Form 6-K PRUDENTIAL PLC For: Mar 13
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of March,
2019
PRUDENTIAL PUBLIC LIMITED COMPANY
(Translation of registrant's name into English)
LAURENCE POUNTNEY HILL,
LONDON, EC4R 0HH, ENGLAND
(Address
of principal executive offices)
Indicate
by check mark whether the registrant files or will file annual
reports
under
cover Form 20-F or Form 40-F.
Form
20-F X
Form 40-F
Indicate
by check mark whether the registrant by furnishing the
information
contained
in this Form is also thereby furnishing the information to
the
Commission
pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes
No X
If
"Yes" is marked, indicate below the file number assigned to the
registrant
in connection with Rule 12g3-2(b): 82-
International
Financial Reporting Standards (IFRS) Basis Results
Consolidated income
statement
|
|
Note
|
2018 £m
|
2017 £m
|
Gross premiums earned
|
|
47,224
|
44,005
|
|
Outward reinsurance premiumsnote
(i)
|
|
(14,023)
|
(2,062)
|
|
Earned premiums, net of reinsurance
|
|
33,201
|
41,943
|
|
Investment return
|
|
(10,263)
|
42,189
|
|
Other incomenote
(ii)
|
|
1,993
|
2,258
|
|
Total revenue, net of reinsurance
|
|
24,931
|
86,390
|
|
Benefits and claimsnote
(i)
|
|
(27,411)
|
(71,854)
|
|
Outward reinsurers’ share of benefit and
claimsnote
(i)
|
|
13,554
|
2,193
|
|
Movement in unallocated surplus of with-profits funds
|
|
1,289
|
(2,871)
|
|
Benefits and claims and movement in unallocated
surplus
of with-profits funds, net of reinsurance
|
|
(12,568)
|
(72,532)
|
|
Acquisition costs and other expenditurenote
(ii)
|
B2
|
(8,855)
|
(9,993)
|
|
Finance costs: interest on core structural borrowings of
shareholder-financed businesses
|
|
(410)
|
(425)
|
|
(Loss) gain on disposal of businesses and corporate
transactions
|
D1.1
|
(80)
|
223
|
|
Remeasurement of the sold Korea life business
|
|
–
|
5
|
|
Total charges, net of reinsurance and (loss) gain on disposal of
businesses
|
|
(21,913)
|
(82,722)
|
|
Share of profits from joint ventures and associates, net of related
tax
|
|
291
|
302
|
|
Profit before tax (being tax attributable to
shareholders’ and policyholders’
returns)note
(iii)
|
|
3,309
|
3,970
|
|
Less tax credit (charge) attributable to policyholders'
returns
|
|
326
|
(674)
|
|
Profit before tax attributable to shareholders
|
B1.1
|
3,635
|
3,296
|
|
Total tax charge attributable to policyholders and
shareholders
|
B4
|
(296)
|
(1,580)
|
|
Adjustment to remove tax (credit) charge attributable to
policyholders' returns
|
|
(326)
|
674
|
|
Tax charge attributable to shareholders' returns
|
B4
|
(622)
|
(906)
|
|
Profit for the year
|
|
3,013
|
2,390
|
|
|
|
|
|
|
Attributable to:
|
|
|
|
|
|
Equity holders of the Company
|
|
3,010
|
2,389
|
|
Non-controlling interests
|
|
3
|
1
|
Profit for the year
|
|
3,013
|
2,390
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share (in pence)
|
Note
|
2018
|
2017
|
|
Based on profit attributable to the equity holders of the
Company:
|
B5
|
|
|
|
|
Basic
|
|
116.9p
|
93.1p
|
|
Diluted
|
|
116.8p
|
93.0p
|
|
|
|
|
|
|
|
|
|
|
Dividends per share (in pence)
|
Note
|
2018
|
2017
|
|
Dividends relating to reporting year:
|
B6
|
|
|
|
|
First interim ordinary dividend
|
|
15.67p
|
14.50p
|
|
Second interim ordinary dividend
|
|
33.68p
|
32.50p
|
Total
|
|
49.35p
|
47.00p
|
|
Dividends paid in reporting year:
|
B6
|
|
|
|
|
Current year first interim dividend
|
|
15.67p
|
14.50p
|
|
Second interim ordinary dividend for prior year
|
|
32.50p
|
30.57p
|
Total
|
|
48.17p
|
45.07p
|
Notes
(i)
Outward reinsurance
premiums include the £(12,149) million paid during the year in
respect of the reinsurance of the UK annuity portfolio. The
associated increase in reinsurance assets is included in outward
reinsurers’ share of benefits and claims and the
consequential change to policyholder liabilities is included in
benefits and claims. See note D1.1 for further
details.
(ii)
The 2017
comparative results have been re-presented from those previously
published for the deduction of certain expenses against revenue
following the adoption of IFRS 15. See note A2.
(iii)
This measure is the
formal profit before tax measure under IFRS but it is not the
result attributable to shareholders. This is principally because
the corporate taxes of the Group include those on the income of
consolidated with-profits and unit-linked funds that, through
adjustments to benefits, are borne by policyholders. These amounts
are required to be included in the tax charge of the Company under
IAS 12. Consequently, the profit before all taxes measure is not
representative of pre-tax profits attributable to shareholders.
Profit before all taxes is determined after deducting the cost of
policyholder benefits and movements in the liability for
unallocated surplus of with-profits funds after adjusting for taxes
borne by policyholders.
International Financial Reporting Standards (IFRS) Basis
Results
Consolidated
statement of comprehensive income
|
Note
|
2018 £m
|
2017 £m
|
|
|
|
|
|
|
Profit for the year
|
|
3,013
|
2,390
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
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
|
A1
|
344
|
(404)
|
|
Cumulative exchange gain of sold Korea life business recycled
through profit or loss
|
|
–
|
(61)
|
|
Related tax
|
|
5
|
(5)
|
|
|
|
349
|
(470)
|
Net unrealised valuation movements on securities of US insurance
operations classified as available-for-sale:
|
|
|
|
|
|
Net unrealised holding (losses) gains arising in the
year
|
|
(1,606)
|
591
|
|
(Deduct net gains) add back net losses included in the income
statement on disposal and impairment
|
|
(11)
|
26
|
|
Total
|
C3.2(c)
|
(1,617)
|
617
|
|
Related change in amortisation of deferred acquisition
costs
|
C5.2
|
246
|
(76)
|
|
Related tax
|
C8.1
|
288
|
(55)
|
|
|
|
(1,083)
|
486
|
|
|
|
|
|
Total
|
|
(734)
|
16
|
|
|
|
|
|
|
Items that will not be reclassified to profit or loss
|
|
|
|
|
Shareholders' share of actuarial gains and losses on defined
benefit pension schemes:
|
|
|
|
|
|
Actuarial gains and losses on defined benefit pension
schemes
|
|
134
|
200
|
|
Related tax
|
|
(23)
|
(33)
|
|
|
|
111
|
167
|
|
Deduct amount attributable to UK with-profit funds transferred to
unallocated surplus of with-profit funds, net of related
tax
|
|
(38)
|
(78)
|
|
|
|
73
|
89
|
|
|
|
|
|
Other comprehensive (loss) income for the year, net of related
tax
|
|
(661)
|
105
|
|
Total comprehensive income for the year
|
|
2,352
|
2,495
|
|
|
|
|
|
|
Attributable to:
|
|
|
|
|
|
Equity holders of the Company
|
|
2,348
|
2,494
|
|
Non-controlling interests
|
|
4
|
1
|
Total comprehensive income for the year
|
|
2,352
|
2,495
|
International Financial Reporting Standards (IFRS) Basis
Results
Consolidated
statement of changes in equity
|
|
|
Year ended 31 December 2018 £m
|
|||||||
|
|
Share
capital
|
Share
premium
|
Retained
earnings
|
Translation
reserve
|
Available
-for-sale
securities
reserves
|
Shareholders'
equity
|
Non-
controlling
interests
|
Total
equity
|
|
|
|
Note
|
C10
|
C10
|
|
|
|
|
|
|
Reserves
|
|
|
|
|
|
|
|
|
|
|
Profit for the year
|
|
–
|
–
|
3,010
|
–
|
–
|
3,010
|
3
|
3,013
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
Exchange movements on foreign operations and net investment hedges,
net of related tax
|
|
–
|
–
|
–
|
348
|
–
|
348
|
1
|
349
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealised valuation movements, net of related change in
amortisation of deferred acquisition costs and related
tax
|
|
–
|
–
|
–
|
–
|
(1,083)
|
(1,083)
|
–
|
(1,083)
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ share of actuarial gains and losses
on
defined benefit pension schemes, net of related tax
|
|
–
|
–
|
73
|
–
|
–
|
73
|
–
|
73
|
Total other comprehensive income (loss)
|
|
–
|
–
|
73
|
348
|
(1,083)
|
(662)
|
1
|
(661)
|
|
Total comprehensive income for the year
|
|
–
|
–
|
3,083
|
348
|
(1,083)
|
2,348
|
4
|
2,352
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
B6
|
–
|
–
|
(1,244)
|
–
|
–
|
(1,244)
|
–
|
(1,244)
|
|
Reserve movements in respect of share-based payments
|
|
–
|
–
|
69
|
–
|
–
|
69
|
–
|
69
|
|
Change in non-controlling interests
|
D1.2
|
–
|
–
|
–
|
–
|
–
|
–
|
7
|
7
|
|
Movements in respect of option to acquire non-controlling
interests
|
D1.2
|
–
|
–
|
(109)
|
–
|
–
|
(109)
|
–
|
(109)
|
|
|
|
|
|
|
|
|
|
|
|
|
Share capital and share premium
|
|
|
|
|
|
|
|
|
|
|
New share capital subscribed
|
C10
|
1
|
16
|
–
|
–
|
–
|
17
|
–
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury shares
|
|
|
|
|
|
|
|
|
|
|
Movement in own shares in respect of share-based payment
plans
|
|
–
|
–
|
29
|
–
|
–
|
29
|
–
|
29
|
|
Movement in Prudential plc shares purchased by unit trusts
consolidated under IFRS
|
|
–
|
–
|
52
|
–
|
–
|
52
|
–
|
52
|
|
Net increase (decrease) in equity
|
|
1
|
16
|
1,880
|
348
|
(1,083)
|
1,162
|
11
|
1,173
|
|
At beginning of year
|
|
129
|
1,948
|
12,326
|
840
|
844
|
16,087
|
7
|
16,094
|
|
At end of year
|
|
130
|
1,964
|
14,206
|
1,188
|
(239)
|
17,249
|
18
|
17,267
|
International
Financial Reporting Standards (IFRS) Basis Results
Consolidated
statement of changes in equity
|
|
|
Year ended 31 December 2017 £m
|
|||||||
|
|
Share
capital
|
Share
premium
|
Retained
earnings
|
Translation
reserve
|
Available
-for-sale
securities
reserves
|
Shareholders'
equity
|
Non-
controlling
interests
|
Total
equity
|
|
|
|
Note
|
C10
|
C10
|
|
|
|
|
|
|
Reserves
|
|
|
|
|
|
|
|
|
|
|
Profit for the year
|
|
–
|
–
|
2,389
|
–
|
–
|
2,389
|
1
|
2,390
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
Exchange movements on foreign operations and net investment hedges,
net of related tax
|
|
–
|
–
|
–
|
(470)
|
–
|
(470)
|
–
|
(470)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealised valuation movements, net of related change in
amortisation of deferred acquisition costs and related
tax
|
|
–
|
–
|
–
|
–
|
486
|
486
|
–
|
486
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ share of actuarial gains and losses
on
defined benefit pension schemes, net of related tax
|
|
–
|
–
|
89
|
–
|
–
|
89
|
–
|
89
|
Total other comprehensive
income (loss)
|
|
–
|
–
|
89
|
(470)
|
486
|
105
|
–
|
105
|
|
Total comprehensive income
for the year
|
|
–
|
–
|
2,478
|
(470)
|
486
|
2,494
|
1
|
2,495
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
B6
|
–
|
–
|
(1,159)
|
–
|
–
|
(1,159)
|
–
|
(1,159)
|
|
Reserve movements in respect of share-based payments
|
|
–
|
–
|
89
|
–
|
–
|
89
|
–
|
89
|
|
Change in non-controlling interests
|
|
–
|
–
|
–
|
–
|
–
|
–
|
5
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
Share capital and share premium
|
|
|
|
|
|
|
|
|
|
|
New share capital subscribed
|
C10
|
–
|
21
|
–
|
–
|
–
|
21
|
–
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury shares
|
|
|
|
|
|
|
|
|
|
|
Movement in own shares in respect of share-based payment
plans
|
|
–
|
–
|
(15)
|
–
|
–
|
(15)
|
–
|
(15)
|
|
Movement in Prudential plc shares purchased by unit trusts
consolidated under IFRS
|
|
–
|
–
|
(9)
|
–
|
–
|
(9)
|
–
|
(9)
|
|
Net increase (decrease) in equity
|
|
–
|
21
|
1,384
|
(470)
|
486
|
1,421
|
6
|
1,427
|
|
At beginning of year
|
|
129
|
1,927
|
10,942
|
1,310
|
358
|
14,666
|
1
|
14,667
|
|
At end of year
|
|
129
|
1,948
|
12,326
|
840
|
844
|
16,087
|
7
|
16,094
|
International
Financial Reporting Standards (IFRS) Basis Results
Consolidated
statement of financial position
|
Note
|
31 Dec 2018 £m
|
31 Dec 2017 £m
|
Assets
|
|
|
|
Goodwill
|
C5.1
|
1,857
|
1,482
|
Deferred acquisition costs and other intangible assets
|
C5.2
|
11,923
|
11,011
|
Property, plant and equipment
|
|
1,409
|
789
|
Reinsurers' share of insurance contract liabilities
|
|
11,144
|
9,673
|
Deferred tax assets
|
C8
|
2,595
|
2,627
|
Current tax recoverable
|
|
618
|
613
|
Accrued investment income
|
|
2,749
|
2,676
|
Other debtors
|
|
4,088
|
2,963
|
Investment properties
|
|
17,925
|
16,497
|
Investment in joint ventures and associates accounted for using the
equity method
|
|
1,733
|
1,416
|
Loans
|
C3.3
|
18,010
|
17,042
|
Equity securities and portfolio holdings in unit
trustsnote
(i)
|
|
214,733
|
223,391
|
Debt securitiesnote
(i)
|
C3.2
|
175,356
|
171,374
|
Derivative assets
|
|
3,494
|
4,801
|
Other investmentsnote
(i)
|
|
6,512
|
5,622
|
Deposits
|
|
11,796
|
11,236
|
Assets held for salenote
(ii)
|
|
10,578
|
38
|
Cash and cash equivalents
|
C1
|
12,125
|
10,690
|
Total assets
|
C1
|
508,645
|
493,941
|
|
|
|
|
Equity
|
|
|
|
Shareholders' equity
|
|
17,249
|
16,087
|
Non-controlling interests
|
|
18
|
7
|
Total equity
|
|
17,267
|
16,094
|
|
|
|
|
Liabilities
|
|
|
|
Insurance contract liabilities
|
C4.1
|
322,666
|
328,172
|
Investment contract liabilities with discretionary participation
features
|
C4.1
|
67,413
|
62,677
|
Investment contract liabilities without discretionary participation
features
|
C4.1
|
19,222
|
20,394
|
Unallocated surplus of with-profits funds
|
C4.1
|
15,845
|
16,951
|
Core structural borrowings of shareholder-financed
businesses
|
C6.1
|
7,664
|
6,280
|
Operational borrowings attributable to shareholder-financed
businesses
|
C6.2
|
998
|
1,791
|
Borrowings attributable to with-profits businesses
|
C6.2
|
3,940
|
3,716
|
Obligations under funding, securities lending and sale and
repurchase agreements
|
|
6,989
|
5,662
|
Net asset value attributable to unit holders of consolidated unit
trusts and similar funds
|
|
11,651
|
8,889
|
Deferred tax liabilities
|
C8
|
4,022
|
4,715
|
Current tax liabilities
|
|
568
|
537
|
Accruals, deferred income and other liabilities
|
C1
|
15,248
|
14,185
|
Provisions
|
|
1,078
|
1,123
|
Derivative liabilities
|
|
3,506
|
2,755
|
Liabilities held for salenote
(ii)
|
|
10,568
|
–
|
Total liabilities
|
C1
|
491,378
|
477,847
|
Total equity and liabilities
|
|
508,645
|
493,941
|
Notes
(i)
Included
within equity securities and portfolio holdings in unit trusts,
debt securities and other investments are £8,278 million (31
December 2017: £8,232 million) of lent securities and assets
subject to repurchase agreements.
(ii)
Assets held for sale of £10,578 million
include £10,568 million in respect of the reinsured UK annuity
business. A corresponding amount is reflected in liabilities
held for sale. See note D1.1 for
further details.
International
Financial Reporting Standards (IFRS) Basis Results
Consolidated
statement of cash flows
|
|
|
Note
|
2018 £m
|
2017 £m
|
Cash flows from operating activities
|
|
|
|
||
Profit before tax (being tax attributable to
shareholders' and policyholders' returns)note
(i)
|
|
3,309
|
3,970
|
||
Adjustments to profit before tax for non-cash movements in
operating assets and liabilities:
|
|
|
|
||
|
Investments
|
|
15,456
|
(49,771)
|
|
|
Other non-investment and non-cash assets
|
|
(3,503)
|
(968)
|
|
|
Policyholder liabilities (including unallocated
surplus)
|
|
(17,392)
|
44,877
|
|
|
Other liabilities (including operational borrowings)
|
|
4,344
|
3,360
|
|
Interest income and expense and dividend income included in result
before tax
|
|
(7,861)
|
(8,994)
|
||
Operating cash items:
|
|
|
|
||
|
Interest receipts and payments
|
|
5,793
|
6,900
|
|
|
Dividend receipts
|
|
2,361
|
2,612
|
|
|
Tax paidnote
(iv)
|
|
(625)
|
(915)
|
|
Other non-cash items
|
|
582
|
549
|
||
Net cash flows from operating activities
|
|
2,464
|
1,620
|
||
Cash flows from investing activities
|
|
|
|
||
Purchases of property, plant and equipment
|
|
(289)
|
(134)
|
||
Proceeds from disposal of property, plant and
equipment
|
|
4
|
–
|
||
Acquisition of businesses and intangiblesnote
(v)
|
|
(504)
|
(351)
|
||
Sale of businessesnote
(v)
|
|
–
|
1,301
|
||
Net cash flows from investing activities
|
|
(789)
|
816
|
||
Cash flows from financing activities
|
|
|
|
||
Structural borrowings of the Group:
|
|
|
|
||
|
Shareholder-financed businesses:note
(ii)
|
C6.1
|
|
|
|
|
|
Issue of subordinated debt, net of costs
|
|
1,630
|
565
|
|
|
Redemption of subordinated debt
|
|
(434)
|
(751)
|
|
|
Fees paid to modify terms and conditions of senior
debtnote
(ii)
|
|
(33)
|
–
|
|
|
Interest paid
|
|
(376)
|
(369)
|
|
With-profits businesses:note
(iii)
|
C6.2
|
|
|
|
|
|
Redemption of subordinated debt
|
|
(100)
|
–
|
|
|
Interest paid
|
|
(4)
|
(9)
|
Equity capital:
|
|
|
|
||
|
Issues of ordinary share capital
|
|
17
|
21
|
|
|
Dividends paid
|
|
(1,244)
|
(1,159)
|
|
Net cash flows from financing activities
|
|
(544)
|
(1,702)
|
||
Net increase in cash and cash equivalents
|
|
1,131
|
734
|
||
Cash and cash equivalents at beginning of year
|
|
10,690
|
10,065
|
||
Effect of exchange rate changes on cash and cash
equivalents
|
|
304
|
(109)
|
||
Cash and cash equivalents at end of year
|
|
12,125
|
10,690
|
Notes
(i)
This measure is the
formal profit before tax measure under IFRS but it is not the
result attributable to shareholders.
(ii)
Structural
borrowings of shareholder-financed businesses exclude borrowings to
support short-term fixed income securities programmes, non-recourse
borrowings of investment subsidiaries of shareholder-financed
businesses and other borrowings of shareholder-financed businesses.
Cash flows in respect of these borrowings are included within cash
flows from operating activities. The changes in the carrying value
of the structural borrowings of shareholder-financed businesses
during 2018 are analysed as follows:
|
|
Cash movements £m
|
|
Non-cash movements £m
|
|||||
|
|
Balance at
beginning
of year
|
Issue
of debt
|
Redemption
of debt
|
Modification
of debt*
|
|
Foreign
exchange
movement
|
Other
movements
|
Balance at
end of
year
|
|
2018
|
6,280
|
1,630
|
(434)
|
(33)
|
|
210
|
11
|
7,664
|
|
2017
|
6,798
|
565
|
(751)
|
–
|
|
(341)
|
9
|
6,280
|
*
The amount in 2018
relates to fees paid to bondholders who participated in the voting
process in respect of certain modifications to the terms and
conditions of the senior debt. Other than these fees, the
modification did not result in an adjustment to the carrying value
of the senior debt.
(iii)
Interest paid on
structural borrowings of with-profits businesses relates solely to
the £100 million 8.5 per cent undated subordinated guaranteed
bonds, which contribute to the solvency base of the Scottish
Amicable Insurance Fund (SAIF), a ring-fenced sub-fund of the UK
with-profits fund. These bonds were redeemed in full on 30 June
2018. 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.
(iv)
Tax paid includes
£134 million (2017: £298 million) paid on profits taxable
at policyholder rather than shareholder rates.
(v)
Cash flows arising
from the ‘acquisition of businesses and intangibles’
and ‘sale of businesses’ include amounts paid for
distribution rights and cash flows arising from the acquisitions
and disposals of businesses (including subsidiaries acquired and
disposed by with-profits funds for investment
purposes).
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
Standards as issued by the International Accounting Standards Board
(IASB) and as endorsed by the European Union (EU) as required by EU
law (IAS Regulation EC1606/2032). EU-endorsed IFRS Standards may
differ from IFRS Standards issued by the IASB if, at any point in
time, new or amended IFRS Standards have not been endorsed by the
EU. At 31 December 2018, there were no unendorsed standards
effective for the two years ended 31 December 2018 which impact the
consolidated financial information of the Group. There were no
differences between IFRS Standards endorsed by the EU and IFRS
Standards issued by the IASB in terms of their application to the
Group.
The
Group IFRS accounting policies are the same as those applied for
the year ended 31 December 2017 with the exception of the adoption
of the new and amended accounting standards as described in note
A2.
Exchange rates
The
exchange rates applied for balances and transactions in currency
other than the presentational currency of the Group, pounds
sterling (GBP), were:
Local currency: £
|
Closing
rate at
31 Dec 2018
|
Average rate
for
2018
|
Closing
rate at
31 Dec 2017
|
Average rate
for
2017
|
Hong
Kong
|
9.97
|
10.46
|
10.57
|
10.04
|
Indonesia
|
18,314.37
|
18,987.65
|
18,353.44
|
17,249.38
|
Malaysia
|
5.26
|
5.38
|
5.47
|
5.54
|
Singapore
|
1.74
|
1.80
|
1.81
|
1.78
|
China
|
8.74
|
8.82
|
8.81
|
8.71
|
India
|
88.92
|
91.25
|
86.34
|
83.90
|
Vietnam
|
29,541.15
|
30,732.53
|
30,719.60
|
29,279.71
|
Thailand
|
41.47
|
43.13
|
44.09
|
43.71
|
US
|
1.27
|
1.34
|
1.35
|
1.29
|
Certain
notes to the financial statements present 2017 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 2018 or 2017 but is derived from those accounts. The
auditors have reported on the 2018 statutory accounts. Statutory
accounts for 2017 have been delivered to the registrar of
companies, and those for 2018 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
New
accounting pronouncements in 2018
IFRS 15, ‘Revenue from Contracts with
Customers’
The Group has adopted IFRS 15, ‘Revenue from Contracts with
Customers’ from 1 January 2018. This standard provides a
single framework to recognise revenue for contracts with different
characteristics and overrides the revenue recognition requirements
previously provided in other standards. The contracts excluded from
the scope of this standard include:
–
Lease
contracts within the scope of IAS 17,
’Leases’;
–
Insurance
contracts within the scope of IFRS 4, ‘Insurance
Contracts’; and
–
Financial
instruments within the scope of IAS 39, ‘Financial
Instruments’.
The main impacts of IFRS 15 for Prudential are to revenue
recognition for asset management contracts and investment contracts
that do not contain discretionary participating features but do
include investment management services.
In
accordance with the transition provisions in IFRS 15, the Group has
adopted the standard using the full retrospective method for all
periods presented. The only impact on the prior periods presented
is a minor reclassification in the consolidated income statement to
present certain expenses (such as rebates to clients of asset
management fees) as a deduction against revenue. Revenue has been
reduced by £234 million in 2018 (2017: £172 million) with
a corresponding deduction in expenses.
IFRS 9, ‘Financial Instruments’ and amendments to IFRS
4, ‘Insurance Contracts’
The
IASB published a complete version of IFRS 9 in July 2014 with the
exception of macro hedge accounting and the standard is mandatorily
effective for annual periods beginning on or after 1 January
2018.
In
September 2016, the IASB published amendments to IFRS 4,
‘Applying IFRS 9 Financial Instruments with IFRS 4 Insurance
Contracts’ to address the temporary consequences of the
different effective dates of IFRS 9 and IFRS 17, ‘Insurance
Contracts’. The amendments include an optional temporary
exemption from applying IFRS 9 and the associated amendments until
IFRS 17 comes into effect in 2021. This temporary exemption is
available to companies whose predominant activity is to issue
insurance contracts based on meeting the eligibility criteria as at
31 December 2015 as set out in the amendments.
The
Group met the eligibility criteria for temporary exemption under
the amendments to IFRS 4 from applying IFRS 9 and has accordingly
deferred the adoption of IFRS 9. See note A3.2 for further details
on IFRS 9, including the disclosures associated with the temporary
exemption.
In
November 2018, the IASB tentatively decided that the effective date
of IFRS 17 should be delayed by one year from periods ending on or
after 1 January 2021 to 1 January 2022. The IASB also tentatively
decided that IFRS 9 could be delayed for insurers by an additional
year to keep the effective date of IFRS 9 and IFRS 17 aligned.
These changes are yet to be finalised and the Group continues to
monitor developments.
Other new accounting pronouncements
In
addition to the above, the following new accounting pronouncements
are also effective from 1 January 2018:
—
IFRIC
22, ‘Foreign Currency Transactions and Advance
Consideration’;
—
Classification
and measurement of share-based payment transactions (amendments to
IFRS 2, ‘Share-based payment’);
—
Transfers
of Investment Property (amendments to IAS 40, ‘Investment
property’); and
—
Annual
Improvements to IFRSs 2014–2016 Cycle.
These
pronouncements have had no effect on the Group’s financial
statements.
B
Earnings
performance
B1
Analysis
of performance by segment
B1.1
Segment results
– profit before tax
|
|
Note
|
2018 £m
|
|
2017 £m
|
|
2018 vs 2017 %
|
||
|
|
|
|
|
AER
|
CER
|
|
AER
|
CER
|
|
|
|
|
|
note (iv)
|
note (iv)
|
|
note (iv)
|
note (iv)
|
Asia:
|
|
|
|
|
|
|
|
|
|
Insurance operations
|
B3(i)
|
1,982
|
|
1,799
|
1,727
|
|
10%
|
15%
|
|
Asset management
|
|
182
|
|
176
|
171
|
|
3%
|
6%
|
|
Total Asia
|
|
2,164
|
|
1,975
|
1,898
|
|
10%
|
14%
|
|
|
|
|
|
|
|
|
|
|
|
US:
|
|
|
|
|
|
|
|
|
|
Jackson (US insurance operations)
|
|
1,911
|
|
2,214
|
2,137
|
|
(14)%
|
(11)%
|
|
Asset management
|
|
8
|
|
10
|
9
|
|
(20)%
|
(11)%
|
|
Total US
|
|
1,919
|
|
2,224
|
2,146
|
|
(14)%
|
(11)%
|
|
|
|
|
|
|
|
|
|
|
|
UK and Europe:
|
|
|
|
|
|
|
|
|
|
UK and Europe insurance operations:
|
B3(iii)
|
|
|
|
|
|
|
|
|
|
Long-term business
|
|
1,138
|
|
861
|
861
|
|
32%
|
32%
|
|
General insurance commissionnote
(i)
|
|
19
|
|
17
|
17
|
|
12%
|
12%
|
Total UK and Europe insurance operations
|
|
1,157
|
|
878
|
878
|
|
32%
|
32%
|
|
UK and Europe asset managementnote
(v)
|
B2
|
477
|
|
500
|
500
|
|
(5)%
|
(5)%
|
|
Total UK and Europe
|
|
1,634
|
|
1,378
|
1,378
|
|
19%
|
19%
|
|
Total segment profit
|
|
5,717
|
|
5,577
|
5,422
|
|
3%
|
5%
|
|
Other income and expenditure:
|
|
|
|
|
|
|
|
|
|
|
Investment return and other income
|
|
52
|
|
11
|
11
|
|
373%
|
373%
|
|
Interest payable on core structural borrowings
|
|
(410)
|
|
(425)
|
(425)
|
|
4%
|
4%
|
|
Corporate expenditurenote
(ii)
|
|
(367)
|
|
(361)
|
(355)
|
|
(2)%
|
(3)%
|
Total other income and expenditure
|
|
(725)
|
|
(775)
|
(769)
|
|
6%
|
6%
|
|
Restructuring costs
|
|
(165)
|
|
(103)
|
(103)
|
|
(60)%
|
(60)%
|
|
Adjusted IFRS operating profit based on longer-term investment
returns
|
|
4,827
|
|
4,699
|
4,550
|
|
3%
|
6%
|
|
Short-term fluctuations in investment returns on
shareholder-backed business
|
B1.2
|
(558)
|
|
(1,563)
|
(1,514)
|
|
64%
|
63%
|
|
Amortisation of acquisition accounting
adjustmentsnote
(iii)
|
|
(46)
|
|
(63)
|
(61)
|
|
27%
|
25%
|
|
(Loss) gain on disposal of businesses and corporate
transactions
|
D1.1
|
(588)
|
|
223
|
218
|
|
n/a
|
n/a
|
|
Profit before tax
|
|
3,635
|
|
3,296
|
3,193
|
|
10%
|
14%
|
|
Tax charge attributable to shareholders' returns
|
B4
|
(622)
|
|
(906)
|
(876)
|
|
31%
|
29%
|
|
Profit for the year
|
|
3,013
|
|
2,390
|
2,317
|
|
26%
|
30%
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to:
|
|
|
|
|
|
|
|
|
|
|
Equity holders of the Company
|
|
3,010
|
|
2,389
|
2,316
|
|
26%
|
30%
|
|
Non-controlling interests
|
|
3
|
|
1
|
1
|
|
200%
|
200%
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
|
2018
|
|
2017
|
|
|
2018 vs 2017 %
|
|
|
|
|
|
|
AER
|
CER
|
|
AER
|
CER
|
Basic earnings per share (in pence)
|
|
|
|
note (iv)
|
note (iv)
|
|
note (iv)
|
note (iv)
|
|
Based on adjusted IFRS operating profit based on longer-term
investment returnsnote
(vi)
|
B5
|
156.6p
|
|
145.2p
|
140.4p
|
|
8%
|
12%
|
|
Based on profit for the year
|
B5
|
116.9p
|
|
93.1p
|
90.0p
|
|
26%
|
30%
|
Notes
(i)
The majority of the
general insurance commission is not expected to recur in future
years.
(ii)
Corporate
expenditure as shown above is primarily for Group Head Office and
Asia Regional Head Office.
(iii)
Amortisation
of acquisition accounting adjustments principally relate to the
REALIC business of Jackson which was acquired in 2012.
(iv)
For definitions of
AER and CER refer to note A1. The difference between ‘Profit
for the year attributable to shareholders’ in the prior year
on an AER basis and a CER basis is £73 million, arising from
the retranslation of the prior year results of the Group’s
foreign subsidiaries into GBP using the exchange rates applied to
the equivalent current year results.
(v)
UK and Europe asset
management adjusted IFRS operating profit based on longer-term
investment returns:
|
|
2018 £m
|
2017 £m
|
|
Asset management fee income
|
1,098
|
1,027
|
|
Other income
|
2
|
7
|
|
Staff costs*
|
(384)
|
(400)
|
|
Other costs*
|
(270)
|
(202)
|
|
Underlying profit before performance-related fees
|
446
|
432
|
|
Share of associate results
|
16
|
15
|
|
Performance-related fees
|
15
|
53
|
|
Total UK and Europe asset management adjusted IFRS operating profit
based on longer-term investment returns
|
477
|
500
|
*
Staff and other
costs include £27 million of charges incurred preparing for
Brexit.
(vi)
Tax charges have
been reflected as operating and non-operating in the same way as
for the pre-tax items. Further details on tax charges are provided
in note B4.
B1.2
Short-term
fluctuations in investment returns on shareholder-backed
business
|
|
|
|
|
|
2018 £m
|
2017 £m
|
Asia operations
|
(512)
|
(1)
|
|
US operations
|
(100)
|
(1,568)
|
|
UK and Europe operations
|
34
|
(14)
|
|
Other operations
|
20
|
20
|
|
Total
|
(558)
|
(1,563)
|
(i)
Asia
operations
In
Asia, the negative short-term fluctuations of £(512) million
(2017: negative £(1) million) principally reflect net value
movements on assets and related liabilities following increases in
bond yields and falls in equity markets during the year, especially
in those countries where policyholder liabilities use a valuation
interest rate which does not reflect all movements in interest
rates in the period.
(ii)
US
operations
The
short-term fluctuations in investment returns for US insurance
operations are reported net of the related charge for amortisation
of deferred acquisition costs of £(114) million as shown in
note C5.2(a) (2017: credit of £462 million) and comprise
amounts in respect of the following items:
|
|
2018 £m
|
2017 £m
|
Net equity hedge resultnote
(a)
|
(58)
|
(1,490)
|
|
Other than equity-related derivativesnote
(b)
|
(64)
|
(36)
|
|
Debt securitiesnote
(c)
|
(31)
|
(73)
|
|
Equity-type investments: actual less longer-term
return
|
38
|
12
|
|
Other items
|
15
|
19
|
|
Total
|
(100)
|
(1,568)
|
Notes
(a)
Net equity hedge
result
The net
equity hedge result relates to the accounting effect of market
movements on both the 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. The level of fees recognised in non-operating profit is
determined by reference to that allowed for within the reserving
basis. The variable annuity guarantees are valued in accordance
with either Accounting Standards Codification (ASC) Topic 820, Fair
Value Measurements and Disclosures (formerly FAS 157) or ASC Topic
944, Financial Services – Insurance (formerly SOP 03-01)
depending on the type of guarantee. Both approaches require an
entity to determine the total fee (‘the fee
assessment’) that is expected to fund future projected
benefit payments arising using the assumptions applicable for that
method. The method under FAS 157 requires this fee assessment to be
fixed at the time of issue. As the fees included within the initial
fee assessment are earned, they are included in non-operating
profit to match the corresponding movement in the guarantee
liability. As the Group applies US GAAP for the measured value of
the product guarantees this item also includes asymmetric impacts
where the measurement bases of the liabilities and associated
derivatives used to manage the Jackson annuity business differ as
described in note B1.3(c) below.
The net
equity hedge result therefore includes significant accounting
mismatches and other factors that do not represent the economic
result. These other factors include:
– The
variable annuity guarantees and fixed index annuity embedded
options being only partially fair valued under
‘grandfathered’ US GAAP as described in note
B1.3(c);
– The interest rate exposure being managed through the
other than equity-related derivative programme explained in note
(b) below; and
The net
equity hedge result (net of related DAC amortisation in accordance
with the policy that DAC is amortised in line with emergence of
margins) can be summarised as follows:
|
|
2018 £m
|
2017 £m
|
|
Fair value movements on equity hedge instruments*
|
299
|
(1,871)
|
|
Accounting value movements on the variable and fixed index annuity
guarantee liabilities†
|
(894)
|
(99)
|
|
Fee assessments net of claim payments
|
537
|
480
|
|
Total
|
(58)
|
(1,490)
|
*
Held to manage
equity exposures of the variable annuity guarantees and fixed index
annuity options.
†
The accounting
value movements on the variable and fixed index annuity guarantee
liabilities reflect the impact of market movements and changes in
economic and actuarial assumptions. Actuarial assumptions include
consideration of persistency, mortality and the expected
utilisation of certain features attaching to variable annuity
contracts. Assumptions are updated annually via a comparison to
experience and after applying expert judgement for how experience
may change in the future. Routine updates in 2018 reduced profit
before tax (after allowing related changed to DAC amortisation) by
£143 million (2017: £382 million).
(b)
Other than
equity-related derivatives
The
fluctuations for this item comprise the net effect
of:
–
Fair value
movements on free-standing, other than equity-related
derivatives;
–
Fair value
movements on the Guaranteed Minimum Income Benefit (GMIB)
reinsurance asset that are not matched by movements in the
underlying GMIB liability, which is not fair valued as explained in
note B1.3; and
–
Related
amortisation of DAC.
The
free-standing, other than equity-related derivatives are held to
manage interest rate exposures and durations within the general
account and the variable annuity guarantees and fixed index annuity
embedded options described in note (a) above. Accounting mismatches
arise because of differences between the measurement basis and
presentation of the derivatives, which are fair valued with
movements recorded in the income statement, and the exposures they
are intended to manage.
(c)
Short-term
fluctuations related to debt securities
|
|
|
2018 £m
|
2017 £m
|
|
(Charges) credits in the year:
|
|
|
|
|
|
Losses on sales of impaired and deteriorating bonds
|
(4)
|
(3)
|
|
|
Bond write-downs
|
(4)
|
(2)
|
|
|
Recoveries/reversals
|
19
|
10
|
|
|
Total credits in the year
|
11
|
5
|
|
Risk margin allowance deducted from adjusted IFRS operating profit
based on longer-term investment returns*
|
77
|
86
|
|
|
|
|
88
|
91
|
|
Interest-related realised (losses) gains:
|
|
|
|
|
|
Losses arising in the year
|
(8)
|
(43)
|
|
|
Less: Amortisation of gains and losses arising in current and prior
years to adjusted IFRS operating profit based on longer-term
investment returns
|
(116)
|
(140)
|
|
|
|
(124)
|
(183)
|
|
Related amortisation of deferred acquisition costs
|
5
|
19
|
|
|
Total short-term fluctuations related to debt
securities
|
(31)
|
(73)
|
*
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 adjusted IFRS
operating profit based on longer-term investment returns 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 adjusted IFRS
operating profit based on longer-term investment returns of Jackson
for 2018 is based on an average annual risk margin reserve of 18
basis points (2017: 21 basis points) on average book values of
US$57.1 billion (2017: US$55.3 billion) as shown
below:
|
Moody’s rating category (or equivalent under NAIC ratings of
mortgage-backed securities)
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
||||||||||
|
|
Average
book
value
|
|
RMR
|
|
Annual expected loss
|
|
Average
book
value
|
|
RMR
|
|
Annual expected loss
|
||
|
|
US$m
|
|
%
|
|
US$m
|
£m
|
|
US$m
|
|
%
|
|
US$m
|
£m
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A3 or higher
|
29,982
|
|
0.10
|
|
(31)
|
(23)
|
|
27,277
|
|
0.12
|
|
(33)
|
(25)
|
|
Baa1, 2 or 3
|
25,814
|
|
0.21
|
|
(55)
|
(40)
|
|
26,626
|
|
0.22
|
|
(58)
|
(45)
|
|
Ba1, 2 or 3
|
1,042
|
|
0.98
|
|
(10)
|
(8)
|
|
1,046
|
|
1.03
|
|
(11)
|
(8)
|
|
B1, 2 or 3
|
289
|
|
2.64
|
|
(8)
|
(6)
|
|
318
|
|
2.70
|
|
(9)
|
(7)
|
|
Below B3
|
11
|
|
3.69
|
|
–
|
–
|
|
23
|
|
3.78
|
|
(1)
|
(1)
|
|
Total
|
57,138
|
|
0.18
|
|
(104)
|
(77)
|
|
55,290
|
|
0.21
|
|
(112)
|
(86)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related amortisation of deferred acquisition costs (see
below)
|
|
22
|
15
|
|
|
|
|
|
21
|
15
|
|||
|
Risk margin reserve charge to adjusted IFRS operating profit for
longer-term credit-related losses
|
|
(82)
|
(62)
|
|
|
|
|
|
(91)
|
(71)
|
Consistent with the basis of measurement of insurance assets and
liabilities for Jackson’s IFRS results, the charges and
credits to adjusted IFRS 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 of
£(1,371) million for net unrealised losses on debt securities
classified as available-for-sale net of related amortisation of
deferred acquisition costs (2017: credit of £541 million).
Temporary market value movements do not reflect defaults or
impairments. Additional details of the movement in the value of the
Jackson portfolio are included in note C3.2(b).
(iii)
UK
and Europe operations
The
positive short-term fluctuations in investment returns for the UK
and Europe operations of £34 million (2017: negative £14
million) mainly arises from unrealised gains on equity options held
to hedge the value of future shareholder transfers from the
with-profits fund partially offset by losses on corporate bonds
backing capital to support the remaining annuity business, given
the increase in interest rates and credit spreads in
2018.
(iv)
Other
operations
The
positive short-term fluctuations in investment returns for other
operations of £20 million (2017: positive £20 million)
include unrealised value movements on financial instruments held
outside of the main life operations.
B1.3 Determining operating segments and performance measure of
operating segments
Operating segments
The
Group's operating segments for financial reporting are defined and
presented in accordance with IFRS 8, ‘Operating
Segments’, on the basis of the management reporting structure
and its financial management information.
Under
the Group's management and reporting structure its chief operating
decision maker is the Group Executive Committee (GEC). In the
management structure, responsibility is delegated to the Chief
Executive Officers of Prudential Corporation Asia, the North
American Business Unit and M&GPrudential for the day-to-day
management of their business units (within the framework set out in
the Group Governance Manual). Financial management information used
by the GEC aligns with these three business segments. These
operating segments derive revenue from both long-term insurance and
asset management activities.
Operations
which do not form part of any business unit are reported as
‘Unallocated to a segment’. These include Group Head
Office and Asia Regional Head Office costs. Prudential Capital and
Africa operations do not form part of any operating segment under
the structure, and their assets and liabilities and profit or loss
before tax are not material to the overall financial position of
the Group. Prudential Capital and Africa operations are therefore
reported as ‘Unallocated to a segment’.
Performance measure
The
performance measure of operating segments utilised by the Company
is adjusted IFRS operating profit attributable to shareholders
based on longer-term investment returns, as described below. This
measurement basis distinguishes adjusted IFRS operating profit
based on longer-term investment returns from other constituents of
the total profit as follows:
–
Short-term
fluctuations in investment returns on shareholder-backed business.
This includes the impact of short-term market effects on the
carrying value of Jackson’s guarantee liabilities and related
derivatives as explained below;
–
Amortisation of
acquisition accounting adjustments arising on the purchase of
business. This comprises principally the charge for the adjustments
arising on the purchase of REALIC in 2012; and
–
Gain
or loss on corporate transactions, such as disposals undertaken in
the year.
Determination of adjusted IFRS operating profit based on
longer-term investment returns for investment and liability
movements:
(a)
General
principles
(i)
UK-style
with-profits business
The
adjusted IFRS operating profit based on longer-term investment
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 adjusted IFRS operating
profit based on longer-term investment returns.
(ii)
Unit-linked
business
The
policyholder unit liabilities are directly reflective of the
underlying asset value movements. Accordingly, the adjusted IFRS
operating profit based on longer-term investment returns reflect
the current period value movements in both the unit liabilities and
the backing assets.
(iii)
US variable annuity
and fixed index annuity business
This
business has guarantee liabilities which are measured on a
combination of fair value and other US GAAP derived principles.
These liabilities are subject to an extensive derivative programme
to manage equity and interest rate exposures whose fair value
movements pass through the income statement each period. The
principles for determination of the adjusted IFRS operating profit
based on longer-term investment returns and short-term fluctuations
are 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 business units 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 adjusted IFRS
operating profit based on longer-term investment returns is not
distorted. In these circumstances, there is no need for the
movement in the liability to be bifurcated between the elements
that relate to longer-term market conditions and short-term
effects.
However,
movements in liabilities for some types of business do require
bifurcation to ensure that at the net level (ie after allocated
investment return and charge for policyholder benefits) the
adjusted IFRS operating profit based on longer-term investment
returns reflects longer-term market returns.
Examples
of where such bifurcation is necessary are in Hong Kong and for UK
shareholder-backed annuity business, as explained in sections b(i)
and d(i), respectively. For other types of Asia’s
non-participating business, expected longer-term investment returns
are used to determine the movement in policyholder liabilities for
determining adjusted IFRS operating profit based on longer-term
investment returns.
(v)
Other
shareholder-financed business
For
long-term insurance business, where assets and liabilities are held
for the long term, the accounting basis for insurance liabilities
under current IFRS can lead to profits that include the effects of
short-term fluctuations in market conditions, which may not be
representative of trends in underlying performance. Therefore, the
following key elements are applied to the results of the
Group’s shareholder-financed businesses to determine adjusted
IFRS operating profit based on longer-term investment
returns.
Except
in the case of assets backing liabilities which are directly
matched (such as unit-linked business) or closely correlated with
value movements (as discussed below) adjusted IFRS operating profit
based on longer-term investment returns for shareholder-financed
business is determined on the basis of expected longer-term
investment returns. Longer-term investment returns comprise actual
income receivable for the period (interest/dividend income) and for
both debt and equity-type securities longer-term capital
returns.
Debt securities and loans
In
principle, for debt securities and loans, the longer-term capital
returns comprise two elements:
–
Risk margin reserve
based charge for the expected level of defaults for the period,
which is determined by reference to the credit quality of the
portfolio. The difference between impairment losses in the
reporting period and the risk margin reserve charge to the adjusted
IFRS operating profit based on longer-term investment returns is
reflected in short-term fluctuations in investment returns;
and
–
The amortisation of
interest-related realised gains and losses to adjusted IFRS
operating profit based on longer-term investment returns to the
date when sold bonds would have otherwise matured.
At 31
December 2018, the level of unamortised interest-related realised
gains and losses related to previously sold bonds for the Group was
a net gain of £629 million (2017: £855
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 businesses other than the UK annuity business,
unit-linked and US variable annuity separate accounts are
principally relevant for the US and Asia insurance operations.
Different rates apply to different categories of equity-type
securities.
Derivative value movements
Generally,
derivative value movements are excluded from adjusted IFRS
operating profit based on longer-term investment returns. The
exception is where the derivative value movements broadly offset
changes in the accounting value of other assets and liabilities
included in adjusted IFRS operating profit based on longer-term
investment returns. The principal example of derivatives whose
value movements are excluded from adjusted IFRS operating profit
based on longer-term investment returns 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. Consequently, for these products, the charge for
policyholder benefits in the adjusted IFRS operating profit based
on longer-term investment returns reflects the asset share feature
rather than volatile movements that would otherwise be reflected if
the local regulatory basis (also applied for IFRS basis) was
used.
For
certain other types of non-participating business expected
longer-term investment returns are used to determine the movement
in policyholder liabilities for determining adjusted IFRS operating
profit based on longer-term investment returns.
(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 amortised over the period to the date
those securities would otherwise have matured, with no explicit
risk margin reserve charge.
Equity-type securities
For
Asia insurance operations, investments in equity securities held
for non-linked shareholder-backed business amounted to £2,146
million as at 31 December 2018 (31 December 2017: £1,759
million). The rates of return applied in 2018 ranged from 5.3 per
cent to 17.6 per cent (2017: 4.3 per cent to 17.2 per cent) with
the rates applied varying by business unit. These rates are broadly
stable from period to period but may be different between countries
reflecting, for example, differing expectations of inflation in
each business unit. The assumptions are for the returns expected to
apply in equilibrium conditions. The assumed rates of return do not
reflect any cyclical variability in economic performance and are
not set by reference to prevailing asset valuations.
The
longer-term investment returns for the Asia insurance joint
ventures accounted for using the equity method are determined on a
similar basis as the other Asia insurance operations described
above.
(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 adjusted
IFRS operating profit 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 adjusted IFRS
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 guaranteed benefit options for the ‘not
for life’ portion of Guaranteed Minimum Withdrawal Benefit
(GMWB) and fixed index annuity business, and Guaranteed Minimum
Income Benefit (GMIB) reinsurance (see below);
–
Movements
in the accounts carrying value of Guaranteed Minimum Death Benefit
(GMDB), GMIB and the ‘for life’ portion of GMWB
liabilities, (see below) for which, under the
‘grandfathered’ US GAAP applied under IFRS for
Jackson’s insurance assets and liabilities, the measurement
basis gives rise to a muted impact of current period market
movements (ie they are relatively insensitive to the effect of
current period equity market and interest rate
changes);
–
A
portion of the fee assessments as well as claim payments, in
respect of guarantee liabilities; and
–
Related
amortisation of deferred acquisition costs for each of the above
items.
Guaranteed benefit options for the ‘not for life’
portion of GMWB and equity index options for the fixed index
annuity business
The
‘not for life’ portion of GMWB guaranteed benefit
option liabilities is measured under the US GAAP basis applied for
IFRS in a manner consistent with IAS 39 under which the projected
future growth rate of the account balance is based on current swap
rates (rather than expected rates of return) with only a portion of
the expected future guarantee fees included. Reserve value
movements on these liabilities are sensitive to changes to levels
of equity markets, implied volatility and interest rates. The
equity index option for fixed index annuity business is measured
under the US GAAP basis applied for IFRS in a manner consistent
with IAS 39 under which the projected future growth is based on
current swap rates.
Guaranteed benefit option for variable annuity guarantee minimum
income benefit
The
GMIB liability, which is substantially reinsured, subject to a
deductible and annual claim limits, is accounted for using
‘grandfathered’ US GAAP. This accounting basis
substantially does not recognise the effects of market movements.
The corresponding reinsurance asset is measured under the
‘grandfathered’ US GAAP basis applied for IFRS in a
manner consistent with IAS 39, ‘Financial Instruments:
Recognition and Measurement’, and the asset is therefore
recognised at fair value. As the GMIB is economically reinsured,
the mark to market element of the reinsurance asset is included as
a component of short-term fluctuations in investment
returns.
(iii)
Other derivative
value movements
The
principal example of non-equity based derivatives (for example,
interest rate swaps and swaptions) whose value movements are
excluded from adjusted IFRS operating profit based on longer-term
investment returns, arises in Jackson. Non-equity based derivatives
are primarily held by Jackson as part of a broadly-based hedging
programme for features of Jackson’s bond portfolio (for which
value movements are booked in the statement of other comprehensive
income rather than the income statement), product liabilities (for
which US GAAP accounting as ‘grandfathered’ under IFRS
4 does not fully reflect the economic features being hedged), and
the interest rate exposure attaching to equity-based product
options.
(iv)
Other US
shareholder-financed business
Debt securities
The
distinction between impairment losses and interest-related realised
gains and losses is of particular relevance to Jackson. 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) 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 note (ii)(c).
Equity-type securities
As at
31 December 2018, the equity-type securities for US insurance
non-separate account operations amounted to £1,359 million (31
December 2017: £946 million). For these operations, the
longer-term rates of return for income and capital applied in the
years indicated, which reflect the combination of the average
risk-free rates over the year and appropriate risk premiums are as
follows:
|
2018
|
2017
|
Equity-type securities such as common and preferred stock and
portfolio holdings in mutual funds
|
6.7% to 7.2%
|
6.1% to 6.5%
|
Other equity-type securities such as investments in limited
partnerships and private equity funds
|
8.7% to 9.2%
|
8.1% to 8.5%
|
(d)
UK
and Europe insurance operations
(i)
Shareholder-backed
annuity business
For
this business, policyholder liabilities are determined by reference
to current interest rates. The value movements of the assets
covering liabilities are closely correlated with the related change
in liabilities. Accordingly, asset value movements are recorded
within the ‘adjusted IFRS operating profit 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
adjusted IFRS operating profit based on longer-term investment
returns reflects the impact of value movements on policyholder
liabilities for shareholder-backed annuity business within The
Prudential Assurance Company Limited (PAC) after adjustments to
allocate the following elements of the movement to the category of
‘short-term fluctuations in investment
returns’:
–
The impact on
credit risk provisioning of actual upgrades and downgrades during
the period;
–
Credit experience
compared with assumptions; and
–
Short-term value
movements on assets backing the capital of the
business.
Credit
experience reflects the impact of defaults and other similar
experience, such as asset exchanges arising from debt restructuring
by issuers that include effectively an element of permanent
impairment of the security held. Positive or negative experience
compared with assumptions is included within short-term
fluctuations in investment returns without further adjustment. The
effects of other changes to credit risk provisioning are included
in the adjusted IFRS operating profit based on longer-term
investment returns, as is the net effect of changes to the
valuation rate of interest due to portfolio rebalancing to align
more closely with management benchmark.
(ii)
Non-linked
shareholder-financed business
For
debt securities backing non-linked shareholder-financed business of
the UK and Europe insurance operations (other than the annuity
business) the realised gains and losses are principally interest
related. Accordingly, all realised gains and losses to date for
these operations are being amortised over the period to the date
those securities would otherwise have matured, with no explicit
risk margin reserve charge.
(e)
Fund
management and other non-insurance businesses
For
these businesses, the particular features applicable for life
assurance noted above do not apply and therefore the adjusted IFRS
operating profit based on longer-term investment returns is not
determined on the basis described above. Instead, realised gains
and losses are generally included in adjusted IFRS operating profit
based on longer-term investment returns with temporary unrealised
gains and losses being included in short-term fluctuations. In some
instances, realised gains and losses on derivatives and other
financial instruments are amortised to adjusted IFRS operating
profit based on longer-term investment returns over a time
period that reflects the underlying economic substance of the
arrangements.
B2
Acquisition
costs and other expenditure
|
2018 £m
|
2017 £m
|
Acquisition costs incurred for insurance policies
|
(3,438)
|
(3,712)
|
Acquisition costs deferred less amortisation of acquisition
costs
|
59
|
911
|
Administration costs and other expenditure*
|
(5,380)
|
(6,208)
|
Movements in amounts attributable to external unit holders of
consolidated investment funds
|
(96)
|
(984)
|
Total acquisition costs and other expenditure
|
(8,855)
|
(9,993)
|
*
Following the
adoption of IFRS 15, the 2017 comparative results have been
re-presented as described in note A2. The 2018 administration costs
and other expenditure includes a credit of £0.4 billion for
the negative ceding commissions arising from the group payout
annuity business reinsurance agreement entered into by Jackson with
John Hancock Life during the year.
B3
Effect
of changes and other accounting matters on insurance assets and
liabilities
The following matters are relevant to the determination of the 2018
results:
(i)
Asia insurance operations
In
2018, the adjusted IFRS operating profit based on longer-term
investment returns for Asia insurance operations included a net
credit of £94 million (2017: £75 million) representing a
small number of items that are not expected to reoccur, including
the non-recurring impact of a refinement to the run-off of the
allowance for prudence within technical provisions within
Singapore.
(ii)
US
insurance operations
Changes
in the policyholder liabilities held for variable and fixed index
annuity guarantees are reported as part of non-operating profit and
are as described in note B1.2.
(iii)
UK
and Europe insurance operations
Allowance for credit risk
For IFRS reporting, the results for UK shareholder-backed annuity
business are particularly sensitive to the allowance made for
credit risk. The allowance is reflected in the deduction from the
valuation rate of interest for discounting projected future annuity
payments to policyholders that would have otherwise applied.
The credit risk allowance comprises an amount for long-term best
estimate defaults and additional provisions for credit risk
premium, the cost of downgrades and short-term
defaults.
The
IFRS credit risk allowance made for the UK shareholder-backed fixed
and linked annuity business equated to 40 basis points at 31
December 2018 (31 December 2017: 42 basis points). The allowance
represented 22 per cent of the bond spread over swap rates (31
December 2017: 28 per cent).
The
reserves for credit risk allowance at 31 December 2018 for the UK
shareholder-backed business were £0.9 billion (31 December
2017: £1.6 billion). The 2018 credit risk allowance
information is after reflecting the impact of the reinsurance of
£12.0 billion of the UK shareholder-backed annuity portfolio
to Rothesay Life entered into in March 2018. See note D1.1 for
further details.
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 2018 was a credit of £437
million (2017: credit of £173 million).This included, among
other items, a benefit to adjusted IFRS operating profit based on
longer-term investment returns of £441 million (2017:
£204 million), relating to changes to annuitant mortality
assumptions to reflect current mortality experience, which has
shown a slowdown in life expectancy improvements in recent periods,
and the adoption of the Continuous Mortality Investigation (CMI)
2016 model (2017: adoption of 2015 model).
Longevity reinsurance and other management actions
Aside from the aforementioned reinsurance agreement with Rothesay
Life, no new longevity reinsurance transactions were
undertaken in 2018 (2017: longevity reinsurance transactions
covering £0.6 billion of IFRS annuity liabilities contributed
£31 million to profit). Other management actions generated
profits of £58 million (2017: £245 million).
Review of past annuity sales
Prudential
has agreed with the Financial Conduct Authority (FCA) to review
annuities sold without advice after 1 July 2008 to its
contract-based defined contribution pension customers. The review
is examining whether customers were given sufficient information
about their potential eligibility to purchase an enhanced annuity,
either from Prudential or another pension provider. A gross
provision of £400 million, before costs incurred, was
established at 31 December 2017 to cover the costs of undertaking
the review and any related redress and following a reassessment, no
change has been made in 2018. The majority of the provision will be
utilised in 2019. The ultimate amount that will be expended by the
Group on the review will remain uncertain until the project is
completed. If the population subject to redress increased or
decreased by 10 per cent, then the provision would be expected to
increase or decrease by circa 7 per cent accordingly. Additionally,
in 2018, the Group agreed with its professional indemnity insurers
that they will meet £166 million of the Group’s claims
costs, which will be paid as the Group incurs costs/redress. This
has been recognised on the Group’s balance sheet within
‘Other debtors’ at 31 December 2018.
B4
Tax
charge
(a)
Total
tax charge by nature of expense
The
total tax charge in the income statement is as
follows:
|
|
2018 £m
|
|
2017 £m
|
||
Tax charge
|
Current
tax
|
Deferred
tax
|
Total
|
|
Total
|
|
Attributable to shareholders:
|
|
|
|
|
|
|
|
Asia operations
|
(199)
|
(78)
|
(277)
|
|
(253)
|
|
US operations
|
(87)
|
(168)
|
(255)
|
|
(508)
|
|
UK and Europe
|
(255)
|
39
|
(216)
|
|
(267)
|
|
Other operations
|
125
|
1
|
126
|
|
122
|
Tax charge attributable to shareholders' returns
|
(416)
|
(206)
|
(622)
|
|
(906)
|
|
Attributable to policyholders:
|
|
|
|
|
|
|
|
Asia operations
|
(92)
|
12
|
(80)
|
|
(249)
|
|
UK and Europe
|
(188)
|
594
|
406
|
|
(425)
|
Tax (charge) credit attributable to policyholders'
returns
|
(280)
|
606
|
326
|
|
(674)
|
|
Total tax charge
|
(696)
|
400
|
(296)
|
|
(1,580)
|
The
principal reason for the decrease in the tax charge attributable to
shareholders’ returns is the inclusion in 2017 of a £445
million deferred tax charge arising on the remeasurement of the US
net deferred tax assets from 35 per cent to 21 per cent following
the enactment of the US tax reform package, the Tax Cuts and Jobs
Act. The movement from a charge of £674 million to a credit of
£326 million in the tax charge attributable to
policyholders’ returns mainly reflects a decrease in the
deferred tax liabilities on unrealised gains on investments in the
with-profits funds of the UK and Europe and of Asia compared to
2017.
The
reconciliation of the expected to actual tax charge attributable to
shareholders is provided in (b) below. The tax credit attributable
to policyholders of £326 million above is equal to the loss
before tax attributable to policyholders of £326 million. This
is the result of accounting for policyholder income after the
deduction of expenses and movement on unallocated surpluses and on
an after-tax basis.
In
2018, a tax charge of £270 million (2017: charge of £93
million) has been taken through other comprehensive
income.
(b)
Reconciliation of shareholder effective tax rate
In the
reconciliation below, the expected tax rates reflect the
corporation tax rates that are expected to apply to the taxable
profit of the relevant business. Where there are profits of more
than one jurisdiction the expected tax rates reflect the
corporation tax rates weighted by reference to the amount of profit
contributing to the aggregate business result.
|
|
|
2018 £m
|
|||||
|
|
|
Asia
operations
|
US
operations
note (i)
|
UK and
Europe
|
Other*
operations
|
Total
attributable to
shareholders
|
Percentage impact on ETR
|
Adjusted IFRS operating profit (loss) based on longer-term
investment returns
|
2,164
|
1,919
|
1,634
|
(890)
|
4,827
|
|
||
Non-operating loss
|
(527)
|
(180)
|
(474)
|
(11)
|
(1,192)
|
|
||
Profit (loss) before tax
|
1,637
|
1,739
|
1,160
|
(901)
|
3,635
|
|
||
Expected tax rate
|
22%
|
21%
|
19%
|
19%
|
21%
|
|
||
|
Tax at the expected rate
|
360
|
365
|
220
|
(171)
|
774
|
21.3%
|
|
|
Effects of recurring tax reconciliation items:
|
|
|
|
|
|
|
|
|
|
Income not taxable or taxable at concessionary rates
|
(34)
|
(17)
|
(6)
|
(2)
|
(59)
|
(1.6)%
|
|
|
Deductions not allowable for tax purposes
|
39
|
3
|
15
|
10
|
67
|
1.8%
|
|
|
Items related to taxation of life insurance
businessesnote
(ii)
|
(13)
|
(83)
|
(2)
|
–
|
(98)
|
(2.7)%
|
|
|
Deferred tax adjustments
|
(11)
|
–
|
2
|
(30)
|
(39)
|
(1.1)%
|
|
|
Effect of results of joint ventures and
associatesnote
(iii)
|
(63)
|
–
|
(3)
|
2
|
(64)
|
(1.8)%
|
|
|
Irrecoverable withholding taxesnote
(iv)
|
–
|
–
|
–
|
47
|
47
|
1.3%
|
|
|
Other
|
(3)
|
–
|
3
|
3
|
3
|
0.1%
|
|
|
Total
|
(85)
|
(97)
|
9
|
30
|
(143)
|
(4.0)%
|
|
|
|
|
|
|
|
|
|
|
Effects of non-recurring tax reconciliation items:
|
|
|
|
|
|
|
|
|
|
Adjustments to tax charge in relation to prior years
|
–
|
(17)
|
(11)
|
14
|
(14)
|
(0.4)%
|
|
|
Movements in provisions for open tax mattersnote
(v)
|
2
|
4
|
(2)
|
1
|
5
|
0.2%
|
|
|
Total
|
2
|
(13)
|
(13)
|
15
|
(9)
|
(0.2)%
|
|
|
|
|
|
|
|
|
|
Total actual tax charge (credit)
|
277
|
255
|
216
|
(126)
|
622
|
17.1%
|
||
Analysed into:
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
Tax on adjusted IFRS operating profit based on longer-term
investment returns
|
308
|
301
|
313
|
(130)
|
792
|
|
|
|
Tax on non-operating profit
|
(31)
|
(46)
|
(97)
|
4
|
(170)
|
|
|
Actual tax rate:
|
|
|
|
|
|
|
||
|
Adjusted IFRS operating profit based on longer-term investment
returns:
|
|
|
|
|
|
|
|
|
|
Including non-recurring tax reconciling items
|
14%
|
16%
|
19%
|
15%
|
16%
|
|
|
|
Excluding non-recurring tax reconciling items
|
14%
|
16%
|
20%
|
16%
|
16%
|
|
|
Total profit
|
17%
|
15%
|
19%
|
14%
|
17%
|
|
*
Other
operations include restructuring costs.
Notes
(i)
Impact of US tax reform
The 2018 tax
charge for US operations reflects the full impact of the US tax
reform package, the Tax Cuts and Jobs Act, which was enacted in
December 2017 and took effect from 1 January 2018. The expected tax
rate of 21 per cent reflects the reduced US corporate income tax
rate compared to 35 per cent for 2017. The benefit of the dividend
received deduction (shown in Items related to the taxation of life
insurance businesses) is lower in 2018 than 2017 reflecting the
changes to how this deduction is computed. In 2017, the reduction
in the US corporate income tax rate gave rise to a £445
million unfavourable reconciling item in US operations relating to
the remeasurement of the net deferred tax asset attributable to
shareholders and a £134 million benefit recognised in other
comprehensive income.
(ii)
Items related to taxation of life insurance
businesses
The
£83 million (2017: £238 million) reconciling item in US
operations reflects
the impact of the dividend received deduction on the taxation of
profits from variable annuity business. The principal reason for
the reduction in the Asia operations reconciling items from
£92 million at 2017 to £13 million at 2018 reflects
non-operating investment losses in Hong Kong which do not attract
tax relief offsetting the benefit of operating profits due to the
taxable profit being computed as 5 per cent of net insurance
premiums.
(iii)
Effects of results of joint ventures and
associates
Profit
before tax includes Prudential’s share of profits after tax
from the joint ventures and associates. Therefore, the actual tax
charge does not include tax arising from profit or loss of joint
ventures and associates and is reflected as a reconciling item in
the table above.
(iv)
Irrecoverable withholding taxes
The
£47 million (2017: £54 million) adverse reconciling items
reflects local withholding taxes on dividends paid by certain
non-UK subsidiaries, principally Indonesia, to the UK. The
dividends are exempt from UK tax and consequently the withholding
tax cannot be offset against UK tax payments.
(v)
Movements in provisions for open tax matters
The
complexity of the tax laws and regulations that relate to our
businesses means that from time to time we may disagree with tax
authorities on the technical interpretation of a particular area of
tax law. This uncertainty means that in the normal course of
business the Group will have matters where, upon ultimate
resolution of the uncertainty, the amount of profit subject to tax
may be greater than the amounts reflected in the Group’s
submitted tax returns. The statement of financial position contains
the following provisions in relation to open tax
matters:
|
|
|
£m
|
|
At 31 December 2017
|
(139)
|
|
|
|
Movements in the current period included in:
|
|
|
|
Tax charge attributable to shareholders
|
(5)
|
|
|
Other movements*
|
(5)
|
|
At 31 December 2018
|
(149)
|
*
Other movements
include interest arising on open tax matters and amounts included
in the Group’s share of profits from joint ventures and
associates, net of related tax.
|
|
|
2017 £m
|
|||||
|
|
|
Asia
operations
|
US
operations
|
UK and
Europe
|
Other
operations*
|
Total
attributable to
shareholders
|
Percentage impact on ETR
|
Adjusted IFRS operating profit (loss) based on longer-term
investment returns
|
1,975
|
2,224
|
1,378
|
(878)
|
4,699
|
|
||
Non-operating profit (loss)
|
53
|
(1,462)
|
(14)
|
20
|
(1,403)
|
|
||
Profit (loss) before tax
|
2,028
|
762
|
1,364
|
(858)
|
3,296
|
|
||
Expected tax rate
|
21%
|
35%
|
19%
|
19%
|
24%
|
|
||
|
Tax at the expected rate
|
426
|
267
|
259
|
(163)
|
789
|
23.9%
|
|
|
Effects of recurring tax reconciliation items:
|
|
|
|
|
|
|
|
|
|
Income not taxable or taxable at concessionary rates
|
(64)
|
(11)
|
(2)
|
(14)
|
(91)
|
(2.8)%
|
|
|
Deductions not allowable for tax purposes
|
26
|
6
|
13
|
10
|
55
|
1.7%
|
|
|
Items related to taxation of life insurance businesses
|
(92)
|
(238)
|
(2)
|
-
|
(332)
|
(10.1)%
|
|
|
Deferred tax adjustments
|
11
|
17
|
(1)
|
(5)
|
22
|
0.7%
|
|
|
Effect of results of joint ventures and associates
|
(52)
|
-
|
(3)
|
-
|
(55)
|
(1.7)%
|
|
|
Irrecoverable withholding taxes
|
-
|
-
|
-
|
54
|
54
|
1.6%
|
|
|
Other
|
(10)
|
-
|
6
|
(1)
|
(5)
|
(0.1)%
|
|
|
Total
|
(181)
|
(226)
|
11
|
44
|
(352)
|
(10.7)%
|
|
|
|
|
|
|
|
|
|
|
Effects of non-recurring tax reconciliation items:
|
|
|
|
|
|
|
|
|
|
Adjustments to tax charge in relation to prior years
|
(3)
|
(15)
|
(3)
|
(3)
|
(24)
|
(0.7)%
|
|
|
Movements in provisions for open tax matters
|
19
|
25
|
-
|
-
|
44
|
1.3%
|
|
|
Impact of US tax reform
|
-
|
445
|
-
|
-
|
445
|
13.5%
|
|
|
Adjustments in relation to business disposals
|
(8)
|
12
|
-
|
-
|
4
|
0.1%
|
|
|
Total
|
8
|
467
|
(3)
|
(3)
|
469
|
14.2%
|
|
|
|
|
|
|
|
|
|
Total actual tax charge (credit)
|
253
|
508
|
267
|
(122)
|
906
|
27.4%
|
||
Analysed into:
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
Tax on adjusted IFRS operating profit based on longer-term
investment returns
|
276
|
548
|
268
|
(121)
|
971
|
|
|
|
Tax on non-operating profit
|
(23)
|
(40)
|
(1)
|
(1)
|
(65)
|
|
|
Actual tax rate:
|
|
|
|
|
|
|
||
|
Adjusted IFRS operating profit based on longer-term investment
returns:
|
|
|
|
|
|
|
|
|
|
Including non-recurring tax reconciling items
|
14%
|
25%
|
19%
|
14%
|
21%
|
|
|
|
Excluding non-recurring tax reconciling items
|
13%
|
24%
|
20%
|
13%
|
20%
|
|
|
Total profit
|
12%
|
67%
|
20%
|
14%
|
27%
|
|
*
Other operations
include restructuring costs.
B5
Earnings
per share
|
|
|
2018
|
|||||
|
|
|
Before
tax
|
Tax
|
Non-controlling interests
|
Net of tax
and non-
controlling
interests
|
Basic
earnings
per share
|
Diluted
earnings
per share
|
|
|
|
£m
|
£m
|
£m
|
£m
|
Pence
|
Pence
|
|
|
Note
|
B1.1
|
B4
|
|
|
|
|
Based on adjusted IFRS operating profit based on longer-term
investment returns
|
|
4,827
|
(792)
|
(3)
|
4,032
|
156.6p
|
156.5p
|
|
Short-term fluctuations in investment returns on shareholder-backed
business
|
B1.2
|
(558)
|
53
|
–
|
(505)
|
(19.7)p
|
(19.7)p
|
|
Amortisation of acquisition accounting adjustments
|
|
(46)
|
9
|
–
|
(37)
|
(1.4)p
|
(1.4)p
|
|
Loss on disposal of businesses and corporate
transactions
|
D1.1
|
(588)
|
108
|
–
|
(480)
|
(18.6)p
|
(18.6)p
|
|
Based on profit for the year
|
|
3,635
|
(622)
|
(3)
|
3,010
|
116.9p
|
116.8p
|
|
|
|
2017
|
|||||
|
|
|
Before
tax
|
Tax
|
Non-controlling interests
|
Net of tax
and non-
controlling
interests
|
Basic
earnings
per share
|
Diluted
earnings
per share
|
|
|
|
£m
|
£m
|
£m
|
£m
|
Pence
|
Pence
|
|
|
Note
|
B1.1
|
B4
|
|
|
|
|
Based on adjusted IFRS operating profit based on longer-term
investment returns
|
|
4,699
|
(971)
|
(1)
|
3,727
|
145.2p
|
145.1p
|
|
Short-term fluctuations in investment returns on shareholder-backed
business
|
B1.2
|
(1,563)
|
572
|
–
|
(991)
|
(38.6)p
|
(38.6)p
|
|
Amortisation of acquisition accounting adjustments
|
|
(63)
|
20
|
–
|
(43)
|
(1.7)p
|
(1.7)p
|
|
Cumulative exchange gain on the sold Korea life business recycled
from other comprehensive income
|
|
61
|
–
|
–
|
61
|
2.4p
|
2.4p
|
|
Profit attaching to the disposal of businesses
|
D1.1
|
162
|
(82)
|
–
|
80
|
3.1p
|
3.1p
|
|
Impact of US tax reform
|
B4
|
–
|
(445)
|
–
|
(445)
|
(17.3)p
|
(17.3)p
|
|
Based on profit for the year
|
|
3,296
|
(906)
|
(1)
|
2,389
|
93.1p
|
93.0p
|
Earnings
per share are calculated based on earnings attributable to ordinary
shareholders, after related tax and non-controlling
interests.
The
weighted average number of shares for calculating earnings per
share, which excludes those held in employee share trusts and
consolidated unit trusts and OEICs, is set out as
below:
|
|
2018
|
2017
|
Weighted average number (in millions) of shares for calculation
of:
|
|
|
|
|
Basic earnings per share
|
2,575
|
2,567
|
|
Shares under option at end of year
|
5
|
6
|
|
Number of shares that would have been issued at fair value on
assumed option price
|
(4)
|
(5)
|
|
Diluted earnings per share
|
2,576
|
2,568
|
B6
Dividends
|
|
2018
|
|
2017
|
||
|
Pence per share
|
£m
|
|
Pence per share
|
£m
|
|
Dividends relating to reporting year:
|
|
|
|
|
|
|
|
First interim ordinary dividend
|
15.67p
|
406
|
|
14.50p
|
375
|
|
Second interim ordinary dividend
|
33.68p
|
873
|
|
32.50p
|
841
|
Total
|
49.35p
|
1,279
|
|
47.00p
|
1,216
|
|
Dividends paid in reporting year:
|
|
|
|
|
|
|
|
Current year first interim ordinary dividend
|
15.67p
|
404
|
|
14.50p
|
373
|
|
Second interim ordinary dividend for prior year
|
32.50p
|
840
|
|
30.57p
|
786
|
Total
|
48.17p
|
1,244
|
|
45.07p
|
1,159
|
Dividend per share
For the year ended 31 December 2017 the second interim ordinary
dividend of 32.50 pence per ordinary share was paid to eligible
shareholders on 18 May 2018. The 2018 first interim ordinary
dividend of 15.67 pence per ordinary share was paid to eligible
shareholders on 27 September 2018.
The second interim ordinary dividend for the year ended 31 December
2018 of 33.68 pence per ordinary share will be paid on 17 May 2019
in sterling to shareholders on the UK register and the Irish branch
register on 29 March 2019 (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 24 May 2019. The second interim
ordinary dividend will be paid on or about 24 May 2019 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 12 March 2019. 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 UK register and Irish branch register are
eligible to participate in a Dividend Reinvestment
Plan.
C
Balance
sheet notes
C1
Analysis
of Group statement of financial position by segment
|
|
|
|
31 Dec 2018 £m
|
|
31 Dec 2017 £m
|
||||||
|
|
|
|
Asia
|
US
|
UK and
Europe
|
Unallocated
to a segment
(central
operations)
|
Elimination
of intra-
group
debtors
and
creditors
|
|
Group
total
|
|
Group
total
|
By operating segment
|
Note
|
C2.1
|
C2.2
|
C2.3
|
note
|
|
|
|
|
|
||
Assets
|
|
|
|
|
|
|
|
|
|
|
||
Goodwill
|
C5.1
|
498
|
–
|
1,359
|
–
|
–
|
|
1,857
|
|
1,482
|
||
Deferred acquisition costs and other intangible assets
|
C5.2
|
2,937
|
8,747
|
195
|
44
|
–
|
|
11,923
|
|
11,011
|
||
Property, plant and equipment
|
|
129
|
246
|
1,031
|
3
|
–
|
|
1,409
|
|
789
|
||
Reinsurers' share of insurance contract liabilities
|
|
2,777
|
6,662
|
2,812
|
2
|
(1,109)
|
|
11,144
|
|
9,673
|
||
Deferred tax assets
|
C8
|
119
|
2,295
|
126
|
55
|
–
|
|
2,595
|
|
2,627
|
||
Current tax recoverable
|
|
26
|
311
|
244
|
118
|
(81)
|
|
618
|
|
613
|
||
Accrued investment income
|
|
664
|
498
|
1,511
|
76
|
–
|
|
2,749
|
|
2,676
|
||
Other debtors
|
|
2,978
|
238
|
4,189
|
1,968
|
(5,285)
|
|
4,088
|
|
2,963
|
||
Investment properties
|
|
5
|
6
|
17,914
|
–
|
–
|
|
17,925
|
|
16,497
|
||
Investment in joint ventures and associates accounted for using the
equity method
|
|
991
|
–
|
742
|
–
|
–
|
|
1,733
|
|
1,416
|
||
Loans
|
C3.3
|
1,377
|
11,066
|
5,567
|
–
|
–
|
|
18,010
|
|
17,042
|
||
Equity securities and portfolio holdings in unit
trusts
|
|
32,150
|
128,657
|
53,810
|
116
|
–
|
|
214,733
|
|
223,391
|
||
Debt securities
|
C3.2
|
45,839
|
41,594
|
85,956
|
1,967
|
–
|
|
175,356
|
|
171,374
|
||
Derivative assets
|
|
296
|
574
|
2,513
|
111
|
–
|
|
3,494
|
|
4,801
|
||
Other investments
|
|
–
|
927
|
5,585
|
–
|
–
|
|
6,512
|
|
5,622
|
||
Deposits
|
|
1,224
|
92
|
10,320
|
160
|
–
|
|
11,796
|
|
11,236
|
||
Assets held for sale*
|
|
–
|
–
|
10,578
|
–
|
–
|
|
10,578
|
|
38
|
||
Cash and cash equivalents
|
|
2,189
|
3,005
|
4,749
|
2,182
|
–
|
|
12,125
|
|
10,690
|
||
Total assets
|
|
94,199
|
204,918
|
209,201
|
6,802
|
(6,475)
|
|
508,645
|
|
493,941
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
6,428
|
5,624
|
8,700
|
(3,485)
|
–
|
|
17,267
|
|
16,094
|
||
Liabilities
|
|
|
|
|
|
|
|
|
|
|
||
Insurance contract liabilities
|
C4.1
|
72,349
|
182,432
|
68,957
|
37
|
(1,109)
|
|
322,666
|
|
328,172
|
||
Investment contract liabilities with discretionary participation
features
|
C4.1
|
375
|
–
|
67,038
|
–
|
–
|
|
67,413
|
|
62,677
|
||
Investment contract liabilities without discretionary participation
features
|
C4.1
|
492
|
3,168
|
15,560
|
2
|
–
|
|
19,222
|
|
20,394
|
||
Unallocated surplus of with-profits funds
|
C4.1
|
2,511
|
–
|
13,334
|
–
|
–
|
|
15,845
|
|
16,951
|
||
Core structural borrowings of shareholder-financed
businesses
|
C6.1
|
–
|
196
|
–
|
7,468
|
–
|
|
7,664
|
|
6,280
|
||
Operational borrowings attributable to shareholder-financed
businesses
|
C6.2
|
61
|
328
|
106
|
503
|
–
|
|
998
|
|
1,791
|
||
Borrowings attributable to with-profits businesses
|
C6.2
|
19
|
–
|
3,921
|
–
|
–
|
|
3,940
|
|
3,716
|
||
Obligations under funding, securities lending and sale and
repurchase agreements
|
|
–
|
5,765
|
1,224
|
–
|
–
|
|
6,989
|
|
5,662
|
||
Net asset value attributable to unit holders of consolidated unit
trusts and similar funds
|
|
2,617
|
–
|
9,013
|
21
|
–
|
|
11,651
|
|
8,889
|
||
Deferred tax liabilities
|
C8
|
1,257
|
1,688
|
1,061
|
16
|
–
|
|
4,022
|
|
4,715
|
||
Current tax liabilities
|
|
133
|
115
|
326
|
75
|
(81)
|
|
568
|
|
537
|
||
Accruals, deferred income and other liabilities
|
|
7,641
|
5,324
|
6,442
|
1,126
|
(5,285)
|
|
15,248
|
|
14,185
|
||
Provisions
|
|
251
|
23
|
743
|
61
|
–
|
|
1,078
|
|
1,123
|
||
Derivative liabilities
|
|
65
|
255
|
2,208
|
978
|
–
|
|
3,506
|
|
2,755
|
||
Liabilities held for sale*
|
|
–
|
–
|
10,568
|
–
|
–
|
|
10,568
|
|
–
|
||
Total liabilities
|
|
87,771
|
199,294
|
200,501
|
10,287
|
(6,475)
|
|
491,378
|
|
477,847
|
||
Total equity and liabilities
|
|
94,199
|
204,918
|
209,201
|
6,802
|
(6,475)
|
|
508,645
|
|
493,941
|
*
Assets held for
sale of £10,578 million includes £10,568 million in
respect of the reinsured UK annuity business. The corresponding
policyholder and other liabilities of £10,568 million is
reflected in liabilities held for sale (see note
D1.1).
Unallocated to a
segment includes central operations, Prudential Capital and Africa
operations as per note B1.3.
C2
Analysis
of segment statement of financial position by business
type
C2.1
Asia
|
|
|
|
31 Dec 2018 £m
|
|
|
|
|
|
|
|
31 Dec
2017 £m
|
||
|
|
|
|
Insurance
|
|
|
|
|
|
|
|
|||
|
|
|
Note
|
With-profits
business*
|
Unit-linked
assets and
liabilities
|
Other
business
|
Total
|
|
Asset
management
|
Eliminations
|
|
Total
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Goodwill
|
|
–
|
–
|
251
|
251
|
|
247
|
–
|
|
498
|
|
305
|
||
Deferred acquisition costs and other intangible assets
|
|
56
|
–
|
2,870
|
2,926
|
|
11
|
–
|
|
2,937
|
|
2,540
|
||
Property, plant and equipment
|
|
90
|
–
|
34
|
124
|
|
5
|
–
|
|
129
|
|
125
|
||
Reinsurers' share of insurance contract liabilities
|
|
63
|
–
|
2,714
|
2,777
|
|
–
|
–
|
|
2,777
|
|
1,960
|
||
Deferred tax assets
|
|
–
|
1
|
108
|
109
|
|
10
|
–
|
|
119
|
|
112
|
||
Current tax recoverable
|
|
–
|
2
|
23
|
25
|
|
1
|
–
|
|
26
|
|
58
|
||
Accrued investment income
|
|
254
|
51
|
327
|
632
|
|
32
|
–
|
|
664
|
|
595
|
||
Other debtors
|
|
1,676
|
730
|
535
|
2,941
|
|
77
|
(40)
|
|
2,978
|
|
2,675
|
||
Investment properties
|
|
–
|
–
|
5
|
5
|
|
–
|
–
|
|
5
|
|
5
|
||
Investment in joint ventures and associates accounted for using the
equity method
|
|
–
|
–
|
827
|
827
|
|
164
|
–
|
|
991
|
|
912
|
||
Loans
|
C3.3
|
792
|
–
|
585
|
1,377
|
|
–
|
–
|
|
1,377
|
|
1,317
|
||
Equity securities and portfolio holdings in unit
trusts
|
|
17,165
|
12,804
|
2,146
|
32,115
|
|
35
|
–
|
|
32,150
|
|
29,976
|
||
Debt securities
|
C3.2
|
27,204
|
3,981
|
14,583
|
45,768
|
|
71
|
–
|
|
45,839
|
|
40,982
|
||
Derivative assets
|
|
201
|
4
|
91
|
296
|
|
–
|
–
|
|
296
|
|
113
|
||
Deposits
|
|
250
|
455
|
458
|
1,163
|
|
61
|
–
|
|
1,224
|
|
1,291
|
||
Cash and cash equivalents
|
|
870
|
326
|
874
|
2,070
|
|
119
|
–
|
|
2,189
|
|
1,934
|
||
Total assets
|
|
48,621
|
18,354
|
26,431
|
93,406
|
|
833
|
(40)
|
|
94,199
|
|
84,900
|
||
Total equity
|
|
–
|
–
|
5,868
|
5,868
|
|
560
|
–
|
|
6,428
|
|
5,926
|
||
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Insurance contract liabilities
|
|
40,389
|
15,876
|
16,084
|
72,349
|
|
–
|
–
|
|
72,349
|
|
63,468
|
||
Investment contract liabilities with discretionary participation
features
|
C4.1(b)
|
375
|
–
|
–
|
375
|
|
–
|
–
|
|
375
|
|
337
|
||
Investment contract liabilities without discretionary participation
features
|
C4.1(b)
|
–
|
492
|
–
|
492
|
|
–
|
–
|
|
492
|
|
328
|
||
Unallocated surplus of with-profits funds
|
|
2,511
|
–
|
–
|
2,511
|
|
–
|
–
|
|
2,511
|
|
3,474
|
||
Operational borrowings attributable to shareholder-financed
businesses
|
|
–
|
50
|
11
|
61
|
|
–
|
–
|
|
61
|
|
50
|
||
Borrowings attributable to with-profits businesses
|
|
19
|
–
|
–
|
19
|
|
–
|
–
|
|
19
|
|
10
|
||
Net asset value attributable to unit holders of consolidated unit
trusts and similar funds
|
|
1,242
|
1,024
|
351
|
2,617
|
|
–
|
–
|
|
2,617
|
|
3,631
|
||
Deferred tax liabilities
|
|
812
|
21
|
422
|
1,255
|
|
2
|
–
|
|
1,257
|
|
1,152
|
||
Current tax liabilities
|
|
27
|
–
|
93
|
120
|
|
13
|
–
|
|
133
|
|
122
|
||
Accruals, deferred income and other liabilities
|
|
3,138
|
889
|
3,475
|
7,502
|
|
179
|
(40)
|
|
7,641
|
|
6,069
|
||
Provisions
|
|
57
|
–
|
115
|
172
|
|
79
|
–
|
|
251
|
|
254
|
||
Derivative liabilities
|
|
51
|
2
|
12
|
65
|
|
–
|
–
|
|
65
|
|
79
|
||
Total liabilities
|
|
48,621
|
18,354
|
20,563
|
87,538
|
|
273
|
(40)
|
|
87,771
|
|
78,974
|
||
Total equity and liabilities
|
|
48,621
|
18,354
|
26,431
|
93,406
|
|
833
|
(40)
|
|
94,199
|
|
84,900
|
*
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
|
|
|
31 Dec 2018 £m
|
|
31 Dec
2017 £m
|
|||||||
|
|
|
Insurance
|
|
|
|
|
|
|
|
||
|
|
Note
|
Variable annuity
separate account
assets and
liabilities
|
Fixed annuity,
GICs and other
business
|
Total
|
|
Asset
management
|
Eliminations
|
|
Total
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
–
|
–
|
–
|
|
–
|
–
|
|
–
|
|
–
|
|
Deferred acquisition costs and other intangible assets
|
|
–
|
8,747
|
8,747
|
|
–
|
–
|
|
8,747
|
|
8,219
|
|
Property, plant and equipment
|
|
–
|
243
|
243
|
|
3
|
–
|
|
246
|
|
214
|
|
Reinsurers' share of insurance contract liabilities
|
|
–
|
6,662
|
6,662
|
|
–
|
–
|
|
6,662
|
|
6,424
|
|
Deferred tax assets
|
|
–
|
2,271
|
2,271
|
|
24
|
–
|
|
2,295
|
|
2,300
|
|
Current tax recoverable
|
|
–
|
309
|
309
|
|
2
|
–
|
|
311
|
|
298
|
|
Accrued investment income
|
|
–
|
493
|
493
|
|
5
|
–
|
|
498
|
|
492
|
|
Other debtors
|
|
–
|
230
|
230
|
|
76
|
(68)
|
|
238
|
|
248
|
|
Investment properties
|
|
–
|
6
|
6
|
|
–
|
–
|
|
6
|
|
5
|
|
Loans
|
C3.3
|
–
|
11,066
|
11,066
|
|
–
|
–
|
|
11,066
|
|
9,630
|
|
Equity securities and portfolio holdings in unit
trusts
|
|
128,220
|
433
|
128,653
|
|
4
|
–
|
|
128,657
|
|
130,630
|
|
Debt securities
|
C3.2
|
–
|
41,594
|
41,594
|
|
–
|
–
|
|
41,594
|
|
35,378
|
|
Derivative assets
|
|
–
|
574
|
574
|
|
–
|
–
|
|
574
|
|
1,611
|
|
Other investments
|
|
–
|
926
|
926
|
|
1
|
–
|
|
927
|
|
848
|
|
Deposits
|
|
–
|
–
|
–
|
|
92
|
–
|
|
92
|
|
43
|
|
Cash and cash equivalents
|
|
–
|
2,976
|
2,976
|
|
29
|
–
|
|
3,005
|
|
1,658
|
|
Total assets
|
|
128,220
|
76,530
|
204,750
|
|
236
|
(68)
|
|
204,918
|
|
197,998
|
|
Total equity
|
|
–
|
5,584
|
5,584
|
|
40
|
–
|
|
5,624
|
|
5,248
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance contract liabilities
|
|
128,220
|
54,212
|
182,432
|
|
–
|
–
|
|
182,432
|
|
177,728
|
|
Investment contract liabilities without discretionary participation
features
|
C4.1(c)
|
–
|
3,168
|
3,168
|
|
–
|
–
|
|
3,168
|
|
2,996
|
|
Core structural borrowings of shareholder-financed
businesses
|
|
–
|
196
|
196
|
|
–
|
–
|
|
196
|
|
184
|
|
Operational borrowings attributable to shareholder-financed
businesses
|
|
–
|
328
|
328
|
|
–
|
–
|
|
328
|
|
508
|
|
Obligations under funding, securities lending and sale and
repurchase agreements
|
|
–
|
5,765
|
5,765
|
|
–
|
–
|
|
5,765
|
|
4,304
|
|
Net asset value attributable to unit holders of consolidated unit
trusts and similar funds
|
|
–
|
–
|
–
|
|
–
|
–
|
|
–
|
|
–
|
|
Deferred tax liabilities
|
|
–
|
1,688
|
1,688
|
|
–
|
–
|
|
1,688
|
|
1,845
|
|
Current tax liabilities
|
|
–
|
114
|
114
|
|
1
|
–
|
|
115
|
|
47
|
|
Accruals, deferred income and other liabilities
|
|
–
|
5,197
|
5,197
|
|
195
|
(68)
|
|
5,324
|
|
5,109
|
|
Provisions
|
|
–
|
23
|
23
|
|
–
|
–
|
|
23
|
|
24
|
|
Derivative liabilities
|
|
–
|
255
|
255
|
|
–
|
–
|
|
255
|
|
5
|
|
Total liabilities
|
|
128,220
|
70,946
|
199,166
|
|
196
|
(68)
|
|
199,294
|
|
192,750
|
|
Total equity and liabilities
|
|
128,220
|
76,530
|
204,750
|
|
236
|
(68)
|
|
204,918
|
|
197,998
|
C2.3
UK and
Europe
|
|
|
|
31 Dec 2018 £m
|
|
31 Dec
2017 £m
|
||||||||
|
|
|
|
Insurance
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
Other funds and subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
|
With-profits business*
|
Unit-linked
assets and
liabilities
|
Annuity
and
other
long-term
business
|
Total
|
|
Asset management
|
Eliminations
|
|
Total
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Goodwill
|
|
206
|
–
|
–
|
206
|
|
1,153
|
–
|
|
1,359
|
|
1,177
|
||
Deferred acquisition costs and other intangible assets
|
|
83
|
–
|
94
|
177
|
|
18
|
–
|
|
195
|
|
210
|
||
Property, plant and equipment
|
|
895
|
–
|
39
|
934
|
|
97
|
–
|
|
1,031
|
|
447
|
||
Reinsurers' share of insurance contract liabilities
|
|
1,131
|
115
|
1,566
|
2,812
|
|
–
|
–
|
|
2,812
|
|
2,521
|
||
Deferred tax assets
|
|
61
|
–
|
45
|
106
|
|
20
|
–
|
|
126
|
|
157
|
||
Current tax recoverable
|
|
58
|
6
|
174
|
238
|
|
6
|
–
|
|
244
|
|
244
|
||
Accrued investment income
|
|
1,010
|
116
|
378
|
1,504
|
|
7
|
–
|
|
1,511
|
|
1,558
|
||
Other debtors
|
|
2,102
|
575
|
641
|
3,318
|
|
1,011
|
(140)
|
|
4,189
|
|
3,118
|
||
Investment properties
|
|
15,635
|
618
|
1,661
|
17,914
|
|
–
|
–
|
|
17,914
|
|
16,487
|
||
Investment in joint ventures and associates accounted for using the
equity method
|
|
705
|
–
|
–
|
705
|
|
37
|
–
|
|
742
|
|
504
|
||
Loans
|
C3.3
|
3,853
|
–
|
1,714
|
5,567
|
|
–
|
–
|
|
5,567
|
|
5,986
|
||
Equity securities and portfolio holdings in unit
trusts
|
|
41,090
|
12,477
|
20
|
53,587
|
|
223
|
–
|
|
53,810
|
|
62,670
|
||
Debt securities
|
C3.2
|
53,798
|
10,512
|
21,646
|
85,956
|
|
–
|
–
|
|
85,956
|
|
92,707
|
||
Derivative assets
|
|
1,957
|
1
|
555
|
2,513
|
|
–
|
–
|
|
2,513
|
|
2,954
|
||
Other investments
|
|
5,573
|
10
|
1
|
5,584
|
|
1
|
–
|
|
5,585
|
|
4,774
|
||
Deposits
|
|
8,530
|
1,101
|
689
|
10,320
|
|
–
|
–
|
|
10,320
|
|
9,540
|
||
Assets held for sale
|
|
10
|
–
|
10,568
|
10,578
|
|
–
|
–
|
|
10,578
|
|
38
|
||
Cash and cash equivalents
|
|
3,520
|
190
|
688
|
4,398
|
|
351
|
–
|
|
4,749
|
|
5,808
|
||
Total assets
|
|
140,217
|
25,721
|
40,479
|
206,417
|
|
2,924
|
(140)
|
|
209,201
|
|
210,900
|
||
Total equity
|
|
–
|
–
|
6,540
|
6,540
|
|
2,160
|
–
|
|
8,700
|
|
8,245
|
||
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Insurance contract liabilities
|
C4.1(d)
|
43,775
|
5,219
|
19,963
|
68,957
|
|
–
|
–
|
|
68,957
|
|
88,180
|
||
Investment contract liabilities with discretionary participation
features
|
C4.1(d)
|
67,018
|
–
|
20
|
67,038
|
|
–
|
–
|
|
67,038
|
|
62,340
|
||
Investment contract liabilities without discretionary participation
features
|
C4.1(d)
|
2
|
15,498
|
60
|
15,560
|
|
–
|
–
|
|
15,560
|
|
17,069
|
||
Unallocated surplus of with-profits funds
|
|
13,334
|
–
|
–
|
13,334
|
|
–
|
–
|
|
13,334
|
|
13,477
|
||
Operational borrowings attributable to shareholder-financed
businesses
|
|
–
|
4
|
102
|
106
|
|
–
|
–
|
|
106
|
|
148
|
||
Borrowings attributable to with-profits businesses
|
|
3,921
|
–
|
–
|
3,921
|
|
–
|
–
|
|
3,921
|
|
3,706
|
||
Obligations under funding, securities lending and sale and
repurchase agreements
|
|
999
|
–
|
225
|
1,224
|
|
–
|
–
|
|
1,224
|
|
1,358
|
||
Net asset value attributable to unit holders of consolidated unit
trusts and similar funds
|
|
4,349
|
4,643
|
21
|
9,013
|
|
–
|
–
|
|
9,013
|
|
5,243
|
||
Deferred tax liabilities
|
|
892
|
–
|
147
|
1,039
|
|
22
|
–
|
|
1,061
|
|
1,703
|
||
Current tax liabilities
|
|
29
|
–
|
269
|
298
|
|
28
|
–
|
|
326
|
|
377
|
||
Accruals deferred income and other liabilities
|
|
4,601
|
354
|
1,141
|
6,096
|
|
486
|
(140)
|
|
6,442
|
|
6,609
|
||
Provisions
|
|
32
|
–
|
484
|
516
|
|
227
|
–
|
|
743
|
|
784
|
||
Derivative liabilities
|
|
1,265
|
3
|
939
|
2,207
|
|
1
|
–
|
|
2,208
|
|
1,661
|
||
Liabilities held for sale
|
|
–
|
–
|
10,568
|
10,568
|
|
–
|
–
|
|
10,568
|
|
–
|
||
Total liabilities
|
|
140,217
|
25,721
|
33,939
|
199,877
|
|
764
|
(140)
|
|
200,501
|
|
202,655
|
||
Total equity and liabilities
|
|
140,217
|
25,721
|
40,479
|
206,417
|
|
2,924
|
(140)
|
|
209,201
|
|
210,900
|
*
Includes the
Scottish Amicable Insurance Fund which, at 31 December 2018, had
total assets and liabilities of £4,844 million (2017:
£5,768 million). The PAC with-profits sub-fund (WPSF) mainly
contains with-profits business but it also contains some non-profit
business (unit-linked, term assurances and annuities). The UK
with-profits fund includes £9.5 billion (2017: £10.6
billion) of non-profits annuities liabilities.
C3
Assets
and liabilities
C3.1
Group assets and
liabilities – measurement
(a)
Determination of fair value
The fair values of the financial instruments for which fair
valuation is required under IFRS are determined by the use of
current market bid prices for exchange-quoted investments or by
using quotations from independent third parties such as brokers and
pricing services or by using appropriate valuation
techniques.
The estimated fair value of derivative financial instruments
reflects the estimated amount the Group would receive or pay in an
arm’s-length transaction. This amount is determined using
quoted prices if exchange listed, quotations from independent third
parties or valued internally using standard market
practices.
Other than the loans which have been designated at fair value
through profit or loss, the loans and receivables have been shown
net of provisions for impairment. The fair value of loans have been
estimated from discounted cash flows expected to be received. The
discount rate is updated for the market rate of interest where
applicable.
The fair value of investment properties is based on market values
as assessed by professionally qualified external valuers or by the
Group’s qualified surveyors.
The fair value of the subordinated and senior debt issued by the
parent company is determined using quoted prices from independent
third parties.
The fair value of financial liabilities (other than derivative
financial instruments) is determined using discounted cash flows of
the amounts expected to be paid.
(b)
Fair value measurement hierarchy of Group assets and
liabilities
Assets and liabilities carried at fair value on the statement of
financial position
The table below shows the assets and liabilities carried at fair
value analysed by level of the IFRS 13, ‘Fair Value
Measurement’ defined fair value hierarchy. This hierarchy is
based on the inputs to the fair value measurement and reflects the
lowest level input that is significant to that
measurement.
Financial instruments at fair value
|
|
31 Dec 2018 £m
|
|||
|
Level 1
|
Level 2
|
Level 3
|
|
|
|
|
Quoted prices
(unadjusted)
in active markets
|
Valuation based
on significant
observable
market inputs
|
Valuation based
on significant
unobservable
market inputs
|
Total
|
Analysis of financial investments, net of derivative liabilities by
business type
|
|
|
|
|
|
With-profits
|
|
|
|
|
|
Loans
|
–
|
–
|
1,703
|
1,703
|
|
Equity securities and portfolio holdings in unit
trusts
|
52,320
|
5,447
|
488
|
58,255
|
|
Debt securities
|
31,210
|
48,981
|
811
|
81,002
|
|
Other investments (including derivative assets)
|
143
|
3,263
|
4,325
|
7,731
|
|
Derivative liabilities
|
(85)
|
(1,231)
|
–
|
(1,316)
|
|
Total financial investments, net of derivative
liabilities
|
83,588
|
56,460
|
7,327
|
147,375
|
|
Percentage of total
|
57%
|
38%
|
5%
|
100%
|
|
Unit-linked and variable annuity separate account
|
|
|
|
|
|
Equity securities and portfolio holdings in unit
trusts
|
152,987
|
505
|
9
|
153,501
|
|
Debt securities
|
4,766
|
9,727
|
–
|
14,493
|
|
Other investments (including derivative assets)
|
6
|
3
|
6
|
15
|
|
Derivative liabilities
|
(2)
|
(3)
|
–
|
(5)
|
|
Total financial investments, net of derivative
liabilities
|
157,757
|
10,232
|
15
|
168,004
|
|
Percentage of total
|
94%
|
6%
|
0%
|
100%
|
|
Non-linked shareholder-backed
|
|
|
|
|
|
Loans
|
–
|
–
|
3,050
|
3,050
|
|
Equity securities and portfolio holdings in unit
trusts
|
2,957
|
2
|
18
|
2,977
|
|
Debt securities
|
17,687
|
61,803
|
371
|
79,861
|
|
Other investments (including derivative assets)
|
61
|
1,258
|
941
|
2,260
|
|
Derivative liabilities
|
(2)
|
(1,760)
|
(423)
|
(2,185)
|
|
Total financial investments, net of derivative
liabilities
|
20,703
|
61,303
|
3,957
|
85,963
|
|
Percentage of total
|
24%
|
71%
|
5%
|
100%
|
|
|
|
|
|
|
|
Group total analysis, including other financial liabilities held at
fair value
|
|
|
|
|
|
Loans
|
–
|
–
|
4,753
|
4,753
|
|
Equity securities and portfolio holdings in unit
trusts
|
208,264
|
5,954
|
515
|
214,733
|
|
Debt securities
|
53,663
|
120,511
|
1,182
|
175,356
|
|
Other investments (including derivative assets)
|
210
|
4,524
|
5,272
|
10,006
|
|
Derivative liabilities
|
(89)
|
(2,994)
|
(423)
|
(3,506)
|
|
Total financial investments, net of derivative
liabilities
|
262,048
|
127,995
|
11,299
|
401,342
|
|
Investment contract liabilities without discretionary participation
features held at fair value
|
–
|
(16,054)
|
–
|
(16,054)
|
|
Borrowings attributable to with-profits businesses
|
–
|
–
|
(1,606)
|
(1,606)
|
|
Net asset value attributable to unit holders of consolidated unit
trusts and similar funds
|
(6,852)
|
(3,811)
|
(988)
|
(11,651)
|
|
Other financial liabilities held at fair value
|
–
|
(2)
|
(3,404)
|
(3,406)
|
|
Total financial instruments at fair value
|
255,196
|
108,128
|
5,301
|
368,625
|
|
Percentage of total
|
70%
|
29%
|
1%
|
100%
|
|
|
31 Dec 2017 £m
|
|||
|
Level 1
|
Level 2
|
Level 3
|
|
|
|
|
Quoted prices
(unadjusted)
in active markets
|
Valuation based
on significant
observable
market inputs
|
Valuation based
on significant
unobservable
market inputs
|
Total
|
Analysis of financial investments, net of derivative liabilities by
business type
|
|
|
|
|
|
With-profits
|
|
|
|
|
|
Loans
|
–
|
–
|
2,023
|
2,023
|
|
Equity securities and portfolio holdings in unit
trusts
|
57,347
|
4,470
|
351
|
62,168
|
|
Debt securities
|
29,143
|
45,602
|
348
|
75,093
|
|
Other investments (including derivative assets)
|
68
|
3,638
|
3,540
|
7,246
|
|
Derivative liabilities
|
(68)
|
(615)
|
–
|
(683)
|
|
Total financial investments, net of derivative
liabilities
|
86,490
|
53,095
|
6,262
|
145,847
|
|
Percentage of total
|
60%
|
36%
|
4%
|
100%
|
|
Unit-linked and variable annuity separate account
|
|
|
|
|
|
Equity securities and portfolio holdings in unit
trusts
|
158,631
|
457
|
10
|
159,098
|
|
Debt securities
|
4,993
|
5,226
|
–
|
10,219
|
|
Other investments (including derivative assets)
|
12
|
4
|
8
|
24
|
|
Derivative liabilities
|
–
|
(1)
|
–
|
(1)
|
|
Total financial investments, net of derivative
liabilities
|
163,636
|
5,686
|
18
|
169,340
|
|
Percentage of total
|
97%
|
3%
|
0%
|
100%
|
|
Non-linked shareholder-backed
|
|
|
|
|
|
Loans
|
–
|
–
|
2,814
|
2,814
|
|
Equity securities and portfolio holdings in unit
trusts
|
2,105
|
10
|
10
|
2,125
|
|
Debt securities
|
21,443
|
64,313
|
306
|
86,062
|
|
Other investments (including derivative assets)
|
7
|
2,270
|
876
|
3,153
|
|
Derivative liabilities
|
–
|
(1,559)
|
(512)
|
(2,071)
|
|
Total financial investments, net of derivative
liabilities
|
23,555
|
65,034
|
3,494
|
92,083
|
|
Percentage of total
|
25%
|
71%
|
4%
|
100%
|
|
|
|
|
|
|
|
Group total analysis, including other financial liabilities held at
fair value
|
|
|
|
|
|
Loans
|
–
|
–
|
4,837
|
4,837
|
|
Equity securities and portfolio holdings in unit
trusts
|
218,083
|
4,937
|
371
|
223,391
|
|
Debt securities
|
55,579
|
115,141
|
654
|
171,374
|
|
Other investments (including derivative assets)
|
87
|
5,912
|
4,424
|
10,423
|
|
Derivative liabilities
|
(68)
|
(2,175)
|
(512)
|
(2,755)
|
|
Total financial investments, net of derivative
liabilities
|
273,681
|
123,815
|
9,774
|
407,270
|
|
Investment contract liabilities without discretionary participation
features held at fair value
|
–
|
(17,397)
|
–
|
(17,397)
|
|
Borrowings attributable to with-profits businesses
|
–
|
–
|
(1,887)
|
(1,887)
|
|
Net asset value attributable to unit holders of consolidated unit
trusts and similar funds
|
(4,836)
|
(3,640)
|
(413)
|
(8,889)
|
|
Other financial liabilities held at fair value
|
–
|
–
|
(3,031)
|
(3,031)
|
|
Total financial instruments at fair value
|
268,845
|
102,778
|
4,443
|
376,066
|
|
Percentage of total
|
72%
|
27%
|
1%
|
100%
|
All assets and liabilities held at fair value are classified as
fair value through profit or loss, except for £40,849 million
(31 December 2017: £35,293 million) of debt securities
classified as available-for-sale.
Investment properties at fair value
|
|
|
|
|
|
31 Dec £m
|
|||
|
Level 1
|
Level 2
|
Level 3
|
|
|
Quoted prices (unadjusted) in active markets
|
Valuation based on significant observable market
inputs
|
Valuation based on significant unobservable market
inputs
|
Total
|
2018
|
–
|
–
|
17,925
|
17,925
|
2017
|
–
|
–
|
16,497
|
16,497
|
(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 a designated independent
pricing service or quote from third-party brokers. These valuations
are subject to a number of monitoring controls, such as comparison
to multiple pricing sources where available, monthly price
variances, stale price reviews and variance analysis on prices
achieved on subsequent trades.
When
prices are not available from pricing services, quotes are sourced
directly from brokers. Prudential seeks to obtain a number of
quotes from different brokers so as to obtain the most
comprehensive information available on their executability. Where
quotes are sourced directly from brokers, the price used in the
valuation is normally selected from one of the quotes based on a
number of factors, including the timeliness and regularity of the
quotes and the accuracy of the quotes considering the spreads
provided. The selected quote is the one which best represents an
executable quote for the security at the measurement
date.
Generally,
no adjustment is made to the prices obtained from independent third
parties. Adjustment is made in only limited circumstances, where it
is determined that the third-party valuations obtained do not
reflect fair value (eg either because the value is stale and/or the
values are extremely diverse in range). These are usually
securities which are distressed or that could be subject to a debt
restructure or where reliable market prices are no longer available
due to an inactive market or market dislocation. In these
instances, prices are derived using internal valuation techniques
including those as described below in this note with the objective
of arriving at a fair value measurement that reflects the price at
which an orderly transaction would take place between market
participants on the measurement date. The techniques used require a
number of assumptions relating to variables such as credit risk and
interest rates. Examples of such variables include an average
credit spread based on the corporate bond universe and the relevant
duration of the asset being valued. Prudential determines the input
assumptions based on the best available information at the
measurement dates. Securities valued in such manner are classified
as level 3 where these significant inputs are not based on
observable market data.
Of the
total level 2 debt securities of £120,511 million at 31
December 2018 (31 December 2017: £115,141 million),
£15,425 million are valued internally (31 December 2017:
£13,910 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 that reflects the price at which an orderly transaction
would take place between market participants on the measurement
date.
The
fair value estimates are made at a specific point in time, based
upon available market information and judgements about the
financial instruments, including estimates of the timing and amount
of expected future cash flows and the credit standing of
counterparties. Such estimates do not reflect any premium or
discount that could result from offering for sale at one time a
significant volume of a particular financial instrument, nor do
they consider the tax impact of the realisation of unrealised gains
or losses from selling the financial instrument being fair
valued.
In
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 2018, the Group
held £5,301 million (31 December 2017: £4,443 million) of
net financial instruments at fair value within level 3. This
represents 1 per cent (31 December 2017: 1 per cent) of the total
fair valued financial assets net of fair valued financial
liabilities. The principal financial assets, net of corresponding
liabilities, classified as fair value within level 3 as of 31
December 2018 are described below:
(i)
£1,702 million
of loans (31 December 2017: £1,983 million) and a
corresponding £1,606 million (31 December 2017: £1,887
million) of borrowings are held by a subsidiary of the
Group’s UK with-profits fund, attaching to a portfolio of
buy-to-let mortgages and other loans financed largely by external
third-party (non-recourse) borrowings. See note C3.3(c) for further
details. The Group’s exposure is limited to the investment
held by the UK with-profits fund, rather than to the individual
loans and borrowings themselves. The fair value movements of these
loans and borrowings have no effect on shareholders’ profit
and equity. The most significant non observable inputs to the
mortgage fair value are the level of future defaults and
prepayments by the mortgage holders.
(ii)
Loans of
£2,783 million at 31
December 2018 (31 December 2017: £2,512 million),
measured as the loan outstanding balance, plus accrued investment
income, attached to acquired REALIC business and held to back the
liabilities for funds withheld under reinsurance arrangements. The
funds withheld liability of £2,941 million at 31 December 2018 (31 December 2017:
£2,664 million) is also classified within level 3, accounted
for on a fair value basis being equivalent to the carrying value of
the underlying assets.
(iii)
Excluding the
above, the level 3 fair valued financial assets net of financial
liabilities are £5,363 million (31 December 2017: £4,499
million). Of this amount, a net liability of £(298) million
(31 December 2017: net liability of £(117) million) is
internally valued, representing less than 0.1 per cent of the total
fair valued financial assets net of financial liabilities (31
December 2017: less than 0.1 per cent). Internal valuations are
inherently more subjective than external valuations. Included
within these internally valued net asset/liability
are:
a)
Debt securities of
£582 million (31 December 2017: £500 million), which are
either valued on a discounted cash flow method with an internally
developed discount rate or on external prices adjusted to reflect
the specific known conditions relating to these securities (eg
distressed securities or securities which were being
restructured).
b)
Private equity and
venture investments in both debt and equity securities of £512
million (31 December 2017: £217 million) which are valued
internally using discounted cash flows based on management
information available for these investments. The significant
unobservable inputs include the determination of expected future
cash flows on the investments being valued, determination of the
probability of counterparty default and prepayments and the
selection of appropriate discount rates. The valuation is performed
in accordance with International Private Equity and Venture Capital
Association Valuation guidelines. These investments are principally
held by consolidated investment funds that are managed on behalf of
third parties.
c)
Equity release
mortgage loan investments of £268 million and a corresponding
loan liability backed by these investments of £(354) million
(31 December 2017: £302 million loan investments and a
corresponding liability of £(385) million) which are valued
internally using the discounted cash flow models. The inputs that
are significant to the valuation of these investments are primarily
the economic assumptions, being the discount rate (risk-free rate
plus a liquidity premium) and property values.
d)
Liabilities of
£(898) million (31 December 2017: £(403) million) for the
net asset value attributable to external unit holders in respect of
the consolidated investment funds, which are non-recourse to the
Group. These liabilities are valued by reference to the underlying
assets.
e)
Derivative
liabilities of £(423) million (31 December 2017: £(512)
million) which are valued internally using the discounted cash flow
method in line with standard market practices but are subject to
independent assessment against external counterparties’
valuations.
f)
Other sundry
individual financial investments of £15 million (31 December
2017: £164 million).
Of the
internally valued net liability referred to above of £(298)
million (31 December 2017: net liability of £(117)
million):
–
A net liability of
£(53) million (31 December 2017: net asset £67 million)
is held by the Group’s participating funds and therefore
shareholders’ profit and equity are not impacted by movements
in the valuation of these financial instruments; and
A net liability of
£(245) million (31 December 2017: £(184) million) is held
to support non-linked shareholder-backed business. If the value of
all the level 3 instruments held to support non-linked
shareholder-backed business valued internally decreased by 10 per
cent, the change in valuation would be £24 million (31
December 2017: £18 million), which would reduce
shareholders’ equity by this amount before tax. All this
amount passes through the income statement substantially as part of
short-term fluctuations in investment returns outside of adjusted
IFRS operating profit based on longer-term investment
returns.
Other assets at fair value – investment
properties
The
investment properties of the Group are principally held by the UK
and Europe insurance operations that are externally valued by
professionally qualified external valuers using the Royal
Institution of Chartered Surveyors (RICS) valuation standards. An
‘income capitalisation’ technique is predominantly
applied for these properties. This technique calculates the value
through the yield and rental value depending on factors such as the
lease length, building quality, covenant and location. The
variables used are compared to recent transactions with similar
features to those of the Group’s investment properties. As
the comparisons are not with properties that are virtually
identical to the Group’s investment properties, adjustments
are made by the valuers where appropriate to the variables used.
Changes in assumptions relating to these variables could positively
or negatively impact the reported fair value of the
properties.
(e)
Transfers
into and transfers out of levels
The
Group’s policy is to recognise transfers into and transfers
out of levels as of the end of each half year reporting period
except for material transfers which are recognised as of the date
of the event or change in circumstances that caused the transfer.
Transfers are deemed to have occurred when there is a material
change in the observed valuation inputs or a change in the level of
trading activities of the securities.
During
the year, the transfers between levels within the Group’s
portfolio were primarily transfers from level 1 to level 2 of
£908 million and transfers from level 2 to level 1 of
£976 million. These transfers which relate to equity
securities and debt securities arose to reflect the change in the
observed valuation inputs and in certain cases, the change in the
level of trading activities of the securities.
In
addition, the transfers into level 3 during the year were £8
million and the transfers out of level 3 were £30 million.
These transfers were primarily between levels 3 and 2 for
derivative liabilities.
(f)
Valuation
processes applied by the Group
The
Group’s valuation policies, procedures and analyses for
instruments categorised as level 3 are overseen by business unit
committees as part of the Group’s wider financial reporting
governance processes. The procedures undertaken include approval of
valuation methodologies, verification processes, and resolution of
significant or complex valuation issues. In undertaking these
activities the Group makes use of the extensive expertise of its
asset management functions. In addition, the Group has minimum
standards for independent price verification to ensure valuation
accuracy is regularly independently verified. Adherence to this
policy is monitored across the business units.
C3.2
Debt
securities
This note provides analysis of the Group’s debt securities,
including asset-backed securities and sovereign debt
securities.
With the exception of certain debt securities for US insurance
operations classified as ‘available-for-sale’ under IAS
39 as disclosed in notes C3.2(b) to (d) below, the Group’s
debt securities are carried at fair value through profit or
loss.
(a)
Credit
rating
Debt securities are analysed below according to external credit
ratings issued, with equivalent ratings issued by different ratings
agencies grouped together. Standard & Poor’s ratings have
been used where available, if this isn’t the case
Moody’s and then Fitch have been used as alternatives. For
the US, NAIC ratings have also been used where relevant. In the
table below, AAA is the highest possible rating. Investment grade
financial assets are classified within the range of AAA to BBB-
ratings. Financial assets which fall outside this range are
classified as below BBB-. Debt securities with no external credit
rating are classified as ‘Other’.
|
|
31 Dec 2018 £m
|
||||||
|
|
AAA
|
AA+ to AA-
|
A+ to A-
|
BBB+
to BBB-
|
Below BBB-
|
Other
|
Total
|
Asia
|
|
|
|
|
|
|
|
|
|
With-profits
|
2,873
|
12,379
|
4,142
|
3,760
|
1,747
|
2,303
|
27,204
|
|
Unit-linked
|
817
|
100
|
492
|
1,431
|
426
|
715
|
3,981
|
|
Non-linked shareholder-backed
|
1,034
|
3,552
|
3,717
|
2,934
|
2,202
|
1,144
|
14,583
|
|
Asset management
|
11
|
-
|
60
|
-
|
-
|
-
|
71
|
US
|
|
|
|
|
|
|
|
|
|
Non-linked shareholder-backed
|
678
|
7,383
|
10,286
|
14,657
|
1,429
|
7,161
|
41,594
|
UK and Europe
|
|
|
|
|
|
|
|
|
|
With-profits
|
6,890
|
9,332
|
11,779
|
14,712
|
2,891
|
8,194
|
53,798
|
|
Unit-linked
|
1,041
|
2,459
|
2,215
|
3,501
|
395
|
901
|
10,512
|
|
Non-linked shareholder-backed
|
3,007
|
6,413
|
4,651
|
1,515
|
158
|
5,902
|
21,646
|
Other operations
|
619
|
1,089
|
151
|
41
|
49
|
18
|
1,967
|
|
Total debt securities
|
16,970
|
42,707
|
37,493
|
42,551
|
9,297
|
26,338
|
175,356
|
|
|
31 Dec 2017 £m
|
||||||
|
|
AAA
|
AA+ to AA-
|
A+ to A-
|
BBB+
to BBB-
|
Below BBB-
|
Other
|
Total
|
Asia:
|
|
|
|
|
|
|
|
|
|
With-profits
|
2,504
|
10,641
|
3,846
|
3,234
|
1,810
|
2,397
|
24,432
|
|
Unit-linked
|
528
|
103
|
510
|
1,429
|
372
|
565
|
3,507
|
|
Non-linked shareholder-backed
|
990
|
2,925
|
3,226
|
2,970
|
1,879
|
1,053
|
13,043
|
US:
|
|
|
|
|
|
|
|
|
|
Non-linked shareholder-backed
|
368
|
6,352
|
9,578
|
12,311
|
1,000
|
5,769
|
35,378
|
UK and Europe:
|
|
|
|
|
|
|
|
|
|
With-profits
|
6,492
|
9,378
|
11,666
|
12,856
|
2,877
|
7,392
|
50,661
|
|
Unit-linked
|
670
|
2,732
|
1,308
|
1,793
|
91
|
117
|
6,711
|
|
Non-linked shareholder-backed
|
5,118
|
11,005
|
9,625
|
3,267
|
258
|
6,062
|
35,335
|
Other operations
|
742
|
1,264
|
182
|
67
|
36
|
16
|
2,307
|
|
Total debt securities
|
17,412
|
44,400
|
39,941
|
37,927
|
8,323
|
23,371
|
171,374
|
The
credit ratings, information or data contained in this report which
are attributed and specifically provided by Standard
&Poor’s, Moody’s and Fitch Solutions and their
respective affiliates and suppliers (‘Content
Providers’) is referred to here as the ‘Content’.
Reproduction of any Content in any form is prohibited except with
the prior written permission of the relevant party. The Content
Providers do not guarantee the accuracy, adequacy, completeness,
timeliness or availability of any Content and are not responsible
for any errors or omissions (negligent or otherwise), regardless of
the cause, or for the results obtained from the use of such
Content. The Content Providers expressly disclaim liability for any
damages, costs, expenses, legal fees, or losses (including lost
income or lost profit and opportunity costs) in connection with any
use of the Content. A reference to a particular investment or
security, a rating or any observation concerning an investment that
is part of the Content is not a recommendation to buy, sell or hold
any such investment or security, nor does it address the
suitability of an investment or security and should not be relied
on as investment advice.
Securities
with credit ratings classified as ‘Other’ can be
further analysed as follows:
|
|
|
|
31 Dec 2018 £m
|
|
31 Dec 2017 £m
|
Asia – non-linked shareholder-backed
|
|
|
|
|
|
|
Internally rated:
|
|
|
|
|
|
|
|
Government bonds
|
|
|
36
|
|
25
|
|
Corporate bonds – rated as investment grade by local external
ratings agencies
|
|
978
|
|
959
|
|
|
Other
|
|
|
130
|
|
69
|
Total Asia non-linked shareholder-backed
|
|
|
1,144
|
|
1,053
|
|
|
|
|
|
|
|
|
|
|
31 Dec 2018 £m
|
|
31 Dec 2017 £m
|
||
|
|
Mortgage
-backed
securities
|
Other
securities
|
Total
|
|
Total
|
US
|
|
|
|
|
|
|
Implicit ratings of other US debt securities based on NAIC*
valuations (see below)
|
|
|
|
|
|
|
|
NAIC 1
|
2,148
|
2,858
|
5,006
|
|
3,918
|
|
NAIC 2
|
2
|
2,116
|
2,118
|
|
1,794
|
|
NAIC 3-6
|
2
|
35
|
37
|
|
57
|
Total US†
|
2,152
|
5,009
|
7,161
|
|
5,769
|
*
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.
†
Mortgage-backed
securities totalling £1,947 million at 31 December 2018 have
credit ratings issued by Standard & Poor’s of BBB- or
above and hence are designated as investment grade. Other
securities totalling £4,974 million at 31 December 2018 with
NAIC ratings 1 or 2 are also designated as investment
grade.
|
|
|
|
31 Dec 2018 £m
|
31 Dec 2017 £m
|
UK and Europe
|
|
|
|
|
|
Internal ratings or unrated
|
|
|
|
|
|
|
AAA to A-
|
|
|
8,150
|
7,994
|
|
BBB to B-
|
|
|
3,034
|
3,141
|
|
Below B- or unrated
|
|
|
3,813
|
2,436
|
Total UK and Europe
|
|
|
14,997
|
13,571
|
(b)
Additional analysis of US insurance operations debt
securities
|
|
31 Dec 2018 £m
|
31 Dec 2017 £m
|
|
|
|
|
Corporate and government security and commercial
loans:
|
|
|
|
|
Government
|
5,465
|
4,835
|
|
Publicly traded and SEC Rule 144A securities*
|
26,196
|
22,849
|
|
Non-SEC Rule 144A securities
|
6,329
|
4,468
|
Asset-backed securities (see note (e))
|
3,604
|
3,226
|
|
Total US debt securities†
|
41,594
|
35,378
|
*
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:
|
|
|
31 Dec 2018 £m
|
31 Dec 2017 £m
|
|
Available-for-sale
|
40,849
|
35,293
|
|
|
Fair value through profit or loss
|
745
|
85
|
|
|
Total US debt securities
|
41,594
|
35,378
|
Realised
gains and losses, including impairments, recorded in the income
statement are as shown in note B1.2 of this report.
(c)
Movements
in unrealised gains and losses on Jackson available-for-sale
securities
The
movement in the statement of financial position value for debt
securities classified as available-for-sale was from a net
unrealised gain of £1,205 million to a net unrealised loss of
£414 million as analysed in the table below.
|
|
|
Reflected as part of movement in other comprehensive
income
|
|
|
|
|
2018
|
Foreign
exchange
translation
|
Changes in
unrealised
appreciation†
|
2017
|
|
|
£m
|
£m
|
£m
|
£m
|
Assets fair valued at below book value
|
|
|
|
|
|
|
Book value*
|
25,330
|
|
|
6,325
|
|
Unrealised gain (loss)
|
(925)
|
(43)
|
(776)
|
(106)
|
|
Fair value (as included in statement of financial
position)
|
24,405
|
|
|
6,219
|
Assets fair valued at or above book value
|
|
|
|
|
|
|
Book value*
|
15,933
|
|
|
27,763
|
|
Unrealised gain (loss)
|
511
|
41
|
(841)
|
1,311
|
|
Fair value (as included in statement of financial
position)
|
16,444
|
|
|
29,074
|
Total
|
|
|
|
|
|
|
Book value*
|
41,263
|
|
|
34,088
|
|
Net unrealised gain (loss)
|
(414)
|
(2)
|
(1,617)
|
1,205
|
|
Fair value (as included in the footnote above in the overview table
and the statement of financial position)
|
40,849
|
|
|
35,293
|
*
Book value
represents cost/amortised cost of the debt securities.
†
Translated at the
average rate of US$1.3352:£1.00.
(d)
US
debt securities classified as available-for-sale in an unrealised
loss position
(i)
Fair value of securities as a percentage of book value
The
fair value of the debt securities in a gross unrealised loss
position for various percentages of book value:
|
|
|
31 Dec 2018 £m
|
|
31 Dec 2017 £m
|
||
|
|
|
Fair
value
|
Unrealised
loss
|
|
Fair
value
|
Unrealised
loss
|
|
Between 90% and 100%
|
23,662
|
(809)
|
|
6,170
|
(95)
|
|
|
Between 80% and 90%
|
707
|
(104)
|
|
36
|
(6)
|
|
|
Below 80%:
|
|
|
|
|
|
|
|
|
Other asset-backed securities
|
–
|
–
|
|
10
|
(4)
|
|
|
Corporate bonds
|
36
|
(12)
|
|
3
|
(1)
|
|
|
|
36
|
(12)
|
|
13
|
(5)
|
|
Total
|
24,405
|
(925)
|
|
6,219
|
(106)
|
(ii)
Unrealised losses by maturity of security
|
31 Dec 2018 £m
|
|
31 Dec 2017 £m
|
1 year to 5 years
|
(72)
|
|
(7)
|
5 years to 10 years
|
(436)
|
|
(41)
|
More than 10 years
|
(372)
|
|
(39)
|
Mortgage-backed and other debt securities
|
(45)
|
|
(19)
|
Total
|
(925)
|
|
(106)
|
(iii)
Age analysis of unrealised losses for the periods
indicated
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:
|
31 Dec 2018 £m
|
|
31 Dec 2017 £m
|
||||
|
|
|
|
|
|
|
|
|
Non-
investment
grade
|
Investment
grade
|
Total
|
|
Non-
investment
grade
|
Investment
grade
|
Total
|
|
|
|
|
|
|
|
|
Less than 6 months
|
(20)
|
(141)
|
(161)
|
|
(4)
|
(31)
|
(35)
|
6 months to 1 year
|
(22)
|
(440)
|
(462)
|
|
(1)
|
(4)
|
(5)
|
1 year to 2 years
|
(10)
|
(142)
|
(152)
|
|
–
|
(49)
|
(49)
|
2 years to 3 years
|
–
|
(123)
|
(123)
|
|
(1)
|
(6)
|
(7)
|
More than 3 years
|
(2)
|
(25)
|
(27)
|
|
–
|
(10)
|
(10)
|
Total
|
(54)
|
(871)
|
(925)
|
|
(6)
|
(100)
|
(106)
|
The age analysis as at 31 December, of the securities whose fair
values were below 80 per cent of the book value:
|
31 Dec 2018 £m
|
|
31 Dec 2017 £m
|
||
Age analysis
|
Fair
value
|
Unrealised
loss
|
|
Fair
value
|
Unrealised
loss
|
Less than 3 months
|
32
|
(10)
|
|
2
|
–
|
3 months to 6 months
|
2
|
(1)
|
|
1
|
(1)
|
More than 6 months
|
2
|
(1)
|
|
10
|
(4)
|
Total
|
36
|
(12)
|
|
13
|
(5)
|
(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 are as
follows:
|
31 Dec 2018 £m
|
31 Dec 2017 £m
|
Shareholder-backed business
|
|
|
Asia operationsnote
(i)
|
121
|
118
|
US operationsnote
(ii)
|
3,604
|
3,226
|
UK and Europe operations (2018: 42% AAA, 13% AA)note
(iii)
|
1,406
|
1,070
|
Other operationsnote
(iv)
|
445
|
589
|
|
5,576
|
5,003
|
With-profits business
|
|
|
Asia operationsnote
(i)
|
235
|
233
|
UK and Europe operations (2018: 66% AAA, 12% AA)note
(iii)
|
5,270
|
5,658
|
|
5,505
|
5,891
|
Total
|
11,081
|
10,894
|
Notes
(i)
Asia
operations
The
Asia operations’ exposure to asset-backed securities is
primarily held by the with-profits businesses. Of the £235
million (31 December 2017: £233 million), 99.8 per cent (2017:
98.2 per cent) are investment grade.
(ii)
US
operations
US
operations’ exposure to asset-backed securities at 31
December comprises:
|
|
|
31 Dec 2018 £m
|
31 Dec 2017 £m
|
|
RMBS
|
|
|
|
|
|
Sub-prime (2018: 1% AAA, 6% AA, 2% A)
|
96
|
112
|
|
|
Alt-A (2018: 3% AAA, 42% A)
|
105
|
126
|
|
|
Prime including agency (2018: 14% AAA, 62% AA, 10% A)
|
441
|
440
|
|
CMBS (2018: 80% AAA, 15% AA, 2% A)
|
1,945
|
1,579
|
|
|
CDO funds (2018: 13% AA, 24% A), including £nil exposure to
sub-prime
|
13
|
28
|
|
|
Other ABS (2018: 20% AAA, 14% AA, 49% A), including £77
million exposure to sub-prime
|
1,004
|
941
|
|
|
Total
|
3,604
|
3,226
|
(iii)
UK and Europe
operations
The
majority of holdings of the shareholder-backed business are UK
securities and relate to PAC’s annuity business. Of the
holdings of the with-profits businesses, £1,823 million (31
December 2017: £1,913 million) relates to exposure to the US
markets with the remaining exposure being primarily to the UK
market.
(iv)
Other
operations
Other
operations’ exposure to asset-backed securities is held by
Prudential Capital with no sub-prime exposure. Of the £445
million, 99 per cent (31 December 2017: 96 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 are
analysed as follows:
Exposure to sovereign debts
|
31 Dec 2018 £m
|
|
31 Dec 2017 £m
|
||
|
Shareholder-backed
business
|
With-profits
funds
|
|
Shareholder-backed
business
|
With-profits
funds
|
Italy
|
–
|
57
|
|
58
|
63
|
Spain
|
36
|
18
|
|
34
|
18
|
France
|
–
|
50
|
|
23
|
38
|
Germany*
|
239
|
281
|
|
693
|
301
|
Other Eurozone
|
103
|
34
|
|
82
|
31
|
Total Eurozone
|
378
|
440
|
|
890
|
451
|
United Kingdom
|
3,226
|
3,013
|
|
5,918
|
3,287
|
United States†
|
5,647
|
11,858
|
|
5,078
|
10,156
|
Other, including Asia
|
5,142
|
2,745
|
|
4,638
|
2,143
|
Total
|
14,393
|
18,056
|
|
16,524
|
16,037
|
*
Including bonds
guaranteed by the federal government.
†
The exposure to the
United States sovereign debt comprises holdings of the US, the UK
and Europe and Asia insurance operations.
Exposure to bank debt securities
|
31 Dec 2018 £m
|
|
31 Dec 2017 £m
|
||||||||
|
Senior debt
|
|
Subordinated debt
|
|
|
|
|
||||
Shareholder-backed business
|
Covered
|
Senior
|
Total
|
|
Tier 1
|
Tier 2
|
Total
|
|
Total
|
|
Total
|
Spain
|
42
|
64
|
106
|
|
–
|
–
|
–
|
|
106
|
|
68
|
France
|
20
|
119
|
139
|
|
14
|
3
|
17
|
|
156
|
|
86
|
Germany
|
30
|
–
|
30
|
|
6
|
89
|
95
|
|
125
|
|
117
|
Netherlands
|
–
|
69
|
69
|
|
3
|
1
|
4
|
|
73
|
|
71
|
Other Eurozone
|
15
|
2
|
17
|
|
–
|
–
|
–
|
|
17
|
|
15
|
Total Eurozone
|
107
|
254
|
361
|
|
23
|
93
|
116
|
|
477
|
|
357
|
United Kingdom
|
550
|
623
|
1,173
|
|
9
|
164
|
173
|
|
1,346
|
|
1,382
|
United States
|
–
|
2,614
|
2,614
|
|
1
|
52
|
53
|
|
2,667
|
|
2,619
|
Other, including Asia
|
–
|
759
|
759
|
|
109
|
369
|
478
|
|
1,237
|
|
1,163
|
Total
|
657
|
4,250
|
4,907
|
|
142
|
678
|
820
|
|
5,727
|
|
5,521
|
|
|
|
|
|
|
|
|
|
|
|
|
With-profits funds
|
|
|
|
|
|
|
|
|
|
|
|
Italy
|
–
|
38
|
38
|
|
–
|
–
|
–
|
|
38
|
|
31
|
Spain
|
–
|
17
|
17
|
|
–
|
–
|
–
|
|
17
|
|
16
|
France
|
6
|
250
|
256
|
|
1
|
95
|
96
|
|
352
|
|
286
|
Germany
|
140
|
46
|
186
|
|
14
|
29
|
43
|
|
229
|
|
180
|
Netherlands
|
–
|
253
|
253
|
|
12
|
1
|
13
|
|
266
|
|
199
|
Other Eurozone
|
–
|
74
|
74
|
|
–
|
–
|
–
|
|
74
|
|
27
|
Total Eurozone
|
146
|
678
|
824
|
|
27
|
125
|
152
|
|
976
|
|
739
|
United Kingdom
|
909
|
850
|
1,759
|
|
2
|
433
|
435
|
|
2,194
|
|
1,938
|
United States
|
–
|
2,418
|
2,418
|
|
1
|
311
|
312
|
|
2,730
|
|
2,518
|
Other, including Asia
|
575
|
1,459
|
2,034
|
|
339
|
452
|
791
|
|
2,825
|
|
2,531
|
Total
|
1,630
|
5,405
|
7,035
|
|
369
|
1,321
|
1,690
|
|
8,725
|
|
7,726
|
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.
C3.3
Loans
portfolio
(a)
Overview
of loans portfolio
Loans
are accounted for at amortised cost net of impairment except
for:
–
Certain mortgage
loans which have been designated at fair value through profit or
loss of the UK and Europe insurance operations as this loan
portfolio is managed and evaluated on a fair value basis;
and
–
Certain policy
loans of the US insurance operations that are held to back
liabilities for funds withheld under reinsurance arrangements and
are also accounted on a fair value basis.
The
amounts included in the statement of financial position are
analysed as follows:
|
|
31 Dec 2018 £m
|
|
31 Dec 2017 £m
|
||||||
|
|
Mortgage loans*
|
Policy loans†
|
Other loans‡
|
Total
|
|
Mortgage
loans*
|
Policy loans†
|
Other loans‡
|
Total
|
Asia
|
|
|
|
|
|
|
|
|
|
|
|
With-profits
|
–
|
727
|
65
|
792
|
|
–
|
613
|
112
|
725
|
|
Non-linked shareholder-backed
|
156
|
226
|
203
|
585
|
|
177
|
216
|
199
|
592
|
US
|
|
|
|
|
|
|
|
|
|
|
|
Non-linked shareholder-backed
|
7,385
|
3,681
|
–
|
11,066
|
|
6,236
|
3,394
|
–
|
9,630
|
UK and Europe
|
|
|
|
|
|
|
|
|
|
|
|
With-profits
|
2,461
|
3
|
1,389
|
3,853
|
|
2,441
|
4
|
1,823
|
4,268
|
|
Non-linked shareholder-backed
|
1,655
|
–
|
59
|
1,714
|
|
1,681
|
–
|
37
|
1,718
|
Other operations
|
–
|
–
|
–
|
–
|
|
–
|
–
|
109
|
109
|
|
Total loans securities
|
11,657
|
4,637
|
1,716
|
18,010
|
|
10,535
|
4,227
|
2,280
|
17,042
|
*
All
mortgage loans are secured by properties.
†
In
the US £2,783 million (31 December 2017: £2,512 million)
policy loans are backing liabilities for funds withheld under
reinsurance arrangements and are accounted for at fair value
through profit or loss. All other policy loans are accounted for at
amortised cost, less any impairment.
‡
Other
loans held in UK with-profits funds are commercial loans and
comprise mainly syndicated loans.
(b)
Additional information on US mortgage loans
In the US, mortgage loans are all commercial mortgage loans that
are secured by the following property types: industrial,
multi-family residential, suburban office, retail or hotel. The
average loan size is £14.0 million (2017: £12.6 million).
The portfolio has a current estimated average loan to value of 53
per cent (2017: 55 per cent).
Jackson had no mortgage loans where the contractual terms of the
agreements had been restructured at the end of both 2018 and
2017.
(c)
Additional information on UK mortgage loans
The UK with-profits fund invests in an entity that holds a
portfolio of buy-to-let mortgage loans. The vehicle financed its
acquisitions through the issue of debt instruments, largely to
external parties, securitised upon the loans acquired. These
third-party borrowings have no recourse to any other assets of the
Group and the Group’s exposure is limited to the amount
invested by the UK with-profits fund.
By carrying value, £1,237 million of the £1,655 million
(31 December 2017: £1,267 million of £1,681 million)
mortgage loans held by the UK shareholder-backed business relates
to lifetime (equity release) mortgage business which has an average
loan to property value of 33 per cent (31 December 2017: 31 per
cent).
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
|
|
Asia
|
US
|
UK and
Europe
|
Total
|
|
|
£m
|
£m
|
£m
|
£m
|
|
|
note C4.1(b)
|
note C4.1(c)
|
note C4.1(d)
|
|
At 1 January 2017
|
62,784
|
177,626
|
169,304
|
409,714
|
|
Comprising:
|
|
|
|
|
|
|
– Policyholder liabilities on the consolidated statement of
financial positionnote
(i)
|
53,716
|
177,626
|
157,654
|
388,996
|
|
– Unallocated surplus of with-profits funds on the
consolidated statement of financial position
|
2,667
|
–
|
11,650
|
14,317
|
|
– Group's share of policyholder liabilities of joint ventures
and associatenote
(ii)
|
6,401
|
–
|
–
|
6,401
|
|
|
|
|
|
|
Premiums
|
11,863
|
15,219
|
14,810
|
41,892
|
|
Surrenders
|
(3,079)
|
(10,017)
|
(6,939)
|
(20,035)
|
|
Maturities/deaths
|
(1,909)
|
(2,065)
|
(7,135)
|
(11,109)
|
|
Net flows
|
6,875
|
3,137
|
736
|
10,748
|
|
Shareholders' transfers post-tax
|
(54)
|
–
|
(233)
|
(287)
|
|
Investment-related items and other movements
|
8,182
|
16,251
|
11,146
|
35,579
|
|
Foreign exchange translation differences
|
(3,948)
|
(16,290)
|
113
|
(20,125)
|
|
At 31 December 2017/1 January 2018
|
73,839
|
180,724
|
181,066
|
435,629
|
|
Comprising:
|
|
|
|
|
|
|
– Policyholder liabilities on the consolidated statement of
financial positionnote
(i)
|
|
|
|
|
|
(excludes £32 million classified as unallocated to a
segment)
|
62,898
|
180,724
|
167,589
|
411,211
|
|
– Unallocated surplus of with-profits funds on the
consolidated statement of financial position
|
3,474
|
–
|
13,477
|
16,951
|
|
– Group's share of policyholder liabilities of joint ventures
and associatenote
(ii)
|
7,467
|
–
|
–
|
7,467
|
Reclassification of reinsured UK annuity contracts as held for
salenote
(iii)
|
–
|
–
|
(10,858)
|
(10,858)
|
|
|
|
|
|
|
|
Premiums
|
13,187
|
13,940
|
14,011
|
41,138
|
|
Surrenders
|
(2,793)
|
(12,141)
|
(6,780)
|
(21,714)
|
|
Maturities/deaths
|
(1,978)
|
(2,012)
|
(6,796)
|
(10,786)
|
|
Net flows
|
8,416
|
(213)
|
435
|
8,638
|
|
Addition for closed block of group payout annuities in the
USnote
(iv)
|
–
|
4,143
|
–
|
4,143
|
|
Shareholders' transfers post-tax
|
(65)
|
–
|
(259)
|
(324)
|
|
Investment-related items and other movements
|
(2,784)
|
(9,999)
|
(5,481)
|
(18,264)
|
|
Foreign exchange translation differences
|
3,357
|
10,945
|
(14)
|
14,288
|
|
At 31 December 2018
|
82,763
|
185,600
|
164,889
|
433,252
|
|
Comprising:
|
|
|
|
|
|
|
– Policyholder liabilities on the consolidated statement of
financial positionnote
(i)
|
|
|
|
|
|
(excludes £39 million classified as unallocated to a
segment)
|
72,107
|
185,600
|
151,555
|
409,262
|
|
– Unallocated surplus of with-profits funds on the
consolidated statement of financial position
|
2,511
|
–
|
13,334
|
15,845
|
|
– Group's share of policyholder liabilities of joint ventures
and associatenote
(ii)
|
8,145
|
–
|
–
|
8,145
|
Average policyholder liability balancesnote
(v)
|
|
|
|
|
|
|
2018
|
75,309
|
182,126
|
162,287
|
419,722
|
|
2017
|
65,241
|
179,175
|
162,622
|
407,038
|
Notes
(i)
The policyholder
liabilities of the Asia insurance operations of £72,107
million (31 December 2017: £62,898 million), shown in the
table above, is after deducting the intra-group reinsurance
liabilities ceded by the UK and Europe insurance operations of
£1,109 million (31 December 2017: £1,235 million) to the
Hong Kong with-profits business. Including this amount total Asia
policyholder liabilities are £73,216 million (31 December
2017: £64,133 million).
(ii)
The Group’s
investments in joint ventures and associate are accounted for on an
equity method basis in the Group’s balance sheet. The
Group’s share of the policyholder liabilities as shown above relate to life businesses in China,
India and of the Takaful business in Malaysia.
(iii)
The
reclassification as held for sale of the reinsured UK annuity
business that will be transferred to Rothesay life once the Part
VII process is complete reflects the value of policyholder
liabilities held at 1 January 2018.
(iv)
In October 2018,
Jackson entered into an agreement with John Hancock Life to
reinsure 100 per cent of the group payout annuity business. The
transaction resulted in an increase to policyholder liabilities of
Jackson £4.1 billion at the inception of the
contract.
(v)
Averages have been
based on opening and closing balances and adjusted for
acquisitions, disposals and corporate transactions arising in the
year and exclude unallocated surplus of with-profits
funds.
The
items above represent the amount attributable to changes in
policyholder liabilities and unallocated surplus of with-profits
funds as a result of each of the components listed. The
policyholder liabilities shown include investment contracts without
discretionary participation features (as defined in IFRS 4) and
their full movement in the year but exclude liabilities that have
not been allocated to a reporting segment. The items above are
shown gross of external reinsurance.
The
analysis includes the impact of premiums, claims and investment
movements on policyholders’ liabilities. The impact does not
represent premiums, claims and investment movements as reported in
the income statement. For example, the premiums shown above will
exclude any deductions for fees/charges. Claims (surrenders,
maturities and deaths) represent the policyholder liabilities
provision released rather than the claim amount paid to the
policyholder.
(ii)
Analysis of movements in policyholder liabilities for
shareholder-backed business
|
|
Asia
|
US
|
UK and
Europe
|
Total
|
|
|
£m
|
£m
|
£m
|
£m
|
At 1 January 2017
|
32,851
|
177,626
|
56,158
|
266,635
|
|
Premiums
|
6,064
|
15,219
|
2,283
|
23,566
|
|
Surrenders
|
(2,755)
|
(10,017)
|
(2,433)
|
(15,205)
|
|
Maturities/deaths
|
(1,008)
|
(2,065)
|
(2,571)
|
(5,644)
|
|
Net flowsnote
(i)
|
2,301
|
3,137
|
(2,721)
|
2,717
|
|
Investment-related items and other movements
|
3,797
|
16,251
|
2,930
|
22,978
|
|
Foreign exchange translation differences
|
(1,547)
|
(16,290)
|
–
|
(17,837)
|
|
At 31 December 2017/1 January 2018
|
37,402
|
180,724
|
56,367
|
274,493
|
|
Comprising:
|
|
|
|
|
|
|
- Policyholder liabilities on the consolidated statement of
financial position
(excludes £32 million classified as unallocated to a
segment)
|
29,935
|
180,724
|
56,367
|
267,026
|
|
- Group's share of policyholder liabilities relating to joint
ventures and associate
|
7,467
|
–
|
–
|
7,467
|
Reclassification of reinsured UK annuity contracts as held for
salenote
(ii)
|
–
|
–
|
(10,858)
|
(10,858)
|
|
|
|
|
|
|
|
Premiums
|
6,752
|
13,940
|
1,486
|
22,178
|
|
Surrenders
|
(2,455)
|
(12,141)
|
(2,016)
|
(16,612)
|
|
Maturities/deaths
|
(1,046)
|
(2,012)
|
(2,244)
|
(5,302)
|
|
Net flowsnote
(i)
|
3,251
|
(213)
|
(2,774)
|
264
|
|
Addition for closed block of group payout annuities in the
USnote
(iii)
|
–
|
4,143
|
–
|
4,143
|
|
Investment-related items and other movements
|
(1,204)
|
(9,999)
|
(1,975)
|
(13,178)
|
|
Foreign exchange translation differences
|
1,148
|
10,945
|
–
|
12,093
|
|
At 31 December 2018
|
40,597
|
185,600
|
40,760
|
266,957
|
|
Comprising:
|
|
|
|
|
|
|
- Policyholder liabilities on the consolidated statement of
financial position
|
|
|
|
|
|
(excludes £39 million classified as unallocated to a
segment)
|
32,452
|
185,600
|
40,760
|
258,812
|
|
- Group's share of policyholder liabilities relating to joint
ventures and associate
|
8,145
|
–
|
–
|
8,145
|
Notes
(i)
Including
net flows of the Group’s insurance joint ventures and
associate.
(ii)
The
reclassification as held for sale of the reinsured UK annuity
business that will be transferred to Rothesay life once the Part
VII process is complete reflects those policyholder liabilities
held at 1 January 2018.
(iii)
In October 2018,
Jackson entered into an agreement with John Hancock Life to
reinsure 100 per cent of the group payout annuity business. The
transaction resulted in an increase to policyholder liabilities of
Jackson £4.1 billion at the inception of the
contract.
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
business
|
Unit-linked
liabilities
|
Other
business
|
Total
|
|
|
£m
|
£m
|
£m
|
£m
|
|
|
note (vi)
|
|
|
|
At 1 January 2017
|
29,933
|
17,507
|
15,344
|
62,784
|
|
Comprising:
|
|
|
|
|
|
|
– Policyholder liabilities on the consolidated statement of
financial position
|
27,266
|
14,289
|
12,161
|
53,716
|
|
– Unallocated surplus of with-profits funds on the
consolidated statement of financial position
|
2,667
|
-
|
-
|
2,667
|
|
– Group's share of policyholder liabilities relating to joint
ventures and associatenote
(i)
|
-
|
3,218
|
3,183
|
6,401
|
|
|
|
|
|
|
Premiums
|
|
|
|
|
|
|
New business
|
1,143
|
1,298
|
999
|
3,440
|
|
In-force
|
4,656
|
1,637
|
2,130
|
8,423
|
|
|
5,799
|
2,935
|
3,129
|
11,863
|
Surrenders note
(ii)
|
(324)
|
(2,288)
|
(467)
|
(3,079)
|
|
Maturities/deaths
|
(901)
|
(150)
|
(858)
|
(1,909)
|
|
Net flowsnote
(iii)
|
4,574
|
497
|
1,804
|
6,875
|
|
Shareholders' transfers post-tax
|
(54)
|
–
|
–
|
(54)
|
|
Investment-related items and other movements
|
4,385
|
2,830
|
967
|
8,182
|
|
Foreign exchange translation differencesnote
(v)
|
(2,401)
|
(807)
|
(740)
|
(3,948)
|
|
At 31 December 2017/1 January 2018
|
36,437
|
20,027
|
17,375
|
73,839
|
|
Comprising:
|
|
|
|
|
|
|
– Policyholder liabilities on the consolidated statement of
financial position
|
32,963
|
16,263
|
13,672
|
62,898
|
|
– Unallocated surplus of with-profits funds on the
consolidated statement of financial position
|
3,474
|
–
|
–
|
3,474
|
|
– Group's share of policyholder liabilities relating to joint
ventures and associatenote
(i)
|
–
|
3,764
|
3,703
|
7,467
|
|
|
|
|
|
|
Premiums
|
|
|
|
|
|
|
New business
|
1,155
|
1,426
|
1,085
|
3,666
|
|
In-force
|
5,280
|
1,767
|
2,474
|
9,521
|
|
|
6,435
|
3,193
|
3,559
|
13,187
|
Surrenders note
(ii)
|
(338)
|
(1,904)
|
(551)
|
(2,793)
|
|
Maturities/deaths
|
(932)
|
(140)
|
(906)
|
(1,978)
|
|
Net flowsnote
(iii)
|
5,165
|
1,149
|
2,102
|
8,416
|
|
Shareholders' transfers post-tax
|
(65)
|
–
|
–
|
(65)
|
|
Investment-related items and other movementsnote
(iv)
|
(1,580)
|
(1,425)
|
221
|
(2,784)
|
|
Foreign exchange translation differencesnote
(v)
|
2,209
|
431
|
717
|
3,357
|
|
At 31 December 2018
|
42,166
|
20,182
|
20,415
|
82,763
|
|
Comprising:
|
|
|
|
|
|
|
– Policyholder liabilities on the consolidated statement of
financial position
|
39,655
|
16,368
|
16,084
|
72,107
|
|
– Unallocated surplus of with-profits funds on the
consolidated statement of financial position
|
2,511
|
–
|
–
|
2,511
|
|
– Group's share of policyholder liabilities relating to joint
ventures and associatenote
(i)
|
–
|
3,814
|
4,331
|
8,145
|
Average policyholder liability balancesnote
(vii)
|
|
|
|
|
|
|
2018
|
36,309
|
20,105
|
18,895
|
75,309
|
|
2017
|
30,115
|
18,767
|
16,359
|
65,241
|
Notes
(i)
The Group’s
investment in joint ventures are accounted for on an equity method
and the Group’s share of the policyholder liabilities as
shown above relate to the life business in China, India and of the
Takaful business in Malaysia.
(ii)
The rate of
surrenders for shareholder-backed business (expressed as a
percentage of opening liabilities) was 6.6 per cent in 2018 (2017:
8.4 per cent).
(iii)
Net flows have
increased by £1,541 million to £8,416 million in 2018
predominantly reflecting continued growth of the in-force
book.
(iv)
Investment-related
items and other movements for 2018 primarily represent unrealised
investments losses following unfavourable equity markets in the
year and rising interest rates.
(v)
Movements in the
year have been translated at the average exchange rates for the
year. The closing balance has been translated at the closing spot
rates as at the end of the year. Differences upon retranslation are
included in foreign exchange translation differences.
(vi)
The policyholder
liabilities of the with-profits business of £39,655 million,
shown in the table above, is after deducting the intra-group
reinsurance liabilities ceded by the UK and Europe insurance
operations of £1,109 million to the Hong Kong with-profits
business (31 December 2017: £1,235 million). Including this
amount the Asia with-profits policyholder liabilities are
£40,764 million (31 December 2017: £34,198
million).
(vii)
Averages have been
based on opening and closing balances and exclude unallocated
surplus of with-profits funds.
(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,
taking account of expected future premiums and investment
returns:
|
|
31 Dec 2018 £m
|
31 Dec 2017 £m
|
Policyholder liabilities
|
72,107
|
62,898
|
|
|
|
|
|
Expected maturity:
|
31 Dec 2018 %
|
31 Dec 2017 %
|
|
|
0 to 5 years
|
20
|
21
|
|
5 to 10 years
|
19
|
19
|
|
10 to 15 years
|
15
|
16
|
|
15 to 20 years
|
12
|
12
|
|
20 to 25 years
|
10
|
10
|
|
Over 25 years
|
24
|
22
|
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
account
liabilities
|
Fixed annuity,
GICs and other
business
|
Total
|
|
|
£m
|
£m
|
£m
|
At 1 January 2017
|
120,411
|
57,215
|
177,626
|
|
Premiums
|
11,529
|
3,690
|
15,219
|
|
Surrenders
|
(6,997)
|
(3,020)
|
(10,017)
|
|
Maturities/deaths
|
(1,026)
|
(1,039)
|
(2,065)
|
|
Net flowsnote
(ii)
|
3,506
|
(369)
|
3,137
|
|
Transfers from general to separate account
|
2,096
|
(2,096)
|
–
|
|
Investment-related items and other movements
|
15,956
|
295
|
16,251
|
|
Foreign exchange translation differencesnote
(i)
|
(11,441)
|
(4,849)
|
(16,290)
|
|
At 31 December 2017/1 January 2018
|
130,528
|
50,196
|
180,724
|
|
Premiums
|
10,969
|
2,971
|
13,940
|
|
Surrenders
|
(8,797)
|
(3,344)
|
(12,141)
|
|
Maturities/deaths
|
(1,085)
|
(927)
|
(2,012)
|
|
Net flowsnote
(ii)
|
1,087
|
(1,300)
|
(213)
|
|
Addition for closed block of group payout annuities in the
USnote
(iii)
|
–
|
4,143
|
4,143
|
|
Transfers from general to separate account
|
530
|
(530)
|
–
|
|
Investment-related items and other movementsnote
(iv)
|
(11,561)
|
1,562
|
(9,999)
|
|
Foreign exchange translation differencesnote
(i)
|
7,636
|
3,309
|
10,945
|
|
At 31 December 2018
|
128,220
|
57,380
|
185,600
|
|
Average policyholder liability balancesnote
(v)
|
|
|
|
|
|
2018
|
129,374
|
52,752
|
182,126
|
|
2017
|
125,469
|
53,706
|
179,175
|
Notes
(i)
Movements in the
year have been translated at an average rate of US$1.34: £1.00
(2017: US$1.29: £1.00). The closing balances have been
translated at closing rate of US$1.27: £1.00 (2017: US$1.35:
£1.00). Differences upon retranslation are included in foreign
exchange translation differences.
(ii)
Net outflows were
£213 million (2017: inflows £3,137 million), with
positive inflows to variable annuities business as new business
exceeds withdrawals and surrenders offset by outflows from fixed
annuity, GICs and other business as the portfolio
matures.
(iii)
In October 2018,
Jackson entered into an agreement with John Hancock Life to
reinsure 100 per cent of the group payout annuity business. The
transaction resulted in an increase to policyholder liabilities of
Jackson £4.1 billion at the inception of the
contract.
(iv)
Negative
investment-related items and other movements in variable annuity
separate account liabilities of £(11,561) million for 2018
primarily reflects the decrease in equity and bond values during
the year. Fixed annuity, GIC and other
business investment and other movements of £1,562 million
primarily reflect the interest credited to the policyholder
accounts and increase in the guarantee reserves in the
year.
(v)
Averages have been
based on opening and closing balances and adjusted for
acquisitions, disposals and corporate transactions arising in the
year.
(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
2018 and 2017:
|
31 Dec 2018
|
|
31 Dec 2017
|
||||
|
Fixed annuity and other business (including GICs and similar
contracts)
|
Variable
annuity
separate
account
liabilities
|
Total
|
|
Fixed annuity and other business (including GICs and similar
contracts)
|
Variable
annuity
separate
account
liabilities
|
Total
|
|
£m
|
£m
|
£m
|
|
£m
|
£m
|
£m
|
Policyholder liabilities
|
57,380
|
128,220
|
185,600
|
|
50,196
|
130,528
|
180,724
|
|
|
|
|
|
|
|
|
Expected maturity:
|
%
|
%
|
%
|
|
%
|
%
|
%
|
0 to 5 years
|
51
|
40
|
43
|
|
50
|
42
|
44
|
5 to 10 years
|
24
|
28
|
27
|
|
25
|
29
|
28
|
10 to 15 years
|
12
|
16
|
15
|
|
12
|
15
|
14
|
15 to 20 years
|
7
|
9
|
8
|
|
7
|
8
|
8
|
20 to 25 years
|
3
|
4
|
4
|
|
3
|
4
|
4
|
Over 25 years
|
3
|
3
|
3
|
|
3
|
2
|
2
|
C4.1(d)
UK
and Europe insurance operations
(i)
Analysis
of movements in policyholder liabilities and unallocated surplus of
with-profits funds
A
reconciliation of the total policyholder liabilities and
unallocated surplus of with-profits funds of UK and Europe
insurance operations from the beginning of the year to the end of
the year is as follows:
|
|
|
Shareholder-backed funds and subsidiaries
|
|
|
|
|
With-profits sub-funds
|
Unit-linked liabilities
|
Annuity
and other
long-term
business
|
Total
|
|
|
£m
|
£m
|
£m
|
£m
|
|
|
note (v)
|
|
|
|
At 1 January 2017
|
113,146
|
22,119
|
34,039
|
169,304
|
|
Comprising:
|
|
|
|
|
|
|
– Policyholder liabilities on the consolidated statement of
financial position
|
101,496
|
22,119
|
34,039
|
157,654
|
|
– Unallocated surplus of with-profits funds on the
consolidated statement of financial position
|
11,650
|
–
|
–
|
11,650
|
|
|
|
|
|
|
Premiums
|
12,527
|
1,923
|
360
|
14,810
|
|
Surrenders
|
(4,506)
|
(2,342)
|
(91)
|
(6,939)
|
|
Maturities/deaths
|
(4,564)
|
(612)
|
(1,959)
|
(7,135)
|
|
Net flowsnote
(i)
|
3,457
|
(1,031)
|
(1,690)
|
736
|
|
Shareholders' transfers post-tax
|
(233)
|
–
|
–
|
(233)
|
|
Switches
|
(192)
|
192
|
–
|
–
|
|
Investment-related items and other movements
|
8,408
|
1,865
|
873
|
11,146
|
|
Foreign exchange translation differences
|
113
|
–
|
–
|
113
|
|
At 31 December 2017/1 January 2018
|
124,699
|
23,145
|
33,222
|
181,066
|
|
Comprising:
|
|
|
|
|
|
|
– Policyholder liabilities on the consolidated statement of
financial position
|
111,222
|
23,145
|
33,222
|
167,589
|
|
– Unallocated surplus of with-profits funds on the
consolidated statement of financial position
|
13,477
|
–
|
–
|
13,477
|
Reclassification of reinsured UK annuity contracts as held for
salenote
(ii)
|
–
|
–
|
(10,858)
|
(10,858)
|
|
|
|
|
|
|
|
Premiums
|
12,525
|
1,147
|
339
|
14,011
|
|
Surrenders
|
(4,764)
|
(1,950)
|
(66)
|
(6,780)
|
|
Maturities/deaths
|
(4,552)
|
(619)
|
(1,625)
|
(6,796)
|
|
Net flowsnote
(i)
|
3,209
|
(1,422)
|
(1,352)
|
435
|
|
Shareholders' transfers post-tax
|
(259)
|
–
|
–
|
(259)
|
|
Switches
|
(165)
|
165
|
–
|
–
|
|
Investment-related items and other movementsnote
(iii)
|
(3,341)
|
(1,171)
|
(969)
|
(5,481)
|
|
Foreign exchange translation differences
|
(14)
|
–
|
–
|
(14)
|
|
At 31 December 2018
|
124,129
|
20,717
|
20,043
|
164,889
|
|
Comprising:
|
|
|
|
|
|
|
– Policyholder liabilities on the consolidated statement of
financial position
|
110,795
|
20,717
|
20,043
|
151,555
|
|
– Unallocated surplus of with-profits funds on the
consolidated statement of financial position
|
13,334
|
–
|
–
|
13,334
|
Average policyholder liability balancesnote
(iv)
|
|
|
|
|
|
|
2018
|
111,009
|
21,931
|
29,347
|
162,287
|
|
2017
|
106,359
|
22,632
|
33,631
|
162,622
|
Notes
(i)
Net inflows were
£435 million (31 December 2017: net inflows of £736
million). Inflows into the with-profits business were offset by
outflows from both the annuity business, as the closed book
matures, and the unit-linked business. The levels of
inflows/outflows for the 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.
(ii)
The
reclassification as held for sale of the reinsured UK annuity
business that will be transferred to Rothesay life once the Part
VII process is complete reflects the value policyholder liabilities
held at 1 January 2018.
(iii)
Investment-related
items and other movements for with-profits business principally
comprise investment return attributable to policyholders reflecting
falling equity markets in the later quarter of the year. For
shareholder-backed annuity and other long-term business,
investment-related items and other movements include the effect of
movements in interest rates and credit spreads.
(iv)
Averages have been
based on opening and closing balances and adjusted for
acquisitions, disposals and corporate transactions arising in the
year and exclude unallocated surplus of with-profits
funds.
(v)
Includes the
Scottish Amicable Insurance Fund.
(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:
|
31 Dec 2018 £m
|
||||||||||||
|
With-profits business
|
|
Annuity business
(insurance contracts)
|
|
Other
|
|
Total
|
||||||
|
Insurance
contracts
|
Investment
contracts
|
Total
|
|
Non-
profit
annuities
within
WPSF
|
Shareholder
-backed
annuity
|
Total
|
|
Insurance
contracts
|
Investments
contracts
|
Total
|
|
|
Policyholder liabilities
|
34,242
|
67,020
|
101,262
|
|
9,533
|
19,119
|
28,652
|
|
6,063
|
15,578
|
21,641
|
|
151,555
|
|
31 Dec 2018 %
|
||||||||||||
Expected maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 to 5 years
|
34
|
37
|
36
|
|
33
|
27
|
29
|
|
44
|
32
|
36
|
|
35
|
5 to 10 years
|
23
|
27
|
26
|
|
26
|
23
|
24
|
|
25
|
24
|
24
|
|
25
|
10 to 15 years
|
16
|
17
|
17
|
|
17
|
19
|
18
|
|
15
|
18
|
17
|
|
17
|
15 to 20 years
|
11
|
9
|
10
|
|
11
|
14
|
13
|
|
8
|
12
|
11
|
|
10
|
20 to 25 years
|
7
|
4
|
5
|
|
6
|
9
|
8
|
|
4
|
7
|
6
|
|
6
|
over 25 years
|
9
|
6
|
6
|
|
7
|
8
|
8
|
|
4
|
7
|
6
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 Dec 2017 £m
|
||||||||||||
Policyholder liabilities
|
38,285
|
62,328
|
100,613
|
|
10,609
|
32,572
|
43,181
|
|
6,714
|
17,081
|
23,795
|
|
167,589
|
|
31 Dec 2017 %
|
||||||||||||
Expected maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 to 5 years
|
33
|
37
|
36
|
|
31
|
26
|
27
|
|
41
|
31
|
34
|
|
34
|
5 to 10 years
|
23
|
27
|
25
|
|
24
|
23
|
23
|
|
26
|
22
|
23
|
|
25
|
10 to 15 years
|
16
|
17
|
17
|
|
17
|
18
|
18
|
|
15
|
18
|
17
|
|
17
|
15 to 20 years
|
11
|
10
|
10
|
|
11
|
13
|
13
|
|
9
|
13
|
12
|
|
11
|
20 to 25 years
|
7
|
4
|
5
|
|
7
|
9
|
9
|
|
5
|
8
|
7
|
|
6
|
over 25 years
|
10
|
5
|
7
|
|
10
|
11
|
10
|
|
4
|
8
|
7
|
|
7
|
—
The cash flow
projections of expected benefit payments used in the maturity
profile table above are from value of in-force business and exclude
the value of future new business, including future vesting of
internal pension contracts.
—
Benefit payments do
not reflect the pattern of bonuses and shareholder transfers in
respect of the with-profits business.
—
Shareholder-backed
annuity business includes the ex-PRIL and the legacy PAC
shareholder annuity business but excludes the amount classified as
held for sale.
—
Investment
contracts under ‘Other’ comprise certain unit-linked
and similar contracts accounted for under IAS 39 and IFRS
15.
—
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
C5.1
Goodwill
|
31 Dec 2018 £m
|
|
31 Dec 2017 £m
|
||
|
Attributable to:
|
|
|
|
|
|
Shareholders
|
With-profits
|
Total
|
|
Total
|
Carrying value at beginning of year
|
1,458
|
24
|
1,482
|
|
1,628
|
Acquisition of TMB Asset Management Co., Ltd. in Thailand (see note
D1.2)
|
181
|
–
|
181
|
|
–
|
Other additions in the year (see below)
|
–
|
195
|
195
|
|
9
|
Disposals/reclassifications to held for sale
|
–
|
(10)
|
(10)
|
|
(155)
|
Exchange differences
|
12
|
(3)
|
9
|
|
–
|
Carrying value at end of year
|
1,651
|
206
|
1,857
|
|
1,482
|
|
|
|
|
|
|
Comprising:
|
|
|
|
|
|
M&G – attributable to shareholders
|
|
|
1,153
|
|
1,153
|
Other – attributable to shareholders
|
|
|
498
|
|
305
|
Goodwill – attributable to shareholders
|
|
|
1,651
|
|
1,458
|
Venture fund investments – attributable to with-profits
funds
|
|
|
206
|
|
24
|
|
|
|
1,857
|
|
1,482
|
During
2018, the UK with-profits fund, via its venture fund holdings
managed by M&GPrudential asset management, made a small number
of acquisitions that are consolidated by the Group resulting in an
addition to goodwill of £195 million. As these transactions
are within the with-profits fund, they have no impact on
shareholders’ profit or equity for the year ended 31 December
2018. The impact on the Group’s consolidated revenue,
including investment returns, is not material. Had the acquisitions
been effected at 1 January 2018, the revenue and profit of the
Group for 2018 would not have been materially
different.
C5.2
Deferred
acquisition costs and other intangible assets
|
31 Dec 2018 £m
|
31 Dec 2017 £m
|
Deferred acquisition costs and other intangible assets attributable
to shareholders
|
11,784
|
10,866
|
Other intangible assets, including computer software, attributable
to with-profits funds
|
139
|
145
|
Total of deferred acquisition costs and other intangible
assets
|
11,923
|
11,011
|
Total
deferred acquisition costs and other intangible assets attributable
to shareholders comprise:
|
31 Dec 2018 £m
|
31 Dec 2017 £m
|
Deferred acquisition costs related to insurance contracts as
classified under IFRS 4
|
10,017
|
9,170
|
Deferred acquisition costs related to investment management
contracts, including life assurance contracts classified as
financial instruments and investment management contracts under
IFRS 4
|
78
|
63
|
Deferred acquisition costs related to insurance and investment
contracts
|
10,095
|
9,233
|
Present value of acquired in-force policies for insurance contracts
as classified under IFRS 4 (PVIF)
|
34
|
36
|
Distribution rights and other intangibles
|
1,655
|
1,597
|
Present value of acquired in-force (PVIF) and other intangibles
attributable to shareholders
|
1,689
|
1,633
|
Total of deferred acquisition costs and other intangible
assetsnote
(a)
|
11,784
|
10,866
|
Notes
(a)
Total deferred
acquisition costs and other intangible assets can be further
analysed by business operations as follows:
|
|
31 Dec 2018 £m
|
|
31 Dec 2017 £m
|
|||||||
|
|
Deferred acquisition costs
|
|
|
|
|
|
|
|||
|
|
Asia
insurance
|
US
insurance
|
UK and
Europe
insurance
|
All
asset
management
|
|
PVIF and
other
intangibles*
|
|
Total
|
|
Total
|
|
|
|
note (b)
|
|
|
|
|
|
|
|
|
Balance at 1 January
|
946
|
8,197
|
84
|
6
|
|
1,633
|
|
10,866
|
|
10,755
|
|
Additions
|
419
|
569
|
15
|
15
|
|
230
|
|
1,248
|
|
1,240
|
|
Amortisation to the income statement:note
(c)†
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted IFRS operating profit based on longer-term investment
returns
|
(148)
|
(683)
|
(11)
|
(3)
|
|
(179)
|
|
(1,024)
|
|
(709)
|
|
Non-operating profit
|
–
|
(114)
|
–
|
–
|
|
(4)
|
|
(118)
|
|
455
|
|
(148)
|
(797)
|
(11)
|
(3)
|
|
(183)
|
|
(1,142)
|
|
(254)
|
|
Disposals and transfers
|
–
|
–
|
–
|
–
|
|
(14)
|
|
(14)
|
|
–
|
|
Exchange differences and other movements
|
47
|
512
|
(2)
|
–
|
|
23
|
|
580
|
|
(799)
|
|
Amortisation of DAC related to net unrealised valuation movements
on the US insurance operation's available-for-sale securities
recognised within other comprehensive income†
|
–
|
246
|
–
|
–
|
|
–
|
|
246
|
|
(76)
|
|
Balance at 31 December
|
1,264
|
8,727
|
86
|
18
|
|
1,689
|
|
11,784
|
|
10,866
|
*
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. Software rights include additions of £34
million, amortisation of £32 million, foreign exchange losses
of £7 million and a balance at 31 December 2018 of £62
million.
†
Under the
Group’s application of IFRS 4, US GAAP is used for measuring
the insurance assets and liabilities of its US and certain Asia
operations. Under US GAAP, most of the US insurance
operation’s products are accounted for under Accounting
Standards Codification Topic 944, Financial Services –
Insurance, of the Financial Accounting Standards Board whereby
deferred acquisition costs are amortised in line with the emergence
of actual and expected gross profits which are determined using an
assumption for long-term investment returns for the separate
account of 7.4 per cent (2017: 7.4 per cent) (gross of asset
management fees and other charges to policyholders, but net of
external fund management fees). The amounts included in the income
statement and other comprehensive income affect the pattern of
profit emergence and thus the DAC amortisation attaching. DAC
amortisation is allocated to the operating and non-operating
components of the Group’s supplementary analysis of profit
and other comprehensive income by reference to the underlying items
(see note C7.3(iv)).
(b)
The DAC amount in
respect of US insurance operations comprises amounts in respect
of:
|
31 Dec 2018 £m
|
31 Dec 2017 £m
|
Variable annuity business
|
8,477
|
8,208
|
Other business
|
299
|
278
|
Cumulative shadow DAC (for unrealised gains booked in other
comprehensive income)*
|
(49)
|
(289)
|
Total DAC for US operations
|
8,727
|
8,197
|
*
A gain of £246
million (2017: a loss of £(76) million) for shadow DAC
amortisation is booked within other comprehensive income to reflect
the impact from the negative unrealised valuation movement in 2018
of £1,617 million (2017: positive unrealised valuation
movement of £617 million). 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 2018, the
cumulative shadow DAC balance as shown in the table above was
negative £49 million (31 December 2017: negative £289
million).
(c)
Sensitivity
of amortisation charge
The amortisation charge to the income statement is reflected in
both adjusted IFRS operating profit based on longer-term investment
returns and short-term fluctuations in investment returns. The
amortisation charge to adjusted IFRS operating profit based on
longer-term investment returns in a reporting period
comprises:
—
A
core amount that reflects a relatively stable proportion of
underlying premiums or profit; and
—
An
element of acceleration or deceleration arising from market
movements differing from expectations.
In periods where the cap and floor feature of the mean reversion
technique (which is used for moderating the effect of short-term
volatility in investment returns) are not relevant, the technique
operates to dampen the second element above. Nevertheless, extreme
market movements can cause material acceleration or deceleration of
amortisation in spite of this dampening effect.
Furthermore, in those periods where the cap or floor is relevant,
the mean reversion technique provides no further dampening and
additional volatility may result.
In 2018, the DAC amortisation charge for adjusted IFRS operating
profit based on longer-term investment returns was determined after
including a debit for accelerated amortisation of £194 million
(2017: credit for decelerated amortisation of £86 million).
The acceleration arising in 2018 reflects a mechanical increase in
the projected separate account return for the next five years under
the mean-reversion technique. Under this technique the projected
level of return for each of the next five years is adjusted so that
in combination with the actual rates of return for the preceding
three years (including the current period) the assumed long-term
annual separate account return of 7.4 per cent is realised on
average over the entire eight-year period. The acceleration in DAC
amortisation in 2018 is driven both by the actual separate return
in the year being lower than that assumed and by the lower than
expected return in 2015 falling out of the eight-year period in
effect reversing the deceleration experienced in 2015 under the
mean reversion formula.
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. At 31
December 2018, it would take approximate movements in separate
account values of more than either negative 22 per cent or positive
57 per cent (31 December 2017: negative 32 per cent or positive 37
per cent) for the mean reversion assumption to move outside the
corridor.
C6
Borrowings
C6.1
Core structural
borrowings of shareholder-financed businesses
|
|
|
31 Dec 2018 £m
|
31 Dec 2017 £m
|
Holding company operations:note
(i)
|
|
|
||
|
Perpetual Subordinated Capital Securities (Tier 1)
|
431
|
814
|
|
|
Perpetual Subordinated Capital Securities (Tier
2)note
(v)
|
2,478
|
2,326
|
|
|
Subordinated Notes (Tier 2)note
(iv)
|
3,767
|
2,132
|
|
|
Subordinated debt total
|
6,676
|
5,272
|
|
|
Senior debt:note
(ii)
|
|
|
|
|
|
£300m 6.875% Bonds 2023
|
294
|
300
|
|
|
£250m 5.875% Bonds 2029
|
223
|
249
|
Bank loannote
(iii)
|
275
|
–
|
||
Holding company total
|
7,468
|
5,821
|
||
Prudential Capital bank loannote
(iii)
|
–
|
275
|
||
Jackson US$250m 8.15% Surplus Notes 2027
|
196
|
184
|
||
Total (per consolidated statement of financial
position)
|
7,664
|
6,280
|
Notes
(i)
These debt tier
classifications are consistent with the treatment of capital for
regulatory purposes under the Solvency II regime.
The
Group has designated US$3,725 million (31 December 2017: US$4,275
million) of its US dollar denominated 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. In 2018, as part of its preparation to demerge
M&GPrudential, the Group made certain modifications to the
terms and conditions of the senior bonds with bondholders’
consent. The amendment to the terms and conditions will avoid an
event of a technical default on the bonds, should the demerger
proceed. The fees paid to bondholders have been adjusted to the
carrying value of the bonds and will be amortised in subsequent
periods. No other adjustments were made to the carrying value of
the debt as a result of the modification.
(iii)
The
bank loan of £275 million is drawn at a cost of 12-month GBP
LIBOR plus 0.33 per cent. The loan, held by Prudential Capital as
of 31 December 2017, was renewed in December 2018, with Prudential
plc becoming the new holder. The loan matures on 20 December 2022
with an option to repay annually.
(iv)
In October 2018,
the Company issued the following three substitutable core
structural borrowings as part of the process required before
demerger to rebalance debt across M&GPrudential and Prudential
(see below):
-
£750 million
5.625 per cent Tier 2 subordinated notes due 2051. The proceeds,
net of costs, were £743 million;
-
£500 million
6.25 per cent Tier 2 subordinated notes due 2068. The proceeds, net
of costs, were £498 million; and
-
US$500 million 6.5
per cent Tier 2 subordinated notes due 2048. The proceeds, net of
costs, were £389 million (US$498 million).
(v)
In December 2018,
the Company paid £434 million to redeem its US$550 million
7.75 per cent Tier 1 perpetual subordinated notes.
Prior
to the demerger, the Group expects to rebalance its debt capital
across Prudential and M&GPrudential. This will include the
ultimate holding company of M&GPrudential becoming an issuer of
new debt, including debt substituted from Prudential, and
Prudential redeeming some of its existing debt. Following these
actions, the overall absolute quantum of debt across Prudential and
M&GPrudential is currently expected to increase, by an amount
which is not considered to be material in the context of the
Group’s total outstanding debt as at 30 June 2018, before any
substitutable debt had been issued, of £7.6 billion
(comprising the Group’s core structural borrowings of
£6.4 billion and shareholder borrowings from short-term fixed
income securities programme of £1.2 billion). At the time of
the demerger, Prudential expects M&GPrudential to be holding
around £3.5 billion of subordinated debt. This expectation is
subject to the M&GPrudential capital risk appetite being
approved by the Board of the ultimate holding company of
M&GPrudential, once fully constituted to include independent
non-executive directors, and reflects the current operating
environment and economic conditions, material changes in which may
lead to a different outcome.
Ratings
Prudential
plc has debt ratings from Standard & Poor’s,
Moody’s and Fitch. Prudential plc’s long-term senior
debt is rated A2 by Moody’s, A by Standard & Poor’s
and A- by Fitch.
Prudential
plc’s short-term debt is rated as P-1 by Moody’s, A-1
by Standard & Poor’s and F1 by Fitch.
The
financial strength of The Prudential Assurance Company Limited is
rated A+ by Standard & Poor’s, Aa3 by Moody’s and
AA- by Fitch.
Jackson
National Life Insurance Company’s financial strength is rated
AA- by Standard & Poor’s and Fitch, A1 by Moody’s
and A+ by A.M. Best.
Prudential
Assurance Co. Singapore (Pte) Ltd.’s (Prudential Singapore)
financial strength is rated AA- by Standard &
Poor’s.
All the
Group’s ratings are on a stable outlook.
C6.2
Other
borrowings
(i)
Operational borrowings attributable to shareholder-financed
businesses
|
|
31 Dec 2018 £m
|
|
31 Dec 2017 £m
|
|
Borrowings in respect of short-term fixed income securities
programmes
|
|
472
|
|
1,085
|
|
Other borrowingsnote
|
|
526
|
|
706
|
|
Total
|
|
998
|
|
1,791
|
|
Note
Other borrowings mainly include senior debt issued through the
Federal Home Loan Bank of Indianapolis (FHLB), secured by
collateral posted with the FHLB by Jackson. In addition, other
borrowings include amounts whose repayment to the lender is
contingent upon future surplus emerging from certain contracts
specified under the arrangement. If insufficient surplus emerges on
those contracts, there is no recourse to other assets of the Group
and the liability is not payable to the degree of
shortfall.
(ii)
Borrowings attributable to with-profits businesses
|
31 Dec 2018 £m
|
31 Dec 2017 £m
|
Non-recourse borrowings of consolidated investment
funds*
|
3,845
|
3,570
|
£100m 8.5% undated subordinated guaranteed bonds of Scottish
Amicable Finance plc†
|
–
|
100
|
Other borrowings (including obligations under finance
leases)
|
95
|
46
|
Total
|
3,940
|
3,716
|
*
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.
These bonds were redeemed in full on 30 June 2018.
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 ‘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 Risk report referred to
above.
The
most significant items that the IFRS shareholders’ profit or
loss and shareholders’ equity for the Group’s life
assurance business are sensitive to, are shown in the following
tables. The distinction between direct and indirect exposure is not
intended to indicate the relative size of the
sensitivity.
|
|
|
|
|
|||||||
Type of business
|
|
Market and credit risk
|
|
Insurance and lapse risk
|
|||||||
|
|
Investments/derivatives
|
Liabilities/unallocated surplus
|
|
Other exposure
|
|
|
||||
Asia insurance operations (see also section C7.2)
|
|
|
|
|
|||||||
All business
|
|
Currency risk
|
|
|
|
Mortality and morbidity risk
|
|||||
|
|
|
|
|
|
Persistency risk
|
|||||
With-profits business
|
|
Net neutral direct exposure (indirect exposure only)
|
|
Investment performance subject to smoothing through declared
bonuses
|
|
|
|||||
Unit-linked business
|
|
Net neutral direct exposure (indirect exposure only)
|
|
Investment performance through asset management fees
|
|
|
|||||
Non-participating business
|
|
Asset/liability mismatch risk
|
|
|
|
|
|||||
|
|
Credit risk
|
Interest rates for those
operations where the basis of insurance liabilities is sensitive to
current market movements
|
|
|
|
|
||||
|
|
Interest rate and price risk
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|||
US insurance operations (see also section C7.3)
|
|
|
|
|
|||||||
All business
|
|
Currency risk
|
|
|
|
Persistency risk
|
|||||
Variable annuity business
|
|
Net effect of market risk arising from incidence of guarantee
features and variability of asset management fees offset by
derivative hedging programme
|
|
|
|
Risk that utilisation of withdrawal benefits or lapse levels differ
from those assumed in pricing
|
|||||
Fixed index annuity business
|
|
Derivative hedge
programme to the extent
not fully hedged against
liability
|
Incidence of equity
participation features
|
|
|
|
|
||||
Fixed index annuities, Fixed annuities and GIC
business
|
|
Credit risk
Interest rate risk
Profit and loss and
shareholders' equity are
volatile for these risks as
they affect the values of
derivatives and embedded
derivatives and impairment
losses. In addition,
shareholders' equity is
volatile for the incidence of
these risks on unrealised
appreciation of fixed
income securities classified
as available-for-sale
under IAS 39
|
|
|
|
Spread difference
between earned
rate and rate
credited
to policyholders
|
|
Lapse risk, but the
effects of extreme
events may be mitigated
by the application of
market value
adjustments
|
|||
|
|
|
|
|
|
|
|
|
|||
UK and Europe insurance operations (see also section
C7.4)
|
|
|
|
|
|||||||
With-profits business
|
|
Net neutral direct exposure (indirect exposure only)
|
|
Investment performance subject to smoothing through declared
bonuses
|
|
Persistency risk to future shareholder transfers
|
|||||
SAIF sub-fund
|
|
Net neutral direct exposure (indirect exposure only)
|
|
Asset management fees earned
|
|
|
|||||
Unit-linked business
|
|
Net neutral direct exposure (indirect exposure only)
|
|
Investment performance through asset management fees
|
|
Persistency risk
|
|||||
|
|
Asset/liability mismatch risk
|
|
|
|
|
|||||
Shareholder-backed
annuity business
|
|
Credit risk for assets covering liabilities and shareholder
capital
|
|
|
|
|
|
Mortality experience and assumptions for 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 would be expected to
occur over a period of time during which the Group would be able to
put mitigating management actions in place. In addition, the equity
risk sensitivity analysis provided assumed that all equity indices
fall by the same percentage.
Impact
of diversification on risk exposure
The
Group benefits from diversification benefits achieved through the
geographical spread of the Group’s operations and, within
those operations, through a broad mix of product types. Relevant
correlation factors include:
Correlation across geographic regions:
—
Financial risk
factors; and
—
Non-financial risk
factors.
Correlation across risk factors:
—
Longevity
risk;
—
Expenses;
—
Persistency;
and
—
Other
risks.
The
sensitivities below do not reflect that assets and liabilities are
actively managed and may vary at the time any actual market
movement occurs. There are strategies in place to minimise the
exposure to market fluctuations. For example, as market indices
fluctuate, Prudential would take certain actions including selling
investments, changing investment portfolio allocation and adjusting
bonuses credited to policyholders. In addition, these analyses do
not consider the effect of market changes on new business generated
in the future.
Other
limitations on the sensitivities include: the use of hypothetical
market movements to demonstrate potential risk that only represent
Prudential’s view of reasonably possible near-term market
changes and that cannot be predicted with any certainty; the
assumption that interest rates in all countries move identically;
the assumption that all global currencies move in tandem with the
US dollar against pound sterling; and the lack of consideration of
the inter-relation of interest rates, equity markets and foreign
currency exchange rates.
C7.2
Asia insurance
operations
Exposure
and sensitivity of IFRS basis profit and shareholders’ equity
to market and other risks
The
Asia operations sell with-profits and unit-linked policies, and the
investment portfolio of the with-profits funds contains a
proportion of equities. Non-participating business is largely
backed by debt securities or deposits. The Group’s exposure
to market risk arising from its Asia operations is therefore at
modest levels. This reflects the fact that the Asia operations have
a balanced portfolio of with-profits, unit-linked and other types
of business.
In
Asia, adverse persistency experience can impact the IFRS
profitability of certain types of business written in the region.
This risk is managed at a business unit level through regular
monitoring of experience and the implementation of management
actions as necessary. These actions could include product
enhancements, increased management focus on premium collection, as
well as other customer retention efforts. The potential financial
impact of lapses is often mitigated through the specific features
of the products, eg surrender charges, or through the availability
of premium holiday or partial withdrawal policy
features.
In
summary, for Asia operations, the adjusted IFRS operating profit
based on longer-term investment returns is mainly affected by the
impact of market levels on unit-linked persistency, and other
insurance risks. At the total IFRS profit level the Asia result is
affected by short-term value movements on the asset portfolio for
non-linked shareholder-backed business.
(i)
Sensitivity
to risks other than foreign exchange risk
Interest rate risk
Excluding
its with-profits and unit-linked businesses, the results of the
Asia business are sensitive to the movements in interest
rates.
For the
purposes of analysing sensitivity to variations in interest rates,
reference has been made to the movements in the 10-year government
bond rates of the territories. At 31 December 2018, 10-year
government bond rates vary from territory to territory and range
from 0.9 per cent to 8.1 per cent (31 December 2017: 1.0 per cent
to 7.5 per cent).
For the
sensitivity analysis as shown in the table below, the reasonably
possible interest rate movement used is 1 per cent for all local
business units.
The
estimated sensitivity to the decrease and increase in interest
rates is as follows:
|
|
2018 £m
|
|
2017 £m
|
|||
|
|
Decrease
of 1%
|
Increase
of 1%
|
|
Decrease
of 1%
|
|
Increase
of 1%
|
Profit before tax attributable to shareholders
|
|
312
|
(338)
|
|
2
|
|
(443)
|
Related deferred tax (where applicable)
|
|
(15)
|
26
|
|
(7)
|
|
20
|
Net effect on profit and shareholders' equity
|
|
297
|
(312)
|
|
(5)
|
|
(423)
|
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 countries 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.
An
additional factor to the direction of the sensitivity of the Asia
operations as a whole is movement in the country mix.
Equity price risk
The
non-linked shareholder-backed business has limited exposure to
equity and property investment (31 December 2018: £2,151
million; 31 December 2017: £1,764 million). Generally, changes
in equity and property investment values are not directly offset by
movements in non-linked policyholder liabilities.
The
estimated sensitivity to a 10 per cent and 20 per cent change in
equity and property prices for shareholder-backed Asia other
business (including those held by the Group’s joint venture
and associate businesses), which would be reflected in the
short-term fluctuation component of the Group’s segmental
analysis of profit before tax, is as follows:
|
2018 £m
|
|
2017 £m
|
||
|
Decrease
|
|
Decrease
|
||
|
of 20%
|
of 10%
|
|
of 20%
|
of 10%
|
Profit before tax attributable to shareholders
|
(557)
|
(279)
|
|
(478)
|
(239)
|
Related deferred tax (where applicable)
|
17
|
8
|
|
7
|
4
|
Net effect on profit and shareholders' equity
|
(540)
|
(271)
|
|
(471)
|
(235)
|
A 10 or
20 per cent increase in equity and property values would have an
approximately equal and opposite effect on profit and
shareholders’ equity to the sensitivities shown
above.
Insurance risk
Many of
the business units in Asia are exposed to mortality/morbidity risk
and provision is made within policyholder liabilities on a prudent
regulatory basis to cover the potential exposure. If these prudent
assumptions were strengthened by 5 per cent then it is estimated
that post-tax profit and shareholders’ equity would be
decreased by approximately £57 million (2017: £66
million). Mortality and morbidity have a broadly 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 2018, the rates for the most significant operations are
given in note A1.
A 10
per cent increase (strengthening of the pound sterling) or decrease
(weakening of the pound sterling) in these rates would have reduced
or increased profit before tax attributable to shareholders, profit
for the year and shareholders’ equity, excluding goodwill
attributable to Asia insurance operations respectively as
follows:
|
A 10% increase in local currency to £ exchange
rates
|
|
A 10% decrease in local currency to £ exchange
rates
|
||
|
2018 £m
|
2017 £m
|
|
2018 £m
|
2017 £m
|
Profit before tax attributable to shareholders
|
(134)
|
(155)
|
|
164
|
189
|
Profit for the year
|
(113)
|
(135)
|
|
138
|
165
|
Shareholders’ equity, excluding goodwill, attributable to
Asia operations
|
(543)
|
(492)
|
|
664
|
601
|
C7.3
US insurance
operations
Exposure
and sensitivity of IFRS basis profit and shareholders’ equity
to market and other risks
Jackson’s
reported adjusted IFRS operating profit based on longer-term
investment returns is sensitive to market conditions, both with
respect to income earned on spread-based products and indirectly
with respect to income earned on variable annuity asset management
fees. Jackson’s main exposures to market risk are to interest
rate risk and equity risk.
Jackson
is exposed primarily to the following risks:
|
|
|
Risks
|
|
Risk of loss
|
Equity risk
|
—
|
Related to the incidence of benefits related to guarantees issued
in connection with its variable annuity contracts; and
|
|
—
|
Related to meeting contractual accumulation requirements in fixed
index annuity contracts.
|
Interest rate risk
|
—
|
Related to meeting guaranteed rates of accumulation on fixed
annuity products following a sustained fall in interest
rates;
|
|
—
|
Related to increases in the present value of projected benefits
related to guarantees issued in connection with its variable
annuity contracts following a sustained fall in interest rates
especially if in conjunction with a fall in equity
markets;
|
|
—
|
Related to the surrender value guarantee features attached to the
Company’s fixed annuity products and to policyholder
withdrawals following a sharp and sustained increase in interest
rates; and
|
|
—
|
The risk of mismatch between the expected duration of certain
annuity liabilities and prepayment risk and extension risk inherent
in mortgage-backed securities.
|
Jackson’s
derivative programme is used to manage interest rate risk
associated with a broad range of products and equity market risk
attaching to its equity-based products. Movements in equity
markets, equity volatility, interest rates and credit spreads
materially affect the carrying value of derivatives that are used
to manage the liabilities to policyholders and backing investment
assets. Movements in the carrying value of derivatives combined
with the use of US GAAP measurement (as ‘grandfathered’
under IFRS 4) for the insurance contracts assets and liabilities,
which is largely insensitive to current period market movements,
mean that the Jackson total profit (ie including short-term
fluctuations in investment returns) is sensitive to market
movements. In addition to these effects the Jackson
shareholders’ equity is sensitive to the impact of interest
rate and credit spread movements on the value of fixed income
securities. Movements in unrealised appreciation on these
securities are included as movement in shareholders’ equity
(ie outside the income statement).
Jackson
enters into financial derivative transactions, including those
noted below, to reduce and manage business risks. These
transactions manage the risk of a change in the value, yield,
price, cash flows or quantity of, or a degree of exposure, with
respect to assets, liabilities or future cash flows, which Jackson
has acquired or incurred.
Jackson
uses free-standing derivative instruments for hedging purposes.
Additionally, certain liabilities, primarily trust instruments
supported by funding agreements, fixed index annuities, certain
variable annuity guaranteed benefit features and reinsured
Guaranteed Minimum Income Benefit variable annuity features are
similar to derivatives. Jackson does not account for such items as
either fair value or cash flow hedges as might be permitted if the
specific hedge documentation requirements of IAS 39 were followed.
Financial derivatives are carried at fair value, including
derivatives embedded in certain host liabilities where these are
required to be valued separately.
The
principal types of derivatives used by Jackson and their purpose
are as follows:
Derivative
|
Purpose
|
Interest rate
swaps
|
These
generally involve the exchange of fixed and floating payments over
the period for which Jackson holds the instrument without an
exchange of the underlying principal amount. These agreements are
used to hedge Jackson’s exposure to movements in interest
rates.
|
Swaption
contracts
|
These
contracts provide the purchaser with the right, but not the
obligation, to require the writer to pay the present value of a
long-duration interest rate swap at future exercise dates. Jackson
both purchases and writes swaptions in order to hedge against
significant movements in interest rates.
|
Treasury futures
contracts
|
These
derivatives are used to hedge Jackson’s exposure to movements
in interest rates.
|
Equity
index futures contracts and equity index options
|
These
derivatives (including various call and put options and options
contingent on interest rates and currency exchange rates) are used
to hedge Jackson’s obligations associated with its issuance
of certain VA guarantees. Some of these annuities and guarantees
contain embedded options that are fair valued for financial
reporting purposes.
|
Cross-currency
swaps
|
Cross-currency
swaps, which embody spot and forward currency swaps and
additionally, in some cases, interest rate swaps and equity index
swaps, are entered into for the purpose of hedging Jackson’s
foreign currency denominated funding agreements supporting trust
instrument obligations.
|
Credit
default swaps
|
These
swaps represent agreements under which the buyer 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.
|
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
Jackson
had variable annuity contracts with guarantees, for which the net
amount at risk (NAR) is defined as the amount of guaranteed benefit
in excess of current account value, as follows:
31 December 2018
|
Minimum
return
|
Account
value
|
Net
amount
at risk
|
Weighted
average
attained age
|
Period
until
expected
annuitisation
|
|
|
|
%
|
£m
|
£m
|
Years
|
Years
|
|
|
|
|
|
|
|
Return of net deposits plus a minimum return
|
|
|
|
|
|
|
|
GMDB
|
0-6%
|
98,653
|
4,437
|
66.5 years
|
|
|
GMWB – premium only
|
0%
|
1,924
|
62
|
|
|
|
GMWB*
|
0-5%†
|
197
|
20
|
|
|
|
GMAB – premium only
|
0%
|
26
|
–
|
|
|
Highest specified anniversary account value minus withdrawals
post-anniversary
|
|
|
|
|
|
|
|
GMDB
|
|
8,531
|
1,113
|
67.1 years
|
|
|
GMWB – highest anniversary only
|
|
2,220
|
314
|
|
|
|
GMWB*
|
|
535
|
89
|
|
|
Combination net deposits plus minimum return, highest specified
anniversary account value minus withdrawals
post-anniversary
|
|
|
|
|
|
|
|
GMDB
|
0-6%
|
5,454
|
1,217
|
69.5 years
|
|
|
GMIB‡
|
0-6%
|
1,256
|
648
|
|
0.1 years
|
|
GMWB*
|
0-8%†
|
91,788
|
16,835
|
|
|
31 December 2017
|
Minimum
return
|
Account
value
|
Net
amount
at risk
|
Weighted
average
attained age
|
Period
until
expected
annuitisation
|
|
|
|
%
|
£m
|
£m
|
Years
|
Years
|
|
|
|
|
|
|
|
Return of net deposits plus a minimum return
|
|
|
|
|
|
|
|
GMDB
|
0-6%
|
100,451
|
1,665
|
66.0 years
|
|
|
GMWB – premium only
|
0%
|
2,133
|
20
|
|
|
|
GMWB*
|
0-5%†
|
235
|
13
|
|
|
|
GMAB – premium only
|
0%
|
38
|
–
|
|
|
Highest specified anniversary account value minus withdrawals
post-anniversary
|
|
|
|
|
|
|
|
GMDB
|
|
9,099
|
96
|
66.5 years
|
|
|
GMWB – highest anniversary only
|
|
2,447
|
51
|
|
|
|
GMWB*
|
|
667
|
47
|
|
|
Combination net deposits plus minimum return, highest specified
anniversary account value minus withdrawals
post-anniversary
|
|
|
|
|
|
|
|
GMDB
|
0-6%
|
5,694
|
426
|
69.0 years
|
|
|
GMIB‡
|
0-6%
|
1,484
|
436
|
|
0.4 years
|
|
GMWB*
|
0-8%†
|
93,227
|
4,393
|
|
|
*
Amounts shown for
GMWB comprise sums for the
‘not for life’ portion (where the guaranteed withdrawal
base less the account value equals to the net amount at risk
(NAR)), and a ‘for life’ portion (where the NAR has
been estimated as the present value of future expected benefit
payment remaining after the amount of the ‘not for
life’ guaranteed benefits is zero).
†
Ranges shown based
on simple interest. The upper limits of 5 per cent or 8 per cent
simple interest are approximately equal to 4.1 per cent and 6 per
cent respectively, on a compound interest basis over a typical
10-year bonus period. For example 1 + 10 x 0.05 is similar to 1.04
growing at a compound rate of 4 per cent for a further nine
years.
‡
The GMIB guarantees
are substantially reinsured.
Account
balances of contracts with guarantees were invested in variable
separate accounts as follows:
Mutual fund type:
|
31 Dec 2018 £m
|
31 Dec 2017 £m
|
|
|
Equity
|
78,387
|
80,843
|
|
Bond
|
13,901
|
13,976
|
|
Balanced
|
19,903
|
19,852
|
|
Money market
|
824
|
681
|
|
Total
|
113,015
|
115,352
|
As
noted above, Jackson is exposed to equity risk through the options
embedded in the fixed index annuity liabilities and guarantees
included in certain variable annuity benefits as illustrated above.
This risk is managed using an equity hedging programme to minimise
the risk of a significant economic impact as a result of increases
or decreases in equity market levels. Jackson purchases futures and
options that hedge the risks inherent in these products, while also
considering the impact of rising and falling guaranteed benefit
fees.
Due to
the nature of valuation under IFRS of the free-standing derivatives
and the variable annuity guarantee features, this hedge, while
highly effective on an economic basis, would not automatically
offset within the financial statements as the impact of equity
market movements resets the free-standing derivatives immediately
while the hedged liabilities reset more slowly and fees are
recognised prospectively in the period in which they are
earned.
In
addition to the exposure explained above, Jackson is also exposed
to equity risk from its holding of equity securities, partnerships
in investment pools and other financial derivatives.
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, as described above.
|
31 Dec 2018 £m
|
|
31 Dec 2017 £m
|
||||||||
|
Decrease
|
|
Increase
|
|
Decrease
|
|
Increase
|
||||
|
of 20%
|
of 10%
|
|
of 20%
|
of 10%
|
|
of 20%
|
of 10%
|
|
of 20%
|
of 10%
|
Pre-tax profit, net of related changes in amortisation of
DAC
|
1,058
|
427
|
|
58
|
(125)
|
|
1,107
|
336
|
|
619
|
262
|
Related deferred tax effects
|
(222)
|
(90)
|
|
(12)
|
26
|
|
(233)
|
(71)
|
|
(130)
|
(55)
|
Net sensitivity of profit after tax and shareholders'
equity*
|
836
|
337
|
|
46
|
(99)
|
|
874
|
265
|
|
489
|
207
|
*
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 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 2018 and 2017.
(ii)
Sensitivity
to interest rate risk
Except
in the circumstances of interest rate scenarios where the guarantee
rates included in contract terms are higher than crediting rates
that can be supported from assets held to cover liabilities, the
accounting measurement of fixed annuity liabilities of
Jackson’s products is not generally sensitive to interest
rate risk. This position derives from the nature of the products
and the US GAAP basis of measurement. The GMWB features attached to
variable annuity business (other than ‘for life’
components) are accounted for under US GAAP at fair-value and,
therefore, will be sensitive to changes in interest
rates.
Debt
securities and related derivatives are marked to fair value. Value
movements on derivatives, again net of related changes to
amortisation of DAC and deferred tax, are recorded within the
income statement. Fair value movements on debt securities, net of
related changes to amortisation of DAC and deferred tax, are
recorded within other comprehensive income. The estimated
sensitivity of these items and policyholder liabilities to a 1 per
cent and 2 per cent decrease and increase in interest rates is as
follows:
|
|
31 Dec 2018 £m
|
|
31 Dec 2017 £m
|
||||||||
|
|
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)
|
(3,535)
|
(1,718)
|
|
1,201
|
2,210
|
|
(4,079)
|
(1,911)
|
|
1,373
|
2,533
|
|
Related effect on charge for deferred tax
|
742
|
361
|
|
(252)
|
(464)
|
|
857
|
401
|
|
(288)
|
(532)
|
Net profit effect
|
(2,793)
|
(1,357)
|
|
949
|
1,746
|
|
(3,222)
|
(1,510)
|
|
1,085
|
2,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct effect on carrying value of debt securities (net of related
changes in amortisation of DAC)
|
4,134
|
2,346
|
|
(2,346)
|
(4,134)
|
|
3,063
|
1,700
|
|
(1,700)
|
(3,063)
|
|
Related effect on movement in deferred tax
|
(868)
|
(493)
|
|
493
|
868
|
|
(643)
|
(357)
|
|
357
|
643
|
Net effect
|
3,266
|
1,853
|
|
(1,853)
|
(3,266)
|
|
2,420
|
1,343
|
|
(1,343)
|
(2,420)
|
|
Total net effect on shareholders' equity
|
473
|
496
|
|
(904)
|
(1,520)
|
|
(802)
|
(167)
|
|
(258)
|
(419)
|
These
sensitivities are shown for interest rates in isolation only and do
not include other movements in credit risk that may affect credit
spreads and valuations of debt securities. Similar to the
sensitivity to equity risk, the sensitivity movements provided in
the table above are at a point in time and reflect the hedging
programme in place on the balance sheet date, while the actual
impact on financial results would vary contingent upon a number of
factors.
(iii)
Sensitivity
to foreign exchange risk
Consistent
with the Group’s accounting policies, the profits of the
Group’s US operations are translated at average exchange
rates and shareholders’ equity at the closing rate for the
reporting period. For 2018, the average and closing rates were
US$1.34 (31 December 2017: US$1.29) and US$1.27 (31 December 2017:
US$1.35) to £1.00 sterling respectively. A 10 per cent
increase (weakening of the dollar) or decrease (strengthening of
the dollar) in these rates would reduce or increase profit before
tax attributable to shareholders, profit for the year and
shareholders’ equity attributable to US insurance operations
respectively as follows:
|
A 10% increase in US$:£ exchange rates
|
|
A 10% decrease in US$:£ exchange rates
|
||
|
2018 £m
|
2017 £m
|
|
2018 £m
|
2017 £m
|
Profit before tax attributable to shareholders
|
(159)
|
(54)
|
|
194
|
66
|
Profit for the year
|
(136)
|
(20)
|
|
166
|
24
|
Shareholders’ equity attributable to US insurance
operations
|
(508)
|
(456)
|
|
620
|
557
|
(iv)
Other
sensitivities
The
total profit of Jackson is sensitive to market risk on the assets
covering liabilities other than variable annuity business
segregated in the separate accounts.
For
term business, acquisition costs are deferred and amortised in line
with expected premiums. For annuity and interest-sensitive life
business, acquisition costs are deferred and amortised in line with
expected gross profits on the relevant contracts. For
interest-sensitive business, the key assumption is the expected
long-term spread between the earned rate and the rate credited to
policyholders. In addition, expected gross profits depend on
mortality assumptions, assumed unit costs and terminations other
than deaths (including the related charges) all of which are based
on a combination of actual experience of Jackson, industry
benchmarking and future expectations. A detailed analysis of actual
experience is measured by internally developed expense, mortality
and persistency studies.
For
variable annuity business, an assumption made is the expected
long-term level of separate account returns, which for 2018 was 7.4
per cent (2017: 7.4 per cent). The impact of using this return is
reflected in two principal ways, namely:
Through the
projected expected gross profits that are used to determine the
amortisation of deferred acquisition costs. This is applied through
the use of a mean reversion technique; and
The required level
of provision for claims for guaranteed minimum death, ‘for
life’ withdrawal, and income benefits.
Jackson
is sensitive to mortality risk, lapse risk and other types of
policyholder behaviour, such as the utilisation of its GMWB product
features. Jackson’s persistency assumptions reflect a
combination of recent experience for each relevant line of business
and expert judgement, especially where a lack of relevant and
credible experience data exists. These assumptions vary by relevant
factors, such as product, policy duration, attained age and for
variable annuity lapse assumptions, the extent to which guaranteed
benefits are ‘in the money’ relative to policy account
values. Changes in these assumptions, which are assessed on an
annual basis after considering recent experience, could have a
material impact on policyholder liabilities and therefore on profit
before tax. See further information in note B1.2.
In
addition, in the absence of hedging, equity and interest rate
movements can both cause a loss directly or an increased future
sensitivity to policyholder behaviour. Jackson has an extensive
derivative programme that seeks to manage the exposure to such
altered equity markets and interest rates.
C7.4
UK
and Europe insurance operations
Exposure
and sensitivity of IFRS basis profit and shareholders’ equity
to market and other risks
The
IFRS basis results of the shareholder-backed business for the UK
and Europe insurance operations are most sensitive to the following
factors:
- Asset/liability matching;
-
Default rate
experience;
-
Annuitant
mortality; and
-
The difference
between the rates of return on corporate bonds and risk-free
rates.
Further
details are described below.
The
adjusted IFRS operating profit based on longer-term investment
returns for UK and Europe insurance operations is sensitive to
changes in longevity assumptions affecting the carrying value of
liabilities to policyholders for UK shareholder-backed annuity
business. At the total IFRS profit level, the result is
particularly sensitive to temporary value movements on assets
backing the capital of the shareholder-backed annuity
business.
With-profits
business
With-profits sub-fund business
The
shareholder results of the UK with-profits business (including
non-participating annuity business of the with-profits sub-fund)
are only sensitive to market risk through the indirect effect of
investment performance on declared policyholder
bonuses.
The investment assets of UK with-profits funds are subject to
market risk. Changes in their carrying value, net of related
changes to asset-share liabilities of with-profits contracts,
affect the level of unallocated surplus of the fund. Therefore, the
level of unallocated surplus is particularly sensitive to the level
of investment returns on the portion of the assets that represents
surplus. However, as unallocated surplus is accounted for as a
liability under IFRS, movements in its value do not affect
shareholders’ profit and equity.
The
shareholder results of the UK with-profits fund are currently
one-ninth of the cost of bonuses declared to with-profits
policyholders. For certain unitised with-profits products, such as
the PruFund range of funds, the bonuses represent the
policyholders’ net return based on the smoothed unit price of
the selected investment fund. Investment performance is a key
driver of bonuses declared, and hence the shareholder results. Due
to the ‘smoothed’ basis of bonus declaration, the
sensitivity to short-term investment performance is relatively low.
However, longer-term investment performance and persistency trends
may affect future shareholder transfers.
Shareholder-backed annuity business
Profits
from shareholder-backed annuity business are most sensitive
to:
-
The extent to which
the duration of the assets held closely matches the expected
duration of the liabilities under the contracts;
-
Actual versus
expected default rates on assets held;
-
The difference
between the 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 £37 million (2017: £66
million). A decrease in credit default assumptions of five basis
points would increase pre-tax profit by £99 million (2017:
£198 million). A decrease in renewal expenses (excluding asset
management expenses) of 5 per cent would increase pre-tax profit by
£21 million (2017: £40 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 £69 million (2017: £143 million). See
C4.1(d)(iii) for further details on mortality
assumptions.
Unit-linked and other business
Unit-linked and other business represents a comparatively small
proportion of the in-force business of the UK and Europe insurance
operations.
Due to the matching of policyholder liabilities to attaching asset
value movements, the UK unit-linked business is not directly
affected by market or credit risk. The liabilities of 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, persistency
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 that provide low levels of
mortality cover, the profits are relatively insensitive to changes
in mortality experience.
Sensitivity to interest rate risk and other market
risk
By
virtue of the fund structure, product features and basis of
accounting, the policyholder liabilities of the UK and Europe
insurance operations are, except annuity business, not generally
exposed to interest rate risk. At 31 December 2018, annuity
liabilities accounted for 95 per cent (31 December 2017: 98 per
cent) of UK non-linked shareholder-backed business
liabilities. For annuity
business, liabilities are exposed to interest rate risk. However,
the net exposure is substantially ameliorated by virtue of the
close matching of assets with appropriate duration. The level of
matching from period to period can vary depending on management
actions and economic factors so it is possible for a degree of
mis-matching profits or losses to arise.
The
close matching by the Group of assets of appropriate duration to
annuity liabilities is based on maintaining economic and regulatory
capital. Liabilities are measured differently under Solvency II
reporting requirements than under IFRS resulting in an alteration
to the assets used to measure the IFRS annuity liabilities. As a
result, IFRS has a different sensitivity to interest rate and
credit risk than under Solvency II.
The
estimated sensitivity of the UK non-linked shareholder-backed
business (principally annuities business) to a movement in interest
rates is as follows:
|
31 Dec 2018 £m
|
|
31 Dec 2017 £m
|
||||||||
|
A
decrease
of 2%
|
A
decrease
of 1%
|
|
An
increase
of 1%
|
An
increase
of 2%
|
|
A
decrease
of 2%
|
A
decrease
of 1%
|
|
An
increase
of 1%
|
An
increase
of 2%
|
Carrying value of debt securities and derivatives
|
7,369
|
3,317
|
|
(2,792)
|
(5,193)
|
|
13,497
|
5,805
|
|
(4,659)
|
(8,541)
|
Policyholder liabilities
|
(4,784)
|
(2,162)
|
|
1,801
|
3,317
|
|
(9,426)
|
(4,210)
|
|
3,443
|
6,295
|
Related deferred tax effects
|
(446)
|
(199)
|
|
171
|
323
|
|
(658)
|
(254)
|
|
190
|
348
|
Net sensitivity of profit after tax and shareholders’
equity
|
2,139
|
956
|
|
(820)
|
(1,553)
|
|
3,413
|
1,341
|
|
(1,026)
|
(1,898)
|
In
addition, the shareholder-backed portfolio of UK non-linked
insurance operations (covering policyholder liabilities and
shareholders’ equity) includes equity securities and
investment properties. Excluding any offsetting effects on the
measurement of policyholder liabilities, a fall in their value
would have given rise to the following effects on pre-tax profit,
profit after tax and shareholders’ equity.
|
2018 £m
|
|
2017 £m
|
||
|
A decrease
of 20%
|
A decrease
of 10%
|
|
A decrease
of 20%
|
A decrease
of 10%
|
Pre-tax profit
|
(336)
|
(168)
|
|
(332)
|
(166)
|
Related deferred tax effects
|
57
|
29
|
|
57
|
28
|
Net sensitivity of profit after tax and shareholders’
equity
|
(279)
|
(139)
|
|
(275)
|
(138)
|
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
(i)
Asset
management
(a)
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 £10 million and £43
million respectively (2017: £30 million and £53 million,
respectively).
(b)
Sensitivities
to other financial risks for asset management
operations
The
profits of asset management businesses are sensitive to the level
of assets under management, as this significantly affects the value
of management fees earned by the business in the current and future
periods. The Group’s asset management operations do not hold
significant investments in property or equities.
(ii)
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 based
on historical experience could be plus or minus £150
million.
Other
operations are sensitive to credit risk on the loan
portfolio of the
Prudential Capital operation. Total debt securities held at 31
December 2018 by Prudential Capital were £1,884 million (2017:
£2,238 million). Debt securities held by Prudential Capital
are in general variable rate bonds and so market value is limited
in sensitivity to interest rate movements and consequently any
change in interest rates would not have a material impact on profit
or shareholders’ equity.
C8
Tax
assets and liabilities
Deferred tax
The
statement of financial position contains the following deferred tax
assets and liabilities in relation to:
|
2018 £m
|
||||
|
At 1 Jan
|
Movement in income statement
|
Movement
through
other comprehensive income and equity
|
Other movements including foreign currency movements
|
At 31 Dec
|
Deferred tax assets
|
|
|
|
|
|
Unrealised losses or gains on investments
|
14
|
1
|
93
|
5
|
113
|
Balances relating to investment and insurance
contracts
|
1
|
–
|
–
|
–
|
1
|
Short-term temporary differences
|
2,532
|
(266)
|
(8)
|
81
|
2,339
|
Capital allowances
|
14
|
–
|
–
|
1
|
15
|
Unused tax losses
|
66
|
23
|
–
|
38
|
127
|
Total
|
2,627
|
(242)
|
85
|
125
|
2,595
|
Deferred tax liabilities
|
|
|
|
|
|
Unrealised losses or gains on investments
|
(1,748)
|
666
|
195
|
20
|
(867)
|
Balances relating to investment and insurance
contracts
|
(872)
|
(91)
|
–
|
(39)
|
(1,002)
|
Short-term temporary differences
|
(2,041)
|
68
|
(15)
|
(109)
|
(2,097)
|
Capital allowances
|
(54)
|
(1)
|
–
|
(1)
|
(56)
|
Total
|
(4,715)
|
642
|
180
|
(129)
|
(4,022)
|
Under
IAS 12 ‘Income Taxes’, deferred tax is measured at the
tax rates that are expected to apply to the period when the asset
is realised or the liability settled, based on the tax rates (and
laws) that have been enacted or are substantively enacted at the
end of the reporting period.
Deferred
tax assets are recognised to the extent that they are regarded as
recoverable, that is to the extent that, on the basis of all
available evidence, it can be regarded as more likely than not that
there will be suitable taxable profits from which the future
reversal of the underlying temporary differences can be
deducted.
C9
Defined
benefit pension schemes
(i)
Background and summary economic and IAS 19 financial
positions
The
Group’s businesses operate a number of pension schemes. The
specific features of these schemes vary in accordance with the
regulations of the country in which the employees are located,
although they are, in general, funded by the Group and based either
on a cash balance formula or on years of service and salary earned
in the last year or years of employment. The largest defined
benefit scheme is the principal UK scheme, namely the Prudential
Staff Pension Scheme (PSPS). PSPS accounts for 82 per cent (2017:
82 per cent) of the underlying scheme liabilities of the
Group’s defined benefit schemes.
The
Group also operates two smaller UK defined benefit schemes in
respect of Scottish Amicable (SASPS) and M&G (M&GGPS). In
addition, there are two small defined benefit schemes in Taiwan
which have negligible deficits.
Under
IAS 19, ‘Employee Benefits’ and IFRIC 14 ‘IAS 19
– The Limit on a Defined Benefit Asset, Minimum Funding
Requirements and their Interaction’, the Group is only able
to recognise a surplus to the extent that it is able to access the
surplus either through an unconditional right of refund or through
reduced future contributions relating to ongoing service of active
members. The Group has no unconditional right of refund to any
surplus in PSPS. Accordingly, the PSPS surplus recognised is
restricted to the present value of the economic benefit to the
Group from the difference between the estimated future ongoing
contributions and the full future cost of service for the active
members. In contrast, the Group is able to access the surplus of
SASPS and M&GGPS. Therefore, the amounts recognised for these
schemes are the IAS 19 valuation amount (either a surplus or
deficit).
The Group asset/liability in respect of defined benefit pension
schemes is as follows:
|
|
|
31 Dec 2018 £m
|
|
31 Dec 2017 £m
|
||||||||
|
|
|
PSPS
|
SASPS
|
M&GGPS
|
Other
schemes
|
Total
|
|
PSPS
|
SASPS
|
M&GGPS
|
Other
schemes
|
Total
|
|
|
|
note (a)
|
note (b)
|
|
|
|
|
note (a)
|
note (b)
|
|
|
|
|
Underlying economic surplus (deficit)
|
908
|
(79)
|
131
|
(1)
|
959
|
|
721
|
(137)
|
109
|
(1)
|
692
|
|
|
Less: unrecognised surplus
|
(677)
|
–
|
–
|
–
|
(677)
|
|
(485)
|
–
|
–
|
–
|
(485)
|
|
|
Economic surplus (deficit) (including investment in Prudential
insurance policies)note
(c)
|
231
|
(79)
|
131
|
(1)
|
282
|
|
236
|
(137)
|
109
|
(1)
|
207
|
|
|
Attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UK with-profits fund
|
162
|
(32)
|
–
|
–
|
130
|
|
165
|
(55)
|
–
|
–
|
110
|
|
|
Shareholder-backed business
|
69
|
(47)
|
131
|
(1)
|
152
|
|
71
|
(82)
|
109
|
(1)
|
97
|
|
Consolidation adjustment against policyholder liabilities for
investment in Prudential insurance policies
|
–
|
–
|
(225)
|
–
|
(225)
|
|
–
|
–
|
(151)
|
–
|
(151)
|
|
|
IAS 19 pension asset (liability) on the Group statement of
financial positionnote
(d)
|
231
|
(79)
|
(94)
|
(1)
|
57
|
|
236
|
(137)
|
(42)
|
(1)
|
56
|
Notes
(a)
No deficit or other
funding is required for PSPS. Deficit funding, where applicable, is
apportioned in the ratio of 70/30 between the UK with-profits fund
and shareholder-backed business 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.
(b)
The deficit of
SASPS has been allocated 40 per cent to the UK with-profits fund
and 60 per cent to the shareholders’ fund as at 31 December
2018 and 2017.
(c)
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.
(d)
At 31 December
2018, the PSPS pension asset of £231 million (31 December
2017: £236 million) and the other schemes’ pension
liabilities of £174 million (31 December 2017: £180
million) are included within ‘Other debtors’ and
‘Provisions’ respectively on the consolidated statement
of financial position.
Triennial actuarial valuations
Defined
benefit pension schemes in the UK are generally required to be
subject to full actuarial valuations every three years in order to
assess the appropriate level of funding for schemes in relation to
their commitments. These valuations include assessments of the
likely rate of return on the assets held within the separate
trustee administered funds. The actuarial valuation differs from
the IAS 19 accounting basis valuation in a number of respects,
including the discount rate assumption where IAS 19 prescribes a
rate based on high-quality corporate bonds while a more
‘prudent’ assumption is used for the actuarial
valuation.
The
information on the latest completed actuarial valuation for the UK
schemes is shown in the table below:
|
PSPS
|
SASPS
|
M&GGPS
|
Last
completed actuarial valuation date
|
5 April
2017
|
31
March 2017
|
31
December 2014*
|
Valuation
actuary, all Fellows of the
Institute
and Faculty of Actuaries
|
C G
SingerTowers Watson Limited
|
Jonathan
SeedXafinity Consulting Limited
|
Paul
Belok
AON
Hewitt Limited
|
Funding
level at the last valuation
|
105 per
cent
|
75 per
cent
|
99 per
cent
|
Deficit
funding arrangement agreed with the Trustees based on the last
completed valuation
|
No
deficit or other funding required. Ongoing contributions for active
members are at the minimum level required under the scheme rules
(approximately £5 million per annum excluding
expenses)
|
Deficit
funding of £26 million per annum
from 1
April 2017 until 31 March 2027, or earlier if the scheme’s
funding level reaches 100 per cent before this date. The deficit
funding will be reviewed every three
years
at subsequent
valuations
|
No
deficit funding required from 1 January 2016
|
*The
triennial valuation for M&GGPS as at 31 December 2017 is
currently in progress.
(ii)
Assumptions
The
actuarial assumptions used in determining benefit obligations and
the net periodic benefit costs for the years shown were as
follows:
|
|
|
31 Dec 2018 %
|
31 Dec 2017 %
|
Discount rate*
|
2.8
|
2.5
|
||
Rate of increase in salaries
|
3.3
|
3.1
|
||
Rate of inflation†
|
|
|
||
|
|
Retail prices index (RPI)
|
3.3
|
3.1
|
|
|
Consumer prices index (CPI)
|
2.3
|
2.1
|
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
|
3.3
|
3.1
|
*
The discount rate
has been determined by reference to an ‘AA’ corporate
bond index, adjusted where applicable to allow for the difference
in duration between the index and the pension
liabilities.
†
The rate of
inflation reflects the long-term assumption for UK RPI or CPI
depending on the tranche of the schemes.
The
calculations are based on current mortality estimates with an
allowance made for expected future improvements in mortality. This
allowance reflected the CMI 2015 Core projections model (2017: CMI
2014 projections model, with scheme-specific calibrations). In
2018, for members post retirement long-term mortality improvement
rates of 1.75 per cent per annum (2017: 1.75 per cent per annum)
and 1.50 per cent per annum (2017: 1.25 per cent per annum) were
applied for males and females, respectively.
(iii)
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
2018, M&GGPS held investments in Prudential insurance policies
of £225 million (31 December 2017: £151
million).
Movements
on the pension scheme surplus determined on the economic basis are
as follows, with the effect of the application of IFRIC 14 being
shown separately:
|
|
2018 £m
|
||||
|
|
Surplus
(deficit)
in schemes
at 1 Jan
2018
|
(Charge) credit
to income
statement
|
Actuarial gains
and losses
in other
comprehensive
income
|
Contributions paid
|
Surplus
(deficit)
in schemes
at 31 Dec
2018
|
All schemes
|
|
|
|
|
|
|
Underlying position (without the effect of IFRIC 14)
|
|
|
|
|
|
|
Surplus (deficit)
|
692
|
(88)
|
303
|
52
|
959
|
|
Less: amount attributable to UK with-profits fund
|
(473)
|
38
|
(178)
|
(20)
|
(633)
|
|
Shareholders' share:
|
|
|
|
|
|
|
|
Gross of tax surplus (deficit)
|
219
|
(50)
|
125
|
32
|
326
|
|
Related tax
|
(42)
|
10
|
(24)
|
(6)
|
(62)
|
Net of shareholders' tax
|
177
|
(40)
|
101
|
26
|
264
|
|
Application of IFRIC 14 for the derecognition
of PSPS surplus
|
|
|
|
|
|
|
Derecognition of surplus
|
(485)
|
(13)
|
(179)
|
–
|
(677)
|
|
Less: amount attributable to UK with-profits fund
|
363
|
8
|
132
|
–
|
503
|
|
Shareholders' share:
|
|
|
|
|
|
|
|
Gross of tax
|
(122)
|
(5)
|
(47)
|
–
|
(174)
|
|
Related tax
|
23
|
1
|
9
|
–
|
33
|
Net of shareholders' tax
|
(99)
|
(4)
|
(38)
|
–
|
(141)
|
|
With the effect of IFRIC 14
|
|
|
|
|
|
|
Surplus (deficit)
|
207
|
(101)
|
124
|
52
|
282
|
|
Less: amount attributable to UK with-profits fund
|
(110)
|
46
|
(46)
|
(20)
|
(130)
|
|
Shareholders' share:
|
|
|
|
|
|
|
|
Gross of tax surplus (deficit)
|
97
|
(55)
|
78
|
32
|
152
|
|
Related tax
|
(19)
|
11
|
(15)
|
(6)
|
(29)
|
Net of shareholders' tax
|
78
|
(44)
|
63
|
26
|
123
|
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 comprise the following
investments:
|
|
31 Dec 2018
|
|
31 Dec 2017
|
||||||
|
|
PSPS
|
Other
schemes
|
Total
|
|
|
PSPS
|
Other
schemes
|
Total
|
|
|
|
£m
|
£m
|
£m
|
%
|
|
£m
|
£m
|
£m
|
%
|
Equities
|
|
|
|
|
|
|
|
|
|
|
|
UK
|
8
|
6
|
14
|
–
|
|
9
|
67
|
76
|
1
|
|
Overseas
|
204
|
53
|
257
|
3
|
|
226
|
272
|
498
|
6
|
Bonds
|
|
|
|
|
|
|
|
|
|
|
|
Government
|
4,596
|
538
|
5,134
|
61
|
|
5,040
|
655
|
5,695
|
63
|
|
Corporate
|
1,586
|
454
|
2,040
|
24
|
|
1,491
|
248
|
1,739
|
20
|
|
Asset-backed securities
|
263
|
12
|
275
|
3
|
|
164
|
–
|
164
|
2
|
Derivatives
|
103
|
4
|
107
|
1
|
|
188
|
(6)
|
182
|
2
|
|
Properties
|
143
|
143
|
286
|
3
|
|
140
|
130
|
270
|
3
|
|
Other assets
|
172
|
198
|
370
|
5
|
|
216
|
77
|
293
|
3
|
|
Total value of assets
|
7,075
|
1,408
|
8,483
|
100
|
|
7,474
|
1,443
|
8,917
|
100
|
(iv)
Sensitivity of the pension scheme liabilities to key
variables
The
sensitivity information below is based on the core scheme
liabilities and assumptions at the balance sheet date. The
sensitivities are calculated based on a change in one assumption
with all other assumptions being held constant. As such,
interdependencies between the assumptions are excluded. The impact
of the rate of inflation assumption sensitivity includes the impact
of inflation on the rate of increase in salaries and rate of
increase of pensions in payment.
The
sensitivities of the underlying pension scheme liabilities as shown
below do not directly equate to the impact on the profit or loss
attributable to shareholders or shareholders’ equity due to
the effect of the application of IFRIC 14 on PSPS and the
allocation of a share of the interest in the financial position of
PSPS and SASPS to the UK with-profits fund as described
above.
|
Assumption applied
|
|
Sensitivity change in assumption
|
|
|
Impact of sensitivity on scheme liabilities on IAS 19
basis
|
|||
|
2018
|
2017
|
|
|
|
|
|
2018
|
2017
|
Discount rate
|
2.8%
|
2.5%
|
|
Decrease by 0.2%
|
|
Increase in scheme liabilities by:
|
|
|
|
|
|
|
|
|
|
|
PSPS
|
3.5%
|
3.5%
|
|
|
|
|
|
|
|
Other schemes
|
5.0%
|
5.4%
|
Discount rate
|
2.8%
|
2.5%
|
|
Increase by 0.2%
|
|
Decrease in scheme liabilities by:
|
|
|
|
|
|
|
|
|
|
|
PSPS
|
3.3%
|
3.4%
|
|
|
|
|
|
|
|
Other schemes
|
4.7%
|
4.9%
|
Rate of inflation
|
3.3%
|
3.1%
|
|
RPI: Decrease by 0.2%
|
|
Decrease in scheme liabilities by:
|
|
|
|
|
2.3%
|
2.1%
|
|
CPI: Decrease by 0.2%
|
|
|
PSPS
|
0.6%
|
0.6%
|
|
|
|
|
with consequent reduction
|
|
|
Other schemes
|
3.9%
|
3.9%
|
|
|
|
|
in salary increases
|
|
|
|
|
|
Mortality rate
|
|
|
|
Increase life expectancy by 1 year
|
|
Increase in scheme liabilities by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PSPS
|
3.9%
|
4.0%
|
|
|
|
|
|
|
|
Other schemes
|
3.9%
|
3.8%
|
C10
Share
capital, share premium and own shares
|
2018
|
|
2017
|
||||
Issued shares of 5p each
|
Number of ordinary shares
|
Share
capital
|
Share
premium
|
|
Number of ordinary shares
|
Share
capital
|
Share
premium
|
fully paid
|
|
£m
|
£m
|
|
|
£m
|
£m
|
At 1 January
|
2,587,175,445
|
129
|
1,948
|
|
2,581,061,573
|
129
|
1,927
|
Shares issued under share-based schemes
|
5,868,964
|
1
|
16
|
|
6,113,872
|
–
|
21
|
At 31 December
|
2,593,044,409
|
130
|
1,964
|
|
2,587,175,445
|
129
|
1,948
|
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 2018, there were options outstanding under save as you
earn schemes to subscribe for shares as follows:
|
|
|
Share
price range
|
|
|
|
|
Number of shares to subscribe for
|
|
from
|
to
|
|
Exercisable by year
|
31 Dec 2018
|
4,885,804
|
|
901p
|
1,455p
|
|
2024
|
31 Dec 2017
|
6,448,853
|
|
629p
|
1,455p
|
|
2023
|
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 £170
million as at 31 December 2018 (31 December 2017: £250
million) is deducted from retained earnings. The Company has
established trusts to facilitate the delivery of shares under
employee incentive plans. At 31 December 2018, 9.6 million (31
December 2017: 11.4 million) Prudential plc shares with a market
value of £135 million (31 December 2017: £218 million)
were held in such trusts all of which are for employee incentive
plans. The maximum number of shares held during 2018 was 14.9
million which was in March 2018.
The
Company purchased the following number of shares in respect of
employee incentive plans. The shares
purchased each month are as follows:
|
|
|
2018 share price
|
|
|
|
|
|
2017 share price
|
|
|
||||
|
Number
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
of shares
|
|
Low
|
|
High
|
|
Cost
|
|
of shares
|
|
Low
|
|
High
|
|
Cost
|
|
|
|
£
|
|
£
|
|
£
|
|
|
|
£
|
|
£
|
|
£
|
January
|
51,555
|
|
19.18
|
|
19.40
|
|
996,536
|
|
62,388
|
|
15.83
|
|
16.02
|
|
989,583
|
February
|
55,765
|
|
17.91
|
|
18.10
|
|
1,004,362
|
|
65,706
|
|
15.70
|
|
16.09
|
|
1,052,657
|
March
|
55,623
|
|
18.25
|
|
18.54
|
|
1,025,238
|
|
70,139
|
|
16.40
|
|
16.54
|
|
1,159,950
|
April
|
1,664,334
|
|
16.67
|
|
17.95
|
|
29,113,556
|
|
3,090,167
|
|
16.58
|
|
16.80
|
|
51,369,760
|
May
|
63,334
|
|
18.91
|
|
19.38
|
|
1,216,136
|
|
55,744
|
|
17.50
|
|
17.62
|
|
979,645
|
June
|
181,995
|
|
18.21
|
|
18.65
|
|
3,335,725
|
|
182,780
|
|
17.52
|
|
18.00
|
|
3,269,447
|
July
|
55,888
|
|
17.68
|
|
17.86
|
|
993,779
|
|
51,984
|
|
17.72
|
|
17.93
|
|
927,452
|
August
|
60,384
|
|
18.04
|
|
18.10
|
|
1,090,283
|
|
55,857
|
|
18.30
|
|
18.73
|
|
1,025,802
|
September
|
82,612
|
|
16.95
|
|
16.98
|
|
1,400,868
|
|
51,226
|
|
17.45
|
|
17.97
|
|
912,151
|
October
|
148,209
|
|
15.62
|
|
16.84
|
|
2,477,127
|
|
136,563
|
|
17.99
|
|
18.22
|
|
2,483,879
|
November
|
67,162
|
|
15.95
|
|
15.96
|
|
1,071,633
|
|
53,951
|
|
18.38
|
|
18.40
|
|
992,123
|
December
|
73,744
|
|
13.99
|
|
14.30
|
|
1,045,278
|
|
53,519
|
|
18.26
|
|
18.47
|
|
986,000
|
Total
|
2,560,605
|
|
|
|
|
|
44,770,521
|
|
3,930,024
|
|
|
|
|
|
66,148,449
|
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 2018 was 3.0 million (31
December 2017: 6.4 million) and the cost of acquiring these shares
of £20 million (2017: £71 million) is included in the
cost of own shares. The market value of these shares as at 31
December 2018 was £42 million (31 December 2017: £121
million). During 2018, these funds made net disposals of 3,368,506
Prudential shares (2017: acquisitions of 372,029) for a net
decrease of £50.5 million to book cost (2017: net increase of
£9.4 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 2018 or 2017.
D
Other
notes
D1
Corporate
transactions
D1.1
Gains/(losses) on
disposal of businesses and corporate
transactions
‘(Loss)
gain on disposal of businesses and corporate transactions’
comprises the following:
|
|
2018 £m
|
2017 £m
|
Loss arising on reinsurance of part of UK shareholder-backed
annuity portfolionote
(i)
|
(508)
|
–
|
|
Other transactionsnote
(ii)
|
(80)
|
223
|
|
|
(588)
|
223
|
Notes
(i)
Loss arising on
reinsurance of part of UK shareholder-backed annuity
portfolio
In
March 2018, M&GPrudential announced the reinsurance of
£12.0 billion (as at 31 December 2017) of its
shareholder-backed annuity portfolio to Rothesay Life. Under the
terms of the agreement, M&GPrudential has reinsured the
liabilities to Rothesay Life, which is expected to be followed by a
court sanctioned legal transfer, under Part VII of the Financial
Services and Markets Act 2000 (Part VII), of most of the portfolio
to Rothesay Life by 30 June 2019.
The
reinsurance agreement became effective on 14 March 2018. A
reinsurance premium of £12,149 million has been recognised
within ‘Outward reinsurance premiums’ in the income
statement and settled via the transfer of financial investments and
other assets to Rothesay Life. After allowing for the recognition
of a reinsurance asset and associated changes to policyholder
liabilities, a loss of £(508) million was recognised in 2018
in relation to the transaction.
The
reinsured annuity business that will be transferred once the Part
VII process is complete has been classified as held for sale in
these consolidated financial statements in accordance with IFRS 5,
‘Non-current assets held for sale and discontinued
operations’.
The
assets and liabilities of the M&GPrudential annuity business
classified as held for sale on the statement of financial position
are as follows:
|
|
31 Dec 2018 £m
|
Assets
|
|
|
Reinsurer's share of insurance contract liabilities
|
10,502
|
|
Other assets (including cash and cash equivalents)
|
66
|
|
Assets held for sale
|
10,568
|
|
|
|
|
Liabilities
|
|
|
Policyholder liabilities
|
10,502
|
|
Other liabilities
|
66
|
|
Liabilities held for sale
|
10,568
|
(ii)
Other
transactions
Other transaction costs of £80 million incurred by the Group
in 2018 primarily relate to additional costs incurred in exiting
from the NPH broker-dealer business and costs related to
preparation for the previously announced intention to demerge
M&GPrudential from Prudential plc, resulting in two separately
listed entities.
In
2017, the Group completed its disposal of its Korea life business,
realising a gain of £61 million principally as a result of
recycling from other comprehensive income cumulative exchange gains
of this business. On 15 August 2017, the Group, through its
subsidiary National Planning Holdings, Inc. (NPH) sold its US
independent broker-dealer network to LPL Financial LLC which
realised a gain of £162 million in 2017. Together these two
transactions generated a gain on disposal of businesses and
corporate transactions of £223 million.
D1.2 Acquisition of TMB Asset Management Co., Ltd. in
Thailand
In
September 2018, the Group completed its initial acquisition of 65
per cent of TMB Asset Management Co,. Ltd. (TMBAM), an asset
management company in Thailand, from TMB Bank Public Limited (TMB)
for £197 million.
The
terms of the sale agreement include a call option exercisable (by
the Group) after three years and a put option exercisable (by TMB)
after four years which, if exercised, triggers the purchase of the
remaining 35 per cent of the business. The put option, in line with
IFRS, has been recognised as a financial liability and a reduction
in shareholders’ equity of £106 million as of the
acquisition date, being the discounted expected consideration
payable for the remaining 35 per cent (£109 million as of 31
December 2018).
The
fair value of the acquired assets, assumed liabilities and
resulting goodwill are shown in the table below:
|
31 Dec 2018 £m
|
Assets
|
|
Intangible assets
|
5
|
Other assets
|
26
|
Cash and cash equivalents
|
2
|
Total assets
|
33
|
Other liabilities
|
(10)
|
Non-controlling interests
|
(7)
|
Net assets acquired and liabilities assumed
|
16
|
Goodwill arising on acquisition*
|
181
|
Purchase consideration
|
197
|
*
The goodwill on
acquisition of £181 million (retranslated to £186 million
at 31 December 2018) is mainly attributable to the expected
benefits from new customers and synergies. Refer to note C5.1 for
changes to the carrying amount of goodwill during the
year.
The
acquisition of TMBAM contributed £18 million to revenue and
£5 million to adjusted IFRS operating profit based on
longer-term investment returns and profit before tax of the Group
for the post-acquisition period from 27 September to 31 December
2018. There is no material impact on the Group’s revenue and
profit for 2018 if the acquisition had occurred on 1 January
2018.
D2
Contingencies and related obligations
Litigation and regulatory matters
In addition to the matters set out in note B3(iii) in relation to
the Financial Conduct Authority review of past annuity sales, the
Group is involved in various litigation and regulatory issues.
These may from time to time include class actions involving
Jackson. While the outcome of such litigation and regulatory issues
cannot be predicted with certainty, the Company believes that their
ultimate outcome will not have a material adverse effect on the
Group’s financial condition, results of operations, or
cash flows.
D3
Post
balance sheet events
Dividends
The second interim ordinary dividend for the year ended 31 December
2018, that was approved by the Board of Directors after 31 December
2018, is described in note B6.
Renewal of strategic bancassurance alliance with United Overseas
Bank Limited
In January 2019, the Group announced the renewal of its regional
strategic bancassurance alliance with United Overseas Bank Limited
(UOB). The new agreement extends the original alliance, which
commenced in 2010 to 2034 and increases the geographical scope to
include a fifth market, Vietnam, alongside the existing markets
across Singapore, Malaysia, Thailand and Indonesia.
As part of this transaction, Prudential has agreed to pay UOB an
initial fee of £662 million (translated using a Singapore
dollar: £ foreign exchange rate of 1.7360) for distribution
rights which is not dependent on future sales volumes. This amount
will be paid in three instalments of £230 million in February
2019, £331 million in January 2020 and £101 million in
January 2021. In line with the Group’s policy, these amounts
will be capitalised as a distribution rights intangible
asset.
Additional Unaudited Financial Information
I
IFRS profit and loss
I(a)
Analysis of
long-term insurance business adjusted IFRS operating profit based
on longer-term investment returns by driver
This schedule classifies the Group’s adjusted IFRS operating
profit based on longer-term investment returns from long-term
insurance operations into the underlying drivers, using the
following categories:
–
Spread income
represents the difference between net
investment income and amounts credited to certain policyholder
accounts. It excludes the operating investment return on
shareholder net assets, which has been separately disclosed as
expected return on shareholder assets.
–
Fee income represents profits driven by net investment
performance, being asset management fees that vary with the size of
the underlying policyholder funds net of investment management
expenses.
–
With-profits represent
the pre-tax shareholders’ transfer from the with-profits
funds 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. These exclude items such as
restructuring 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 adjusted IFRS
operating profit based on longer-term investment returns by source
and margin analysis of Group long-term insurance
business
The
following analysis expresses certain of the Group’s sources
of adjusted IFRS operating profit based on long-term investment
returns as a margin of policyholder liabilities or other relevant
drivers. Details on the calculation of the Group’s average
policyholder liability balances are given in note (iv) at the end
of this section.
|
|
2018
|
|||||
|
|
Asia
|
US
|
UK and
Europe
|
Total
|
Average
liability
|
Margin
|
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
bps
|
|
|
|
|
|
|
note (iv)
|
note (ii)
|
Spread income
|
232
|
583
|
84
|
899
|
85,850
|
105
|
|
Fee income
|
210
|
2,445
|
56
|
2,711
|
175,443
|
155
|
|
With-profits
|
71
|
–
|
320
|
391
|
147,318
|
27
|
|
Insurance margin
|
1,481
|
949
|
50
|
2,480
|
|
|
|
Margin on revenues
|
2,105
|
–
|
149
|
2,254
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Acquisition costsnote
(i)
|
(1,503)
|
(759)
|
(57)
|
(2,319)
|
6,802
|
(34)%
|
|
Administration expenses
|
(1,029)
|
(1,204)
|
(180)
|
(2,413)
|
265,597
|
(91)
|
|
DAC adjustmentsnote
(v)
|
326
|
(114)
|
4
|
216
|
|
|
Expected return on shareholder assets
|
129
|
11
|
102
|
242
|
|
|
|
|
|
2,022
|
1,911
|
528
|
4,461
|
|
|
Share of related tax charges from joint ventures and
associatenote
(vi)
|
(40)
|
|
–
|
(40)
|
|
|
|
Longevity reinsurance and other management actions to improve
solvency
|
|
|
58
|
58
|
|
|
|
Changes in longevity assumption basis
|
|
|
441
|
441
|
|
|
|
Provision for guaranteed minimum pension equalisation
|
|
|
(55)
|
(55)
|
|
|
|
Insurance recoveries of costs associated with review of past
annuity sales
|
|
|
166
|
166
|
|
|
|
Long-term business adjusted IFRS operating profit based on
longer-term investment returns
|
1,982
|
1,911
|
1,138
|
5,031
|
|
|
|
|
2017 AER
|
|||||
|
|
Asia
|
US
|
UK and
Europe
|
Total
|
Average
liability
|
Margin
|
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
bps
|
|
|
|
|
|
|
note (iv)
|
note(ii)
|
Spread income
|
234
|
751
|
137
|
1,122
|
88,908
|
126
|
|
Fee income
|
205
|
2,343
|
61
|
2,609
|
166,839
|
156
|
|
With-profits
|
59
|
–
|
288
|
347
|
136,474
|
25
|
|
Insurance margin
|
1,341
|
906
|
55
|
2,302
|
|
|
|
Margin on revenues
|
2,098
|
–
|
189
|
2,287
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Acquisition costsnote
(i)
|
(1,499)
|
(876)
|
(68)
|
(2,443)
|
6,958
|
(35)%
|
|
Administration expenses
|
(967)
|
(1,174)
|
(164)
|
(2,305)
|
261,114
|
(88)
|
|
DAC adjustmentsnote
(v)
|
241
|
260
|
4
|
505
|
|
|
Expected return on shareholder assets
|
126
|
4
|
104
|
234
|
|
|
|
|
1,838
|
2,214
|
606
|
4,658
|
|
|
|
Share of related tax charges from joint ventures and
associatenote
(vi)
|
(39)
|
–
|
–
|
(39)
|
|
|
|
Longevity reinsurance and other management actions to improve
solvency
|
–
|
–
|
276
|
276
|
|
|
|
Changes in longevity assumption basis
|
–
|
–
|
204
|
204
|
|
|
|
Provision for review of past annuity sales
|
–
|
–
|
(225)
|
(225)
|
|
|
|
Long-term business adjusted IFRS operating profit based on
longer-term investment returns
|
1,799
|
2,214
|
861
|
4,874
|
|
|
|
|
2017 CERnote
(iii)
|
|||||
|
|
Asia
|
US
|
UK and
Europe
|
Total
|
Average
liability
|
Margin
|
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
bps
|
|
|
|
|
|
|
note (iv)
|
note (ii)
|
Spread income
|
228
|
725
|
137
|
1,090
|
87,553
|
124
|
|
Fee income
|
195
|
2,262
|
61
|
2,518
|
162,267
|
155
|
|
With-profits
|
57
|
–
|
288
|
345
|
136,496
|
25
|
|
Insurance margin
|
1,293
|
875
|
55
|
2,223
|
|
|
|
Margin on revenues
|
2,021
|
–
|
189
|
2,210
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Acquisition costsnote
(i)
|
(1,450)
|
(846)
|
(68)
|
(2,364)
|
6,767
|
(35)%
|
|
Administration expenses
|
(933)
|
(1,134)
|
(164)
|
(2,231)
|
255,313
|
(87)
|
|
DAC adjustmentsnote
(v)
|
235
|
251
|
4
|
490
|
|
|
Expected return on shareholder assets
|
120
|
4
|
104
|
228
|
|
|
|
|
1,766
|
2,137
|
606
|
4,509
|
|
|
|
Share of related tax charges from joint ventures and
associatenote
(vi)
|
(39)
|
–
|
–
|
(39)
|
|
|
|
Longevity reinsurance and other management
actions to improve solvency
|
–
|
–
|
276
|
276
|
|
|
|
Changes in longevity assumption basis
|
–
|
–
|
204
|
204
|
|
|
|
Provision for review of past annuity sales
|
–
|
–
|
(225)
|
(225)
|
|
|
|
Long-term business adjusted IFRS operating profit based
on
longer-term investment returns
|
1,727
|
2,137
|
861
|
4,725
|
|
|
Notes to sources of earnings tables throughout I(a)
(i)
The
ratio of acquisition costs is calculated as a percentage of APE
sales including with-profits sales. Acquisition costs include only
those relating to shareholder-backed business.
(ii)
Margin
represents the operating return earned in the year as a proportion
of the relevant class of average policyholder liabilities excluding
unallocated surplus.
(iii)
The 2017 comparative information has been
presented at AER and CER to eliminate the impact of foreign
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 policyholder liability calculations, the amounts
have been translated using current year opening and closing
exchange rates. For the US CER average liability calculations, the
amounts have been translated at the current year month-end closing
exchange rates. See note A1 in the IFRS financial statements for
foreign exchange rates used.
(iv)
For
UK and Europe and Asia, opening and closing policyholder
liabilities have been used to derive an average balance for the
year, as a proxy for average balances throughout the year. The
calculation of average liabilities for Jackson is generally derived
from month-end balances throughout the year, as opposed to opening
and closing balances only. The average liabilities for fee income
in Jackson have been calculated using daily balances instead of
month-end balances in order to provide a more meaningful analysis
of the fee income, which is charged on the daily account balance.
Average liabilities for spread income are based on the general
account liabilities to which spread income attaches. Average
liabilities used to calculate the administration expense margin
exclude the REALIC liabilities reinsured to third parties prior to
the acquisition by Jackson.
(v)
The
DAC adjustments contain a credit of £55 million in respect of
joint ventures and associate in 2018 (2017: AER credit of £43
million).
(vi)
Under
IFRS, the Group’s share of results from its investments in
joint ventures and associate accounted for using the equity method
is included in the Group’s profit before tax on a net of
related tax basis. In 2018, the Group altered the presentation of
its analysis of Asia adjusted IFRS operating profit based on
longer-term investment returns by driver to show these tax charges
separately in order for the contribution from the joint ventures
and associate to be included in the margin analysis on a consistent
basis as the rest of the Asia operations. 2017 comparatives have
been re-presented accordingly.
Margin analysis of long-term insurance business –
Asia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017 AER
|
|
2017 CER
|
note (iii)
|
|||||
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Profit
|
liability
|
Margin
|
|
Profit
|
liability
|
Margin
|
|
Profit
|
liability
|
Margin
|
|
|
£m
|
£m
|
bps
|
|
£m
|
£m
|
bps
|
|
£m
|
£m
|
bps
|
|
|
|
note (iv)
|
note (ii)
|
|
|
note (iv)
|
note (ii)
|
|
|
note (iv)
|
note (ii)
|
Spread income
|
232
|
18,895
|
123
|
|
234
|
16,359
|
143
|
|
228
|
16,351
|
139
|
|
Fee income
|
210
|
20,105
|
104
|
|
205
|
18,767
|
109
|
|
195
|
18,638
|
105
|
|
With-profits
|
71
|
36,309
|
20
|
|
59
|
30,115
|
20
|
|
57
|
30,137
|
19
|
|
Insurance margin
|
1,481
|
|
|
|
1,341
|
|
|
|
1,293
|
|
|
|
Margin on revenues
|
2,105
|
|
|
|
2,098
|
|
|
|
2,021
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition costsnote
(i)
|
(1,503)
|
3,744
|
(40)%
|
|
(1,499)
|
3,805
|
(39)%
|
|
(1,450)
|
3,671
|
(39)%
|
|
Administration expenses
|
(1,029)
|
39,000
|
(264)
|
|
(967)
|
35,126
|
(275)
|
|
(933)
|
34,989
|
(267)
|
|
DAC adjustmentsnote
(v)
|
326
|
|
|
|
241
|
|
|
|
235
|
|
|
Expected return on shareholder assets
|
129
|
|
|
|
126
|
|
|
|
120
|
|
|
|
|
|
2,022
|
|
|
|
1,838
|
|
|
|
1,766
|
|
|
Share of related tax charges from joint ventures and
associatenote
(vi)
|
(40)
|
|
|
|
(39)
|
|
|
|
(39)
|
|
|
|
Adjusted IFRS operating profit based on longer-term investment
returns
|
1,982
|
|
|
|
1,799
|
|
|
|
1,727
|
|
|
Analysis of Asia adjusted IFRS operating profit based on
longer-term investment returns by driver:
–
Spread
income has increased on a CER basis by 2 per cent (AER: decreased
by 1 per cent) to £232 million in 2018, with a decrease in the
margin on a CER basis from 139 basis points in 2017 to 123 basis
points in 2018 (AER: decreased from 143 basis points in 2017 to 123
basis points in 2018) predominantly reflecting the change in
investment mix, country and product mix.
–
Fee income has
increased by 8 per cent on a CER basis (AER: 2 per cent) to
£210 million in 2018, broadly in line with the increase in
movement in average unit-linked policyholder
liabilities.
–
Insurance margin
has increased by 15 per cent on a CER basis (AER: 10 per cent) to
£1,481 million in 2018, primarily reflecting the continued
growth of the in-force book, which contains a relatively high
proportion of risk-based products.
–
Margin on revenues
has increased by 4 per cent on a CER basis (AER: less than one per
cent) to £2,105 million in 2018, primarily reflecting higher
premiums together with the effect of changes in product mix and
higher premium allocation to policyholders.
–
Acquisition costs
have increased by 4 per cent on a CER basis (AER: less than one per
cent) to £1,503 million in 2018, compared to a 2 per cent
increase in APE sales on a CER basis, resulting in an increase in
the acquisition costs ratio. The analysis in the table above uses
shareholder acquisition costs as a proportion of total APE sales.
If with-profits sales were excluded from the denominator, the
acquisition cost ratio would become 69 per cent (2017: 67 per cent
on a CER basis), the increase being the result of product and
country mix.
–
Administration
expenses including renewal commissions have increased by 10 per
cent on a CER basis (AER: 6 per cent) to £1,029 million in
2018 as the business continues to expand. On a CER basis, the
administration expense ratio has decreased from 267 basis points in
2017 to 264 basis points in 2018 as a result of changes in country
and product mix.
Margin analysis of long-term insurance business –
US
|
|
2018
|
|
2017 AER
|
|
2017 CERnote
(iii)
|
||||||
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Profit
|
liability
|
Margin
|
|
Profit
|
liability
|
Margin
|
|
Profit
|
liability
|
Margin
|
|
|
£m
|
£m
|
bps
|
|
£m
|
£m
|
bps
|
|
£m
|
£m
|
bps
|
|
|
|
note (iv)
|
note (ii)
|
|
|
note (iv)
|
note (ii)
|
|
|
note (iv)
|
note (ii)
|
Spread income
|
583
|
37,608
|
155
|
|
751
|
38,918
|
193
|
|
725
|
37,571
|
193
|
|
Fee income
|
2,445
|
133,407
|
183
|
|
2,343
|
125,440
|
187
|
|
2,262
|
120,997
|
187
|
|
Insurance margin
|
949
|
|
|
|
906
|
|
|
|
875
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition costsnote
(i)
|
(759)
|
1,542
|
(49)%
|
|
(876)
|
1,662
|
(53)%
|
|
(846)
|
1,605
|
(53)%
|
|
Administration expenses
|
(1,204)
|
175,319
|
(69)
|
|
(1,174)
|
169,725
|
(69)
|
|
(1,134)
|
164,061
|
(69)
|
|
DAC adjustments
|
(114)
|
|
|
|
260
|
|
|
|
251
|
|
|
Expected return on shareholder assets
|
11
|
|
|
|
4
|
|
|
|
4
|
|
|
|
Adjusted IFRS operating profit based on longer-term investment
returns
|
1,911
|
|
|
|
2,214
|
|
|
|
2,137
|
|
|
Analysis of US adjusted IFRS operating profit based on long-term
investment returns by driver:
Spread
income has decreased by 20 per cent on a CER basis (AER: 22 per
cent) to £583 million in 2018. The reported spread margin
decreased to 155 basis points from 193 basis points in 2017,
primarily due to the impact of increasing LIBOR on interest rate
swaps, lower investment yields and maturing of swaps previously
entered into to more closely match the asset and liability
duration. Excluding the effect of these historic swap transactions,
the spread margin would have been 130 basis points (2017: 144 basis
points at CER and AER).
–
Fee
income has increased by 8 per cent on a CER basis (AER: 4 per cent)
to £2,445 million during 2018, primarily due to higher average
separate account balances resulting from positive net flows from
variable annuity business and market appreciation during most of
2018 before a decline in the fourth quarter of 2018. Fee income
margin has decreased to 183 basis points (2017:187 basis points at
CER and AER) primarily reflecting a change in business
mix.
–
Insurance
margin represents profits from insurance risks, including variable
annuity guarantees and other sundry items. Insurance margin
increased by 8 per cent on a CER basis (AER: 5 per cent) to
£949 million in 2018 mainly due to higher income from variable
annuity guarantees and favourable mortality
experience.
–
Acquisition
costs, which are commissions and expenses incurred to acquire new
business, including those that are not deferrable, have decreased
by 10 per cent on a CER basis (AER: 13 per cent). This reflects a 4
per cent decrease in APE sales and lower level of front-ended
commissions.
–
Administration
expenses increased by 6 per cent on a CER basis (AER: 3 per cent)
to £(1,204) million during 2018, primarily as a result of
higher asset-based commissions. Excluding these asset-based
commissions, the resulting administration expense ratio would be
lower at 34 basis points (2017: 35 basis points at CER and
AER).
–
DAC
adjustments in 2018 was negative £(114) million (compared to
£251 million credit in 2017 on a CER basis) due to an increase
in the DAC amortisation charge. The higher DAC amortisation charge
arises largely from an acceleration of amortisation of £(194)
million (2017: credit for deceleration of £83 million on a CER
basis) primarily relating to the market returns in 2018 and the
reversal of the benefit received in 2015 under the mean reversion
formula.
Analysis of adjusted IFRS operating profit based on longer-term
investment returns before and after acquisition costs and DAC
adjustments
|
|
2018 £m
|
|
2017 AER £m
|
|
2017 CERnote
(iii) £m
|
|||||||||
|
|
|
Acquisition costs
|
|
|
|
Acquisition costs
|
|
|
|
Acquisition costs
|
|
|||
|
|
Before acquisition
costs
and DAC
adjustments
|
Incurred
|
Deferred
|
After
acquisition
costs
and DAC
adjustments
|
|
Before
acquisition
costs
and DAC
adjustments
|
Incurred
|
Deferred
|
After
acquisition
costs
and DAC
adjustments
|
|
Before
acquisition
costs
and DAC
adjustments
|
Incurred
|
Deferred
|
After
acquisition
costs
and DAC
adjustments
|
Total adjusted IFRS operating profit based on longer-term
investment returns before acquisition costs and DAC
adjustments
|
2,784
|
|
|
2,784
|
|
2,830
|
|
|
2,830
|
|
2,732
|
|
|
2,732
|
|
Less new business strain
|
|
(759)
|
569
|
(190)
|
|
|
(876)
|
663
|
(213)
|
|
|
(846)
|
640
|
(206)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortisation of previously deferred acquisition costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Normal
|
|
|
(489)
|
(489)
|
|
|
|
(489)
|
(489)
|
|
|
|
(472)
|
(472)
|
|
(Accelerated)decelerated
|
|
|
(194)
|
(194)
|
|
|
|
86
|
86
|
|
|
|
83
|
83
|
Total
|
2,784
|
(759)
|
(114)
|
1,911
|
|
2,830
|
(876)
|
260
|
2,214
|
|
2,732
|
(846)
|
251
|
2,137
|
Analysis of adjusted IFRS operating profit based on longer-term
investment returns for US operations by product
|
|
2018 £m
|
|
2017 £m
|
|
2018 vs 2017 %
|
|
||
|
|
|
|
AER
|
CER
|
|
AER
|
CER
|
|
Spread business
|
297
|
|
317
|
306
|
|
(6)%
|
(3)%
|
|
|
Fee business
|
1,532
|
|
1,788
|
1,726
|
|
(14)%
|
(11)%
|
|
|
Life and other business
|
82
|
|
109
|
105
|
|
(25)%
|
(22)%
|
|
|
Total insurance operationsnote
|
1,911
|
|
2,214
|
2,137
|
|
(14)%
|
(11)%
|
|
|
|
|
|
|
|
|
|
|
|
|
US asset management and broker-dealer
|
8
|
|
10
|
9
|
|
(20)%
|
(11)%
|
|
|
Total US operations
|
1,919
|
|
2,224
|
2,146
|
|
(14)%
|
(11)%
|
|
Note
The
analysis of adjusted IFRS operating profit based on longer-term
investment returns for US operations by product represents the net
profit generated by
each line of business after allocation of costs.
Broadly:
–
Spread business is
the net profit for fixed annuity, fixed indexed annuity and
guaranteed investment contracts and largely comprises spread income
less costs.
–
Fee business
represents profits from variable annuity products. As well as fee
income, revenue for this product line includes spread income from
investments directed to the general account and other variable
annuity fees included in insurance margin.
–
Life and other
business includes the profits from the REALIC business and other
closed life books. Revenue allocated to this product line includes
spread income and premiums and policy charges for life protection,
which are included in insurance margin after claim costs. Insurance
margin forms the vast majority of revenue.
Margin analysis of long-term insurance business – UK and
Europe
|
|
|
2018
|
|
|
|
2017
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Profit
|
liability
|
Margin
|
|
Profit
|
liability
|
Margin
|
|
|
£m
|
£m
|
bps
|
|
£m
|
£m
|
bps
|
|
|
|
note (iv)
|
note (ii)
|
|
|
note (iv)
|
note (ii)
|
Spread income
|
84
|
29,347
|
29
|
|
137
|
33,631
|
41
|
|
Fee income
|
56
|
21,931
|
26
|
|
61
|
22,632
|
27
|
|
With-profits
|
320
|
111,009
|
29
|
|
288
|
106,359
|
27
|
|
Insurance margin
|
50
|
|
|
|
55
|
|
|
|
Margin on revenues
|
149
|
|
|
|
189
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Acquisition costsnote
(i)
|
(57)
|
1,516
|
(4)%
|
|
(68)
|
1,491
|
(5)%
|
|
Administration expenses
|
(180)
|
51,278
|
(35)
|
|
(164)
|
56,263
|
(29)
|
|
DAC adjustments
|
4
|
|
|
|
4
|
|
|
Expected return on shareholder assets
|
102
|
|
|
|
104
|
|
|
|
|
|
528
|
|
|
|
606
|
|
|
Longevity reinsurance and other management actions to improve
solvency
|
58
|
|
|
|
276
|
|
|
|
Changes in longevity assumption basis
|
441
|
|
|
|
204
|
|
|
|
Provision for guaranteed minimum pension equalisation
|
(55)
|
|
|
|
-
|
|
|
|
Insurance recoveries of costs associated with review of past
annuity sales
|
166
|
|
|
|
-
|
|
|
|
Provision for review of past annuity sales
|
-
|
|
|
|
(225)
|
|
|
|
Adjusted IFRS operating profit based on longer-term investment
returns
|
1,138
|
|
|
|
861
|
|
|
Analysis of UK and Europe adjusted IFRS operating profit based on
longer-term investment returns by driver:
–
Spread income has
reduced from £137 million in 2017 to £84 million in 2018
reflecting the run-off of the in-force annuity portfolio and the
effect of the reinsurance of £12.0 billion of annuity
portfolios to Rothesay Life entered into in March
2018.
–
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 mostly arises within the
UK and Europe asset management business). Fee income is after costs
relating to managing the underlying funds which include recent
rationalisation activity to remove sub-scale funds. If these costs
and the direct investment only schemes are excluded, the fee margin
on the remaining balances would be 36 basis points (2017: 40 basis
points).
–
Margin on revenues
represents premium charges for expenses of shareholder-backed
business and other sundry net income.
–
The £441
million favourable effect of longevity assumption relates to
changes to annuitant mortality assumptions to reflect current
mortality experience and the adoption of the Continuous Mortality
Investigation (CMI) 2016 model. Further information on changes to
mortality assumptions is given in note C4.1(d) in the IFRS
financial statements.
–
An allowance
provision of £(55) million has been made in 2018 to reflect
the costs of equalising guaranteed minimum pension benefits on
pension products sold by the insurance business following the
ruling by the High Court in October 2018. Further information is
provided in note C9 in the IFRS financial statements.
–
The 2018 insurance
recoveries of costs associated with undertaking a review of past
annuity sales of £166 million (2017: nil) is explained in note
B4(b) in the IFRS financial statements.
I(b)
Asia operations
– analysis of IFRS operating profit by business
unit
Operating
profit based on longer-term investment returns for Asia operations
is analysed as follows:
|
2018 £m
|
|
AER
2017 £m
|
CER
2017 £m
|
|
2017 AER
vs 2018
|
2017 CER
vs 2018
|
Hong Kong
|
443
|
|
346
|
332
|
|
28%
|
33%
|
Indonesia
|
416
|
|
457
|
415
|
|
(9)%
|
0%
|
Malaysia
|
194
|
|
173
|
178
|
|
12%
|
9%
|
Philippines
|
43
|
|
41
|
38
|
|
5%
|
13%
|
Singapore
|
329
|
|
272
|
269
|
|
21%
|
22%
|
Thailand
|
113
|
|
107
|
108
|
|
6%
|
5%
|
Vietnam
|
149
|
|
135
|
129
|
|
10%
|
16%
|
South-east Asia operations including Hong Kong
|
1,687
|
|
1,531
|
1,469
|
|
10%
|
15%
|
China
|
143
|
|
121
|
119
|
|
18%
|
20%
|
Taiwan
|
51
|
|
43
|
41
|
|
19%
|
24%
|
Other
|
51
|
|
71
|
67
|
|
(28)%
|
(24)%
|
Non-recurrent itemsnote
|
94
|
|
75
|
73
|
|
25%
|
29%
|
Total insurance operations
|
2,026
|
|
1,841
|
1,769
|
|
10%
|
15%
|
Share of related tax charges from joint ventures and
associate*
|
(40)
|
|
(39)
|
(39)
|
|
(3)%
|
(3)%
|
Development expenses
|
(4)
|
|
(3)
|
(3)
|
|
(33)%
|
(33)%
|
Total long-term business operating profit
|
1,982
|
|
1,799
|
1,727
|
|
10%
|
15%
|
Asset management (Eastspring Investments)
|
182
|
|
176
|
171
|
|
3%
|
6%
|
Total Asia operations
|
2,164
|
|
1,975
|
1,898
|
|
10%
|
14%
|
*
Under
IFRS, the Group’s share of results from its investments in
joint ventures and associate accounted for using the equity method
is included in the Group’s profit before tax on a net of
related tax basis. In 2018, the Group altered the presentation of
its analysis of Asia operating profit to show these tax charges
separately in order for the contribution from the joint ventures
and associate to be included in the operating profit analysis on a
consistent basis as the rest of the Asia’s operations. 2017
comparatives have been re-presented accordingly.
Note
In 2018, the IFRS operating profit based on longer-term investment
returns for Asia insurance operations included a net credit of
£94 million (2017: £75 million) representing a small
number of items that are not expected to reoccur, including the
impact of a refinement to the run-off of the allowance for prudence
within technical provisions, within Singapore.
I(c)
Analysis of asset
management operating profit based on longer-term investment
returns
|
2018 £m
|
|
|
|
M&GPrudential
asset management
|
Eastspring
Investments
|
|
|
note (ii)
|
note (ii)
|
|
Operating income before performance-related fees
|
1,100
|
424
|
|
Performance-related fees
|
15
|
17
|
|
Operating income (net of commission)note
(i)
|
1,115
|
441
|
|
Operating expensenote
(i)
|
(654)
|
(232)
|
|
Share of associate’s results
|
16
|
–
|
|
Group's share of tax on joint ventures' operating
profit
|
–
|
(27)
|
|
Operating profit based on longer-term investment
returns
|
477
|
182
|
|
|
|
|
|
Average funds under management
|
£276.6bn
|
£146.3bn
|
|
Margin based on operating income*
|
40bps
|
29bps
|
|
Cost/income ratio†
|
59%
|
55%
|
|
|
|
|
|
|
|
|
|
|
2017 £m
|
|
|
|
M&GPrudential
asset management
|
Eastspring
Investments
|
|
|
note (ii)
|
note (ii)
|
|
Operating income before performance-related fees
|
1,034
|
421
|
|
Performance-related fees
|
53
|
17
|
|
Operating income (net of commission)note
(i)
|
1,087
|
438
|
|
Operating expensenote
(i)
|
(602)
|
(238)
|
|
Share of associate’s results
|
15
|
–
|
|
Group's share of tax on joint ventures' operating
profit
|
–
|
(24)
|
|
Operating profit based on longer-term investment
returns
|
500
|
176
|
|
|
|
|
|
Average funds under management
|
£275.9bn
|
£128.4bn
|
|
Margin based on operating income*
|
37bps
|
33bps
|
|
Cost/income ratio†
|
58%
|
56%
|
|
|
|
|
|
|
|
|
|
*
Margin represents
operating income before performance-related fees as a proportion of
the related funds under management (FUM). Monthly closing internal
and external funds managed by the respective entity have been used
to derive the average. Any funds held by the Group's insurance
operations that are managed by third parties outside the Prudential
Group are excluded from these amounts. M&GPrudential operating
expense includes £27 million of Brexit preparation
costs.
†
Cost/income ratio
represents cost as a percentage of operating income before
performance-related fees.
Notes
(i)
Operating
income and expense include the Group’s pre-tax share of
contribution from joint ventures but excludes any contribution from
associate. In the consolidated income statement of the IFRS
financial statements, the net post-tax income of the joint ventures
and associate is shown as a single line item.
(ii)
Operating
income before performance related fees and margin on related funds
under management for M&GPrudential asset management and
Eastspring Investments can be further analysed as
follows:
|
|
|
|
|
|
|
|
|
|
M&GPrudential asset management
|
|
|
|
||
|
|
Operating income before performance related fees
|
|
|
|
||
|
|
Retail
|
Margin
|
Institutional*
|
Margin
|
Total
|
Margin
|
|
|
£m
|
bps
|
£m
|
bps
|
£m
|
bps
|
|
2018
|
662
|
85
|
438
|
22
|
1,100
|
40
|
|
2017
|
604
|
85
|
430
|
21
|
1,034
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eastspring Investments
|
|
|
|
||
|
|
Operating income before performance related fees
|
|
|
|
||
|
|
Retail
|
Margin
|
Institutional*
|
Margin
|
Total
|
Margin
|
|
|
£m
|
bps
|
£m
|
bps
|
£m
|
bps
|
|
2018
|
252
|
50
|
172
|
18
|
424
|
29
|
|
2017
|
249
|
57
|
172
|
20
|
421
|
33
|
*
Institutional
includes internal funds.
I(d)
Contribution to UK
long-term financial metrics from specific management actions
undertaken to position the balance sheet more efficiently under the
Solvency II regime
In
2018, further management actions were taken to improve the solvency
of the UK and Europe insurance operations and to mitigate market
risks. These actions included repositioning the fixed income asset
portfolio to improve the trade-off between yield and credit risk.
No new longevity reinsurance transactions were undertaken in 2018
(2017: longevity reinsurance transactions entered into covering
£0.5 billion of IFRS annuity liabilities).
The
effect of these actions on the UK’s long-term IFRS operating
profit, underlying free surplus generation and EEV operating
profit, before restructuring costs, is shown in the tables
below.
IFRS operating profit of UK long-term business before
tax
|
|
|||
|
|
2018 £m
|
2017 £m
|
|
Shareholder-backed annuity new business
|
9
|
9
|
|
|
In-force business:
|
|
|
|
|
|
Longevity reinsurance transactions
|
–
|
31
|
|
|
Other management actions to improve solvency
|
58
|
245
|
|
|
Changes in longevity assumption basis
|
441
|
204
|
|
|
Provision for the review of past annuity sales
|
–
|
(225)
|
|
|
Insurance recoveries in respect of above costs
|
166
|
–
|
|
|
Provision for guaranteed minimum pension equalisation
|
(55)
|
–
|
|
|
|
610
|
255
|
|
With-profits and other in-force
|
519
|
597
|
|
|
Total IFRS operating profit before restructuring costs
|
1,138
|
861
|
|
|
|
|
|
|
|
Underlying free surplus generation of UK long-term
business
|
|
|||
|
|
|
|
|
|
|
2018 £m
|
2017 £m
|
|
Expected in-force and return on net worth
|
686
|
706
|
|
|
Longevity reinsurance transactions
|
–
|
15
|
|
|
Other management actions to improve solvency
|
54
|
385
|
|
|
Changes in longevity assumption basis
|
364
|
179
|
|
|
Provision for the review of past annuity sales
|
–
|
(187)
|
|
|
Insurance recoveries in respect of above costs
|
138
|
–
|
|
|
Provision for guaranteed minimum pension equalisation
|
(95)
|
–
|
|
|
|
461
|
392
|
|
|
Other in-force
|
130
|
(28)
|
|
|
Underlying free surplus generated from in-force
business
|
1,277
|
1,070
|
|
|
New business strain
|
(102)
|
(175)
|
|
|
Total free surplus generation before restructuring
costs
|
1,175
|
895
|
|
|
|
|
|
|
|
EEV post-tax operating profit of UK long-term business
|
|
|
|
|
|
|
2018 £m
|
2017 £m
|
|
Unwind of discount and other expected return
|
474
|
465
|
|
|
Longevity reinsurance transactions
|
–
|
(6)
|
|
|
Other management actions to improve solvency
|
141
|
127
|
|
|
Changes in longevity assumption basis
|
330
|
195
|
|
|
Provision for the review of past annuity sales
|
–
|
(187)
|
|
|
Insurance recoveries in respect of above costs
|
138
|
–
|
|
|
Provision for guaranteed minimum pension equalisation
|
(48)
|
–
|
|
|
|
|
561
|
129
|
|
Other in-force
|
(13)
|
79
|
|
|
Operating profit from in-force business
|
1,022
|
673
|
|
|
New business profit
|
352
|
342
|
|
|
Total EEV operating profit before restructuring costs
|
1,374
|
1,015
|
|
II
Other
information
II(a)
Holding company
cash flow*
|
|
|
2018 £m
|
2017 £m
|
Net cash remitted by business units:
|
|
|
||
Asia
|
699
|
645
|
||
US
|
342
|
475
|
||
UK and Europe:
|
|
|
||
|
With-profits remittance
|
233
|
215
|
|
|
Shareholder-backed insurance business remittance
|
97
|
105
|
|
|
Asset management remittance
|
324
|
323
|
|
|
|
|
654
|
643
|
|
Other UK paid to the Group (including Prudential
Capital)
|
37
|
25
|
|
Total UK net remittances to the Group
|
691
|
668
|
||
Net remittances to the Group from business unitsnote
(i)
|
1,732
|
1,788
|
||
Net interest paid
|
(366)
|
(415)
|
||
Tax received
|
142
|
152
|
||
Corporate activities
|
(206)
|
(207)
|
||
Total central outflows
|
(430)
|
(470)
|
||
Operating holding company cash flow before dividend
|
1,302
|
1,318
|
||
Dividend paid
|
(1,244)
|
(1,159)
|
||
Operating holding company cash flow after dividend
|
58
|
159
|
||
Non-operating net cash flownote
(ii)
|
913
|
(511)
|
||
Total holding company cash flow
|
971
|
(352)
|
||
Cash and short-term investments at beginning of year
|
2,264
|
2,626
|
||
Foreign exchange movements
|
1
|
(10)
|
||
Cash and short-term investments at end of yearnote
(iii)
|
3,236
|
2,264
|
*
The holding company
cash flow differs from the IFRS cash flow statement, which includes
all cash flows in the period including those relating to both
policyholder and shareholder funds. The holding company cash flow
is therefore a more meaningful indication of the Group’s
central liquidity.
Notes
(i)
Net cash
remittances comprise dividends and other transfers from business
units that are reflective of emerging earnings and capital
generation.
(ii)
Non-operating net
cash flow principally relates to the issue of subordinated debt
less repayment of debt, and payments for distribution rights and
acquisition of subsidiaries.
(iii)
Including
central finance subsidiaries.
II(b)
Funds under
management
(a)
Summary
For our
asset management businesses, funds managed on behalf of third
parties are not recorded on the balance sheet. They are, however, a
driver of profitability. We therefore analyse the movement in the
funds under management each period, focusing on those which are
external to the Group and those primarily held by the insurance
businesses. The table below analyses, by segment, the funds of the
Group held in the statement of financial position and the external
funds that are managed by Prudential’s asset management
operations.
|
|
|
31 Dec 2018 £bn
|
31 Dec 2017 £bn
|
Asia operations:
|
|
|
||
|
Internal funds
|
89.5
|
81.4
|
|
|
Eastspring Investments' external funds
|
61.1
|
55.9
|
|
|
|
|
150.6
|
137.3
|
|
|
|
|
|
US operations: internal funds
|
183.1
|
178.3
|
||
|
|
|
|
|
UK and Europe operations:
|
|
|
||
|
Internal funds, including PruFund-backed products
|
174.3
|
186.8
|
|
|
External funds
|
146.9
|
163.9
|
|
|
|
|
321.2
|
350.7
|
|
|
|
|
|
Other operations
|
2.4
|
3.0
|
||
Group total funds under managementnote
|
657.3
|
669.3
|
Note
Total
funds under management comprise:
|
|
|
31 Dec 2018 £bn
|
31 Dec 2017 £bn
|
|
Total investments per the consolidated statement of financial
position
|
449.6
|
451.4
|
|
|
External funds of M&GPrudential and Eastspring Investments (as
analysed in note (b) below)
|
208.0
|
219.8
|
|
|
Internally managed funds held in joint ventures and other
adjustments
|
(0.3)
|
(1.9)
|
|
|
Group total funds under management
|
657.3
|
669.3
|
(b)
Investment
products – external funds under management
|
2018 £m
|
|
2017 £m
|
||||||||
|
At 1 Jan 2018
|
Market gross inflows
|
Redemptions
|
Market and other movements
|
At 31 Dec 2018
|
|
At 1 Jan 2017
|
Market gross inflows
|
Redemptions
|
Market and other movements
|
At 31 Dec 2017
|
M&GPrudential Wholesale/Direct
|
79,697
|
24,584
|
(29,452)
|
(5,364)
|
69,465
|
|
64,209
|
30,949
|
(19,906)
|
4,445
|
79,697
|
M&GPrudential Institutional
|
84,158
|
12,954
|
(18,001)
|
(1,630)
|
77,481
|
|
72,554
|
15,220
|
(8,926)
|
5,310
|
84,158
|
Total M&GPrudentialnote
(i)
|
163,855
|
37,538
|
(47,453)
|
(6,994)
|
146,946
|
|
136,763
|
46,169
|
(28,832)
|
9,755
|
163,855
|
Eastspring Investmentsnote(ii)
|
55,885
|
212,070
|
(212,156)
|
5,258
|
61,057
|
|
45,756
|
215,907
|
(211,271)
|
5,493
|
55,885
|
Totalnote
(iii)
|
219,740
|
249,608
|
(259,609)
|
(1,736)
|
208,003
|
|
182,519
|
262,076
|
(240,103)
|
15,248
|
219,740
|
Notes
(i)
The results exclude
contribution from PruFund products: net inflows of £8.5
billion in 2018 (2017: £9.0 billion); funds under management
of £43 billion as at 31 December 2018 (31 December 2017:
£35.9 billion).
(ii)
Market and other
movements during the year for Eastspring investments include inflow
of £9.3 billion funds under management from acquisition of TMB
Asset Management Co., Ltd. (‘TMBAM’) in Thailand. See
note D1.2 of the consolidated financial statements for further
details.
(iii)
The £208
billion (31 December 2017: £219.7 billion) investment products
comprise £196.4 billion (31 December 2017: £210.4
billion) plus Asia Money Market Funds of £11.6 billion (31
December 2017: £9.3 billion).
(c)
M&G
and Eastspring Investments – total funds under
management
M&G,
the asset management business of M&GPrudential and Eastspring
Investments, the Group’s asset management business in Asia,
manage funds from external parties and also funds for the
Group’s insurance operations. The table below analyses the
total funds under management managed by M&G and Eastspring
Investments respectively.
|
M&G
|
|
Eastspring Investments
|
||
|
31 Dec 2018 £bn
|
31 Dec 2017 £bn
|
|
31 Dec 2018 £bn
|
31 Dec 2017 £bn
|
|
|
|
|
note
|
note
|
External funds under management
|
146.9
|
163.9
|
|
61.1
|
55.9
|
Internal funds under management
|
118.2
|
134.6
|
|
90.2
|
83.0
|
Total funds under management
|
265.1
|
298.5
|
|
151.3
|
138.9
|
Note
The
external funds under management for Eastspring Investments include
Asia Money Market Funds at 31 December 2018 of £11.6 billion
(31 December 2017: £9.3 billion).
II(c)
Solvency II capital
position
The
estimated Group shareholder Solvency II surplus at 31 December 2018 was £17.2
billion, before allowing for payment of the 2018 second
interim ordinary dividend and reflecting approved regulatory
transitional measures as at 31 December 2018.
Estimated Group shareholder Solvency II capital
position*
|
31 Dec 2018
|
31 Dec 2017
|
Own Funds(£bn)
|
30.2
|
26.4
|
Solvency Capital Requirement (£bn)
|
13.0
|
13.1
|
Surplus (£bn)
|
17.2
|
13.3
|
Solvency ratio (%)
|
232%
|
202%
|
|
|
|
*
The Group
shareholder capital position excludes the contribution to Own Funds
and the Solvency Capital Requirement from ring fenced with-profit
funds and staff pension schemes in surplus. The estimated solvency
positions include management’s calculation of UK transitional
measures reflecting operating and market conditions at each
valuation date, which for both 2018 and 2017 reflects the approved
regulatory position.
In
accordance with Solvency II requirements, these results allow
for:
–
Capital in Jackson
in excess of 250 per cent of the US local Risk Based Capital
requirement. As agreed with the Prudential Regulation Authority,
this is incorporated in the result above as follows:
–
Own funds:
represents Jackson’s local US Risk Based available capital
less 100 per cent of the US Risk Based Capital requirement (Company
Action Level);
–
Solvency Capital
Requirement: represents 150 per cent of Jackson’s local US
Risk Based Capital requirement (Company Action Level);
and
–
No diversification
benefits are taken into account between Jackson and the rest of the
Group.
–
Matching adjustment
for UK annuities and volatility adjustment for US dollar
denominated Hong Kong with-profits business, based on approvals
from the Prudential Regulation Authority and calibrations published
by the European Insurance and Occupational Pensions Authority;
and
–
UK transitional
measures, which have been recalculated using management’s
estimate of the impact of operating and market conditions at the
valuation date. An application to recalculate the transitional
measures as at 31 December 2018 has been approved by the Prudential
Regulation Authority and this recalculation will therefore be
reflected in the formal regulatory Quantitative Reporting Templates
as at 31 December 2018.
The
Group shareholder Solvency II capital position
excludes:
–
A portion of
Solvency II surplus capital (£1.7 billion at 31 December 2018)
relating to the Group’s Asian life operations, primarily due
to the Solvency II definition of ‘contract boundaries’
which prevents some expected future cash flows from being
recognised;
–
The contribution to
Own Funds and the Solvency Capital Requirement from ring-fenced
with-profits funds in surplus (representing £5.5 billion of
surplus capital from UK with-profits funds at 31 December 2018) and
from the shareholders’ share of the estate of with-profits
funds; and
–
The contribution to
Own Funds and the Solvency Capital Requirement from pension funds
in surplus.
It also
excludes unrealised gains on certain derivative instruments taken
out to protect Jackson against declines in long-term interest
rates. At Jackson’s request, the Department of Insurance
Financial Services renewed its approval to carry these instruments
at book value in the local statutory returns for the period 31
December 2018 to 1 October 2019. At 31 December 2018, applying this
approval had the effect of decreasing local available statutory
capital and surplus (and by extension Solvency II Own Funds and
Solvency II surplus) by £0.1 billion, net of tax. This
arrangement reflects an elective long-standing practice first put
in place in 2009, which can be unwound at Jackson’s
discretion.
The 31
December 2018 Solvency II results above allow for the reinsurance
of £12.0 billion of the UK annuity portfolio to Rothesay Life
effective from 14 March 2018 and the transfer of Prudential
plc’s Hong Kong subsidiaries to Prudential Corporation Asia
Limited. In total these items have resulted in a decrease to UK
Solvency II surplus in 2018 of £3.3 billion with Group
Solvency II surplus increasing by £0.4 billion.
Analysis of movement in Group capital position
A
summary of the estimated movement in Group Solvency II surplus from
£13.3 billion at year end 2017 to £17.2 billion at year
end 2018 is set out in the table below. The movement from the Group
Solvency II surplus at 31 December 2016 to the Solvency II surplus
at 31 December 2017 is included for comparison.
Analysis of movement in Group shareholder surplus
|
2018 Surplus £bn
|
2017 Surplus £bn
|
|
Estimated Solvency II surplus at beginning of year
|
13.3
|
12.5
|
|
Underlying operating experience
|
4.1
|
3.2
|
|
Management actions
|
0.1
|
0.4
|
|
Operating experience
|
4.2
|
3.6
|
|
Non-operating experience (including market movements)
|
(1.2)
|
(0.6)
|
|
M&GPrudential transactions
|
0.4
|
–
|
|
Other capital movements:
|
|
|
|
|
Net subordinated debt issuance/redemption
|
1.2
|
(0.2)
|
|
Foreign currency translation impacts
|
0.5
|
(0.7)
|
|
Dividends paid
|
(1.2)
|
(1.2)
|
Model changes
|
0.0
|
(0.1)
|
|
Estimated Solvency II surplus at end of year
|
17.2
|
13.3
|
|
|
|
|
The estimated movement in Group Solvency II surplus over 2018 is
driven by:
–
Operating experience of £4.2
billion: generated by in-force business and new business
written in 2018, after allowing for amortisation of the UK
transitional measures and the impact of one-off management
optimisations implemented over the year. This includes a £0.4
billion benefit from the impact of updates to UK longevity best
estimate assumptions and a £0.1 billion benefit from an
insurance recovery relating to the costs and any related redress of
reviewing internally vesting annuities sold without advice after 1
July 2008;
–
Non-operating experience of £(1.2)
billion: resulting mainly from the negative impact of market
movements, after allowing for the recalculation of the UK
transitional measures at the valuation date, the impact of US Risk
Based Capital updates announced in June 2018 to reflect US tax
reform changes and the £(0.3) billion impact from the
acquisition of TMB Asset Management Co., Ltd. (see IFRS Financial
Statements note D1.2 for further information);
–
M&GPrudential transactions
of £0.4 billion: the
beneficial impact on the Group Solvency II surplus of the UK
annuities reinsurance transaction effective from 14 March 2018 and
the transfer of Prudential plc’s Hong Kong subsidiaries to
Prudential Corporation Asia Limited after allowing for the impact
of recalculation of the UK transitional measures as a result of
these transactions;
–
Other capital movements: comprising an
increase in surplus from the net impact of debt raised offset by
debt redeemed during 2018, a benefit from foreign currency
translation and a reduction in surplus from payment of dividends;
and
–
Model changes: reflecting internal
model changes approved by the Prudential Regulation Authority and
other minor internal model calibration changes made in
2018.
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 Dec 2018
|
|
31 Dec 2017
|
||
|
|
% of undiversified
|
% of diversified
|
|
% of undiversified
|
% of diversified
|
Split of the Group’s estimated Solvency Capital
Requirements
|
Solvency Capital
Requirements
|
Solvency Capital
Requirements
|
|
Solvency Capital
Requirements
|
Solvency Capital
Requirements
|
|
Market
|
57%
|
70%
|
|
57%
|
71%
|
|
|
Equity
|
13%
|
23%
|
|
14%
|
23%
|
|
Credit
|
23%
|
38%
|
|
24%
|
38%
|
|
Yields (interest rates)
|
16%
|
6%
|
|
13%
|
7%
|
|
Other
|
5%
|
3%
|
|
6%
|
3%
|
Insurance
|
24%
|
20%
|
|
26%
|
21%
|
|
|
Mortality/morbidity
|
5%
|
2%
|
|
5%
|
2%
|
|
Lapse
|
15%
|
17%
|
|
14%
|
17%
|
|
Longevity
|
4%
|
1%
|
|
7%
|
2%
|
Operational/expense
|
12%
|
8%
|
|
11%
|
7%
|
|
FX translation
|
7%
|
2%
|
|
6%
|
1%
|
|
|
|
|
|
|
|
Reconciliation of IFRS equity to Group Solvency II Shareholder Own
Funds
Reconciliation of IFRS equity to Group Solvency II Shareholder Own
Funds
|
31 Dec 2018 £bn
|
31 Dec 2017 £bn
|
IFRS shareholders' equity
|
17.2
|
16.1
|
Restate US insurance entities from IFRS to local US statutory
basis
|
(2.5)
|
(3.0)
|
Remove DAC, goodwill and intangibles
|
(4.6)
|
(4.0)
|
Add subordinated debt
|
7.2
|
5.8
|
Impact of risk margin (net of transitional measures)
|
(3.8)
|
(3.9)
|
Add value of shareholder transfers
|
5.3
|
5.3
|
Liability valuation differences
|
13.3
|
12.1
|
Increase in net deferred tax liabilities resulting from liability
valuation differences above
|
(1.5)
|
(1.6)
|
Other
|
(0.4)
|
(0.4)
|
Estimated Solvency II Shareholder Own Funds
|
30.2
|
26.4
|
The key
items of the reconciliation as at 31 December 2018
are:
–
£(2.5)
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 de-recognition of Own Funds of
£1.0 billion, equivalent to the value of 100 per cent of Risk
Based Capital requirements (Company Action Level), as agreed with
the Prudential Regulation Authority;
–
£(4.6)
billion due to the removal of DAC, goodwill and intangibles from
the IFRS balance sheet;
–
£7.2
billion due to the addition of subordinated debt which is treated
as available capital under Solvency II but as a liability under
IFRS;
–
£(3.8)
billion due to the inclusion of a risk margin for UK and Asia
non-hedgeable risks, net of £1.6 billion from transitional
measures (after allowing for recalculation of the transitional
measures as at 31 December 2018) which are not applicable under
IFRS;
–
£5.3
billion due to the inclusion of the value of future shareholder
transfers from with-profits business (excluding the
shareholders’ share of the with-profits estate, for which no
credit is given under Solvency II), which is excluded from the
determination of the Group’s IFRS shareholders’
funds;
–
£13.3
billion mainly due to differences in insurance valuation
requirements between Solvency II and IFRS, with Solvency II Own
Funds partially capturing the value of in-force business which is
excluded from IFRS;
–
£(1.5)
billion due to the impact on the valuation of net deferred tax
liabilities resulting from the liability valuation differences
noted above; and
–
£(0.4)
billion due to other items, including the impact of revaluing
loans, borrowings and debt from IFRS to Solvency II.
Sensitivity analysis
The estimated sensitivity of the Group shareholder Solvency II
capital position to significant changes in market conditions is as
follows:
|
|
31 Dec 2018
|
|
31 Dec 2017
|
||
Impact of market sensitivities
|
Surplus £bn
|
Ratio
|
|
Surplus £bn
|
Ratio
|
|
Base position
|
17.2
|
232%
|
|
13.3
|
202%
|
|
Impact of:
|
|
|
|
|
|
|
|
20% instantaneous fall in equity markets
|
(1.6)
|
(10)%
|
|
0.7
|
9%
|
|
40% fall in equity markets1
|
(4.0)
|
(28)%
|
|
(2.1)
|
(11)%
|
|
50 basis points reduction in interest rates2,3
|
(1.8)
|
(21)%
|
|
(1.0)
|
(14)%
|
|
100 basis points increase in interest rates3
|
1.2
|
20%
|
|
1.2
|
21%
|
|
100 basis points increase in credit spreads4
|
(1.7)
|
(9)%
|
|
(1.4)
|
(6)%
|
Notes
1
Where hedges are
dynamic, rebalancing is allowed for by assuming an instantaneous 20 per cent fall followed by a
further 20 per cent fall over a four-week
period.
2
Subject to a floor
of zero for Asia and US interest rates.
3
Allowing for
further transitional measures recalculation after the interest rate
stress.
4
US Risk Based
Capital solvency position included using a stress of 10 times
expected credit defaults.
The
Group believes it is positioned to withstand significant
deteriorations in market conditions and we continue to use market
hedges to manage some of this exposure across the Group, where we
believe the benefit of the protection outweighs the cost. The
sensitivity analysis above allows for predetermined management
actions and those taken to date, but does not reflect all possible
management actions which could be taken in the future.
UK Solvency II capital position1, 2
On the
same basis as above, the estimated shareholder Solvency II surplus for The Prudential Assurance Company
Limited (‘PAC’) and its subsidiaries2
at 31 December 2018 was £3.7
billion, after allowing for recalculation of transitional measures
as at 31 December 2018. This relates to shareholder-backed business
including future with-profits shareholder transfers, but excludes
the shareholders’ share of the estate in line with Solvency
II requirements.
Estimated UK shareholder Solvency II capital position*
|
31 Dec 2018
|
31 Dec 2017
|
Own Funds (£bn)
|
8.8
|
14.0
|
Solvency Capital Requirement (£bn)
|
5.1
|
7.9
|
Surplus (£bn)
|
3.7
|
6.1
|
Solvency ratio (%)
|
172%
|
178%
|
|
|
|
*
The UK shareholder
capital position excludes the contribution to Own Funds and the
Solvency Capital Requirement from ring-fenced with-profit funds and
staff pension schemes in surplus. The estimated solvency positions
include management’s calculation of UK transitional measures
reflecting operating and market conditions at each valuation date,
which for both 2018 and 2017 reflects the approved regulatory
position.
The
Prudential Assurance Company Limited shareholder Solvency II
position at 31 December 2018 includes the actual impact of the
transfer of Prudential plc’s Hong Kong subsidiaries to
Prudential Corporation Asia Limited, and the impact of the
reinsurance of £12.0 billion of the UK annuity portfolio to
Rothesay Life. In total these items have resulted in a decrease to
UK Solvency II surplus in 2018 of £3.3 billion.
Upon
completion of the Part VII transfer a further circa £0.1
billion of Solvency Capital Requirement is expected to be
released.
Whilst
there is a large surplus in the UK with-profits funds, this is
ring-fenced from the shareholder balance sheet and is therefore
excluded from both the Group and the UK shareholder Solvency II
surplus results. The estimated UK with-profits funds Solvency II
surplus at 31 December 2018 was £5.5 billion, after allowing
for recalculation of transitional measures as at 31 December
2018.
Estimated UK with-profits Solvency II capital
position*
|
31 Dec 2018
|
31 Dec 2017
|
Own Funds (£bn)
|
9.7
|
9.6
|
Solvency Capital Requirement (£bn)
|
4.2
|
4.8
|
Surplus (£bn)
|
5.5
|
4.8
|
Solvency ratio (%)
|
231%
|
201%
|
|
|
|
*
The estimated
solvency positions include management’s calculation of UK
transitional measures reflecting operating and market conditions at
each valuation date, which for both 2018 and 2017 reflects the
approved regulatory position.
Reconciliation of UK with-profits IFRS unallocated surplus to
Solvency II Own Funds1
A
reconciliation between the IFRS unallocated surplus and Solvency II
Own Funds for UK with-profits business is as follows:
Reconciliation of UK with-profits funds
|
31 Dec 2018 £bn
|
31 Dec 2017 £bn
|
IFRS unallocated surplus of UK with-profits funds
|
13.3
|
13.5
|
Value of shareholder transfers
|
(2.4)
|
(2.7)
|
Risk margin (net of transitional measures)
|
(1.0)
|
(0.7)
|
Other valuation differences
|
(0.2)
|
(0.5)
|
Estimated Solvency II Own Funds
|
9.7
|
9.6
|
|
|
|
Annual regulatory reporting
The
Group will publish its Solvency and Financial Condition Report and
related quantitative templates no later than 4 June 2019. The
templates will require us to combine the Group shareholder solvency
position with those of all other ring fenced funds across the
Group. In combining these solvency positions, the contribution to
own funds from these ring fenced funds will be set equal to their
aggregate solvency capital requirements, estimated at £5.6
billion (ie the solvency surplus in these ring fenced funds will
not be captured in the templates). There will be no impact on the
reported Group Solvency II surplus.
Statement of independent review in respect of Solvency II Capital
Position at 31 December 2018
The methodology, assumptions and overall result have been subject
to examination by KPMG LLP.
Notes
1
The
UK with-profits capital position includes the PAC with-profits
sub-fund, the Scottish Amicable Insurance Fund and the Defined
Charge Participating Sub-Fund.
2
The
insurance subsidiaries of PAC are Prudential International
Assurance plc and Prudential Pensions Limited. Prudential General
Insurance Hong Kong Limited and Prudential Hong Kong Limited are no
longer subsidiaries of PAC following the transfer of these Hong
Kong subsidiaries to Prudential Corporation Asia Limited in
2018.
III
Calculation
of alternative performance measures
The annual report uses alternative performance measures (APMs) to
provide more relevant explanations of the Group’s financial
position and performance. This section sets out explanations for
each APM and reconciliations to relevant IFRS
balances.
III(a)
Reconciliation
of adjusted IFRS operating profit based on longer-term investment
returns to profit before tax
The annual report uses alternative performance measures (APMs) to
provide more relevant explanations of the Group’s financial
position and performance. This section sets out explanations for
each APM and reconciliations to relevant IFRS
balances.
Adjusted IFRS operating profit attributable to shareholders based
on longer-term investment returns presents the operating
performance of the business. This measurement basis adjusts for the
following items within total IFRS profit before tax:
–
Short-term fluctuations in investment returns on shareholder-backed
business;
–
Amortisation of acquisition accounting adjustments arising on the
purchase of business; and
–
Gain or loss on corporate transactions, such as disposals
undertaken in the year.
More details on how adjusted IFRS operating profit based on
longer-term investment returns is determined are included in note
B1.3 of the IFRS financial statements.
III(b)
Calculation of
return on IFRS shareholders’ funds
Return
on IFRS shareholders’ funds is calculated as operating profit
based on longer-term investment returns net of tax and
non-controlling interests divided by opening shareholders’
funds. Operating profit based on longer-term investment returns is
reconciled to IFRS profit before tax in note B1 to the IFRS
financial statements.
|
Note
|
2018 £m
|
2017 £m
|
Operating profit based on longer-term investment
returns
|
B1.1
|
4,827
|
4,699
|
Tax on operating profit
|
|
(792)
|
(971)
|
Profit attributable to non-controlling interests
|
|
(3)
|
(1)
|
Operating profit based on longer-term investment returns, net of
tax and non-controlling interests
|
|
4,032
|
3,727
|
Opening shareholders’ funds
|
|
16,087
|
14,666
|
Return on shareholders’ funds
|
|
25%
|
25%
|
III(c)
Calculation
of IFRS gearing ratio
Gearing
ratio is calculated as net core structural borrowings of
shareholder-financed operations divided by closing IFRS
shareholders’ funds plus net core structural
borrowings.
|
Note
|
31 Dec 2018 £m
|
31 Dec 2017 £m
|
Core structural borrowings of shareholder-financed
operations
|
C6.1
|
7,664
|
6,280
|
Less holding company cash and short-term investments
|
II(a)
|
(3,236)
|
(2,264)
|
Net core structural borrowings of shareholder-financed
operations
|
|
4,428
|
4,016
|
Closing shareholders’ funds
|
|
17,249
|
16,087
|
Shareholders’ funds plus net core structural
borrowings
|
|
21,677
|
20,103
|
Gearing ratio
|
|
20%
|
20%
|
III(d)
Calculation of IFRS
shareholders’ funds per share
IFRS
shareholders’ funds per share is calculated as closing IFRS
shareholders’ funds divided by the number of issued shares at
the balance sheet date.
|
Note
|
31 Dec 2018
|
31 Dec 2017
|
Closing shareholders’ funds (£ million)
|
|
17,249
|
16,087
|
Number of issued shares at year end (millions)
|
C10
|
2,593
|
2,587
|
Shareholders’ funds per share (pence)
|
|
665
|
622
|
III(e)
Calculation of
asset management cost/income ratio
The
asset management cost/income ratio is calculated as asset
management operating expenses, adjusted for commission and joint
venture contribution, divided by asset management total IFRS
revenue adjusted for commission, joint venture contribution,
performance-related fees and non-operating items.
|
M&GPrudential asset management
|
|
|
2018 £m
|
2017 £m
|
Operating income used in cost/income ratio
|
1,100
|
1,034
|
Commission
|
313
|
351
|
Performance-related fees
|
15
|
53
|
Investment Return
|
(14)
|
–
|
Short-term fluctuations in investment returns on shareholder backed
business
|
(15)
|
6
|
Total IFRS revenue
|
1,399
|
1,444
|
|
|
|
Operating expense used in cost/income ratio
|
654
|
602
|
Investment Return
|
(14)
|
–
|
Commission
|
313
|
351
|
IFRS charges
|
953
|
953
|
Cost/income ratio – Operating expense/operating
income
|
59%
|
58%
|
|
|
|
|
Eastspring Investments
|
|
|
2018 £m
|
2017 £m
|
Operating income before performance-related fees used in
cost/income ratio
|
424
|
421
|
Share of joint venture revenue
|
(188)
|
(176)
|
Commission
|
118
|
103
|
Performance-related fees
|
17
|
17
|
Total IFRS revenue
|
371
|
365
|
|
|
|
Operating expense used in cost/income ratio
|
232
|
238
|
Share of joint venture expense
|
(100)
|
(92)
|
Commission
|
118
|
103
|
IFRS charges
|
250
|
249
|
Cost/income ratio – Operating expense/operating income before
performance-related fees
|
55%
|
56%
|
III(f)
Reconciliation
of Asia renewal insurance premium to gross earned
premiums
Asia
renewal insurance premium is calculated as IFRS gross earned
premiums less new business premiums and adjusted for the
contribution from joint ventures.
|
|
|
AER
|
CER
|
|
Note
|
2018 £m
|
2017 £m
|
2017 £m
|
Asia renewal insurance premium
|
|
12,856
|
11,482
|
11,087
|
Add: General insurance premium
|
|
90
|
89
|
87
|
Add: IFRS gross earned premium from new regular and single premium
business
|
|
4,809
|
4,986
|
4,819
|
Less: Renewal premiums from joint ventures
|
|
(1,286)
|
(1,068)
|
(1,022)
|
Add: premiums relating to sold Korea life business
|
|
–
|
199
|
197
|
Asia segment IFRS gross earned premium
|
B1.4
|
16,469
|
15,688
|
15,168
|
III(g)
Reconciliation
of APE new business sales to earned premiums
The
Group reports APE new business sales as a measure of the new
policies sold in the year. This differs from the IFRS measure of
premiums earned as shown below:
|
|
|
|
|
Note
|
2018 £m
|
2017 £m
|
Annual premium equivalents as published
|
|
6,802
|
6,958
|
Adjustment to include 100% of single premiums on new business sold
in the yearnote
(i)
|
|
28,009
|
28,769
|
Premiums from in-force business and other
adjustmentsnote
(ii)
|
|
12,413
|
8,278
|
Gross premiums earned
|
B1.4
|
47,224
|
44,005
|
Outward reinsurance premiumsnote
(iii)
|
B1.4
|
(14,023)
|
(2,062)
|
Earned premiums, net of reinsurance as shown in the IFRS financial
statements
|
B1.4
|
33,201
|
41,943
|
Notes
(i)
APE new business
sales only include one tenth of single premiums, recorded on
policies sold in the year. Gross premiums earned include 100 per
cent of such premiums.
(ii)
Other adjustments
principally include amounts in respect of the
following:
-
Gross premiums
earned include premiums from existing in-force business as well as
new business. The most significant amount is recorded in Asia,
where a significant portion of regular premium business is written.
Asia in-force premiums form the vast majority of the other
adjustment amount;
-
In October 2018,
Jackson entered into a 100 per cent reinsurance agreement with John
Hancock Life Insurance Company to acquire a closed block of group
pay-out annuity business. The transaction resulted in an addition
to gross premiums earned of £3.7 billion. No amounts were
included in APE new business sales.
-
APE includes new
policies written in the year which are classified as investment
contracts without discretionary participation features under IFRS
4, arising mainly in Jackson for guaranteed investment contracts
and in M&GPrudential for certain unit-linked savings and
similar contracts. These are excluded from gross premiums earned
and recorded as deposits;
-
APE new business
sales are annualised while gross premiums earned are recorded only
when revenues are due; and
-
For the purpose of
reporting APE new business sales, we include the Group’s
share of amounts sold by the Group’s insurance joint ventures
and associates. Under IFRS, joint ventures and associates are
equity accounted and so no amounts are included within gross
premiums earned.
(iii)
Outward
reinsurance premiums in 2018 include £(12,149) million in
respect of the reinsurance of the UK annuity
portfolio.
III(h)
Reconciliation
between IFRS and EEV shareholders’ funds
The
table below shows the reconciliation of EEV shareholders’
funds and IFRS shareholders’ funds at the end of the
year:
|
31 Dec 2018 £m
|
31 Dec 2017 £m
|
EEV shareholders’ funds
|
49,782
|
44,698
|
Less: Value of in-force business of long-term
businessnote
(i)
|
(33,013)
|
(29,410)
|
Deferred acquisition costs assigned zero value for EEV
purposes
|
10,077
|
9,227
|
Othernote
(ii)
|
(9,597)
|
(8,428)
|
IFRS shareholders’ funds
|
17,249
|
16,087
|
Notes
(i)
The EEV
shareholders’ funds comprises the present value of the
shareholders’ interest in the value of in-force business, net
worth of long-term business operations and IFRS shareholders’
funds of asset management and other operations. The value of
in-force business reflects the present value of future shareholder
cash flows from long-term in-force business which are not captured
as shareholders’ interest on an IFRS basis. Net worth
represents the net assets for EEV reporting purposes that reflect
the regulatory basis position, sometimes with adjustments to
achieve consistency with the IFRS treatment of certain
items.
(ii)
Other adjustments
represent asset and liability valuation differences between IFRS
and the local regulatory reporting basis used to value net worth
for long-term insurance operations. For the UK, this would be the
difference between IFRS and Solvency II.
It also
includes the mark to market of the Group’s core structural
borrowings which are fair valued under EEV but not IFRS. The most
significant valuation differences relate to changes in the
valuation of insurance liabilities. For example, in Jackson where
IFRS liabilities are higher than the local regulatory basis as they
are principally based on policyholder account balances (with a
deferred acquisition costs recognised as an asset) whereas the
local regulatory basis used for EEV is based on future cash flows
due to the policyholder on a prudent basis with consideration of an
expense allowance as applicable, but with no separate deferred
acquisition cost asset.
III(i)
Reconciliation
of EEV operating profit based on longer-term investment
returns
To the
extent applicable, the presentation of the EEV post-tax profit for
the year is consistent in the classification between operating and
non-operating results with the basis that the Group applies for the
analysis of IFRS basis results. Operating results reflect
underlying results including longer-term investment returns, which
are determined following the EEV Principles issued by the European
Insurance CFO Forum.
Non-operating
results comprise:
-
Short-term
fluctuations in investment returns;
-
The mark to market
value movements on core structural borrowings;
-
The effect of
changes in economic assumptions; and
-
The impact of
corporate transactions undertaken in the year.
More
details on how EEV post-tax profit is determined and the components
of EEV operating profit are included in note 13 of the EEV
supplementary basis of results.
III(j)
Calculation
of return on embedded value
Return
on embedded value is calculated as the EEV post-tax operating
profit based on longer-term investment returns, as a percentage of
opening EEV basis shareholders’ funds.
|
2018
|
2017
|
EEV operating profit based on longer-term investment returns
(£ million)
|
7,563
|
6,598
|
Opening EEV basis shareholders' funds (£ million)
|
44,698
|
38,968
|
Return on embedded value (%)
|
17%
|
17%
|
III(k)
Calculation
of EEV shareholders’ funds per share
EEV
shareholders’ funds per share is calculated as closing EEV
shareholders’ funds divided by the number of issued shares at
the balance sheet date. EEV shareholders’ funds per share
excluding goodwill attributable to shareholders is calculated in
the same manner, except goodwill attributable to shareholders is
deducted from closing EEV shareholders’ funds.
|
31 Dec 2018
|
31 Dec 2017
|
Closing EEV shareholders' funds (£ million)
|
49,782
|
44,698
|
Less: Goodwill attributable to shareholders (£
million)
|
(1,651)
|
(1,458)
|
Closing EEV shareholders' funds excluding goodwill attributable to
shareholders (£ million)
|
48,131
|
43,240
|
Number of issued shares at year end (millions)
|
2,593
|
2,587
|
Shareholders' funds per share (in pence)
|
1,920p
|
1,728p
|
Shareholders' funds per share excluding goodwill attributable to
shareholders (in pence)
|
1,856p
|
1,671p
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date:
13 March 2019
|
PRUDENTIAL
PUBLIC LIMITED COMPANY
|
|
|
|
By:
/s/ Mark
FitzPatrick
|
|
|
|
Mark
FitzPatrick
|
|
Chief
Financial Officer
|