Prudential plc - FY18 Results - EEV

RNS Number : 6633S
Prudential PLC
13 March 2019
 

European Embedded Value (EEV) Basis Results

 

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

 

 




2018 £m

2017 £m



Note


note (iii)

Asia operations




New business

3

2,604

2,368

Business in force

4

1,783

1,337

Long-term business


4,387

3,705

Asset management


159

155

Total


4,546

3,860






US operations




New business

3

921

906

Business in force

4

1,194

1,237

Long-term business


2,115

2,143

Asset management


3

7

Total


2,118

2,150






UK and Europe operations




New business

3

352

342

Business in force

4

1,022

673

Long-term business


1,374

1,015

General insurance commission


15

13

Total insurance operations


1,389

1,028

Asset management


392

403

Total


1,781

1,431






Other income and expenditurenote (i)


(726)

(746)

Restructuring costsnote (ii)


(156)

(97)

Operating profit based on longer-term investment returns


7,563

6,598






Analysed as profit (loss) from:




New business

3

3,877

3,616

Business in force

4

3,999

3,247

Long-term business


7,876

6,863

Asset management and general insurance commission


569

578

Other results


(882)

(843)



7,563

6,598

 

Notes

(i)     EEV basis other income and expenditure represents the post-tax IFRS basis results for other operations (including Group and Asia Regional Head Office, holding company borrowings, Africa operations and Prudential Capital) less the unwind of expected margins on the internal management of the assets of the covered business (as explained in note 13(i)(g)).

(ii)    Restructuring costs comprise the post-tax charge recognised on an IFRS basis and the additional amount recognised on an EEV basis for the shareholders' share incurred by the with-profits funds, representing the cost of business transformation and integration.

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

 

POST-TAX SUMMARISED CONSOLIDATED INCOME STATEMENT









Note

2018 £m

2017 £m

Asia operations


4,546

3,860

US operations


2,118

2,150

UK and Europe operations


1,781

1,431

Other income and expenditure


(726)

(746)

Restructuring costs


(156)

(97)

Operating profit based on longer-term investment returns


7,563

6,598

Short-term fluctuations in investment returns

5

(3,219)

2,111

Effect of changes in economic assumptions

6

146

(102)

Mark to market value movements on core structural borrowings


549

(326)

Impact of US tax reform

16

-

390

(Loss) profit attaching to corporate transactions

17

(451)

80

Total non-operating (loss) profit


(2,975)

2,153

Profit for the year


4,588

8,751





Attributable to:




Equity holders of the Company


4,585

8,750

Non-controlling interests


3

1



4,588

8,751

 

Basic earnings per share










2018

2017

Based on post-tax operating profit including longer-term investment returns

   after non-controlling interests (in pence)


293.6p

257.0p

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


178.1p

340.9p

Weighted average number of shares (millions)


2,575

2,567

 

MOVEMENT IN SHAREHOLDERS' EQUITY













Note

2018 £m

2017 £m

Profit for the year attributable to equity holders of the Company


4,585

8,750

Items taken directly to equity:





Exchange movements on foreign operations and net investment hedges


1,706

(2,045)


External dividends


(1,244)

(1,159)


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


(95)

40


Other reserve movements


132

144

Net increase in shareholders' equity

8

5,084

5,730

Shareholders' equity at beginning of year

8

44,698

38,968

Shareholders' equity at end of year

8

49,782

44,698

 


31 Dec 2018 £m


31 Dec 2017 £m

Comprising:

Long-term

business operations

Asset

management

and other operations  

Group total


Long-term

business

operations

Asset

management

and other operations  

Group total

Asia operations

24,580

552

25,132


21,191

401

21,592

US operations

14,650

40

14,690


13,257

235

13,492

UK and Europe operations

11,409

2,175

13,584


11,713

1,914

13,627

Other operations

-

(3,624)

(3,624)


-

(4,013)

(4,013)

Shareholders' equity at end of year

50,639

(857)

49,782


46,161

(1,463)

44,698










Representing:








Net assets attributable to equity holders of the Company









excluding acquired goodwill, holding company net









borrowings and non-controlling interests

50,388

2,105

52,493


45,917

1,562

47,479

Acquired goodwill*

251

1,400

1,651


244

1,214

1,458

Holding company net borrowings at market valuenote 7

-

(4,362)

(4,362)


-

(4,239)

(4,239)


50,639

(857)

49,782


46,161

(1,463)

44,698

* Acquired goodwill for asset management and other operations for 2018 includes goodwill recognised on acquisition of TMB Asset Management Co., Ltd. as discussed in note D1.2 of the IFRS statements.

 

SUMMARY STATEMENT OF FINANCIAL POSITION













Note

31 Dec 2018 £m

31 Dec 2017 £m

Total assets less liabilities, before deduction of insurance funds*


431,269

434,615

Less insurance funds:





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






of with-profits funds


(414,002)

(418,521)


Less shareholders' accrued interest in the long-term business

8

32,533

28,611





(381,469)

(389,910)

Less non-controlling interests


(18)

(7)

Total net assets attributable to equity holders of the Company

8

49,782

44,698







Share capital


130

129

Share premium


1,964

1,948

IFRS basis shareholders' reserves


15,155

14,010

Total IFRS basis shareholders' equity

8

17,249

16,087

Additional EEV basis retained profit

8

32,533

28,611

Total EEV basis shareholders' equity

8

49,782

44,698

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

 

Net asset value per share










31 Dec 2018

31 Dec 2017

Based on EEV basis shareholders' equity of £49,782 million (31 December 2017: £44,698 million) (in pence)


1,920p

1,728p

Number of issued shares at year end (millions)


2,593

2,587





Annualised return on embedded value*


17%

17%

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



 

Notes on the EEV basis results

 

1    Basis of preparation

 

The EEV basis results have been prepared in accordance with the EEV Principles dated April 2016, issued by the European Insurance CFO Forum. Where appropriate, the EEV basis results include the effects of adoption of EU-endorsed IFRS.

 

The directors are responsible for the preparation of the supplementary information in accordance with the EEV Principles. The auditors have reported on the 2018 EEV basis results supplement to the Company's statutory accounts for 2018. Their report was (i) unqualified and (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report. The 2017 results have been derived from the EEV basis results supplement to the Company's statutory accounts for 2017. The supplement included an unqualified audit report from the auditors.

 

A detailed description of the EEV methodology and accounting presentation is provided in note 13.

 

2    Results analysis by business area

 

The 2017 comparative results are shown below on both actual exchange rates (AER) and constant exchange rates (CER) bases. The 2017 CER comparative results are translated at 2018 average exchange rates.

 

Annual premium equivalents (APE)note 15

 




2018 £m


2017 £m


% change


Note



AER

CER


AER

CER

Asia


3,744


3,805

3,671


(2)%

2%

US


1,542


1,662

1,605


(7)%

(4)%

UK and Europe


1,516


1,491

1,491


2%

2%

Group total

3

6,802


6,958

6,767


(2)%

1%

 

Post-tax operating profit











2018 £m


2017 £m


% change


Note



AER

CER


AER

CER

Asia operations









New business

3

2,604


2,368

2,282


10%

14%

Business in force

4

1,783


1,337

1,280


33%

39%

Long-term business


4,387


3,705

3,562


18%

23%

Asset management


159


155

150


3%

6%

Total


4,546


3,860

3,712


18%

22%











US operations









New business

3

921


906

874


2%

5%

Business in force

4

1,194


1,237

1,195


(3)%

0%

Long-term business


2,115


2,143

2,069


(1)%

2%

Asset management


3


7

7


(57)%

(57)%

Total


2,118


2,150

2,076


(1)%

2%











UK and Europe operations









New business

3

352


342

342


3%

3%

Business in force

4

1,022


673

673


52%

52%

Long-term business


1,374


1,015

1,015


35%

35%

General insurance commission*


15


13

13


15%

15%

Total insurance operations


1,389


1,028

1,028


35%

35%

Asset management


392


403

403


(3)%

(3)%

Total


1,781


1,431

1,431


24%

24%

Other income and expenditure


(726)


(746)

(740)


3%

2%

Restructuring costs


(156)


(97)

(97)


(61)%

(61)%

Operating profit based on










longer-term investment returns


7,563


6,598

6,382


15%

19%










Analysed as profit (loss) from:









New business

3

3,877


3,616

3,498


7%

11%

Business in force

4

3,999


3,247

3,148


23%

27%

Total long-term business


7,876


6,863

6,646


15%

19%

Asset management and general










insurance commission


569


578

573


(2)%

(1)%

Other results


(882)


(843)

(837)


(5)%

(5)%




7,563


6,598

6,382


15%

19%

* The majority of the general insurance commission is not expected to recur in future years.

 

Post-tax profit




















2018 £m


2017 £m


% change


Note



AER

CER


AER

CER

Operating profit based on longer-term

    investment returns


7,563


6,598

6,382


15%

19%

Short-term fluctuations in investment returns

 5

(3,219)


2,111

2,057




Effect of changes in economic assumptions

 6

146


(102)

(91)




Mark to market value movements on

   core structural borrowings


549


(326)

(326)




Impact of US tax reform

16

-


390

376




(Loss) profit attaching to corporate transactions

17

(451)


80

77




Total non-operating (loss) profit


(2,975)


2,153

2,093




Profit for the year


4,588


8,751

8,475


(48)%

(46)%

 

Basic earnings per share











2018


2017


% change





AER

CER


AER

CER

Based on post-tax operating profit including










longer-term investment returns after










non-controlling interests (in pence)


293.6p


257.0p

248.6p


14%

18%

Based on post-tax profit attributable to










equity holders of the Company (in pence)


178.1p


340.9p

330.2p


(48)%

(46)%

 

3    Analysis of new business contribution

 

(i)    Group summary for long-term business operations









2018


Annual premium

Present value

 of new business

New business


New business margin


equivalents (APE)

 premiums (PVNBP)

contribution


APE

PVNBP


£m

£m

£m


%

%


note 15

note 15





Asianote (ii)

3,744

20,754

2,604


70

12.5

US

1,542

15,423

921


60

6.0

UK and Europe

1,516

14,073

352


23

2.5

Total

6,802

50,250

3,877


57

7.7









2017


Annual premium

Present value

 of new business

New business


New business margin


equivalents (APE)

 premiums (PVNBP)

contribution


APE

PVNBP


£m

£m

£m


%

%


note 15

note 15





Asianote (ii)

3,805

20,405

2,368


62

11.6

US

1,662

16,622

906


55

5.5

UK and Europe

1,491

13,784

342


23

2.5

Total

6,958

50,811

3,616


52

7.1

 

Note

After allowing for foreign exchange effects of £(118) million, the new business contribution has increased by £379 million on a CER basis. The increase is driven by a beneficial effect of pricing, product mix and other actions of £278 million reflecting our strategic emphasis on increasing sales from health and protection business in Asia, together with changes in long-term interest rates and other economic assumptions (£83 million) and higher sales volumes (a contribution of £18 million).

 

(ii)  Asia new business contribution by business unit

 


2018 £m


2017 £m

  



AER

CER

China

149


133

131

Hong Kong

1,729


1,535

1,474

Indonesia

122


174

158

Taiwan

46


57

56

Other

558


469

463

Total

2,604


2,368

2,282

 

4    Operating profit from business in force

 

(i)    Group summary for long-term business operations

 







2018 £m


Asia

US

UK and Europe

Total


note (ii)

note (iii)

note (iv)


Unwind of discount and other expected returns

1,218

881

474

2,573

Effect of changes in operating assumptions

342

115

330

787

Experience variances and other items

223

198

218

639

Group total

1,783

1,194

1,022

3,999







2017 £m


Asia

US

UK and Europe

Total


note (ii)

note (iii)

note (iv)


Unwind of discount and other expected returns

1,007

694

465

2,166

Effect of changes in operating assumptions

241

196

195

632

Experience variances and other items

89

347

13

449

Group total

1,337

1,237

673

3,247

 

Note

The movement in operating profit from business in force of £752 million from £3,247 million for 2017 to £3,999 million for 2018 comprises:

 




£m

Movement in unwind of discount and other expected returns:




Growth in opening value of in-force business

368



Effect of interest rates and other economic assumptions

101



Foreign exchange movements

(62)




407

Movement in effect of changes in operating assumptions, experience variances and other items

345

Net movement in operating profit from business in force

752

 

(ii)   Asia

 



2018 £m

2017 £m

Unwind of discount and other expected returnsnote (a)

1,218

1,007

Effect of changes in operating assumptionsnote (b)

342

241

Experience variances and other itemsnote (c)

223

89

Total

1,783

1,337

 

Notes

(a)   The £211 million increase in unwind of discount and other expected returns from £1,007 million in 2017 to £1,218 million in 2018 is primarily driven by the growth in the in-force book and a positive £51 million impact from movements in long-term interest rates and other economic assumptions, partially offset by a negative effect of foreign exchange movements of £(38) million.

(b)   The effects of changes in operating assumptions of £342 million reflects the outcome from the annual review of persistency, claims and expense experience together with the benefit of medical repricing management actions. It also reflects profits arising after reflection of a number of tax changes across a number of countries.

(c)   The £223 million effect of experience variances and other items in 2018 is driven by positive mortality and morbidity experiences in a number of local business units, together with positive persistency variances from participating and health and protection products.

(iii)  US

 



2018 £m

2017 £m

Unwind of discount and other expected returnsnote (a)

881

694

Effect of changes in operating assumptionsnote (b)

115

196

Experience variances and other items:




Spread experience variance

39

71


Amortisation of interest-related realised gains and losses

92

91


Othernote (c)

67

185



198

347

Total

1,194

1,237

 

Notes                                                                                                                        

(a)   The £187 million increase in unwind of discount and other expected returns from £694 million in 2017 to £881 million in 2018 reflects prior period growth in the in-force book, a £30 million benefit from a 30 basis point increase in the US 10-year treasury yield in the year offset by a £(24) million negative effect for foreign exchange movements.

(b)   The effect of operating assumption changes of £115 million (2017: £196 million) mainly relates to routine updates for persistency and policyholder utilisation.

(c)   Other experience variances of £198 million include the effects of positive mortality and persistency experience in the year.

 

(iv) UK and Europe

 



2018 £m

2017 £m

Unwind of discount and other expected returnsnote (a)

474

465

Change in longevity assumption basisnote (b)

330

195

Other itemsnote (c)

218

13

Total

1,022

673

 

Notes 

(a)   Unwind of discount and expected returns for 2018 is broadly consistent with 2017 and reflects the benefit from a 10 basis point increase in the 15-year swap yields offset by the impact from the reinsurance of part of its shareholder annuity portfolio to Rothesay Life as discussed in note 17.

(b)   The credit of £330 million (2017: £195 million) relates 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: CMI 2015 model) as the basis for future mortality improvements.

(c)   Other items comprise the following:

 



2018 £m

2017 £m


Longevity reinsurance

-

(6)


Impact of specific management actions to improve solvency position

141

127


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

-

(187)


Insurance recoveries in respect of the above costsnote (d)

138

-


Provision for guaranteed minimum pension equalisationnote (e)

(48)

-


Other

(13)

79



218

13

 

(d)   The UK business 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. A gross provision of £(330) million, post-tax and before costs incurred, was established at 31 December 2017, of which £(187) million was charged in full year 2017. During 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 balance sheet at 31 December 2018 and a post-tax credit of £138 million is recognised in the EEV operating profit. For more details, refer to note C11 of the IFRS financial statements.

(e)   An allowance has been made for higher liabilities that may arise when applying the recent High Court decision to equalise guaranteed minimum pension (GMP) benefits between males and females for certain pension products sold by the UK business. 

 

5    Short-term fluctuations in investment returns

 

(i)   Group summary

 


2018 £m

2017 £m

Asia operationsnote (ii)

(1,029)

887

US operationsnote (iii)

(1,481)

582

UK and Europe operationsnote (iv)

(721)

621

Other operations

12

21

Group total

(3,219)

2,111

 

(ii)  Asia operations

 


2018 £m

2017 £m

Hong Kong

(552)

531

Singapore

(233)

126

Other

(244)

230

Total

(1,029)

887

 

Note

For 2018, the charge of £(1,029) million mainly represents the reduction of bond and equity values in Hong Kong and lower than expected investment returns on participating and unit-linked business in Indonesia, Singapore and Malaysia.

 

(iii)  US operations

 



2018 £m

2017 £m

Investment return related experience on fixed income securitiesnote (a)

60

(46)

Investment return related impact due to changed expectation of profits on in-force




variable annuity business in future periods based on current year




separate account return, net of related hedging activity and other itemsnote (b)

(1,541)

628

Total

(1,481)

582

 

Notes

(a)   The net result relating to fixed income securities reflects a number of offsetting items as follows:

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

-      The difference between actual realised gains and losses and the amortisation of interest-related realised gains and losses that is recorded within operating profit; and

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

(b)   This item reflects the net impact of:

-      Changes in projected future fees and future benefit costs arising from the difference between the actual growth in separate account asset values of negative (5.4) per cent and that assumed of 6.2 per cent (2017: actual growth of 17.5 per cent compared to assumed growth of 5.9 per cent); and

-      Related hedging activity arising from realised and unrealised gains and losses on equity-related hedges and interest rate options, and other items.

 

(iv)  UK and Europe operations

 


2018 £m

2017 £m

Insurance operations:




Shareholder-backed annuity business

(151)

387


With-profits and other business

(557)

229

Asset management

(13)

5

Total

(721)

621

 

Note

The £(721) million fluctuation in 2018 primarily represents the impact of achieving a (2.5) per cent pre-tax return on the with-profits fund (including unallocated surplus) compared to the assumed rate of return of 4.2 per cent (2017: achieved return of 9 per cent compared to assumed rate of 5 per cent), partially offset by the effect of a partial hedge of future shareholder transfers expected to emerge from the UK's with-profits sub-fund entered into to protect future shareholder with-profit transfers from movements in the UK equity market.  It also reflects losses on corporate bonds backing shareholder annuity business, reflecting changes to interest rates and credit spreads over the period.

 

6    Effect of changes in economic assumptions

 

(i)    Group summary for long-term business operations

 


2018 £m

2017 £m

Asianote (ii)

115

(95)

USnote (iii)

197

(136)

UK and Europenote (iv)

(166)

129

Group total

146

(102)

 

(ii)   Asia

 


2018 £m

2017 £m

Hong Kong

165

(321)

Indonesia

(94)

81

Malaysia

(19)

59

Singapore

70

131

Other

(7)

(45)

Total

115

(95)

 

Note

The positive effect in 2018 of £115 million largely arises from movements in long-term interest rates, resulting in higher assumed fund earned rates in Hong Kong and Singapore, partially offset by the impact of valuing future profits for health and protection business at higher discount rates in Indonesia and Malaysia.

 

(iii)  US

 


2018 £m

2017 £m

Variable annuity business

365

(101)

Fixed annuity and other general account business

(168)

(35)

Total

197

(136)

 

Note

For 2018, the credit of £197 million mainly reflects the increase in the assumed separate account return following the 30 basis points increase in the US 10-year treasury yield over the year, resulting in higher projected fee income and a decrease in projected benefit costs for variable annuity business. For fixed annuity and other general account business, the impact reflects the effect on the present value of future projected spread income from the combined increase in interest rates and credit spreads in the year. In June 2018, the National Association of Insurance Commissioners (NAIC) formally approved changes to RBC capital factors that reflected the December 2017 US tax reform. Consequently, the effect of changes in economic assumptions for 2018 of £197 million includes a negative £(23) million impact resulting from these changes.

 

(iv)  UK and Europe

 


2018 £m

2017 £m

Shareholder-backed annuity business

1

28

With-profits and other business

(167)

101

Total

(166)

129

 

Note

The charge of £(166) million includes the impact of the movement in expected long-term rates of investment return, resulting from market movements and changes in asset mix in the year, and risk discount rates. In addition, the effect of changes in economic assumptions for with-profits and other business of £(167) million includes a £(78) million charge for the effect on lower fund earned rates on equities and property as a result of the change in UK indexation of capital gains rules effective from 1 January 2018.

 

7   Net core structural borrowings of shareholder-financed businesses











31 Dec 2018 £m


31 Dec 2017 £m


IFRS

basis

Mark to

market

value

adjustment

EEV

basis at

market

value


IFRS

basis

Mark to

market

value

adjustment

EEV

basis at

market

value

Holding company (including central finance subsidiaries)









cash and short-term investments

(3,236)

-

(3,236)


(2,264)

-

(2,264)

Central funds









Subordinated debt

6,676

(44)

6,632


5,272

515

5,787


Senior debt

517

174

691


549

167

716



7,193

130

7,323


5,821

682

6,503

Bank loan

275

-

275


-

-

-

Holding company net borrowings

4,232

130

4,362


3,557

682

4,239

Prudential Capital bank loan

-

-

-


275

-

275

Jackson surplus notes

196

53

249


184

61

245

Group total

4,428

183

4,611


4,016

743

4,759

 

Note

In October 2018, the Company issued three tranches of substitutable core structural borrowings as part of the process required before demerger, to rebalance debt across M&GPrudential and Prudential plc. Total proceeds, net of costs, were £1,630 million. In December 2018, the Company paid £434 million to redeem its US$550 million 7.75 per cent Tier 1 perpetual subordinated notes. The movement in the value of core structural borrowings also includes foreign exchange effects for US dollar denominated debts. For more details on the core structural borrowings, refer to note C6.1 of the IFRS financial statement.

 

8  Reconciliation of movement in shareholders' equity

 



2018 £m


Asia

operations


US

operations


UK and Europe operations


Other

operations


Group

total


note (i)






note (i)


note (iv)

Long-term business:











New businessnote 3

2,604


921


352


-


3,877


Business in forcenote 4

1,783


1,194


1,022


-


3,999


4,387


2,115


1,374


-


7,876

Asset management and general

   insurance commission

159


3


407


-


569

Restructuring costs

(19)


(17)


(109)


(11)


(156)

Other results

-


-


-


(726)


(726)

Operating profit based on

   longer-term investment returns

4,527


2,101


1,672


(737)


7,563

Non-operating items

(925)


(1,313)


(1,263)


526


(2,975)

Non-controlling interests

(1)


-


-


(2)


(3)

Profit for the year attributable to equity

   holders of the Company

3,601


788


409


(213)


4,585

Other items taken directly to equity:










Exchange movements on foreign operations

   and net investment hedges

1,028


862


-


(184)


1,706

Intra-group dividends and investment in

   operationsnote (ii)

(1,177)


(337)


(447)


1,961


-

External dividends

-


-


-


(1,244)


(1,244)

Mark to market value movements on Jackson

   assets backing surplus and required capital

-


(95)


-


-


(95)

Other movementsnote (iii)

81


(20)


(5)


76


132

Net increase in shareholders' equity

3,533


1,198


(43)


396


5,084

Shareholders' equity at beginning of year

21,348


13,492


13,627


(3,769)


44,698

Shareholders' equity at end of year

24,881


14,690


13,584


(3,373)


49,782











Representing:










IFRS basis shareholders' equity:











Net assets (liabilities)

5,921


5,624


7,547


(3,494)


15,598


Goodwill

247


-


1,153


251


1,651

IFRS basis shareholders' equity

6,168


5,624


8,700


(3,243)


17,249

Additional retained profit (loss) on an

   EEV basis

18,713


9,066


4,884


(130)


32,533

EEV basis shareholders' equity

24,881


14,690


13,584


(3,373)


49,782











Balance at beginning of year:










IFRS basis shareholders' equity:











Net assets (liabilities)

5,620


5,248


7,092


(3,331)


14,629


Goodwill

61


-


1,153


244


1,458

IFRS basis shareholders' equity

5,681


5,248


8,245


(3,087)


16,087

Additional retained profit (loss) on an

   EEV basis

15,667


8,244


5,382


(682)


28,611

EEV basis shareholders' equity

21,348


13,492


13,627


(3,769)


44,698

 

Notes

(i)     Other operations of £(3,373) million represents the shareholders' equity of £(3,624) million as shown in the movement in shareholders' equity and includes goodwill of £251 million (2017: £244 million) related to Asia long-term operations.

(ii)    Intra-group dividends represent dividends that have been declared in the year and investment in operations reflect movements in share capital. The amounts included for these items in the analysis of movement in free surplus (note 10) are as per the holding company cash flow at transaction rates. The difference primarily relates to intra-group loans, foreign exchange and other non-cash items.

(iii)   Other movements include reserve movements in respect of the shareholders' share of actuarial gains and losses on defined benefit pension schemes, share capital subscribed, share-based payments and treasury shares and intra-group transfers between operations which have no overall effect on the Group's embedded value. Also included is the put option recognised on acquisition of TMB Asset Management Co., Ltd. as discussed in note D1.2 of the IFRS financial statements.

(iv)   Group total EEV basis shareholders' equity can be further analysed as follows:

 




31 Dec 2018 £m


31 Dec 2017 £m



Total

long-term business operations

Asset management

and general

insurance

commission

Other

operations

Group

total


Total

 long-term

business

operations

Asset management

and general

insurance

commission

Other

operations

Group

total



note 9


note (v)



note 9


note (v)



IFRS basis shareholders' equity

17,725

2,767

(3,243)

17,249


16,624

2,550

(3,087)

16,087


Additional retained profit (loss)

   on an EEV basisnote (v)

32,663

-

(130)

32,533


29,293

-

(682)

28,611


EEV basis shareholders' equity

50,388

2,767

(3,373)

49,782


45,917

2,550

(3,769)

44,698

 

(v)   The additional retained loss on an EEV basis for other operations represents the mark to market value adjustment for holding company net borrowings of a cumulative charge of £(130) million (31 December 2017: £(682) million) as shown in note 7.

 

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

 



2018 £m



Free

surplus

Required

capital

Total

net worth


Value of

in-force business

Total

embedded

value







note (i)


Group







Shareholders' equity at beginning of year

6,242

10,265

16,507


29,410

45,917

New business contributionnote 3

(815)

619

(196)


4,073

3,877

Existing business - transfer to net worth

3,439

(776)

2,663


(2,663)

-

Expected return on existing businessnote 4

201

195

396


2,177

2,573

Changes in operating assumptions and experience variancesnote 4

778

69

847


579

1,426

Restructuring costs

(68)

-

(68)


(20)

(88)

Operating profit based on longer-term investment returns

3,535

107

3,642


4,146

7,788

Non-operating items

(720)

(730)

(1,450)


(2,008)

(3,458)

Profit for the year

2,815

(623)

2,192


2,138

4,330

Exchange movements on foreign operations and

   net investment hedges

201

206

407


1,465

1,872

Intra-group dividends and investment in operations

(1,654)

-

(1,654)


-

(1,654)

Other movements

(77)

-

(77)


-

(77)

Shareholders' equity at end of year

7,527

9,848

17,375


33,013

50,388









Asia







New business contributionnote 3

(488)

158

(330)


2,934

2,604

Existing business - transfer to net worth

1,370

(253)

1,117


(1,117)

-

Expected return on existing businessnote 4

68

55

123


1,095

1,218

Changes in operating assumptions and experience variancesnote 4

62

185

247


318

565

Operating profit based on longer-term investment returns

1,012

145

1,157


3,230

4,387

Non-operating items

(393)

15

(378)


(547)

(925)

Profit for the year

619

160

779


2,683

3,462









US







New business contributionnote 3

(225)

288

63


858

921

Existing business - transfer to net worth

1,462

(171)

1,291


(1,291)

-

Expected return on existing businessnote 4

54

69

123


758

881

Changes in operating assumptions and experience variancesnote 4

125

6

131


182

313

Restructuring costs

(17)

-

(17)


-

(17)

Operating profit based on longer-term investment returns

1,399

192

1,591


507

2,098

Non-operating itemsnote (ii)

(812)

164

(648)


(635)

(1,283)

Profit for the year

587

356

943


(128)

815









UK and Europe







New business contributionnote 3

(102)

173

71


281

352

Existing business - transfer to net worth

607

(352)

255


(255)

-

Expected return on existing businessnote 4

79

71

150


324

474

Changes in operating assumptions and experience variancesnote 4

591

(122)

469


79

548

Restructuring costs

(51)

-

(51)


(20)

(71)

Operating profit based on longer-term investment returns

1,124

(230)

894


409

1,303

Non-operating items

485

(909)

(424)


(826)

(1,250)

Profit for the year

1,609

(1,139)

470


(417)

53

 

Notes

(i)     The net value of in-force business comprises the value of future margins from current in-force business less the cost of holding required capital for long-term business as shown below:

 




31 Dec 2018 £m


31 Dec 2017 £m




Asia

US

UK and Europe

Total


Asia

US

UK and Europe

Total


Value of in-force business before












deduction of cost of capital and












time value of guarantees

21,867

11,811

3,083

36,761


17,539

10,486

3,648

31,673


Cost of capital

(566)

(296)

(459)

(1,321)


(588)

(232)

(607)

(1,427)


Cost of time value of guarantees

(981)

(1,446)

-

(2,427)


(186)

(650)

-

(836)


Net value of in-force business

20,320

10,069

2,624

33,013


16,765

9,604

3,041

29,410


Total net worth

4,009

4,581

8,785

17,375


4,182

3,653

8,672

16,507


Total embedded valuenote 8(iv)

24,329

14,650

11,409

50,388


20,947

13,257

11,713

45,917

* The cost of time value of guarantees arises from the variability of economic outcomes in the future and is, where appropriate, calculated as the difference between a full stochastic valuation and a single deterministic valuation as described in note 13(i)(d). Both valuations reflect the level of policyholder benefits (including guaranteed benefits and discretionary bonuses) and associated charges, together with management actions in response to emerging investment and fund solvency conditions. The increase in the cost of time value of guarantees for Asia operations from £(186) million at 31 December 2017 to £(981) million at 31 December 2018 reflects the interaction between these effects on the two valuations at the respective level of interest rates and equity markets, as well as growth in the business over the year. The increase in the cost of time value of guarantees for the US operations from £(650) million at 31 December 2017 to £(1,446) million at 31 December 2018 primarily reflects the reduction in US equity markets during the fourth quarter of 2018.

 

(ii)    In June 2018, the National Association of Insurance Commissioners (NAIC) formally approved changes to RBC capital factors that reflected the December 2017 US tax reform. The 2018 EEV results reflect these changes, with a resulting increase in required capital and a corresponding reduction in free surplus of £(165) million.

 

10   Analysis of movement in free surplus

 

For EEV covered business, free surplus is the excess of the regulatory basis net assets for EEV reporting purposes (net worth) over the capital required to support the covered business. Where appropriate, adjustments are made to the net worth so that backing assets are included at fair value rather than cost so as to comply with the EEV Principles. In Asia and the US operations, assets deemed to be inadmissible on local regulatory basis are included in net worth where considered fully recognisable on an EEV basis. Free surplus for asset management operations and the UK general insurance commission is taken to be IFRS basis post-tax earnings and shareholders' equity net of goodwill. Free surplus for other operations (including Group and Asia Regional Head Office, holding company borrowings, Africa operations and Prudential Capital) is taken to be EEV basis post-tax earnings and shareholders' equity net of goodwill, with subordinated debt recorded as free surplus to the extent that it is classified as available capital under Solvency II.

 

(i)    Underlying free surplus generated - insurance and asset management operations

The 2017 comparative results are shown below on both actual exchange rates (AER) and constant exchange rates (CER) bases. The 2017 CER comparative results are translated at 2018 average exchange rates. 

 


2018 £m


2017 £m


% change




AER

CER


AER

CER

Asia operations








Underlying free surplus generated from

   in-force life business

1,500


1,407

1,343


7%

12%

Investment in new businessnote (iii)(a)

(488)


(484)

(466)


(1)%

(5)%

Long-term business

1,012


923

877


10%

15%

Asset management

159


155

150


3%

6%

Total

1,171


1,078

1,027


9%

14%










US operations








Underlying free surplus generated from

   in-force life business

1,641


1,575

1,520


4%

8%

Investment in new businessnote (iii)(a)

(225)


(254)

(245)


11%

8%

Long-term business

1,416


1,321

1,275


7%

11%

Asset management

3


7

7


(57)%

(57)%

Total

1,419


1,328

1,282


7%

11%










UK and Europe operations








Underlying free surplus generated from

   in-force life business

1,277


1,070

1,070


19%

19%

Investment in new businessnote (iii)(a)

(102)


(175)

(175)


42%

42%

Long-term business

1,175


895

895


31%

31%

General insurance commission

15


13

13


15%

15%

Total insurance operations

1,190


908

908


31%

31%

Asset management

392


403

403


(3)%

(3)%

Total

1,582


1,311

1,311


21%

21%










Underlying free surplus generated from

   insurance and asset management

   operations before restructuring costs

4,172


3,717

3,620


12%

15%

Restructuring costs

(125)


(77)

(77)


(62)%

(62)%

Underlying free surplus generated from

   insurance and asset management operations

4,047


3,640

3,543


11%

14%









Representing:








Expected in-force cash flows (including

   expected return on net assets)

3,640


3,417

3,315


7%

10%

Effects of changes in operating assumptions,

   operating experience variances and other

   items before restructuring costs

778


635

618


23%

26%

Underlying free surplus generated from

   in-force life business before restructuring costs

4,418


4,052

3,933


9%

12%

Investment in new businessnote (iii)(a)

(815)


(913)

(886)


11%

8%

Total long-term business

3,603


3,139

3,047


15%

18%

Asset management and general insurance

   commission

569


578

573


(2)%

(1)%

Restructuring costs

(125)


(77)

(77)


(62)%

(62)%


4,047


3,640

3,543


11%

14%

 

(ii)   Underlying free surplus generated - Group total











2018 £m


2017 £m


% change




AER

CER


AER

CER

Underlying free surplus generated from

   insurance and asset management operationsnote (i)

4,047


3,640

3,543


11%

14%

Other income and expenditure

(737)


(756)

(750)


3%

2%

Group total

3,310


2,884

2,793


15%

19%

 

(iii)  Movement in free surplus











2018 £m


Asia

operations

US

operations

UK and

Europe

operations

Total insurance

and asset

management

operations

Other

operations

Underlying free surplus generated before

   restructuring costs

1,171

1,419

1,582

4,172

(726)

3,446

Restructuring costs

(19)

(17)

(89)

(125)

(11)

(136)

Underlying free surplus generatednotes (i)(ii)

1,152

1,402

1,493

4,047

(737)

3,310

Non-operating itemsnote (b)

(393)

(842)

472

(763)

(22)

(785)


759

560

1,965

3,284

(759)

2,525

Net cash flows to parent companynote (c)

(699)

(342)

(691)

(1,732)

1,732

-

External dividends

-

-

-

-

(1,244)

(1,244)

Exchange rate movements, timing differences

   and other itemsnote (d)

(496)

21

239

(236)

1,505

1,269

Net movement in free surplus

(436)

239

1,513

1,316

1,234

2,550

Balance at beginning of year

2,470

1,928

3,180

7,578

1,774

9,352

Balance at end of year

2,034

2,167

4,693

8,894

3,008

11,902

 



2017 £m


Asia

operations

US

operations

UK and

Europe

operations

Total insurance

and asset

management

operations

Other

operations

Group

total

Underlying free surplus generated before

   restructuring costs

1,078

1,328

1,311

3,717

(746)

2,971

Restructuring costs

(14)

-

(63)

(77)

(10)

(87)

Underlying free surplus generatednotes(i)(ii)

1,064

1,328

1,248

3,640

(756)

2,884

Non-operating itemsnote (b)

330

(1,203)

572

(301)

27

(274)


1,394

125

1,820

3,339

(729)

2,610

Net cash flows to parent companynote (c)

(645)

(475)

(668)

(1,788)

1,788

-

External dividends

-

-

-

-

(1,159)

(1,159)

Exchange rate movements, timing differences

   and other itemsnote (d)

(421)

(140)

22

(539)

226

(313)

Net movement in free surplus

328

(490)

1,174

1,012

126

1,138

Balance at beginning of year

2,142

2,418

2,006

6,566

1,648

8,214

Balance at end of year

2,470

1,928

3,180

7,578

1,774

9,352

 

Notes

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

(b)   Non-operating items include short-term fluctuations in investment returns, the effect of changes in economic assumptions for long-term business operations and the effect of corporate transactions as described in note 17. In addition, for 2018 this includes the impact of a capital modelling enhancement in the UK and in the US changes to RBC factors following the US tax reform, which were formally approved by the National Association of Insurance Commissioners (NAIC) in June 2018. For 2017 this included the impact of US tax reform (see note 16).

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

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

 











2018 £m


Asia

operations

US

operations

UK and

Europe

operations

Total insurance

and asset

management operations

Other

operations

Exchange rate movements

88

131

-

219

(6)

213

Mark to market value movements on Jackson assets

   backing surplus and required capital

-

(95)

-

(95)

-

(95)

Other itemsnote (e)

(584)

(15)

239

(360)

1,511

1,151



(496)

21

239

(236)

1,505

1,269











2017 £m


Asia

operations

US

operations

UK and Europe

operations

Total insurance

and asset management operations

Other

operations

Exchange rate movements

(113)

(190)

6

(297)

(13)

(310)

Mark to market value movements on Jackson assets

   backing surplus and required capital

-

40

-

40

-

40

Other itemsnote (e)

(308)

10

16

(282)

239

(43)



(421)

(140)

22

(539)

226

(313)

 

(e)   Other items include the effect of the net issuance of £1.2 billion of subordinated debt for other operations in 2018, intra-group loans and other intra-group transfers between operations and other non-cash items.

 

11   Expected transfer of value of in-force business and required capital to free surplus

 

The discounted value of in-force business and required capital for long-term business operations can be reconciled to the 2018 and 2017 total emergence of free surplus as follows:

 


2018 £m

2017 £m

Required capitalnote 9

9,848

10,265

Value of in-force business (VIF)note 9

33,013

29,410

Add back: deduction for cost of time value of guaranteesnote 9

2,427

836

Other items*

(2,169)

(1,371)

Total long-term business operations

43,119

39,140

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

 

Cash flows are projected on a deterministic basis and are discounted at the appropriate risk discount rate. The modelled cash flows use the same methodology underpinning the Group's EEV reporting and so are subject to the same assumptions and sensitivities.

 

The table below shows how the VIF generated by the in-force business and the associated required capital for long-term business operations is modelled as emerging into free surplus over future years.

 



2018 £m



Expected period of conversion of future post-tax distributable earnings

and required capital flows to free surplus


2018 total as shown above

1-5 years

6-10 years

11-15 years

16-20 years

21-40 years

40+ years

Asia

23,332

6,276

4,185

2,762

2,053

5,399

2,657

US

13,294

6,928

4,094

1,771

378

123

-

UK and Europe

6,493

2,616

1,713

1,053

633

476

2

Total

43,119

15,820

9,992

5,586

3,064

5,998

2,659


100%

37%

23%

13%

7%

14%

6%



















2017 £m



Expected period of conversion of future post-tax distributable earnings

and required capital flows to free surplus


2017 total as shown above

1-5 years

6-10 years

11-15 years

16-20 years

21-40 years

40+ years

Asia

18,692

5,583

3,638

2,418

1,655

3,845

1,553

US

12,455

6,247

3,993

1,697

401

117

-

UK and Europe

7,993

3,012

2,066

1,289

899

704

23

Total

39,140

14,842

9,697

5,404

2,955

4,666

1,576


100%

38%

25%

14%

7%

12%

4%

12   Sensitivity of results to alternative assumptions

 

(i)    Sensitivity analysis - economic assumptions

 

The tables below show the sensitivity of the embedded value as at 31 December 2018 and 31 December 2017 and the new business contribution after the effect of required capital for 2018 and 2017 for long-term business operations to:

 

-    1 per cent increase in the discount rates;

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

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

-    1 per cent rise in equity and property yields;

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

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

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

 

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

 

New business contribution from long-term business operations


















2018 £m


2017 £m


Asia

US

UK and

Europe

Total


Asia

US

UK and

Europe

Total

New business contributionnote 3

2,604

921

352

3,877


2,368

906

342

3,616

Discount rates - 1% increase

(549)

(42)

(33)

(624)


(477)

(34)

(48)

(559)

Interest rates - 1% increase

(202)

94

43

(65)


(103)

124

44

65

Interest rates - 0.5% decrease

58

(66)

(23)

(31)


(59)

(85)

(23)

(167)

Equity/property yields - 1% rise

130

115

45

290


130

130

52

312

Long-term expected defaults - 5 bps increase

-

-

-

-


-

-

(1)

(1)

 

Embedded value of long-term business operations

















31 Dec 2018 £m


31 Dec 2017 £m


Asia

US

UK and

Europe

Total


Asia

US

UK and

Europe

Total

Shareholders' equitynote 8

24,329

14,650

11,409

50,388


20,947

13,257

11,713

45,917

Discount rates - 1% increase

 (3,292)

 (513)

 (648)

 (4,453)


 (2,560)

 (440)

 (774)

 (3,774)

Interest rates - 1% increase

 (1,564)

119

 (668)

 (2,113)


 (944)

26

 (635)

 (1,553)

Interest rates - 0.5% decrease

366

 (273)

363

456


121

 (166)

384

339

Equity/property yields - 1% rise

1,041

1,011

377

2,429


873

896

425

2,194

Equity/property market values - 10% fall

 (473)

 (498)

 (461)

 (1,432)


 (429)

 (209)

 (479)

 (1,117)

Statutory minimum capital

110

217

-

327


169

158

-

327

Long-term expected defaults - 5 bps increase

-

-

 (76)

 (76)


-

-

 (135)

 (135)

 

The sensitivities shown above are for the impact of instantaneous changes on the embedded value of long-term business operations and include the combined effect on the value of in-force business and net assets at the balance sheet dates indicated. If the change in assumptions shown in the sensitivities were to occur, then the effect shown above would be recorded within two components of the profit analysis for the following year, namely the effect of economic assumption changes and short-term fluctuations in investment returns. In addition to the sensitivity effects shown above, the other components of the profit for the following year would be calculated by reference to the altered assumptions, for example new business contribution and unwind of discount, together with the effect of other changes such as altered corporate bond spreads. In addition for changes in interest rates, the effect shown above for Jackson would also be recorded within the fair value movements on assets backing surplus and required capital, which are taken directly to shareholders' equity.

 

(ii)   Sensitivity analysis - non-economic assumptions

 

The tables below show the sensitivity of the embedded value as at 31 December 2018 and 31 December 2017 and the new business contribution after the effect of required capital for 2018 and 2017 for long-term business operations to:

 

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

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

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

 

New business contribution from long-term business operations




















2018 £m


2017 £m



Asia

US

UK and

Europe

Total


Asia

US

UK and

Europe

Total

New business contributionnote 3

2,604

921

352

3,877


2,368

906

342

3,616

Maintenance expenses - 10% decrease

40

11

2

53


38

14

3

55

Lapse rates - 10% decrease

154

24

17

195


133

24

20

177

Mortality and morbidity - 5% decrease

70

4

1

75


69

4

(2)

71

 

Embedded value of long-term business operations





















31 Dec 2018 £m


31 Dec 2017 £m



Asia

US

UK and Europe

Total


Asia

US

UK and Europe

Total

Shareholders' equitynote 8

24,329

14,650

11,409

50,388


20,947

13,257

11,713

45,917

Maintenance expenses - 10% decrease

254

178

80

512


213

169

64

446

Lapse rates - 10% decrease

972

619

87

1,678


753

659

64

1,476

Mortality and morbidity - 5% decrease

835

141

(294)

682


668

214

(442)

440

Change representing effect on:











Life business

835

196

13

1,044


668

214

13

895


Annuities

-

(55)

(307)

(362)


-

-

(455)

(455)

 

13   Methodology and accounting presentation

 

(i)    Methodology

 

Overview

The embedded value is the present value of the shareholders' interest in the earnings distributable from assets allocated to covered business after sufficient allowance has been made for the aggregate risks in that business. The shareholders' interest in the Group's long-term business comprises:

 

-    The present value of future shareholder cash flows from in-force covered business (value of in-force business), less deductions for:

-      The cost of locked-in required capital; and

-      The time value of cost of options and guarantees;

-    Locked-in required capital; and

-    The shareholders' net worth in excess of required capital (free surplus).

 

The value of future new business is excluded from the embedded value.

 

Notwithstanding the basis of presentation of results as explained in note 13(ii)(c), no smoothing of market or account balance values, unrealised gains or investment return is applied in determining the embedded value or profit. Separately, the analysis of profit is delineated between operating profit based on longer-term investment returns and other constituent items, as explained in note 13(ii)(a).

 

(a)   Covered business

The EEV results for the Group are prepared for 'covered business', as defined by the EEV Principles. Covered business represents the Group's long-term insurance business, including the Group's investments in joint venture and associate insurance operations, for which the value of new and in-force contracts is attributable to shareholders. The post-tax EEV basis results for the Group's covered business are then combined with the post-tax IFRS basis results of the Group's asset management and other operations (including Group and Asia Regional Head Office, holding company borrowings, Africa operations and Prudential Capital). Under the EEV Principles, the results for covered business incorporate the projected margins of attaching internal asset management, as described in note 13(i)(g).

 

The definition of long-term business operations comprises those contracts falling under the definition for regulatory purposes together with, for US operations, contracts that are in substance the same as guaranteed investment contracts (GICs) but do not fall within the technical definition.

 

Covered business comprises the Group's long-term business operations, with two exceptions:

 

-       The closed Scottish Amicable Insurance Fund (SAIF) which is excluded from covered business. SAIF is a ring-fenced sub-fund of The Prudential Assurance Company Limited (PAC) long-term fund, established by a Court Approved Scheme of Arrangement in October 1997. SAIF is closed to new business and the assets and liabilities of the fund are wholly attributable to the policyholders of the fund; and

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

 

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

 

(b)   Valuation of in-force and new business

The embedded value results are prepared incorporating best estimate assumptions about all relevant factors including levels of future investment returns, expenses, persistency, mortality and morbidity, as described in note 14(vii). These assumptions are used to project future cash flows. The present value of the future cash flows is then calculated using a discount rate which reflects both the time value of money and the non-diversifiable risks associated with the cash flows that are not otherwise allowed for.

 

New business

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

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

 

New business premiums reflect those premiums attaching to covered business, including premiums for contracts classified as

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

 

The post-tax contribution from new business represents profits determined by applying operating and economic assumptions as at the end of the year. New business profitability is a key metric for the Group's management of the development of the business. In addition, post-tax new business margins are shown by reference to annual premium equivalents (APE) and the present value of new business premiums (PVNBP). These margins are calculated as the percentage of the value of new business profit to APE and PVNBP. APE is calculated as the aggregate of regular premiums on new business written in the period and one-tenth of single premiums. PVNBP is calculated as the aggregate of single premiums and the present value of expected future premiums from regular premium new business, allowing for lapses and the other assumptions made in determining the EEV new business contribution.

 

Valuation movements on investments

With the exception of debt securities held by Jackson, investment gains and losses during the year (to the extent that changes in capital values do not directly match changes in liabilities) are included directly in the profit for the year and shareholders' equity as they arise.

 

The results for any covered business conceptually reflect the aggregate of the IFRS results and the movements on the additional shareholders' interest recognised on the EEV basis. Thus the start point for the calculation of the EEV results for Jackson, as for other businesses, reflects the market value movements recognised on an IFRS basis.

 

However, in determining the movements on the additional shareholders' interest, the basis for calculating the EEV result for Jackson acknowledges that, for debt securities backing liabilities, the aggregate EEV results reflect the fact that the value of in-force business instead incorporates the discounted value of future spread earnings. This value is not affected generally by short-term market movements on securities that, broadly speaking, are held for the longer term.

 

Fixed income securities backing the free surplus and required capital for Jackson are accounted for at fair value. However, consistent with the treatment applied under IFRS for Jackson securities classified as available-for-sale, movements in unrealised appreciation/depreciation on these securities are accounted for in equity rather than in the income statement, as shown in the movement in shareholders' equity.

 

(c)   Cost of capital

A charge is deducted from the embedded value for the cost of locked-in required capital supporting the Group's long-term business. The cost is the difference between the nominal value of the capital and the discounted value of the projected releases of this capital, allowing for post-tax investment earnings on the capital.

 

The annual result is affected by the movement in this cost from year to year which comprises a charge against new business profit and generally a release in respect of the reduction in capital requirements for business in force as this runs off.

 

Where required capital is held within a with-profits long-term fund, the value placed on surplus assets in the fund is already discounted to reflect its expected release over time and no further adjustment is necessary in respect of required capital.

 

(d)   Financial options and guarantees

 

Nature of financial options and guarantees in Prudential's long-term business

 

Asia

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

 

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

 

US (Jackson)

The principal financial options and guarantees in Jackson are associated with the fixed annuity (FA) and variable annuity (VA) lines of business.

 

Fixed annuities provide that, at Jackson's discretion, it may reset the interest rate credited to policyholders' accounts, subject to a guaranteed minimum. The guaranteed minimum return varies from 1.0 per cent to 5.5 per cent for both years, depending on the particular product, jurisdiction where issued, and date of issue. At 31 December 2018, 88 per cent of the account values on fixed annuities are for policies with guarantees of 3 per cent or less (31 December 2017: 87 per cent), and the average guarantee rate is 2.6 per cent for both years.

 

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

 

Jackson issues variable annuity (VA) contracts for which it contractually guarantees to the contract holder, subject to specific conditions, either: a) return of no less than total deposits made to the contract adjusted for any partial withdrawals; b) total deposits made to the contract adjusted for any partial withdrawals plus a minimum return; or c) the highest contract value on a specified anniversary date adjusted for any withdrawals following the specified contract anniversary. These guarantees include benefits that are payable upon depletion of funds (Guaranteed Minimum Withdrawal Benefit (GMWB)), as death benefits (Guaranteed Minimum Death Benefits (GMDB)) or as income benefits (Guaranteed Minimum Income Benefits (GMIB)). These guarantees generally protect the policyholders' value in the event of poor equity market performance. Jackson hedges the GMWB and GMDB guarantees through the use of equity options and futures contracts, and essentially fully reinsures the GMIB guarantees.

 

Jackson also issues fixed index annuities (FIA) that enable policyholders to obtain a portion of an equity-linked return while providing a guaranteed minimum return. The guaranteed minimum returns are of a similar nature to those described above for fixed annuities.

 

UK and Europe (M&GPrudential)

The only significant financial options and guarantees in M&GPrudential's covered business arise in the with-profits fund.

 

With-profits products provide returns to policyholders through bonuses that are smoothed. There are two types of bonuses: annual and final. Annual bonuses are declared once a year and, once credited, are guaranteed in accordance with the terms of the particular product. Final bonuses are guaranteed only until the next bonus declaration. The UK with-profits fund also held a provision of £49 million at 31 December 2018 (31 December 2017: £53 million) to honour guarantees on a small number of guaranteed annuity option products.

 

The Group's main exposure to guaranteed annuity options in M&GPrudential is through the non-covered business of SAIF. A provision of £361 million was held in SAIF at 31 December 2018 (31 December 2017: £503 million) to honour the guarantees. As described in note 13 (i)(a), the assets and liabilities are wholly attributable to the policyholders of the fund. Therefore the movement in the provision has no direct impact on shareholders' funds.

 

Time value

The value of financial options and guarantees comprises two parts:

 

-       The first part arises from a deterministic valuation on best estimate assumptions (the intrinsic value); and

-       The second part arises from the variability of economic outcomes in the future (the time value).

 

Where appropriate, a full stochastic valuation has been undertaken to determine the time value of the financial options and guarantees.

 

The economic assumptions used for the stochastic calculations are consistent with those used for the deterministic calculations. Assumptions specific to the stochastic calculations reflect local market conditions and are based on a combination of actual market data, historic market data and an assessment of long-term economic conditions. Common principles have been adopted across the Group for the stochastic asset models, for example, separate modelling of individual asset classes but with an allowance for correlation between the various asset classes. Details of the key characteristics of each model are given in notes 14(iv), (v) and (vi).

 

In deriving the time value of financial options and guarantees, management actions in response to emerging investment and fund solvency conditions have been modelled. Management actions encompass, but are not confined to, investment allocation decisions, levels of reversionary and terminal bonuses and credited rates. Bonus rates are projected from current levels and varied in accordance with assumed management actions applying in the emerging investment and fund solvency conditions.

 

In all instances, the modelled actions are in accordance with approved local practice and therefore reflect the options actually available to management. For the UK with-profits fund, the actions assumed are consistent with those set out in the Principles and Practices of Financial Management which explains how regular and final bonus rates within the discretionary framework are determined, subject to the general legislative requirements applicable.

 

(e)   Level of required capital

In adopting the EEV Principles, Prudential has based required capital on the applicable local statutory regulations, including any amounts considered to be required above the local statutory minimum requirements to satisfy regulatory constraints.

 

For with-profits business in Asia and the UK, the available capital in the fund is sufficient to meet the capital requirements. For M&GPrudential, a portion of future shareholder transfers expected from the with-profits fund is recognised within net worth, together with the associated capital requirements.

 

For shareholder-backed business, the following capital requirements for long-term business operations apply:

 

-    Asia: the level of required capital has been set to an amount at least equal to local statutory notification requirements. For China operations, the level of required capital follows the approach for embedded value reporting issued by the China Association of Actuaries (CAA) reflecting the C-ROSS regime;

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

-    UK and Europe: the capital requirements are set at the Solvency II Solvency Capital Requirement (SCR) for shareholder-backed business as a whole. Following the announced demerger, from 1 January 2018 this does not allow for diversification outside the planned perimeter of the business to be demerged.

 

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

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

 

(g)   Internal asset management

The in-force and new business results from long-term business include the projected value of profits or losses from asset management and service companies that support the Group's covered insurance businesses. The results of the Group's asset management operations include the current year profits from the management of both internal and external funds. EEV basis shareholders' other income and expenditure is adjusted to deduct the unwind of the expected internal asset management profit margin for the year as included in 'Other operations'. The deduction is on a basis consistent with that used for projecting the results for covered insurance business. Group operating profit accordingly includes the variance between actual and expected profit in respect of management of the assets for covered business.

 

(h)   Allowance for risk and risk discount rates

 

Overview

Under the EEV Principles, discount rates used to determine the present value of future cash flows are set by reference to risk-free rates plus a risk margin.

 

For Asia and the US, the risk-free rates are based on 10-year local government bond yields. For UK and Europe, the EEV risk-free rate is based on the full term structure of interest rates, ie a yield curve, which is used to determine the embedded value at the end of the reporting period.

 

The risk margin should reflect any non-diversifiable risk associated with the emergence of distributable earnings that is not allowed for elsewhere in the valuation. In order to better reflect differences in relative market risk volatility inherent in each product group, Prudential sets the risk discount rates to reflect the expected volatility associated with the cash flows for each product category in the embedded value model, rather than at a Group level.

 

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

 

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

 

Market risk allowance

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

 

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

 

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

 

Additional credit risk allowance

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

 

-    Expected long-term defaults;

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

-    Short-term downgrades and defaults.

 

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

 

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

 

Asia

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

 

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

 

US (Jackson)

For Jackson business, the allowance for long-term defaults of 0.17 per cent (31 December 2017: 0.19 per cent) is reflected in the risk margin reserve (RMR) charge that is deducted in determining the projected spread margin between the earned rate on the investments and the policyholder crediting rate.

 

The risk discount rate incorporates an additional allowance for credit risk premium and short-term downgrades and defaults (0.2 per cent for variable annuity business and 1.0 per cent for non-variable annuity business for both years), as shown in note 14(ii). In determining this allowance a number of factors have been considered. These factors, in particular, include:

 

-    How much of the credit spread on debt securities represents an increased short-term credit risk not reflected in the RMR long-term default assumptions, and how much is liquidity premium (which is the premium required by investors to compensate for the risk of longer-term investments which cannot be easily converted into cash at the fair market value). In assessing this effect, consideration has been given to a number of approaches to estimating the liquidity premium by considering recent statistical data; and

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

 

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

 

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

 

UK and Europe (M&GPrudential)

(1) Shareholder-backed annuity business

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

 

In the annuity MCEV calculations, as the assets are generally held to maturity to match liabilities, the future cash flows are discounted using the swap yield curve plus an allowance for liquidity premium based on the Solvency II allowance for credit risk. The Solvency II allowance is set by the European Insurance and Occupational Pensions Authority (EIOPA) using a prudent assumption that all future downgrades will be replaced annually, and allowing for the credit spread floor.

 

For the purposes of presentation in the EEV results, the results produced on this basis are reconfigured. Under this approach the projected earned rate of return on the debt securities held is determined after allowing for a best estimate credit risk allowance. The remaining elements of prudence within the Solvency II allowance are incorporated into the risk margin included in the discount rate, shown in note 14(iii).

 

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

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

 

(3) With-profits fund holdings of debt securities

The with-profits fund holds debt securities as part of its investment portfolio backing policyholder liabilities and unallocated surplus. The assumed earned rate for with-profit holdings of corporate bonds is defined as the risk-free rate plus an assessment of the long-term spread over riskfree, net of expected long-term defaults. This approach is similar to that applied for equities and properties for which the projected earned rate is defined as the risk-free rate plus a long-term risk premium.

     

Allowance for non-diversifiable non-market risks

The majority of non-market and non-credit risks are considered to be diversifiable. An allowance for non-diversifiable non-market risks is estimated as set out below:

 

A base level allowance of 50 basis points is applied to cover the non-diversifiable non-market risks associated with the Group's businesses. For the Group's Asia operations in Indonesia, the Philippines, Taiwan, Thailand and Vietnam, additional allowances are applied for emerging market risk ranging from 100 to 250 basis points. The level of these allowances are reviewed and updated based on an assessment of a range of pre-defined emerging market risk indicators, as well as the Group's exposure and experience in the business units. At 31 December 2018, the China allowance for non-market risk was reduced reflecting the growth in the size of the business, increasing management exposure and experience in the country and an improvement in our risk assessment of the market. For the Group's US business and UK and Europe business, no additional allowance is necessary.

 

(i)   Foreign currency translation

Foreign currency profits and losses have been translated at average exchange rates for the year. Foreign currency assets and liabilities have been translated at year-end exchange rates. The principal exchange rates are shown in note A1 of the IFRS financial statements.

 

(j)   Taxation

In determining the post-tax profit for the year for covered business, the overall tax rate includes the impact of tax effects determined on a local regulatory basis. Tax payments and receipts included in the projected cash flows to determine the value of in-force business are calculated using rates that have been announced and substantively enacted by the end of the reporting period.

 

(k) Inter-company arrangements

The EEV results for covered business incorporate annuities established in the PAC non-profit sub-fund from vesting pension policies in SAIF (which is not covered business). The EEV results also incorporate the effect of the reinsurance arrangement of non-profit immediate pension annuity liabilities of SAIF to the PAC non-profit sub-fund.

 

(ii)  Accounting presentation

 

(a) Analysis of post-tax profit

To the extent applicable, the presentation of the EEV post-tax profit for the year is consistent with the classification between operating and non-operating results with the basis that the Group applies for the analysis of IFRS basis results. Operating results reflect underlying results including longer-term investment returns, which are determined as described in note 13(ii)(b) and incorporate the following:

 

-    New business contribution, as defined in note 13(i)(b);

-    Unwind of discount on the value of in-force business and other expected returns, as described in note 13(ii)(c);

-    The impact of routine changes of estimates relating to operating assumptions, as described in note 13(ii)(d); and

-    Operating experience variances, as described in note 13(ii)(e).

 

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.

 

In addition, operating results include the effect of changes in tax legislation, unless these changes are one-off and structural in nature, such as the impact of the US tax reform in 2017 (see note 16), or primarily affect the level of projected investment returns, in which case they are reflected as a non-operating result.

 

Total profit attributable to shareholders and basic earnings per share include these items, together with actual investment returns. The Group believes that operating profit, as adjusted for these items, better reflects underlying performance.

 

For M&GPrudential, the embedded value incorporates Solvency II transitional measures, which are recalculated using management's estimate of the impact of operating and market conditions at the valuation date. The impact of this recalculation is recorded within the corresponding component of the analysis of post-tax profit.

 

(b) Investment returns included in operating profit

For the investment element of the assets covering the net worth of long-term insurance business, investment returns are recognised in operating results at the expected long-term rate of return. These expected returns are calculated by reference to the asset mix of the portfolio. For the purpose of calculating the longer-term investment return to be included in the operating result of the with-profits fund of M&GPrudential, where assets backing the liabilities and unallocated surplus are subject to market volatility, asset values at the beginning of the reporting period are adjusted to remove the effects of short-term market movements as explained in note 13(ii)(c).

 

For the purpose of determining the long-term returns for debt securities of US operations for fixed annuity and other general account business, a risk margin reserve charge is included which reflects the expected long-term rate of default based on the credit quality of the portfolio. For Jackson, interest-related realised gains and losses are amortised to the operating results over the maturity period of the sold bonds and for equity-related investments, a long-term rate of return is assumed, which reflects the aggregation of end-of-period risk-free rates and the equity risk premium. For US variable annuity separate account business, operating profit includes the unwind of discount on the opening value of in-force business adjusted to reflect end-of-period projected rates of return with the excess or deficit of the actual return recognised within non-operating profit, together with related hedging activity.

     

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

 

(c) Unwind of discount and other expected returns

The Group's methodology in determining the unwind of discount and other expected returns is by reference to:

 

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

-   Required capital and surplus assets.

 

In applying this general approach, the unwind of discount included in operating profit for M&GPrudential is described below.

 

M&GPrudential

The unwind is determined by reference to an implied single risk discount rate. The EEV risk-free rate is based on a yield curve (as set out in note 13(i)(h)), which is used to derive an implied single discount rate which, if this rate had been used, would reproduce the same embedded value as that calculated by reference to the yield curve. The difference between the operating profit determined using the single implied discount rate and that derived using the yield curve is included within non-operating profit.

 

For with-profits business, the opening value of in-force is adjusted for the effect of short-term investment volatility due to market movements (ie smoothed). In the summary statement of financial position and for total profit reporting, asset values and investment returns are not smoothed. At 31 December 2018, the shareholders' interest in the smoothed surplus assets used for this purpose only were £12 million higher (31 December 2017: £57 million lower) than the surplus assets carried in the statement of financial position.

 

(d) Effect of changes in operating assumptions

Operating profit includes the effect of changes to non-economic assumptions on the value of in-force at the end of the year. For presentational purposes the effect of changes is delineated to show the effect on the opening value of in-force as operating assumption changes, with the experience variances subsequently being determined by reference to the end-of-year assumptions (see note 13(ii)(e)).

 

(e) Operating experience variances

Operating profit includes the effect of experience variances on non-economic assumptions, such as persistency, mortality and morbidity, expenses and other factors, which are calculated with reference to the end-of-year assumptions.

 

(f)  Effect of changes in economic assumptions

Movements in the value of in-force business at the beginning of the year caused by changes in economic assumptions, net of the related change in the time value of cost of options and guarantees, are recorded in non-operating results. 

 

14   Assumptions

 

Principal economic assumptions

The EEV basis results for the Group's operations have been determined using economic assumptions where the long-term expected rates of return on investments and risk discount rates are set by reference to year-end risk-free rates of return (defined below for each of the Group's insurance operations). Expected returns on equity and property asset classes and corporate bonds are derived by adding a risk premium, based on the Group's long-term view, to the risk-free rate.

 

The total profit that emerges over the lifetime of an individual contract as calculated using the embedded value basis is the same over time as that calculated under the IFRS basis. Since the embedded value basis reflects discounted future cash flows, under the EEV methodology the profit emergence is advanced, thus more closely aligning the timing of the recognition of profit with the efforts and risks of current management actions, particularly with regard to business sold during the year.

 

(i)    Asia

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

 


Risk discount rate %


10-year government

bond yield %


Expected

long-term Inflation %


New business


In-force business




31 Dec

31 Dec


31 Dec

31 Dec


31 Dec

31 Dec


31 Dec

31 Dec


2018

2017


2018

2017


2018

2017


2018

2017

China

8.1

9.7


8.1

9.7


3.3

3.9


3.0

3.0

Hong Kongnotes (b)(d)

4.4

4.1


4.4

4.1


2.7

2.4


2.5

2.5

Indonesia

12.4

10.6


12.4

10.6


8.2

6.4


4.5

4.5

Malaysianote (d)

6.6

6.4


6.6

6.5


4.1

3.9


2.5

2.5

Philippines

14.5

12.7


14.5

12.7


7.0

5.2


4.0

4.0

Singaporenote (d)

3.4

3.5


4.2

4.4


2.1

2.0


2.0

2.0

Taiwan

4.5

4.3


4.4

3.9


0.9

0.9


1.5

1.5

Thailand

10.0

9.8


10.0

9.8


2.5

2.3


3.0

3.0

Vietnam

12.6

12.6


12.6

12.6


5.1

5.1


5.5

5.5

Total weighted risk discount ratenote (a)

5.4

5.3


5.8

5.7







 

Notes

(a)   The weighted risk discount rates for Asia operations shown above have been determined by weighting each market's risk discount rates by reference to the post-tax EEV basis new business contribution and the closing value of in-force business. The changes in the risk discount rates for individual Asia business units reflect the movements in 10-year government bond yields, changes in the economic basis and changes in product mix.

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

(c)   Equity risk premiums in Asia range from 4.0 per cent to 9.4 per cent (2017: 4.0 per cent to 9.4 per cent).

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

 



31 Dec 2018 %

31 Dec 2017 %


Hong Kong

6.7

6.4


Malaysia

10.6

10.4


Singapore

8.6

8.5

(ii)   US

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

 




31 Dec 2018 %

31 Dec 2017 %

Risk discount rate:




Variable annuity:





Risk discount rate

7.1

6.8



Additional allowance for credit risk included in risk discount ratenote 13(i)(h)

0.2

0.2


Non-variable annuity:





Risk discount rate

4.4

4.1



Additional allowance for credit risk included in risk discount ratenote 13(i)(h)

1.0

1.0


Weighted average total:





New business

6.9

6.7



In-force business

6.8

6.5

US 10-year treasury yield

2.7

2.4

Allowance for long-term defaults included in projected spreadnote 13(i)(h)

0.17

0.19

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

6.7

6.4

Expected long-term rate of inflation

2.9

3.0

Equity risk premium

4.0

4.0

S&P equity return volatility

17.5

18.0

 

Note

Assumed new business spread margins are as follows:

 


31 Dec 2018 %


31 Dec 2017 %


January to June issues

July to December issues


January to June issues

July to December issues

Fixed annuity business*

1.75

1.75


1.50

1.25

Fixed index annuity business*

2.00

2.00


1.75

1.50

Institutional business

0.50

0.50


0.50

0.50

* The assumed spread margin grades up linearly by 25 basis points to a long-term assumption over five years.

Including the proportion of variable annuity business invested in the general account.

 

(iii)  UK and Europe

The risk-free rate is based on the full term structure of interest rates, ie a yield curve, which is used to determine the embedded value at the end of the reporting period. These yield curves are used to derive pre-tax expected long-term nominal rates of investment return and risk discount rates. For the purpose of determining the unwind of discount in the analysis of operating profit, these yield curves are used to derive a single implied risk discount rate, as explained in note 13(i)(h).

 

This single implied risk discount rate is shown, along with the 15-year nominal rate of investment return and 15-year rate of inflation based on the inflation yield curve.

 



31 Dec 2018 %

31 Dec 2017 %

Shareholder-backed annuity in-force business:note (a)



Risk discount rate

4.7

4.0

Pre-tax expected 15-year nominal rates of investment returnnote (c)

3.1

2.6

With-profits and other business:



Risk discount rate:note (b)




New business

4.9

4.7


In-force business

5.0

4.8

Pre-tax expected 15-year nominal rates of investment return:note (c)




Overseas equities

6.5 to 10.1

6.2 to 10.1


Property

4.4

4.4


15-year gilt yield

1.7

1.6


Corporate bonds

3.5

3.4

Expected 15-year rate of inflation

3.6

3.5

Equity risk premium

4.0

4.0

 

Notes

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

(b)   The risk discount rates for with-profits and other business shown above represents a weighted average total of the rates applied to determine the present value of future cash flows, including the portion of future with-profits business shareholders' transfers recognised in net worth.

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

 



1 year

5 year

10 year

15 year

20 year


31 Dec 2018

1.0%

1.2%

1.3%

1.4%

1.5%


31 Dec 2017

0.6%

0.9%

1.2%

1.3%

1.4%

 

Stochastic assumptions

Details are given below of the key characteristics of the models used to determine the time value of the financial options and guarantees as referred to in note 13(i)(d).

 

(iv) Asia

-    The stochastic cost of guarantees is primarily of significance for the Hong Kong, Malaysia, Singapore and Taiwan operations;

-    The principal asset classes are government and corporate bonds;

-    The asset return models are similar to the models as described for M&GPrudential below; and

-    The volatility of equity returns ranges from 18 per cent to 35 per cent for both years, and the volatility of government bond yields ranges from 1.1 per cent to 2.0 per cent (2017: from 1.1 per cent to 2.0 per cent).

 

(v) US (Jackson)

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

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

-    The volatility of equity returns ranges from 17 per cent to 26 per cent (2017: from 18 per cent to 27 per cent), and the standard deviation of interest rates ranges from 3.4 per cent to 3.7 per cent (2017: from 2.5 per cent to 2.8 per cent).

 

(vi) UK and Europe (M&GPrudential)

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

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

-    The corporate bond return is calculated based on a risk-free return plus a mean-reverting spread;

-    Property returns are also modelled based on a risk-free return plus a risk premium with a stochastic process reflecting total property returns; and

-    The standard deviation of equities and property ranges from 14 per cent to 20 per cent for both years.

 

Operating assumptions

 

(vii)    Best estimate assumptions

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

 

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

 

Demographic assumptions

Persistency, mortality and morbidity assumptions are based on an analysis of recent experience, but also reflect expected future experience. Where relevant, when calculating the time value of financial options and guarantees, policyholder withdrawal rates vary in line with the emerging investment conditions according to management's expectations. When projecting cash flows for medical reimbursement business that is repriced annually, explicit allowance is made for expected future premiums inflation and separately for future medical claims inflation. The 2018 EEV results reflect this approach. Previously, medical claims inflation was implicitly allowed for by assuming that all increases in medical claim costs were directly offset by future premium increases with no impact on profits.

 

Expense assumptions

Expense levels, including those of service companies that support the Group's long-term business operations, are based on internal expense analysis and are appropriately allocated to acquisition of new business and renewal of in-force business. For mature business, it is Prudential's policy not to take credit for future cost reduction programmes until the actions to achieve the savings have been delivered. An allowance is made for short-term required expenses, that are not representative of the longer-term expense loadings of the relevant businesses. At 31 December 2018, the allowance held for these costs across the Group was £(436) million mainly arising in Asia. Expense overruns are reported where these are expected to be short-lived, including businesses that are growing rapidly or are sub-scale.

 

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

 

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

 

-    Expenditure for Group Head Office, to the extent not allocated to the UK with-profits funds, together with restructuring costs incurred across the group; and

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

 

(viii)   Tax rates

The assumed long-term effective tax rates for operations reflect the incidence of taxable profits and losses in the projected cash flows as explained in note 13(i)(j).

 

The local statutory corporate tax rates applicable for the most significant operations for 2018 and 2017 are as follows:

 



%

Asia operations:



Hong Kong

 

16.5 per cent on 5 per cent of premium income

Indonesia


25.0

        Malaysia 


24.0

Singapore


17.0

US operations


2017: 35.0; 2018: 21.0

UK operations


2017 and 2018: 19.0; from 1 April 2020: 17.0

 

15   Insurance new business premiumsnote (i)

 


Single premiums


Regular premiums


Annual premium

equivalents

(APE)


 Present value of

new business premiums

(PVNBP)








note 13(i)(b)


note 13(i)(b)


2018 £m

2017 £m


2018 £m

2017 £m


2018 £m

2017 £m


2018 £m

2017 £m

Asia

2,316

2,299


3,513

3,575


3,744

3,805


20,754

20,405

US

15,423

16,622


-

-


1,542

1,662


15,423

16,622

UK and Europe

13,382

13,044


177

187


1,516

1,491


14,073

13,784

Group total

31,121

31,965


3,690

3,762


6,802

6,958


50,250

50,811













Asia












Cambodia

-

-


20

16


20

16


89

70

Hong Kong

343

582


1,663

1,667


1,697

1,725


10,200

10,027

Indonesia

205

288


215

268


236

297


910

1,183

Malaysia

84

73


243

271


251

278


1,322

1,398

Philippines

43

62


83

71


87

77


296

287

Singapore

930

859


369

361


462

447


3,611

3,463

Thailand

217

139


95

70


117

84


609

421

Vietnam

20

8


144

133


146

134


708

659

South-east Asia operations

   including Hong Kong

1,842

2,011


2,832

2,857


3,016

3,058


17,745

17,508

Chinanote (ii)

103

179


292

276


302

294


1,313

1,299

Taiwan

292

46


182

208


211

213


788

634

Indianote (iii)

79

63


207

234


215

240


908

964

Total

2,316

2,299


3,513

3,575


3,744

3,805


20,754

20,405













US












Variable annuities

10,810

11,536


-

-


1,081

1,154


10,810

11,536

Elite Access (variable annuity)

1,681

2,013


-

-


168

201


1,681

2,013

Fixed annuities

340

454


-

-


34

45


340

454

Fixed index annuities

251

295


-

-


25

30


251

295

Wholesale

2,341

2,324


-

-


234

232


2,341

2,324

Total

15,423

16,622


-

-


1,542

1,662


15,423

16,622













UK and Europe












Bonds

3,539

3,509


-

-


354

351


3,540

3,510

Corporate pensions

69

103


117

130


124

140


443

533

Individual pensions

5,681

5,747


35

32


603

607


5,832

5,897

Income drawdown

2,555

2,218


-

-


256

222


2,555

2,218

Other products

1,538

1,467


25

25


179

171


1,703

1,626

Total

13,382

13,044


177

187


1,516

1,491


14,073

13,784













Group total

31,121

31,965


3,690

3,762


6,802

6,958


50,250

50,811

 

Notes

(i)     The tables shown above are provided as an indicative volume measure of transactions undertaken in the reporting period that have the potential to generate profits for shareholders. The amounts shown are not, and not intended to be, reflective of premium income recorded in the IFRS income statement.

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

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

 

16   Impact of US tax reform

 

On 22 December 2017, The Tax Cuts and Jobs Act in the US was enacted into law effective from 1 January 2018. The tax reform package as a whole, which included a reduction in the corporate income tax rate from 35 per cent to 21 per cent and a number of specific measures affecting US life insurers, resulted in a £390 million benefit in non-operating profit reflected within the 2017 results. The positive impact on an EEV basis represented the benefit of future profits being taxed at a lower rate, partially offset by a reduction in the net deferred tax asset held in the balance sheet to reflect remeasurement at the new lower tax rate, together with a reduction in the benefit from the dividend received deduction on taxable profits from variable annuity business. In June 2018, the National Association of Insurance Commissioners (NAIC) formally approved changes to RBC capital factors that reflected the December 2017 US tax reform and the 2018 EEV results reflect these changes as shown in notes 6 and 9.

 

17   Corporate transactions

 

Disposals and other corporate transactions

 


2018 £m


2017 £m

Transactions associated with M&GPrudentialnote (i)

(376)


-

Other transactionsnote (ii)

(75)


80


(451)


80

 

Notes

(i)    Transactions associated with M&GPrudential

The following transactions reduced the Group's EEV by £(376) million, which primarily reflects the loss of profits on the portion of annuity liabilities sold.

 

        Intention to demerge the Group's UK and Europe business and transfer of Hong Kong insurance subsidiaries

        In March 2018, the Group announced its intention to demerge its UK and Europe business (M&GPrudential) from Prudential plc, resulting in two separately listed companies. In preparation for the UK demerger process, during December 2018, the legal ownership of Prudential plc's Hong Kong insurance subsidiaries was transferred from The Prudential Assurance Company Limited (M&GPrudential's UK regulated Insurance entity) to Prudential Corporation Asia Limited.

 

        Sale of shareholder annuity portfolio

        In March 2018, M&GPrudential reinsured £12.0 billion of its shareholder annuity portfolio (IFRS liabilities valued as at 31 December 2017) to Rothesay Life. Under the terms of the agreement, the reinsurance is expected to be followed by a Part VII transfer of most of the reinsured portfolio by 30 June 2019. The 2018 EEV results include the impact on EEV resulting from this transfer.

 

(ii)   Other transactions

        In 2018, other corporate transactions resulted in an EEV loss of £(75) million (2017: £80 million gain). This primarily relates to additional costs incurred in exiting the US broker-dealer business (which realised a post-tax gain of £80 million when the independent broker-dealer network was sold to LPL Financial LLC in 2017) and costs related to the preparation for the announced demerger discussed above.

 

 

 

18   Post balance sheet events

 

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 distribution rights intangible asset.

 

Additional EEV financial information*

 

A    New business

 

BASIS OF PREPARATION

 

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

 

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

 

New business premiums reflect those premiums attaching to covered business, including premiums for contracts designed as investment products for IFRS reporting and for regular premium products are shown on an annualised basis.

 

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

 

Post-tax New Business Profit has been determined using the European Embedded Value (EEV) methodology set out in our EEV basis results supplement.

 

In determining the EEV basis value of new business written in the period when policies incept, premiums are included in projected cash flows on the same basis of distinguishing annual and single premium business as set out for statutory basis reporting.

 

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

 

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

 

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

 

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

 



Average rate*


Closing rate


Local currency : £

2018

2017

% appreciation (depreciation) of local currency against GBP


31 Dec

2018

31 Dec

2017

% appreciation (depreciation) of local currency against GBP


China

8.82

8.71

(1)%


8.74

8.81

1%


Hong Kong

10.46

10.04

(4)%


9.97

10.57

6%


Indonesia

18,987.65

17,249.38

(9)%


18,314.37

18,353.44

0%


Malaysia

5.38

5.54

3%


5.26

5.47

4%


Singapore

1.80

1.78

(1)%


1.74

1.81

4%


Thailand

43.13

43.71

1%


41.47

44.09

6%


US

1.34

1.29

(4)%


1.27

1.35

6%


Vietnam

30,732.53

29,279.71

(5)%


29,541.15

30,719.60

4%

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

 

(2)   Annual premium equivalents (APE), calculated as the aggregate of regular premiums on business written in the period and one-tenth of single premiums, are subject to rounding. Present value of new business premiums (PVNBP) are calculated as the aggregate of single premiums and the present value of expected future premiums from regular premium new business, allowing for lapses and the other assumptions applied in determining the EEV new business profit.

(3)   Balance includes segregated and pooled pension funds, private finance assets and other institutional clients.

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

(5)   Balance sheet figures have been calculated at the closing exchange rates.

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

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

(8)   Investment flows for the year exclude year-to-date Eastspring Money Market Funds (MMF) gross inflow of £191,523 million (2017: gross inflow of £192,662 million) and net inflow of £1,500 million (2017: net inflow of £1,495 million).

(9)   Total Group Investment Operations funds under management exclude MMF funds under management of £11,602 million at 31 December 2018 (31 December 2017: £9,317 million).

 

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

 

Note:      The 2017 comparative results are shown below on actual exchange rates (AER) as previously reported.

 


Single premiums

Regular premiums

APEnote(2)

PVNBPnote(2)


2018

2017

+/(-)

2018

2017

+/(-)

2018

2017

+/(-)

2018

2017

+/(-)


 

£m

 

£m

%

 

£m

 

£m

%

 

£m

 

£m

%

 

£m

 

£m

%














Asia

2,316

2,299

1%

3,513

3,575

(2)%

3,744

3,805

(2)%

20,754

20,405

2%

US

15,423

16,622

(7)%

-

-

-

1,542

1,662

(7)%

15,423

16,622

(7)%

UK and Europe

13,382

13,044

3%

177

187

(5)%

1,516

1,491

2%

14,073

13,784

2%

Group total

31,121

31,965

(3)%

3,690

3,762

(2)%

6,802

6,958

(2)%

50,250

50,811

(1)%














Asia













Cambodia

-

-

-

20

16

25%

20

16

25%

89

70

27%

Hong Kong

343

582

(41)%

1,663

1,667

(0)%

1,697

1,725

(2)%

10,200

10,027

2%

Indonesia

205

288

(29)%

215

268

(20)%

236

297

(21)%

910

1,183

(23)%

Malaysia

84

73

15%

243

271

(10)%

251

278

(10)%

1,322

1,398

(5)%

Philippines

43

62

(31)%

83

71

17%

87

77

13%

296

287

3%

Singapore

930

859

8%

369

361

2%

462

447

3%

3,611

3,463

4%

Thailand

217

139

56%

95

70

36%

117

84

39%

609

421

45%

Vietnam

20

8

150%

144

133

8%

146

134

9%

708

659

7%

South-east Asia

operations including

Hong Kong

1,842

2,011

(8)%

2,832

2,857

(1)%

3,016

3,058

(1)%

17,745

17,508

1%

Chinanote (6)

103

179

(42)%

292

276

6%

302

294

3%

1,313

1,299

1%

Taiwan

292

46

535%

182

208

(13)%

211

213

(1)%

788

634

24%

Indianote (4)

79

63

25%

207

234

(12)%

215

240

(10)%

908

964

(6)%

Total Asia

2,316

2,299

1%

3,513

3,575

(2)%

3,744

3,805

(2)%

20,754

20,405

2%














US













Variable annuities

10,810

11,536

(6)%

-

-

-

1,081

1,154

(6)%

10,810

11,536

(6)%

Elite Access (variable

annuity)

1,681

2,013

(16)%

-

-

-

168

201

(16)%

1,681

2,013

(16)%

Fixed annuities

340

454

(25)%

-

-

-

34

45

(24)%

340

454

(25)%

Fixed index annuities

251

295

(15)%

-

-

-

25

30

(17)%

251

295

(15)%

Wholesale

2,341

2,324

1%

-

-

-

234

232

1%

2,341

2,324

1%

Total US

15,423

16,622

(7)%

-

-

-

1,542

1,662

(7)%

15,423

16,622

(7)%














UK and Europe













Bonds

3,539

3,509

1%

-

-

-

354

351

1%

3,540

3,510

1%

Corporate pensions

69

103

(33)%

117

130

(10)%

124

140

(11)%

443

533

(17)%

Individual pensions

5,681

5,747

(1)%

35

32

9%

603

607

(1)%

5,832

5,897

(1)%

Income drawdown

2,555

2,218

15%

-

-

-

256

222

15%

2,555

2,218

15%

Other products

1,538

1,467

5%

25

25

-

179

171

5%

1,703

1,626

5%

Total UK and Europe

13,382

13,044

3%

177

187

(5)%

1,516

1,491

2%

14,073

13,784

2%














Group total

31,121

31,965

(3)%

3,690

3,762

(2)%

6,802

6,958

(2)%

50,250

50,811

(1)%

 

During 2018, the Africa business operations sold £38 million APE of new business. Given the relative immaturity of the Africa business, it is incorporated into the Group's EEV results on an IFRS basis and hence excluded from our new business metrics.

 

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

 

Note:      The 2017 comparative results are shown below on constant exchange rates (CER), ie translated at 2018 average exchange rates.

 


Single premiums

Regular premiums

APEnote (2)

PVNBPnote (2)


2018

2017

+/(-)

2018

2017

+/(-)

2018

2017

+/(-)

2018

2017

+/(-)


 

£m

 

£m

%

 

£m

 

£m

%

 

£m

 

£m

%

 

£m

 

£m

%














Asia

2,316

2,230

4%

3,513

3,450

2%

3,744

3,671

2%

20,754

19,730

5%

US

15,423

16,045

(4)%

-

-

-

1,542

1,605

(4)%

15,423

16,045

(4)%

UK and Europe

13,382

13,044

3%

177

187

(5)%

1,516

1,491

2%

14,073

13,784

2%

Group total

31,121

31,319

(1)%

3,690

3,637

1%

6,802

6,767

1%

50,250

49,559

1%














Asia













Cambodia

-

-

-

20

16

25%

20

16

25%

89

67

33%

Hong Kong

343

558

(39)%

1,663

1,600

4%

1,697

1,655

3%

10,200

9,625

6%

Indonesia

205

262

(22)%

215

244

(12)%

236

270

(13)%

910

1,074

(15)%

Malaysia

84

75

12%

243

279

(13)%

251

286

(12)%

1,322

1,438

(8)%

Philippines

43

57

(25)%

83

65

28%

87

71

23%

296

266

11%

Singapore

930

849

10%

369

357

3%

462

442

5%

3,611

3,421

6%

Thailand

217

141

54%

95

71

34%

117

85

38%

609

426

43%

Vietnam

20

8

150%

144

127

13%

146

127

15%

708

628

13%

South-east Asia operations

including Hong Kong

1,842

1,950

(6)%

2,832

2,759

3%

3,016

2,952

2%

17,745

16,945

5%

Chinanote (6)

103

177

(42)%

292

273

7%

302

290

4%

1,313

1,282

2%

Taiwan

292

45

549%

182

203

(10)%

211

208

1%

788

617

28%

Indianote (4)

79

58

36%

207

215

(4)%

215

221

(3)%

908

886

2%

Total Asia

2,316

2,230

4%

3,513

3,450

2%

3,744

3,671

2%

20,754

19,730

5%














US













Variable annuities

10,810

11,136

(3)%

-

-

-

1,081

1,114

(3)%

10,810

11,136

(3)%

Elite Access (variable

annuity)

1,681

1,943

(13)%

-

-

-

168

194

(13)%

1,681

1,943

(13)%

Fixed annuities

340

438

(22)%

-

-

-

34

44

(23)%

340

438

(22)%

Fixed index annuities

251

285

(12)%

-

-

-

25

29

(14)%

251

285

(12)%

Wholesale

2,341

2,243

4%

-

-

-

234

224

4%

2,341

2,243

4%

Total US

15,423

16,045

(4)%

-

-

-

1,542

1,605

(4)%

15,423

16,045

(4)%














UK and Europe













Bonds

3,539

3,509

1%

-

-

-

354

351

1%

3,540

3,510

1%

Corporate pensions

69

103

(33)%

117

130

(10)%

124

140

(11)%

443

533

(17)%

Individual pensions

5,681

5,747

(1)%

35

32

9%

603

607

(1)%

5,832

5,897

(1)%

Income drawdown

2,555

2,218

15%

-

-

-

256

222

15%

2,555

2,218

15%

Other products

1,538

1,467

5%

25

25

-

179

171

5%

1,703

1,626

5%

Total UK and Europe

13,382

13,044

3%

177

187

(5)%

1,516

1,491

2%

14,073

13,784

2%














Group total

31,121

31,319

(1)%

3,690

3,637

1%

6,802

6,767

1%

50,250

49,559

1%

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

 

Note:      Comparative results for the first half (H1) and second half (H2) of 2017 are presented on both actual exchange rates (AER) and constant exchange rates (CER). The H2 amounts are presented on year-to-date average exchange rates (including the effect of retranslating H1 results for movements in average exchange rates between H1 and the year-to-date).

 


AER

CER


2017

2018

2017

2018


H1

H2

H1

H2

H1

H2

H1

H2


£m

£m

£m

£m

£m

£m

£m

£m










Asia

1,943

1,862

1,736

2,008

1,840

1,831

1,765

1,979

US

960

702

816

726

906

699

841

701

UK and Europe

721

770

770

746

721

770

770

746

Group total

3,624

3,334

3,322

3,480

3,467

3,300

3,376

3,426










Asia









Cambodia

8

8

8

12

8

8

9

11

Hong Kong

914

811

742

955

855

800

764

933

Indonesia

144

153

113

123

127

143

113

123

Malaysia

128

150

117

134

131

155

118

133

Philippines

36

41

38

49

32

39

39

48

Singapore

195

252

205

257

192

250

208

254

Thailand

42

42

53

64

43

42

54

63

Vietnam

62

72

61

85

58

69

62

84

South-east Asia operations including Hong Kong

1,529

1,529

1,337

1,679

1,446

1,506

1,367

1,649

Chinanote (6)

187

107

187

115

183

107

186

116

Taiwan

105

108

108

103

101

107

109

102

Indianote (4)

122

118

104

111

110

111

103

112

Total Asia insurance operations

1,943

1,862

1,736

2,008

1,840

1,831

1,765

1,979










US









Variable annuities

604

550

544

537

570

544

560

521

Elite Access (variable annuity)

110

91

89

79

104

90

93

75

Fixed annuities

24

21

17

17

23

21

17

17

Fixed index annuities

16

14

13

12

15

14

13

12

Wholesale

206

26

153

81

194

30

158

76

Total US

960

702

816

726

906

699

841

701










UK and Europe









Bonds

174

177

165

189

174

177

165

189

Corporate pensions

75

65

75

49

75

65

75

49

Individual pensions

279

328

316

287

279

328

316

287

Income drawdown

106

116

123

133

106

116

123

133

Other products

87

84

91

88

87

84

91

88

Total UK and Europe

721

770

770

746

721

770

770

746










Group total

3,624

3,334

3,322

3,480

3,467

3,300

3,376

3,426

 

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

 

Note:      The H1 and H2 of 2017 comparative results are shown below on actual exchange rates (AER) as previously reported.

 

 



2017



2018




H1

H2



H1

H2




£m

£m



£m

£m











Opening FUM


174,805

193,714



210,423

207,860


Net Flows:note (8)


9,452

11,026



2,685

(14,186)


    - Gross Inflows


34,213

35,201



31,857

26,227


    - Redemptions


(24,761)

(24,175)



(29,172)

(40,413)


Other Movements


9,457

5,683



(5,248)

2,727


Group totalnote (9)


193,714

210,423



207,860

196,401











M&GPrudential









Retail:









Opening FUM


64,209

72,500



79,697

79,821


Net Flows:


5,515

5,528



2,154

(7,022)


    - Gross Inflows


15,871

15,078



16,471

8,113


    - Redemptions


(10,356)

(9,550)



(14,317)

(15,135)


Other Movements


2,776

1,669



(2,030)

(3,334)


Closing FUM


72,500

79,697



79,821

69,465











Comprising amounts for:









   UK


35,201

35,740



33,786

30,600


   Europe (excluding UK)


35,192

42,321



44,571

37,523


   South Africa


2,107

1,636



1,464

1,342




72,500

79,697



79,821

69,465











Institutional:note (3)









Opening FUM


72,554

76,618



84,158

85,669


Net Flows:


1,664

4,630



1,394

(6,441)


    - Gross Inflows


6,806

8,414



4,930

8,024


    - Redemptions


(5,142)

(3,784)



(3,536)

(14,465)


Other Movements


2,400

2,910



117

(1,747)


Closing FUM


76,618

84,158



85,669

77,481











Total M&GPrudential


149,118

163,855



165,490

146,946











PPM South Africa FUM included in total M&GPrudential


5,427

5,963



5,452

5,144











Eastspring - excluding MMFnote (8)









Third party retail:note (7)









Opening FUM


30,793

36,093



38,676

36,086


Net Flows:


2,186

1,567



25

(692)


    - Gross Inflows


10,781

11,017



10,118

9,125


    - Redemptions


(8,595)

(9,450)



(10,093)

(9,817)


Other Movements*


3,114

1,016



(2,615)

7,946


Closing FUMnote (5)


36,093

38,676



36,086

43,340











Third party institutional:









Opening FUM


7,249

8,503



7,892

6,284


Net Flows:


87

(699)



(888)

(31)


    - Gross Inflows


755

692



338

965


    - Redemptions


(668)

(1,391)



(1,226)

(996)


Other Movements


1,167

88



(720)

(138)


Closing FUMnote (5)


8,503

7,892



6,284

6,115











Total Eastspring investment operations (excluding MMF)


44,596

46,568



42,370

49,455


 

*    Other movements during the year for Eastspring investments include an inflow of £8.7 billion funds under management (ex MMF) from the acquisition of TMB Asset Management Co., Ltd. ('TMBAM') in Thailand. See note D1.2 of the consolidated financial statements for further details.

 

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

 

Note:      Comparative results for half year (HY) and full year (FY) 2017 are presented on both actual exchange rates (AER) and constant exchange rates (CER). The full year 2018 results are presented on actual exchange rates.

 


AER

CER


2017

2018

2017

2018


HY

FY

HY

FY

HY

FY

HY

FY


£m

£m

£m

£m

£m

£m

£m

£m

New business profit (NBP)









Total Asia insurance operations

1,092

2,368

1,122

2,604

1,030

2,282

1,147

2,604

Total US insurance operations

436

906

466

921

412

874

480

921

Total UK and Europe insurance operations

161

342

179

352

161

342

179

352

Group total

1,689

3,616

1,767

3,877

1,603

3,498

1,806

3,877










APEnote (2)









Total Asia insurance operations

1,943

3,805

1,736

3,744

1,840

3,671

1,765

3,744

Total US insurance operations

960

1,662

816

1,542

906

1,605

841

1,542

Total UK and Europe insurance operations

721

1,491

770

1,516

721

1,491

770

1,516

Group total

3,624

6,958

3,322

6,802

3,467

6,767

3,376

6,802










New business margin (NBP as % of APE)









Total Asia insurance operations

56%

62%

65%

70%

56%

62%

65%

70%

Total US insurance operations

45%

55%

57%

60%

45%

55%

57%

60%

Total UK and Europe insurance operations

22%

23%

23%

23%

22%

23%

23%

23%

Group total

47%

52%

53%

57%

46%

52%

53%

57%










PVNBPnote (2)









Total Asia insurance operations

10,095

20,405

9,132

20,754

9,584

19,730

9,292

20,754

Total US insurance operations

9,602

16,622

8,163

15,423

9,062

16,045

8,412

15,423

Total UK and Europe insurance operations

6,616

13,784

7,088

14,073

6,616

13,784

7,088

14,073

Group total

26,313

50,811

24,383

50,250

25,262

49,559

24,792

50,250










New business margin (NBP as % of PVNBP)









Total Asia insurance operations

10.8%

11.6%

12.3%

12.5%

10.7%

11.6%

12.3%

12.5%

Total US insurance operations

4.5%

5.5%

5.7%

6.0%

4.5%

5.5%

5.7%

6.0%

Total UK and Europe insurance operations

2.4%

2.5%

2.5%

2.5%

2.4%

2.5%

2.5%

2.5%

Group total

6.4%

7.1%

7.2%

7.7%

6.3%

7.1%

7.3%

7.7%

 

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

 

The tables below show how the value of in-force business (VIF) generated by the in-force long-term business and the associated required capital is modelled as emerging into free surplus over the next 40 years. Although a small amount (circa 5 per cent) of the Group's embedded value emerges after this date, analysis of cash flows emerging in the years shown in the tables is considered most meaningful. The modelled cash flows use the same methodology underpinning the Group's embedded value reporting and so are subject to the same assumptions and sensitivities used to prepare our 2018 results.

 

In addition to showing the amounts, both discounted and undiscounted, expected to be generated from all in-force business at 31 December 2018, the tables also present the expected future free surplus to be generated from the investment made in new business during 2018 over the same 40-year period for long-term business operations.

 





31 Dec 2018 £m



Undiscounted expected generation from

all in-force business*


Undiscounted expected generation from

new business written*

Expected period of emergence

Asia

Total


Asia

Total

2019

1,560

1,584

593

3,737


204

205

31

440

2020

1,504

1,674

609

3,787


200

153

34

387

2021

1,446

1,737

591

3,774


195

147

36

378

2022

1,441

1,674

572

3,687


206

154

38

398

2023

1,438

1,625

555

3,618


187

122

42

351

2024

1,371

1,629

537

3,537


166

73

38

277

2025

1,345

1,407

521

3,273


176

60

36

272

2026

1,332

1,249

497

3,078


167

166

35

368

2027

1,309

1,224

472

3,005


155

163

34

352

2028

1,266

1,143

448

2,857


163

147

34

344

2029

1,177

1,056

425

2,658


131

136

32

299

2030

1,169

962

402

2,533


134

129

31

294

2031

1,145

798

379

2,322


122

108

29

259

2032

1,131

645

465

2,241


120

97

30

247

2033

1,115

422

435

1,972


137

85

29

251

2034

1,061

448

405

1,914


119

74

27

220

2035

1,059

242

375

1,676


120

51

25

196

2036

1,081

135

346

1,562


120

49

24

193

2037

1,113

94

319

1,526


120

44

23

187

2038

1,104

102

292

1,498


129

44

22

195

2039-2043

6,131

320

1,137

7,588


884

84

83

1,051

2044-2048

5,843

-

696

6,539


944

-

49

993

2049-2053

5,452

-

329

5,781


922

-

31

953

2054-2058

4,964

-

157

5,121


897

-

17

914

Total free surplus expected to











emerge in the next 40 years

47,557

20,170

11,557

79,284


6,718

2,291

810

9,819

* The analysis excludes amounts incorporated into VIF at 31 December 2018 where there is no definitive time frame for when the payments will be made or receipts received. In particular, it excludes the value of the shareholders' interest in the with-profits estate. It also excludes any free surplus emerging after 2058.

 

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








2018 £m



Asia

US

UK and

Europe

Total

Undiscounted expected free surplus generation for years 2019 to 2058

6,718

2,291

810

9,819

Less: discount effect

(3,964)

(905)

(352)

(5,221)

Discounted expected free surplus generation for years 2019 to 2058

2,754

1,386

458

4,598

Discounted expected free surplus generation for years after 2058

863

-

1

864

Less: Free surplus investment in new business

(488)

(225)

(102)

(815)

Other items

(525)

(240)

(5)

(770)

Post-tax EEV new business profit for long-term business operations

2,604

921

352

3,877

†  Other items represent the impact of the time value of options and guarantees on new business, foreign exchange effects and other non-modelled items. Foreign exchange effects arise as EEV new business profit amounts are translated at average exchange rates and the expected free surplus generation uses year end closing rates.

 

The undiscounted expected free surplus generation from all in-force business at 31 December 2018 shown below can be

reconciled to the amount that was expected to be generated as at 31 December 2017 as follows:













Group

2018

2019

2020

2021

2022

2023


Other


Total



£m

£m

£m

£m

£m

£m


£m


£m

2017 expected free surplus generation   

   for years 2018 to 2057

3,528

3,462

3,456

3,467

3,318

3,253


49,636


70,120

Less: Amounts expected to be realised

   in the current year

(3,528)

-

-

-

-

-


-


(3,528)

Add: Expected free surplus to be

   generated in year 2058*

-

-

-

-

-

-


649


649

Foreign exchange differences

-

129

132

137

132

132


1,916


2,578

New business

-

440

387

378

398

351


7,865


9,819

Operating movements

-

(52)

(60)

(22)

23

56





Non-operating and other movements

-

(242)

(128)

(186)

(184)

(174)


615


(354)

2018 expected free surplus generation

   for years 2019 to 2058

-

3,737

3,787

3,774

3,687

3,618


60,681


79,284















2018

2019

2020

2021

2022

2023


Other


Total

Asia operations

£m

£m

£m

£m

£m

£m


£m


£m

2017 expected free surplus generation   

   for years 2018 to 2057

1,393

1,352

1,299

1,256

1,239

1,202


30,029


37,770

Less: Amounts expected to be realised

   in the current year

(1,393)

-

-

-

-

-


-


(1,393)

Add: Expected free surplus to be

   generated in year 2058*

-

-

-

-

-

-


610


610

Foreign exchange differences

-

40

40

41

42

43


1,304


1,510

New business

-

204

200

195

206

187


5,726


6,718

Operating movements

-

(24)

(38)

(42)

(25)

(22)





Non-operating and other movements

-

(12)

3

(4)

(21)

28


2,499


2,342

2018 expected free surplus generation

   for years 2019 to 2058

-

1,560

1,504

1,446

1,441

1,438


40,168


47,557















2018

2019

2020

2021

2022

2023


Other


Total

US operations

£m

£m

£m

£m

£m

£m


£m


£m

2017 expected free surplus generation

   for years 2018 to 2057

1,464

1,425

1,483

1,551

1,441

1,433


9,847


18,644

Less: Amounts expected to be realised

   in the current year

(1,464)

-

-

-

-

-


-


(1,464)

Foreign exchange differences

-

89

92

96

90

89


612


1,068

New business

-

205

153

147

154

122


1,510


2,291

Operating movements

-

(25)

(18)

27

58

85





Non-operating and other movements

-

(110)

(36)

(84)

(69)

(104)


(93)


(369)

2018 expected free surplus generation

   for years 2019 to 2058

-

1,584

1,674

1,737

1,674

1,625


11,876


20,170














2018

2019

2020

2021

2022

2023


Other


Total

M&GPrudential insurance operations

£m

£m

£m

£m

£m

£m


£m


£m

2017 expected free surplus generation

   for years 2018 to 2056

671

685

674

660

638

618


9,760


13,706

Less: Amounts expected to be realised

   in the current year

(671)

-

-

-

-

-


-


(671)

Add: Expected free surplus to be

   generated in year 2058*

-

-

-

-

-

-


39


39

New business

-

31

34

36

38

42


629


810

Operating movements

-

(3)

(4)

(7)

(10)

(7)





Non-operating and other movements

-

(120)

(95)

(98)

(94)

(98)


(1,791)


(2,327)

2018 expected free surplus generation

   for years 2019 to 2058

-

593

609

591

572

555


8,637


11,557

*    Excluding 2018 new business.

 

At 31 December 2018, the total free surplus expected to be generated over the next five years (2019 to 2023 inclusive), using the same assumptions and methodology as those underpinning our 2018 embedded value reporting was £18.6 billion, an increase of £1.4 billion from the £17.2 billion expected over an equivalent period from the end of 2017.

 

This increase primarily reflects the new business written in 2018, which is expected to generate £1,954 million of free surplus over the next five years.

 

At 31 December 2018, the total free surplus expected to be generated on an undiscounted basis in the next 40 years is £79.3 billion, up from the £70.1 billion expected at the end of 2017, reflecting the effect of new business written across all three business operations of £9.8 billion, a positive foreign exchange translation effect of £2.6 billion and a £(0.4) billion net effect reflecting operating, market assumption changes and other items. The £2.3 billion impact in Asia of operating, non-operating and other movements includes the net benefit from changes in operating assumptions following the annual review of experience, together with the benefit of management actions and generally higher interest rates increasing projected returns. The £(0.4) billion impact in the US mainly reflects the effect of lower than expected separate account return in the year, partially offset by the positive effect from persistency assumption updates and higher interest rates increasing future separate account return. The £(2.3) billion impact in the UK and Europe reflects the effect of lower than assumed investment returns on with-profits funds and the reinsurance of part of its shareholder annuity portfolio to Rothesay Life as discussed in note 17. The overall growth in the Group's undiscounted value of free surplus reflects our ability to write both growing and profitable new business.

 

Actual underlying free surplus generated in 2018 from life business in force, before restructuring costs,  at the end of 2018 was £4.4 billion including £0.8 billion of changes in operating assumptions and experience variances. This compares with the expected 2018 realisation at the end of 2017 of £3.5 billion. In the UK and Europe, the difference between the transfer to free surplus recognised in 2018 and the free surplus expected to be generated at 31 December 2017 reflects the reinsurance of the shareholder annuity portfolio to Rothesay Life (as discussed in note 17) which was not known at 2017. This can be analysed further as follows:







Asia

US

UK and Europe

Total


£m

£m

£m

£m

Transfer to free surplus in 2018

1,370

1,462

607

3,439

Expected return on free assets

68

54

79

201

Changes in operating assumptions and

   experience variances

62

125

591

778

Underlying free surplus generated from

in-force life business before restructuring

   costs in 2018

1,500

1,641

1,277

4,418






2018 free surplus expected to be generated at

   31 December 2017

1,393

1,464

671

3,528












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





31 Dec 2018 £m



Discounted expected generation from all

in-force business


Discounted expected generation from

new business written

Expected period of emergence

Asia

Total


Asia

Total

2019

1,495

1,497

579

3,571


194

198

31

423

2020

1,353

1,486

568

3,407


176

139

32

347

2021

1,217

1,447

531

3,195


161

126

33

320

2022

1,140

1,307

488

2,935


159

121

34

314

2023

1,071

1,191

450

2,712


138

92

35

265

2024

965

1,120

411

2,496


116

52

31

199

2025

895

910

379

2,184


118

41

28

187

2026

835

760

341

1,936


106

100

26

232

2027

776

694

308

1,778


92

92

24

208

2028

714

610

274

1,598


92

77

22

191

2029

624

527

245

1,396


68

67

20

155

2030

588

452

215

1,255


65

60

18

143

2031

548

355

187

1,090


56

46

16

118

2032

516

273

218

1,007


52

39

16

107

2033

486

164

188

838


56

32

14

102

2034

436

165

163

764


47

25

12

84

2035

415

93

139

647


45

16

10

71

2036

409

52

123

584


43

14

9

66

2037

407

33

110

550


41

12

8

61

2038

386

35

98

519


43

11

6

60

2039-2043

1,951

123

324

2,398


285

26

21

332

2044-2048

1,509

-

110

1,619


251

-

10

261

2049-2053

1,128

-

38

1,166


197

-

2

199

2054-2058

811

-

4

815


153

-

-

153

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

20,675

13,294

6,491

40,460


2,754

1,386

458

4,598

 

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





31 Dec 2018 £m

Discounted expected generation from all in-force business for years 2019 to 2058

40,460

Discounted expected generation from all in-force business for years after 2058

2,659

Discounted expected generation from all in-force business at 31 December 2018

43,119

Add: Free surplus of life operations held at 31 December 2018

7,527

Less: Time value of guarantees

(2,427)

Other non-modelled items

2,169

Total EEV for long-term business operations

50,388

 

C    Foreign currency source of key metrics

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

 

Free surplus and Group IFRS results




 

Underlying free surplus generated for total insurance and asset management operations

IFRS pre-tax

operating profit

IFRS shareholders'

funds


note (iii)

notes (ii),(iv)

notes (ii),(iv)

US dollar linkednote (i)

15%

28%

22%

Other Asia currencies

13%

17%

15%

Total Asia

28%

45%

37%

UK sterlingnotes (ii),(iv)

39%

15%

49%

US dollarnote (iv)

33%

40%

14%

Total

100%

100%

100%

 

Group EEV post-tax results





New business

profit

Operating profit

Shareholders' funds



notes (ii),(iv)

notes (i),(iv)

US dollar linkednote (i)

57%

53%

40%

Other Asia currencies

10%

7%

10%

Total Asia

67%

60%

50%

UK sterlingnotes (ii),(iv)

9%

12%

26%

US dollarnote (iv)

24%

28%

24%

Total

100%

100%

100%

 

Notes

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

(ii)    For operating profit and shareholders' funds, UK sterling includes amounts in respect of M&GPrudential and other operations (including central operations and Prudential Capital). Operating profit for central operations includes amounts for corporate expenditure for Group Head Office as well as Asia Regional Head Office which is incurred in HK dollars as well as restructuring costs incurred by the Group.

(iii)   For operating free surplus generation, UK sterling includes amounts in respect of restructuring costs incurred by insurance and asset management operations.

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

 

 


This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
 
END
 
 
FR EANDAFAPNEFF

Companies

Prudential (PRU)
UK 100

Latest directors dealings