SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the
month of March, 2017
PRUDENTIAL PUBLIC LIMITED COMPANY
(Translation of registrant's name into English)
LAURENCE POUNTNEY HILL,
LONDON, EC4R 0HH, ENGLAND
(Address
of principal executive offices)
Indicate
by check mark whether the registrant files or will file annual
reports
under
cover Form 20-F or Form 40-F.
Form
20-F X
Form 40-F
Indicate
by check mark whether the registrant by furnishing the
information
contained
in this Form is also thereby furnishing the information to
the
Commission
pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Chief
Financial Officer's report on the 2016 financial
performanceYes
No X
If
"Yes" is marked, indicate below the file number assigned to the
registrant
in connection with Rule 12g3-2(b): 82-
|
NEWS
RELEASE
|
PRUDENTIAL
PLC
|
|
|
GROUP
COMMUNICATIONS
|
|
|
12
ARTHUR STREET
|
|
|
LONDON
EC4R 9AQ
|
|
|
TEL
020 7220 7588
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|
|
FAX
020 7548 3725
|
|
|
www.prudential.co.uk
|
14 March
2017
PRUDENTIAL PLC FULL YEAR 2016 RESULTS
RECORD GROUP IFRS OPERATING PROFIT OF £4,256 MILLION LED BY
DOUBLE DIGIT-GROWTH IN ASIA
Performance highlights on a constant (and actual) exchange rate
basis
● Asia
IFRS operating profit1 of £1,644
million, up 15 per cent2,3 (up 28 per
cent4)
● Asia
new business profit5 of £2,030
million, up 22 per cent2,3 (up 37 per
cent4)
● US
life insurance IFRS operating profit1 of £2,052
million, up 8 per cent3 (up 21 per
cent4)
● UK
life retail APE sales of £1,160 million, up 33 per cent, with
PruFund APE sales up 52 per cent to £873
million
● M&G
total assets under management of £265 billion, with external
assets under management up 8 per cent4
● Full
year 2016 ordinary dividend increased by 12 per cent to 43.5 pence
per share8
● Group
Solvency II surplus6 estimated at
£12.5 billion; equivalent to a cover ratio of 201 per
cent7
● The
Group is on course to achieve its 2017 financial
objectives
Mike Wells, Group Chief Executive, said: "Prudential has delivered
a strong financial performance in 2016. In a year that has seen
continued low interest rates, market volatility and dramatic
political change, our results continue to benefit from the scale
and diversity of the Group's global platform, the disciplined
execution of our strategy and the strength of the opportunities in
our target markets.
"Our performance
has been driven by Asia, which has delivered a seventh consecutive
year of double-digit growth in new business profit, IFRS operating
profit and capital generation. In the fourth quarter of 2016,
quarterly APE sales in Asia exceeded £1 billion for the first
time, with eight of our markets in the region growing by more than
20 per cent. For the full year, our new business profit in this
region increased by 22 per cent2 to £2,030
million, IFRS operating profit was 15 per cent2 higher at
£1,644 million and free surplus generation2,10 grew 15 per
cent to £859 million. In the US and in the UK, our businesses
remain well positioned to navigate a period of significant
regulatory change. We remain on course to achieve our 2017
financial objectives.
"This performance has allowed us to increase our full year ordinary
dividend by 12 per cent to 43.5 pence per share8. The dividend
increase demonstrates our commitment to deliver long-term value for
our shareholders and our confidence in the future prospects of our
Group.
"Prudential helps to remove uncertainty from the most significant
financial events of our customers' lives, such as saving for a
child's education, protecting against the financial cost of
ill-health or turning hard-earned savings into secure retirement
income. We are well placed to provide these services through our
leading positions in many of our chosen markets. In Asia, growing
numbers of middle-class consumers increasingly require our health
and protection products, and ageing populations in the UK and the
US are seeking ways to invest their savings to produce secure
income for retirement.
"The Group's performance demonstrates our ability to capitalise on
the significant growth opportunities in these regions. We are well
positioned to continue to deliver high-quality products and
services to our 24 million life customers, and retain our
distinctive ability to generate both growth and cash for our
shareholders."
|
Summary financials
|
2016
£m
|
2015
£m
|
Change on
AER basis
|
Change on
CER basis
|
|
|
|
|
|
|
|
IFRS
operating profit based on longer-
term
investment returns1,2,9
|
4,256
|
3,969
|
7%
|
(2)%
|
|
Underlying
free surplus generated2,10,11
|
3,588
|
3,043
|
18%
|
10%
|
|
Life
new business profit2,11,12
|
3,088
|
2,492
|
24%
|
11%
|
|
IFRS
profit after tax13
|
1,921
|
2,579
|
(26)%
|
(32)%
|
|
Net
cash remittances from business units
|
1,718
|
1,625
|
6%
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
£bn
|
2015
£bn
|
Change on
AER basis
|
|
|
|
|
|
|
|
|
IFRS shareholders'
funds
|
14.7
|
13.0
|
13%
|
|
|
EEV shareholders'
funds14
|
39.0
|
31.9
|
22%
|
|
|
Group Solvency II
capital surplus6,7
|
12.5
|
9.7
|
29%
|
|
1. Based on
longer-term investment returns
2. Following its
reclassification to held for sale during 2016, operating results
exclude the contribution of the Korea life business. The 2015
comparative results have been similarly
adjusted.
3. Year-on-year
percentage increases are stated on a constant exchange rate basis
unless otherwise stated.
4. Growth rate on an
actual exchange rate basis.
5. New business profit
on business sold in the year, calculated in accordance with EEV
principles.
6.
The
Group Solvency II surplus represents the shareholder capital
position excluding the contribution to Own Funds and the Solvency
Capital Requirement from ring fenced with-profits funds and staff
pension schemes in surplus. The estimated solvency position
includes the impact of recalculated transitionals at the valuation
date, which has reduced the Group shareholder surplus from
£12.9 billion to £12.5 billion. The formal Quantitative
Reporting Templates (Solvency II regulatory templates) will include
transitional measures without this
recalculation.
7. Before allowing for
second interim ordinary dividend.
8. In 2015, in
addition to the ordinary dividend, a special dividend of 10 pence
per share was awarded.
9. IFRS operating
profit based on longer-term investment returns reflects higher
earnings from growth in premium base in Asia and aggregate assets
managed by our life and asset management operations across the
group. These higher earnings are offset by the effect of one-off
impacts in our UK Life operations.
10. Underlying free
surplus generated comprises underlying free surplus generated from
the Group's long-term business (net of investment in new business)
and that generated from asset management operations. Further
information is set out in note 11 of the EEV basis
results.
11. The 2016 EEV basis
results for UK insurance operations have been prepared on a basis
that reflect the Solvency II regime, effective from 1 January 2016.
The 2015 comparative results for UK insurance operations reflect
the Solvency I basis.
12. Excluding UK bulk
annuities from 2015 comparative results as Prudential has withdrawn
from this market.
13. IFRS profit after
tax reflects the combined effects of operating results, negative
short-term investment variances, (loss)/profit on sale of Korea
life business and the total tax charge for the
year.
14. Includes adjustment
for opening EEV shareholders' funds of negative £0.5 billion
for the impact of Solvency II as at 1 January
2016.
Contact:
|
Media
|
|
Investors/Analysts
|
|
|
Jonathan
Oliver
|
+44 (0)20 7548
3537
|
Raghu
Hariharan
|
+44 (0)20 7548
2871
|
|
Tom
Willetts
|
+44 (0)20 7548
2776
|
Richard
Gradidge
|
+44 (0)20 7548
3860
|
|
|
|
William
Elderkin
|
+44 (0)20 3480
5590
|
Notes to Editors:
|
1.
|
The results in this
announcement are prepared on two bases: International Financial
Reporting Standards (IFRS) and European Embedded Value (EEV). The
results prepared under IFRS form the basis of the Group's statutory
financial statements. The supplementary EEV basis results have been
prepared in accordance with the amended European Embedded Value
principles dated April 2016 formulated by the CFO Forum of European
Insurance Companies. The 2016 EEV results for UK insurance
operations have been prepared to reflect the Solvency II regime.
The 2015 EEV results for UK insurance operations have been prepared
reflecting the Solvency I basis, being the regime applicable for
that year. There is no change to the basis of preparation for Asia
and US operations. The Group's EEV basis results are stated on a
post-tax basis and, where appropriate, include the effects of IFRS.
Year-on-year percentage increases are presented on a constant
exchange rate basis unless otherwise stated. Constant exchange
rates results are calculated by translating prior year results
using the current year foreign exchange rate i.e. current year
average rates for the income statement and current year closing
rates for the balance sheet.
|
|
2.
|
Annual Premium
Equivalent (APE) sales comprise regular premium sales plus
one-tenth of single premium insurance sales.
|
|
3.
|
Operating profit is
determined on the basis of including longer-term investment
returns. EEV and IFRS operating profit is stated after excluding
the effect of short-term fluctuations in investment returns against
long-term assumptions, and (loss)/profit attaching to the held for
sale Korea life business. Furthermore, for EEV basis results,
operating profit based on longer-term investment returns excludes
the effect of changes in economic assumptions and the mark to
market value movement on core borrowings. Separately on the IFRS
basis, operating profit also excludes amortisation of accounting
adjustments arising principally on the acquisition of REALIC
completed in 2012 and the cumulative foreign exchange loss on the
disposal of the Japan Life business that has been recycled from
Other Comprehensive Income on completion of the sale process in
2015.
|
|
|
Total number of
Prudential plc shares in issue as at 31 December 2016 was
2,581,061,573.
|
|
|
A presentation for
analysts and investors will be held today at 11:00am (UK)/ 7:00pm
(Hong Kong) in the conference suite at Nomura International plc, 1
Angel Lane, London EC4R 3AB. The presentation will be webcast live
and as a replay on the corporate website via the link
below:
|
|
|
http://www.prudential.co.uk/investors/results-centre
|
|
|
A dial-in facility
will be available to listen to the presentation. Please allow time
ahead of the presentation to join the call (lines open half an hour
before the presentation is due to start, ie from 10.30am (UK) /
6.30pm (Hong Kong)). Dial-in: +44 (0) 20 3059 8125 / 0800 368 0649
(Freephone UK), Passcode: 'Prudential' (this must be quoted to the
operator to gain access to the call). Playback: +44 (0) 121 260
4861 (UK and international excluding US)/ +1 844 2308 058 (US
only), Passcode: 5392336#.
This will be available from approximately 2.00pm (UK) / 10.00pm
(Hong Kong) on 14 March 2017 until 11.59pm (UK) on 28 March 2017 /
6.59am (Hong Kong) on 29 March 2017.
|
|
6.
|
High-resolution
photographs are available to the media free of charge at
www.prudential.co.uk/prudential-plc/media/media_library
|
|
7.
|
2016 Second interim
ordinary dividend
|
|
|
Ex-dividend
date
|
29
March 2017 (Singapore)
|
|
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30
March 2017 (UK, Ireland and Hong Kong)
|
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Record
date
|
31
March 2017
|
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Payment
of dividend
|
19 May
2017 (UK, Ireland and Hong Kong)
|
|
|
|
On or
about 26 May 2017 (Singapore and ADR holders)
|
|
8.
|
About Prudential
plc
|
|
|
Prudential plc and
its affiliated companies constitute one of the world's leading
financial services groups, serving around 24 million insurance
customers and it has £599 billion of assets under management
(as at 31 December 2016). Prudential plc is incorporated in England
and Wales and is listed on the stock exchanges in London, Hong
Kong, Singapore and New York. Prudential plc is not affiliated in
any manner with Prudential Financial, Inc., a company whose
principal place of business is in the United States of
America.
|
|
9.
|
Forward-Looking Statements
|
|
|
This document may contain 'forward-looking statements' with respect
to certain of Prudential's plans and its goals and expectations
relating to its future financial condition, performance, results,
strategy and objectives. Statements that are not historical facts,
including statements about Prudential's beliefs and expectations
and including, without limitation, statements containing the words
'may', 'will', 'should', 'continue', 'aims', 'estimates',
'projects', 'believes', 'intends', 'expects', 'plans', 'seeks' and
'anticipates', and words of similar meaning, are forward-looking
statements. These statements are based on plans, estimates and
projections as at the time they are made, and therefore undue
reliance should not be placed on them. By their nature, all
forward-looking statements involve risk and uncertainty. A number
of important factors could cause Prudential's actual future
financial condition or performance or other indicated results to
differ materially from those indicated in any forward-looking
statement. Such factors include, but are not limited to, future
market conditions, including fluctuations in interest rates and
exchange rates, the potential for a sustained low-interest rate
environment, and the performance of financial markets generally;
the policies and actions of regulatory authorities, including, for
example, new government initiatives; the political, legal and
economic effects of the UK's vote to leave the European Union; the
impact of continuing designation as a Global Systemically Important
Insurer or 'G-SII'; the impact of competition, economic
uncertainty, inflation and deflation; the effect on Prudential's
business and results from, in particular, mortality and morbidity
trends, lapse rates and policy renewal rates; the timing, impact
and other uncertainties of future acquisitions or combinations
within relevant industries; the impact of changes in capital,
solvency standards, accounting standards or relevant regulatory
frameworks, and tax and other legislation and regulations in the
jurisdictions in which Prudential and its affiliates operate; and
the impact of legal and regulatory actions, investigations and
disputes. These and other important factors may, for example,
result in changes to assumptions used for determining results of
operations or re-estimations of reserves for future policy
benefits. Further discussion of these
and other important factors that could cause Prudential's actual
future financial condition or performance or other indicated
results to differ, possibly materially, from those anticipated in
Prudential's forward-looking statements can be found under the
'Risk factors' heading in this document.
|
|
|
Any forward-looking statements contained in this document speak
only as of the date on which they are made. Prudential expressly
disclaims any obligation to update any of the forward-looking
statements contained in this document or any other forward-looking
statements it may make, whether as a result of future events, new
information or otherwise except as required pursuant to the UK
Prospectus Rules, the UK Listing Rules, the UK Disclosure and
Transparency Rules, the Hong Kong Listing Rules, the SGX-ST listing
rules or other applicable laws and regulations.
|
Summary 2016 financial performance
Financial highlights
|
Life
APE new business sales (APE sales)1
|
|
|
Actual Exchange Rate
|
|
Constant Exchange Rate
|
|
|
2016 £m
|
2015 £m
|
Change %
|
|
2015 £m
|
Change %
|
|
|
|
|
|
|
|
|
|
Asia2
|
3,599
|
2,712
|
33
|
|
3,020
|
19
|
|
US
|
1,561
|
1,729
|
(10)
|
|
1,950
|
(20)
|
|
UK
retail3
|
1,160
|
874
|
33
|
|
874
|
33
|
|
Total
Group excluding bulk annuities2,3
|
6,320
|
5,315
|
19
|
|
5,844
|
8
|
|
UK
bulk annuities
|
-
|
151
|
(100)
|
|
151
|
(100)
|
|
Total
Group2
|
6,320
|
5,466
|
16
|
|
5,995
|
5
|
|
Life
EEV new business profits and investment in new
business
|
|
|
Actual Exchange Rate
|
|
Constant Exchange Rate
|
|
|
2016 £m
|
|
2015 £m
|
|
Change %
|
|
2015 £m
|
|
Change %
|
|
|
New
Business
Profit
|
|
Free
surplus
invested in
new
business
|
|
New
Business
Profit
|
|
Free
surplus
invested in
new
business
|
|
New
Business
Profit
|
|
Free
surplus
investment
in new
business
|
|
New
Business
Profit
|
|
Free
surplus
investment
in new
business
|
|
New
Business
Profit
|
|
Free
surplus
investment
in new
business
|
|
Asia2
|
2,030
|
|
476
|
|
1,482
|
|
386
|
|
37
|
|
23
|
|
1,660
|
|
426
|
|
22
|
|
12
|
|
US
|
790
|
|
298
|
|
809
|
|
267
|
|
(2)
|
|
12
|
|
913
|
|
301
|
|
(13)
|
|
(1)
|
|
UK
retail3,4
|
268
|
|
129
|
|
201
|
|
42
|
|
33
|
|
207
|
|
201
|
|
42
|
|
33
|
|
207
|
|
Total Group excluding
bulk
annuities2,3,4
|
3,088
|
|
903
|
|
2,492
|
|
695
|
|
24
|
|
30
|
|
2,774
|
|
769
|
|
11
|
|
17
|
|
UK
bulk annuities
|
-
|
|
-
|
|
117
|
|
23
|
|
(100)
|
|
(100)
|
|
117
|
|
23
|
|
(100)
|
|
(100)
|
|
Total
Group2,4
|
3,088
|
|
903
|
|
2,609
|
|
718
|
|
18
|
|
26
|
|
2,891
|
|
792
|
|
7
|
|
14
|
|
IFRS
Profit
|
|
|
|
|
|
|
|
|
|
|
Actual Exchange Rate
|
|
Constant Exchange Rate
|
|
|
|
|
2016 £m
|
2015 £m
|
Change %
|
|
2015 £m
|
Change %
|
|
Operating profit before tax based on longer-term investment
returns5
|
|
|
|
|
|
|
|
Long-term
business:
|
|
|
|
|
|
|
|
|
Asia2
|
1,503
|
1,171
|
28
|
|
1,303
|
15
|
|
|
US
|
2,052
|
1,691
|
21
|
|
1,908
|
8
|
|
|
UK
|
799
|
1,167
|
(32)
|
|
1,167
|
(32)
|
|
Long-term
business operating profit2
|
4,354
|
4,029
|
8
|
|
4,378
|
(1)
|
|
UK
general insurance commission
|
29
|
28
|
4
|
|
28
|
4
|
|
Asset
management business:
|
|
|
|
|
|
|
|
|
M&G
|
425
|
442
|
(4)
|
|
442
|
(4)
|
|
|
Prudential
Capital
|
27
|
19
|
42
|
|
19
|
42
|
|
|
Eastspring
Investments
|
141
|
115
|
23
|
|
128
|
10
|
|
|
US
|
(4)
|
11
|
(136)
|
|
13
|
(131)
|
|
Other
income and expenditure
|
(716)
|
(675)
|
(6)
|
|
(675)
|
(6)
|
|
Total operating profit based on longer-term
investment
returns before tax2
|
4,256
|
3,969
|
7
|
|
4,333
|
(2)
|
|
Non-operating
items:
|
|
|
|
|
|
|
|
|
(Loss)/Profit
attaching to held for sale Korea business
|
(227)
|
56
|
n/a
|
|
62
|
n/a
|
|
|
Other
non-operating items
|
(1,754)
|
(877)
|
(100)
|
|
(958)
|
(83)
|
|
Profit before tax attributable to shareholders
|
2,275
|
3,148
|
(28)
|
|
3,437
|
(34)
|
|
Tax
charge attributable to shareholders' returns
|
(354)
|
(569)
|
38
|
|
(621)
|
43
|
|
Profit for the year attributable to
shareholders
|
1,921
|
2,579
|
(26)
|
|
2,816
|
(32)
|
|
Post-tax
profit - EEV4,6
|
|
|
|
|
|
|
|
|
|
Actual Exchange Rate
|
|
Constant Exchange Rate
|
|
|
|
2016 £m
|
2015 £m
|
Change %
|
|
2015 £m
|
Change %
|
|
Post-tax operating profit based on longer-term
investment returns
|
|
|
|
|
|
|
|
Long-term
business:
|
|
|
|
|
|
|
|
|
Asia2
|
3,074
|
2,280
|
35
|
|
2,555
|
20
|
|
|
US
|
1,971
|
1,808
|
9
|
|
2,040
|
(3)
|
|
|
UK
|
643
|
863
|
(25)
|
|
863
|
(25)
|
|
Long-term
business post-tax operating profit2
|
5,688
|
4,951
|
15
|
|
5,458
|
4
|
|
UK
general insurance commission
|
23
|
22
|
5
|
|
22
|
5
|
|
Asset
management business:
|
|
|
|
|
|
|
|
|
M&G
|
341
|
358
|
(5)
|
|
358
|
(5)
|
|
|
Prudential
Capital
|
22
|
18
|
22
|
|
18
|
22
|
|
|
Eastspring
Investments
|
125
|
101
|
24
|
|
112
|
12
|
|
|
US
|
(3)
|
7
|
(143)
|
|
8
|
(138)
|
|
Other
income and expenditure
|
(699)
|
(617)
|
(13)
|
|
(617)
|
(13)
|
|
Post-tax operating profit based on longer-term
investment
returns2
|
5,497
|
4,840
|
14
|
|
5,359
|
3
|
|
Non-operating
items:
|
|
|
|
|
|
|
|
|
(Loss)/Profit
attaching to held for sale Korea business
|
(410)
|
39
|
n/a
|
|
42
|
n/a
|
|
|
Other
non-operating items
|
(571)
|
(928)
|
38
|
|
(1,057)
|
46
|
|
Post-tax profit for the year attributable to
shareholders
|
4,516
|
3,951
|
14
|
|
4,344
|
4
|
|
Basic
earnings per share2
-
based on operating profit after tax
|
|
|
Actual Exchange Rate
|
|
Constant Exchange Rate
|
|
|
2016 pence
|
2015 pence
|
Change %
|
|
2015 pence
|
Change %
|
|
IFRS
|
131.3
|
124.6
|
5
|
|
136.0
|
(3)
|
|
EEV4
|
214.7
|
189.6
|
13
|
|
209.9
|
2
|
|
Underlying
free surplus generated 4,6,7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual Exchange Rate
|
|
Constant Exchange Rate
|
|
|
|
2016 £m
|
|
2015 £m
|
|
Change %
|
|
2015 £m
|
Change %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-
term
|
Total
|
|
Long-
term
|
Total
|
|
Long-
term
|
Total
|
|
Long-
term
|
Total
|
Long-
term
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia2
|
734
|
859
|
|
565
|
666
|
|
30
|
29
|
|
638
|
750
|
15
|
15
|
|
US
|
1,568
|
1,565
|
|
1,159
|
1,166
|
|
35
|
34
|
|
1,307
|
1,315
|
20
|
19
|
|
UK
|
778
|
801
|
|
813
|
835
|
|
(4)
|
(4)
|
|
813
|
835
|
(4)
|
(4)
|
|
M&G
|
-
|
341
|
|
-
|
358
|
|
-
|
(5)
|
|
-
|
358
|
-
|
(5)
|
|
Prudential
Capital
|
-
|
22
|
|
-
|
18
|
|
-
|
22
|
|
-
|
18
|
-
|
22
|
|
Total
Group2
|
3,080
|
3,588
|
|
2,537
|
3,043
|
|
21
|
18
|
|
2,758
|
3,276
|
12
|
10
|
|
Cash
remitted by the business units to the
Group8
|
|
|
|
|
|
|
|
2016 £m
|
2015 £m
|
Change %
|
|
Asia
|
516
|
467
|
10
|
|
US
|
420
|
470
|
(11)
|
|
UK
|
300
|
301
|
-
|
|
M&G
|
290
|
302
|
(4)
|
|
Prudential
Capital
|
45
|
55
|
(18)
|
|
Other
UK
|
147
|
30
|
n/a
|
|
Total
Group
|
1,718
|
1,625
|
6
|
|
Cash
and capital
|
|
|
|
|
|
|
|
|
|
|
2016
|
2015
|
Change %
|
|
Ordinary
dividend per share relating to the reporting
year
|
43.5p
|
38.78p
|
12
|
|
Special
dividend per share
|
-
|
10.00p
|
n/a
|
|
Holding
company cash and short-term investments
|
£2,626m
|
£2,173m
|
21
|
|
Group
Solvency II capital surplus9,10
|
£12.5bn
|
£9.7bn
|
29
|
|
Group
Solvency II capital ratio9,10
|
201%
|
193%
|
+8pp
|
|
|
|
|
|
|
Group
shareholders' funds (including goodwill attributable to
shareholders)
|
|
|
|
|
|
|
|
2016
|
2015
|
Change %
|
|
IFRS
|
£14.7bn
|
£13.0bn
|
13
|
|
EEV4,11
|
£39.0bn
|
£31.9bn
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 %
|
2015 %
|
|
|
Return
on IFRS shareholders' funds12
|
26
|
27
|
|
|
Return
on embedded value4,11,12
|
17
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
2015
|
Change %
|
|
EEV
shareholders' funds4,11
per
share (including goodwill attributable to
shareholders)
|
1,510p
|
1,240p
|
22
|
|
EEV
shareholders' funds4,11
per
share (excluding goodwill attributable to
shareholders)
|
1,453p
|
1,183p
|
23
|
2017 Financial objectives13,14
|
Asia Objectives
|
2012
£m
|
|
2013
£m
|
|
2014
£m
|
|
2015
£m
|
|
2016
£m
|
|
CAGR
(since 2012)
%
|
Objectives
201713
|
|
Asia
life and asset management IFRS operating profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full
year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuals
|
909
|
|
1,058
|
|
1,108
|
|
1,286
|
|
1,644
|
|
|
>£1,826
million
|
|
|
|
Constant
exchange rate15
|
884
|
|
1,058
|
|
1,228
|
|
1,430
|
|
1,641
|
|
|
>15%
CAGR
|
|
|
|
Constant
exchange rate change % (year-on-year)
|
|
|
20
|
|
16
|
|
16
|
|
15
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia
Underlying Free Surplus Generation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full
year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuals
|
468
|
|
565
|
|
599
|
|
666
|
|
859
|
|
|
£0.9
- £1.1 billion
|
|
|
|
Constant
exchange rate15
|
454
|
|
565
|
|
669
|
|
758
|
|
872
|
|
|
|
|
|
|
Constant
exchange rate change % (year-on-year)
|
|
|
24
|
|
18
|
|
13
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group Objective for cumulative period 1 January 2014 to 31 December
2017
|
|
|
|
Actual
|
|
Objective
|
|
|
|
|
|
|
|
|
|
|
|
1 Jan 2014 to
31 Dec 2016
|
|
1 Jan 2014 to
31 Dec 2017
|
|
|
Cumulative
Group Underlying Free Surplus Generation7 from 2014
onwards
|
|
|
|
|
|
£9.2
billion
|
|
>
£10 billion
|
|
Notes:
|
1
|
APE sales is a measure of new
business activity that is calculated as the sum of annualised
regular premiums from new business plus 10 per cent of single
premiums on new business written during the period for all
insurance products, including premiums for contracts designated as
investment contracts under IFRS 4. It is not representative of
premium income recorded in the IFRS financial statements. Further
explanation of the differences is included in Note E of the
Additional EEV financial
information.
|
|
2
|
Following its reclassification to
held for sale during 2016, operating results exclude the
contribution of the Korea life business. The 2015 comparative
results have been similarly
adjusted.
|
|
3
|
Excluding UK bulk annuities as
Prudential has withdrawn from this
market.
|
|
4
|
The 2016 EEV basis results for UK
insurance operations have been prepared on a basis that reflects
the Solvency II regime, effective from 1 January 2016. The 2015
comparative results for UK insurance reflect the Solvency I
basis.
|
|
5
|
IFRS operating profit is
management's primary measure of profitability and provides an
underlying operating result based on longer-term investment returns
and excludes non-operating items. Further information on its
definition and reconciliation to profit for the period is set out
in note B1 of the IFRS financial
statements.
|
|
6
|
Embedded value reporting provides
investors with a measure of the future profit streams of the Group.
The EEV basis results have been prepared in accordance with EEV
principles discussed in note 1 of EEV basis results. A
reconciliation between IFRS and the EEV shareholder funds is
included in Note C of the Additional EEV financial
information.
|
|
7
|
Underlying free surplus generated
comprises underlying free surplus generated from the Group's
long-term business (net of investment in new business) and that
generated from asset management operations. Further information is
set out in note 11 of the EEV basis
results.
|
|
8
|
Cash remitted to the Group form part
of the net cash flows of the holding company. A full holding
company cash flow is set out in Note II (a) of Additional IFRS
financial information. This differs from the IFRS Consolidated
Statement of Cash Flows which includes all cash flows relating to
both policyholders and shareholders' fund. The holding company cash
flow is therefore a more meaningful indicator of the Group's
central liquidity
|
|
9
|
Estimated before allowing for second
interim ordinary dividend.
|
|
10
|
The Group Solvency II surplus represents the
shareholder capital position excluding the contribution to Own
Funds and the Solvency Capital Requirement from ring fenced
with-profits funds and staff pension schemes in surplus. The
estimated solvency position includes the impact of recalculated
transitionals at the valuation date, which has reduced the Group
shareholder surplus from £12.9 billion to £12.5 billion.
The formal Quantitative Reporting Templates (Solvency II regulatory
templates) will include transitional measures without this
recalculation.
|
|
11
|
Includes adjustment for opening EEV
shareholders' funds of negative £0.5 billion for the impact of
Solvency II as at 1 January 2016.
|
|
12
|
Operating profit after tax and
non-controlling interests, as a percentage of opening shareholders'
funds.
|
|
13
|
The objectives assume exchange rate
at December 2013 and economic assumptions made by Prudential in
calculating the EEV basis supplementary information for the half
year ended 30 June 2013, and are based on regulatory and solvency
regimes applicable across the Group at the time the objectives were
set. The objectives assume the existing EEV, IFRS and Free Surplus
methodology at December 2013 will be applicable over the
period.
|
|
14
|
Following the announcement of the
proposed sale of the Korea life business in November 2016, reported
amounts exclude the results of the Korea life business. As this
sale is expected to complete in 2017. The relevant 2017 objective
(Asia IFRS operating profit) has been
adjusted.
|
|
15
|
Constant exchange rates results
translated using exchange rates at December
2013.
|
Group Chief
Executive's report
I am pleased to report significant progress in 2016, reflecting our
successful strategy and the growing capabilities of the
Group.
Our global scale, close understanding of our markets and constant
drive to improve are continuing to create shared value for our
customers and our shareholders.
Prudential exists to de-risk people's lives. Saving for a child's
education, protecting people against the financial cost of
ill-health or the death of a family's primary income earner,
turning hard-earned savings into secure retirement income - across
all these areas we help to remove uncertainty from life's biggest
financial events.
Our strategy is shaped around meeting those needs where they are
greatest and where we have the capabilities to make the most
significant impact. That is among the increasingly affluent
population of Asia, who have a growing demand for the health and
protection products we provide, and the ageing populations of the
US and the UK, who are looking for ways to invest their savings to
produce income for retirement.
This was another year of innovation, as we continue to improve and
personalise our products to ensure they are tailored to the diverse
financial needs of our customers. At the same time, we remain
focused on the expansion of our distinctive distribution platforms,
allowing us to reach new customers and better serve existing ones.
Meanwhile, we continue to develop the investment capabilities of
our asset management businesses and to invest in the systems and
people to manage the risks we assume on behalf of our customers. We
are also sowing the seeds for our future growth by investing in new
markets.
Group performance
Prudential has delivered a strong financial performance in 2016,
led by growth in Asia. In a year that has seen continued low
interest rates, market volatility and dramatic political change,
our results continue to benefit from the scale and diversity of the
Group's global platform, the disciplined execution of our strategy
and the strength of the opportunities in our target
markets.
Our operational agility and broad business mix mean we are able to
continually flex our approach in response to local market
conditions and opportunities without compromising our overall
near-term financial performance. These characteristics have
recently been particularly evident in our businesses in Asia, which
continue to drive the growth of the Group and in 2016 achieved
double-digit increases across all of our major metrics. This was
despite deliberate pricing and product actions to protect
profitability of some market segments where returns were no longer
sufficiently attractive given the low-interest-rate environment. We
always seek the appropriate balance between value and
volume.
As in previous years, we comment on our performance in local
currency terms (expressed on a constant exchange rate basis) to
show the underlying business trends in a period of significant
currency movements.
New business profit1,3 increased by 11
per cent2,4 to £3,088
million (up 24 per cent on an actual exchange rate basis), driven
by growth of 22 per cent2 in Asia and 33 per
cent4 in
our UK retail business. In the US, a 13 per cent reduction in new
business profit mainly reflected lower industry volumes due to the
sector-wide disruption that followed the announcement in April 2016
of the Department of Labor's fiduciary reform, the implementation
of which is presently uncertain under the Trump
administration.
Group IFRS operating profit6 based on
longer-term investment returns was 2 per cent2 lower at
£4,256 million (up 7 per cent on an actual exchange rate
basis). Our businesses in Asia and the US generated growth of 15
per cent2 and 7 per cent
respectively, while the contribution from our UK-based businesses
reduced by 23 per cent. Here, as expected, the overall result was
impacted by the effect of negative fund flows at M&G, our
deliberate withdrawal from the UK bulk annuity market as returns
ceased to be attractive and a lower contribution from UK capital
optimisation actions. The result also includes a provision for the
cost of undertaking a review
in the UK of past non-advised annuity sales practices
and related potential redress.
Prudential's growing in-force business continues to support our
overall cash generation. Free surplus generation3,7 rose by 10 per
cent2 to
£3,588 million (up 18 per cent on an actual exchange rate
basis). Cash remittances to the Group were also higher at
£1,718 million, supporting the 12 per cent increase in the
2016 full year ordinary dividend to 43.5 pence per share. Since
2012 Prudential has made total payments to shareholders of
£4.6 billion, highlighting the underlying growth and
cash-generative nature of the business.
The Group continues to operate with a strong capital position,
ending the year with a Solvency II cover ratio9 of 201 per
cent8.
Over the period, IFRS shareholders' funds increased by 13 per cent
to £14.7 billion after taking into account profit after tax of
£1,921 million (2015: £2,579 million, on an actual
exchange rate basis) and other movements including positive foreign
exchange movements of £1.2 billion. EEV shareholders' funds
increased by 22 per cent to £39.0 billion, equivalent to 1,510
pence per share.
During 2016, we have strengthened our position as a diversified
global Group, delivering long-term value to customers and
shareholders.
In Asia, we are developing our operations, through the quality of
our business and through our scale. Underpinning the outlook for
Asia earnings, our new regular-premium income is up 20 per cent to
£3,359 million and life in-force weighted premium income is up
20 per cent to £9.1 billion. In addition, our Asian asset
manager, Eastspring Investments, has grown, with overall assets
under management reaching £117.9 billion at the year-end, a
new high.
In the US we are well positioned to navigate a period of
significant regulatory change, including the currently scheduled
introduction of the Department of Labor's fiduciary duty rule. The
product innovation that is in train to address the new regulatory
requirements, coupled with our sector-leading IT and servicing
capabilities, enables us to access sizeable retirement asset pools
that were previously not open to Jackson. The demographic shift
occurring in the US is a significant long-term driver of demand for
the types of products that we offer. In 2016, through this period
of disruption, Jackson's separate account assets relating to its
variable annuity business, and the main driver of earnings,
increased by 11 per cent to US$148.8 billion.
In the UK, where we are seeing a large amount of change in the
marketplace along with the introduction of new capital rules, we
are also adapting well. PruFund sales growth continues to
outperform the market, and our retail sales are now higher than
before the Retail Distribution Review. During this period of change
we remain focused on delivering high-quality products to meet our
customers' evolving needs. The FCA's thematic review of non-advised
annuity sales practices showed that, in a portion of annuity sales
that the UK business made since July 2008, it was not adequately
explained to customers that they may have been eligible for an
enhanced annuity. We are continuing to work to ensure we put things
right.
Also in the UK, at M&G, we are focused on careful management of
costs and improving performance. In 2016, assets managed by M&G
on behalf of external clients increased by 8 per cent to £137
billion, with internal assets taking the total to £265 billion
(2015: £246 billion).
We have made good progress towards our 2017 objectives, which we
announced in December 2013. Asia life and asset management pre-tax
operating profit has grown at a compound annual rate of 17 per cent
over the period 2012 to 2016. We are therefore on track to meet the
objective of growing this measure at a compound annual rate of at
least 15 per cent over the period 2012 to 2017. In 2016, Asia
delivered underlying free surplus generation of £859 million
demonstrating that we are on course to meet the objective of
£900 million to £1.1 billion for full-year 2017.
Collectively the Group has so far delivered underlying free surplus
generation from the beginning of 2014 to 2016 of £9.2 billion,
close to our objective for the period 2014 to the end of 2017 of at
least £10 billion.
Our strategy
We have a clear, consistent strategy focused on three parts of the
world where the needs of customers for the products we provide are
not fully met.
In Asia we aim to meet the savings, accumulation, health and
protection needs of the fast-growing and increasingly affluent
middle class.
As this group of people grows, so does their demand for goods and
services. As an example, three-quarters of
China's total population is forecast to be defined as middle income
by 2030. The growing purchasing power of this section of the
society is evident today. To illustrate,
60 million people left China for leisure travel purposes in 2011,
but by last year this had doubled to 120 million and by 2020 is
expected to top 200 million. Similarly last year Asian consumers
bought around half of all the cars sold in the world, up from an
average of less than 20 per cent during the
1990s.
The region's consumer spending growth is remarkable, but what is
closest to the hearts of people in Asia, as anywhere else, is
providing a secure and more prosperous future for their loved ones.
This is creating a powerful - and largely unmet - demand for the
products we provide. Asia has low insurance penetration, high
out-of-pocket healthcare spend and rapidly growing private wealth.
The working age population in the region is predicted to rise by
178 million by 2030. Mutual fund penetration rates are currently
just 12 per cent in Asia, compared with 75 per cent in Europe and
96 per cent in the US, and there is a significant mortality
protection gap.
We are a leading pan-regional franchise in Asia, we hold top-three
positions in nine of our 12 life markets in the region, and we are
the number one Asian retail asset manager10. We
have the presence, scale, distribution and product capabilities to
tap into the growing needs of our Asian
customers.
The US is the largest11 retirement
savings market in the world, and over the next 20 years Americans
will be retiring at a rate of 10,000 per day12. At the same
time, private defined-benefit pension plans are disappearing and
government plans are underfunded, life expectancy at age 65 has
increased significantly, and individual investors struggle to
capture returns and are exposed to volatile equity markets. The
confluence of these trends is precipitating an expansion of the
retirement market and a flight to quality that is aligned with
Jackson's capabilities.
In the UK, an ageing population that does not have enough saved for
the future is driving increasing demand for savings and retirement
income products, and this demand has been reinforced by the
pensions freedom changes. This is creating significant
opportunities for our UK businesses that both Prudential UK and
M&G are addressing through their long-term savings solutions
and investment strategies.
Our capabilities
We believe we have a great strategy, but any strategy is only as
good as its implementation. We are executing our strategy with
discipline and continually developing our
capabilities.
Across our markets, we are constantly innovating to improve the way
we do business. During 2016, we added a number of new
products
and services
to the successful range we offer around the world. In Asia, to take
just two examples,
Prudential Singapore became
the
first insurer in its
market
to launch an online community portal, where customers can share
ideas and suggestions to help us improve our products and services,
and Prudential Hong Kong gave customers access to an innovative
DNA-based health and nutrition programme, demonstrating how we are
building our capabilities to partner with customers to help improve
their long-term health and wellbeing. We also expanded our reach in
the region during 2016, by launching a new operation in
Laos.
In the US, Jackson launched its first fee-based variable annuity,
designed to meet the need for products compatible with the
Department of Labor's fiduciary duty rule. In the UK retail market
we introduced the Prudential Retirement Account, an online
account-based plan that offers both accumulation and decumulation
for customers near retirement and has proved extremely popular.
M&G added a number of new funds, including its Global Target
Return Fund and Absolute Return Bond Fund, helping customers deal
with market volatility.
Our distribution capability is another of our key strengths. In
2016, we made good progress in improving our distribution platform
throughout our markets. In Asia, productivity within our network of
agents improved, with average case sizes rising by 30 per
cent14.
The total number of agents across all our Asian markets is more
than 500,000. We also continued to leverage the strength of our
relationships with our bank partners, which has allowed us to
ensure the appropriate balance between value and volume. We have
access to more than 10,000 active bank branches through a total of
three regional, five strategic and a variety of local partnerships.
In the US, our variable annuity wholesale distribution platform is
now more than 60 per cent larger13 than that of our
nearest competitor, and our wholesaler productivity is 24 per cent
greater13.
In the UK, the number of our adviser firms has grown by 37 per cent
since 2013, and Prudential Financial Planning, our UK advisory
business, has grown to become a top-10 UK advisory business, from
its inception in
2012. In 2016
M&G,
whose
products are now registered in 23 jurisdictions around the
world,
established a new SICAV fund range in Luxembourg as a platform for
future international distribution. At the same time, we entered
Zambia, our fourth market in Africa. In less than three years, we
have built our African business to the point where it has 1,750
agents, is active in 181 bank branches and has over 160,000
customers, with a further 1.5 million micro-insurance customers
through partnerships with mobile phone operators and micro-finance
institutions.
Our proven investment performance track record is another vital
part of our capability. Across our asset management businesses we
offer a range of funds that give investors the opportunity to
benefit from a long-term, diversified approach, helping to deliver
sustainable investment performance regardless of short-term
market
fluctuations.
M&G
has a longstanding track record of superior investment performance,
with 85 per cent15 of retail assets
under management above median over the tenure of the fund manager.
Likewise, the proportion of Eastspring's funds outperforming the
median on a three-year period basis was 65 per cent16. In the UK, over
the last 10 years our highly regarded PruFund investment option has
delivered growth of 75 per cent, compared with a total return of 39
per cent for a benchmark ABI mixed investment fund. In the US, the
number of funds within Jackson's living benefit variable annuity
product that delivered a three-year annualised return, over the
period 2014 to 2016, of over 7 per cent was twice the number of
funds within the top 12 peer products combined5.
We are also using the Group's scale to improve our risk management
capabilities, including investing in new technology. In 2016 this
included commencing implementation of Aladdin, a global risk and
portfolio management platform for our asset management businesses,
which will help to simplify reporting systems and support future
growth.
Our outlook
Our growth prospects are based on clear long-term opportunities in
the three markets we are targeting. There are historic demographic
shifts taking place in these economies, and we are focused on
ensuring that our capabilities develop in line with the evolving
needs and preferences of our customers.
We have demonstrated our ability to manage through times of
economic uncertainty and market volatility, conditions that appear
likely to prevail for some time. Our strategy is clear, the demand
from customers for our products is strong and our execution is good
and getting better. We are well positioned to continue to deliver
value for both our customers and our
shareholders.
1. Embedded value reporting provides
investors with a measure of the future profit streams of the Group.
The EEV basis results have been prepared in accordance with EEV
principles discussed in note 1 of EEV basis results. A
reconciliation between IFRS and the EEV shareholder funds is
included in Note C of the Additional EEV financial
information.
2. Following
its reclassification to held for sale during 2016, operating
results exclude the contribution of the Korea life business. The
2015 comparative results have been similarly
adjusted.
3. The 2016 EEV basis results for UK
insurance operations have been prepared on a basis that reflects
the Solvency II regime, effective from 1 January 2016. The 2015
comparative results for UK insurance reflect the Solvency I
basis.
4. Excluding UK bulk annuities as
Prudential has withdrawn from this market.
5. Jackson analysis based on Morningstar
fund performance information as at 4Q YTD 2016, ranked by sales as
of end Q3 2016. ©2017 Morningstar Inc. All Rights Reserved.
The information contained herein: (1) is proprietary to Morningstar
and/or its content providers; (2) may not be copied or distributed;
and (3) is not warranted to be accurate, complete, or timely.
Neither Morningstar nor its content providers are responsible for
any damages or losses arising from any use of this
information. Past performance is no guarantee of future
results. Morningstar www.AnnuityIntel.com.
6. IFRS operating profit is management's
primary measure of profitability and provides an underlying
operating result based on longer-term investment returns and
excludes non-operating items. Further information on its definition
and reconciliation to profit for the period is set out in note B1
of the IFRS financial statements.
7. Underlying free surplus generated
comprises underlying free surplus generated from the Group's
long-term business (net of investment in new business) and that
generated from asset management operations. Further information is
set out in notes 9 of the EEV basis results.
8. Estimated before allowing for second
interim ordinary dividend.
9. The
Group Solvency II surplus represents the shareholder capital
position excluding the contribution to Own Funds and the Solvency
Capital Requirement from ring fenced with-profits funds and staff
pension schemes in surplus. The estimated solvency position
includes the impact of recalculated transitionals at the valuation
date, which has reduced the Group shareholder surplus from
£12.9 billion to £12.5 billion. The formal Quantitative
Reporting Templates (Solvency II regulatory templates) will include
transitional measures without this
recalculation.
10. Source: Asia asset management September 2016
(Ranked according to participating regional players only). Based on
assets sourced from the region, excluding Japan, Australia and New
Zealand as at June 2016.
11. Cerulli Associates - Advisor Metrics
2016.
12. Social Security
Administration, Annual Performance Plan for FY 2012 and Revised
Final Performance Plan for FY 2011.
13. Market Metrics - Variable Annuity Sales,
Staffing and Productivity Report: Q3 2016.
14. Excluding
India.
15. Investment
performance is to 31 December 2016 and reflects 33 retail funds,
representing 85 per cent of M&G retail funds under management,
which have delivered top or upper quartile performance over fund
manager tenure which is an average of 6 years. Quartile rankings
are based on returns which are net of fees.
16. Blended score representing 50 per cent by
number of funds and 50 per cent assets under management
outperforming benchmark or in top two quartiles over three-year
period.
Chief Financial Officer's report on the 2016 financial
performance
I am particularly
pleased to be able to report that Prudential's financial
performance in 2016 has showcased the resilience of our earnings,
cash and capital. While these are qualities I have mentioned in
previous reports, the external events of 2016 have seen them tested
repeatedly across our businesses during a year of significant
uncertainty, market volatility and unexpected political and
regulatory events. By remaining focused on our strategy and on
disciplined execution, our business withstood the effect of these
events and successfully adapted to changes in market conditions,
regulatory intervention and shifts in consumer preference, to
deliver a strong operating performance in 2016 and an improved
capital position.
Prudential's
financial attributes and multiple, diverse levers of growth have
enabled the Group to absorb not only the areas of earnings pressure
known at the beginning of the year, but also the fluctuations of
both equity markets and yields. New business profit, IFRS operating
profit and free surplus generation, the three financial measures
that we use to track delivery of our 'growth and cash' agenda, have
all increased in 2016 when expressed on an actual exchange rate
basis. This achievement demonstrates the benefits of our scale and
the strength of our business model which is well diversified by
geography, currency and source of earnings. The 2016 results also
highlight the earnings power of our growing in-force book of
business and our ability to add large new business volumes which
are an important store of future value.
The year-on-year
trends of the three 'growth and cash' measures are also positive
when expressed on a constant exchange rate basis, except for IFRS
operating profit, where we have seen a marginal fall due to the
effect of one-off impacts in our UK Life
operations.
The Group's
performance has once-again been led by Asia, with double digit
growth across new business profit, IFRS operating profit and free
surplus generation for the 7th year in a row.
This underlines the scale and quality of our regional franchise,
characterised by the high proportion of recurring income and bias
for protection business that is uncoupled from market effects. In
our insurance and asset management businesses in the UK and US, we
have continued to build our earnings base with growth in assets
managed on behalf of our customers.
2016 has seen
sterling weakening against most global currencies, which is
positive for the translation of results from our sizeable
non-sterling operations. However, to aid understanding of the
underlying progress in these businesses, we continue to express and
comment on the performance trends of our Asia and US operations on
a constant currency basis.
The key financial
highlights in 2016 were as follows:
|
●
|
New
business profit1
was
11 per cent2,3 higher at
£3,088 million (up 24 per cent on an actual exchange rate
basis), primarily as a result of higher volumes with APE sales up 8 per cent2,3. Growth was
strongest in Asia, where new business profit increased 22 per cent
on a 19 per cent uplift in APE sales and improvements in country
and channel mix. The contribution to new business profit from
Jackson declined by 13 per cent, reflecting lower variable annuity
sales volumes. UK life retail new business profit grew by 33 per
cent, driven by strong consumer demand for products offering access
to our PruFund investment option, which resulted in a 33 per cent
increase in retail APE sales. There was no bulk annuity new
business profit as we withdrew from this market in
2016.
|
|
●
|
IFRS
operating profit based
on longer-term investment returns (IFRS
operating profit) was 2 per cent3 lower at
£4,256 million (up 7 per cent on an actual exchange rate
basis). IFRS operating profit from our Asia life insurance and
asset management businesses grew by 15 per cent3 to £1,644
million, reflecting continued business momentum. In the US,
Jackson's total IFRS operating profit increased by 7 per cent,
mainly due to growth in fee income on higher asset balances, which
outweighed the anticipated reduction in spread earnings. In the UK,
total IFRS operating profit was 31 per cent lower than the prior
year, as a result of significantly reduced profits from annuity new
business following our withdrawal from the bulk annuity market, the
lower contribution from actions to support solvency and a provision
for the cost of undertaking a review of past non-advised annuity
sales practices and related potential redress. M&G's operating
profit was 4 per cent lower, reflecting the earnings impact of the
recent period of net fund
outflows.
|
|
●
|
Underlying
free surplus generation1,4,
our preferred measure of cash generation from our life and asset
management businesses, increased by 10 per cent3 to £3,588
million (up 18 per cent on an actual exchange rate basis), after
financing new business growth. The increase reflects a higher
contribution from our growing in-force book of business, as we
continue to focus on high-return new business with fast payback
periods and includes the benefit from capital actions in the UK and
the US.
|
|
●
|
Group
shareholders' Solvency II capital surplus7
was
estimated at £12.5 billion at 31 December 2016, equivalent to
a cover ratio of 201 per cent6 (1 January 2016:
£9.7 billion, 193 per cent). The improvement in the period
primarily reflects the continuing strength of the Group's operating
capital generation in excess of growing dividend payments to
shareholders, and also includes the benefit of debt issued in the
year.
|
|
●
|
Full
year ordinary dividend increased
by 12 per cent to 43.5 pence per share, reflecting our strong 2016
performance and our confidence in the future prospects of our
Group.
|
Global
investment market movements during 2016 were dominated by the sharp
drop in long-term yields over the first three quarters, and the
subsequent recovery into the end of the year prompted by more
favourable growth expectations in the US. Equity market performance
was notably stronger in the second half of the year, contributing
to a generally positive movement for 2016 overall in the countries
in which we operate. Over the full year, the US S&P 500 index
was up 10 per cent, the UK FTSE 100 index up 12 per cent and the
MSCI Asia ex-Japan index up 5 per cent. We have taken steps to
reduce the investment market sensitivity of our earnings and
balance sheet, but remain significant long-term holders of
financial assets to back the commitments that we have made to our
customers. Short-term fluctuations in both these assets and related
liabilities are reported outside the operating result, which is
based on long-term investment return assumptions. These short-term
fluctuations were overall negative in 2016, primarily as a result
of movements in the value of derivatives used by Jackson to protect
the economics of its business from adverse market shocks. As a
result, total IFRS post tax profit was £1,921 million (2015:
£2,579 million on an actual exchange rate basis) and total EEV
post-tax profit was £4,516 million (2015: £3,951 million
on an actual exchange rate basis).
Reflecting
the combined effects of improved operating results on an actual
exchange rate basis, negative short-term investment fluctuations
and positive currency movements of £1.2 billion, IFRS
shareholders' equity was 13 per cent higher at £14.7 billion.
Similarly, EEV basis shareholders' equity was up 22 per
cent5 at
£39.0 billion. As at 31 December 2016, the Group's Solvency II
capital surplus7 was £12.5
billion, equivalent to a cover ratio of 201 per cent6 (1 January 2016:
£9.7 billion, 193 per cent).
|
IFRS
profit
|
|
|
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
|
|
|
2016 £m
|
2015 £m
|
Change %
|
|
2015 £m
|
Change %
|
|
Operating profit before tax based on longer-term investment
returns
|
|
|
|
|
|
|
|
Long-term
business:
|
|
|
|
|
|
|
|
|
Asia3
|
1,503
|
1,171
|
28
|
|
1,303
|
15
|
|
|
US
|
2,052
|
1,691
|
21
|
|
1,908
|
8
|
|
|
UK
|
799
|
1,167
|
(32)
|
|
1,167
|
(32)
|
|
Long-term
business operating profit3
|
4,354
|
4,029
|
8
|
|
4,378
|
(1)
|
|
UK
general insurance commission
|
29
|
28
|
4
|
|
28
|
4
|
|
Asset
management business:
|
|
|
|
|
|
|
|
|
M&G
|
425
|
442
|
(4)
|
|
442
|
(4)
|
|
|
Prudential
Capital
|
27
|
19
|
42
|
|
19
|
42
|
|
|
Eastspring
Investments
|
141
|
115
|
23
|
|
128
|
10
|
|
|
US
|
(4)
|
11
|
(136)
|
|
13
|
(131)
|
|
Other
income and expenditure8
|
(716)
|
(675)
|
(6)
|
|
(675)
|
(6)
|
|
Total operating profit based on longer-term
investment
returns before tax3
|
4,256
|
3,969
|
7
|
|
4,333
|
(2)
|
|
Non-operating
items:
|
|
|
|
|
|
|
|
|
(Loss)/Profit
attaching to held for sale Korea business
|
(227)
|
56
|
n/a
|
|
62
|
n/a
|
|
|
Other
non-operating items8
|
(1,754)
|
(877)
|
(100)
|
|
(958)
|
(83)
|
|
Profit before tax attributable to shareholders
|
2,275
|
3,148
|
(28)
|
|
3,437
|
(34)
|
|
Tax
charge attributable to shareholders' returns
|
(354)
|
(569)
|
38
|
|
(621)
|
43
|
|
Profit for the year attributable to
shareholders
|
1,921
|
2,579
|
(26)
|
|
2,816
|
(32)
|
|
IFRS Earnings per share
|
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
|
2016
pence
|
2015
pence
|
Change %
|
|
2015
pence
|
Change %
|
|
Basic
earnings per share based on operating profit after
tax
|
131.3
|
124.6
|
5
|
|
136.0
|
(3)
|
|
Basic
earnings per share based on total profit after
tax
|
75.0
|
101.0
|
(26)
|
|
110.1
|
(32)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IFRS operating profit based on longer-term investment
returns
Total IFRS
operating profit declined by 2 per cent3 (7 per cent
increase on an actual exchange rate basis) in 2016 to £4,256
million, with increases in Asia and the US offset by anticipated
declines in the contribution from our UK
businesses.
|
●
|
Asia total
operating profit of £1,644
million was 15 per cent3 higher than the
previous year (28 per cent on an actual exchange rate basis), with
strong growth in both life insurance and asset management through
Eastspring Investments.
|
|
●
|
US total
operating profit at
£2,048 million increased by 7 per cent (20 per cent increase
on an actual exchange rate basis), driven by higher fee income from
growth in Jackson's separate account asset base and lower
amortisation of deferred acquisition costs, which together exceeded
the anticipated reduction in spread
income.
|
|
●
|
UK total
operating profit was 31
per cent lower at £828 million. This decline reflects lower
profit from new annuity business, down from £123 million to
£41 million in 2016 as we scale down our participation in the
annuity market, a lower contribution from management actions to
support solvency, down from £400 million to £332 million,
and the establishment of a £175 million provision for the cost
of undertaking a review of past non-advised annuity sales practices
and related potential redress.
|
|
●
|
M&G operating
profit was 4 per cent
lower at £425 million. The impact of recent asset outflows
from retail funds on overall funds under management has been
partially offset by the benefit of positive market
movements.
|
At the beginning of the year, we expected that
earnings would contract in a few discrete areas of the business: at
M&G, due to the impact of outflows on funds under management
and the corresponding fee income; in Jackson's spread business
portfolio as a result of persistently low interest rates; and in
our UK life business given our withdrawal from the bulk annuity
market. These identified effects have emerged largely as expected.
However, our focus on cost control and the effective management of
our in-force book of business have mitigated the overall impact of
these anticipated adverse effects. Earnings have also benefited
from continued growth in the premium base in Asia and the level of
aggregate assets managed by our life and asset management
operations across the Group, which together underpin the
longer-term earnings progression of our
business.
Life insurance operations:
Taken together, IFRS operating profit from our life insurance
operations in Asia, the US and the UK was 1 per cent3 lower at
£4,354 million (8 per cent increase on an actual exchange rate
basis).
IFRS operating profit in our life insurance operations in
Asia was 15 per
cent3
higher at £1,503 million (up 28 per cent on an actual exchange
rate basis), reflecting our ability to translate top-line growth
into shareholder value. The performance is underpinned by the
recurring premium income nature of our in-force book and the highly
diverse nature of our earnings by geography and by source.
Insurance income was up 24 per cent, reflecting our continued focus
on health and protection business. At a country level, we have seen
double-digit growth in six markets, led by Hong Kong (up 40 per
cent), China (up 83 per cent) and growth of 15 per cent or more
from Malaysia, Thailand, Vietnam and Taiwan. These markets have
more than compensated for the impact of lower earnings growth in
Indonesia and Singapore, following deliberate actions taken to
improve the quality of new business flows.
In the US, life IFRS
operating profit was 8 per cent higher at £2,052 million (up
21 per cent on an actual exchange rate basis), reflecting the
resilient performance of Jackson's franchise in an environment of
market volatility and sector-wide disruption following the
announcement of the Department of Labor's fiduciary duty rule in
April 2016. Average separate account balances increased by 5 per
cent, resulting in a 3 per cent rise in fee income, while the
result also benefited from scale efficiencies. As expected, lower
yields in the year have impacted spread income, which decreased by
5 per cent.
UK
life IFRS operating profit declined by 32 per cent to £799
million (2015: £1,167 million). Within this total, the
contribution from our core in-force with-profits and annuity
business was £601 million (2015: £644 million), including
an unchanged transfer to shareholders from the with-profits funds
of £269 million. The balance of the result reflects the
contribution from other activities which are either non-core or are
not expected to recur to the same extent going
forward.
Profit from new annuity business reduced from £123 million in
2015 to £41 million, as we scaled down our participation in
the annuity market. In response to the volatile investment market
environment during 2016, we took a number of asset and liability
actions to improve the solvency position of our UK life operations
and further mitigate market risk, generating combined profits of
£332 million (2015: £400 million). Of this amount,
£197 million related to profit from longevity reinsurance
transactions (2015: £231 million) and £135 million (2015:
£169 million) from the effect of repositioning the fixed
income asset portfolio. In response to the findings of the
FCA's thematic review of non-advised annuity sales
practices,
the UK business will review internally vesting annuities sold
without advice after 1 July 2008. Reflecting this, the UK life 2016
result includes a provision of £175 million for the cost of
this review and related potential redress. The provision does not
include potential insurance recoveries of up to £175
million.
We track the progress that we make in growing our life insurance
business by reference to the scale of our obligations to our
customers, which are referred to in the financial statements as
policyholder liabilities. Each year these increase as we write new
business and collect regular premiums from existing customers and
decrease as we pay claims and policies mature. The overall scale of
these policyholder liabilities is relevant in the evaluation of our
profit potential in that it reflects, for example, our ability to
earn fees on the unit-linked element and indicates the scale of the
insurance element, another key source of profitability for the
Group.
|
Shareholder-backed
policyholder liabilities and net liability
flows9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 £m
|
|
2015 £m
|
|
|
Actual Exchange Rate
|
|
Actual Exchange Rate
|
|
|
At 1
January
2016
|
Net liability
flows10
|
Market and
other
movements
|
At 31
December
2016
|
|
At 1
January
2015
|
Net liability
flows10
|
Market and
other
movements
|
At 31
December
2015
|
|
Asia11
|
25,032
|
2,086
|
5,733
|
32,851
|
|
26,410
|
1,867
|
(433)
|
27,844
|
|
US
|
138,913
|
5,198
|
33,515
|
177,626
|
|
126,746
|
8,476
|
3,691
|
138,913
|
|
UK
|
52,824
|
(3,646)
|
6,980
|
56,158
|
|
55,009
|
(2,694)
|
509
|
52,824
|
|
Total
Group
|
216,769
|
3,638
|
46,228
|
266,635
|
|
208,165
|
7,649
|
3,767
|
219,581
|
Focusing on the business supported by shareholder capital, which
generates over 90 per cent of the life profit, in 2016 net flows
into our businesses were overall positive at £3.6 billion,
reflecting our focus on both retaining our existing customers and
attracting new business to drive long-term value creation.
The weakening of sterling during the year contributed a total
£32.4 billion positive foreign exchange movement which,
together with favourable investment and other movements, led to a
£46.2 billion increase in policyholder liabilities, with much
of this arising in the second half of the year.
|
Policyholder
liabilities and net liability flows in with-profits
business9,25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 £m
|
|
2015 £m
|
|
|
Actual Exchange Rate
|
|
Actual Exchange Rate
|
|
|
At 1
January
2016
|
Net liability
flows10
|
Market and
other
movements
|
At 31
December
2016
|
|
At 1
January
2015
|
Net liability
flows10
|
Market and
other
movements
|
At 31
December
2015
|
|
Asia
|
20,934
|
3,696
|
5,303
|
29,933
|
|
18,612
|
2,102
|
220
|
20,934
|
|
UK
|
100,069
|
1,119
|
11,958
|
113,146
|
|
99,427
|
(968)
|
1,610
|
100,069
|
|
Total
Group
|
121,003
|
4,815
|
17,261
|
143,079
|
|
118,039
|
1,134
|
1,830
|
121,003
|
The 18 per cent increase in policyholder liabilities in our
with-profits business to £143.1 billion (2015: £121.0
billion), reflects the growing popularity with consumers seeking
protection from the impact of volatile market conditions. In the
course of 2016, net liability flows increased to £4.8 billion
across our Asian and UK operations. As returns from these funds are
smoothed and shared with customers, the emergence of shareholder
profit is more gradual. This business, nevertheless, remains an
important source of future shareholder value.
|
Analysis of long-term insurance business pre-tax IFRS operating
profit based on longer-term investment returns by
driver
|
|
|
|
Actual Exchange Rate
|
|
Constant Exchange Rate
|
|
|
|
2016 £m
|
2015 £m
|
|
2015 £m
|
|
|
|
Operating
profit3
|
Average
liability
|
Margin
bps
|
Operating
profit3
|
Average
liability
|
Margin
bps
|
|
Operating
profit3
|
Average
liability
|
Margin
bps
|
|
|
Spread
income
|
1,171
|
83,054
|
141
|
1,153
|
72,900
|
158
|
|
1,267
|
78,026
|
162
|
|
|
Fee
income
|
2,175
|
139,451
|
156
|
1,888
|
123,232
|
153
|
|
2,118
|
135,717
|
156
|
|
|
With-profits
|
317
|
118,334
|
27
|
314
|
106,749
|
29
|
|
319
|
108,551
|
29
|
|
|
Insurance
margin
|
1,991
|
|
|
1,671
|
|
|
|
1,858
|
|
|
|
|
Margin
on revenues
|
2,126
|
|
|
1,822
|
|
|
|
2,000
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
costs
|
(2,251)
|
6,320
|
(36)%
|
(2,100)
|
5,466
|
(38)%
|
|
(2,339)
|
5,995
|
(39)%
|
|
|
|
Administration
expenses*
|
(1,943)
|
229,477
|
(85)
|
(1,656)
|
203,664
|
(81)
|
|
(1,829)
|
222,250
|
(82)
|
|
|
|
DAC
adjustments
|
390
|
|
|
313
|
|
|
|
352
|
|
|
|
|
Expected
return on shareholder assets
|
221
|
|
|
224
|
|
|
|
232
|
|
|
|
|
|
4,197
|
|
|
3,629
|
|
|
|
3,978
|
|
|
|
|
Longevity
reinsurance and other management actions to improve UK
solvency
|
332
|
|
|
400
|
|
|
|
400
|
|
|
|
|
Provision
for review of past annuity sales
|
(175)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Operating
profit based on longer-term investment returns3
|
4,354
|
|
|
4,029
|
|
|
|
4,378
|
|
|
|
*
The ratio of acquisition costs is calculated as a percentage of APE
sales including with-profits sales. The acquisition costs include
only those relating to shareholders backed
business.
Alongside growing our overall level of life operating profit, we
continue to maintain our bias for higher-quality sources of income
such as insurance margin and fee income. We favour insurance margin
because it is relatively insensitive to the equity and interest
rate cycle and prefer fee income to spread income because it is
more capital-efficient. In line with this approach, on a constant
exchange rate basis, insurance margin has increased by 7 per cent
(up 19 per cent on an actual exchange rate basis) and fee income by
3 per cent (up 15 per cent on an actual exchange rate basis), while
spread income decreased by 8 per cent (up 2 per cent on an actual
exchange rate basis).
Asset management:
Movements in asset management operating profit are also primarily
influenced by changes in the scale of these businesses, as measured
by funds managed on behalf of external institutional and retail
customers and our internal life insurance operations. In 2016, IFRS
operating profit from our asset management businesses was
marginally lower at £589 million (2015: £602 million on a
constant exchange rate basis), primarily due to the impact of
negative net flows in M&G.
|
Asset
management net inflows and external funds under
management13,14
|
|
|
|
2016 £m
|
|
2015
£m
|
|
|
|
Actual Exchange Rate
|
|
Actual
Exchange Rate
|
|
|
|
At 1 January 2016
|
Net flows
|
Market and other movements
|
At 31 Dec 2016
|
|
At 1
January 2015
|
Net
flows
|
Market
and other movements
|
At 31
Dec 2015
|
|
M&G
|
126,405
|
(8,090)
|
18,448
|
136,763
|
|
137,047
|
(7,008)
|
(3,634)
|
126,405
|
|
Eastspring15
|
30,281
|
1,835
|
5,926
|
38,042
|
|
25,333
|
5,971
|
(1,023)
|
30,281
|
|
Total
external assets managed
|
156,686
|
(6,255)
|
24,374
|
174,805
|
|
162,380
|
(1,037)
|
(4,657)
|
156,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
external assets managed (including MMF)
|
162,692
|
(5,852)
|
25,679
|
182,519
|
|
167,180
|
28
|
(4,516)
|
162,692
|
M&G's
IFRS operating profit
declined by 4 per cent to £425 million (2015: £442
million),
reflecting the impact on revenues of lower average assets under
management during the year, following the net outflows experienced
since the second quarter of 2015. As these net outflows were
primarily from the higher margin retail business, they had a
disproportionately adverse impact on earnings. The same dynamics
have seen the cost-income ratio move up 2 percentage points to 59
per cent.
Despite continued outflows in 2016, external assets under
management at 31 December 2016 were 8 per cent higher than a year
ago at £136.8 billion, benefitting from
positive investment market movements, particularly in the second
half of the year and a return to positive net flows for retail
business in the fourth quarter of £942 million. Including the
assets managed for internal life operations, M&G's total assets
under management rose to £264.9 billion (2015: £246.1
billion).
Our Asia-based asset manager, Eastspring Investments, increased
IFRS operating profit by 10 per cent (up 23 per cent on an actual
exchange rate basis) to £141 million, reflecting the positive
effect on average assets under management of favourable market
movements and £2.2 billion net inflows in the second half of
the year. Although a shift in the mix of assets away from
higher-margin equity funds has moderated the overall revenue
margin, scale efficiencies have resulted in an improvement in the
cost-income ratio to 56 per cent (2015: 58 per cent). External
assets under management at 31 December 2016 increased to £38.0
billion (31 December 2015: £30.3 billion). Including money
market funds and the assets managed for internal life operations,
Eastspring Investment's total assets under management rose to a
record £117.9 billion (2015: £89.1
billion).
IFRS non-operating items8
IFRS non-operating items consist of short-term fluctuations, the
results attaching to the held for sale life business in Korea and
other non-operating items.
Short-term investment fluctuations represent the most significant
component of non-operating items and are discussed further
below.
The result of the held for sale Korea life business, a loss of
£227 million, comprises both the write down of the IFRS net
assets to sales proceeds (net of costs) and the profits for the
year. The comparative profits for the year have been similarly
reclassified as non-operating for consistency of
presentation.
Other non-operating items of negative £76 million mainly
represent the amortisation of acquisition accounting adjustments
arising principally on the acquisition of the REALIC business in
2012 (2015: negative £76 million on an actual exchange rate
basis). Additionally, 2015 non-operating items included a loss of
£46 million from the recycling of exchange losses on the sale
of the Japan business.
IFRS short-term investment fluctuations
IFRS operating profit is based on longer-term investment return
assumptions. The difference between actual investment returns
recorded in the income statement and the assumed longer-term
returns is reported within short-term fluctuations in investment
returns. In 2016, the total short-term fluctuations in investment
returns relating to the life operations were negative £1,482
million and comprised negative £225 million for Asia, negative
£1,455 million in the US and positive £198 million in the
UK.
The Asia negative £225 million short-term fluctuations
principally reflected the net impact of changes in interest rates
and equity markets across the region.
In the US, Jackson provides certain guarantees on its annuity
products, the value of which would typically rise when equity
markets fall and long-term interest rates decline. Jackson charges
fees for these guarantees which are in turn used to purchase
downside protection in the form of options and futures to mitigate
the effect of equity market falls, and swaps and swaptions to
cushion the impact of drops in long-term interest rates. Under
IFRS, accounting for the movement in the valuation of these
derivatives, which are all fair valued, is asymmetrical to the
movement in guarantee liabilities, which are not fair valued in all
cases. Jackson designs its hedge programme to protect the economics
of the business from large movements in investment markets and
accepts the variability in accounting results. The negative
short-term fluctuations of £1,455 million in the year mainly
reflect the effect of the increase in equity markets on net value
movements on the guarantees and associated derivatives with the
S&P 500 index closing at 10 per cent higher than at the start
of the year. While the resulting negative mark-to-market movements
on these hedging instruments are recorded in 2016, the related
increases in fee income that arise from the higher asset values
managed, will be recognised and reported in future
years.
The UK non-operating profit of positive £198 million mainly
reflects gains on bonds backing annuity capital and shareholders'
funds following the 70bps fall in 15-year UK gilt yields in
2016.
The negative short-term fluctuations in investment returns for
other operations of negative £196 million (2015: negative
£61 million) include unrealised value movements on financial
instruments.
IFRS effective tax rates
In 2016, the effective tax rate on IFRS operating profit based on
longer-term investment returns was 21 per cent, (2015: 20 per
cent), reflecting a larger contribution to operating profit from
Jackson which attracts a higher rate of tax.
The 2016 effective tax rate on the total IFRS profit was 16 per
cent (2015: 18 per cent), reflecting a smaller contribution to the
total profit from Jackson which attracts higher rate of
tax.
The main driver of the Group's effective tax rate is the relative
mix of the profits between countries with higher tax rates (such as
US, Indonesia, and Malaysia), and countries with lower tax rates
(such as Hong Kong, Singapore and the UK). The UK has enacted
legislation to reduce the corporation tax rate in stages from 20
per cent to 17 per cent from 1 April 2020. The effect of reductions
to 17 per cent is reflected in the full year 2016 results.
Following the US elections, there is the prospect of significant
tax reform occurring in the US, which potentially could reduce the
US corporate income tax rate from the current 35 per cent. A number
of Asian countries, most notably Indonesia, have indicated they are
considering reducing corporation tax rates, but no legislative
proposals have been announced to date.
We do not expect that changes being introduced in the UK and other
countries to implement recommendations made by the OECD's base
erosion and profit shifting project to reform the international tax
regime to have any significant impact on the
Group.
Total tax contribution
The Group continues to make significant tax contributions in the
countries in which it operates, with £2,890 million remitted
to tax authorities in 2016. This was lower than the equivalent
amount of £3,004 million in 2015, reflecting lower corporation
tax payments, partly offset by increases in other taxes borne and
taxes collected. In the US a change of basis for taxing derivatives
which affects the timing, but not the quantum, of tax payable accelerated tax payments
from 2016 into 2015.
Publication of tax strategy
In 2017, a new UK requirement for large UK businesses to publish
their tax strategy will take effect. Prudential's tax strategy,
together with further details of the tax payments made in 2016,
will be available on the Group's website before 30 June
2017.
New business performance
|
Life
EEV new business profit1
and
APE new business sales (APE sales)
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
|
2016 £m
|
2015 £m
|
Change %
|
|
2015 £m
|
Change %
|
|
|
APE sales
|
New business profit
|
APE sales
|
New business profit
|
APE sales
|
New business profit
|
|
APE sales
|
New business profit
|
APE sales
|
New business profit
|
|
Asia3
|
3,599
|
2,030
|
2,712
|
1,482
|
33
|
37
|
|
3,020
|
1,660
|
19
|
22
|
|
US
|
1,561
|
790
|
1,729
|
809
|
(10)
|
(2)
|
|
1,950
|
913
|
(20)
|
(13)
|
|
UK
retail2
|
1,160
|
268
|
874
|
201
|
33
|
33
|
|
874
|
201
|
33
|
33
|
|
Total
Group excluding bulk annuities2,3
|
6,320
|
3,088
|
5,315
|
2,492
|
19
|
24
|
|
5,844
|
2,774
|
8
|
11
|
|
UK
bulk annuities
|
-
|
-
|
151
|
117
|
(100)
|
(100)
|
|
151
|
117
|
(100)
|
(100)
|
|
Total
Group3
|
6,320
|
3,088
|
5,466
|
2,609
|
16
|
18
|
|
5,995
|
2,891
|
5
|
7
|
Life insurance new business profit1
was up 11 per cent2,3 (24 per cent on
an actual exchange rate basis) to £3,088 million, reflecting
the net outcome from strong growth in Asia and in UK retail
business and reduced contribution from our US operations.
Life insurance new business APE sales increased by 8
per cent2,3 (19 per cent on
an actual exchange rate basis) to £6,320 million led by Asia
and the UK.
In
Asia
new business profit was 22 per cent3 higher at
£2,030 million, outpacing new business APE sales in the region
which increased by 19 per cent3 to £3,599
million (up 37 per cent and 33 per cent respectively on an actual
exchange rate basis). APE sales progression has been strongest in
the agency channel, up 23 per cent, as we continue to drive
improvements in productivity and invest in recruitment initiatives
to underpin future sales prospects. The fourth quarter saw an
acceleration in the positive trends observed earlier in the year;
overall APE increased to over £1 billion for the first time in
a discrete quarter, with 8 of our markets in the region growing by
20 per cent or more. Despite the strength of this growth our focus
on quality is undiminished, with regular premiums on long-term
contracts accounting for over 93 per cent of APE sales and a
continuing high proportion of new business from health and
protection coverage (62 per cent of new business profit). This
favourable mix provides a high level of recurring income and an
earnings profile that is significantly less correlated to
investment markets.
Our businesses in China and Hong Kong have performed well in 2016,
with APE sales increasing by 31 per cent and 40 per cent,
respectively, and demonstrating the extent of the opportunity in
these markets. In Hong Kong, we continue to generate business from
both Mainland China residents and local customers, with a strong
bias for regular premiums (94 per cent of APE sales) and an
increasing contribution from health and protection business (up 43
per cent). 2016 saw increased intervention by the Chinese
authorities in relation to capital controls and we continue to
monitor developments, which to date have not had a meaningful
impact on our business in Hong Kong. In China, we have pivoted the
business towards higher quality regular premium business driven by
our increased scale in the agency channel, and sales of single
premiums have reduced as we de-emphasised further new spread-based
business across the region in 2016.
In Indonesia, trading conditions remain challenging, and in such an
environment we have retained our more cautious approach to new
business, resulting in a 25 per cent reduction in APE sales.
However, sales performance in the fourth quarter was more
encouraging with a more modest period-on-period decline in APE
sales of 3 per cent and a return to growth in the month of
December. In Malaysia, APE sales were up 8 per cent, driven by
improvements in the conventional agency channel and increased
contributions from our bancassurance partners. In Singapore, where
APE sales were up 1 per cent in 2016, new business performance has
improved through the year which saw APE sales in the second half
increase by 12 per cent relative to the equivalent period last
year, driven by increased agent activation and a recovery in
bancassurance sales.
The 22 per cent increase in new business profit primarily reflects
the effect of higher APE sales volumes (up 19 per cent) and
positive effects from changes in country mix and channel
mix.
In the US, uncertainty
following the announcement of the Department of Labor's fiduciary
duty rule on the distribution of retirement market products has
contributed to a marked decline of 22 per cent16 in industry sales
of variable annuities. Jackson's APE sales from all our variable
annuity products were also lower as a result, down 25 per cent.
Notwithstanding this reduction in sales, net inflows into Jackson's
separate account asset balances, which drive fee-based earnings on
variable annuity business, remained positive at £4.4 billion.
More favourable market conditions in the institutional product
market provided Jackson with the opportunity to write APE sales of
£184 million compared to £138 million in
2015.
Jackson's new business profit of £790 million declined by 13
per cent overall, although this represents a smaller decrease than
the reduction in sales volumes, demonstrating the benefit of
improved business mix and a modest uplift from higher interest
rates. The economics on new business in variable annuities remain
extremely attractive, with high internal rates of return and short
payback periods.
In our UK life business, our
strategy of extending customer access to
PruFund's with-profits investment option via additional product
wrappers
continues to drive growth in retail APE sales, which increased 33
per cent to £1,160 million. In the current low interest rate
environment, consumers are attracted to PruFund's smoothed
multi-asset fund returns and the financial security attaching to
its strong capitalisation. We have seen notable success with the
build out of PruFund through individual pensions (up 104 per cent),
income drawdown (up 62 per cent) and ISAs (up 70 per cent),
although our more established PruFund investment bonds also
increased 21 per cent. Reflecting this strong performance, total
PruFund assets under management of £24.7 billion as at 31
December 2016 were 50 per cent higher than at the start of the
year.
UK's retail new business profit of £268 million increased by
33 per cent reflecting the increased sales volume and positive
effects from changes in product mix.
Free surplus generation
Free surplus generation is the financial metric we use to measure
the internal cash generation of our business operations. For life
insurance operations it represents amounts maturing from the
in-force business during the year, net of amounts reinvested in
writing new business. For asset management it equates to post-tax
IFRS profit for the period.
This metric is based on the capital regimes which apply locally in
the various jurisdictions in which our life businesses operate. The
introduction of Solvency II with effect from 1 January 2016 has
altered the regime locally applied to our UK life business, so the
2016 UK life free surplus figures reflect this change. The 2015 UK
life comparatives are unchanged as they reflect the regime that
applied at that time. Solvency II does not directly impact the way
capital is generated locally in the US and in our Asian life
operations, so there is no change in the way free surplus is
calculated for these businesses.
In 2016 underlying free surplus generation, after investment in new
business, increased by 10 per cent2 to £3,588
million.
|
Free surplus generation
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
|
|
2016 £m
|
2015 £m
|
Change %
|
|
2015 £m
|
Change %
|
|
|
|
|
|
|
|
|
|
|
Free
surplus generation1,4
|
|
|
|
|
|
|
|
Asia3
|
1,335
|
1,052
|
27
|
|
1,176
|
14
|
|
US
|
1,863
|
1,433
|
30
|
|
1,616
|
15
|
|
UK
|
930
|
900
|
3
|
|
900
|
3
|
|
M&G
|
341
|
358
|
(5)
|
|
358
|
(5)
|
|
Prudential
Capital
|
22
|
18
|
22
|
|
18
|
22
|
|
Underlying
free surplus generated from in-force life business and asset
management3
|
4,491
|
3,761
|
19
|
|
4,068
|
10
|
|
Investment
in new business3
|
(903)
|
(718)
|
(26)
|
|
(792)
|
(14)
|
|
Underlying
free surplus generated3
|
3,588
|
3,043
|
18
|
|
3,276
|
10
|
|
Market
related movements, timing differences and other
movements
|
(588)
|
289
|
|
|
|
|
|
Net
cash remitted by business units
|
(1,718)
|
(1,625)
|
|
|
|
|
|
Total
movement in free surplus
|
1,282
|
1,707
|
|
|
|
|
|
Free
surplus at end of year1,17
|
6,575
|
5,293
|
|
|
|
|
The
10 per cent3
increase in free surplus generated1 by our life
insurance and asset management businesses to £4,491 million
(up 19 per cent3 on an actual
exchange rate basis) reflects our growing scale and the highly
capital-generative nature of our business model. In 2016 a key
contributor to this growth has been derived from the positive
momentum of Asia's in-force life insurance portfolio, which
provides an important underpin to this metric and helps absorb
cyclicality elsewhere in the Group. We drive this metric by
targeting markets and products that have low-strain, high-return
and fast payback profiles and by delivering both good service and
value to improve customer retention. Our ability to generate both
growth and cash is a distinctive feature of Prudential. The closing
value of free surplus in our life and asset management operations
was £6.6 billion at 31 December 2016, after financing
reinvestment in new business and funding cash remittances from the
business units to Group.
In
Asia,
growth in the in-force life portfolio, combined with post-tax asset
management profits from Eastspring Investments, contributed to free
surplus generation of £1,335 million, up 14 per cent. In the
US, in-force free surplus
generation increased 15 per cent, reflecting higher expected
returns and a benefit of £236 million from contingent
financing of specific US statutory reserves, which strengthened
Jackson's local statutory capital position.
In the UK, free surplus
generation1 was 3 per cent
higher at £930 million, including a net contribution of
£206 million (2015: £275 million) from management actions
taken in the year to improve solvency, net of the provision for the
cost of undertaking a review of past non-advised annuity sales
practices and related potential redress.
We invested £903 million of the free surplus
generated1 during the period
in writing new business (2015: £792 million, including bulk
annuities) equivalent to an increase of 14 per
cent.
Asia
remains
the primary destination for reinvestment of capital given its
higher margin organic growth opportunities. Investment of free
surplus in new business was 12 per cent3 higher at
£476 million, which is lower than the 19 per cent3 growth in APE
sales, mainly due to positive mix effects. We continue to generate
internal rates of return in excess of 20 per cent, with an average
payback period of three years.
In the US, new business
investment was broadly consistent with 2015 at £298 million,
reflecting a greater proportion of variable annuity premiums being
directed to the fixed account option and higher institutional
volumes. At just 2 per cent of new business single premium sales,
Jackson's overall strain remains low, supporting the generation of
high returns on capital. New business economics on Jackson's sales
remain extremely attractive, with business written at an overall
internal rate of return in excess of 20 per cent and payback
periods averaging two years.
The new business investment1 in the
UK was £129 million
(2015: £65 million), although comparisons are distorted by the
application of different capital regimes in the two periods, with
investment in 2016 including a significantly higher strain for new
non-profit annuities under the new Solvency II regime, despite the
much reduced sales. Following our decision in June 2016 to stop
writing annuity business in the open market and our action in early
February 2017 to direct internal vestings to a panel of providers,
UK new business strain is expected to reduce significantly in
2017.
We continue to manage cashflows across the Group with a view to
achieving a balance between ensuring sufficient remittances are
made to service central requirements (including paying the external
dividend) and maximising value to shareholders through retention
and reinvestment of capital in business
opportunities.
|
Business unit remittance18
|
Actual Exchange Rate
|
|
|
|
2016 £m
|
2015 £m
|
|
Net
cash remitted by business units:
|
|
|
|
|
Asia
|
516
|
467
|
|
|
US
|
420
|
470
|
|
|
UK
|
300
|
301
|
|
|
M&G
|
290
|
302
|
|
|
Prudential
Capital
|
45
|
55
|
|
|
Other
UK
|
147
|
30
|
|
Net
cash remitted by business units
|
1,718
|
1,625
|
|
Holding
company cash at 31 December
|
2,626
|
2,173
|
Cash remitted to the corporate centre in
2016 amounted to £1,718 million, driven by higher remittances
from Asia (up 21 per cent, after adjusting for £42 million of
proceeds in 2015 from the sale of our Japan life business). Jackson
made sizeable remittances of £420 million, albeit lower than
last year when more supportive markets enhanced capital formation.
The remittance from UK Life of £300 million was in line with
2015, while the remittance from M&G of £290 million was
lower than last year reflecting lower levels of post tax earnings
in the year. Actions completed in the period, including internal
restructuring that has enabled us to access central resources
previously held at intermediary holding and other companies,
contributed a further £147 million.
Cash remitted to the Group in 2016 was used to meet central costs
of £416 million (2015: £354 million), pay the 2015 second
interim ordinary, 2015 special and 2016 first interim dividends and
finance the final up-front payment for the renewal of the
distribution agreement with Standard Chartered Bank. These
movements combined with the net proceeds of debt raised in the year
and other corporate cash flows led to holding company cash
increasing from £2,173 million to £2,626 million over
2016.
|
Post-tax
profit - EEV1
|
|
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
|
|
2016 £m
|
2015 £m
|
Change %
|
|
2015 £m
|
Change %
|
|
Post-tax operating profit based on longer-term
investment returns
|
|
|
|
|
|
|
|
Long-term
business:
|
|
|
|
|
|
|
|
|
Asia3
|
3,074
|
2,280
|
35
|
|
2,555
|
20
|
|
|
US
|
1,971
|
1,808
|
9
|
|
2,040
|
(3)
|
|
|
UK
|
643
|
863
|
(25)
|
|
863
|
(25)
|
|
Long-term
business post-tax operating profit3
|
5,688
|
4,951
|
15
|
|
5,458
|
4
|
|
UK
general insurance commission
|
23
|
22
|
5
|
|
22
|
5
|
|
Asset
management business:
|
|
|
|
|
|
|
|
|
M&G
|
341
|
358
|
(5)
|
|
358
|
(5)
|
|
|
Prudential
Capital
|
22
|
18
|
22
|
|
18
|
22
|
|
|
Eastspring
Investments
|
125
|
101
|
24
|
|
112
|
12
|
|
|
US
|
(3)
|
7
|
(143)
|
|
8
|
(138)
|
|
Other
income and expenditure19
|
(699)
|
(617)
|
(13)
|
|
(617)
|
(13)
|
|
Post-tax operating profit based on longer-term
investment
returns3
|
5,497
|
4,840
|
14
|
|
5,359
|
3
|
|
Non-operating
items:
|
|
|
|
|
|
|
|
|
(Loss)/Profit
attaching to held for sale Korea business
|
(410)
|
39
|
n/a
|
|
42
|
n/a
|
|
|
Other
non-operating items19
|
(571)
|
(928)
|
38
|
|
(1,057)
|
46
|
|
Post-tax profit for the year attributable to
shareholders
|
4,516
|
3,951
|
14
|
|
4,344
|
4
|
|
Earnings
per share1
|
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
|
2016 pence
|
2015 pence
|
Change %
|
|
2015 pence
|
Change %
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share based on post-tax operating profit3
|
214.7
|
189.6
|
13
|
|
209.9
|
2
|
|
Basic
earnings per share based on post-tax total
profit
|
176.4
|
154.8
|
14
|
|
170.2
|
4
|
EEV operating profit
On an EEV basis, Group post-tax operating profit based1 on longer-term
investment return increased by 3 per cent3 (up 14 per cent on
an actual exchange rate basis) to £5,497 million in 2016.
Prudential adopts an active basis of setting the future return
assumptions used to calculate the Group's EEV basis operating
profit. These assumptions are therefore based on the 31 December
2016 long-term interest rates which were lower in our key markets
of the UK, Indonesia and Singapore, and higher in other markets
including US, Hong Kong and Malaysia. The impact of these movements
in the full year results broadly offset.
The EEV operating profit includes new business profit1 from the Group's
life business, which increased by 11 per cent3 (up 24 per cent on
an actual exchange rate basis) to £3,088 million and in-force
life business profit1 of £2,600
million, which was 1 per cent3 higher than prior
year (up 11 per cent on an actual exchange rate basis).
Experience
and assumptions changes were positive at £706 million (2015:
£741 million), reflecting our ongoing focus on managing the
in-force book for value.
Capital position, financing and liquidity
Capital position
With effect from 1 January 2016, the Group is required to adopt
Solvency II as its consolidated capital regime. This was developed
by the EU in order to harmonise the various regimes previously
applied across EU member states. As the regime was primarily
designed with European life products in mind, it is a poor fit with
Prudential's business given the predominantly non-EU footprint of
the Group. The one year value at risk nature of the Solvency II
test, which has its roots in banking regulation where risk
positions can be priced and readily traded, runs counter to the
multi-year nature of life insurance business, where the illiquid
nature of liabilities renders such potential market solutions
theoretical and not grounded in established sector practices. It
also means that solvency capital will be highly
volatile.
While Solvency II does not fully recognise the economic capital
strength of the Group, we implemented it in 2016 having received
internal model approval from the Prudential Regulation Authority in
December 2015.
|
Analysis of movement in Group shareholder Solvency II
surplus20
|
|
|
|
|
|
2016 £bn
|
2015 £bn
|
|
Estimated solvency II surplus at 1 January/economic capital surplus
at 1 January
|
9.7
|
9.7
|
|
Operating
experience
|
2.7
|
2.4
|
|
Non-operating
experience (including market movements)
|
(1.1)
|
(0.6)
|
|
Other
capital movements
|
|
|
|
|
Subordinated
debt issuance
|
1.2
|
0.6
|
|
|
Foreign
currency translation impacts
|
1.6
|
0.2
|
|
|
Dividends
paid
|
(1.3)
|
(1.0)
|
|
Methodology
and calibration changes
|
(0.3)
|
(1.6)
|
|
Estimated Solvency II surplus at 31 December
|
12.5
|
9.7
|
The high quality and recurring nature of our operating capital
generation and our disciplined approach to managing balance sheet
risk enabled us to enter the new Solvency II regime on 1 January
2016 with a strong Group shareholders' capital surplus of £9.7
billion. These factors also provided meaningful protection against
the significant adverse market-driven effects on this metric in the
first half of 2016. Reflecting the improvement in long-term yields
during the last three months of the year, combined with strong
operating capital generation and the beneficial effects of debt
issued, the Group shareholders' Solvency II capital surplus was
estimated at £12.5 billion at 31 December 2016, equivalent to
a cover ratio of 201 per cent6,7 (1 January 2016:
193 per cent).
In July 2013, Prudential plc was listed by the Financial Stability
Board as one of nine companies to be designated as a Global
Systemically Important Insurer, a classification that was
reaffirmed in November 2016. Prudential is monitoring the
development and potential impact of the related framework of policy
measures and is engaging closely with the Prudential Regulation
Authority on the implications of this
designation.
Local statutory capital
All of our subsidiaries continue to hold appropriate capital levels
on a local regulatory basis. In the UK, at 31 December 2016 the
Prudential Assurance Company Limited and its subsidiaries had an
estimated Solvency II shareholder surplus21 of £4.6
billion (equivalent to a cover ratio of 163 per cent) and a
with-profits surplus22 of £3.7
billion (equivalent to a cover ratio of 179 per cent). In the US,
the combination of a high start of year capital level coupled with
strong operational capital formation in the year and specific
actions taken to strengthen further Jackson's local statutory
capital position led to an increase in its Risk Based Capital ratio
to 485 per cent (2015: 481 per cent).
Debt portfolio
The Group continues to maintain a high-quality defensively
positioned debt portfolio. Shareholders' exposure to credit is
concentrated in the UK annuity portfolio
and the US general account, mainly attributable to Jackson's fixed
annuity portfolio. The credit exposure is well diversified, with
investment grade securities representing 96 per cent of our UK
portfolio and 98 per cent of our US portfolio at end-2016.
During 2016, default losses were minimal and reported impairments
of £35 million across these two portfolios were in line with
those in 2015.
Financing and liquidity
|
Shareholders' net core structural borrowings
|
2016 £m
|
|
2015 £m
|
|
|
IFRS
basis
|
Mark to
market
value
|
EEV
basis
|
|
IFRS
basis
|
Mark to
market
value
|
EEV
basis
|
|
Total
borrowings of shareholder-financed operations
|
6,798
|
422
|
7,220
|
|
5,011
|
408
|
5,419
|
|
Less:
Holding company cash and short-term investments
|
(2,626)
|
-
|
(2,626)
|
|
(2,173)
|
-
|
(2,173)
|
|
Net
core structural borrowings of shareholder-financed
operations
|
4,172
|
422
|
4,594
|
|
2,838
|
408
|
3,246
|
|
Gearing
ratio*
|
22%
|
|
|
|
18%
|
|
|
* Net core structural borrowings as
proportion of IFRS shareholders' funds plus net
debt.
Our financing and central liquidity position remained strong
throughout the year. Our central cash resources amounted to
£2.6 billion at 31 December 2016 (31 December 2015: £2.2
billion). Total
core structural borrowings increased by £1.8 billion to
£6.8 billion following the issue of US$1 billion (£800
million at 31 December 2016) 5.25 per cent tier 2 perpetual
subordinated debt in June 2016, US$725 million (£580 million
at 31 December 2016) 4.38 per cent tier 2 perpetual subordinated
debt in September 2016 and the impact of currency
movements.
In addition to its net core structural borrowings of
shareholder-financed operations set out above, the Group also has
access to funding via the money markets and has in place an
unlimited global commercial paper
programme.
As at 31 December 2016, we had issued commercial paper under
this
programme totalling
£70 million and US$1,213 million, to finance non-core
borrowings.
Prudential's holding company currently has access to £2.6
billion of syndicated and bilateral committed revolving credit
facilities provided by 19 major international banks, expiring in
2021 and 2022. Apart from small drawdowns to test the process,
these facilities have never been drawn, and there were no amounts
outstanding at 31 December 2016. The medium-term note programme,
the SEC registered shelf programme, the commercial paper programme
and the committed revolving credit facilities are all available for
general corporate purposes and to support the liquidity needs of
Prudential's holding company and are intended to maintain a strong
and flexible funding capacity.
|
|
|
|
|
|
|
|
|
|
Shareholders' funds
|
|
|
|
|
|
|
|
|
|
IFRS
|
|
EEV
|
|
|
|
|
2016 £m
|
2015 £m
|
|
2016 £m
|
2015 £m
|
|
|
|
|
|
|
|
|
|
|
Profit after tax for the year
|
1,921
|
2,579
|
|
4,516
|
3,951
|
|
Exchange
movements, net of related tax
|
1,161
|
118
|
|
4,211
|
244
|
|
Unrealised
gains and losses on Jackson fixed income securities classified as
available for sale23
|
31
|
(629)
|
|
-
|
-
|
|
Dividends
|
(1,267)
|
(974)
|
|
(1,267)
|
(974)
|
|
Market
to market value movements on Jackson assets backing surplus and
required capital
|
-
|
-
|
|
(11)
|
(76)
|
|
Other
|
(135)
|
50
|
|
(367)
|
53
|
|
Net increase in shareholders' funds
|
1,711
|
1,144
|
|
7,082
|
3,198
|
|
Shareholders'
funds at 1 January
|
12,956
|
11,812
|
|
31,886
|
29,161
|
|
Shareholders' funds at 31 December
|
14,667
|
12,956
|
|
38,968
|
32,359
|
|
Effect
of implementation of Solvency II at 1 January
2016
|
|
|
|
|
(473)
|
|
Revised shareholders' funds at 1 January 2016
|
|
|
|
|
31,886
|
|
Shareholders' value per share
|
568p
|
504p
|
|
1,510p
|
1,240p
|
|
Return on shareholders' funds24
|
26%
|
27%
|
|
17%
|
17%
|
In
2016, UK sterling weakened relative to the US dollar and various
Asian currencies. With approximately 49 per cent of the Group's
IFRS net assets (71 per cent of the Group's EEV net assets)
denominated in non-sterling currencies this generated a positive
foreign exchange movement on net assets in the
period.
This movement, together with profit after tax, movement in other
comprehensive income and dividends paid, has led to the Group's
IFRS shareholders' funds at 31 December 2016 increasing by 13 per
cent to £14.7 billion (31 December 2015: £13.0 billion on
an actual exchange rate basis).
The introduction of Solvency II at the start of 2016 changed the
capital dynamics of our UK life operations which are directly
impacted by this change. In overview, it permitted the inclusion of
future profits in the available capital of the business but
increased the statutory capital requirements. Factoring these and
other consequential methodology changes in the EEV calculations of
the UK life business produced a net charge of £473 million,
equivalent to 5 per cent of the UK's embedded value (just over 1
per cent of the Group's embedded value at the start of the year).
For our operations in Asia and the US, there is no impact on the
EEV results since Solvency II does not act as the local constraint
on the ability to distribute capital to the
Group.
The Group's EEV basis shareholders' funds also increased by 22 per
cent5 to
£39.0 billion (31 December 2015: £31.9 billion on an
actual exchange rate basis), equivalent of 1,510 pence per share,
up from 1,240 pence per share5 at 31 December
2015.
Corporate transactions
Sale of Korea life insurance business
In November 2016 we announced the sale of our Korea life insurance
business, PCA Life Insurance Co Ltd. to Mirae Asset Life Insurance
Co. Ltd., for KRW170 billion (equivalent to £114 million at 31
December 2016 closing exchange rate) cash consideration. The
completion of this sale is subject to regulatory approval.
Consistent with the classification of the business as held for
sale, the IFRS and EEV carrying values have been set to £105
million, representing the estimated proceeds, net of related
expenses of £9 million. The IFRS loss of £227 million and
EEV loss of £410 million comprises the 2016 reduction on
writing down the carrying value of the business to the agreed sale
proceeds (net of costs) together with its profits for the year. The
comparative profits for the year have been similarly reclassified
as non-operating for consistency of
presentation.
Entrance into Zambia
In June 2016 we completed the acquisition of Professional Life
Assurance of Zambia, increasing Prudential's insurance business
footprint in Africa to four markets. Across Ghana, Kenya, Uganda
and now Zambia we are gradually laying the foundations for what we
hope will become a meaningful component of the Group in the years
to come. Our current focus in these businesses is on growing our
distribution; at 31 December we had 1,750 agents and were active in
181 branches of our four local bank partners (three exclusive)
across these businesses.
Dividend
During 2016 the Group's dividend policy was updated. The board will
maintain its focus on delivering a growing ordinary dividend. In
line with this policy, Prudential aims to grow the ordinary
dividend by 5 per cent per annum. The potential for additional
distributions will continue to be determined after taking into
account the Group's financial flexibility across a broad range of
financial metrics and our assessment of opportunities to generate
attractive returns by investing in specific areas of the
business.
The board has decided to increase the full-year ordinary dividend
by 12 per cent to 43.5 pence per share, reflecting our strong 2016
financial performance and our confidence in the future prospects of
the Group. In line with this, the directors have approved a second
interim ordinary dividend of 30.57 pence per share (2015: 26.47
pence per share). In 2015, a special dividend of 10 pence per share
was also awarded.
Notes:
1. The 2016 EEV basis
results for UK insurance operations have been prepared on a basis
that reflect the Solvency II regime, effective from 1 January 2016.
The 2015 comparative results for UK insurance operations reflect
the Solvency I basis.
2. Excluding UK bulk
annuities as Prudential has withdrawn from this
market.
3. Following its
reclassification to held for sale during 2016, operating results
exclude the results of the Korea life business. The 2015
comparative results have been similarly
adjusted.
4. Free
surplus represents 'underlying free surplus' based on operating
movements, including the general insurance commission earned during
the year and excludes market movements, foreign exchange, capital
movements, shareholders' other income and expenditure and centrally
arising restructuring and Solvency II implementation
costs.
5. Includes adjustment
for opening EEV shareholders' funds of negative £0.5 billion
for the impact of Solvency II as at 1 January
2016.
6. Before allowing for
second interim ordinary dividend.
7. The Group Solvency
II surplus represents the shareholder capital position excluding
the contribution to Own Funds and the Solvency Capital Requirement
from ring fenced with-profits funds and staff pension schemes in
surplus. The estimated solvency position includes the impact of
recalculated transitionals at the valuation date, which has reduced
the Group shareholder surplus from £12.9 billion to £12.5
billion. The formal Quantitative Reporting Templates (Solvency II
regulatory templates) will include transitional measures without
this recalculation.
8. Refer to note B1.1
in IFRS financial statements for the breakdown of other income and
expenditure and other non-operating items.
9. Includes
Group's proportionate share of the liabilities and associated flows
of the insurance joint ventures and associates in
Asia.
10. Defined as
movements in policyholder liabilities arising from premiums (net of
charges), surrenders/withdrawals, maturities and
deaths.
11. Following its
reclassification to held for sale during 2016, the
shareholder-backed policyholder liabilities for Asia exclude the
value of policyholder liabilities held at 1 January 2016 and 2016
net liability flows for Korea life business.
12. For basis of
preparation see note I (a) of Additional unaudited IFRS financial
information.
13. Includes Group's
proportionate share in PPM South Africa and the Asia asset
management joint ventures.
14. For our asset
management business the level of funds managed on behalf of third
parties, which are not therefore recorded on the balance sheet, is
a driver of profitability. We therefore analyse the movement in the
funds under management each period, focusing between those which
are external to the Group and those held by the insurance business
and included on the Group balance sheet. This is analysed in note
II(b) of the Additional IFRS financial
information.
15. Net inflows exclude
Asia Money Market Fund (MMF) inflows of £403 million (2015:
net inflows £1,065 million). External funds under management
exclude Asia MMF balances of £7,714 million (2015: £6,006
million).
16. LIMRA/Secure
Retirement Institute, US Individual Annuity Participants Report 3Q
YTD 2016
17. The 2015
comparative includes an adjustment to opening free surplus
representing the impact of Solvency II at 1 January 2016, together
with the effect of a reclassification between long-term business
and other operations, as discussed in note 9(v) of the EEV basis
results.
18. Net cash remitted
by business units are included in the Holding company cash flow,
which is disclosed in detail in note II(a) of Additional unaudited
IFRS financial information.
19. Refer to the EEV
basis supplementary information - Post-tax operating profit based
on longer-term investment returns and Post-tax summarised
consolidated income statement, for the breakdown of other income
and expenditure, and other non-operating items.
20. The methodology and
assumptions used in calculating the Solvency II capital results are
set out in note II (c) of Additional unaudited financial
information.
21. The UK Solvency II
surplus represents the shareholder capital position excluding the
contribution to Own Funds and the
Solvency Capital Requirement from ring fenced with-profits funds
and staff pension scheme in surplus. The estimated solvency
position includes the impact of recalculated transitionals at the
valuation date.
22. The
with-profits Solvency II surplus represents the contribution to Own
Funds and the Solvency Capital Requirement from ring fenced funds.
The estimated solvency position includes the impact of recalculated
transitionals at the valuation date.
23. Net of related
charges to deferred acquisition costs and tax.
24. Operating profit
after tax and non-controlling interests as percentage of opening
shareholders' funds.
25. Includes
Unallocated surplus of with-profits business.
Group Chief Risk Officer's Report of the risks facing our business
and how these are managed
1. Introduction
2016 has been a year of extraordinary global change, starting with
market turbulence in China, followed by the UK's vote to leave the
EU and ending with the election of a new president in the
US.
Even in such a year, we have maintained a strong and sustained
focus on planning for the possibility of, and ultimately managing,
the market volatility and macroeconomic uncertainty arising from
these events. Our Risk Management Framework and risk appetite have
allowed us to control successfully our risk exposure throughout the
year. Our strong governance, processes and controls enable us to
deal with the uncertainty ahead in order to continue helping our
customers achieve their long-term financial
goals.
For our shareholders, we generate value by selectively taking
exposure to risks that are adequately rewarded and that can be
appropriately quantified and managed. We retain risks within a
clearly defined risk appetite, where we believe doing so
contributes to value creation and the Group is able to withstand
the impact of an adverse outcome. For our retained risks, we ensure
that we have the necessary capabilities, expertise, processes and
controls to manage appropriately the exposure.
In my report, I seek to explain the main risks
inherent in our business and how we manage these evolving risks,
with the aim of ensuring we maintain an appropriate risk
profile.
2.
Risk governance, culture
and our risk management cycle
Prudential defines 'risk' as the uncertainty that
we face in successfully implementing our strategies and objectives.
This includes all internal or external events, acts or omissions
that have the potential to threaten the success and survival of the
Group. As such, material risks will be retained selectively where
we think there is value to do so, and where it is consistent with
the Group's risk appetite and philosophy towards
risk-taking.
The following section provides more detail on our
risk governance, culture and risk management
process.
a.
Risk governance
Our risk governance comprises the organisational
structures, reporting relationships, delegation of authority, roles
and responsibilities, and risk policies that the Group head office
and the business units establish to make decisions and control
their activities on risk-related matters. This encompasses
individuals, Group-wide functions and committees involved in the
management of risk.
i. Risk committees and governance
structure
Our Risk governance structure is led by the Group's Risk Committee,
supported by independent non-executives on risk committees of major
subsidiaries. These committees monitor the development of the risk
management framework, the Group's risk appetites, limits, and
policies, as well as its risk culture. We have in place a
comprehensive risk management cycle to identify, measure, manage
and monitor our risk exposures.
In addition to the risk committees mentioned, there are various
executive risk forums to ensure risk issues are shared and
considered across the Group. These are led by the Group Executive
Risk Committee which is supported by a number of specific
committees including in relation to security and information
security where specialist skills are required.
ii. Risk Management
Framework
The Group's Risk Management Framework has been developed to monitor
and manage the risk of the business at all levels and is owned by
the Board. The aggregate Group exposure to the key risk drivers is
monitored and managed by the Group Risk function whose
responsibility it is to review, assess and report on the Group's
risk exposure and solvency position from the Group economic,
regulatory and ratings perspectives.
The Framework requires that all our businesses and functions
establish processes for identifying, evaluating and managing the
key risks faced by the Group - the 'Risk Management Cycle' (see
below) and is based on the concept of the 'three lines of defence',
comprising risk taking and management, risk control and oversight,
and independent assurance.
A major part of the Risk Management Cycle is the annual assessment
of the Group's risks which are considered key. These key risks
range from risks associated with the economic, market, political
and regulatory environment; those that we assume when writing our
insurance products and by virtue of the investments we hold; and
those that are inherent in our business model and its operation.
This is used to inform risk reporting to the risk committees and
the Board for the year.
iii. Risk appetite, limits and
triggers
The extent to which we are willing to take risk in the pursuit of
our objective to create shareholder value is defined by a number of
risk appetite statements, operationalised through measures such as
limits, triggers and indicators. The Group risk appetite is
approved by the Board and is set with reference to economic and
regulatory capital, liquidity and earnings volatility. The Group
risk appetite is aimed at ensuring that we take an appropriate
level of aggregate risk and covers all risks to shareholders,
including those from participating and third party business. We
have no appetite for material losses (direct or indirect) suffered
as a result of failing to develop, implement and monitor
appropriate controls to manage operational risks. Group limits
operate within the risk appetite to constrain the material risks,
while triggers and indicators provide further constraint and ensure
escalation. The Group Chief Risk Officer determines the action to
be taken upon any breaches.
The Group Risk function is responsible for reviewing the scope and
operation of these measures at least annually, to determine that
they remain relevant. The Board approves all changes made to the
Group's Risk Appetite Framework.
We define and monitor aggregate risk limits based on financial and
non-financial stresses for our earnings volatility, liquidity and
capital requirements.
Earnings volatility:
The objectives of the aggregate risk limits seek
to ensure that:
● The volatility of
earnings is consistent with the expectations of
stakeholders;
● The Group has
adequate earnings (and cash flows) to service debt, expected
dividends and to withstand unexpected shocks;
and
● Earnings (and cash
flows) are managed properly across geographies and are consistent
with funding strategies.
The two measures used to monitor the volatility
of earnings are IFRS operating profit and EEV operating profit,
although IFRS and EEV total profits are also
considered.
Liquidity:
The objective is to ensure that the Group is able
to generate sufficient cash resources to meet financial obligations
as they fall due in business as usual and stressed scenarios. Risk
appetite with respect to liquidity risk is measured using a
Liquidity Coverage Ratio which considers the sources of liquidity
versus liquidity requirements under stress
scenarios.
Capital requirements:
The limits aim to ensure
that:
● The Group meets its
internal economic capital requirements;
● The Group achieves
its desired target rating to meet its business objectives;
and
● Supervisory
intervention is avoided.
The two measures used at the Group level are
Solvency II capital requirements and internal economic capital
requirements. In addition, capital requirements are monitored on
local statutory bases.
The Group Risk Committee is responsible for
reviewing the risks inherent in the Group's business plan and for
providing the Board with input on the risk/reward trade-offs
implicit therein. This review is supported by the Group Risk
function, which uses submissions from our local business units to
calculate the Group's aggregated position (allowing for
diversification effects between local business units) relative to
the aggregate risk limits.
iv. Risk
policies
These set out the specific requirements which
cover the fundamental principles for risk management within the
Group Risk Framework. Policies are designed to give some
flexibility so that business users can determine how best to comply
with policies based on their local expertise.
There are core risk policies for credit, market,
insurance, liquidity and operational risks and a number of internal
control policies covering internal model risk, underwriting,
dealing controls and tax risk management. They form part of the
Group Governance Manual, which was developed to make a key
contribution to the sound system of internal control that we
maintain in line with the UK Corporate Governance Code and the Hong
Kong Code on Corporate Governance Practices. Group Head Office and
business units must confirm that they have implemented the
necessary controls to evidence compliance with the Group Governance
Manual on an annual basis.
v. Risk standards
The Group-wide Operating Standards provide
supporting detail to the higher level risk policies. In many cases
they define the minimum requirements for compliance with Solvency
II regulations which in some areas are highly prescriptive. The
standards are more detailed than policies.
b. Our risk culture
Culture is a strategic priority of the Board who
recognise the importance of good culture in the way that we do
business. Risk culture is a subset of broader organisational
culture, which shapes the organisation-wide values that we use to
prioritise risk management behaviours and
practices.
An evaluation of risk culture is part of the Risk
Management Framework and in particular seeks to identify evidence
that:
● Senior management
in business units articulate the need for good risk management as a
way to realise long-term value and continuously support this
through their actions.
● Employees
understand and care about their role in managing risk - they are
aware of and openly discuss risk as part of the way they perform
their role; and
● Employees invite
open discussion on the approach to the management of
risk.
Key aspects of risk culture are also communicated
through the Code of Conduct and the policies in the Group
Governance Manual, including the commitments to the fair treatment
of our customers and staff. The approach to the management of risk
is also a key part of the evaluation of the remuneration of
executives. Risk culture is an evolving topic across the financial
services industry and we will be continuing work to evaluate and
embed a strong risk culture through 2017.
c. The risk management
cycle
The risk management cycle comprises processes to
identify, measure and assess, manage and control, and monitor and
report on our risks.
i. Risk
identification
Group-wide risk identification takes place throughout the year, and
includes processes such as our Own Risk and Solvency Assessment
(ORSA) and the horizon-scanning performed as part of our emerging
risk management process.
On an annual basis, a top-down identification of the Group's key
risks is performed which considers those risks that have the
greatest potential to impact the Group's operating results and
financial condition. A bottom-up process of risk identification is
performed by the business units who identify, assess and document
risks, with appropriate coordination and challenge from the risk
functions.
The Group ORSA report pulls together the analysis performed by a
number of risk and capital management processes, which are embedded
across the Group, and provides quantitative and qualitative
assessments of the Group's risk profile, risk management and
solvency needs on a forward-looking basis. The scope of the report
covers the full known risk universe of the
Group.
In accordance with provision C.2.1 of the UK Code, the Directors
have performed a robust assessment of the principal risks facing
the Company, through the Group ORSA report and the risk assessments
done as part of the business planning review, including how they
are managed and mitigated.
Reverse stress testing, which requires us to work backwards from an
assumed point of business model failure, is another tool that helps
us to identify the key risks and scenarios that may materially
impact the Group.
Our emerging risk management process identifies potentially
material risks which have a high degree of uncertainty around
timing, magnitude and propensity to evolve. The Group holds
emerging risk sessions over the year to identify emerging risks
which includes input from local subject matter and industry
experts. We maintain contacts with thought leaders and peers to
benchmark and refine our process.
The risk profile is a key output from the risk identification and
risk measurement processes, and is used as a basis for setting
Group-wide limits, management information, assessment of solvency
needs, and determining appropriate stress and scenario testing. The
risk identification processes support the creation of our annual
set of key risks, which are then given enhanced management and
reporting focus.
ii. Risk measurement and
assessment
All identified risks are assessed based on an
appropriate methodology for that risk. All quantifiable risks which
are material and mitigated by holding capital are modelled in the
Group's internal model, which is used to determine capital
requirements under Solvency II and our own economic capital basis.
Governance arrangements are in place to support the internal model,
including independent validation and process and controls around
model changes and limitations.
iii. Risk management and
control
The control procedures and systems established
within the Group are designed to manage reasonably the risk of
failing to meet business objectives and are detailed in the Group
risk policies. This can of course only provide reasonable and not
absolute assurance against material misstatement or loss. They
focus on aligning the levels of risk-taking with the achievement of
business objectives.
The management and control of risks are set out
in the Group risk policies, and form part of the holistic risk
management approach under the Group's ORSA. These risk policies
define:
● The Group's risk
appetite in respect of material risks, and the framework under
which the Group's exposure to those risks is
limited;
● The processes to
enable Group senior management to effect the measurement and
management of the Group material risk profile in a consistent and
coherent way; and
● The flows of
management information required to support the measurement and
management of the Group material risk profile and to meet the needs
of external stakeholders.
The methods and risk management tools we employ
to mitigate each of our major categories of risks are detailed in
section 4 below.
iv. Risk monitoring and
reporting
The identification of the Group's key risks
informs the management information received by the Group risk
committees and the Board. Risk reporting of key exposures against
appetite is also included, as well as ongoing developments in other
key and emerging risks.
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3. Summary
risks
The table below is a summary of the key risks
facing the Group, which can be grouped into those which apply to us
because of the global environment in which we operate, and those
which arise as a result of the business that we operate - including
risks arising from our investments, the nature of our products and
from our business operations.
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'Macro'- risks
Some of the risks that we are exposed to are
necessarily broad given the external influences which may impact on
the Group. These risks include:
● Global economic conditions.
Changes in global economic conditions
can impact us directly; for example by leading to poor returns on
our investments and increasing the cost of promises we have made to
our customers. They can also have an indirect impact; for example
economic pressures could lead to decreased savings, reducing the
propensity for people to buy our products. Global economic
conditions may also impact on regulatory risk for the Group by
changing prevailing political attitudes towards
regulation.
● Geopolitical risk. The geopolitical environment is increasingly
uncertain with political upheaval in the UK, the US and the
Eurozone. Uncertainty in these regions, combined with conflict in
the Middle East and increasing tensions in east Asia underline that
geopolitical risks are truly global and their potential impacts are
wide-ranging; for example through increased regulatory risk. The
geopolitical and economic environments are increasingly closely
linked, and changes in the political arena may have direct or
indirect impacts on our Group.
● Digital disruption. The emergence of advance technologies such as
artificial intelligence and block chain is providing an impetus for
companies to rethink their existing operating models and how they
interact with their customers. Prudential is embracing the
opportunities presented by digitalisation and is closely monitoring
any risks which arise.
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Risks from our investments
|
Risks from our products
|
Risks from our business operations
|
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Global economic conditions - see above - have a
large impact on those risks from our
investments.
Our fund investment performance is a
fundamental part of our
business in providing appropriate returns for our customers and
shareholders, and so is an important area of
focus.
Credit risk
Is the potential for reduced value of our
investments due to the uncertainty around investment returns
arising from the potential for defaults of our investment
counterparties.
Invested credit risk arises from our asset
portfolio. We increase sector focus where
necessary.
The assets backing the UK and Jackson's annuity
business mean credit risk is a significant focus for the
Group.
Market risk
Is the potential for reduced value of our
investments resulting from the volatility of asset prices as driven
by fluctuations in equity prices, interest rates, foreign exchange
rates and property prices.
In our Asia business, our main market risks arise
from the value of fees from our fee-earning
products.
In the US, Jackson's fixed and variable annuity
books are exposed to a variety of market risks due to the assets
backing these policies.
In the UK, exposure relates to the valuation of
the proportion of the with-profits fund's future profits which is
transferred to the shareholders (future transfers), which is
dependent on equity, property and bond values.
M&G invests in a broad range of asset classes
and its income is subject to the price volatility of global
financial and currency markets.
Liquidity risk
Is the risk of not having sufficient liquid
assets to meet our obligations as they fall due , and incorporates
the risk arising from funds composed of illiquid assets. It results
from a mismatch between the liquidity profile of assets and
liabilities.
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Insurance risks
The nature of the products offered by the Group
exposes it to insurance risks, which are a significant part of our
overall risk profile.
The insurance risks that we are exposed to by
virtue of our products include longevity risk (policyholders living
longer than expected); mortality
risk (policyholders with life protection dying);
morbidity risk
(policyholders with health protection becoming ill) and
persistency risk (customers
lapsing their policies).
From our health protection products, increases in
the costs of claims (including the level of medical expenses)
increasing over and above price inflation (claim inflation) is
another risk.
The processes that determine the price of our
products and reporting the results of our long-term business
operations require us to make a number of assumptions. Where
experience deviates from these assumptions our profitability may be
impacted.
Across our business units, persistency and
morbidity risks are among the largest insurance risks for our Asia
business given our strong focus on health protection products in
the region.
For the UK and Jackson, the most significant
insurance risk is longevity risk driven by their annuity
businesses.
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Operational risks
As a Group, we are dependent on the appropriate
and secure processing of a large number of transactions by our
people, IT infrastructure and outsourcing partners, which exposes
us to operational risks and reputational risks.
Information
security risk is a
significant consideration within operational risk, including both
the risk of malicious attack on our systems as well as risks
relating to data security and integrity and network disruption. The
size of Prudential's IT infrastructure and network, our move toward
digitisation and the increasing number of high profile cyber
security incidents across industries means that this will continue
to be an area of high focus.
Regulatory risk
We also operate under the ever-evolving
requirements set out by diverse regulatory and legal regimes
(including tax), as well as utilising a significant number of third
parties to distribute products and to support business operations;
all of which add to the complexity of the operating model if not
properly managed.
The number of regulatory changes under way across
Asia, in particular those focusing on consumer protection means
that regulatory change in the region is also considered a key
risk.
Both Jackson and the UK operate in highly
regulated markets. Regulatory reforms could materially impact our
businesses, and regulatory focus continues to be
high.
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4. Further risk
information
In reading the sections below, it is
useful to understand that there are some risks that our
policyholders assume by virtue of the nature of their products, and
some risks that the Company and its shareholders assume. Examples
of the latter include those risks arising from assets held directly
by and for the Company or the risk that policyholder funds are
exhausted. This report is focused mainly on risks to the
shareholder, but will include those which arise indirectly through
our policyholder exposures.
4.1 Risks
from our investments
a. Market risk
The main drivers of market risk in the
Group are:
● Investment risk
(including equity and property risk);
● Interest rate risk;
and
● Given the
geographical diversity of our business, foreign exchange
risk.
With respect to investment risk, equity and
property risk arises from our holdings of equity and property
investments, the prices of which can change depending on market
conditions.
The valuation of our assets (particularly the
bonds that we invest in) and liabilities are also dependent on
market interest rates and exposes us to the risk of those moving in
a way that is detrimental for us.
Given our global business, we earn our profits
and hold assets in various currencies. The translation of those
into our reporting currency exposes us to movements in foreign
exchange rates.
Our main investment risk exposure arises from the
portion of the profits from the UK with-profits fund to which we
are entitled to receive; the value of the future fees from our
fee-earning products in our Asia business; and from the asset
returns backing Jackson's variable annuities
business.
Our interest rate risk is driven in the UK by our
need to match our assets and liabilities; from the guarantees of
some non unit-linked investment products in Asia; and the cost of
guarantees in Jackson's fixed, fixed index and variable annuity
business.
The methods that we use to manage and mitigate
our market risks include the following:
● Our market risk
policy;
● Risk appetite
statements, limits and triggers that we have in
place;
● The monitoring and
oversight of market risks through the regular reporting of
management information;
● Our asset and
liability management programmes;
● Use of derivative
programmes, including, for example, interest rate swaps, options
and hybrid options for interest rate risk;
● Regular deep dive
assessments; and
● Use of currency
hedging.
Investment
risk
In the UK business,
our main investment risk arises from the assets held in the
with-profits funds. Although this is mainly held by our
policyholders, a proportion of the fund's profit (one tenth) is
transferred to us and so our investment exposure relates to the
future valuation of that proportion (future transfers). This
investment risk is driven mainly by equities in the fund, although
there is some risk associated with other investments such as
property and bonds. Some hedging to protect from a reduction in the
value of these future transfers against falls in equity prices is
performed outside the fund using derivatives. The with-profits
funds large Solvency II own funds - estimated at £8.4 billion
as at 31 December 2016 (31 December 2015: £7.6 billion) -
helps to protect against market fluctuations and helps the fund to
maintain appropriate solvency levels. The with-profits funds
Solvency II own funds are partially protected against falls in
equity markets through an active hedging programme within the
fund.
In Asia, our shareholder exposure to equity price
movements results from unit-linked products, where our fee income
is linked to the market value of the funds under management.
Further exposure arises from with-profits businesses where bonuses
declared are broadly based on historical and current rates of
return on equity.
In Jackson, investment risk arises from the
assets backing customer policies. In the case of spread-based
business, including fixed annuities, these assets are generally
bonds, and shareholder exposure comes from the minimum returns
needed to meet the guaranteed rates that we offer to policyholders.
For our variable annuity business, these assets include both
equities and bonds. In this case, the main risk to the shareholder
comes from the guaranteed benefits that can be included as part of
these products. Our exposure to this kind of situation is reduced
by using a derivative hedging programme, as well as through the use
of reinsurance to pass on the risk to third party
reinsurers.
Interest rate
risk
While long-term
interest rates in advanced economies have broadly increased since
mid-2016, they remain close to historical lows. Some products that
we offer are sensitive to movements in interest rates. We have
already taken a number of actions to reduce the risk to the
in-force business, as well as re-pricing and restructuring new
business offerings in response to these historically low interest
rates. Nevertheless, we still retain some sensitivity to interest
rate movements.
Interest rate risk arises in our UK business from
the need to match cash payments to meet annuity obligations with
the cash we receive from our investments. To minimise the impact on
our profit, we aim to match the duration (a measure of interest
rate sensitivity) of assets and liabilities as closely as possible
and the position is monitored regularly. Under the Solvency II
regulatory regime, additional interest rate risk results from the
way the balance sheet is constructed, such as the requirement for
us to include a risk margin. The UK business continually assesses
the need for any derivatives in managing its interest rate
sensitivity. The with-profits business is exposed to interest rate
risk because of underlying guarantees in some of its products. Such
risk is largely borne by the with-profits fund itself but
shareholder support may be required in extreme circumstances where
the fund has insufficient resources to support the
risk.
In Asia, our exposure to interest rate risk
arises from the guarantees of some non unit-linked investment
products. This exposure exists because it may not be possible to
hold assets which will provide cash payments to us which match
exactly those payments we in turn need to make to policyholders -
this is known as an asset and liability mismatch and although it is
small and appropriately managed, it cannot be
eliminated.
Jackson is exposed to interest rate risk in its
fixed, fixed index and variable annuity books. Movements in
interest rates can impact on the cost of guarantees in these
products, in particular the cost of guarantees may increase when
interest rates fall. We actively monitor the level of sales of
variable annuity products with guaranteed living benefits, and
together with the risk limits we have in place this helps us to
ensure that we are comfortable with the interest rate and market
risks we incur as a result. The Jackson hedging programme in place
includes hybrid derivatives to protect us from a combined fall in
interest rates and equity markets since Jackson is exposed to the
combination of these market movements.
Foreign exchange risk
The geographical
diversity of our businesses means that we have some exposure to the
risk of exchange rate fluctuations. Our operations in the US and
Asia, which represent a large proportion of our operating profit
and shareholders' funds, generally write policies and invest in
assets in local currencies. Although this limits the effect of
exchange rate movements on local operating results, it can lead to
fluctuations in our Group financial statements when results are
reported in UK sterling.
We retain revenues locally to support the growth
of our business and capital is held in the local currency of the
business to meet local regulatory and market requirements. We
accept the foreign exchange risk this can produce when reporting
our Group balance sheet and income statement. In cases where a
surplus arises in an overseas operation which is to be used to
support Group capital, or where a significant cash payment is due
from an overseas subsidiary to the Group, this foreign exchange
exposure is hedged where we believe it is economically favourable
to do so. Generally, we do not have appetite for significant direct
shareholder exposure to foreign exchange risks in currencies
outside local territories, but we do have some controlled appetite
for this on fee income and on non-sterling investments within the
with-profits fund. Where foreign exchange risk arises outside our
appetite, currency borrowings, swaps and other derivatives are used
to manage our exposure.
b.
Credit risk
We invest in bonds that provide a regular, fixed
amount of interest income (fixed income assets) in order to match
the payments we need to make to policyholders. We also enter into
reinsurance and derivative contracts with third parties to mitigate
various types of risk, as well as holding cash deposits at certain
banks. As a result, we are exposed to credit risk and counterparty
risk across our business.
Credit risk is the potential for reduction in the
value of our investments which results from the perceived level of
risk of an investment issuer being unable to meet its obligations
(defaulting). Counterparty risk is a type of credit risk and
relates to the risk that the counterparty to any contract we enter
into being unable to meet their obligations causing us to suffer
loss.
We use a number of risk management tools to
manage and mitigate this credit risk, including the
following:
● Our credit risk
policy;
● Risk appetite
statements and limits that we have defined on issuers,
counterparties and the average credit quality of the
portfolio;
● Collateral
arrangements we have in place for derivative
transactions;
● The Group Credit
Risk Committee's oversight of credit and counterparty credit risk
and sector and/or name-specific reviews. During 2016, it has
conducted sector reviews in the banking (UK and Asia) and energy
sectors;
● Regular deep dive
assessments; and
● Close monitoring or
restrictions on investments that may be of
concern.
Debt and loan
portfolio
Our UK business is
mainly exposed to credit risk on fixed income assets in the
shareholder-backed portfolio. At 31 December 2016, this portfolio
contained fixed income assets worth £35.6 billion. Credit risk
arising from a further £55.2 billion of fixed income assets is
largely borne by the with-profits fund, to which the shareholder is
not directly exposed although under extreme circumstances
shareholder support may be required if the fund is unable to meet
payments as they fall due.
The value of our
debt portfolio in our Asia business was £36.5 billion at 31
December 2016. The majority (69 per cent) of the portfolio is in
unit-linked and with-profits funds and so exposure of the
shareholder to this component is minimal. The remaining 31 per cent
of the debt portfolio is held to back the shareholder
business.
Credit risk also
arises in the general account of the Jackson business, where
£40.7 billion of fixed income assets are held to support
shareholder liabilities including those from our fixed annuities,
fixed index annuities and life insurance
products.
The
shareholder-owned debt and loan portfolio of the Group's asset
management business of £2.4 billion as at 31 December 2016
mostly belongs to our Prudential Capital (PruCap)
operations.
Certain sectors
have been under pressure during 2016, including the European
banking sector. Most of the focus on the latter was around UK banks
due to Brexit concerns, Italian banks and certain banks at risk of
fines for the mis-selling of mortgage securities leading up to the
2008 financial crisis. We subject these sectors to ongoing
monitoring and regular management information reporting to the
Group's risk committees. Certain sectors are also subject to our
watch list and early warning indicator monitoring
processes.
Further details of
the composition and quality of our debt portfolio, and exposure to
loans, can be found in the IFRS financial
statements.
Group sovereign
debt
We also invest in
bonds issued by national governments, that are traditionally seen
as safer investments. This sovereign debt represented 19 per cent
or £17.1 billion of the shareholder debt portfolio as at 31
December 2016 (31 December 2015: 17 per cent or £12.8
billion). 4 per cent of this was rated AAA and 92 per cent was
considered investment grade (31 December 2015: 94 per cent
investment grade). At 31 December 2016, the Group's shareholder
holding in Eurozone sovereign debt1 was £767
million. 75 per cent of this was rated AAA (31 December 2015: 75
per cent rated AAA). We do not have any sovereign debt investments
in Greece.
The particular
risks associated with holding sovereign debt are detailed further
in our disclosures on risk factors.
The exposures held
by the shareholder-backed business and with-profits funds in
sovereign debt securities at 31 December 2016 are given in Note
C3.2(f) of the Group's IFRS financial
statements.
Bank debt exposure
and counterparty credit risk
Our exposure to
banks is a key part of our core investment business, as well as
being important for the hedging and other activities we undertake
to manage our various financial risks. Given the importance of our
relationship with our banks, exposure to the sector is a considered
a key risk for the Group with an appropriate level of management
information provided to the Group's risk committees and the
Board.
The exposures held
by the shareholder-backed business and with-profits funds in bank
debt securities at 31 December 2016 are given in Note C3.2(f) of
the Group's IFRS financial statements.
Our exposure to
derivative counterparty and reinsurance counterparty credit risk is
managed using an array of risk management tools, including a
comprehensive system of limits.
Where appropriate,
we reduce our exposure, buy credit protection or use additional
collateral arrangements to manage our levels of counterparty credit
risk.
At December 2016,
shareholder exposures by rating and sector are shown
below:
● 96 per cent of the
shareholder portfolio is investment grade rated. In particular, 68
per cent of the portfolio is rated A- and above; and
● The Group's
shareholder portfolio is well diversified: no individual sector
makes up more than 10 per cent of the total portfolio (excluding
the financial and sovereign sectors).
c.
Liquidity risk
Our liquidity risk arises from the need to have
sufficient liquid assets to meet policyholder and third-party
payments as they fall due. This incorporates the risk arising from
funds composed of illiquid assets and results from a mismatch
between the liquidity profile of assets and liabilities. Liquidity
risk may arise, for example, where external capital is unavailable
at sustainable cost, increased liquid assets are required to be
held as collateral under derivative transactions or redemption
requests are made against Prudential issued illiquid
funds.
We have significant internal sources of
liquidity, which are sufficient to meet all of our expected cash
requirements for at least 12 months from the date the financial
statements are approved, without having to resort to external
sources of funding. In total, the Group has £2.6 billion of
undrawn committed facilities that we can make use of, expiring in
2020. We have access to further liquidity by way of the debt
capital markets, and also have in place an unlimited commercial
paper programme and have maintained a consistent presence as an
issuer in this market for the last decade.
Liquidity uses and sources are assessed at a
Group and business unit level under both base case and stressed
assumptions. We calculate a Liquidity Coverage Ratio (LCR) under
stress scenarios as one measure of our liquidity risk, and this
ratio and the liquidity resources available to us are regularly
monitored and are assessed to be sufficient.
Our risk management and mitigation of liquidity
risk include:
● Our liquidity risk
policy;
● The risk appetite
statements, limits and triggers that we have in
place;
● The monitoring of
liquidity risk we perform through regular management information to
committees and the Board;
● Our Liquidity Risk
Management Plan, which includes details of the Group Liquidity Risk
Framework as well as gap analysis of our liquidity risks and the
adequacy of our available liquidity resources under normal and
stressed conditions;
● Regular stress
testing;
● Our established
contingency plans and identified sources of
liquidity;
● Our ability to
access the money and debt capital markets;
● Regular deep dive
assessments; and
● The access we enjoy
to external sources of finance through committed credit
facilities.
4.2 Risks from our
products
a.
Insurance risk
Insurance risk makes up a significant proportion
of our overall risk exposure. The profitability of our businesses
depends on a mix of factors including levels of, and trends in,
mortality (policyholders dying), morbidity (policyholders becoming
ill) and persistency (customers lapsing their policies), and
increases in the costs of claims, including the level of medical
expenses increases over and above price inflation (claim
inflation).
The key drivers of the Group's insurance risks
are persistency and morbidity risk in the Asia business; and
longevity risk in the Jackson and Prudential UK & Europe
businesses.
We manage and mitigate our insurance risk using
the following:
● Our insurance and
underwriting risk policies;
● The risk appetite
statements, limits and triggers we have in
place;
● Using longevity,
morbidity and persistency assumptions that reflect recent
experience and expectation of future trends, and industry data and
expert judgement where appropriate;
● We use reinsurance
to mitigate longevity and morbidity risks;
● Morbidity risk is
also mitigated by appropriate underwriting when policies are issued
and claims are received;
● Persistency risk is
mitigated through the quality of sales processes and with
initiatives to increase customer retention;
● Medical expense
inflation risk mitigated through product re-pricing;
and
● Regular deep dive
assessments.
Longevity risk is an important element of our
insurance risks for which we need to hold a large amount of capital
under Solvency II regulations. Longevity reinsurance is a key tool
for us in managing our risk. The enhanced pensions freedoms
introduced in the UK during 2015 greatly reduced the demand for
retail annuities and further liberalisation is anticipated.
Although we have scaled down our participation in the annuity
market by reducing new business acquisition, given our significant
annuity portfolio the assumptions we make about future rates of
improvement in mortality rates remain key to the measurement of our
insurance liabilities and to our assessment of any reinsurance
transactions.
We continue to conduct research into longevity
risk using both experience from our annuity portfolio and industry
data. Although the general consensus in recent years is that people
are living longer, there is considerable volatility in year-on-year
longevity experience, which is why we need expert judgement in
setting our longevity basis.
Our morbidity risk is mitigated by appropriate
underwriting when policies are issued and claims are received. Our
morbidity assumptions reflect our recent experience and expectation
of future trends for each relevant line of
business.
In Asia, we write significant volumes of health
protection business, and so a key assumption for us is the rate of
medical inflation, which is often in excess of general price
inflation. There is a risk that the expenses of medical treatment
increase more than we expect, so the medical claim cost passed on
to us is higher than anticipated. Medical expense inflation risk is
best mitigated by retaining the right to re-price our products each
year and by having suitable overall claim limits within our
policies, either limits per type of claim or in total across a
policy.
Our persistency assumptions similarly reflect a
combination of recent past experience for each relevant line of
business and expert judgement, especially where a lack of relevant
and credible experience data exists. Any expected change in future
persistency is also reflected in the assumption. Persistency risk
is mitigated by appropriate training and sales processes and
managed locally post-sale through regular experience monitoring and
the identification of common characteristics of business with high
lapse rates. Where appropriate, we make allowance for the
relationship (either assumed or historically observed) between
persistency and investment returns and account for the resulting
additional risk. Modelling this dynamic policyholder behaviour is
particularly important when assessing the likely take-up rate of
options embedded within certain products. The effect of persistency
on our financial results can vary but mostly depends on the value
of the product features and market conditions.
4.3 Risks from our business
operations
a.
Operational risk
Operational risk is the risk of loss (or
unintended gain or profit) arising from inadequate or failed
internal processes, personnel and systems, or from external events.
This includes employee error, model error, system failures, fraud
or some other event which disrupts business
processes.
We manage and
mitigate our operational risk using the
following:
● Operational risk
and outsourcing and third-party supply
policies;
● Corporate insurance
programmes to limit the impact of operational
risks;
● Scenario analysis
for operational risk capital requirements, which focus on extreme,
yet plausible, events;
● Internal and
external review of cyber security capability;
and
● Regular testing of
elements of the disaster-recovery plan.
An important element of operational risk relates
to compliance with changing regulatory requirements. The high rate
of global regulatory change, in an already complex regulatory
landscape, increases the risk of non-compliance due to a failure to
identify, correctly interpret, implement and/or monitor
regulations. Legislative developments over recent years, together
with enhanced regulatory oversight and increased capability to
issue sanctions, have resulted in a complex regulatory environment
that may lead to breaches of varying magnitude if the Group's
business-as-usual operations are not compliant. As well as
prudential regulation, we focus on conduct regulation, including
regulations related to anti-money laundering, bribery and
corruption, and sales practices. We have a particular focus on
these regulations in newer/emerging markets.
The performance of core activities places
reliance on the IT infrastructure that supports day-to-day
transaction processing. Our IT environment must also be secure and
we must address an increasing cyber risk threat as our digital
footprint increases - see separate Cyber risk section below. The
risk that our IT infrastructure does not meet these requirements is
a key area of focus, particularly the risk that legacy IT
infrastructure supporting core activities/processes affects
business continuity or impacts on business
growth.
As well as the above, other key areas of focus
within operational risk include:
● The risk of a
significant failure of a third-party outsourcing partner impacting
critical services;
● The risk of trading
or transaction errors having a material cost across
Group;
● The risk that
errors within models and user-developed applications used by the
Group result in incorrect or inappropriate transactions being
instructed;
● Departure of key
persons or teams resulting in disruption to current and planned
business activities;
● The risk that key
people, processes and systems are unable to operate (thus impacting
on the on-going operation of the business) due to
a
significant unexpected external event; for example pandemic,
terrorist attack, natural disaster or political
unrest;
● The risk that a
significant project fails or partially fails to meet its
objectives, leading to financial loss; and
● The risk of
inadequate or inappropriate controls, governance structures or
communication channels in place to support the desired culture and
ensure that the business is managed in line with the core business
values, within the established risk appetite and in alignment with
external stakeholder expectations.
b.
Global regulatory and political risk
Our risk management and mitigation of regulatory
and political risk includes the following:
● A Risk and Capital
Plan that includes considerations of current
strategies;
● Close monitoring
and assessment of our business environment and strategic
risks;
● Board strategy
sessions that consider risk themes;
● A Systemic Risk
Management Plan that details the Group's strategy and Risk
Management Framework; and
● A Recovery Plan
covering corporate and risk governance for managing risks in a
distressed environment, a range of recovery options, and scenarios
to assess the effectiveness of these recovery
options
In June 2016, the UK voted to leave the EU. The
potential outcome of the negotiations on UK withdrawal and any
subsequent negotiations on trade and access to major trading
markets, including the single EU market, is currently highly
uncertain.
The ongoing uncertainty and likelihood of a
lengthy negotiation period may increase volatility in the markets
where we operate, creating the potential for a general downturn in
economic activity and for further or prolonged falls in interest
rates in some jurisdictions due to easing of monetary policy and
investor sentiment. We have several UK-domiciled operations,
including Prudential UK and M&G, and these may be impacted by a
UK withdrawal from the EU. However, our diversification by
geography, currency, product and distribution should reduce some of
the potential impact. Contingency plans were developed ahead of the
referendum by business units and operations that may be immediately
impacted by a vote to withdraw the UK from the EU, and these plans
have been enacted since the referendum result.
The EU's Solvency II Directive came into effect
on 1 January 2016; however, the UK's vote to leave the EU has the
potential to result in changes to future applicability of the
regime in the UK. In September 2016, following the Brexit vote, the
UK Treasury published terms of reference of its consultation into
Solvency II to consider the options for British insurers and to
assess the impact of the regime on the competitiveness of the UK
insurance industry, the needs of UK consumers and the wider UK
business economy. The outcome is likely to be dependent on the
overall Brexit agreement reached between the UK and EU. Separately,
the European Commission has commenced a review of some elements of
the application of the Solvency II legislation with a particular
focus on the Solvency Capital Requirement calculated using the
standard formula.
National and regional efforts to curb systemic
risk and promote financial stability are also underway in certain
jurisdictions in which Prudential operates, including the
Dodd-Frank Wall Street Reform and Consumer Protection Act in the
US, and other European Union legislation related to the financial
services industry.
There are a number of ongoing policy initiatives
and regulatory developments that are having, and will continue to
have, an impact on the way Prudential is supervised. These include
addressing Financial Conduct Authority (FCA) reviews, ongoing
engagement with the Prudential Regulation Authority (PRA), and the
work of the Financial Stability Board (FSB) and standard-setting
institutions such as the International Association of Insurance
Supervisors (IAIS). Decisions taken by regulators, including those
related to solvency requirements and capital allocation may have an
impact on our business.
The IAIS's Global Systematically Important
Insurers (G-SII) regime form additional compliance considerations
for us. Groups designated as G-SIIs are subject to additional
regulatory requirements, including enhanced group-wide supervision,
effective resolution planning, development of a Systemic Risk
Management Plan, a Recovery Plan and a Liquidity Risk Management
Plan. Prudential's designation as a G-SII was reaffirmed by the
IAIS in November 2016, based on the updated methodology published
in June 2016. Prudential is monitoring the development and
potential impact of the policy measures and is continuing to engage
with the PRA on the implications of the policy measures and
Prudential's designation as a G-SII. We continue to engage with the
IAIS on developments in capital requirements for groups with G-SII
designation.
The IAIS is also developing a Common Framework
(ComFrame) which is focused on the supervision of Internationally
Active Insurance Groups. ComFrame will establish a set of common
principles and standards designed to assist regulators in
addressing risks that arise from insurance groups with operations
in multiple jurisdictions. As part of this, work is underway to
develop a global Insurance Capital Standard that is intended to
apply to Internationally Active Insurance Groups. Once the
development of the Insurance Capital Standard (ICS) has been
concluded, it is intended to replace the Basic Capital Requirement
as the minimum group capital requirement for
G-SIIs.
A consultation on the ICS was concluded in 2016
and the IAIS intends to publish an interim version of ICS in 2017.
Further field testing, consultations and private reporting to
group-wide supervisors on the interim version of the ICS are
expected over the coming years. It is currently planned to be
adopted as part of ComFrame by the IAIS in late
2019.
The IAIS's Insurance Core Principles, which
provide a globally-accepted framework for the supervision of the
insurance sector and ComFrame evolution, are expected to create
continued development in both prudential and conduct regulations
over the next two to three years.
In the US, the Department of Labor proposal in
April 2016 to introduce new fiduciary obligations for distributors
of investment products to holders of regulated accounts, which
could dramatically reshape the distribution of retirement products.
Jackson's strong relationships with distributors, history of
product innovation and efficient operations should help mitigate
any impacts.
The US National Association of Insurance
Commissioners (NAIC) is currently conducting an industry
consultation with the aim of reducing the complexity in the
variable annuity statutory balance sheet and risk management.
Following an industry quantitative impact study, changes have been
proposed to the current framework; however, these are considered to
be at an early stage of development. Jackson continues to be
engaged in the consultation and testing process. The proposal is
currently planned to be effective from 2018.
With the new US administration having taken
office in January 2017, the potential uncertainty as to the
timetable and status of these key US reforms has increased given
preliminary indications from Washington. Our preparations to manage
the impact of these reforms will continue until further
clarification is provided.
In Asia, regulatory regimes are developing at
different speeds, driven by a combination of global factors and
local considerations. New requirements could be introduced in these
and other regulatory regimes that challenge legal structures,
current sales practices.
c.
Cyber risk
Cyber risk is an area of increased scrutiny for
global regulators after a number of recent high profile attacks and
data losses. The growing maturity and industrialisation of
cyber-criminal capability, together with an increasing level of
understanding of complex financial transactions by criminal groups,
are two reasons why risks to the financial services industry are
increasing.
Given this, cyber security is seen as a key risk
for the Group. Our current threat assessment is that, while we are
not individually viewed as a compelling target for a direct
cyber-attack, we are at risk of suffering attacks as a member of
the global financial services industry, with potentially
significant impact on business continuity, our customer
relationship and our brand reputation.
The Board receives periodic updates on cyber risk
management throughout the year. The current Group-wide Cyber Risk
Management Strategy and the associated Group-wide Coordinated Cyber
Defence Plan were approved by the Board in
2016.
The Cyber Risk Management Strategy includes three
core objectives: to develop a comprehensive situational awareness
of our business in cyberspace, to pro-actively engage cyber
attackers to minimise harm to our business and to enable the
business to grow confidently and safely in
cyberspace.
The Cyber Defence Plan consists of a number of
work-streams, including developing our ability to deal with
incidents; alignment with our digital transformation strategy; and
increasing cyber oversight and assurance to the
Board.
Protecting our customers remains core to our
business, and the successful delivery of the Cyber Defence Plan
will reinforce our capabilities to continue doing so in cyberspace
as we transition to a digital business.
Group functions work with each of the business
units to address cyber risks locally within the national and
regional context of each business, following the strategic
direction laid out in the Cyber Risk Management Strategy and
managed through the execution of the Cyber Defence
Plan.
The Group Information Security Committee, which
consists of senior executives from each of the businesses and meets
on a regular basis, governs the execution of the Cyber Defence Plan
and reports on delivery and cyber risks to the Group Executive Risk
Committee. Both committees also receive regular operational
management information on the performance of
controls.
1
Excludes Group's
proportionate share in joint ventures and unit-linked assets and
holdings of consolidated unit trust and similar
funds.
Corporate governance
The Board confirms that it has complied with all relevant
provisions set out in the Hong Kong Code on Corporate Governance
Practices (the HK Code) throughout the accounting period. With
respect to Code Provision B.1.2(d) of the HK
Code, the responsibilities of the Remuneration Committee
do not include making recommendations to the Board on the
remuneration of non-executive directors. In line with the
principles of the UK Code, fees for Non-executive Directors are
determined by the Board.
The directors also confirm that the financial results contained in
this document have been reviewed by the Group Audit
Committee.
The company confirms that it has adopted a code of conduct
regarding securities transactions by directors on terms no less
exacting than required by the Hong Kong Listing Rules and that the
directors of the Company have complied with this code of conduct
throughout the year.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: 14
March 2017
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PRUDENTIAL
PUBLIC LIMITED COMPANY
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By: /s/
Nic Nicandrou
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Nic
Nicandrou
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Chief
Financial Officer
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