions would have a similar equal and opposite impact.
ii Sensitivity to foreign exchange risk
Consistent with the Group's accounting policies, the profits of the Asia insurance operations are translated at average exchange rates and shareholders' equity at the closing rate for the reporting period. For 2015, the rates for the most significant operations are given in note A1.
A 10 per cent increase (strengthening of the pound sterling) or decrease (weakening of the pound sterling) in these rates would have reduced or increased profit before tax attributable to shareholders, profit for the year and shareholders' equity, excluding goodwill attributable to Asia operations respectively as follows:
A 10% increase in local currency to GBP A 10% decrease in local currency to GBP
exchange rates exchange rates
-------------------------------------------- ----------------------------------------------
2015 GBPm 2014 GBPm 2015 GBPm 2014 GBPm
---------------------- --------------------- --------------------- ---------------------- ----------------------
Profit before tax
attributable to
shareholders (94) (111) 115 135
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Profit for the year (79) (95) 97 117 Shareholders' equity, excluding goodwill, attributable to Asia operations (367) (315) 449 384 ---------------------- --------------------- --------------------- ---------------------- ---------------------- C7.3 US insurance operations
Exposure and sensitivity of IFRS basis profit and shareholders' equity to market and other risks
At the level of operating profit based on longer-term investment returns, Jackson's results are sensitive to market conditions to the extent of income earned on spread-based products and indirectly in respect of variable annuity asset management fees.
Jackson's main exposures are to market risk through its exposure to interest rate risk and equity risk. Approximately 92 per cent (2014: 94 per cent) of its general account investments support fixed interest rate and fixed index annuities, variable annuity fixed account deposits and guarantees, life business and surplus and 8 per cent (2014: 6 per cent) support institutional businesses. All of these types of business contain considerable interest rate guarantee features and, consequently, require that the assets that support them are primarily fixed income or fixed maturity.
Jackson is exposed primarily to the following risks:
Risks Risk of loss
------------------ --------------------------------------------------------------------------------------------------
-- related to the incidence of benefits related to guarantees issued in connection with its
variable annuity contracts; and
Equity risk -- related to meeting contractual accumulation requirements in fixed index annuity contracts.
------------------ --------------------------------------------------------------------------------------------------
-- related to meeting guaranteed rates of accumulation on fixed annuity products following
a sharp and
Interest rate risk sustained fall in interest rates;
-- related to increases in the present value of projected benefits related to guarantees issued
in connection with its variable annuity contracts following a sharp and sustained fall in
interest rates in conjunction with a fall in equity markets;
-- related to the surrender value guarantee features attached to the company's fixed annuity
products and to policyholder withdrawals following a sharp and sustained increase in interest
rates; and
-- the risk of mismatch between the expected duration of certain annuity liabilities and
prepayment
risk
and extension risk inherent in mortgage-backed securities.
------------------ --------------------------------------------------------------------------------------------------
Jackson's derivative programme is used to manage interest rate risk associated with a broad range of products and equity market risk attaching to its equity-based products. Movements in equity markets, interest rates and credit spreads materially affect the carrying value of derivatives which are used to manage the liabilities to policyholders and backing investment assets. Combined with the use of US GAAP measurement (as 'grandfathered' under IFRS 4) for the insurance contracts assets and liabilities which is largely insensitive to current period market movements, the Jackson total profit (ie including short-term fluctuations in investment returns) is sensitive to market movements. In addition to these effects the Jackson shareholders' equity is sensitive to the impact of interest rate and credit spread movements on the value of fixed income securities. Movements in unrealised appreciation on these securities are included as movement in shareholders' equity (ie outside the income statement).
Jackson enters into financial derivative transactions, including those noted below to reduce and manage business risks. These transactions manage the risk of a change in the value, yield, price, cash flows or quantity of, or a degree of exposure with respect to assets, liabilities or future cash flows, which Jackson has acquired or incurred.
Jackson uses free-standing derivative instruments for hedging purposes. Additionally, certain liabilities, primarily trust instruments supported by funding agreements, fixed index annuities, certain Guaranteed Minimum Withdrawal Benefit variable annuity features and reinsured Guaranteed Minimum Income Benefit variable annuity features contain embedded derivatives as defined by IAS 39, 'Financial Instruments: Recognition and Measurement'. Jackson does not account for such derivatives as either fair value or cash flow hedges as might be permitted if the specific hedge documentation requirements of IAS 39 were followed. Financial derivatives, including derivatives embedded in certain host liabilities that have been separated for accounting and financial reporting purposes are carried at fair value.
Value movements on the derivatives are reported within the income statement. In preparing Jackson's segment profit as shown in note B1.1 value movements on Jackson's derivative contracts, are included within short-term fluctuations in investment returns and excluded from operating results based on longer-term investment returns.
The principal types of derivatives used by Jackson and their purpose are as follows:
Derivative Purpose
-------------------------------------------------------- ------------------------------------------------------------
These generally involve the exchange of fixed and floating
payments over the period for which
Jackson holds the instrument without an exchange of the
underlying principal amount. These
Interest rate swaps agreements are used for hedging purposes.
-------------------------------------------------------- ------------------------------------------------------------
These contracts provide the purchaser with the right, but
not the obligation, to require the
writer to pay the present value of a long-duration interest
rate swap at future exercise dates.
Jackson both purchases and writes swaptions in order to
hedge against significant movements
Swaption contracts in interest rates.
-------------------------------------------------------- ------------------------------------------------------------
These derivatives (including various call and put options
and interest rate contingent options)
are used to hedge Jackson's obligations associated with its
issuance of certain VA guarantees.
Some of these annuities and guarantees contain embedded
options which are fair valued for
Equity index futures contracts and equity index options financial reporting purposes.
-------------------------------------------------------- ------------------------------------------------------------
Cross-currency swaps, which embody spot and forward
currency swaps and additionally, in some
cases, interest rate swaps and equity index swaps, are
entered into for the purpose of hedging
Jackson's foreign currency denominated funding agreements
Cross-currency swaps supporting trust instrument obligations.
-------------------------------------------------------- ------------------------------------------------------------
These swaps, represent agreements under which Jackson has
purchased default protection on
certain underlying corporate bonds held in its portfolio.
These contracts allow Jackson to
sell the protected bonds at par value to the counterparty
if a default event occurs in exchange
for periodic payments made by Jackson for the life of the
agreement. Jackson does not write
Credit default swaps default protection using credit derivatives.
-------------------------------------------------------- ------------------------------------------------------------
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The estimated sensitivity of Jackson's profit and shareholders' equity to equity and interest rate risks provided below is net of the related changes in amortisation of DAC. The effect on the related changes in amortisation of DAC provided is based on the current 'grandfathered' US GAAP DAC basis but does not include any effect from an acceleration or deceleration of amortisation of DAC.
i Sensitivity to equity risk
At 31 December 2015 and 2014, Jackson had variable annuity contracts with guarantees, for which the net amount at risk ('NAR') is defined as the amount of guaranteed benefit in excess of current account value, as follows:
Period
Net Weighted until
Minimum Account amount average expected
31 December 2015 return value at risk attained age annuitisation
GBPm GBPm
------------------------------------------------------- -------- ------- -------- ------------- --------------
Return of net deposits plus a minimum return
GMDB 0-6% 70,732 2,614 65.3 years
GMWB - Premium only 0% 1,916 56
GMWB* 0-5%(**) 229 23
GMAB - Premium only 0% 45 -
Highest specified anniversary account value minus
withdrawals post-anniversary
GMDB 7,008 587 65.4 years
GMWB - Highest anniversary only 2,025 202
GMWB* 698 101
Combination net deposits plus minimum return, highest
specified anniversary account value
minus withdrawals post-anniversary
GMDB 0-6% 4,069 640 68.3 years
GMIB 0-6% 1,422 518 0.5 years
GMWB* 0-8%(**) 63,924 7,758
------------------------------------------------------- -------- ------- -------- ------------- --------------
Period
Net Weighted until
Minimum Account amount average expected
31 December 2014 return value at risk attained age annuitisation
GBPm GBPm
------------------------------------------------------- -------- ------- -------- ------------- --------------
Return of net deposits plus a minimum return
GMDB 0-6% 64,344 1,463 65.0 years
GMWB - Premium only 0% 2,151 32
GMWB* 0-5%(**) 264 17
GMAB - Premium only 0% 53 -
Highest specified anniversary account value minus
withdrawals post-anniversary
GMDB 6,581 193 65.0 years
GMWB - Highest anniversary only 2,131 85
GMWB* 830 58
Combination net deposits plus minimum return, highest
specified anniversary account value
minus withdrawals post-anniversary
GMDB 0-6% 3,978 302 67.5 years
GMIB 0-6% 1,595 360 1.4 years
GMWB* 0-8%(**) 57,323 2,033
------------------------------------------------------- -------- ------- -------- ------------- --------------
* Amounts shown for Guaranteed Minimum Withdrawal Benefit comprise sums for the 'not for life' portion (where the guaranteed withdrawal base less the account value equals to the net amount at risk (NAR)), and a 'for life' portion (where the NAR has been estimated as the present value of future expected benefit payment remaining after the amount of the 'not for life' guaranteed benefits is zero).
** Ranges shown based on simple interest. The upper limits of 5 per cent, or 8 per cent simple interest are approximately equal to 4.1 per cent and 6 per cent respectively, on a compound interest basis over a typical ten year bonus period. For example 1 + 10 x 0.05 is similar to 1.041 growing at a compound rate of 4.01 per cent for a further nine years.
The GMIB reinsurance guarantees are essentially fully reinsured.
Account balances of contracts with guarantees were invested in variable separate accounts as follows:
2015 GBPm 2014 GBPm
------------------ --------- ---------
Mutual fund type:
Equity 55,488 50,071
Bond 11,535 11,139
Balanced 13,546 12,901
Money market 832 675
------------------ --------- ---------
Total 81,401 74,786
------------------ --------- ---------
As noted above, Jackson is exposed to equity risk through the options embedded in the fixed index annuity liabilities and Guaranteed Minimum Death Benefit and Guaranteed Minimum Withdrawal Benefit guarantees included in certain variable annuity benefits as illustrated above. This risk is managed using an equity hedging programme to minimise the risk of a significant economic impact as a result of increases or decreases in equity market levels while taking advantage of naturally offsetting exposures in Jackson's operations. Jackson purchases external futures and options that hedge the risks inherent in these products, while also considering the impact of rising and falling guaranteed benefit fees.
As a result of this hedging programme, if the equity markets were to increase further in the future, the net effect of Jackson's free-standing derivatives would decrease in value. However, over time, this movement would be broadly offset by increased separate account fees and reserve decreases, net of the related changes to amortisation of deferred acquisition costs. Due to the nature of the free-standing and embedded derivatives, this hedge, while highly effective on an economic basis, may not completely mute in the financial reporting the immediate impact of equity market movements as the free-standing derivatives reset immediately while the hedged liabilities reset more slowly and fees are recognised prospectively. The opposite impact would be observed if the equity markets were to decrease.
In addition to the exposure explained above, Jackson is also exposed to equity risk from its holding of equity securities, partnerships in investment pools and other financial derivatives.
At 31 December 2015, the estimated sensitivity of Jackson's profit and shareholders' equity to immediate increases and decreases in equity markets is shown below. The sensitivities are shown net of related changes in DAC amortisation.
2015 GBPm 2014 GBPm
------------------------------ ------------------------------
Decrease Increase Decrease Increase
-------------- -------------- -------------- --------------
of 20% of 10% of 20% of 10% of 20% of 10% of 20% of 10%
------------------------------------------------ ------ ------ ------ ------ ------ ------ ------ ------
Pre-tax profit, net of related changes in
amortisation of DAC 738 259 (86) (128) 360 130 8 (25)
Related deferred tax effects (258) (91) 30 45 (126) (46) (3) 9
------------------------------------------------ ------ ------ ------ ------ ------ ------ ------ ------
Net sensitivity of profit after tax and
shareholders' equity 480 168 (56) (83) 234 84 5 (16)
------------------------------------------------ ------ ------ ------ ------ ------ ------ ------ ------
Note
The table above has been prepared to exclude the impact of the instantaneous equity movements on the separate account fees. In addition, the sensitivity movements shown include those relating to the fixed index annuity and the reinsurance of GMIB guarantees.
The above table provides sensitivity movements as at a point in time while the actual impact on financial results would vary contingent upon the volume of new product sales and lapses, changes to the derivative portfolio, correlation of market returns and various other factors including volatility, interest rates and elapsed time.
The directional movements in the sensitivities reflect the hedging programme in place at 31 December 2015 and 2014.
ii Sensitivity to interest rate risk
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Notwithstanding the market risk exposure previously described, except in the circumstances of interest rate scenarios where the guarantee rates included in contract terms are higher than crediting rates that can be supported from assets held to cover liabilities, the accounting measurement of fixed annuity liabilities of Jackson products is not generally sensitive to interest rate risk. This position derives from the nature of the products and the US GAAP basis of measurement. The Guaranteed Minimum Withdrawal Benefit features attached to variable annuity business (other than 'for-life' components) are accounted for as embedded derivatives which are fair valued and, therefore, will be sensitive to changes in interest rate.
Debt securities and related derivatives are marked to fair value. Value movements on derivatives, again net of related changes to amortisation of DAC and deferred tax, are recorded within the income statement. Fair value movements on debt securities, net of related changes to amortisation of DAC and deferred tax, are recorded within other comprehensive income. The estimated sensitivity of these items and policyholder liabilities to a 1 per cent and 2 per cent decrease and increase in interest rates at 31 December 2015 and 2014 is as follows:
2015 GBPm 2014 GBPm
-------------------------------- --------------------------------
Decrease Increase Decrease Increase
-------------- ---------------- -------------- ----------------
of 2% of 1% of 1% of 2% of 2% of 1% of 1% of 2%
----------------------------------------- ------- ----- ------- ------- ------- ----- ------- -------
Profit and loss:
Pre-tax profit effect (net of related
changes in amortisation of DAC) (1,776) (847) 628 1,120 (1,398) (690) 494 875
Related effect on charge for deferred tax 621 296 (220) (392) 489 242 (173) (306)
----------------------------------------- ------- ----- ------- ------- ------- ----- ------- -------
Net profit effect (1,155) (551) 408 728 (909) (448) 321 569
------------------------------------------ ------- ----- ------- ------- ------- ----- ------- -------
Other comprehensive income:
Direct effect on carrying value of debt
securities (net of related changes in
amortisation
of DAC) 3,167 1,782 (1,782) (3,167) 2,979 1,663 (1,663) (2,979)
Related effect on movement in deferred
tax (1,108) (624) 624 1,108 (1,043) (582) 582 1,043
----------------------------------------- ------- ----- ------- ------- ------- ----- ------- -------
Net effect 2,059 1,158 (1,158) (2,059) 1,936 1,081 (1,081) (1,936)
------------------------------------------ ------- ----- ------- ------- ------- ----- ------- -------
Total net effect on shareholders' equity 904 607 (750) (1,331) 1,027 633 (760) (1,367)
------------------------------------------ ------- ----- ------- ------- ------- ----- ------- -------
These sensitivities are shown only for interest rates in isolation and do not include other movements in credit risk that may affect credit spreads and valuations of debt securities. Similar to sensitivity to equity risk, the sensitivity movements provided in the table above are at a point in time and reflects the hedging programme in place on the balance sheet date, while the actual impact on financial results would vary contingent upon a number of factors.
iii Sensitivity to foreign exchange risk
Consistent with the Group's accounting policies, the profits of the Group's US operations are translated at average exchange rates and shareholders' equity at the closing rate for the reporting period. For 2015, the average and closing rates were US$1.53 (2014: $1.65) and US$1.47 (2014: US$1.56) to GBP1.00 sterling, respectively. A 10 per cent increase (weakening of the dollar) or decrease (strengthening of the dollar) in these rates would reduce or increase profit before tax attributable to shareholders, profit for the year and shareholders' equity attributable to US insurance operations respectively as follows:
A 10% increase in US$:GBP exchange rates A 10% decrease in US$:GBP exchange rates
------------------------------------------ ------------------------------------------
2015 GBPm 2014 GBPm 2015 GBPm 2014 GBPm
---------------------------- -------------------- -------------------- -------------------- --------------------
Profit before tax
attributable to
shareholders (note) (109) (23) 133 29
Profit for the year (87) (23) 107 28
Shareholders' equity
attributable to US
insurance operations (378) (370) 462 452
---------------------------- -------------------- -------------------- -------------------- --------------------
Note: Sensitivity on profit (loss) before tax ie aggregate of the operating profit based on longer-term investment returns and short-term fluctuations in investment returns.
iv Other sensitivities
Total profit of Jackson is sensitive to market risk on the assets covering liabilities other than variable annuity business segregated in the separate accounts.
As with other shareholder-backed business the profit or loss for Jackson is presented by distinguishing the result for the year between an operating result based on longer-term investment returns and short-term fluctuations in investment returns. In this way the most significant direct effect of market changes that have taken place to the Jackson result are separately identified. The principal determinants of variations in operating profit based on longer-term returns are:
- Growth in the size of assets under management covering the liabilities for the contracts in force;
- Variations in fees and other income, offset by variations in market value adjustment payments and, where necessary, strengthening of liabilities;
- Spread returns for the difference between investment returns and rates credited to policyholders; and
- Amortisation of deferred acquisition costs.
For term business, acquisition costs are deferred and amortised in line with expected premiums. For annuity and interest sensitive life business, acquisition costs are deferred and amortised in line with expected gross profits on the relevant contracts. For interest-sensitive business, the key assumption is the expected long-term spread between the earned rate and the rate credited to policyholders, which is based on an annual spread analysis. In addition, expected gross profits depend on mortality assumptions, assumed unit costs and terminations other than deaths (including the related charges) all of which are based on a combination of actual experience of Jackson, industry experience and future expectations. A detailed analysis of actual experience is measured by internally developed expense, mortality and persistency studies.
Except to the extent of mortality experience, which primarily affects profits through variations in claim payments and Guaranteed Minimum Death Benefit reserves, the profits of Jackson are relatively insensitive to changes in insurance risk.
Jackson is sensitive to lapse risk and other types of policyholder behaviour, such as the take-up of its Guaranteed Minimum Withdrawal Benefit product features. In the absence of hedging, equity and interest rate movements can both cause a loss directly and cause an increased future sensitivity to policyholder behaviour. Jackson has an extensive derivative programme that seeks to manage the exposure to such altered equity markets and interest rates.
For variable annuity business, the key assumption is the expected long-term level of separate account returns, which for 2015 was 7.4 per cent (2014: 7.4 per cent). The impact of using this return is reflected in two principal ways, namely:
- Through the projected expected gross profits which are used to determine the amortisation of deferred acquisition costs. This is applied through the use of a mean reversion technique which is described in more detail in note C5.1(b) above; and
- The required level of provision for claims for guaranteed minimum death, 'for life' withdrawal, and income benefits.
C7.4 UK insurance operations
Exposure and sensitivity of IFRS basis profit and shareholders' equity to market and other risks
The IFRS basis results of the UK insurance operations are most sensitive to asset/liability matching, mortality and default rate experience and longevity assumptions and the difference between the return on corporate bond and risk-free rate for shareholder-backed annuity business of Prudential Retirement Income Limited and the Prudential Assurance Company non-profit sub-fund. Further details are described below.
The IFRS operating profit based on longer-term investment returns for UK insurance operations is sensitive to changes in longevity assumptions affecting the carrying value of liabilities to policyholders for UK shareholder-backed annuity business. At the total IFRS profit level, the result is particularly sensitive to temporary value movements on assets backing the capital of the shareholder-backed annuity business.
With-profits business
SAIF
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Shareholders have no interest in the profits of the ring-fenced fund of SAIF but are entitled to the asset management fees paid on the assets of the fund.
With-profits sub-fund business
The shareholder results of the UK with-profits business (including non-participating annuity business of the with-profits sub-fund are only sensitive to market risk through the indirect effect of investment performance on declared policyholder bonuses.
The investment assets of PAC with-profits funds are subject to market risk. Changes in their carrying value, net of related changes to asset-share liabilities of with-profit contracts, affect the level of unallocated surplus of the fund. Therefore, the level of unallocated surplus is particularly sensitive to the level of investment returns on the portion of the assets that represents surplus. However, as unallocated surplus is accounted for as a liability under IFRS, movements in its value do not affect shareholders' profit and equity.
The shareholder results of the UK with-profits fund correspond to the shareholders' share of the cost of bonuses declared on the with-profits business which is currently one-ninth of the cost of bonuses declared. Investment performance is a key driver of bonuses, and hence the shareholders' share of the cost of bonuses. Due to the 'smoothed' basis of bonus declaration, the sensitivity to investment performance in a single year is low relative to movements in the period to period performance. However, over multiple periods, it is important as it may affect future expected shareholder transfers.
Mortality and other insurance risk are relatively minor factors in the determination of the bonus rates. Adverse persistency experience can affect the level of profitability from with-profits but in any given one year, the shareholders' share of cost of bonus may only be marginally affected. However, altered persistency trends may affect future expected shareholder transfers.
Shareholder-backed annuity business
The principal items affecting the IFRS results of the UK shareholder-backed annuity business are mortality experience and assumptions, and credit risk. The assets covering the liabilities are principally debt securities and other investments that are held to match the expected duration and payment characteristics of the policyholder liabilities. These liabilities are valued for IFRS reporting purposes by applying discount rates that reflect the market rates of return attaching to the covering assets.
Except to the extent of any asset/liability duration mismatch which is reviewed regularly, and exposure to credit risk, the sensitivity of the Group's results to market risk for movements in the carrying value of the liabilities and covering assets is broadly neutral on a net basis.
The main market risk sensitivity for the UK shareholder-backed annuity business arises from interest rate risk on the debt securities which substantially represent shareholders' equity. This shareholders' equity comprises the net assets held within the long-term fund of the company that cover regulatory basis liabilities that are not recognised for IFRS reporting purposes, for example contingency reserves, and shareholder capital held outside the long-term fund.
In summary, profits from shareholder-backed annuity business are most sensitive to:
- The extent to which the duration of the assets held closely matches the expected duration of the liabilities under the contracts;
- Actual versus expected default rates on assets held; - The difference between long-term rates of return on corporate bonds and risk-free rates; - The variance between actual and expected mortality experience;
- The extent to which changes to the assumed rate of improvements in mortality give rise to changes in the measurement of liabilities; and
- Changes in renewal expense levels.
In addition the level of profit is affected by change in the level of reinsurance cover.
A decrease in assumed mortality rates of 1 per cent would decrease pre-tax profit by approximately GBP67 million (2014: GBP94 million). A decrease in credit default assumptions of five basis points would increase pre-tax profit by GBP176 million (2014: GBP190 million). A decrease in renewal expenses (excluding asset management expenses) of 5 per cent would increase pre-tax profit by GBP35 million (2014: GBP30 million). The effect on profit would be approximately symmetrical for changes in assumptions that are directionally opposite to those explained above. The net effect on profit after tax and shareholders' equity from all the changes in assumptions as described above would be an increase of approximately GBP115 million (2014: GBP101 million).
Unit-linked and other business
Unit-linked and other business represents a comparatively small proportion of the in-force business of the UK insurance operations.
Due to the matching of policyholder liabilities to attaching asset value movements the UK unit-linked business is not directly affected by market or credit risk. The liabilities of the other business are also broadly insensitive to market risk. Profits from unit-linked and similar contracts primarily arise from the excess of charges to policyholders for management of assets, over expenses incurred. The former is most sensitive to the net accretion of funds under management as a function of new business and lapse and timing of death. The accounting impact of the latter is dependent upon the amortisation of acquisition costs in line with the emergence of margins (for insurance contracts) and amortisation in line with service provision (for the investment management component of investment contracts). By virtue of the design features of most of the contracts which provide low levels of mortality cover, the profits are relatively insensitive to changes in mortality experience.
Sensitivity to interest rate risk and other market risk
By virtue of the fund structure, product features and basis of accounting, the policyholder liabilities of the UK insurance operations are, except annuity business, not generally exposed to interest rate risk. At 31 December 2015 annuity liabilities accounted for 98 per cent (2014: 98 per cent) of UK shareholder-backed business liabilities. For annuity business, liabilities are exposed to interest rate risk. However, the net exposure to the Prudential Assurance Company with-profits sub-fund (for its non-profit annuity business) and shareholders (for annuity liabilities of Prudential Retirement Income Limited and the non-profit sub-fund) is very substantially ameliorated by virtue of the close matching of assets with appropriate duration. The level of matching from period to period can vary depending on management actions and economic factors so it is possible for a degree of mis-matching profits or losses to arise.
The close matching by the Group of assets of appropriate duration to annuity liabilities is based on maintaining economic and regulatory capital. The measurement of liabilities under capital reporting requirements and IFRS is not the same with contingency reserves and some other margins for prudence within the assumptions required under the regulatory solvency basis not included for IFRS reporting purposes. As a result IFRS equity is higher than regulatory capital and therefore more sensitive to interest rate and credit risk.
The estimated sensitivity of the UK non-linked shareholder-backed business (principally annuities business) to a movement in interest rates is as follows:
2015 GBPm 2014 GBPm
------------------------------------------- -------------------------------------------
A A An An A A An An
decrease decrease increase increase decrease decrease increase increase
of 2% of 1% of 1% of 2% of 2% of 1% of 1% of 2%
---------------------- ---------- --------- --------- --------- ---------- --------- --------- ---------
Carrying value of debt
securities and
derivatives 10,862 4,812 (3,935) (7,219) 11,559 5,063 (4,085) (7,457)
Policyholder
liabilities (8,738) (3,909) 3,208 5,872 (9,550) (4,250) 3,454 6,297
Related deferred tax
effects (402) (172) 138 257 (402) (163) 126 232
---------------------- ---------- --------- --------- --------- ---------- --------- --------- ---------
Net sensitivity of
profit after tax and
shareholders' equity 1,722 731 (589) (1,090) 1,607 650 (505) (928)
---------------------- ---------- --------- --------- --------- ---------- --------- --------- ---------
In addition the shareholder-backed portfolio of UK non-linked insurance operations covering liabilities and shareholders' equity includes equity securities and investment properties. Excluding any second order effects on the measurement of the liabilities for future cash flows to the policyholder, a fall in their value would have given rise to the following effects on pre-tax profit, profit after tax and shareholders' equity.
2015 GBPm 2014 GBPm
------------------------------------ ------------------------------------
A decrease of 20% A decrease of 10% A decrease of 20% A decrease of 10%
---------------------------------------- ----------------- ----------------- ----------------- -----------------
Pre-tax profit (327) (163) (347) (173)
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Related deferred tax effects 66 33 75 37 ---------------------------------------- ----------------- ----------------- ----------------- ----------------- Net sensitivity of profit after tax and shareholders' equity (261) (130) (272) (136) ---------------------------------------- ----------------- ----------------- ----------------- -----------------
A 10 or 20 per cent increase in their value would have an approximately equal and opposite effect on profit and shareholders' equity to the sensitivities shown above. The market risk sensitivities shown above reflect the impact of temporary market movements, and, therefore the primary effect of such movements would, in the Group's segmental analysis of profits, be included within the short-term fluctuations in investment returns.
C7.5 Asset management and other operations a Asset management i Sensitivities to foreign exchange risk
Consistent with the Group's accounting policies, the profits of Eastspring Investments and US asset management operations are translated at average exchange rates and shareholders' equity at the closing rate for the reporting period. The rates for the functional currencies of most significant operations are shown in note A1.
A 10 per cent increase in the relevant exchange rates (strengthening of the pound sterling) would have reduced reported profit before tax attributable to shareholders and shareholders' equity, excluding goodwill attributable to Eastspring Investments and US asset management operations, by GBP11 million and GBP38 million respectively (2014: GBP9 million and GBP33 million, respectively).
ii Sensitivities to other financial risks for asset management operations
The principal sensitivities to other financial risk of asset management operations are credit risk on the bridging loan portfolio of the Prudential Capital operation and the indirect effect of changes to market values of funds under management. Due to the nature of the asset management operations there is limited direct sensitivity to movements in interest rates. Total debt securities held at 31 December 2015 by asset management operations were GBP2,204 million (2014: GBP2,293 million), the majority of which are held by the Prudential Capital's operation. Debt securities held by Prudential Capital are in general variable rate bonds and so market value is limited in sensitivity to interest rate movements and consequently any change in interest rates would not have a material impact on profit or shareholders' equity. The Group's asset management operations do not hold significant investments in property or equities.
b Other operations
The Group holds certain derivatives that are used to manage foreign currency movements and macroeconomic exposures. The fair value of these derivatives is sensitive to the combined effect of movements in exchange rates, interest rates and inflation rates. The possible permutations cover a wide range of scenarios. For indicative purposes, a reasonably possible range of fair value movements could be plus or minus GBP150 million.
C8 Tax assets and liabilities C8.1 Deferred tax
The statement of financial position contains the following deferred tax assets and liabilities in relation to:
Deferred tax assets Deferred tax liabilities
--------------------- --------------------------
2015 GBPm 2014 GBPm 2015 GBPm 2014 GBPm
-------------------------------------------------------- ---------- --------- ------------ ------------
Unrealised losses or gains on investments 21 83 (1,036) (1,697)
Balances relating to investment and insurance contracts 1 4 (543) (499)
Short-term temporary differences 2,752 2,607 (2,400) (2,065)
Capital allowances 10 9 (31) (30)
Unused deferred tax losses 35 62 -
-------------------------------------------------------- ---------- --------- ------------ ------------
Total 2,819 2,765 (4,010) (4,291)
-------------------------------------------------------- ---------- --------- ------------ ------------
Deferred tax assets are recognised to the extent that they are regarded as recoverable, that is to the extent that, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying temporary differences can be deducted.
The taxation regimes applicable across the Group often apply separate rules to trading and capital profits and losses. The distinction between temporary differences that arise from items of either a trading or capital nature may affect the recognition of deferred tax assets. Accordingly, for the 2015 full year results and financial position at 31 December 2015 the possible tax benefit of approximately GBP98 million (2014: GBP110 million), which may arise from capital losses valued at approximately GBP0.5 billion (2014: GBP0.5 billion), is sufficiently uncertain that it has not been recognised. In addition, a potential deferred tax asset of GBP52 million (2014: GBP47 million), which may arise from trading tax losses and other potential temporary differences totalling GBP0.3 billion (2014: GBP0.2 billion) is sufficiently uncertain that it has not been recognised. Of these, losses of GBP36 million will expire within the next seven years. Of the remaining losses GBP1 million will expire within 20 years and the rest have no expiry date.
The table that follows provides a breakdown of the recognised deferred tax assets set out in the table above for both the short-term temporary differences and unused tax losses split by business unit. The table also shows the period of estimated recoverability for each respective business unit. For these and each category of deferred tax asset recognised their recoverability against forecast taxable profits is not significantly impacted by any current proposed changes to future accounting standards.
Short-term temporary differences Unused tax losses
---------------------------------- --------------------------
Expected Expected
period of period of
2015 GBPm recoverability 2015 GBPm recoverability
-------------------------- ------------ -------------------- --------- ---------------
Asia insurance operations 34 1 to 3 years 30 3 to 5 years
With run-off
US insurance operations 2,433 of in-force book - -
UK insurance operations 128 1 to 10 years - -
Other operations 157 1 to 10 years 5 1 to 3 years
-------------------------- ------------ -------------------- --------- ---------------
Total 2,752 35
-------------------------- ------------ -------------------- --------- ---------------
Under IAS 12, 'Income Taxes', deferred tax is measured at the tax rates that are expected to apply to the period when the asset is realised or the liability settled, based on the tax rates (and laws) that have been enacted or are substantively enacted at the end of the reporting period.
The reduction in the UK corporation tax rate to 19 per cent from 1 April 2017 and a further reduction to 18 per cent from 1 April 2020 was substantively enacted on 26 October 2015 which has had the effect of reducing the UK with-profits and shareholder-backed business element of the deferred tax balances as at 31 December 2015 by GBP17 million and the effects of these changes are reflected in the financial statements for the year ended 31 December 2015.
C9 Defined benefit pension schemes (a) Background and summary economic and IAS 19 financial positions
The Group's businesses operate a number of pension schemes. The specific features of these plans vary in accordance with the regulations of the country in which the employees are located, although they are, in general, funded by the Group and based either on a cash balance formula or on years of service and salary earned in the last year or years of employment. The largest defined benefit scheme is the principal UK scheme, namely the Prudential Staff Pension Scheme (PSPS). PSPS accounts for 84 per cent (2014: 84 per cent) of the underlying scheme liabilities of the Group's defined benefit schemes.
The Group also operates two smaller UK defined benefit schemes in respect of Scottish Amicable (SASPS) and M&G (M&GGPS). In addition, there are two small defined benefit schemes in Taiwan which have negligible deficits.
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Under the IAS 19 'Employee Benefits' valuation basis, the Group applies the principles of IFRIC 14, 'IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction', whereby a surplus is only recognised to the extent that the Company is able to access the surplus either through an unconditional right of refund to the surplus or through reduced future contributions relating to ongoing service, which have been substantively enacted or contractually agreed. Further, the IFRS financial position recorded, reflects the higher of any underlying IAS 19 deficit and any obligation for committed deficit funding where applicable.
The Group asset/liability in respect of defined benefit pension schemes is as follows:
2015 GBPm 2014 GBPm
------------------------------------------- -------------------------------------------
Other Other
PSPS SASPS M&GGPS schemes Total PSPS SASPS M&GGPS schemes Total
note note
note (i) (ii) note (i) (ii)
---------------------- -------- -------- ------ -------- ----- -------- -------- ------ -------- -----
Underlying economic
surplus (deficit) 969 (82) 75 (1) 961 840 (144) 60 (1) 755
Less: unrecognised
surplus note (i) (800) - - - (800) (710) - - - (710)
----------------------- -------- -------- ------ -------- ----- -------- -------- ------ -------- -----
Economic surplus
(deficit) (including
investment in
Prudential insurance
policies) 169 (82) 75 (1) 161 130 (144) 60 (1) 45
Attributable to:
-------- -------- ------ -------- ----- -------- -------- ------ -------- -----
PAC with-profits fund 118 (33) - - 85 91 (72) - - 19
Shareholder-backed
operations 51 (49) 75 (1) 76 39 (72) 60 (1) 26
-------- -------- ------ -------- ----- -------- -------- ------ -------- -----
Consolidation
adjustment against
policyholder
liabilities for
investment in
Prudential insurance
policiesnote (iii) - - (77) - (77) - - (132) - (132)
----------------------- -------- -------- ------ -------- ----- -------- -------- ------ -------- -----
IAS 19 pension asset
(liability) on the
Group statement of
financial positionnote
(iv) 169 (82) (2) (1) 84 130 (144) (72) (1) (87)
----------------------- -------- -------- ------ -------- ----- -------- -------- ------ -------- -----
Notes
(i) For PSPS, the Group does not have an unconditional right of refund to any surplus of the scheme. The PSPS pension asset represents the present value of the economic benefit (impact) of the Company from the difference between future ongoing contributions to the scheme and estimated accrued cost of service. No deficit or other funding is required for PSPS. Deficit funding, where applicable, is apportioned in the ratio of 70/30 between the PAC with-profits fund and shareholder-backed operations following detailed considerations in 2005 of the sourcing of previous contributions. Employer contributions for ongoing service of current employees are apportioned in the ratio relevant to current activity.
(ii) The deficit of SASPS has been allocated 40 per cent to the PAC with-profits fund and 60 per cent to the shareholders' fund as at 31 December 2015 (2014: approximately 50/50).
(iii) The underlying position on an economic basis reflects the assets (including investments in Prudential insurance policies that are offset against liabilities to policyholders on the Group consolidation) and the liabilities of the schemes.
(iv) At 31 December 2015, the PSPS pension asset of GBP169 million (2014: GBP130 million) and the other schemes' pension liabilities of GBP85 million (2014: GBP217 million) are included within 'Other debtors' and 'Provisions' respectively on the consolidated statement of financial position.
Triennial actuarial valuations
The last completed actuarial valuation of PSPS was as at 5 April 2014 by CG Singer, Fellow of the Institute of Actuaries, of Towers Watson Limited. This valuation was finalised in the first half of 2015 and demonstrated the scheme to be 107 per cent funded by reference to the Scheme Solvency Target that forms the basis of the scheme's funding objective. The contributions into the scheme are payable at the minimum level required under the scheme rules. Excluding expenses, the contributions are payable at approximately GBP6 million per annum for on-going service of active members of the scheme. No deficit or other funding is required. Deficit funding for PSPS, when applicable, is apportioned in the ratio of 70/30 between the PAC with-profits fund and shareholder-backed operations based on the sourcing of previous contributions. Employer contributions for on-going service of current employees are apportioned in the ratio relevant to current activity.
The last completed actuarial valuation of SASPS was as at 31 March 2014 by Jonathan Seed, Fellow of the Institute of Actuaries, of Xafinity Consulting Limited. This valuation was finalised in the first half of 2015 and demonstrated the scheme to be 78 per cent funded. It has been agreed with the Trustees that the level of deficit funding be increased from the previous level of GBP13.1 million per annum to GBP21.0 million per annum from 1 January 2015 until 31 March 2024, or earlier if the scheme's funding level reaches 100 per cent before this date, to eliminate the actuarial deficit. The deficit funding will be reviewed every three years at subsequent valuations.
The last completed actuarial valuation of M&GGPS was as at 31 December 2014 by Paul Belok, Fellow of the Institute of Actuaries, of AON Hewitt Limited. This valuation was finalised in the second half of 2015 and demonstrated the scheme to be 98.6 per cent funded. It has been agreed with the Trustees that no deficit funding is required from 1 January 2016. Deficit funding of GBP9.3 million was paid in 2015 (2014: GBP18.6 million).
Defined benefit pension schemes in the UK are generally required to be subject to full actuarial valuations every three years in order to assess the appropriate level of funding for schemes in relation to their commitments. These valuations include assessments of the likely rate of return on the assets held within the separate trustee administered funds.
(b) Assumptions
The actuarial assumptions used in determining benefit obligations and the net periodic benefit costs for the years ended 31 December were as follows:
2015 % 2014 %
------------------------------------------------------- ------ ------
Discount rate* 3.8 3.5
Rate of increase in salaries 3.0 3.0
Rate of inflation**
Retail prices index (RPI) 3.0 3.0
Consumer prices index (CPI) 2.0 2.0
Rate of increase of pensions in payment for inflation:
PSPS:
Guaranteed (maximum 5%) 2.5 2.5
Guaranteed (maximum 2.5%) 2.5 2.5
Discretionary 2.5 2.5
Other schemes 3.0 3.0
-------------------------------------------------------- ------ ------
* The discount rate has been determined by reference to an 'AA' corporate bond index, adjusted where applicable, to allow for the difference in duration between the index and the pension liabilities.
** The rate of inflation reflects the long-term assumption for the UK RPI or CPI depending on the tranche of the schemes.
The calculations are based on current mortality estimates with an allowance made for future improvements in mortality. The allowance made is in line with a custom calibration and was updated in 2014 to reflect the 2012 mortality model from the Continuous Mortality Investigation Bureau of the Institute and Faculty of Actuaries (CMI). For the PSPS immediate annuities in payment, in 2015 and 2014, a long-term improvement rate of 1.75 per cent per annum and 1.25 per cent per annum were applied for males and females, respectively.
(c) Estimated pension scheme surpluses and deficits
The underlying pension position on an economic basis reflects the assets (including investments in Prudential policies that are offset against liabilities to policyholders on the Group consolidation) and the liabilities of the schemes. The IAS 19 basis excludes the investments in Prudential policies. At 31 December 2015, the investments in Prudential insurance policies comprise GBP125 million (2014: GBP131 million) for PSPS and GBP77 million (2014: GBP132 million) for the M&GGPS. In principle, on consolidation the investments are eliminated against policyholder liabilities of UK insurance operations, so that the formal IAS 19 position for the scheme in isolation excludes these items. This treatment applies to the M&GGPS investments. However, as a substantial portion of the Company's interest in the underlying surplus of PSPS is not recognised, the adjustment is not necessary for the PSPS investments.
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Movements on the pension scheme deficit determined on the economic basis are as follows, with the effect of the application of IFRIC 14 being shown separately:
2015 GBPm
------------------------------------------------------------------------------
(Charge) credit
Surplus to income Actuarial gains Surplus
(deficit) statement and losses (deficit)
in schemes or other in other in schemes
at 1 Jan comprehensive comprehensive at 31 Dec
2015 income income Contributions paid 2015
----------------------------------- ----------- --------------- --------------- ------------------ -----------
All schemes
Underlying position (without the
effect of IFRIC 14)
Surplus 755 36 115 55 961
Less: amount attributable to PAC
with-profits fund (525) (38) (78) (17) (658)
------------------------------------ ----------- --------------- --------------- ------------------ -----------
Shareholders' share:
Gross of tax surplus (deficit) 230 (2) 37 38 303
Related tax (46) - (7) (7) (60)
----------------------------------- ----------- --------------- --------------- ------------------ -----------
Net of shareholders' tax 184 (2) 30 31 243
------------------------------------ ----------- --------------- --------------- ------------------ -----------
Application of IFRIC 14 for the
derecognition
of PSPS surplus
Derecognition of surplus (710) (26) (64) - (800)
Less: amount attributable to PAC
with-profits fund 506 18 49 - 573
------------------------------------ ----------- --------------- --------------- ------------------ -----------
Shareholders' share:
Gross of tax surplus (deficit) (204) (8) (15) - (227)
Related tax 41 1 3 - 45
----------------------------------- ----------- --------------- --------------- ------------------ -----------
Net of shareholders' tax (163) (7) (12) - (182)
------------------------------------ ----------- --------------- --------------- ------------------ -----------
With the effect of IFRIC 14
Surplus (deficit) 45 10 51 55 161
Less: amount attributable to PAC
with-profits fund (19) (20) (29) (17) (85)
------------------------------------ ----------- --------------- --------------- ------------------ -----------
Shareholders' share:
Gross of tax surplus (deficit) 26 (10) 22 38 76
Related tax (5) 2 (4) (7) (14)
----------------------------------- ----------- --------------- --------------- ------------------ -----------
Net of shareholders' tax 21 (8) 18 31 62
------------------------------------ ------------------
Underlying investments of the schemes
On the 'economic basis', after including the underlying assets represented by the investments in Prudential insurance policies as scheme assets, the plans' assets at 31 December comprise the following investments:
2015 2014
--------------------------- ---------------------------
Other Other
PSPS schemes Total PSPS schemes Total
GBPm GBPm GBPm % GBPm GBPm GBPm %
Equities
UK 126 70 196 3 126 86 212 2
Overseas 151 329 480 6 143 317 460 6
Bonds
Government 4,795 427 5,222 67 5,078 440 5,518 68
Corporate 970 145 1,115 14 931 117 1,048 13
Asset-backed securities 135 21 156 2 197 26 223 3
Derivatives 183 (5) 178 2 159 (13) 146 2
Properties 70 62 132 2 93 57 150 2
Other assets 298 42 340 4 270 40 310 4
Total value of assets** 6,728 1,091 7,819 100 6,997 1,070 8,067 100
(d) Sensitivity of the pension scheme liabilities to key variables
The sensitivity information below is based on the core scheme liabilities and assumptions at the balance sheet date. The sensitivity is calculated based on a change in one assumption with all other assumptions being held constant. As such, interdependencies between the assumptions are excluded.
The sensitivity of the underlying pension scheme liabilities as shown above does not directly equate to the impact on the profit or loss attributable to shareholders or shareholders' equity due to the effect of the application of IFRIC 14 on PSPS and the allocation of a share of the interest in financial position of the PSPS and SASPS to the PAC with-profits fund as described above.
Sensitivity change in Impact of sensitivity on scheme
Assumption applied assumption liabilities on IAS 19 basis
2015 2014 2015 2014
--------- --------- ------ ------
Increase in scheme
Discount rate 3.8% 3.5% Decrease by 0.2% liabilities
by:
PSPS 3.3% 3.4%
Other schemes 5.0% 5.2%
--------- --------- ------ ------
Decrease in scheme
Discount rate 3.8% 3.5% Increase by 0.2% liabilities
by:
PSPS 3.1% 3.2%
Other schemes 4.6% 4.9%
--------- --------- ------ ------
Decrease in scheme
Rate of inflation 3.0% 3.0% RPI: Decrease by 0.2% liabilities
by:
2.0% 2.0% CPI: Decrease by 0.2% PSPS 0.5% 0.6%
with consequent reduction Other schemes 4.0% 4.2%
in salary increases
--------- --------- ------ ------
Mortality rate Increase life expectancy Increase in scheme
by 1 year liabilities by:
PSPS 3.2% 3.3%
Other schemes 2.8% 3.0%
--------- --------- ------ ------
C10 Share capital, share premium and own shares
2015 2014
Number of ordinary Share Share Number of ordinary Share Share
Issued shares of 5p each shares capital premium shares capital premium
fully paid GBPm GBPm GBPm GBPm
-------- -------- -------- --------
At 1 January 2,567,779,950 128 1,908 2,560,381,736 128 1,895
Shares issued under
share-based schemes 4,675,008 - 7 7,398,214 - 13
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-------- -------- -------- --------
At 31 December 2,572,454,958 128 1,915 2,567,779,950 128 1,908
-------- -------- -------- --------
Amounts recorded in share capital represent the nominal value of the shares issued. The difference between the proceeds received on issue of shares, net of issue costs, and the nominal value of shares issued is credited to the share premium account.
At 31 December 2015, there were options outstanding under save as you earn schemes to subscribe for shares as follows:
Share price range
Number of
shares to Exercisable
subscribe for from to by year
31 December 2015 8,795,617 288p 1,155p 2021
31 December 2014 8,624,491 288p 1,155p 2020
Transactions by Prudential plc and its subsidiaries in Prudential plc shares
The Group buys and sells Prudential plc shares ('own shares') either in relation to its employee share schemes or via transactions undertaken by authorised investment funds that the Group is deemed to control. The cost of own shares of GBP219 million as at 31 December 2015 (2014: GBP195 million) is deducted from retained earnings. The Company has established trusts to facilitate the delivery of shares under employee incentive plans. At 31 December 2015, 10.5 million (2014: 10.3 million) Prudential plc shares with a market value of GBP161 million (2014: GBP153 million) were held in such trusts all of which are for employee incentive plans. The maximum number of shares held during 2015 was 10.5 million which was in December 2015.
The Company purchased the following number of shares in respect of employee incentive plans. The shares purchased each month are as follows:
2015 Share Price 2014 Share Price
Number Number
of shares Low High Cost of shares Low High Cost
GBP GBP GBP GBP GBP GBP
January 52,474 14.83 15.11 786,584 13,740 13.56 13.56 186,314
February 49,423 16.01 16.14 795,683 16,841 12.77 12.77 215,060
March 4,660,458 16.44 17.01 78,940,633 4,623,303 12.82 13.59 60,161,823
April 52,371 16.78 17.24 892,795 149,199 13.12 13.48 2,006,955
May 145,542 16.07 16.61 2,357,705 1,361,688 13.90 14.13 19,184,679
June 160,078 15.65 16.20 2,563,060 11,290 13.80 13.80 155,802
July 55,208 15.04 15.99 868,713 10,745 13.83 13.83 148,550
August 57,653 15.07 15.17 868,091 11,321 13.22 13.22 149,607
September 154,461 13.57 14.31 2,149,244 355,268 14.18 14.41 5,074,731
October 58,087 15.14 15.22 879,999 51,199 13.75 13.84 704,601
November 56,948 15.35 15.61 866,033 51,314 14.36 14.47 737,173
December 61,441 15.07 15.08 923,600 1,223,290 14.41 15.47 17,983,248
Total 5,564,144 92,892,140 7,879,198 106,708,543
The Group has consolidated a number of authorised investment funds where it is deemed to control these funds under IFRS. Some of these funds hold shares in Prudential plc. The total number of shares held by these funds at 31 December 2015 was 6.1 million (2014: 7.5 million) and the cost of acquiring these shares of GBP54 million (2014: GBP67 million) is included in the cost of own shares. The market value of these shares as at 31 December 2015 was GBP94 million (2014: GBP112 million). During 2015, these funds made net disposals of 1,402,697 Prudential shares (2014: net additions of 405,940) for a net decrease of GBP13 million to book cost (2014: net increase of GBP7 million).
All share transactions were made on an exchange other than the Stock Exchange of Hong Kong.
Other than set out above the Group did not purchase, sell or redeem any Prudential plc listed securities during 2015 or 2014.
D OTHER NOTES D1 Sale of Japan life business
On 5 February 2015, the Group announced that it had completed the sale of its closed book life insurance business in Japan, PCA Life Insurance Company Limited to SBI Holdings, Inc. following regulatory approvals. The transaction was announced on 16 July 2013. Of the agreed US$85 million cash consideration, the Group received US$68 million on completion of the transaction, and a further payment of up to US$17 million will be received contingent upon the future performance of the Japan life business.
The Japan life business had been classified as held for sale on the statement of financial position of the Group since 2013. The held for sale assets and liabilities of the Japan life business on the statement of financial positional as at 31 December 2014 were as follows:
2014 GBPm
---------
Assets
Investments 898
Other assets 45
--------------------------------------------------------------------------------------- ---------
943
Adjustment for remeasurement of the carrying value to fair value less costs to sell (124)
---------
Assets held for sale 819
--------------------------------------------------------------------------------------- ---------
Liabilities
Policyholder liabilities 717
Other liabilities 53
--------------------------------------------------------------------------------------- ---------
Liabilities held for sale 770
--------------------------------------------------------------------------------------- ---------
Net assets 49
--------------------------------------------------------------------------------------- ---------
Upon its classification as held for sale in 2013, the IFRS carrying value of the Japan life business was set to represent the proceeds, net of related expenses. Subsequent remeasurement of the carrying value of the Japan life business in 2014 resulted in a charge in the income statement of GBP(13) million in 2014. These amounts, together with the results of the business including short-term value movements on investments also included in the income statement, netted to an insignificant amount for those periods.
On completion of the sale, the cumulative foreign exchange translation loss of the Japan life business of GBP46 million, that had arisen from 2004 (the year of the Group's conversion to IFRS) to disposal was recycled from other comprehensive income through the profit and loss account in 2015 as required by IAS 21. This amount is included within 'Cumulative exchange loss on the sold Japan life business recycled from other comprehensive income' in the supplementary analysis of profit of the Group as shown in note B1.1. The adjustment has no net effect on shareholders' equity.
D2 Contingencies and related obligations
The Group is involved in a number of litigation and regulatory issues. These include civil proceedings involving Jackson, which appear to be substantially similar to other class action litigation brought against many life insurers in the US, alleging misconduct in the sale of insurance products. Whilst the outcome of such litigation and regulatory issues cannot be predicted with certainty, the Company believes that their ultimate outcome will not have a material adverse effect on the Group's nancial condition, results of operations, or cash ows.
D3 Post balance sheet events
Dividends
The second interim and special dividends for the year ended 31 December 2015, which were approved by the Board of Directors after 31 December 2015 are described in note B7.
Additional Unaudited IFRS Financial Information
I(a) Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment returns by driver
This schedule classifies the Group's pre-tax operating earnings from long-term insurance operations into the underlying drivers of those profits, using the following categories:
- Spread income represents the difference between net investment income (or premium income in the case of the UK annuities new business) and amounts credited to certain policyholder accounts. It excludes the operating investment return on shareholder net assets, which has been separately disclosed as expected return on shareholder assets.
- Fee income represents profits driven by net investment performance, being asset management fees that vary with the size of the underlying policyholder funds net of investment management expenses.
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- With-profits business represents the gross of tax shareholders' transfer from the with-profits fund for the year.
- Insurance margin primarily represents profits derived from the insurance risks of mortality and morbidity.
- Margin on revenues primarily represents amounts deducted from premiums to cover acquisition costs and administration expenses.
- Acquisition costs and administration expenses represent expenses incurred in the year attributable to shareholders. It excludes items such as restructuring costs and Solvency II costs which are not included in the segment profit for insurance as well as items that are more appropriately included in other sources of earnings lines (eg investment expenses are netted against investment income as part of spread income or fee income as appropriate).
- DAC adjustments comprise DAC amortisation for the year, excluding amounts related to short-term fluctuations in investment returns, net of costs deferred in respect of new business.
Analysis of pre-tax IFRS operating profit by source and margin analysis of Group long-term insurance business
The following analysis expresses certain of the Group's sources of operating profit as a margin of policyholder liabilities or other suitable driver. Details on the calculation of the Group's average policyholder liability balances are given in note (iv).
2015 GBPm
Average Total
Asia US UK Total liability bps
note (iv) note (ii)
---------- ---------
Spread income 153 746 258 1,157 73,511 157
Fee income 162 1,672 62 1,896 125,380 151
With-profits 45 - 269 314 106,749 29
Insurance margin 783 796 180 1,759
Margin on revenues 1,732 - 179 1,911
Expenses:
Acquisition costsnote (i) (1,161) (939) (86) (2,186) 5,607 (39)%
Administration expenses (701) (828) (159) (1,688) 206,423 (82)
DAC adjustmentsnote (vi) 124 218 (2) 340
Expected return on shareholder assets 72 26 127 225
---------- ---------
1,209 1,691 828 3,728
Impact of specific management actions in second half of
2015 ahead of Solvency II - - 339 339
---------- ---------
Long-term business operating profit 1,209 1,691 1,167 4,067
----------
See notes at the end of this section.
2014 AER GBPm
Average Total
Asia US UK Total liability bps
note (v) note (iv) note(ii)
------- ------ -------- ------- ---------- --------
Spread income 125 734 272 1,131 67,252 168
Fee income 155 1,402 61 1,618 110,955 146
With-profits 43 - 255 298 101,290 29
Insurance margin 675 670 73 1,418
Margin on revenues 1,545 - 176 1,721
Expenses:
Acquisition costsnote (i) (1,031) (887) (96) (2,014) 4,627 (44)%
Administration expenses (618) (693) (143) (1,454) 186,049 (78)
DAC adjustmentsnote (vi) 92 191 (6) 277
Expected return on shareholder assets 64 14 137 215
--------------------------------------- ------- ------ -------- ------- ---------- --------
Long-term business operating profit 1,050 1,431 729 3,210
------- ------ -------- ------- ---------- --------
See notes at the end of this section.
2014 CER GBPm
note (iii)
Average Total
Asia US UK Total liability bps
note (v) note (iv) note (ii)
------- ------ -------- ------- ---------- ---------
Spread income 126 791 272 1,189 69,628 171
Fee income 154 1,511 61 1,726 116,507 148
With-profits 44 - 255 299 101,653 29
Insurance margin 669 722 73 1,464
Margin on revenues 1,532 - 176 1,708
Expenses:
Acquisition costsnote (i) (1,025) (956) (96) (2,077) 4,778 (43)%
Administration expenses (615) (747) (143) (1,505) 194,588 (77)
DAC adjustmentsnote (vi) 92 206 (6) 292
Expected return on shareholder assets 63 16 137 216
------- ------ -------- ------- ---------- ---------
Long-term business operating profit 1,040 1,543 729 3,312
------- ------ -------- ------- ----------
See notes at the end of this section.
Margin analysis of long-term insurance business - Asia
Asia
--------- --------- --------- ---------
2015 2014 AER 2014 CER
note (iii)
--------- ---------
Average Average Average
Profit Liability Margin Profit liability Margin Profit liability Margin
note (iv) note (ii) note (iv) note (ii) note (iv) note (ii)
Long-term business GBPm GBPm bps GBPm GBPm bps GBPm GBPm bps
--------- --------- --------- ---------
Spread income 153 11,039 139 125 9,183 136 126 9,333 135
Fee income 162 16,088 101 155 14,987 103 154 14,967 103
With-profits 45 17,446 26 43 14,823 29 44 15,186 29
Insurance margin 783 675 669
Margin on revenues 1,732 1,545 1,532
Expenses:
Acquisition
costsnote (i) (1,161) 2,853 (41)% (1,031) 2,237 (46)% (1,025) 2,267 (45)%
Administration
expenses (701) 27,127 (258) (618) 24,170 (256) (615) 24,300 (253)
DAC
adjustmentsnote
(vi) 124 92 92
Expected return on
shareholder assets 72 64 63
--------- --------- --------- ---------
Operating profit 1,209 1,050 1,040
--------- --------- --------- ---------
See notes at the end of the section.
Analysis of Asia operating profit drivers:
- Spread income increased by 21 per cent at constant exchange rates to GBP153 million in 2015, predominantly reflecting the growth of the Asia non-linked policyholder liabilities.
- Fee income increased by 5 per cent at constant exchange rates from GBP154 million in 2014 to GBP162 million in 2015, broadly in line with the increase in movement in average unit-linked liabilities.
- Insurance margin increased by 17 per cent at constant exchange rates to GBP783 million in 2015, predominantly reflecting the continued growth of the in-force book, which contains a relatively high proportion of risk-based products.
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- Margin on revenues increased by GBP200 million at constant exchange rates to GBP1,732 million in 2015, primarily reflecting higher premium income recognised in the year.
- Acquisition costs increased by 13 per cent at constant exchange rates (AER 13 per cent) to GBP1,161 million in 2015, compared to the 26 per cent increase in APE sales (AER 28 per cent increase), resulting in a decrease in the acquisition costs ratio. The analysis above uses shareholder acquisition costs as a proportion of total APE sales. If with-profits APE sales were excluded from the denominator the acquisition cost ratio would become 68 per cent (2014: 66 per cent at CER), the small increase being the result of changes to product and country mix.
- Administration expenses increased by 14 per cent at constant exchange rates to GBP701 million in 2015 as the business continues to expand. At constant exchange rates, the administration expense ratio has increased from 253 basis points in 2014 to 258 basis points in 2015, the result of changes to product and country mix.
Margin analysis of long-term insurance business - US
US
------ --------- --------- --------- ------ --------- ---------
2014 CER
2015 2014 AER note (iii)
Average Average Average
Profit liability Margin Profit liability Margin Profit liability Margin
note (iv) note (ii) note (iv) note (ii) note (iv) note (ii)
Long-term business GBPm GBPm bps GBPm GBPm bps GBPm GBPm bps
------ --------- --------- --------- ------ --------- ---------
Spread income 746 30,927 241 734 28,650 256 791 30,876 256
Fee income 1,672 86,921 192 1,402 72,492 193 1,511 78,064 194
Insurance margin 796 670 722
Expenses
Acquisition costsnote
(i) (939) 1,729 (54)% (887) 1,556 (57)% (956) 1,677 (57)%
Administration
expenses (828) 125,380 (66) (693) 108,984 (64) (747) 117,393 (64)
DAC adjustments 218 191 206
Expected return on
shareholder assets 26 14 16
------ --------- --------- --------- ------ --------- ---------
Operating profit 1,691 1,431 1,543
------ --------- --------- --------- ------ --------- ---------
See notes at the end of this section
Analysis of US operating profit drivers:
- Spread income declined by 6 per cent at constant exchange rates (AER increased by 2 per cent) to GBP746 million in 2015. The reported spread margin decreased to 241 basis points from 256 basis points in 2014 primarily due to lower investment yields. Spread income benefited from swap transactions previously entered into to more closely match the asset and liability duration. Excluding this effect, the spread margin would have been 166 basis points (2014 CER: 182 basis points and AER: 183 basis points).
- Fee income increased by 11 per cent at constant exchange rates (AER 19 per cent) to GBP1,672 million in 2015, primarily due to higher average separate account balances reflecting positive net cash flows from variable annuity business. Fee income margin has remained broadly in line with the prior year at 192 basis points (2014 CER: 194 basis points and AER: 193 basis points).
- Insurance margin represents operating profits from insurance risks, including variable annuity guarantees and other sundry items. Insurance margin increased to GBP796 million in 2015 compared to GBP722 million in the previous year at constant exchange rates primarily due to higher fee income from variable annuity guarantees following positive net flows in recent periods into variable annuity business with guarantees. REALIC contributed GBP215 million to this total (2014: GBP233 million at constant exchange rates).
- Acquisition costs, which are commissions and expenses incurred to acquire new business, including those that are not deferrable, decreased in absolute terms at constant exchange rates in line with trends observed in recent years. As a percentage of APE sales, acquisition costs have decreased to 54 per cent, compared to 57 per cent in 2014. This is due to the continued increase in producers selecting asset-based commissions which are treated as an administrative expense in this analysis, rather than front-end commissions.
- Administration expenses increased to GBP828 million in 2015 compared to GBP747 million for 2014 at constant exchange rates (AER GBP693 million), primarily as a result of higher asset-based commissions paid on the larger 2015 separate account balance subject to these trail commissions. These are paid on policy anniversary dates and are treated as an administration expense in this analysis. Excluding these trail commissions, the resulting administration expense ratio would be unchanged at 36 basis points (2014: CER 36 basis points and AER 36 basis points).
Analysis of pre-tax operating profit before and after acquisition costs and DAC adjustments
2014 CER GBPm
2015 GBPm 2014 AER GBPm note (iii)
Acquisition costs Acquisition costs Acquisition costs
Other Other Other
operating operating operating
profits Incurred Deferred Total profits Incurred Deferred Total profits Incurred Deferred Total
----- --------- ---------
Total operating profit
before acquisition costs
and DAC adjustments 2,412 2,412 2,127 2,127 2,293 2,293
Less new business strain (939) 734 (205) (887) 678 (209) (956) 731 (225)
Other DAC adjustments -
amortisation of previously
deferred acquisition costs:
Normal (514) (514) (474) (474) (511) (511)
(Accelerated)/Decelerated (2) (2) (13) (13) (14) (14)
----- --------- ---------
Total 2,412 (939) 218 1,691 2,127 (887) 191 1,431 2,293 (956) 206 1,543
----- --------- ---------
Margin analysis of long-term insurance business - UK
UK
2015 2014
note (v)
Average Average
Profit liability Margin Profit liability Margin note (ii)
note (iv) note (ii) note (iv)
Long-term business GBPm GBPm bps GBPm GBPm bps
Spread income 258 31,545 82 272 29,419 92
Fee income 62 22,371 28 61 23,476 26
With-profits 269 89,303 30 255 86,467 29
Insurance margin 180 73
Margin on revenues 179 176
Expenses:
Acquisition costsnote (i) (86) 1,025 (8)% (96) 834 (12)%
Administration expenses (159) 53,916 (29) (143) 52,895 (27)
DAC adjustments (2) (6)
Expected return on shareholder's assets 127 137
828 729
Impact of specific management actions in second
half of 2015 ahead of Solvency II 339 -
Operating profit 1,167 729
See notes at the end of this section
Analysis of UK operating profit drivers:
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- Spread income reduced from GBP272 million in 2014 to GBP258 million in 2015, mainly due to lower annuity new business profit post the reforms brought about by Pension Freedoms.
- Fee income principally represents asset management fees from unit-linked business, including direct investment only business to group pension schemes, where liability flows are driven by a small number of large single mandate transactions and fee income mostly arises within our UK asset management business. Excluding these schemes, the fee margin on the remaining balances was 43 bps (2014: 41 bps).
- With-profits transfers increased from GBP255 million in 2014 to GBP269 million in 2015, due to an increase in terminal bonus rates.
- Insurance margin increased to GBP180 million in 2015, reflecting the higher contribution from longevity reinsurance transactions undertaken during the first half of the year, positive experience in the year and the modest net effect of the annual review of assumptions.
- Margin on revenues represents premium charges for expenses and other sundry net income received by the UK. The 2015 margin remained stable at GBP179 million compared to the previous year.
- Acquisition costs incurred declined to GBP86 million, equivalent to 8 per cent of total APE sales in 2015 (2014: 12 per cent). The decline reflects a shift in business mix towards with-profits business where acquisition costs are funded by the estate. The acquisition cost ratio is also distorted by the high contribution to APE of bulk annuity sales in the year, where acquisition costs are comparatively lower. Acquisition costs expressed as a percentage of shareholder-backed APE sales (excluding the bulk annuity transactions) were 36 per cent (2014: 36 per cent).
- Administration expenses increased by GBP16 million to GBP159 million in 2015 largely due to increased spend associated with UK pension reforms.
- The contribution from specific management actions undertaken in the second half of 2015 to position the balance sheet more effectively under the new Solvency II regime was GBP339 million. Further explanation and analysis is provided in Additional Unaudited IFRS Financial Information section I(d).
Notes to sources of earnings tables:
(i) The ratio for acquisition costs is calculated as a percentage of APE sales including with-profits sales. Acquisition costs include only those relating to shareholder-backed business.
(ii) Margin represents the operating return earned in the year as a proportion of the relevant class of policyholder liabilities excluding unallocated surplus.
(iii) The 2014 comparative information has been presented at AER and CER so as to eliminate the impact of exchange translation. CER results are calculated by translating prior year results using the current year foreign exchange rates. All CER profit figures have been translated at current year average rates. For Asia CER average liability calculations the policyholder liabilities have been translated using current year opening and closing exchange rates. For the US CER average liability calculations the policyholder liabilities have been translated at the current year month end closing exchange rates. See also Note A1.
(iv) For UK and Asia, opening and closing policyholder liabilities have been used to derive an average balance for the year, as a proxy for average balances throughout the year. The calculation of average liabilities for Jackson is derived from month end balances throughout the year as opposed to opening and closing balances only. Average liabilities for spread income are based on the general account liabilities to which spread income attaches. Average liabilities used to calculate the administrative expense margin exclude the REALIC liabilities reinsured to third parties prior to the acquisition by Jackson.
(v) In order to show the UK long-term business on a comparable basis, the 2014 comparative results exclude the contribution from the sold PruHealth and PruProtect businesses.
(vi) The DAC adjustments contain a charge of GBP3 million in respect of joint ventures in 2015 (2014: AER credit of GBP11 million).
I(b) Asia operations - analysis of IFRS operating profit by territory
Operating profit based on longer-term investment returns for Asia operations is analysed as follows:
AER CER 2014 AER 2014 CER
2015 GBPm 2014 GBPm 2014 GBPm vs 2015 vs 2015
--------- ---------- ---------- -------- --------
Hong Kong 150 109 118 38% 27%
Indonesia 356 309 295 15% 21%
Malaysia 120 118 107 2% 12%
Philippines 32 28 29 14% 10%
Singapore 204 214 213 (5)% (4)%
Thailand 70 53 54 32% 30%
Vietnam 86 72 75 19% 15%
--------- ---------- ---------- -------- --------
SE Asia Operations inc. Hong Kong 1,018 903 891 13% 14%
China 32 13 14 146% 129%
India 42 49 49 (14)% (14)%
Korea 38 32 32 19% 19%
Taiwan 25 15 15 67% 67%
Other (4) (9) (9) 56% 56%
Non-recurrent itemsnote (ii) 62 49 50 27% 24%
--------- ---------- ---------- -------- --------
Total insurance operationsnote (i) 1,213 1,052 1,042 15% 16%
Development expenses (4) (2) (2) 100% 100%
--------- ---------- ---------- -------- --------
Total long-term business operating profit 1,209 1,050 1,040 15% 16%
Eastspring Investments 115 90 91 28% 26%
--------- ---------- ---------- -------- --------
Total Asia operations 1,324 1,140 1,131 16% 17%
--------- ---------- ---------- -------- --------
Notes
(i) Analysis of operating profit between new and in-force business
The result for insurance operations comprises amounts in respect of new business and business in force as follows:
2015 GBPm 2014 GBPm
AER CER
New business strain* (4) (18) (23)
Business in force 1,155 1,021 1,015
Non-recurrent itemsnote (ii) 62 49 50
Total 1,213 1,052 1,042
* The IFRS new business strain corresponds to approximately 0.1 per cent of new business APE premiums for 2015 (2014: approximately 0.8 per cent of new business APE).
The strain reflects the aggregate of the pre-tax regulatory basis strain to net worth after IFRS adjustments for deferral of acquisition costs and deferred income where appropriate.
(ii) Other non-recurrent items of GBP62 million in 2015 (2014: GBP49 million) represent a number of items none of which are individually significant and that are not anticipated to reoccur in subsequent years.
I(c) Analysis of asset management operating profit based on longer-term investment returns
2015 GBPm
---------- ----------
Eastspring Prudential
M&G Investments Capital US Total
note (ii) note (ii)
---------- ----------
Operating income before performance-related fees 939 304 118 321 1,682
Performance-related fees 22 3 - - 25
---------- ----------
Operating income (net of commission)note (i) 961 307 118 321 1,707
Operating expensenote (i) (533) (176) (99) (310) (1,118)
Share of associate's results 14 - - 14
Group's share of tax on joint ventures' operating profit - (16) - (16)
---------- ----------
Operating profit based on longer-term investment returns 442 115 19 11 587
---------- ----------
Average funds under management GBP252.5bn GBP85.1bn
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Margin based on operating income* 37bps 36bps
Cost / income ratio** 57% 58%
----------
2014 GBPm
Eastspring Prudential
M&G Investments Capital US Total
note (ii) notes (ii),(iii)
---------- ----------
Operating income before performance-related fees 954 240 130 303 1,627
Performance-related fees 33 1 - - 34
---------- ----------
Operating income (net of commission)note (i) 987 241 130 303 1,661
Operating expensenote (i) (554) (140) (88) (291) (1,073)
Share of associate's results 13 - - - 13
Group's share of tax on joint ventures' operating profit - (11) - - (11)
---------- ----------
Operating profit based on longer-term investment returns 446 90 42 12 590
---------- ----------
Average funds under management GBP250.0bn GBP68.8bn
Margin based on operating income* 38bps 35bps
Cost / income ratio** 58% 59%
----------
(i) Operating income and expense includes the Group's share of contribution from joint ventures (but excludes any contribution from associates). In the income statement as shown in note B2 of the IFRS financial statements, these amounts are netted and tax deducted and shown as a single amount.
(ii) M&G and Eastspring Investments can be further analysed as follows:
M&G Eastspring Investments
Operating income before performance related fees Operating income before performance related fees
Margin
of Institu- Margin Margin Margin Institu- Margin Margin
Retail FUM* tional(+) of FUM* Total of FUM* Retail of FUM* tional(+) of FUM* Total of FUM*
GBPm bps GBPm bps GBPm bps GBPm bps GBPm bps GBPm bps
------ --------- ------- ----- ------- ------- --------- ------- -----
2015 582 87 357 19 939 37 2015 188 61 116 21 304 36
------ --------- ------- ----- ------- ------- --------- ------- -----
2014 593 84 361 20 954 38 2014 139 60 101 22 240 35
------ --------- ------- ----- ------- ------- --------- ------- -----
* Margin represents operating income before performance-related fees as a proportion of the related funds under management (FUM). Monthly closing internal and external funds managed by the respective entity have been used to derive the average. Any funds held by the Group's insurance operations which are managed by third parties outside of the Prudential Group are excluded from these amounts.
** Cost/income ratio represents cost as a percentage of operating income before performance-related fees.
Institutional includes internal funds.
I(d) Contribution to UK Life financial metrics from specific management actions undertaken to position the balance sheet more effectively under the new Solvency II regime
In the second half of 2015 and ahead of securing Solvency II internal model approval, a number of specific actions were taken by Prudential's UK life business to position the balance sheet more efficiently under the new regime. These actions included extending the reinsurance of longevity risk to cover GBP8.7 billion of annuity liabilities (on a Pillar 1 basis) by the end of 2015 (end 2014: programme covered GBP2.3 billion of liabilities). It also included the repositioning of the fixed income asset portfolio, increasing to 95 per cent the proportion that would benefit from the matching adjustment under Solvency II. The effect of these actions on the UK's long term IFRS operating profit, underlying free surplus generation and EEV operating profit is shown in the tables below.
IFRS operating profit of UK long-term business
First Second Full Full
half half year year
2015 2015 2015 2014
Shareholder annuity new business 66 57 123 162
In-force business:
Longevity reinsurance transactions 61 170 231 30
Impact of specific management actions ahead of
Solvency II - 169 169 -
61 339 400 30
With-profits and other in-force 309 335 644 537
Total Life IFRS operating profit 436 731 1,167 729
Underlying free surplus generation of UK long-term business
First Second Full Full
half half year year
2015 2015 2015 2014
Expected in-force and return on net worth 310 310 620 571
Longevity reinsurance transactions 52 148 200 30
Impact of specific management actions ahead of
Solvency II - 75 75 -
52 223 275 30
Changes in operating assumptions, experience
variances and solvency II and other restructuring
costs (10) (7) (17) 36
Underlying free surplus generated from in-force
business 352 526 878 637
New business strain (57) (8) (65) (65)
Total underlying free surplus generation 295 518 813 572
EEV post-tax operating profit of UK long-term business
First Second Full Full
half half year year
2015 2015 2015 2014
Unwind of discount and other expected return 245 243 488 410
Longevity reinsurance transactions (46) (88) (134) (8)
Impact of specific management actions ahead of
Solvency II - 75 75 -
(46) (13) (59) (8)
Changes in operating assumptions and experience
variances 57 59 116 74
Operating profit from in-force business 256 289 545 476
New business profit 155 163 318 259
Total post-tax Life EEV operating profit 411 452 863 735
II Other Information
II(a) Holding company cash flow
2015 GBPm 2014 GBPm
------------------------------------------------------------------- --------- ---------
Net cash remitted by business units:
UK net remittances to the Group
UK Life fund paid to the Group 200 193
Shareholder-backed business:
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Other UK paid to the Group 131 132
------------------------------------------------------------------- --------- ---------
Total UK net remittances to the Group 331 325
US remittances to the Group 470 415
Asia net remittances to the Group
Asia paid to the Group:
Long-term business 494 453
Other operations 74 60
------------------------------------------------------------------- --------- ---------
568 513
Group invested in Asia:
Long-term business (5) (3)
Other operations (including funding of regional head office costs) (96) (110)
------------------------------------------------------------------- --------- ---------
(101) (113)
------------------------------------------------------------------- --------- ---------
Total Asia net remittances to the Group 467 400
M&G remittances to the Group 302 285
PruCap remittances to the Group 55 57
--------------------------------------------------------------------- --------- ---------
Net remittances to the Group from business units 1,625 1,482
Net interest paid (290) (335)
Tax received 145 198
Corporate activities (193) (193)
Solvency II costs (16) (23)
--------- ---------
Total central outflows (354) (353)
--------- ---------
Operating holding company cash flow before dividend* 1,271 1,129
Dividend paid (974) (895)
--------------------------------------------------------------------- --------- ---------
Operating holding company cash flow after dividend* 297 234
Non-operating net cash flow** 376 (978)
--------------------------------------------------------------------- --------- ---------
Total holding company cash flow 673 (744)
Cash and short-term investments at beginning of year 1,480 2,230
Foreign exchange movements 20 (6)
--------- ---------
Cash and short-term investments at end of year 2,173 1,480
--------------------------------------------------------------------- --------- ---------
* Including central finance subsidiaries.
**Non-operating net cash flow is principally for corporate transactions for distribution rights and acquired subsidiaries and issue and repayment of subordinated debt.
II(b) Funds under management
(a) Summary
2015 GBPbn 2014 GBPbn
---------- ----------
Business area:
Asia operations 54.0 49.0
US operations 134.6 123.6
UK operations 168.4 169.0
---------- ----------
Prudential Group funds under managementnote (i) 357.0 341.6
External funds note (ii) 151.6 154.3
---------- ----------
Total funds under management 508.6 495.9
---------- ----------
Notes
(i) Prudential Group funds under management of GBP357.0 billion (2014: GBP341.6 billion) comprise:
2015 GBPbn 2014 GBPbn
---------- ----------
Total investments per the consolidated statement of financial position 352.0 337.4
Less: investments in joint ventures and associates accounted for using the equity method (1.0) (1.0)
Investment properties which are held for sale or occupied by the Group (included in other
IFRS captions) 0.4 0.3
Internally managed funds held in joint ventures 5.6 4.9
---------- ----------
Prudential Group funds under management 357.0 341.6
---------- ----------
(ii) External funds shown above as at 31 December 2015 of GBP151.6 billion (2014: GBP154.3 billion) comprise GBP162.7 billion (2014: GBP167.2 billion) of funds managed by M&G and Eastspring Investments as shown in note (b) below less GBP11.1 billion (2014: GBP12.9 billion) that are classified within Prudential Group's funds.
(b) Investment products - external funds under management
2015 GBPm 2014 GBPm
--------------------------------- ---------------------------------
Eastspring Group Eastspring Group
Investments M&G total Investments M&G total
note note
---------------------------------------------- ------------ -------- --------- ------------ -------- ---------
1 January 30,133 137,047 167,180 22,222 125,989 148,211
Market gross inflows 110,396 33,626 144,022 82,440 38,017 120,457
Redemptions (103,360) (40,634) (143,994) (77,001) (30,930) (107,931)
Market exchange translation and other
movements (882) (3,634) (4,516) 2,472 3,971 6,443
---------------------------------------------- ------------ -------- --------- ------------ -------- ---------
31 December 36,287 126,405 162,692 30,133 137,047 167,180
---------------------------------------------- ------------ -------- --------- ------------ -------- ---------
Note
The GBP162.7 billion (2014: GBP167.2 billion) investment products comprise GBP156.7 billion (2014: GBP162.4 billion) plus Asia Money Market Funds of GBP6.0 billion (2014: GBP4.8 billion)
(c) M&G and Eastspring Investments - total funds under management
Eastspring
Investments M&G
---------------------- ----------------------
2015 GBPbn 2014 GBPbn 2015 GBPbn 2014 GBPbn
---------- ---------- ---------- ----------
note note
---------- ---------- ---------- ----------
External funds under management 36.3 30.1 126.4 137.0
Internal funds under management 52.8 47.2 119.7 127.0
---------- ---------- ---------- ----------
Total funds under management 89.1 77.3 246.1 264.0
---------- ---------- ---------- ----------
Note
The external funds under management for Eastspring Investments include Asia Money Market Funds at 31 December 2015 of GBP6.0 billion (2014: GBP4.8 billion).
II(c) Solvency II capital position at 31 December 2015
The estimated Group Solvency II surplus at 31 December 2015 was GBP9.7 billion, before allowing for the 2015 second interim ordinary and special dividend.
Estimated Group Solvency II capital position 31 December 2015 GBPbn
----------------------
Own funds 20.1
Solvency capital requirement 10.4
Surplus 9.7
Solvency ratio 193%
----------------------
These results allow for:
-- Capital in Jackson in excess of 250 per cent of the US local Risk Based Capital requirement. As agreed with the Prudential Regulation Authority, this is incorporated in the result above as follows:
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-- Own funds: represent Jackson's local US Risk Based available capital less 100 per cent of the US Risk Based Capital requirement (Company Action Level); and
-- Solvency Capital Requirement: represent 150 per cent of Jackson's local US Risk Based Capital requirement (Company Action Level);
-- Non-recognition of a portion of Solvency II surplus capital relating to the Group's Asian life operations, reflecting regulatory prudence;
-- Matching adjustment for UK annuities, based on the 31 December 2015 calibration published by the European Insurance and Occupational Pensions Authority; and
-- Transitional measures which have the effect of preserving the Solvency II surplus for our UK business at the same level as under Solvency I, for business written before 1 January 2016.
The Group's Solvency II capital surplus excludes:
-- Diversification benefits between Jackson and the rest of the Group;
-- Surplus in ring-fenced with-profits funds including the shareholder's share of the estate of with-profits funds; and
-- Surplus in pension funds.
Analysis of movement in capital position
We previously reported our economic capital results at year end 2013 and year end 2014 before there was certainty in the final outcome of Solvency II and before we received internal model approval. The Solvency II results now reflect the output from our approved internal model under the final Solvency II rules. Allowing for this change in basis, the movement from the previously reported economic capital basis solvency surplus at 31 December 2014 to the Solvency II approved internal model surplus at 31 December 2015 is set out in the table below:
Analysis of movement in Group surplus GBPbn Economic capital surplus as at 1 January 2015 9.7 Operating experience 2.4 Non-operating experience (including market movements) (0.6) Other capital movements Subordinated debt issuance 0.6 Foreign currency translation impacts 0.2 Dividends paid (1.0) Methodology and calibration changes Changes to Own Funds (net of transitionals) and Solvency Capital Requirement calibration strengthening (0.2) Effect of partial derecognition of Asia Solvency II surplus (1.4) Estimated solvency II surplus as at 31 December 2015 9.7
The movement in Group surplus over 2015 is driven by:
-- Operating experience of GBP2.4 billion: generated by in-force business and new business written in 2015, including GBP0.4 billion of benefit from the specific actions taken in the second half of the year to position the balance sheet more efficiently under the new Solvency II regime;
-- Non-operating experience of GBP0.6 billion: mainly arising from negative market experience during the year; and
-- Other capital movements: comprising an increase in capital from subordinated debt issuance, a gain from positive foreign currency translation effects and a reduction in surplus from payment of dividends.
In addition, the methodology and calibration changes arising from Solvency II relate to:
-- A GBP0.2 billion reduction in surplus due to an increase in the Solvency Capital Requirement from strengthening of internal model calibrations, mainly relating to longevity risk, operational risk, credit risk and correlations, and a corresponding increase in the risk margin, which is partially offset by UK transitionals; and
-- A GBP1.4 billion reduction in surplus due to the negative impact of Solvency II rules for "contract boundaries" and a reduction in the capital surplus of the Group's Asian life operations, as agreed with the Prudential Regulation Authority.
The change in US treatment from including 150 per cent, rather than 250 per cent of US Risk Based Capital (Company Action Level) in the Group Solvency Capital Requirement, is offset by a corresponding reduction in the Group Own Funds and therefore has no impact on surplus despite the positive impact on the solvency ratio.
The impacts above, including the impact of the change in basis from economic capital to Solvency II, represent an overall reduction in the Group solvency ratio from 218 per cent to 193 per cent.
Solvency
Own Capital Solvency
Analysis of movement in Group solvency position (GBP billion) Funds Requirement Surplus ratio
----------------------------------------------------------------------------- ------ ------------ ------- --------
Economic capital position at 1 January 2015 17.9 8.2 9.7 218%
Capital generation and other movements 2.0 0.4 1.6 13%
Methodology and calibration changes
Changes to Own Funds (net of transitionals) and Solvency Capital Requirement
calibration strengthening 2.3 2.5 (0.2) (32)%
Effect of partial derecognition of Asia Solvency II surplus (1.4) - (1.4) (12)%
US Risk Based Capital treatment (0.7) (0.7) - 6%
Estimated Solvency II position at 31 December 2015 20.1 10.4 9.7 193%
----------------------------------------------------------------------------- ------ ------------ ------- --------
Analysis of Group Solvency Capital Requirements
The split of the Group's estimated Solvency Capital Requirement by risk type including the capital requirements in respect of Jackson's risk exposures based on 150 per cent of US Risk Based Capital requirements (Company Action Level) but with no diversification between Jackson and the rest of the Group, is as follows:
31 December 2015 31 December 2015
------------------ -----------------
% of undiversified % of diversified
Solvency Capital Solvency Capital
Split of the Group's estimated Solvency Capital Requirements Requirements Requirements
-------------------------------------------------------------- ------------------ -----------------
Market 55% 72%
Equity 11% 16%
Credit 28% 47%
Yields (interest rates) 13% 6%
Other 3% 3%
Insurance 27% 20%
Mortality/morbidity 5% 2%
14% 14%
Longevity 8% 4%
Operational/expense 11% 7%
FX translation 7% 1%
------------------ -----------------
Reconciliation of IFRS equity to Group Solvency II Own Funds
31 December 2015
Reconciliation of IFRS equity to Group Solvency II Own Funds GBPbn
IFRS shareholders' equity 13.0
Restate US insurance entities from IFRS onto local US statutory basis (1.5)
Remove DAC, goodwill & intangibles (3.7)
Add subordinated-debt 4.4
Impact of risk margin (net of transitionals) (2.5)
Add value of shareholder-transfers 3.1
Liability valuation differences 8.6
Increase in value of net deferred tax liabilities
(resulting from valuation differences above) (0.9)
Other (0.4)
Estimated Solvency II Own Funds 20.1
The key items of the reconciliation are:
-- GBP1.5 billion represents the adjustment required to the Group's shareholders' funds in order to convert Jackson's contribution from an IFRS basis to the local statutory valuation basis. This item also reflects a derecognition of Own Funds of GBP0.7 billion, equivalent to the value of 100 per cent of Risk Based Capital requirements (Company Action Level), as agreed with the Prudential Regulation Authority;
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