TIDMPRU
RNS Number : 4701R
Prudential PLC
09 March 2016
NEWS RELEASE
PRUDENTIAL PLC
GROUP COMMUNICATIONS
12 ARTHUR STREET
LONDON EC4R 9AQ
TEL 020 7220 7588
FAX 020 7548 3725
www.prudential.co.uk
9 March 2016
PRUDENTIAL PLC FULL YEAR 2015 RESULTS
PRUDENTIAL DELIVERS BROAD-BASED GROWTH AND INCREASED CASH
GENERATION
Group Performance Highlights (on constant exchange rate
basis):
-- IFRS operating profit of GBP4,007 million, up 22 per cent(1)
-- EEV new business profit of GBP2,617 million, up 20 per cent(1,2)
-- Underlying free surplus generation(3) (after investment in
new business) of GBP3,050 million, up 15 per cent(1)
-- Net cash remittances from business units of GBP1,625 million, up 10 per cent
Business Units Performance Highlights (on constant exchange rate
basis):
-- Asia life and asset management IFRS operating profit of GBP1,324 million, up 17 per cent(1)
-- Jackson life IFRS operating profit of GBP1,691 million, up 10 per cent(1)
-- UK life IFRS operating profit of GBP1,167 million, up 60 per cent(2)
-- M&G IFRS operating profit of GBP442 million, down 1 per cent
Capital & Dividend:
-- IFRS shareholders' funds of GBP13.0 billion, up 10 per cent(4)
-- EEV shareholders' funds of GBP32.4 billion, up 11 per cent(4)
, equivalent to 1,258 pence per share
-- Group Solvency II capital surplus(5) estimated at GBP9.7 billion
-- 2015 full year(6) ordinary dividend increased by 5 per cent to 38.78 pence per share
-- Special dividend of 10 pence per share
Commenting on the results, Mike Wells, Group Chief Executive,
said:
"We have delivered a strong performance in 2015. We continue to
grow across our key metrics despite the macroeconomic uncertainty
and the challenges presented by low long-term interest rates. IFRS
operating profit increased 22 per cent to GBP4,007 million and EEV
new business profit grew 20 per cent to GBP2,617 million. The
Group's underlying free surplus generation increased by 15 per cent
to GBP3,050 million and cash remittances from business units were
up 10 per cent to GBP1,625 million. These results represent good
progress towards the 2017 growth and cash objectives, which we set
out at the December 2013 investor conference in London.
"In Asia, our portfolio of businesses remains focused on serving
the protection and investment needs of the growing middle classes
in the region through a high-quality agency force and
well-established bank partnerships. Our life and asset management
businesses delivered a combined IFRS operating profit of GBP1,324
million, up 17 per cent. Life APE sales were 26 per cent higher at
GBP2,853 million and generated a 28 per cent increase in EEV new
business profit to GBP1,490 million. Despite this strong sales
performance, our focus on growth and cash in the region also saw
underlying free surplus generation rise 16 per cent to GBP673
million. Eastspring, our Asian asset management business, achieved
record third-party net inflows of GBP6.0 billion, driving its total
funds under management to a new high of GBP89.1 billion.
"In the US, we continue to meet the needs of the 'baby-boomer'
generation transitioning into retirement. Jackson's disciplined
execution delivered good returns to our shareholders, with life
IFRS operating profit up 10 per cent to GBP1,691 million and cash
remittances to Group 13 per cent higher to a record GBP470 million.
Our success in capturing strong variable annuity inflows at
attractive margins drove our separate account asset base up 5 per
cent(1) to GBP91.0 billion.
(1) Year-on-year percentage increases are stated on a constant
exchange rate basis unless otherwise stated. Increases on an actual
exchange rate basis, which incorporate the effect of the exchange
rate movements, are shown in the Financial Highlights section and
in the Chief Financial Officer's report. All amounts are comparable
to 2014 unless otherwise indicated.
(2) Following the disposal of the Group's 25 per cent interest
in PruHealth and PruProtect in November 2014, the 2014 comparative
results of UK insurance operations have been adjusted to exclude
results of those businesses.
(3) Underlying free surplus generation comprises underlying free
surplus released from long-term business (net of investment in new
business) and that generated from asset management operations.
(4) Comparable to 31 December 2014 at actual exchange rates.
(5) Before allowing for second interim ordinary and special dividends.
(6) From 2016, Prudential will make twice-yearly interim
ordinary dividend payments to replace final/interim dividend.
"In the UK, our life business delivered a 60 per cent(1)
increase in IFRS operating profit to GBP1,167 million, reflecting
continued pro-active management of our in-force book. This result
includes GBP339 million from specific management actions undertaken
in the second half to position the balance sheet more efficiently
under the new Solvency II regime, which are not expected to recur
going forward. Against a backdrop of unprecedented change brought
about by pension reforms, we delivered a 23 per cent increase in
life APE sales to GBP1,025 million and drove new business profit up
23 per cent to GBP318 million.
"After a period of exceptional growth, M&G had a more
challenging year with retail net outflows more than offsetting
positive flows from institutional new business. As a result total
funds under management declined by 7 per cent to GBP246.1 billion.
Despite this, IFRS operating profit of GBP442 million was broadly
in line with last year reflecting actions on costs and cash
remittances were 6 per cent higher at GBP302 million.
"Prudential's capital generative business operations and
disciplined approach to risk management have improved the Group's
shareholders' equity and solvency levels and have enhanced the
Group's financial flexibility. Our Solvency II outcome, following
approval by the Prudential Regulation Authority of our internal
model in December 2015, underscores the strength and resilience of
the Group's capital position. At 31 December 2015, Group Solvency
II capital surplus was estimated at GBP9.7 billion(2) , which is
equivalent to a Group Solvency II capital ratio of 193 per cent.
Shareholders' equity on an EEV basis at 31 December 2015 was 11 per
cent higher at GBP32.4 billion, equivalent to GBP12.58 per
share.
"The Board has decided to increase the full-year ordinary
dividend by 5 per cent to 38.78 pence per share, reflecting the
continued strong financial performance of the Group in 2015. The
Board has also decided to award a special dividend of 10 pence per
share reflecting the additional contribution to earnings from the
specific management actions in the UK.
"I am pleased to be able to announce such a strong performance
today despite the current macroeconomic and political uncertainty,
which have created a more volatile and unpredictable short-term
outlook for global growth. We have the flexibility and resilience
to adapt to these developments due to our focus on those markets
where the need for our products is greatest, our growing level of
recurring income from our sizeable in-force portfolio and our
robust balance sheet position.
"The fundamentals of the Group remain compelling, our
opportunities are intact and we are in an enviable position to
benefit from the attractive structural and demographic
opportunities in Asia, the US and the UK. The disciplined execution
of our strategy, underpinned by the cash generating nature of our
business, positions us well to be able to continue to deliver
high-quality products and services to our 24 million customers and
long-term profitable growth to our shareholders."
(1) Following the disposal of the Group's 25 per cent interest
in PruHealth and PruProtect in November 2014, the 2014 comparative
results of UK insurance operations
have been adjusted to exclude results of those businesses.
(2) Before allowing for second interim ordinary and special
dividends.
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
Notes to Editors:
(MORE TO FOLLOW) Dow Jones Newswires
March 09, 2016 03:15 ET (08:15 GMT)
1. The results in this announcement are prepared on two bases:
International Financial Reporting Standards (IFRS) and European
Embedded Value (EEV). The IFRS basis results form the basis of the
Group's statutory financial statements. The supplementary EEV basis
results have been prepared in accordance with the European Embedded
Value principles (EEV Principles) issued by the CFO Forum of
European Insurance Companies in May 2004 and expanded by the
Additional Guidance on EEV disclosures published in October 2005.
The impact of Solvency II is not reflected in EEV results in line
with the guidance issued by the CFO Forum in October 2015. 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 stated 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 ie 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, the gain on sale
of PruProtect and PruHealth and the costs arising from the
domestication of our Hong Kong 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.
4. Total number of Prudential plc shares in issue as at 31 December 2015 was 2,572,454,958.
5. 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://prudential.co.uk/investors/results-and-presentations/results-day
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, Passcode: 124923#. This will be
available from approximately 3.00pm (UK) / 11.00pm (Hong Kong) on 9
March 2016 until 11.59pm (UK) on 23 March 2016 / 7.59am (Hong Kong)
on 24 March 2016.
6. High-resolution photographs are available to the media free of charge at www.prudential.co.uk/prudential-plc/media/media_library
7. 2015 Dividend (Second interim ordinary and Special)
Ex-dividend date 24 March 2016 (UK, Ireland, Hong Kong and Singapore)
Record date 29 March 2016
Payment of dividend 20 May 2016 (UK, Ireland and Hong Kong)
On or about 27 May 2016 (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 GBP509 billion of assets
under management (as at 31 December 2015). 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 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 actions 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 2015 financial performance
Financial highlights
Life APE new business sales (APE sales)
Actual Exchange Rate Constant Exchange Rate
------------------------------ ------------------------
2015 GBPm 2014 GBPm Change % 2014 GBPm Change %
--------------- --------- --------- -------- ------------ ----------
Asia 2,853 2,237 28 2,267 26
US 1,729 1,556 11 1,677 3
UK(1) 1,025 834 23 834 23
--------------- --------- --------- -------- ------------ ----------
Total Group(1) 5,607 4,627 21 4,778 17
--------------- --------- --------- -------- ------------ ----------
Life EEV new business profits and investment in new business
Actual Exchange Rate Constant Exchange Rate
------------------------------------------------------------ -------------------------------------------
2015 GBPm 2014 GBPm Change % 2014 GBPm Change %
------------------ ------------------ -------------------- -------------------- ---------------------
Free Free
surplus surplus Free Free Free
invested invested surplus surplus surplus
New in New in New investment New investment New investment
Business new Business new Business in new Business in new Business in new
Profit business Profit business Profit business Profit business Profit business
--------- -------- -------- -------- -------- -------- ---------- -------- ---------- -------- -----------
Asia 1,490 413 1,162 346 28 19 1,168 352 28 17
US 809 267 694 187 17 43 748 201 8 33
UK(1) 318 65 259 65 23 - 259 65 23 -
--------- -------- -------- -------- -------- -------- ---------- -------- ---------- -------- -----------
Total
Group(1) 2,617 745 2,115 598 24 25 2,175 618 20 21
(MORE TO FOLLOW) Dow Jones Newswires
March 09, 2016 03:15 ET (08:15 GMT)
--------- -------- -------- -------- -------- -------- ---------- -------- ---------- -------- -----------
IFRS Profit
Actual Exchange Rate Constant Exchange Rate
------------------------------ ------------------------
2015 GBPm 2014 GBPm Change % 2014 GBPm Change %
------------------------------------------ --------- --------- -------- ------------ ----------
Operating profit before tax
Long-term business:
Asia 1,209 1,050 15 1,040 16
US 1,691 1,431 18 1,543 10
UK(1) 1,167 729 60 729 60
------------------------------------------- --------- --------- -------- ------------ ----------
Long-term business operating profit(1) 4,067 3,210 27 3,312 23
UK general insurance commission 28 24 17 24 17
Asset management business:
M&G 442 446 (1) 446 (1)
Prudential Capital 19 42 (55) 42 (55)
Eastspring Investments 115 90 28 91 26
US 11 12 (8) 13 (15)
Other income and expenditure (675) (661) (2) (661) (2)
Results of the sold PruHealth and PruProtect
business - 23 (100) 23 (100)
-------------------------------------------- --------- --------- -------- ------------ ----------
Total operating profit based on longer-term
investment returns before tax 4,007 3,186 26 3,290 22
-------------------------------------------- --------- --------- -------- ------------ ----------
Non-operating items (859) (572) (50) (654) (31)
-------------------------------------------- --------- --------- -------- ------------ ----------
Profit before tax attributable to
shareholders 3,148 2,614 20 2,636 19
Tax charge attributable to shareholders'
returns (569) (398) (43) (396) (44)
-------------------------------------------- --------- --------- -------- ------------ ----------
Profit for the year attributable to
shareholders 2,579 2,216 16 2,240 15
-------------------------------------------- --------- --------- -------- ------------ ----------
Post-tax profit - EEV
Actual Exchange Rate Constant Exchange Rate
------------------------------ ------------------------
2015 GBPm 2014 GBPm Change % 2014 GBPm Change %
------------------------------------------- --------- --------- -------- ------------ ----------
Post-tax operating profit
Long-term business:
Asia 2,321 1,900 22 1,903 22
US 1,808 1,528 18 1,647 10
UK(1) 863 735 17 735 17
------------------------------------------- --------- --------- -------- ------------ ----------
Long-term business post-tax operating
profit(1) 4,992 4,163 20 4,285 16
UK general insurance commission 22 19 16 19 16
Asset management business:
M&G 358 353 1 353 1
Prudential Capital 18 33 (45) 33 (45)
Eastspring Investments 101 78 29 79 28
US 7 6 17 7 -
Other income and expenditure (617) (567) (9) (567) (9)
Results of the sold PruHealth and PruProtect
business - 11 (100) 11 (100)
-------------------------------------------- --------- --------- -------- ------------ ----------
Post-tax operating profit based on
longer-term investment returns 4,881 4,096 19 4,220 16
-------------------------------------------- --------- --------- -------- ------------ ----------
Non-operating items (930) 247 (477) 235 (496)
-------------------------------------------- --------- --------- -------- ------------ ----------
Post-tax profit for the year attributable to
shareholders 3,951 4,343 (9) 4,455 (11)
-------------------------------------------- --------- --------- -------- ------------ ----------
Basic earnings per share - based on operating profit after tax
Actual Exchange Rate Constant Exchange Rate
---------------------------------------- ------------------------
2015 pence 2014 pence Change % 2014 pence Change %
------ ------------- ------------- ---------- ------------- ---------
IFRS 125.8 96.6 30 99.5 26
EEV 191.2 160.7 19 165.6 15
------ ------------- ------------- ---------- ------------- ---------
Underlying free
surplus generated
(2)
Actual Exchange Rate Constant Exchange Rate
----------------------------------------------- ---------------------------------
2015 GBPm 2014 GBPm Change % 2014 GBPm Change %
------------ ---------------- --------------- ------------------ -------------
Long- Long- Long- Long- Long-
term Total term Total term Total term Total term Total
------------------- ----- ----- --------- ----- -------- ----- ----------- ----- ------ -----
Asia 572 673 514 592 11 14 499 578 15 16
US 1,159 1,166 1,004 1,010 15 15 1,083 1,090 7 7
UK(1) 813 835 572 591 42 41 572 591 42 41
M&G - 358 - 353 - 1 - 353 - 1
Prudential Capital - 18 - 33 - (45) - 33 (45)
-------------------- ----- ----- --------- ----- -------- ----- ----------- ----- ------ -----
Total Group 2,544 3,050 2,090 2,579 22 18 2,154 2,645 18 15
-------------------- ----- ----- --------- ----- -------- ----- ----------- ----- ------ -----
Cash remitted by the business units to the Group
2015 GBPm 2014 GBPm Change %
--------------------------------------------- --------------- ------------------ --------------------
Asia 467 400 17
US 470 415 13
UK 331 325 2
M&G 302 285 6
Prudential Capital 55 57 (4)
--------------------------------------------- --------------- ------------------ --------------------
Total Group 1,625 1,482 10
--------------------------------------------- --------------- ------------------ --------------------
Cash and capital
2015 2014 Change %
------------------------------------------------------------------------------------ --------- --------- --------
Ordinary dividend per share relating to the reporting year 38.78p 36.93p 5
Special dividend per share 10.00p - -
Holding company cash and short-term investments GBP2,173m GBP1,480m 47
IGD capital surplus(3) GBP5.5bn GBP4.7bn 17
Group Solvency II capital surplus(3,4) GBP9.7bn n/a n/a
Group Solvency II capital ratio(3, 4) 193% n/a n/a
(MORE TO FOLLOW) Dow Jones Newswires
March 09, 2016 03:15 ET (08:15 GMT)
------------------------------------------------------------------------------------ --------- --------- --------
Group shareholders' funds (including goodwill attributable to shareholders)
2015 2014 Change %
------------------------------------------------------------------------------------ --------- --------- --------
IFRS GBP13.0bn GBP11.8bn 10
EEV GBP32.4bn GBP29.2bn 11
------------------------------------------------------------------------------------ --------- --------- --------
2015% 2014%
------------------------------------------------------------------------------------ --------- ---------
Return on IFRS shareholders' funds(5) 27 26
Return on embedded value(5) 17 16
------------------------------------------------------------------------------------ --------- ---------
2015 2014 Change %
------------------------------------------------------------------------------------ --------- --------- --------
EEV shareholders' funds per share (including goodwill attributable to shareholders) 1,258p 1,136p 11
EEV shareholders' funds per share (excluding goodwill attributable to shareholders) 1,201p 1,079p 11
------------------------------------------------------------------------------------ --------- --------- --------
Notes:
(1) Following the disposal of the Group's 25 per cent interest
in PruHealth and PruProtect in November 2014, the 2014 comparative
results of UK insurance operations have been adjusted to exclude
results of those businesses.
(2) Underlying free surplus generated comprises underlying free
surplus released from long-term business (net of investment in new
business) and that generated from asset management operations.
(3) Estimated before allowing for second interim ordinary and
special dividends. IGD capital surplus for 2014 estimated before
allowing for final dividend.
(4) The methodology and assumptions used in calculating the
Group Solvency II capital results are set out in note II (c) of
Additional unaudited financial information. The Group Solvency II
capital ratio is based on outputs from the Group's Solvency II
internal model, approved by Prudential Regulation Authority in
December 2015.
(5) Operating profit after tax and non-controlling interests, as
a percentage of opening shareholders' funds.
Group Chief Executive's Report
I am pleased to report a strong performance in 2015.
Our strategy continues to serve us well, focusing on the three
long term opportunities across our geographic markets - (i) serving
the protection and investment needs of the growing middle class in
Asia; (ii) providing asset accumulation and retirement income
products to US baby boomers and (iii) meeting the savings and
retirement needs of an ageing British population. The strength of
the Group's execution capabilities, combined with our leading
market positions, growing in-force book and excellent
diversification by geography, currency, product and distribution
enable us to create value for our customers while generating
sustainable earnings and cash for our shareholders.
Group performance(1)
We continue to comment on our international business performance
in local currency terms (expressed on a constant exchange rate
basis) to show the underlying business trends in a period of
currency volatility. We have used this basis in discussions below
for our Asian and US businesses to maintain comparability.
Our Group IFRS operating profit based on longer-term investment
returns increased by 22 per cent in 2015 to GBP4,007 million. On an
actual exchange rate basis, the Group's IFRS operating profit grew
by 26 per cent.
-- Asia life and asset management operating profit of GBP1,324
million grew by 17 per cent, reflecting the growing recurring
income from our life in-force book (up 14 per cent to GBP7.2
billion(2) ) and higher assets under management in Eastspring. The
recurring premium focus underpins our earnings growth in the region
and is key to the resilience of our financial performance across
the cycle.
-- US life IFRS operating profit of GBP1,691 million was up 10
per cent, driven by growth in fee income earned on separate account
assets that have continued to benefit from robust net inflows.
-- UK life IFRS operating profit of GBP1,167 million grew by 60
per cent(4) , and included GBP339 million arising in the second
half of 2015 from specific management actions taken to position the
balance sheet more efficiently under the new Solvency II
regime.
-- M&G delivered operating profit of GBP442 million, broadly
in line with 2014. Funds under management (including internal
funds) were 7 per cent lower at GBP246.1 billion, reflecting retail
outflows during 2015.
The Group is focused on delivering strong cash generation, which
underpins both our strategic and financial flexibility. Underlying
free surplus generation(3) , a key indicator of cash generation
from our life and asset management businesses, was 15 per cent
higher at GBP3,050 million after reinvestment in new business. In
total, our businesses remitted cash to the corporate centre of
GBP1,625 million, up 10 per cent on an actual exchange rate basis.
Cash remittances of GBP467 million from Asia were 17 per cent
higher while those from the US increased by 13 per cent to GBP470
million, both on an actual exchange rate basis. In the UK, our life
operation remitted GBP331 million in line with last year and
M&G delivered a 6 per cent increase in remittances to GBP302
million.
New business profit was up 20 per cent(4) to GBP2,617 million,
primarily reflecting higher overall volumes in Asia and the UK. All
three of our life businesses contributed significantly to the
total, with GBP1,490 million (up 28 per cent) of new business
profit from Asia, GBP809 million (up 8 per cent) from the US and
GBP318 million (up 23 per cent(4) ) from the UK.
APE sales(5) increased by 17 per cent(4) to GBP5,607 million led
by Asia where APE sales were 26 per cent higher at GBP2,853
million. In the US, APE sales were 3 per cent higher at GBP1,729
million as demand for our sales of variable annuities remained
strong. In 2015, Jackson continued to proactively manage sales of
variable annuities with living benefits while diversifying sales
mix. In the UK, APE sales grew by 23 per cent(4) to GBP1,025
million, based on our attractive with-profits product propositions
sold through an expanding range of wrappers including income
drawdown, individual pensions, ISAs and investment bonds. M&G
experienced net outflows of GBP7.0 billion (2014: net inflows of
GBP7.1 billion) driven by retail net outflows of GBP10.9 billion,
due to redemptions from bond funds reflecting softer consumer
sentiment on fixed income assets. Eastspring Investments, our Asia
asset management business, delivered a strong performance in 2015,
with third party net inflows of GBP6.0 billion (2014: net inflows
of GBP5.4 billion).
Our balance sheet continues to be defensively positioned and our
Solvency II outcome, following approval by the Prudential
Regulation Authority of our internal model in December 2015,
underscores the strength and resilience of the Group's capital
position.
We are continuing to make good progress towards our 2017
objectives announced in December 2013.
2012 GBPm(6) 2013 GBPm 2014 GBPm 2015 GBPm CAGR 2017
Asia Objectives (since 2012) % Objectives*
------------ --------- --------- --------- --------------- -----------------
Asia life and asset
management IFRS operating
profit
Reported actuals 924 1,075 1,140 1,324
Constant exchange >GBP1,858
rate*** 901 1,075 1,260 1,468 million**
Constant exchange rate
change % (year-on-year) 19 17 17 18 >15% CAGR**
Asia underlying free
surplus generation(3)
Reported actuals 484 573 592 673
Constant exchange GBP0.9 - GBP1.1
rate*** 471 573 662 765 billion
Constant exchange rate
change % (year-on-year) 22 16 16
Group Objective for
cumulative period
1 January 2014 to 31
December 2017 Actual Objective
--------------- -----------------
1 Jan 2014 to 1 Jan 2014 to
31 Dec 2015 31 Dec 2017
--------------- -----------------
Cumulative Group GBP5.6 billion > GBP10 billion
underlying free surplus
generation
from 2014 onwards
* The objectives assume exchange rates at December 2013 and
economic assumptions made by Prudential in calculating the EEV
basis supplementary information
(MORE TO FOLLOW) Dow Jones Newswires
March 09, 2016 03:15 ET (08:15 GMT)
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 that the
existing EEV, IFRS and Free Surplus methodology at December 2013
will be applicable over the period.
** Asia life and asset management pre-tax IFRS operating profit
to grow at a compound annual rate of at least 15 per cent over the
period 2012-2017.
*** Constant exchange rate results translated using exchange rates as at December 2013.
Our operating performance by business unit
Asia
Asia has delivered strong financial results in 2015 across all
of our key metrics, demonstrating the resilient performance of our
well diversified and increasingly large in-force business
portfolio. IFRS operating profit of GBP1,324 million was up 17 per
cent (16 per cent on an actual exchange rate basis), free surplus
generation grew by 16 per cent to GBP673 million (14 per cent on
actual exchange rate basis) and net cash remittances of GBP467
million were up 17 per cent.
Our life business strategy is centred on Asia's rapidly growing
life insurance markets with a focus on regular premium, protection
orientated policies distributed primarily through high quality
agency and bank partners. We have over 14 million customers across
the region, one of the largest and most productive agency sales
forces, a well-established bancassurance franchise and leadership
positions in 9 out of 12 markets. Despite our strong progress over
the last decade, insurance penetration in the markets in which we
operate remains low and the demand for savings, health and
protection products from a growing middle class continues to be
high. Our scale and scope in the region, combined with proven
operational expertise, enables us to execute on strategic growth
opportunities, invest in building the business through the economic
cycle and remain flexible to resist market pressure for products we
consider to be less attractive. This approach will, from time to
time, lead to fluctuations in APE sales at a country level but
allows us to conserve value without compromising the overall
regional delivery.
In 2015 new business APE sales increased by 26 per cent driven
by 30 per cent growth in regular premium new business (which
contributes 93 per cent of our APE sales) offsetting the 8 per cent
reduction in single premiums, which are more susceptible to softer
economic conditions. Our sales performance continues to benefit
from our broad-based multi-channel distribution platform, new
product launches and continued actions to improve both distribution
scale and productivity. Agency APE sales were 29 per cent higher
across the region, reflecting continued investment in agency
manpower and an improvement in average agent productivity of 25 per
cent. Our core bank partnerships continue to make good progress,
led by Standard Chartered Bank where APE sales rose by 16 per cent.
New business profit was up 28 per cent at GBP1,490 million and
outpaced the APE sales growth of 26 per cent.
In Hong Kong, APE sales grew 74 per cent driven by increases in
agency headcount and productivity and also from our successful
inroads into Hong Kong's broker network. During 2015, we have also
seen acceleration in demand from Mainland China-based customers,
with around 70 per cent of this business having an annual premium
below US$5,000. We remain well placed to satisfy the growing demand
for savings and protection products from both domestic and Mainland
Chinese customers.
Our joint venture with CITIC in China continues to perform well,
with APE sales growth of 28 per cent and operations now in 64
cities. The second half of the year was marked by significantly
higher levels of volatility in investment markets, which impacted
single premium business through the bancassurance channel. However,
regular premium sales remain strong, with growth of 34 per cent in
the fourth quarter and 29 per cent for the year. Furthermore, sales
of health and protection business nearly doubled during the year,
contributing over 42 per cent of our APE sales in China. We are
well prepared for the implementation in 2016 of China's Risk
Oriented Solvency System (C-ROSS) and we do not expect this to
cause any issues for our business.
In Singapore, we continue to lead the market for regular premium
products with a market share of 23 per cent(7) and the largest
agency force in the industry. During 2015, we have focused on
growing regular premium agency-sourced protection sales, which has
enhanced the mix of business and contributed to a 7 per cent
increase in new business profit through this channel. Reflecting
our pro-active de-emphasis of universal life sales, and the effect
of cessation of distribution relationships with Maybank and
Singpost, total APE sales were 13 per cent lower in 2015.
Indonesia continues to generate material levels of new business
value for our Asia business, and the recurring regular premium
nature of our in-force portfolio has driven a 21 per cent increase
in IFRS operating profit. Our sales performance reflects both
softer market conditions and the impact of deliberate, pro-active
actions to further improve the quality of our distribution. While
this might affect shorter-term sales progression, it conserves
value and positions us well to capitalise on the eventual upturn.
Market conditions for new business sales remain challenging, with
suppressed consumer sentiment making it harder to close sales,
reflected in APE sales 11 per cent lower at GBP326 million.
However, average agency case sizes increased by 9 per cent in 2015.
We remain confident about our long-term prospects in Indonesia
given the low insurance penetration levels and we are continuing to
invest in building our agency force nationwide.
In Malaysia, we have seen continued success from our strategy to
increase our penetration of the Bumi sector, where we are the
largest provider with a 43 per cent share of the Takaful market. In
addition to growing the agency force by 13 per cent, we have also
increased our activity in bancassurance with APE sales from this
channel up 68 per cent. Overall APE sales increased by 17 per cent
in the year.
All of our other markets have delivered good quality growth. In
the Philippines, we have continued to focus on the agency channel,
with increased manpower and higher average case sizes driving APE
sales growth of 20 per cent in this channel. Overall APE sales were
up 9 per cent, reflecting our decision of being selective in how we
participate in bancassurance. Thailand's APE sales were up 12 per
cent, driven by strong growth from our main bancassurance partners,
United Overseas Bank and Thanachart. Vietnam had an excellent year,
with APE sales growing 32 per cent on higher levels of agency
activity. Our green field operations in Cambodia continue to move
ahead well with APE sales up 167 per cent. While our larger, more
established markets are progressing well, our ability to execute
across the spectrum, covering markets at different stages of
development, is key to driving long-term, profitable growth in the
region.
Our joint venture with ICICI Bank in India remains the leader in
the private sector with a market share of 12 per cent and APE sales
growth of 21 per cent. In Taiwan and Korea, we remain selective in
our participation and as a result we are content to tolerate
fluctuations in new business volumes. Both businesses have
generated a higher level of IFRS operating profit.
Despite significant volatility in capital markets, Eastspring
Investments, our Asia asset management business, delivered strong
results in 2015 with record third-party net inflows of GBP6.0
billion, up 11 per cent on 2014. The businesses benefited from
robust inflows into equity funds, including Asian equity funds in
Japan, good investment performance in Korea and India driving
excellent domestic flows and healthy net inflows into bond funds
from our joint ventures in China and India. Total funds under
management at 31 December 2015 were a record GBP89.1 billion, up 16
per cent on the prior year as a result of net inflows from both our
third party and our life businesses.
The fundamentals of our Asian business remain compelling and we
have the capabilities and market positions to be able to deliver
long-term, profitable growth.
US
Our US business delivered a strong performance in 2015, with
total IFRS operating profit of GBP1,702 million, up 9 per cent (18
per cent on an actual exchange rate basis). Jackson's life IFRS
operating profit grew 10 per cent (18 per cent on an actual
exchange rate basis) to GBP1,691 million, driven by increased fee
income from higher levels of separate account assets. The growth in
operating profit underpinned significant levels of capital
generation in the year, enabling Jackson to remit a record GBP470
million of cash to the Group (2014: GBP415 million), while
maintaining a healthy balance sheet. Jackson's Risk-Based Capital
ratio at the end of 2015 was 481 per cent, compared to 456 per cent
at the end of 2014.
The US economy experienced uneven performance during 2015, with
a noticeable deceleration in consumer spending and a contraction in
business investment in the fourth quarter. Employment data was more
positive, with non-farm payrolls in the last two months of the year
exceeding expectations. This contributed to the Federal Reserve
decision to increase the Federal Funds target rate by 25 basis
points in December. The S&P 500 Index ended the year roughly in
line with year-end 2014 levels and the 10-year Treasury rate rose
10 basis points to 2.28 per cent at the end of 2015.
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Overall, in 2015 the US competitive landscape remained
relatively stable, although the industry continued to adjust its
products and benefits in reaction to regulatory developments and
economic conditions. Within variable annuities, providers are
mainly choosing to modify their product offerings through
reductions in fund availability and increased fees. With a final
fiduciary rule expected from the US Department of Labor in the
first half of 2016, we are working on contingency plans with the
expectation of some changes to the rule, but the basic framework of
the original proposal is presumed to remain intact. Given Jackson's
proven record of product innovation, best-in-class infrastructure,
access to competitive intelligence and integration of product
design with distribution, we believe we are well positioned to
respond, adapt and take advantage of any market disruptions.
Jackson achieved total retail APE sales of GBP1,606 million in
2015, broadly consistent with the levels in 2014. Including
institutional sales, total APE sales increased 3 per cent to
GBP1,729 million, driving an 8 per cent growth in new business
profit to GBP809 million.
Total variable annuity APE sales of GBP1,512 million in 2015
remained flat compared to 2014, reflecting Jackson's continued
focus on proactively managing sales of products with living
benefits to maintain an appropriate balance of revenue streams and
match our annual risk appetite. The proportion of variable annuity
sales without living benefits remains significant at 33 per cent of
total variable annuity APE sales, broadly in line with last year.
Elite Access continues to be the undisputed leader in the
investment-only variable annuity market with APE sales of GBP314
million (2014: GBP335 million), with the proportion of business
from non-qualified accounts representing 69 per cent of the total
(up from 66 per cent in 2014). With GBP9.6 billion in assets since
its launch in March 2012, Elite Access not only reflects Jackson's
strength in commercialising a low cost, no guarantee product but in
also navigating a demand shift from qualified to non-qualified
accounts. In relation to Variable Annuities with living benefit
guarantees, during 2015 we introduced a broader range of living
benefit features to policyholders, creating additional product
capacity to meet the underlying customer demand. Overall, Jackson's
statutory separate account assets increased by 5 per cent, from
GBP86.5 billion in 2014 to GBP91.0 billion in 2015 (up 11 per cent
on an actual exchange rate basis), reflecting positive business
flows.
Jackson's strategy is unchanged, serving the 75 million US baby
boomers as they enter retirement. We continue to price new business
on a conservative basis, targeting value over volume and the
economics of our business remain very attractive. Our hedging
remains focused on optimising the economics of our exposures over
time while maintaining a strong balance sheet. Our hedging
programme continued to perform well throughout 2015 and under the
recent volatility experienced in the markets. Our credit book is in
good shape and we have continued to take actions to improve further
its quality, increasing our Treasury position and reducing our high
yield energy exposure. With this strategy, Jackson has been able to
deliver significant profitable growth across the cycle and since 1
January 2008 has remitted nearly US$3.3 billion of cash to the
Group. Our performance continues to demonstrate that Jackson's
approach has successfully translated into value for customers and
into profits and cash for shareholders.
UK and Europe
Our UK business delivered strong growth in IFRS operating
profit, new business profit and free surplus generation. We
continue to execute successfully our UK strategy, focusing on our
core strength of investment-based retail offerings, selective
participation in the wholesale business segment and active
management of our in-force book. Life IFRS operating profit was 60
per cent(4) higher at GBP1,167 million and includes GBP339 million
from the positive impact of specific management actions undertaken
in the second half to position the balance sheet more efficiently
under the new Solvency II regime, which are not expected to recur
going forward. Cash remitted to the Group increased to GBP331
million (2014: GBP325 million).
In 2015, APE sales grew 23 per cent(4) to GBP1,025 million with
a consequent 23 per cent(4) increase in new business profit to
GBP318 million. These results demonstrate the strength of our
customer propositions in retail risk-managed investment products,
combined with our diversified distribution capability. In 2015 we
continued to participate in the pensions de-risking market in a
disciplined manner, and delivered a robust performance from this
sector.
Our retail business achieved APE sales growth of 32 per cent to
GBP874 million (2014: GBP663 million(4) ) driven by a growing
demand for our savings and retirement products and specifically the
distinctive PruFund range, with momentum increasing through the
year as additional products and services came online including
PruFund ISA, Flexible Income Drawdown and our simplified
non-advised drawdown Pension Choices Plan. Our capabilities in
multi-asset investing, the strength of our brand and diversified
distribution, collectively position us well to meet evolving
customer needs in a post-pension freedoms retirement market. Retail
new business profit increased by 31 per cent(4) benefiting from
increased sales volumes partially offset by a lower contribution
from individual annuity sales. APE sales of individual annuities
decreased by 46 per cent from 2014 levels to GBP57 million and now
represent 7 per cent of retail sales.
Demand for our PruFund multi-asset funds among our target
customer base remains strong as customers continue to be attracted
by both the performance track record and the benefits of a smoothed
return in managing market volatility and reducing customer
investment risk. Our successful launch in February 2015 of the
PruFund range of investment funds within an ISA wrapper generated
APE sales of GBP73 million with assets under management totalling
GBP674 million at the end of December 2015. In total across all
products, PruFund APE sales of GBP574 million increased by 82 per
cent, with total assets under management having increased 42 per
cent since the start of the year to GBP16.5 billion.
Onshore bonds APE sales of GBP258 million increased by 11 per
cent and offshore bonds APE sales of GBP75 million rose by 21 per
cent over the previous year. Reflecting increased demand for our
wider range of retirement solutions post-pension reforms, income
drawdown APE sales have almost trebled to GBP102 million and
individual pensions APE sales have more than doubled to GBP150
million compared to 2014. We continue to diversify our product
portfolio in response to the expanding market for flexible
retirement income and pensions products.
Corporate pensions APE sales of GBP152 million were 3 per cent
higher than in 2014. We remain the largest provider of Additional
Voluntary Contribution plans within the public sector, where we
provide schemes for 73 of the 101 public sector authorities in the
UK (2014: 72 of the 99).
Our bulk annuity business concluded four deals, generating APE
sales of GBP151 million (2014: GBP171 million, seven deals), new
business profit of GBP117 million (2014: GBP105 million) and IFRS
operating profit of GBP89 million (2014: GBP105 million). In 2015
our approach to bulk transactions in the UK continued to be one of
disciplined participation, focusing on those opportunities where we
can bring both significant value to our customers and meet our
shareholder return requirements. The implementation of Solvency II
has increased significantly the capital intensity of annuity
business and this will significantly reduce our appetite to
transact bulk business going forward.
In Poland, our life business continues to grow steadily. The
business now has 18 branches across the country and 597 financial
planning consultants. Its success demonstrates our ability to build
a new business franchise by transferring our existing product and
distribution strengths to new markets.
Our strategy in the UK and Europe remains to leverage our
investment expertise, distribution scale and well-established brand
in order to deliver capital light profitable growth in retail
investment products, while managing our in-force business to
generate long-term earnings and cash.
Africa
During 2015 we continued to develop our businesses in Sub-Sahara
Africa. We entered the Uganda insurance market through the
acquisition of Goldstar Life Assurance in June 2015 and established
bank distribution agreements with Societe Generale and Fidelity
Bank in Ghana, and with Standard Chartered in Kenya. In January
2016 we announced entry into Zambia via our acquisition of
Professional Life Assurance. Once regulatory approval is received
for the Zambia acquisition, our footprint in Africa will have
expanded to four countries with access to nearly 1,300 agents and
200 bank branches.
M&G
M&G's focus on producing superior long-term investment
returns, coupled with well-established distribution in the UK and
across Europe, underpins its financial results. IFRS operating
profit of GBP442 million was broadly in line with 2014, with cash
remittances to Group of GBP302 million up 6 per cent. At the end of
2015 M&G's total funds under management were 7 per cent lower
at GBP246.1 billion (2014: GBP264 billion), with external funds
under management of GBP126.4 billion accounting for 51 per cent of
the total compared with 45 per cent five years ago. Despite
outflows in 2015, M&G's total funds under management have grown
from GBP198.3 billion at the end of 2010 to GBP246.1 billion at the
end of 2015, reflecting M&G's continued focus towards
innovation and asset class diversification.
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Gross retail and institutional inflows amounted to GBP33.6
billion (2014: GBP38.0 billion). Redemptions in the retail
business, however, resulted in overall net outflows of GBP7.0
billion in 2015. Retail net outflows of GBP10.9 billion (2014: net
inflows of GBP6.7 billion) were partially offset by institutional
net inflows of GBP3.9 billion (2014: GBP0.4 billion).
In the fourth quarter of 2015, M&G experienced net retail
outflows of GBP3.5 billion, including GBP2.4 billion from Europe.
This reflected the continuation of a market-wide change in investor
sentiment away from fixed income, against a backdrop of high levels
of volatility and macroeconomic uncertainties, conditions that have
continued into the early part of 2016. Our strategy of
diversification by asset class has helped attract good net inflows
into several M&G multi-asset funds (totalling GBP2.0 billion)
and into our retail property fund (GBP0.5 billion) in 2015.
At the end of 2015, retail funds under management were 18 per
cent lower at GBP60.8 billion (2014: GBP74.3 billion). Retail funds
under management from Continental Europe represent 39 per cent of
total retail assets.
A track record of innovation in the institutional market has
enabled M&G to be at the forefront of a number of specialist
fixed income markets, including leveraged finance and
infrastructure investment. Net institutional inflows were GBP3.9
billion, compared with GBP0.4 billion in 2014. The M&G Alpha
Opportunities Fund has been particularly popular with institutional
investors, attracting GBP2.0 billion of net inflows during
2015.
M&G had a multi-billion pound pipeline of institutional
commitments at the end of 2015 across a diverse range of fixed
income, real estate and alternative investment strategies that have
yet to be invested. External institutional funds under management
increased 5 per cent in 2015 to GBP65.6 billion (2014: GBP62.8
billion).
M&G's disciplined approach to cost management is reflected
in a small improvement in the cost income ratio to 57 per cent
(2014: 58 per cent), despite the impact of lower revenues from
reductions in the level of average assets managed.
On 1 February 2016, Michael McLintock announced that he is
retiring as Chief Executive of M&G Investments after 19 years
in the role. I would like to thank Michael for his exceptional
contribution to M&G over the last two decades. Under his
leadership M&G has grown to become one of Europe's largest fund
managers by offering innovative investment solutions to meet the
needs of our customers and clients. I wish him all the very best
for the future. He will be succeeded later this year by Anne
Richards, whose prior role was Chief Investment Officer and Head of
EMEA at Aberdeen Asset Management. Anne joins the Board in June
2016.
M&G remains focused on producing superior long-term
investment returns for clients, while continuing to diversify its
business by geography and asset class and providing capital
efficient profits and cash generation for the Group.
Capital and risk management
We continue to take a disciplined approach to capital management
and have implemented a number of measures over the last few years
to enable us to make our capital work more efficiently for the
Group. Our Solvency II outcome, following approval by the
Prudential Regulation Authority of our internal model in December
2015, underscores the strength and resilience of the Group's
capital position. At 31 December 2015, Group Solvency II capital
surplus(8,9) was estimated at GBP9.7 billion, which is equivalent
to a Group Solvency II capital ratio of 193 per cent.
Based on the Insurance Groups Directive solvency measure, our
surplus position(9) at 31 December 2015 was estimated at GBP5.5
billion (31 December 2014: GBP4.7 billion(10) ), equivalent to a
cover of 2.5 times.
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 2015. 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.
Dividend
The Board has decided to increase the full-year ordinary
dividend by 5 per cent to 38.78 pence per share, reflecting the
continued strong financial performance of the Group in 2015. In
line with this, the directors have approved a second interim
ordinary dividend of 26.47 pence per share (2014: final dividend of
25.74 pence) which brings the total ordinary dividend for the year
to 38.78 pence (2014: 36.93 pence). In addition, the Board has
decided to award a special dividend of 10 pence per share
reflecting the additional contribution to earnings from the
specific management actions taken to position the balance sheet
more efficiently under the new Solvency II regime.
Although the Board has been able to approve a special dividend
of 10 pence per share in 2015, the Group's dividend policy remains
unchanged. The Board will maintain its focus on delivering a
growing ordinary dividend, which will continue to be determined
after taking into account the Group's financial flexibility and our
assessment of opportunities to generate attractive returns by
investing in specific areas of the business. The Board believes
that in the medium term a dividend cover of around two times is
appropriate.
Outlook
The strength of our 2015 results demonstrates the successful
execution of our strategy and our distinctive ability to deliver
profitable growth across the cycle. Asia remains at the heart of
the Group and our progress this year is underlined by the strong
growth that we have delivered across sales, earnings and cash from
the region. This has been well complemented by our disciplined
progress in our more mature markets of the US and the UK.
The current significant macroeconomic uncertainty and market
instability is resulting in a more unpredictable near-term outlook
for global growth prospects. While this creates a headwind for our
fee-based businesses, our progress continues to remain underpinned
by the structural demand for regular premium savings and protection
products in Asia. Through proactive management of our product mix
and balance sheet and the growing scale of stable, recurring income
from our in-force portfolio, the Group has the flexibility and
resilience to adapt to changes in the market and deliver robust
earnings and shareholder value.
The Group's strategy remains centred on the long-term
opportunity of servicing an increasingly self-reliant middle class
through the provision of savings globally and health and protection
in Asia. We have premium franchises in our chosen markets of Asia,
the US and the UK with significant structural competitive
advantages to deliver effectively conservative products to protect
our consumers' health and wealth and provide absolute and good
relative returns to our shareholders.
In Asia, the growing savings and protection needs of a rapidly
emerging and increasingly wealthy population underpin our
long-term, structural growth prospects in the region. The high
quality, recurring nature of our income and the scale and diversity
of our pan-regional platform position us well to smooth out the
inevitable country level fluctuations to deliver value across the
cycle.
In the US, our business is focused on the provision of products
for the savings and income needs of the baby boomers entering
retirement. While the proposed Department of Labor regulations are
likely to reduce the access to valuable retirement products and
services to the American middle class, our competitive advantages
of superior product performance, low costs and strong
commercialisation skills align the business well to meet these
growing needs in the new landscape. We are in the advanced stages
of executing our contingency plans which are designed to underpin
our future prospects for both earnings and cash.
In the UK, our life business is proving adept at navigating the
significant changes brought about by pension reforms and is
successfully extending its product offering to meet evolving
consumer needs. In asset management, M&G is currently
experiencing headwinds but benefits from its scale and the
diversity of its asset base. Our well-regarded brands, investment
performance track record and strong market positioning are key
attributes that support our execution in this market.
We remain well capitalised with a defensive, high quality
balance sheet.
The disciplined execution of our strategy, underpinned by the
recurring income and cash generating nature of our business,
positions us well to continue to deliver sustainable, long-term
profitable value to both our customers and shareholders.
Notes:
(1) The comparative results referenced above and elsewhere in
this document have been prepared using constant exchange rates
basis except where otherwise stated. Comparative results on an
actual exchange rate basis are also shown in financial tables in
the Chief Financial Officer's report on our 2015 financial
performance.
(2) Recurring income from Asia in-force book represents external
renewal Gross Earned Premiums (including Joint Ventures).
(3) Underlying free surplus generation comprises underlying free
surplus released from long-term business (net of investment in new
business) and that generated from asset management operations. The
2012 comparative is based on the retrospective application of new
and amended accounting standards and excludes the 2012 one-off gain
of GBP51 million from the sale of the Group's holding in China Life
Insurance Company of Taiwan.
(4) Following the disposal of the Group's 25 per cent interest
in PruHealth and PruProtect in November 2014, the 2014 comparative
results of UK insurance operations have been adjusted to exclude
results of those businesses.
(5) Annual Premium Equivalent (APE) sales comprise regular
premium sales plus one-tenth of single premium insurance sales.
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(6) Asia 2012 IFRS operating profit of GBP924 million is based
on the retrospective application of new and amended accounting
standards as at 31 December 2013, and excludes the 2012 one-off
gain of GBP51 million from the sale of the Group's holding in China
Life Insurance Company of Taiwan.
(7) Source: Based on Life Insurance Association, Singapore data as at December 2015.
(8) The methodology and assumptions used in calculating the
Group Solvency II capital results are set out in note II (c) of
Additional unaudited financial information. The Group Solvency II
capital ratio is based on outputs from the Group's Solvency II
internal model, approved by Prudential Regulation Authority in
December 2015.
(9) Before allowing for second interim ordinary and special dividends.
(10) Before allowing for 2014 final dividend.
Chief Financial Officer's report on our 2015 financial
performance
2015 has been another year of progress, delivering a strong
financial performance across our 'growth and cash' metrics of new
business profit, IFRS operating profit and operating free surplus
generation. This performance was broad-based with strong
contributions from our principal business operations. The Group's
financial performance and its resilience increasingly benefits from
ongoing improvement in the quality of our income delivered through
stronger growth in non-interest sensitive sources and from the
balance of profit and cash across different geographies,
currencies, products and distribution channels. Prudential's
balance sheet remains conservatively positioned, our Group solvency
under the Insurance Groups Directive (IGD) is robust and our
Solvency II outcome, following approval by the Prudential
Regulation Authority of our internal model in December 2015,
underscores the strength and resilience of the Group's capital
position.
The key financial highlights of 2015 (on a constant exchange
rate basis) were:
-- Group IFRS operating profit was 22 per cent higher at GBP4,007 million.
-- Group profit before tax attributable to shareholders on an
IFRS basis increased 19 per cent to GBP3,148 million, including the
financial impact of short-term movements in investment values and
other items reported outside the operating result.
-- Underlying free surplus generation(1) (net of investment in
new business) rose by 15 per cent to GBP3,050 million.
-- On the European Embedded Value (EEV) basis of reporting
performance, new business profit increased 20 per cent(2) to
GBP2,617 million, contributing to EEV operating profit of GBP4,881
million, up 16 per cent.
-- EEV basis shareholders' funds at 31 December 2015 increased
to GBP32.4 billion, 11 per cent higher than the previous year-end
on an actual exchange rate basis.
During 2015, investment markets have remained volatile,
reflecting growing concerns on the outlook for global growth, the
consequences of monetary policy actions and unease caused by the
steep decline in commodities prices. The fourth quarter in
particular saw weakening equity markets and widening credit spreads
across most of the major global economies. Although we have taken
steps to reduce the investment market sensitivity of our earnings
and balance sheet in recent years, we remain significant long-term
holders of financial assets. Short-term fluctuations in the value
of these assets are reported outside the operating result, which is
based on longer-term investment return assumptions.
Currency values in the countries in which we operate have also
fluctuated in the course of 2015. As a significant proportion of
our earnings and capital are US dollar denominated, the weaker
sterling benefited our reported results, shareholders' equity and
solvency. However, for the purposes of evaluating the financial
performance of our businesses outside the UK, unless otherwise
stated, we continue to present growth rates before the impact of
currency movements, as this gives a more meaningful assessment of
underlying performance trends.
IFRS Profit
-------------------------------------------------------- --------- --------- -------- ------------------------
Actual Exchange Rate Constant Exchange Rate
------------------------------ ------------------------
2015 GBPm 2014 GBPm Change % 2014 GBPm Change %
--------- --------- -------- ------------ ----------
Operating profit before tax
Long-term business:
Asia 1,209 1,050 15 1,040 16
US 1,691 1,431 18 1,543 10
UK(2) 1,167 729 60 729 60
------------------------------------------------------- --------- --------- -------- ------------ ----------
Long-term business operating profit(2) 4,067 3,210 27 3,312 23
UK general insurance commission 28 24 17 24 17
Asset management business:
M&G 442 446 (1) 446 (1)
Prudential Capital 19 42 (55) 42 (55)
Eastspring Investments 115 90 28 91 26
US 11 12 (8) 13 (15)
Other income and expenditure(3) (675) (661) (2) (661) (2)
Results of the sold PruHealth and PruProtect business - 23 (100) 23 (100)
-------------------------------------------------------- --------- --------- -------- ------------ ----------
Total operating profit based on longer-term investment
returns 4,007 3,186 26 3,290 22
-------------------------------------------------------- --------- --------- -------- ------------ ----------
Short-term fluctuations in investment returns:
--------- --------- -------- ------------ ----------
Insurance operations (663) (461) (44) (537) (23)
Other operations (74) (113) 35 (113) 35
--------- --------- -------- ------------ ----------
(737) (574) (28) (650) (13)
Other non-operating items(3) (122) 2 n/a (4) n/a
Profit before tax attributable to shareholders 3,148 2,614 20 2,636 19
Tax charge attributable to shareholders' returns (569) (398) (43) (396) (44)
--------- --------- -------- ------------ ----------
Profit for the year attributable to shareholders 2,579 2,216 16 2,240 15
-------------------------------------------------------- --------- --------- -------- ------------ ----------
IFRS Earnings per share
---------- ---------- -------- ------------- ---------
Actual Exchange Rate Constant Exchange Rate
-------------------------------- ------------------------
2015 pence 2014 pence Change % 2014 pence Change %
-------------------------------------------------------- ---------- ---------- -------- ------------- ---------
Basic earnings per share based on operating profit after
tax 125.8 96.6 30 99.5 26
Basic earnings per share based on total profit after tax 101.0 86.9 16 87.9 15
-------------------------------------------------------- ---------- ---------- -------- ------------- ---------
IFRS Operating Profit
Total IFRS operating profit increased by 22 per cent to GBP4,007
million in 2015, driven by improved performance in our life
operations in Asia, the US and the UK.
-- Asia total operating profit of GBP1,324 million was 17 per
cent higher than the previous year (16 per cent on an actual
exchange rate basis), with strong growth in both life insurance and
Eastspring Investments, our Asia-based asset management
business.
-- US total operating profit at GBP1,702 million increased by 9
per cent (18 per cent on an actual exchange rate basis), driven by
higher fee income from growth in Jackson's separate account asset
base.
-- UK total operating profit was 59 per cent(2) higher at
GBP1,195 million, driven by our focused approach on active
management of our in-force portfolio and the positive impact of
specific management actions taken to position the balance sheet
more efficiently under the new Solvency II regime.
-- M&G operating profit (excluding Prudential Capital) at
GBP442 million was in line with 2014, with action on costs
mitigating the impact of lower revenues following a 7 per cent
reduction in funds managed at end 2015.
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Life insurance operations: Taken together, IFRS operating profit
from our life insurance operations in Asia, the US and the UK
increased 23 per cent(2) to GBP4,067 million. This increase
reflects the growth in the scale of these operations, driven
primarily by positive business inflows. 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 liabilities increase as we collect premiums and decrease as
we pay claims and policies mature. The overall scale of these
policyholder liabilities is relevant in evaluating our profit
potential, in that it reflects, for example, our ability to earn
fees on the unit-linked element and it sizes the risk that we carry
on the insurance element, for which Prudential needs to be
compensated.
Shareholder-backed policyholder liabilities and net liability flows(4)
2015 GBPm 2014 GBPm
---------------------------------------------- ----------------------------------------------
Actual Exchange Rate Actual Exchange Rate
---------------------------------------------- ----------------------------------------------
At 1 Net liability Market and At 31 At 1 Net liability Market and At 31
January flows(5) other December January flows(5) other December
2015 movements 2015 2014 movements 2014
------------ -------- ------------- ---------- --------- -------- ------------- ---------- ---------
Asia 26,410 1,867 (433) 27,844 21,931 1,937 2,542 26,410
US 126,746 8,476 3,691 138,913 107,411 8,263 11,072 126,746
UK 55,009 (2,694) 509 52,824 50,779 (610) 4,840 55,009
------------ -------- ------------- ---------- --------- -------- ------------- ---------- ---------
Total Group 208,165 7,649 3,767 219,581 180,121 9,590 18,454 208,165
------------ -------- ------------- ---------- --------- -------- ------------- ---------- ---------
Focusing on the business supported by shareholder capital, which
generates the majority of the life profit, in the course of 2015
policyholder liabilities increased from GBP208.2 billion at the
start of the year to GBP219.6 billion at 31 December 2015. The
consistent addition of high-quality profitable new business and
proactive management of the existing in-force portfolio underpins
this increase, resulting in positive net flows(4,5) into
policyholder liabilities of GBP7.6 billion in 2015 driven by our US
and Asia businesses. Net flows into our US business were GBP8.5
billion in 2015, reflecting continued success in attracting new
variable annuity business. The consistency of our net flows into
Asia is underpinned by our focus on recurring premium new business
and strong customer retention. Across this business net liability
flows continue to be positive at GBP1.9 billion. Net outflows in
the UK are partly due to the impact of large investment only
corporate pension schemes transfers combined with annuity payments
that are no longer offset by new business inflows following the
reduction in retail annuity sales. Positive foreign currency
translation effects together with favourable investment market and
other movements have contributed a further GBP3.8 billion to the
increase in policyholder liabilities since the start of the
year.
Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term
investment returns by driver(6)
------------------------------------------------------------------------------------------------------------------
Actual Exchange Rate Constant Exchange Rate
-------------------------------------------------------------- --------------------------------
2015 GBPm 2014 GBPm 2014 GBPm
---------------------------- -------------------------------- --------------------------------
Operating Average Operating(2) Average Operating(2) Average
profit liability Margin profit liability Margin profit liability Margin
bps bps bps
--------------- --------- --------- ------ ------------ ---------- ------ ------------ ---------- ------
Spread income 1,157 73,511 157 1,131 67,252 168 1,189 69,628 171
Fee income 1,896 125,380 151 1,618 110,955 146 1,726 116,507 148
With-profits 314 106,749 29 298 101,290 29 299 101,653 29
Insurance margin 1,759 1,418 1,464
Margin on
revenues 1,911 1,721 1,708
Expenses:
Acquisition
costs* (2,186) 5,607 (39)% (2,014) 4,627 (44)% (2,077) 4,778 (43)%
Administration
expenses (1,688) 206,423 (82) (1,454) 186,049 (78) (1,505) 194,588 (77)
DAC adjustments 340 277 292
Expected return
on shareholder
assets 225 215 216
---------------- --------- --------- ------ ------------ ---------- ------ ------------ ---------- ------
3,728 3,210 3,312
Impact of
specific
management
actions in
second half of
the year, ahead
of Solvency II 339 - -
--------- --------- ------ ------------ ---------- ------ ------------ ---------- ------
Operating profit
based on
longer-term
investment
returns 4,067 3,210 3,312
---------------- --------- --------- ------ ------------ ---------- ------ ------------ ---------- ------
*The ratio of acquisition costs is calculated as a percentage of
APE sales including with-profits sales. Acquisition costs include
only those relating to shareholder-backed business.
In 2015, we maintained our preference 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. Insurance margin was up 20
per cent (24 per cent on an actual exchange rate basis) reflecting
our strategic emphasis on growing our offering of risk products
such as health and protection in Asia. Fee income was up 10 per
cent (17 per cent on an actual exchange rate basis) primarily
reflecting the growth in the level of assets that we manage on
behalf of our customers, primarily in the US. In contrast, the
contribution to our profits from spread income decreased by 3 per
cent (increase 2 per cent on an actual exchange rate basis),
primarily due to the effect of lower achieved yields in the US and
a declining contribution from UK annuities. The fact that insurance
margin and fee income generated a higher and growing proportion of
our income represents a healthy evolution in the quality,
resilience and balance of our earnings. Our share of returns from
with-profits operations was up 5 per cent, providing a stable and
reliable source of income for both shareholders and customers
invested in these funds.
The total costs we have incurred in writing new business and
administering the in-force life business also increased but at a
more modest rate than total income, highlighting the advantages of
increased scale as we build our business, while maintaining control
of costs.
In the second half of 2015 and ahead of securing Solvency II
internal model approval, a number of specific management actions
were taken by our UK life business to position the balance sheet
more efficiently under the new regime. These actions included
extending the reinsurance of longevity risk to cover GBP8.7 billion
of annuity liabilities by the end of 2015 (end-2014: programme
covered GBP2.3 billion of liabilities). It also included
repositioning of the fixed income asset portfolio, increasing to 95
per cent the proportion that would benefit from the matching
adjustment under Solvency II. The combined effect of these and
other actions generated a GBP339 million IFRS operating profit in
the second half of 2015 and is not expected to recur going
forward.
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IFRS operating profit from our portfolio of life insurance
operations in Asia was up 16 per cent to GBP1,209 million, driven
by a 14 per cent increase in the contribution from the in-force
business, reflecting both its larger scale and our regular premium
health and protection oriented product focus. Indonesia IFRS
operating profit, our largest market on this measure, increased 21
per cent to GBP356 million, reflecting the addition of new savings
and protection sales in the year to an already sizeable recurring
premium in-force business. Hong Kong IFRS operating profit was 27
per cent higher at GBP150 million, mainly due to the increasing
profit contribution from a growing customer base purchasing health
and protection cover. Malaysia IFRS operating profit grew by 12 per
cent to GBP120 million, reflecting a growing contribution from the
in-force business. IFRS operating profit in Singapore declined 4
per cent to GBP204 million, the result of our deliberate decision
to discontinue universal life sales as the returns of these
products in the current interest rate environment are unattractive.
We are also encouraged to see further progress among our
fast-growing businesses in China, Thailand, the Philippines and
Vietnam which collectively generated GBP220 million of Asia's IFRS
operating profit, up 28 per cent compared to the prior year and now
account for 18 per cent of the total life result compared to just 7
per cent only 3 years ago.
In the US, life IFRS operating profit increased by 10 per cent
to GBP1,691 million, primarily as a result of an 11 per cent
increase in fee income, which is now Jackson's main income source,
and efficient management of costs. The uplift in fee income
reflects the growth in average separate account assets from GBP78.1
billion in 2014 to GBP86.9 billion in 2015, equating to an increase
of 11 per cent on a constant exchange rate basis (20 per cent on an
actual exchange rate basis), driven by sizeable variable annuity
net premium inflows. Contribution from insurance margin also
increased by 10 per cent. Lower yields impacted the spread income
which decreased by 6 per cent on a constant exchange rate
basis.
UK life IFRS operating profit was 60 per cent higher than 2014
at GBP1,167 million (2014: GBP729 million). New annuity business
contributed GBP123 million (2014: GBP162 million) including GBP89
million (2014: GBP105 million) from the four bulk transactions
completed in 2015. The balance of GBP1,044 million (2014: GBP567
million), reflects a robust level of profit from our core annuity
in-force and with-profits business and includes a GBP339 million
benefit from specific management actions taken in the second half
of the year to position the balance sheet more efficiently under
the new Solvency II regime. Of this amount, GBP170 million related
to profit on longevity reinsurance transactions executed in the
second half of the year, with a further GBP169 million reflecting
the effect of repositioning the fixed income asset portfolio and
other actions. The non-recurring nature of these actions and our
reduced appetite for annuities post-Solvency II will mean that,
going forward, IFRS earnings from our UK life business will be
predominantly driven by the contribution from core annuity in-force
and with-profits business.
Asset management net inflows and external funds under management(7)
External net inflows External funds under management
-------------------------------------------------------- -----------------------------------
Actual Exchange Rate Constant Exchange Rate Actual Exchange Rate
------------------------------ -----------------------------------
2015 GBPm 2014 GBPm Change % 2014 GBPm Change % 2015 GBPm 2014 GBPm Change %
---------------- --------- --------- -------- ------------ ---------- ----------- ----------- ---------
M&G
Retail (10,858) 6,686 (262) 6,686 (262) 60,801 74,289 (18)
Institutional 3,850 401 860 401 860 65,604 62,758 5
---------------- --------- --------- -------- ------------ ---------- ----------- ----------- ---------
M&G (7,008) 7,087 (199) 7,087 (199) 126,405 137,047 (8)
Eastspring(8) 5,971 5,430 10 5,380 11 30,281 25,333 20
----------------- --------- --------- -------- ------------ ---------- ----------- ----------- ---------
Total asset
management (1,037) 12,517 (108) 12,467 (108) 156,686 162,380 (4)
----------------- --------- --------- -------- ------------ ---------- ----------- ----------- ---------
Total asset
management
(including MMF) 28 12,526 (100) 12,481 (100) 162,692 167,180 (3)
----------------- --------- --------- -------- ------------ ---------- ----------- ----------- ---------
Asset management: In 2015 our asset management businesses in the
UK and Asia collectively increased their contribution to IFRS
operating profit compared to the previous year. Similar to the
trend observed in our life operations, asset management operating
profit primarily reflects the scale of these businesses, as
measured by funds managed on behalf of external institutional and
retail customers and our internal life insurance operations.
M&G delivered a broadly unchanged IFRS operating profit of
GBP442 million (2014: GBP446 million), reflecting a 2 per cent rise
in underlying profit to GBP406 million (2014: GBP400 million),
lower performance-related fees of GBP22 million (2014: GBP33
million) and a similar level of earnings from associates of GBP14
million (2014: GBP13 million). While underlying revenues in the
first half of 2015 benefited from higher levels of funds under
management, the large net outflows from retail funds since May
contributed to a two per cent decrease in underlying revenues for
the year overall. Actions on costs mitigated the effect of lower
overall revenues to deliver a modest increase in underlying profit
compared to 2014. However, the lower level of assets under
management at the end of 2015 will impact the revenue prospects for
2016 absent a meaningful recovery in M&G's overall third party
net flows or a significant uplift in the market value of
assets.
Our Asia asset management business, Eastspring Investments, has
benefited from significant growth in funds under management during
2015, with IFRS operating profit higher by 26 per cent at GBP115
million. An 11 per cent increase in third party net inflows to
GBP6.0 billion saw external funds managed rise by 20 per cent on an
actual exchange rate basis to GBP30.3 billion at end-2015. Average
total funds under management including funds managed on behalf of
Prudential's life operations, increased by 25 per cent to GBP85.1
billion compared with 2014. Eastspring Investments growth in fee
revenue outpaced the increase in operating costs, resulting in a
modestly improved cost income ratio of 58 per cent (59 per cent on
an actual exchange rate basis).
In the US, our non-insurance businesses collectively generated
IFRS operating profit of GBP11 million (2014: GBP13 million). In
July, Jackson announced that Curian would no longer accept new
business effective from 31 July 2015. Curian continues to actively
manage existing accounts into 2016 to allow for the transition of
accounts, but is expected to exit the business around the end of
the first quarter of 2016. Total IFRS operating losses in Curian in
2015 were GBP16 million and included GBP13 million of cost related
to exiting the business.
Prudential Capital produced IFRS operating profit of GBP19
million in 2015 (2014: GBP42 million). During 2015 we started to
refocus activity away from revenue generation towards internal
treasury services and this reprioritisation will continue into
2016.
IFRS short-term 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 2015 the total short-term fluctuations in investment
returns relating to the life operations were negative GBP663
million, comprising negative GBP119 million for Asia, negative
GBP424 million in the US and negative GBP120 million in the UK.
In Asia, the negative short-term fluctuations of GBP119 million
reflected net unrealised losses on fixed income securities,
primarily due to rises in bond yields.
Short-term fluctuations in the US mainly reflect the net value
movement on the guarantees offered by Jackson and the associated
derivatives held to manage market exposures. Under IFRS accounting
the movement in the valuation of derivatives, which are fair
valued, is asymmetrical to the movement in the 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 therefore
accepts variability in the accounting results. The negative
short-term fluctuations of GBP424 million in 2015 were primarily
attributable to the net value movement in the year of the hedge
instruments held to manage market exposures.
Negative short-term fluctuations of GBP120 million in the UK
reflected net unrealised losses on fixed income assets supporting
the excess capital held within the shareholder-backed annuity
business following a rise in interest rates during the year.
IFRS effective tax rates
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In 2015, the effective tax rate on IFRS operating profit based
on longer-term investment returns was 20 per cent (2014: 23 per
cent). The reduction is due to lower corporate tax rates in certain
jurisdictions and a higher benefit from non-recurring tax credits
specifically in Jackson.
The 2015 effective tax rate on the total IFRS profit was 18 per
cent (2014: 15 per cent), reflecting a larger overall contribution
to the total profit from Jackson which attracts a higher rate of
tax.
Total tax contribution
The Group continues to make significant tax contributions in the
countries in which it operates, with GBP3,004 million remitted to
tax authorities in 2015. This was higher than the equivalent amount
of GBP2,237 million in 2014, principally due to higher corporation
tax payments. In the US a change of basis for taxing derivatives
which affects the timing but not the quantum of tax payable, has
accelerated future tax payable into 2015. Tax payments in the UK in
2015, which relate to both the current and prior year, reflect
positive investment returns in 2014.
2015 GBPm 2014 GBPm
------------------------------------------------ ------------------------------------------------
Corporation Taxes Total Corporation Taxes Total
taxes Other taxes collected remitted taxes Other taxes collected remitted
------------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Taxes paid in:
Asia 258 77 111 446 199 52 87 338
US 556 51 433 1,040 205 35 375 615
UK 521 184 786 1,491 314 202 759 1,275
Other 5 20 2 27 3 4 2 9
------------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Total tax paid 1,340 332 1,332 3,004 721 293 1,223 2,237
-------------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Corporation taxes include amounts paid on taxable profits which,
in certain countries such as the UK, include policyholder
investment returns on certain life insurance products. Other taxes
include property taxes, withholding taxes, employer payroll taxes
and irrecoverable indirect taxes. Taxes collected are other taxes
that Prudential remits to tax authorities which it is obliged to
collect from employees, customers and third parties which include
sales taxes, employee and annuitant payroll taxes.
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 year. In 2015 underlying free surplus
generation, after investment in new business, increased by 15 per
cent to GBP3,050 million.
Free surplus generation
-------------------------------------------------------- --------- --------- -------- ------------ ----------
Actual Exchange Rate Constant Exchange Rate
------------------------------ ------------------------
2015 GBPm 2014 GBPm Change % 2014 GBPm Change %
--------- --------- -------- ------------ ----------
Free surplus generation(1)
Asia 1,086 938 16 930 17
US 1,433 1,197 20 1,291 11
UK(2) 900 656 37 656 37
M&G 358 353 1 353 1
Prudential Capital 18 33 (45) 33 (45)
-------------------------------------------------------- --------- --------- -------- ------------ ----------
Underlying free surplus generated from in-force life
business and asset management(2) 3,795 3,177 19 3,263 16
Investment in new business(2) (745) (598) (25) (618) (21)
-------------------------------------------------------- --------- --------- -------- ------------ ----------
Underlying free surplus generated 3,050 2,579 18 2,645 15
-------------------------------------------------------- --------- --------- -------- ------------ ----------
Market related movements, timing differences and other
movements 282 (6)
Net cash remitted by business units (1,625) (1,482)
--------- ---------
Total movement in free surplus 1,707 1,091
Free surplus at 1 January 5,059 4,003
Effect of domestication of Hong Kong branch - (35)
-------------------------------------------------------- --------- ---------
Free surplus at end of year 6,766 5,059
-------------------------------------------------------- --------- ---------
The increase in free surplus generated by our life insurance
businesses reflects our growing scale and the highly capital
generative nature of our business model. 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 in our
industry. In line with this approach the closing value of free
surplus in our life and asset management operations increased to
GBP6,766 million at 31 December 2015 (31 December 2014: GBP5,059
million, on an actual exchange rate basis), 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, and a 28 per
cent increase in post-tax profit from Eastspring Investments,
contributed to free surplus generation of GBP1,086 million, up 17
per cent. In the US, free surplus generation before new business
increased by 11 per cent, also reflecting business growth. In the
UK, the 37 per cent increase to GBP900 million reflects a higher
underlying contribution from the in-force business and a
contribution of GBP223 million for the specific management actions
taken in the second half of the year to position the balance sheet
more efficiently under the new Solvency II regime.
We invested GBP745 million of the free surplus generated during
the year in writing new business (2014: GBP618 million on a
constant exchange rate basis) equivalent to a re-investment rate(9)
of 20 per cent, which is in line with recent periods. Asia remained
the primary destination of our new business investment, 17 per cent
higher at GBP413 million, lower than the 26 per cent increase in
APE sales reflecting changes to product mix. In the US, new
business investment increased to GBP267 million, mainly due to an
increase in the proportion of variable annuity premiums that
customers directed towards the fixed account option. At just under
2 per cent of new single premiums, Jackson's overall strain remains
low supporting the generation of significant returns on capital.
New business investment in the UK remains at GBP65 million (2014:
GBP65 million), despite higher new business volumes, reflecting
capital efficient growth in with-profits business and lower strain
on bulk annuities (measured under the solvency regime applicable in
2015).
The internal rates of return achieved on new business remain
attractive at over 20 per cent across all three business operations
and the average payback period(10) for business written in 2015 was
3 years for Asia, 1 year for the US and 3 years for the UK.
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.
Holding company cash(11)
-------------------------------------- ---------- ---------- --------
Actual Exchange Rate
---------------------- --------
2015 GBPm 2014 GBPm Change %
---------- ---------- --------
Net cash remitted by business units:
Asia 467 400 17
US 470 415 13
UK 331 325 2
M&G 302 285 6
Prudential Capital 55 57 (4)
------------------------------------- ---------- ---------- --------
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Net cash remitted by business units 1,625 1,482 10
-------------------------------------- ---------- ---------- --------
Holding company cash at 31 December 2,173 1,480
-------------------------------------- ---------- ----------
Cash remitted by the business units to the corporate centre in
2015 increased by 10 per cent to GBP1,625 million with significant
contributions from each of our four major business operations.
Asia's remittances increased to GBP467 million and included the
proceeds from the sale of the Japan life business of GBP42 million.
The higher remittances from the US of GBP470 million reflect
Jackson's disciplined approach to growing this business and its
effective risk management. The remittances from the UK are in line
with 2014 and we continue to invest in upgrading our UK pre and
post retirement customers propositions. M&G's remittances of
GBP302 million reflected the level of post-tax earnings delivered
in the year.
Cash remitted to the Group in 2015 was used to meet central
costs of GBP354 million (2014: GBP353 million), pay the dividends
and finance the second of three up-front payments for the renewal
of the distribution agreement with Standard Chartered Bank. The
issue of hybrid debt in June 2015 raised GBP590 million. Reflecting
these movements in the year, total holding company cash at the end
of 2015 was GBP2,173 million compared to GBP1,480 million at the
end of 2014.
EEV Profit
-------------------------------------------------------- --------- --------- -------- ------------ ----------
Actual Exchange Rate Constant Exchange Rate
------------------------------ ------------------------
2015 GBPm 2014 GBPm Change % 2014 GBPm Change %
Post-tax operating profit
Long-term business:
Asia 2,321 1,900 22 1,903 22
US 1,808 1,528 18 1,647 10
UK(2) 863 735 17 735 17
------------------------------------------------------- --------- --------- -------- ------------ ----------
Long-term business operating profit(2) 4,992 4,163 20 4,285 16
UK general insurance commission 22 19 16 19 16
Asset management business:
M&G 358 353 1 353 1
Prudential Capital 18 33 (45) 33 (45)
Eastspring Investments 101 78 29 79 28
US 7 6 17 7 -
Other income and expenditure(12) (617) (567) (9) (567) (9)
Results of the sold PruHealth and PruProtect businesses - 11 (100) 11 (100)
-------------------------------------------------------- --------- --------- -------- ------------ ----------
Post-tax operating profit based on longer-term
investment returns 4,881 4,096 19 4,220 16
-------------------------------------------------------- --------- --------- -------- ------------ ----------
Short-term fluctuations in investment returns:
--------- --------- -------- ------------ ----------
Insurance operations (1,153) 856 (235) 864 (233)
Other operations (55) (93) 41 (93) 41
--------- --------- -------- ------------ ----------
(1,208) 763 (258) 771 (257)
Effect of changes in economic assumptions 57 (369) 115 (389) 115
Other non-operating items(12) 221 (147) 250 (147) 250
-------------------------------------------------------- ---------
Profit attributable to shareholders 3,951 4,343 (9) 4,455 (11)
-------------------------------------------------------- --------- --------- -------- ------------ ----------
Earnings per share
-------------------------------------------------------- ---------- ---------- -------- ------------- ---------
Actual Exchange Rate Constant Exchange Rate
2015 pence 2014 pence Change % 2014 pence Change %
---------- ---------- -------- ------------- ---------
Basic earnings per share based on post-tax operating
profit 191.2 160.7 19 165.6 15
Basic earnings per share based on post-tax total profit 154.8 170.4 (9) 174.8 (11)
-------------------------------------------------------- ---------- ---------- -------- ------------- ---------
EEV Operating Profit
On an EEV basis, Group post-tax operating profit based on
longer-term investment returns was 16 per cent higher (19 per cent
on an actual exchange rate basis) at GBP4,881 million in 2015. The
increase is primarily due to higher new business profit from the
Group's life businesses, which increased by 20 per cent (24 per
cent on an actual exchange rate) to GBP2,617 million and profit
from the in-force life business, which increased by 13 per cent (16
per cent on an actual exchange rate basis) to GBP2,375 million.
This reflects on-going business growth and higher profits from the
better than expected management of the in-force business, with
positive experience and assumptions changes of GBP666 million
(2014: GBP648 million).
In Asia, EEV life operating profit was 22 per cent higher at
GBP2,321 million, with in-force profit up 13 per cent to GBP831
million, benefiting from increased scale across all of our
operations. Asia new business profit was 28 per cent higher at
GBP1,490 million, reflecting volume growth from the continued build
out of our distribution platform.
Jackson's EEV life operating profit increased by 10 per cent to
GBP1,808 million, driven by growth in the scale of our in-force
book and higher new business profit. In-force profit increased by
11 per cent to GBP999 million (20 per cent on an actual exchange
rate basis), primarily reflecting higher unwind from the larger
book of existing business. US new business profit was up 8 per cent
to GBP809 million (17 per cent on an actual exchange rate basis),
due to the 3 per cent (11 per cent on an actual exchange rate
basis) increase in sales volume and a beneficial shift in business
mix.
In the UK, EEV life operating profit increased by 17 per cent(2)
to GBP863 million (2014: GBP735 million). New business profit was
23 per cent(2) higher at GBP318 million (2014: GBP259 million) and
includes a contribution of GBP117 million (2014: GBP105 million)
from four bulk annuity transactions in 2015. Retail new business
profit was up 31 per cent(2) at GBP201 million (2014: GBP154
million), due to the positive effect of the 32 per cent increase in
retail sales volumes offset by business mix effects. In-force
profit was 14 per cent higher at GBP545 million (2014: GBP476
million) and includes a net charge of GBP13 million from the
specific management actions taken in the second half of the year to
position the balance sheet more efficiently under the new Solvency
II regime.
EEV non-operating results
EEV operating profit is based on longer-term investment returns
and excludes the effect of short-term volatility arising from
market movements and the effect of changes from economic
assumptions. These items are captured in non-operating profit which
reduced the 2015 results by a net GBP930 million (2014: net
increase of GBP247 million on an actual exchange rate basis).
EEV short-term fluctuations
Short-term fluctuations in investment returns reflect the
element of non-operating profit which relates to the effect on EEV
of the difference between the actual investment returns achieved
and those assumed in arriving at the reported operating profit.
Short-term fluctuations in investment returns for life
operations of negative GBP1,153 million include negative GBP206
million for Asia, negative GBP753 million for our US operations and
negative GBP194 million in the UK.
In Asia and the UK, negative short-term fluctuations principally
reflect unrealised movements on bond holdings in the year. They
also reflect the effect on the embedded value of flat to negative
equity market returns. In the US, the variance represents the
impact of modestly negative market-related movements on separate
account values in the year and on the value movements on
derivatives held to manage the Group's equity and interest rates
exposure.
Effect of changes in economic assumptions
The small overall interest rate rises in the UK and US have had
a beneficial impact on the level of future assumed earnings that we
expect to generate from our existing book of business. This is
partly offset by the effect of interest rate rises in Asia, which
impact EEV negatively, as the present value future Asia health and
protection profits are discounted at higher rates.
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Capital position, financing and liquidity
Capital position
We continue to operate with a strong solvency position, while
maintaining high levels of liquidity and capital generation. This
is testament to our capital discipline, the effectiveness of our
hedging activities, our low direct Eurozone exposure, the minimal
level of credit impairments and the natural offsets in our
portfolio of businesses. The estimated Group Solvency II capital
surplus(13,14) at 31 December 2015 is GBP9.7 billion equivalent to
a ratio of 193 per cent.
The table below shows the impact of moving from our previously reported economic capital basis
to the Solvency II approved internal model basis and the capital generation in 2015
Analysis of movement in Group capital surplus GBP billion
-------------------------------------------------------------------------------------------------------- ------------
Economic capital surplus as at 1 January 9.7
Operating experience 2.4
Non-operating experience (including market movements) (0.6)
Other capital movements
Subordinated debt issuance 0.6
Foreign currency translation impacts 0.2
Final 2014 and 2015 first interim dividend paid (1.0)
Methodology and calibration changes
Changes to Own Funds (net of transitionals) and Solvency Capital Requirement calibration
strengthening (0.2)
Effect of partial derecognition of Asia Solvency II surplus (1.4)
-------------------------------------------------------------------------------------------------------- ------------
Estimated solvency II surplus as at 31 December 9.7
-------------------------------------------------------------------------------------------------------- ------------
The movement in the Group Solvency II capital surplus in 2015
was driven by:
- Operating experience of GBP2.4 billion: generated by in-force
business and new business written in 2015 and included GBP0.4
billion of benefit from the specific management actions taken in
the second half of the year to position the balance sheet more
efficiently under the new Solvency II regime;
- Non-operating experience of GBP0.6 billion: mainly arising
from negative market experience during the year; and
- Other capital movements: comprising an increase in capital
from subordinated debt issuance, positive foreign currency
translation effects offset by a reduction in surplus from payment
of the 2014 final and 2015 first interim dividend.
The methodology and calibration changes arose as part of the
internal model approval process and related to:
- a GBP0.2 billion reduction in surplus due to an increase in
the Solvency Capital Requirement from strengthening of internal
model calibrations, mainly relating to longevity risk, operational
risk, credit risk and correlations, and a corresponding increase in
the risk margin, which is partially offset by UK transitionals;
and
- a GBP1.4 billion reduction in surplus due to the negative
impact of Solvency II rules for "contract boundaries" and a
reduction in the capital surplus of the Group's Asian life
operations, as agreed with the Prudential Regulation Authority.
Solvency II as a measure of regulatory capital is more volatile
than under the previous Solvency I regime. At 31 December 2015, the
estimated sensitivity of the Group Solvency II capital surplus to
significant changes in market conditions is as set out below:
- an instantaneous 20 per cent fall in equity markets would
reduce surplus by GBP1.0 billion and reduce the solvency ratio to
186 per cent;
- a 40 per cent fall in equity markets (comprising an
instantaneous 20 per cent fall followed by a further 20 per cent
fall over a four-week period) would reduce surplus by GBP1.8
billion and reduce the solvency ratio to 179 per cent;
- a 50 basis points reduction in interest rates (subject to a
floor of zero and allowing for transitional recalculation) would
reduce surplus by GBP1.1 billion and reduce the solvency ratio to
179 per cent;
- a 100 basis points increase in interest rates (allowing for
transitional recalculation) would increase surplus by GBP1.1
billion and increase the solvency ratio to 210 per cent; and
- a 100 basis points increase in credit spreads (with credit
defaults of 10 times the expected level in Jackson) would reduce
surplus by GBP1.2 billion and reduce the solvency ratio to 187 per
cent.
At 31 December 2015 our Insurance Groups Directive surplus is
estimated at GBP5.5 billion(14) , equivalent to a solvency cover of
2.5 times.
Local statutory capital
All of our subsidiaries continue to hold appropriate capital
positions on a local regulatory basis. Jackson's Risk-Based Capital
ratio at the end of 2015 was 481 per cent, having remitted GBP470
million to Group earlier in the year. The Prudential Assurance
Company Limited, our main UK operation, has an estimated Solvency
II surplus of GBP3.3 billion in respect of its shareholder
business, equivalent to a ratio of 146 per cent. Separately the UK
with-profits funds remained well capitalised with an estate value
of GBP7.6 billion(15) , covering its solvency capital requirements
approximately 1.75 times.
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 and 98 per cent of our UK
portfolio and 96 per cent of our US portfolio are investment grade.
We experienced no default losses and reported impairments of GBP26
million (2014: GBP7 million) across these two fixed income
securities portfolios.
Financing and liquidity
Shareholders' net core structural borrowings and ratings 2015 GBPm 2014 GBPm
-------------------------------------------------------------- ------------------------- -------------------------
Mark to Mark to
IFRS market EEV IFRS market EEV
basis value basis basis value basis
-------------------------------------------------------------- ------- ------- ------- ------- ------- -------
Shareholders' borrowings in holding company 4,567 353 4,920 3,869 579 4,448
Prudential Capital 275 - 275 275 - 275
Jackson surplus notes 169 55 224 160 42 202
-------------------------------------------------------------- ------- ------- ------- ------- ------- -------
Total 5,011 408 5,419 4,304 621 4,925
Less: Holding company cash and short-term investments (2,173) - (2,173) (1,480) - (1,480)
-------------------------------------------------------------- ------- ------- ------- ------- ------- -------
Net core structural borrowings of shareholder-financed
operations 2,838 408 3,246 2,824 621 3,445
-------------------------------------------------------------- ------- ------- ------- ------- ------- -------
Our financing and liquidity position remained strong throughout
the year. Our central cash resources amounted to GBP2.2 billion at
31 December 2015, compared with GBP1.5 billion at the end of 2014,
and we currently retain a further GBP2.6 billion of untapped
committed liquidity facilities.
On an IFRS basis the Group's core structural borrowings at 31
December 2015 were GBP5,011 million (31 December 2014: GBP4,304
million on an actual exchange rate basis) and comprised GBP4,567
million (31 December 2014: GBP3,869 million on an actual exchange
rate basis) of debt held by the holding company, and GBP444 million
(31 December 2014: GBP435 million on an actual exchange rate basis)
of debt held by the Group's subsidiaries, Prudential Capital and
Jackson. In June 2015, Prudential issued GBP600 million 5.0 per
cent tier 2 subordinated notes, increasing funds available for
general corporate purposes.
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
2015, we had issued commercial paper under this programme,
totalling GBP138 million and US$1,428 million, to finance non-core
borrowings.
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Prudential's holding company currently has access to GBP2.6
billion of syndicated and bilateral committed revolving credit
facilities, provided by 19 major international banks, expiring in
2020. Apart from small drawdowns to test the process, these
facilities have never been drawn, and there were no amounts
outstanding at 31 December 2015. The medium-term note programme,
the SEC registered US 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.
Prudential manages the Group's core debt within a target level
consistent with its current debt ratings. At 31 December 2015, the
gearing ratio (debt, net of cash and short-term investments, as a
proportion of IFRS shareholders' funds plus net debt) was 18 per
cent, compared to 19 per cent at 31 December 2014. Prudential plc
has strong debt ratings from Standard & Poor's, Moody's and
Fitch. Prudential plc's long-term senior debt is rated A+, A2 and A
from Standard & Poor's, Moody's and Fitch, while short-term
ratings are A-1, P-1 and F1 respectively. The Prudential Assurance
Company Limited was downgraded by Moody's in September 2015 from
Aa2 to Aa3. All ratings on Prudential and its subsidiaries are on
stable outlook.
The financial strength of The Prudential Assurance Company
Limited is rated AA by Standard & Poor's, Aa3 by Moody's and AA
by Fitch.
Jackson National Life Insurance Company's financial strength is
rated AA by Standard & Poor's, A1 by Moody's and AA by
Fitch.
Prudential Assurance Co. Singapore (Pte) Ltd.'s (Prudential
Singapore) financial strength is rated AA by Standard &
Poor's.
Shareholders' Funds
-------------------------------------------------------------------- --------- --------- --------- ---------
IFRS EEV
2015 GBPm 2014 GBPm 2015 GBPm 2014 GBPm
--------- --------- --------- ---------
Profit after tax for the year 2,579 2,216 3,951 4,343
Exchange movements, net of related tax 118 220 244 737
Unrealised gains and losses on Jackson fixed income securities
classified as available for
sale(16) (629) 565 - -
Dividends (974) (895) (974) (895)
Other 50 55 (23) 131
-------------------------------------------------------------------- --------- --------- --------- ---------
Net increase in shareholders' funds 1,144 2,161 3,198 4,316
Shareholders' funds at beginning of the year 11,811 9,650 29,161 24,856
Effect of domestication of Hong Kong branch - - - (11)
-------------------------------------------------------------------- --------- --------- --------- ---------
Shareholders' funds at end of the year 12,955 11,811 32,359 29,161
-------------------------------------------------------------------- --------- --------- --------- ---------
Shareholders' value per share 504p 460p 1,258p 1,136p
-------------------------------------------------------------------- --------- --------- --------- ---------
Return on Shareholders' funds(17) 27% 26% 17% 16%
-------------------------------------------------------------------- --------- --------- --------- ---------
In a period of currency volatility, UK sterling weakened
relative to non-sterling currencies in particular the US dollar.
With approximately 54 per cent of the Group's IFRS net assets (68
per cent of EEV net assets) denominated in non-sterling currencies
this generated a positive foreign exchange movement on net assets
in the year. In addition, the increase in US 10-year treasury rate
and higher spreads produced unrealised losses on fixed income
securities held by Jackson that are accounted for as
available-for-sale under IFRS.
Taking these non-operating movements into account, the Group's
IFRS shareholders' funds at 31 December 2015 increased by 10 per
cent to GBP13.0 billion (31 December 2014: GBP11.8 billion on an
actual exchange rate basis).
The Group's EEV shareholders' funds also increased by 11 per
cent to GBP32.4 billion (31 December 2014: GBP29.2 billion on an
actual exchange rate basis). On a per share basis the Group's
embedded value at 31 December 2015 stood at 1,258 pence, up from
1,136 pence at 31 December 2014.
Corporate transactions
Entrance into Uganda life insurance market
In June 2015 we completed the acquisition of Ugandan company
Goldstar Life Assurance and signed a long-term co-operation
agreement with Crane Bank of Uganda. In January 2016 we announced
entry into Zambia via our acquisition of Professional Life
Assurance, which is subject to regulatory approval.
Reporting considerations
As announced at our investor conference in January 2016, we plan
to discontinue publication of our first and third quarter interim
management statements with immediate effect.
Dividend
The Board has decided to increase the full-year ordinary
dividend by 5 per cent to 38.78 pence per share, reflecting the
continued strong financial performance of the Group in 2015. In
line with this, the directors have approved a second interim
ordinary dividend of 26.47 pence per share (2014: final dividend of
25.74 pence) which brings the total ordinary dividend for the year
to 38.78 pence (2014: 36.93 pence). In addition, the Board has
decided to award a special dividend of 10 pence per share
reflecting the additional contribution to earnings from the
specific management actions taken to position the balance sheet
more efficiently under the new Solvency II regime.
Although the Board has been able to approve a special dividend
of 10 pence per share in 2015, the Group's dividend policy remains
unchanged. The Board will maintain its focus on delivering a
growing ordinary dividend, which will continue to be determined
after taking into account the Group's financial flexibility and our
assessment of opportunities to generate attractive returns by
investing in specific areas of the business. The Board believes
that in the medium term a dividend cover of around two times is
appropriate.
Notes:
(1) Underlying free surplus generation comprises underlying free
surplus released from long-term business (net of investment in new
business) and that generated from asset management operations.
(2) Following the disposal of the Group's 25 per cent interest
in PruHealth and PruProtect in November 2014, the 2014 comparative
results of UK insurance operations have been adjusted to exclude
results of those businesses.
(3) Refer to note B1.1 in IFRS financial statements for the
break-down of other income and expenditure, and other non-operating
items.
(4) Includes Group's proportionate share of the liabilities and
associated flows of the insurance joint ventures in Asia.
(5) Defined as movements in shareholder-backed policyholder
liabilities arising from premiums (net of charges),
surrenders/withdrawals, maturities and deaths.
(6) For basis of preparation see note I (a) of Additional
Unaudited IFRS financial information.
(7) Includes Group's proportionate share in PPM South Africa and
the Asia asset management joint ventures.
(8) Net inflows exclude Asia Money Market Fund (MMF) inflows of
GBP1,065 million (2014: net inflows GBP9 million). External funds
under management exclude Asia MMF balances of GBP6,006 million
(2014: GBP4,800 million).
(9) Investment in new business as a percentage of underlying
free surplus generated from in-force life business and asset
management.
(10) Payback period, measured on an undiscounted basis, is the
time in which the initial 'cash' outflow of investment is expected
to be recovered from the 'cash' inflows generated by the
investment. The 'cash' outflow is measured by our investment of
free surplus in new business sales. The payback period equals the
time taken for new business sales to generate free surplus to cover
this investment.
(11) The full Holding Company Cashflow is disclosed in note II
(a) of Additional unaudited IFRS financial information.
(12) 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
break-down of other income and expenditure, and other non-operating
items.
(13) The methodology and assumptions used in calculating the
Solvency II capital results are set out in note II (c) of
Additional unaudited financial information. The Group Solvency II
capital ratio is based on outputs from the Group's Solvency II
internal model, approved by Prudential Regulation Authority in
December 2015.
(14) Before allowing for second interim ordinary and special
dividends.
(15) Representing Solvency II own funds of the UK with-profit
funds.
(16) Net of related charges to deferred acquisition costs and
tax.
(17) Operating profit after tax and non-controlling interests as
percentage of opening shareholders' funds.
Group Chief Risk Officer's Report of the risks facing our
business and how these are managed
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The Group aims to help customers achieve their long term
financial goals by providing and promoting a range of products and
services that meet customer needs, are easy to understand and
deliver real value. We recognise that we are implicitly committing
to customers that we will maintain a healthy company, and are there
to meet our long term commitments to them.
From the shareholder's perspective, we generate value by
selectively taking exposures to risks that are adequately rewarded
and that can be appropriately quantified and managed. The Group's
approach is to retain risks where doing so contributes to value
creation, the Group is able to withstand the impact of an adverse
outcome, and has the necessary capabilities, expertise, processes
and controls to manage appropriately the risk.
In my report, I seek to explain the main risks inherent in our
business and how we manage those risks, with the aim of ensuring we
maintain an appropriate risk profile.
Principles and objective
Prudential defines 'risk' as the uncertainty that Prudential
faces in successfully implementing its strategies and objectives.
This includes all internal or external events, acts or omissions
that have the potential to threaten the success and survival of
Prudential. As such, material risks will be retained only where
this is consistent with the Group's risk appetite framework and its
philosophy towards risk-taking.
Risk governance
The organisational structures, reporting relationships,
delegation of authority, and roles and responsibilities that Group
Head Office and the business units establish to make decisions and
control their activities on risk related matters form the
foundation of Prudential's risk governance. Effective risk
governance encompasses individuals, Group-wide functions and
committees involved in the management of risk.
Risk framework
The Group's risk 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 market, credit, insurance,
liquidity and operational risks is monitored and managed by the
Group Risk function whose responsibility it is to seek to ensure
the maintenance of an adequate risk exposure and solvency position
from the Group economic, regulatory and ratings perspectives.
Our Group Risk Framework requires that all our businesses and
functions establish processes for identifying, evaluating and
managing the key risks faced by the Group and is based on the
concept of the 'three lines of defence'. These comprise risk taking
and management, risk control and oversight, and independent
assurance.
The key risks inherent in the insurance and capital management operations of Prudential's
business:
----------------------------------------------------------------------------------------------------------------------
Risks from our investments Risks from our products Risks from our business operations
-------------------------------------- -------------------------------------- --------------------------------------
Insurance risk Operational risk
Uncertainty around investment The processes of determining the As a group we are dependent on the
returns can arise through credit price of our products and reporting successful processing of a large
risk via the potential of defaults, the results of our long-term number of transactions,
and market risks resulting from the business operations require us to utilising various IT systems and
volatility of asset values as a make a number of assumptions. platforms across numerous and diverse
result of fluctuations products.
in equity prices, interest rates, In common with other life insurers, We also operate under the
foreign exchange and property the profitability of our businesses ever-evolving requirements set out by
prices. Liquidity risk is depends on a mix of different regulatory and legal
also a key area of focus. Regular factors including mortality and regimes (including tax), as well as
stress testing is undertaken to morbidity levels and trends, utilising a significant number of
ensure the Group is able persistency, and claim inflation. third parties to distribute
to generate sufficient cash products and to support business
resources to meet financial operations; all of which add to the
obligations as they fall due in complexity of the operating
business model if not properly managed.
as usual and in stress scenarios.
Risk mitigation and hedging
We manage our risk profile according to our desired acceptance
of risk. To do this, Group Head Office and the business units
maintain risk registers that include details of the risks
identified and of the controls and mitigating actions used in
managing them. Our identified keys risks are set out in the table
below.
Key Risks
Risk Type Risk Definition Risk Management and Mitigation
--------------------------- --------------------------- ------------------------------------------------------------
Market Risk The risk of loss for our
business, or of adverse
change in the financial
situation, resulting,
directly or indirectly,
from fluctuations in the
level or volatility of
market prices of assets
and liabilities.
--------------------------- ------------------------------------------------------------
Equity
---------------------------
Investment risk
Interest rates
Foreign exchange * Market risk policy
* Risk appetite statements, limits and triggers in
place
* Monitoring and oversight of market risks through the
reporting of regular management information
* Asset Liability Management programmes in place
* Use of derivative programmes
* Currency hedging of expected business unit
remittances
--------------------------- --------------------------- ------------------------------------------------------------
Credit Risk The risk of loss for our
business, or of adverse
change in the financial
situation, resulting
from fluctuations in the
credit standing of issuers
of securities,
counterparties and any
debtors in the form of
default or other
significant credit event
(eg downgrade or spread
widening).
--------------------------- ------------------------------------------------------------
Counterparty
---------------------------
Invested credit * Credit risk policy
* Risk appetite statements and limits defined on an
issuer/counterparty/average credit quality of the
portfolio basis
* Collateral arrangements in place for derivative
transactions
* Group Credit Risk Committee oversight of credit and
counterparty credit risk and sector and/or name
specific reviews
* Close monitoring/restricting of investments that may
be of concern
--------------------------- --------------------------- ------------------------------------------------------------
Insurance Risk The risk of loss for our
business, or of adverse
change in the value of
insurance liabilities,
resulting from changes in
the level, trend, or
volatility of a number of
insurance risk drivers.
This includes adverse
mortality, longevity,
morbidity, persistency and
claim inflation.
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--------------------------- ------------------------------------------------------------
Mortality/Longevity
---------------------------
Morbidity/Health
Persistency
Medical expense inflation * Insurance and Underwriting risk policies
risk
* Risk appetite statements, limits and triggers in
place
* Longevity, morbidity and persistency assumptions
reflect recent experience and expectation of future
trends; industry data and expert judgement are used,
where appropriate
* Reinsurance is used to mitigate longevity and
morbidity risks
* Morbidity mitigated by appropriate underwriting when
policies are issued and claims received
* Persistency mitigated through improving quality of
sales processes and customer retention initiatives
* Medical expense inflation risk mitigated through
regular product re-pricing
--------------------------- --------------------------- ------------------------------------------------------------
Liquidity Risk The risk of the Group
being unable to generate * Liquidity risk policy
sufficient cash resources
to meet financial
obligations as they fall * Risk appetite statements, limits and triggers in
due in business as usual place
and stress scenarios.
* Monitoring of liquidity risk through regular
management information
* Regular stress testing
* Liquidity contingency plans established and sources
identified
* Ability to access the money and debt capital markets
* Access to external sources of finance through
committed credit facilities
--------------------------- --------------------------- ------------------------------------------------------------
Operational Risk The risk of loss (or
unintended gain/profit)
arising from inadequate or
failed internal processes,
or from personnel and
systems, or from external
events (other than those
external events covered
under Business Environment
Risk).
--------------------------- ------------------------------------------------------------
Regulatory and legislative
compliance
---------------------------
Third party management
IT and information
(including cybersecurity)
Business continuity * 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
* Regular testing of elements of the disaster recovery
plan
--------------------------- --------------------------- ------------------------------------------------------------
Business Environment Risk Exposure to forces in the
external environment that
could significantly change
the fundamentals
that drive the business's
overall strategy
------------------------------------------------------------
Strategic Risk Ineffective, inefficient * A Risk and Capital Plan that includes considerations
or inadequate senior of current strategies
management processes for
the development and
implementation of business * Business environment and strategic risks closely
strategy in relation to monitored and assessed for consideration in the
the business environment business plans where appropriate
and the Group's
capabilities.
* Board Strategy sessions consider risk themes
* Systemic Risk Management Plan which details the
Group's strategy and risk management framework
* Recovery Plan which covers the Group corporate and
risk governance for managing distressed environment,
a range of credible recovery options, and scenarios
to assess the effectiveness of these recovery options
--------------------------- --------------------------- ------------------------------------------------------------
The drivers of each of the key risks vary by business unit, and
depend primarily on the value of locally held products.
Market Risk
Investment Risk
In Prudential UK, investment risk arising out of the assets in
the with-profits fund impacts the shareholders' interest in future
transfers and is driven predominantly by equities in the fund as
well as by other investments such as property and bonds. The value
of the future transfers is partially protected against equity falls
by hedging conducted outside of the fund. The fund's large
inherited estate - estimated at GBP7.6 billion(1) as at 31 December
2015 on a Solvency II basis - can absorb market fluctuations and
protect the fund's solvency. The inherited estate is partially
protected against falls in equity markets through an active hedging
programme within the fund.
In Asia, our shareholder exposure to equities arises from
unit-linked products where revenue is linked to funds under
management and on its with-profits businesses where bonuses
declared are broadly based on historical and current rates of
return on equity.
In Jackson, investment risk arises in relation to the assets
backing the policies. In the case of 'spread business', including
fixed annuities, these assets are generally bonds and our
shareholder exposure comes from the minimum asset return required
to be generated to meet the guaranteed rates of return offered to
policyholders. For the variable annuity business, these assets
include equities as well as other assets such as bonds. In this
case the impact on the shareholder comes from the guarantees on
return on investments embedded in variable annuity products.
Shareholders' exposure to these guarantees is mitigated through a
hedging programme, as well as reinsurance. Further measures have
been undertaken including re-pricing initiatives and the
introduction of variable annuities without guarantees. Furthermore,
it is our philosophy not to compete on price; rather, we seek to
sell at a price sufficient to fund the cost incurred to hedge or
reinsure the risks and to achieve an acceptable return.
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Jackson hedges the guarantees on its variable annuity book on an
economic basis and, thus, accepts variability in its accounting
results in the short term in order to achieve the appropriate
economic result. In particular, under Prudential's Group IFRS
reporting, the measurement of the Jackson variable annuity
guarantees is typically less sensitive to market movements than the
corresponding hedging derivatives, which are held at market value.
However, depending on the level of hedging conducted regarding a
particular risk type, certain market movements can drive volatility
in the economic result which may be either more or less significant
under IFRS reporting. The Jackson IFRS shareholders' equity and US
statutory capital are also sensitive to the effects of policyholder
behaviour on the valuation of guarantees.
Interest Rate Risk
Long-term rates remain close to historic lows. Products that we
offer are sensitive to movements in interest rates. We have already
taken a number of actions to de-risk the in-force business as well
as re-price and restructure new business offerings in response to
historically low interest rates. However, this remains an area of
sensitivity and persistently low rates may impact policyholders'
savings patterns and behaviour.
Interest rate risk arises in our UK business from the need to
match cash flows for annuity payments with those from investments;
movements in interest rates may have an impact on profits where
durations are not perfectly matched. As a result, we aim to match
the duration of assets and liabilities as closely as possible and
the position is monitored regularly. Under the European Union's
Solvency II Directive, additional interest rate exposure is created
due to the nature of the construction of this balance sheet, such
as the inclusion of the risk margin. The UK business continually
assesses the need for any derivative overlays in managing this
sensitivity. The with-profits business is exposed to interest rate
risk as a result of underlying guarantees. Such risk is largely
borne by the with-profits fund but shareholder support may be
required in extremis.
In Asia, exposure to interest rate risk arises from the
guarantees of some non-unit-linked investment products. This
exposure arises because it may not be possible to hold assets which
will provide cash flows to match exactly those relating to
policyholder liabilities. While this residual asset/liability
mismatch risk can be 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
influence the cost of guarantees in such products, in particular
the cost of guarantees may increase when interest rates fall.
Interest rate risk across the entire business is managed through
the use of interest rate swaps, interest rate options and hybrid
options (options protecting against simultaneous decreases in
equity values and interest rates).
Foreign Exchange Risk
We principally operate in Asia, the US and the UK. The
geographical diversity of our businesses means that we are
inevitably subject to the risk of exchange rate fluctuations. Our
operations in the US and Asia, which represent a significant
proportion of our operating profit and shareholders' funds,
generally write policies and invest in assets denominated in local
currencies. Although this practice limits the effect of exchange
rate fluctuations on local operating results, it can lead to
significant fluctuations in our consolidated financial statements
when results are expressed 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, accepting the accounting
balance sheet translation risks this can produce. However, in cases
where a surplus arising in an overseas operation supports Group
capital or where a significant cash remittance is due from an
overseas subsidiary to the Group, this exposure is hedged where we
believe it is economically optimal to do so. We do not have
appetite for significant shareholder exposure to foreign exchange
risks in currencies outside the local territory. Where this arises,
currency borrowings, swaps and other derivatives are used to manage
exposures.
Credit Risk
We invest in fixed income assets in order to match policyholder
liabilities and enter into reinsurance and derivative contracts to
mitigate various types of risk. As a result, we are exposed to
credit and counterparty credit risk across our business. We employ
a number of risk management tools to manage credit risk, including
limits defined on an issuer/counterparty basis as well as on
average credit quality to seek to ensure the diversification of the
portfolio and have in place collateral arrangements in derivative
transactions. The Group Credit Risk Committee oversees credit and
counterparty credit risk across the Group and conducts sector
and/or name specific reviews as required. In particular, in 2015 it
has conducted sector reviews in the banking, commodities and energy
sectors.
Debt and loan portfolio
Our UK business is primarily exposed to credit risk in the
shareholder-backed portfolio, with fixed income assets of GBP32.1
billion. Credit risk arising from a further GBP44.5 billion of
fixed income assets is largely borne by the with-profits fund,
although in extremis shareholder support may be required should the
with-profits fund become unable to meet its liabilities.
The debt portfolio of our Asia business totalled GBP28.3 billion
at 31 December 2015. Of this, approximately 68 per cent was in
unit-linked and with-profits funds with minimal shareholder risk.
The remaining 32 per cent is shareholder exposure.
Credit risk arises in the general account of our US business,
where GBP34.1 billion of fixed income assets back shareholder
liabilities including those arising from fixed annuities, fixed
index annuities and life insurance.
The shareholder-owned debt and loan portfolio of the Group's
asset management operations of GBP2.2 billion as at 31 December
2015 is principally related to Prudential Capital operations.
Prudential Capital generates revenue by providing bridging finance,
managing investments and operating a securities lending and cash
management business for the Prudential Group and our clients.
Certain sectors have seen specific pressure during 2015 and into
early 2016. The Group's credit exposure to the oil and gas sector
represents approximately 4 per cent or GBP3.1 billion of the
shareholder credit portfolio. Prolonged, depressed oil prices are
expected to exert downward rating pressure within the sector, which
is being monitored closely through Group risk processes and the
Group Credit Risk Committee. The Group's credit exposure to the
metal and mining sector represents 1 per cent of the total
shareholder debt portfolio (GBP78 billion). Similarly, this sector
is subject to ongoing monitoring and regular management information
reporting to the Group's risk committees.
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
Sovereign debt represented 17 per cent or GBP12.8 billion of the
debt portfolio backing shareholder business at 31 December 2015 (31
December 2014: 15 per cent or GBP11.0 billion). 44 per cent of this
was rated AAA and 94 per cent investment grade (31 December 2014:
43 per cent AAA, 95 per cent investment grade). At 31 December
2015, the Group's shareholder-backed business's holding in Eurozone
sovereign debt(2) was GBP546 million. 75 per cent of this was AAA
rated (31 December 2014: 82 per cent AAA rated). We do not have any
sovereign debt exposure to Greece.
Bank debt exposure and Counterparty Credit Risk
Our bank exposure is a function of our core investment business,
as well as of the hedging and other activities undertaken to manage
our various financial risks. Given the importance of our
relationship with our banks, exposure to the banking sector is a
key focus 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 sovereign debt and bank debt securities at 31
December 2015 are given in Note C3.3(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, purchase credit
protection or make use of additional collateral arrangements to
control our levels of counterparty credit risk. At 31 December
2015, shareholders exposure to corporate debt by rating and sector
is shown below:
-- 95 per cent of the Shareholder portfolio is investment grade
rated. In particular, 67 per cent of the portfolio is rated A- and
above(3) .
-- 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 utilities sectors).
Insurance Risk
Insurance risk constitutes a sizeable proportion of the Group's
exposure; the profitability of our businesses depends on a mix of
factors including mortality and morbidity levels and trends,
persistency, investment performance and claim inflation.
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Longevity risk (people's propensity to live longer) is a
significant contributor to our insurance risk exposure and is also
capital intensive under the Solvency II regime. One tool used to
manage this risk is reinsurance. During 2015, we completed deals on
a number of tranches of bulk and retail annuity liabilities when
terms were sufficiently attractive and aligned with our risk
management framework. The recently enhanced pensions freedoms in
the UK have greatly reduced the demand for retail annuities and
further liberalisation is anticipated. However, given our
significant UK annuity portfolio, the assumptions that we make
about future rates of mortality improvement will remain key to the
measurement of insurance liabilities and to the assessment of any
subsequent 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 remains considerable volatility in year-on-year
longevity experience, which is why we need expert judgement in
setting our longevity assumptions.
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, a key assumption is the rate of medical inflation,
typically in excess of general price inflation. This is the risk
that the expenses of medical treatment increase more than expected,
so that the medical claim cost passed on to Prudential is much
higher. Medical expense inflation risk is best mitigated through
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 aggregate across policies.
Our persistency assumptions similarly reflect recent experience
for each relevant line of business, and future expectations.
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 poor
persistency business. Where appropriate, allowance is also made for
the relationship - either assumed or historically observed -
between persistency and investment returns, and for the resulting
additional risk. Modelling this 'dynamic' policyholder behaviour is
particularly important when assessing the likely take-up rate of
options embedded within product features.
Liquidity Risk
The Group has significant internal sources of liquidity which
are sufficient to meet all of its expected requirements, for a
period of at least 12 months from the date the financial statements
are approved, without having to make use of external funding. In
aggregate the Group currently has GBP2.6 billion of undrawn
committed facilities, expiring in 2020. In addition, the Group has
access to liquidity via the debt capital markets. We 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 have been assessed at the Group and
at a business unit level under base case and stressed assumptions.
The liquidity resources available and the subsequent Liquidity
Coverage Ratio are regularly monitored and are assessed to be
sufficient.
Operational Risk
The Group does not actively seek to take operational risk to
generate returns. Instead, it accepts a level of risk whereby the
controls in place should prevent material losses, but should also
not excessively restrict business activities. Direct and/or
indirect financial losses are likely to arise if there is a failure
to develop, implement and monitor appropriate controls.
For each business unit, accountabilities for operational risk
management and oversight are based on the principles of the 'three
lines of defence' model of risk taking and management, risk control
and oversight, and independent assurance. The approach adopted is
proportional to the size, nature and complexity of the business
unit and the risks it manages.
We have an operational risk management framework in place that
facilitates both the qualitative and quantitative analysis of
operational risk exposures. The output of this framework, in
particular management information on key operational risk and
control assessments, scenario analysis, internal incidents and
external incidents, is reported by the business units and presented
to the Group Operational Risk Committee.
This information also supports business decision-making and
lessons-learned activities, the ongoing improvement of the control
environment, and determination of the adequacy of our corporate
insurance programme.
Top Operational Risks
Key areas of focus within the operational risk framework
are:
-- the risk of non-compliance due to the momentum of regulatory
change in both our developed and developing markets, as well as
recognising that Prudential's designation as a Global Systemically
Important Insurer which requires the Group to comply with
additional policy measures including enhanced Group-wide
supervision;
-- the risk of improper, or mis-selling of Prudential products
and the resulting risk of censure from local regulators;
-- the risk of regulatory censure due to poor conduct or weaknesses in systems and controls;
-- the risk of censure for money laundering, sanctions or
anti-bribery and corruption failures;
-- the risk that reliance on IT infrastructures which support
core activities/processes of the business, could fail or otherwise
negatively impact business continuity and scalability needed to
support the growth and changing needs of the business;
-- the risk of a significant failure of a third-party provider impacting critical services;
-- the risk of trading, transacting or modelling errors having a material cost across Group;
-- the risk of the Group failing to attract and retain quality
senior managers and other key employees;
-- the risk that key people, processes and systems are unable to
operate (thus impacting the on-going operation of the business) due
to a significant unexpected external event occurring (e.g. a
pandemic, terrorist attack, natural disaster, political unrest);
and
-- the risk of losses resulting from damage to the firm's
reputation. This can be either real or perceived reputational
damage but which could nevertheless diminish the standing of the
organisation in the eyes of key stakeholders (e.g. customers,
shareholders), destroy shareholder value, adversely impact revenues
or result in significant costs to rectify.
Cyber Security
Cyber security is an increasingly important risk facing the
Group. The risk is that a member of the Group could be the target
of a cyber-related attack which could result in disruption to the
key operations, make it difficult to recover critical services,
damage assets, and compromise data (both corporate and customer).
This is a global issue which is rising in prominence across the
financial services industry. As a result of Prudential's increasing
market profile, the growing interest by customers to interact with
their insurance provider and asset manager through the internet and
social media, improved brand awareness and the classification of
Prudential as a Global Systemically Important Insurer, there is an
increased likelihood of Prudential being considered a target by
cyber criminals. A number of industry, company-wide and local
business unit-specific initiatives are underway in response to this
risk.
Business environment and strategic risks
Global Regulatory and Political Risk
There are a number of on-going 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 reviews, on-going engagement with the
Prudential Regulation Authority and includes the work of the
Financial Stability Board and standard-setting institutions such as
the International Association of Insurance Supervisors.
The International Association of Insurance Supervisors has
various initiatives. On 18 July 2013, it published a methodology
for identifying Global Systemically Important Insurers, and a set
of policy measures that will apply to them, which the Financial
Stability Board endorsed. Groups designated as a Global
Systemically Important Insurer 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 Global Systemically Important Insurer
was reaffirmed on 3 November 2015. Prudential is monitoring the
development and potential impact of the policy measures and is
continuing to engage with the Prudential Regulation Authority on
the implications of the policy measures and Prudential's
designation as a Global Systemically Important Insurer.
The Global Systemically Important Insurer regime also introduces
two types of capital requirements. The first, a Basic Capital
Requirement, is designed to act as a minimum group capital
requirement and the second, a Higher Loss Absorption requirement
reflects the drivers of the assessment of Global Systemically
Important Insurer designation. The International Association of
Insurance Supervisors intends for these requirements to take effect
from January 2019, but Global Systemically Important Insurers will
be expected to report privately to their group-wide supervisors in
the interim.
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The International Association of Insurance Supervisors is also
developing a Common Framework (ComFrame) which is focused on the
supervision of large and complex 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 would apply to
Internationally Active Insurance Groups. Once the development of
the Insurance Capital Standard has been concluded, it is intended
to replace the Basic Capital Requirement as the minimum group
capital requirement for Global Systemically Important Insurers.
Further consultations on the Insurance Capital Standard are
expected over the coming years and a version of the Insurance
Capital Standard is expected to be adopted as part of ComFrame in
late 2019.
The International Association of Insurance Supervisors'
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, particularly in the emerging markets of Asia.
The European Union's Solvency II Directive came into effect on 1
January 2016. The European Commission will review elements of the
Solvency II legislation from 2016 onwards including a review of the
Long Term Guarantee measures by 1 January 2021.
Similar 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.
The UK Government has committed to holding a "remain/leave"
referendum on EU membership which will be held on 23 June 2016. The
possible withdrawal of the UK from the EU would have political,
legal and economic ramifications for both the UK and the EU,
although these are expected to be more pronounced on the UK.
In the US, the implementation of the Department of Labor
proposal to introduce new fiduciary obligations for distributors of
investment products to holders of regulated accounts would
dramatically reshape the distribution of retirement products. If
approved, the final rule could be in place in 2016. Jackson's
strong relationships with distributors, history of product
innovation and efficient operations should help mitigate any
impacts.
Emerging Risks
Generally, emerging risks are qualitative in nature and are not
amenable to modelling using statistical techniques. The emerging
risk identification process at Prudential seeks to leverage the
expertise of the organisation through a combination of top-down and
bottom-up assessments of risks. Following two years of development,
the emerging risk identification process is now well-embedded
across the Group.
The use of 'brainstorming' sessions at various levels of the
organisation is used as a central pillar of the emerging risk
identification process to identify, develop and challenge potential
emerging risks. Input is also taken from external speakers, forums
and databases.
The Group has also sought to maintain contacts with industry
experts and peers to benchmark and refine the emerging risk
management process. For example, Prudential has been a member of
the Emerging Risk Initiative at the CRO Forum for two years, and
chaired this initiative for 2015.
Risk factors
Our disclosures covering risk factors can be found at the end of
this document.
Risk Management Cycle and Governance
Our Group Risk Framework requires that all our businesses and
functions establish processes for identifying, evaluating and
managing the key risks faced by the Group. The framework is based
on the concept of 'three lines of defence' comprising risk taking
and management, risk control and oversight and independent
assurance.
Risk identification
The Group's risk profile is a robust assessment of the principal
risks facing the Group, including those that would threaten its
business model, future performance, solvency or liquidity. 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.
An annual 'top-down' identification of our key risks assesses
the risks that have the greatest potential to impact the Group's
operating results and financial condition. The bottom up approach
of risk identification is more granular and refers to the processes
by which the business units identify, assess and document risks,
with the appropriate coordination and challenge from the risk
functions.
The Group Own Risk and Solvency Assessment 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 Group Own Risk and Solvency Assessment
Report covers the full known risk universe of the Group.
In accordance with provision C.2.1 of the UK Corporate
Governance Code, the directors have performed robust assessment of
the principal risks facing the company, through the Group Own Risk
and Solvency Assessment Report and the risk assessments completed
as part of the business planning review including how they are
managed and mitigated given in this Chief Risk Officer's
report.
Insurers are also required to undertake Reverse Stress Testing,
which requires firms to work backwards from an assumed point of
business model failure, to identify the stress scenarios that could
result in such adverse outcomes. Each firm must then consider
whether the likelihood of these scenarios, taking into account
likely management actions, is consistent with its risk appetite
and, if not, must initiate actions to address any inconsistencies.
The actions considered form a part of our Recovery Plan.
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 the Solvency II Pillar 1 and economic capital
bases. Governance arrangements are in place to support the internal
model. This includes independent validation and process and
controls around model changes and limitations.
Manage and control
The control procedures and systems established within the Group
are designed to manage the risk of failing to meet business
objectives. 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. 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.
Monitoring and reporting
The management information received by the Group Risk Committees
and the Board is tailored around the risks identified in the annual
'top-down' process, and also covers on-going developments in other
key and emerging risks.
Risk Appetite and Limits
The extent to which the Group is willing to take risk in the
pursuit of its objective to create shareholder value is defined by
a number of risk appetite statements, operationalised through
measures such as limits, triggers and indicators.
Risk appetite has been set at a Group aggregate level and by
risk type, and covers all risks to shareholders, including those
from participating and third party business. The qualitative
statements are operationalised down to the local business units
through measures such as limits, triggers and indicators, and cover
the most significant exposures to the Group, particularly those
that could impact the Group's aggregate risk appetite metrics.
The Group Risk function is responsible for reviewing the scope
and operation of these measures at least annually, to determine
that they remain relevant. On the recommendation of the Group Risk
Committee, 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 as follows:
Earnings volatility:
The objectives of the aggregate risk limits seek to manage
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 monitor 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.
Capital requirements:
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