European Embedded Value (EEV) basis results
EEV
results highlights
|
2023
|
|
2022
|
|
|
|
AER
|
|
CER
|
|
$m
|
|
$m
|
%
change
|
|
$m
|
%
change
|
New
business profit note (i)
|
3,125
|
|
2,184
|
43%
|
|
2,149
|
45%
|
Annual premium equivalent (APE) note
(i)
|
5,876
|
|
4,393
|
34%
|
|
4,287
|
37%
|
New
business margin (APE) (%)
|
53%
|
|
50%
|
+3pp
|
|
50%
|
+3pp
|
Present value of new business
premiums (PVNBP)
|
28,737
|
|
22,406
|
28%
|
|
22,080
|
30%
|
|
|
|
|
|
|
|
|
Operating free surplus generated notes
(i)(ii)
|
2,007
|
|
2,193
|
(8)%
|
|
2,173
|
(8)%
|
Operating free surplus generated from in-force insurance and
asset management business notes
(i)(ii)
|
2,740
|
|
2,760
|
(1)%
|
|
2,725
|
1%
|
|
|
|
|
|
|
|
|
EEV
operating profit notes (i)(iii)
|
4,546
|
|
3,952
|
15%
|
|
3,901
|
17%
|
EEV
operating profit, net of non-controlling
interests
|
4,526
|
|
3,923
|
15%
|
|
3,872
|
17%
|
Operating return on average EEV
shareholders' equity, net of non-controlling interests
(%)
|
10%
|
|
9%
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing EEV shareholders' equity,
net of non-controlling interests
|
45,250
|
|
42,184
|
7%
|
|
42,038
|
8%
|
Closing EEV shareholders' equity,
net of non-controlling interests per share (in cents)
|
1,643¢
|
|
1,534¢
|
7%
|
|
1,529¢
|
7%
|
Notes
(i) Results are
presented before deducting the amounts attributable to
non-controlling interests. This presentation is applied
consistently throughout this document, unless stated
otherwise.
(ii) Operating free surplus
generated is for long-term and asset management businesses only and
is stated before restructuring and IFRS 17 implementation costs,
centrally incurred costs and eliminations.
(iii) Group EEV operating
profit is stated after restructuring and IFRS 17 implementation
costs, centrally incurred costs and eliminations.
European Embedded Value (EEV) basis
results
Basis
of preparation
IFRS profit for insurance contracts largely reflects the level of
services provided for a given period. Unearned future profits
expected on those same insurance contracts are contained in a
separate liability called the contractual service margin. These
future profits have been derived on a risk neutral basis (including
a liquidity premium), namely without allowing for the real world
investment return that will be earned on the assets held. By
contrast, EEV reflects all future profits, with no equivalent
liability to the contractual service margin, but values those
profits on a risk adjusted real world basis, namely allowing for
the future investment returns that are expected to be earned by the
assets held but uses a higher discount rate that allows for the
uncertainties in these cash flows. The value of future new business
is excluded from the embedded value.
The EEV Principles provide
consistent definitions of the components of EEV, a framework for
setting assumptions and an approach to the underlying methodology
and disclosures. The EEV Principles were designed to provide
guidance and common principles that could be understood by both
users and preparers alongside prescribing a minimum level of
disclosures to enable users to understand an entity's methodology,
assumptions and key judgements as well as the sensitivity of an
entity's EEV to key assumptions. Results prepared under the EEV
Principles represent the present value of the shareholders'
interest in the post-tax future profits (generally on a local
statutory basis) expected to arise from the current book of
long-term business, after sufficient allowance has been made for
the aggregate risks in the business. The shareholders' interest in
the Group's long-term business is the sum of the shareholders'
total net worth and the value of in-force business.
For the purposes of preparing EEV results, insurance joint ventures
and associates are included at the Group's proportionate share of
their embedded value and not at their market value. Asset
management and other non-insurance subsidiaries, joint ventures and
associates are included in the EEV results at the Group's
proportionate share of IFRS shareholders' equity, with central
Group debt shown on a market value basis. Further information is
contained in note 5.
Key features of the Group's EEV
methodology include:
Economic assumptions: The projected
post-tax profits assume a level of future investment return and are
discounted using a risk discount rate. Both the risk discount rate
and the investment return assumptions are updated at each valuation
date to reflect current market risk-free rates, such that changes
in market risk-free rates impact all projected future cash flows.
Risk-free rates, and hence investment return assumptions, are based
on observable market data, with current market risk-free rates
assumed to remain constant and do not revert to longer-term rates
over time. Different products will be sensitive to different
assumptions, for example, participating products or products with
guarantees are likely to benefit disproportionately from higher
assumed investment returns.
Time value of financial options and
guarantees: Explicit quantified allowances are made for the time
value of financial options and guarantees (TVOG). The TVOG is
determined by weighting the probability of outcomes across a large
number of different economic scenarios and is typically less
applicable to health and protection business that generally
contains more limited financial options or guarantees. At
31 December 2023, the TVOG is $(290) million (31 December
2022: $(151) million). The magnitude of the TVOG at
31 December 2023 would be approximately equivalent to a 6
basis point (2022: 3 basis point) increase in the weighted average
risk discount rate.
Allowance for risk in the risk
discount rates: Risk discount rates are set equal to the risk-free
rate at the valuation date plus product-specific allowances for
market and non-market risks. Risks that are explicitly captured
elsewhere, such as via the TVOG, are not included in the risk
discount rates.
The allowance for market risk is
based on a product-by-product assessment of the sensitivity of
shareholder cash flows to varying market returns. This approach
reflects the inherent market risk in each product group and results
in lower risk discount rates for products where the majority of
shareholder profit is uncorrelated to market risk and appropriately
higher risk discount rates for products where there is greater
market exposure for shareholders.
For example, for health and protection products, which represent 51
per cent of the value of in-force business (31 December 2022: 51
per cent) and 40 per cent of new business profit (31 December 2022:
43 per cent), the major sources of shareholder profits are
underwriting profits or fixed shareholder charges which have low
market risk sensitivity. The proportion of health and protection
business varies with interest rates as well as the mix of business
sold in the current period.
The construct of UK-style with-profits or similar participating
funds in some business units, representing 27 per cent of the value
of in-force (31 December 2022: 26 per cent) and 14 per cent of new
business profit (31 December 2022: 18 per cent), reduce the market
volatility of both policyholder and shareholder cash flows due to
smoothed bonus declarations and for some markets the presence of an
estate. Accordingly, 78 per cent of the value of in-force (31
December 2022: 77 per cent) is products with low market risk
sensitivity and this is reflected in the overall risk discount
rate.
For unit-linked products where fund
management charges fluctuate with the investment return, a portion
of the profits will typically be more sensitive to market risk due
to the higher proportion of equity-type assets in the investment
portfolio resulting in a higher risk discount rate. This business
represents 13 per cent of the value of in-force (31 December 2022:
17 per cent) and 4 per cent of the value of new business profit (31
December 2022: 11 per cent) which limits the impact on the overall
risk discount rate.
The remaining parts of the business,
9 per cent of the value of in-force business (31 December 2022: 6
per cent) and 42 per cent of the value of new business (31 December
2022: 28 per cent), relate to other products not covered by the
above. The high proportion of new business in the current period
reflects the higher proportion of savings product in Hong Kong as
the border reopened.
The allowance for non-market risk comprises a base Group-wide
allowance of 50 basis points plus additional allowances for
emerging market risk where appropriate. At 31 December 2023, the
total allowance for non-market risk is equivalent to a $(3.0)
billion (31 December 2022: $(2.8) billion) reduction, or around (7)
per cent (31 December 2022: (7) per cent) of the embedded
value.
Movement in Group EEV shareholders' equity
|
|
2023 $m
|
|
2022
$m
|
|
Note
|
Insurance
and
asset
management
operations
|
Other
(central)
operations
|
Group
total
|
|
Group
total
|
New business profit
|
1
|
3,125
|
-
|
3,125
|
|
2,184
|
Profit from in-force
business
|
2
|
1,779
|
-
|
1,779
|
|
2,358
|
Long-term business
|
|
4,904
|
-
|
4,904
|
|
4,542
|
Asset management
|
|
254
|
-
|
254
|
|
234
|
Operating profit from long-term and
asset management businesses
|
|
5,158
|
-
|
5,158
|
|
4,776
|
Other income
(expenditure)
|
5
|
-
|
(420)
|
(420)
|
|
(542)
|
Operating profit (loss) before
restructuring and IFRS 17 implementation costs
|
|
5,158
|
(420)
|
4,738
|
|
4,234
|
Restructuring and IFRS 17
implementation costs
|
|
(72)
|
(120)
|
(192)
|
|
(282)
|
Operating profit (loss) for the year
|
|
5,086
|
(540)
|
4,546
|
|
3,952
|
Short-term fluctuations in
investment returns
|
2
|
(62)
|
(8)
|
(70)
|
|
(6,874)
|
Effect of changes in economic
assumptions
|
2
|
(589)
|
-
|
(589)
|
|
(1,571)
|
(Loss) profit attaching to corporate
transactions
|
|
-
|
(22)
|
(22)
|
|
57
|
Mark-to-market value movements on
core structural borrowings
|
6
|
-
|
(153)
|
(153)
|
|
865
|
Non-operating results
|
|
(651)
|
(183)
|
(834)
|
|
(7,523)
|
Profit (loss) for the year
|
|
4,435
|
(723)
|
3,712
|
|
(3,571)
|
Non-controlling interests share of
(profit)
|
|
(20)
|
-
|
(20)
|
|
(29)
|
Profit (loss) for the year attributable to equity holders of
the Company
|
|
4,415
|
(723)
|
3,692
|
|
(3,600)
|
Equity items:
|
|
|
|
|
|
|
Foreign exchange movements on
operations
|
|
(135)
|
1
|
(134)
|
|
(1,195)
|
Intra-group dividends and investment
in operations note (i)
|
|
(1,702)
|
1,702
|
-
|
|
-
|
External dividends
|
|
-
|
(533)
|
(533)
|
|
(474)
|
New share capital
subscribed
|
|
-
|
4
|
4
|
|
(4)
|
Other movements note
(ii)
|
|
118
|
(81)
|
37
|
|
(127)
|
Net
increase (decrease) in shareholders' equity
|
|
2,696
|
370
|
3,066
|
|
(5,400)
|
Shareholders' equity at beginning of
year note (v)
|
|
40,262
|
1,922
|
42,184
|
|
47,584
|
Shareholders' equity at end of year
|
|
42,958
|
2,292
|
45,250
|
|
42,184
|
|
|
|
|
|
|
|
Contribution to Group EEV:
|
|
|
|
|
|
|
At
end of year:
|
|
|
|
|
|
|
Long-term business
|
2
|
41,528
|
-
|
41,528
|
|
38,857
|
Asset management and
other
|
5
|
663
|
2,292
|
2,955
|
|
2,565
|
Shareholders' equity, excluding
goodwill attributable to equity holders
|
|
42,191
|
2,292
|
44,483
|
|
41,422
|
Goodwill attributable to equity
holders
|
|
767
|
-
|
767
|
|
762
|
Shareholders' equity at end of year
|
|
42,958
|
2,292
|
45,250
|
|
42,184
|
|
|
|
|
|
|
|
At
beginning of year:
|
|
|
|
|
|
|
Long-term business note
(v)
|
2
|
38,857
|
-
|
38,857
|
|
44,875
|
Asset management and
other
|
5
|
643
|
1,922
|
2,565
|
|
1,931
|
Shareholders' equity, excluding
goodwill attributable to equity holders
|
|
39,500
|
1,922
|
41,422
|
|
46,806
|
Goodwill attributable to equity
holders
|
|
762
|
-
|
762
|
|
778
|
Shareholders' equity at beginning of year note
(v)
|
|
40,262
|
1,922
|
42,184
|
|
47,584
|
|
2023
|
|
2022
|
EEV
shareholders' equity per share (in cents) note
(iii)
|
Insurance
and
asset
management
operations
|
Other
(central)
operations
|
Group
total
|
|
Group
total
|
At
end of year:
|
|
|
|
|
|
Based on shareholders' equity, net
of goodwill attributable to equity holders
|
1,532¢
|
83¢
|
1,615¢
|
|
1,507¢
|
Based on shareholders' equity at end
of year
|
1,560¢
|
83¢
|
1,643¢
|
|
1,534¢
|
At
beginning of year:
|
|
|
|
|
|
Based on shareholders' equity, net
of goodwill attributable to equity holders
|
1,437¢
|
70¢
|
1,507¢
|
|
1,696¢
|
Based on shareholders' equity at
beginning of year
|
1,464¢
|
70¢
|
1,534¢
|
|
1,725¢
|
|
2023
|
|
2022
|
EEV
basis basic earnings per share note
(iv)
|
Before non-controlling
interests
|
After non-
controlling
interests
|
Basic
earnings
per share
|
|
Basic
earnings
per
share
|
|
$m
|
$m
|
cents
|
|
cents
|
Based on operating profit
|
4,546
|
4,526
|
165.1¢
|
|
143.4¢
|
Based on profit (loss) for the
year
|
3,712
|
3,692
|
134.7¢
|
|
(131.6)¢
|
Notes
(i) Intra-group
dividends represent dividends that have been paid in the year.
Investment in operations reflects movements in share
capital.
(ii) Other movements include
reserve movements in respect of valuation changes on the retained
interest in Jackson prior to its disposal in 2023, share-based
payments, treasury shares and intra-group transfers between
operations that have no overall effect on the Group's
shareholders' equity.
(iii) Based on the number of
issued shares at 31 December 2023 of 2,754 million shares (31
December 2022: 2,750 million shares).
(iv) Based on weighted
average number of issued shares of 2,741 million shares in 2023,
which excludes those held in employee share trusts (2022: 2,736
million shares).
(v) Balance at the beginning
of the year after the adoption of HK RBC.
Movement in Group free surplus
Operating free surplus
generation is the financial metric we use to measure the internal
cash generation of our business operations and for our life
operations is generally based on (with adjustments as discussed
below) the capital regimes that apply locally in the various
jurisdictions in which the Group operates. It represents amounts
emerging from the in-force business during the year, net of amounts
reinvested in writing new business. For asset management
businesses, it equates to post-tax adjusted operating profit for
the year. For insurance business, free surplus is generally based
on (with adjustments including recognition of certain intangibles
and other assets that may be inadmissible on a regulatory basis)
the excess of the regulatory basis net assets (EEV total net worth)
over the EEV capital required to support the covered business. For
shareholder-backed businesses, the level of EEV required capital
has been based on the Group Prescribed Capital Requirements (GPCR)
used in our GWS (Group Wide Supervision) reporting as set out in
note 7.1(e).
Adjustments are also made to enable free surplus to be a better
measure of shareholders' resources available for distribution as
described in the reconciliation to GWS surplus as disclosed in note
I(i) of the Additional unaudited financial information. For asset
management and other non-insurance operations (including the
Group's central operations), free surplus is taken to be IFRS
shareholders' equity, net of goodwill attributable to shareholders,
with central Group debt recorded as free surplus to the extent that
it is classified as capital resources under the Group's capital
regime. A reconciliation of EEV free surplus to the GWS shareholder
capital surplus over group minimum capital requirements is also set
out in note I(i) of the Additional unaudited financial
information.
|
|
2023 $m
|
|
2022
$m
|
|
Note
|
Insurance
and asset
management
operations
|
Other
(central)
operations
|
Group
total
|
|
Group
total
note
(i)
|
Expected transfer from in-force
business
|
|
2,635
|
-
|
2,635
|
|
2,406
|
Expected return on existing free
surplus
|
|
234
|
-
|
234
|
|
347
|
Changes in operating assumptions and
experience variances
|
|
(383)
|
-
|
(383)
|
|
(227)
|
Operating free surplus generated
from in-force long-term business
|
|
2,486
|
-
|
2,486
|
|
2,526
|
Investment in new business note
(i)
|
|
(733)
|
-
|
(733)
|
|
(567)
|
Long-term business
|
2
|
1,753
|
-
|
1,753
|
|
1,959
|
Asset management
|
|
254
|
-
|
254
|
|
234
|
Operating free surplus generated
from long-term and asset management businesses
|
|
2,007
|
-
|
2,007
|
|
2,193
|
Other income
(expenditure)
|
|
-
|
(420)
|
(420)
|
|
(542)
|
Restructuring and IFRS 17
implementation costs
|
|
(72)
|
(120)
|
(192)
|
|
(277)
|
Operating free surplus generated
|
|
1,935
|
(540)
|
1,395
|
|
1,374
|
Non-operating free surplus generated
note (ii)
|
|
(188)
|
(35)
|
(223)
|
|
(1,924)
|
Free surplus generated for the year
|
|
1,747
|
(575)
|
1,172
|
|
(550)
|
Equity items:
|
|
|
|
|
|
|
Net cash flows paid to parent
company note (iii)
|
|
(1,611)
|
1,611
|
-
|
|
-
|
External dividends
|
|
-
|
(533)
|
(533)
|
|
(474)
|
Foreign exchange movements on
operations
|
|
(25)
|
1
|
(24)
|
|
(316)
|
New share capital
subscribed
|
|
-
|
4
|
4
|
|
(4)
|
Other movements and timing
differences
|
|
27
|
10
|
37
|
|
(127)
|
Net movement in free surplus before
non-controlling interests and before net subordinated debt
redemption
|
|
138
|
518
|
656
|
|
(1,471)
|
Net subordinated debt
redemption
|
6
|
-
|
(421)
|
(421)
|
|
(1,699)
|
Net movement in free surplus before
non-controlling interests
|
|
138
|
97
|
235
|
|
(3,170)
|
Change in amounts attributable to
non-controlling interests
|
|
(9)
|
-
|
(9)
|
|
(10)
|
Balance at beginning of year
note (iv)
|
|
6,678
|
5,551
|
12,229
|
|
15,409
|
Balance at end of year
|
|
6,807
|
5,648
|
12,455
|
|
12,229
|
Representing:
|
|
|
|
|
|
|
Free surplus excluding distribution
rights and other intangibles
|
|
5,663
|
2,855
|
8,518
|
|
8,390
|
Distribution rights and other
intangibles
|
|
1,144
|
2,793
|
3,937
|
|
3,839
|
Balance at end of year
|
|
6,807
|
5,648
|
12,455
|
|
12,229
|
|
|
2023 $m
|
|
2022 $m
|
Contribution to Group free surplus:
|
Note
|
Insurance
and asset
management
operations
|
Other
(central)
operations
|
Group
total
|
|
Group
total
|
At
end of year:
|
|
|
|
|
|
|
Long-term business
|
2
|
6,144
|
-
|
6,144
|
|
6,035
|
Asset management and
other
|
5
|
663
|
5,648
|
6,311
|
|
6,194
|
Free surplus at end of year
|
|
6,807
|
5,648
|
12,455
|
|
12,229
|
At
beginning of year:
|
|
|
|
|
|
|
Long-term business
note
(iv)
|
2
|
6,035
|
-
|
6,035
|
|
7,320
|
Asset management and
other
|
5
|
643
|
5,551
|
6,194
|
|
8,089
|
Free surplus at beginning of year note
(iv)
|
|
6,678
|
5,551
|
12,229
|
|
15,409
|
Notes
(i) Free surplus
invested in new business primarily represents acquisition costs and
amounts set aside for required capital.
(ii) Non-operating free
surplus generated for other (central) operations represents the
post-tax IFRS basis short-term fluctuations in investment returns,
the movement in the mark-to-market value adjustment on core
structural borrowings which did not meet the qualifying conditions
as set out in the Insurance (Group Capital) Rules and gain or loss
on corporate transactions for other entities.
(iii) Net cash flows to parent
company reflect the cash remittances as included in the holding
company cash flow at transaction rates. The difference to the
intra-group dividends and investment in operations in the movement
in EEV shareholders' equity primarily relates to intra-group loans,
other non-cash items, and foreign exchange.
(iv) Balance at the beginning
of the year after the adoption of HK RBC.
Notes on the EEV basis results
1 Analysis of new business profit and EEV for insurance
business operations
|
2023
|
|
New
business
profit
(NBP)
|
Annual
premium
equivalent
(APE)
|
Present
value of
new
business
premiums
(PVNBP)
|
New
business
margin
(APE)
|
New
business
margin
(PVNBP)
|
Closing EEV
shareholders'
equity,
excluding
goodwill
|
|
$m
|
$m
|
$m
|
%
|
%
|
$m
|
CPL (Prudential's share)
|
222
|
534
|
2,020
|
42%
|
11%
|
3,038
|
Hong Kong
|
1,411
|
1,966
|
10,444
|
72%
|
14%
|
17,702
|
Indonesia
|
142
|
277
|
1,136
|
51%
|
13%
|
1,509
|
Malaysia
|
167
|
384
|
1,977
|
43%
|
8%
|
3,709
|
Singapore
|
484
|
787
|
5,354
|
61%
|
9%
|
7,896
|
Growth markets and other
|
699
|
1,928
|
7,630
|
36%
|
9%
|
7,674
|
Total long-term
operations
|
3,125
|
5,876
|
28,561
|
53%
|
11%
|
41,528
|
|
|
|
|
|
|
|
|
2022
(AER)
|
|
New
business
profit
(NBP)
|
Annual
premium
equivalent
(APE)
|
Present
value of
new
business
premiums
(PVNBP)
|
New
business
margin
(APE)
|
New
business
margin
(PVNBP)
|
Closing
EEV
shareholders'
equity,
excluding
goodwill
|
|
$m
|
$m
|
$m
|
%
|
%
|
$m
|
CPL (Prudential's share)
|
387
|
884
|
3,521
|
44%
|
11%
|
3,259
|
Hong Kong
|
384
|
522
|
3,295
|
74%
|
12%
|
16,576
|
Indonesia
|
125
|
247
|
1,040
|
51%
|
12%
|
1,833
|
Malaysia
|
159
|
359
|
1,879
|
44%
|
8%
|
3,695
|
Singapore
|
499
|
770
|
6,091
|
65%
|
8%
|
6,806
|
Growth markets and other
|
630
|
1,611
|
6,580
|
39%
|
10%
|
6,688
|
Total long-term
operations
|
2,184
|
4,393
|
22,406
|
50%
|
10%
|
38,857
|
|
|
|
|
|
|
2022
(CER)
|
|
New
business
profit
(NBP)
|
Annual
premium
equivalent
(APE)
|
Present
value of
new
business
premiums
(PVNBP)
|
New
business
margin
(APE)
|
New
business
margin
(PVNBP)
|
Closing
EEV
shareholders'
equity,
excluding
goodwill
|
|
$m
|
$m
|
$m
|
%
|
%
|
$m
|
CPL (Prudential's share)
|
368
|
840
|
3,346
|
44%
|
11%
|
3,195
|
Hong Kong
|
384
|
523
|
3,296
|
73%
|
12%
|
16,568
|
Indonesia
|
122
|
240
|
1,014
|
51%
|
12%
|
1,853
|
Malaysia
|
154
|
347
|
1,813
|
44%
|
8%
|
3,542
|
Singapore
|
512
|
791
|
6,254
|
65%
|
8%
|
6,921
|
Growth markets and other
|
609
|
1,546
|
6,357
|
39%
|
10%
|
6,616
|
Total long-term
operations
|
2,149
|
4,287
|
22,080
|
50%
|
10%
|
38,695
|
Note
The movement in new business profit
from long-term operations is analysed as follows:
|
$m
|
2022 new business profit
|
2,184
|
Foreign exchange movement
|
(35)
|
Sales volume
|
796
|
Effect of changes in interest rates
and other economic assumptions
|
(37)
|
Business mix, product mix and other
items
|
217
|
2023 new business profit
|
3,125
|
2
Analysis of movement in net worth and value of in-force business
for insurance business operations
|
2023 $m
|
|
2022
$m
|
|
Free
surplus
|
Required
capital
|
Net
worth
|
Value of
in-force
business
|
Embedded
value
|
|
Embedded
value
|
|
|
|
|
|
note
(i)
|
|
note
(i)
|
Balance at beginning of year after adoption of HK
RBC
|
6,035
|
5,556
|
11,591
|
27,266
|
38,857
|
|
44,875
|
New business contribution
|
(733)
|
582
|
(151)
|
3,276
|
3,125
|
|
2,184
|
Existing business - transfer to net
worth
|
2,635
|
(261)
|
2,374
|
(2,374)
|
-
|
|
-
|
Expected return on existing business
note (ii)
|
234
|
236
|
470
|
1,652
|
2,122
|
|
2,559
|
Changes in operating assumptions,
experience variances and other items
note(iii)
|
(383)
|
(70)
|
(453)
|
110
|
(343)
|
|
(201)
|
Operating profit before
restructuring and IFRS 17 implementation costs
|
1,753
|
487
|
2,240
|
2,664
|
4,904
|
|
4,542
|
Restructuring and IFRS 17
implementation costs
|
(55)
|
-
|
(55)
|
-
|
(55)
|
|
(116)
|
Operating profit
|
1,698
|
487
|
2,185
|
2,664
|
4,849
|
|
4,426
|
Non-operating result note
(iv)
|
(188)
|
(36)
|
(224)
|
(427)
|
(651)
|
|
(8,469)
|
Profit (loss) for the year
|
1,510
|
451
|
1,961
|
2,237
|
4,198
|
|
(4,043)
|
Non-controlling interests share of
(profit) loss
|
(2)
|
(1)
|
(3)
|
(10)
|
(13)
|
|
(22)
|
Profit (loss) for the year attributable to equity holders of
the Company
|
1,508
|
450
|
1,958
|
2,227
|
4,185
|
|
(4,065)
|
Foreign exchange
movements
|
(21)
|
(22)
|
(43)
|
(93)
|
(136)
|
|
(1,146)
|
Intra-group dividends and investment
in operations
|
(1,502)
|
-
|
(1,502)
|
-
|
(1,502)
|
|
(999)
|
Other movements note
(v)
|
124
|
-
|
124
|
-
|
124
|
|
192
|
Balance at end of year
|
6,144
|
5,984
|
12,128
|
29,400
|
41,528
|
|
38,857
|
(i) Total embedded value
The total embedded value for
long-term business operations at the end of each year, excluding
goodwill attributable to equity holders, can be analysed as
follows:
|
31 Dec 2023
$m
|
31 Dec
2022 $m
|
Value of in-force business before
deduction of cost of capital and time value of options and
guarantees
|
30,436
|
28,126
|
Cost of capital
|
(746)
|
(709)
|
Time value of options and guarantees
note
|
(290)
|
(151)
|
Net
value of in-force business
|
29,400
|
27,266
|
Free surplus
|
6,144
|
6,035
|
Required capital
|
5,984
|
5,556
|
Net
worth
|
12,128
|
11,591
|
Embedded value
|
41,528
|
38,857
|
Note
The time value of options and
guarantees (TVOG) arises from the variability of economic outcomes
in the future and is, where appropriate, calculated as the
difference between an average outcome across a range of economic
scenarios, calibrated around a central scenario, and the outcome
from the central economic scenario, as described in note 7.1(d). At
31 December 2023, the TVOG is $(290) million, with the substantial
majority arising in Hong Kong.
(ii) Expected return on existing
business
The expected return on existing
business comprises the expected unwind of discounting effects on
the opening value of in-force business and required capital (after
allowing for updates to economic and operating assumptions) and the
expected return on existing free surplus, as described in note
7.2(c). The movement in this amount compared to the prior year from
long-term operations is analysed as follows:
|
$m
|
2022 expected return on existing
business
|
2,559
|
Foreign exchange movement
|
(28)
|
Effect of changes in interest rates
and other economic assumptions
|
(513)
|
Growth in opening value of in-force
business and other items
|
104
|
2023 expected return on existing
business
|
2,122
|
(iii) Changes in operating assumptions, experience variances
and other items
Overall, the total impact of
operating assumption changes, experience variances and other items
in 2023 was $(343) million (2022: $(201) million), comprising
changes in operating assumptions of $85 million in 2023 (2022: $32
million) and experience variances and other items of $(428) million
(2022: $(233) million).
(iv) Non-operating results
The EEV non-operating result from
long-term operations can be summarised as follows:
|
2023
$m
|
2022
$m
|
Short-term fluctuations in
investment returns note (i)
|
(62)
|
(6,893)
|
Effect of change in economic
assumptions note(ii)
|
(589)
|
(1,571)
|
Loss attaching to corporate
transactions
|
-
|
(5)
|
Non-operating results
|
(651)
|
(8,469)
|
Notes
(i) Short-term
fluctuations in investment returns of $(62) million mainly reflect
the impact of lower than expected equity returns in some regions
broadly offset by higher than expected bond gains, following the
decrease in interest rates in many markets during the
year.
(ii) The charge of $(589)
million for the effect of changes in economic assumptions primarily
arises from decreases in interest rates and credit spreads in some
markets, resulting in lower fund earned rate that impact future
cashflows, partially offset by the positive effect of lower risk
discount rates. The effects and impacts vary between businesses and
products.
(v) Other reserve movements
Other movements include reserve
movements in respect of intra-group loans and other intra-group
transfers between operations that have no overall effect on the
Group's shareholders' equity.
3
Sensitivity of results for insurance business
operations
(a) Sensitivity analysis - economic
assumptions
The tables below show the
sensitivity of the new business profit and the embedded value for
insurance business operations to:
- 1 per cent and 2 per cent increases in interest rates and 0.5
per cent decrease in interest rates. This allows for consequential
changes in the assumed investment returns for all asset classes,
market values of fixed interest assets, local statutory reserves,
capital requirements and risk discount rates (but excludes changes
in the allowance for market risk);
- 1 per cent rise in equity and property yields;
- 1 per cent and 2 per cent increases in the risk discount
rates. The main driver for changes in the risk discount rates from
period to period is changes in interest rates, the impact of which
is expected to be partially offset by a corresponding change in
assumed investment returns, the effect of which is not included in
the risk discount rate sensitivities. The impact of higher
investment returns can be approximated as the difference between
the sensitivity to increases in interest rates and the sensitivity
to increases in risk discount rates;
- For embedded value only, 20 per cent fall in the market value
of equity and property assets; and
- For embedded value only, holding the group minimum capital
requirements (GMCR) under the GWS Framework in contrast to EEV
required capital based on the group prescribed capital requirements
(GPCR). This reduces the level of capital and therefore the level
of charge deducted from the embedded value for the cost of
locked-in required capital. This has the effect of increasing
EEV.
The sensitivities shown below are
for the impact of instantaneous and permanent changes (with no
trending or mean reversion) on the embedded value of long-term
business operations and include the combined effect on the value of
in-force business and net assets (including derivatives) held at
the valuation dates indicated. The results only allow for limited
management actions, such as changes to future policyholder bonuses,
where applicable. If such economic conditions persisted, the
financial impacts may differ to the instantaneous impacts shown
below. In this case, management could also take additional actions
to help mitigate the impact of these stresses. No change in the mix
of the asset portfolio held at the valuation date is assumed when
calculating sensitivities, while changes in the market value of
those assets are recognised. The sensitivity impacts are expected
to be non-linear. To aid understanding of this non-linearity,
impacts of both a 1 per cent and 2 per cent increase to interest
rates and risk discount rates are shown.
If the changes in assumptions shown
in the sensitivities were to occur, the effects shown below would
be recorded within two components of the profit analysis for the
following period, namely the effect of changes in economic
assumptions and short-term fluctuations in investment returns. In
addition to the sensitivity effects shown below, the other
components of the profit for the following period would be
calculated by reference to the altered assumptions at the end of
that period, for example, new business profit and expected return
on existing business are calculated with reference to end of period
economic assumptions.
New
business profit from insurance business
|
2023
$m
|
2022
$m
|
New
business profit
|
3,125
|
2,184
|
Sensitivity to alternative economic
assumptions:
|
|
|
Interest rates and consequential
effects - 2% increase
|
(175)
|
220
|
Interest rates and consequential
effects - 1% increase
|
(88)
|
134
|
Interest rates and consequential
effects - 0.5% decrease
|
35
|
(97)
|
Equity/property yields - 1%
rise
|
139
|
160
|
Risk discount rates - 2%
increase
|
(917)
|
(551)
|
Risk discount rates - 1%
increase
|
(529)
|
(309)
|
Embedded value of insurance business
|
31 Dec 2023
$m
|
31
Dec 2022 $m
|
Embedded value note
|
41,528
|
38,857
|
Sensitivity to alternative economic
assumptions:
|
|
|
Interest rates and consequential
effects - 2% increase
|
(4,154)
|
(3,988)
|
Interest rates and consequential
effects - 1% increase
|
(2,172)
|
(2,067)
|
Interest rates and consequential
effects - 0.5% decrease
|
1,133
|
1,058
|
Equity/property yields - 1%
rise
|
1,856
|
1,884
|
Equity/property market values - 20%
fall
|
(1,863)
|
(1,840)
|
Risk discount rates - 2%
increase
|
(8,015)
|
(7,371)
|
Risk discount rates - 1%
increase
|
(4,516)
|
(4,155)
|
Group minimum capital
requirements
|
117
|
117
|
Note
Embedded value includes Africa
operations following the change in the Group's operating segments
in 2023. In the context of the Group, Africa's results are not
materially impacted by the above sensitivities.
New business sensitivities vary with
changes in business mix and APE sales volumes. In particular, the
directional movements in the new business profit interest rate
sensitivities from 31 December 2022 to 31 December 2023 reflect the
significantly higher new business levels in 2023 along with a
greater proportion of sales to Hong Kong.
For a 1 per cent increase in assumed
interest rates, the $(2,172) million negative effect comprises a
$(4,516) million negative impact of increasing the risk discount
rate by 1 per cent, partially offset by a $2,344 million benefit
from assuming 1 per cent higher investment returns. Similarly, for
a 2 per cent increase in assumed interest rates the $(4,154)
million negative effect comprises a $(8,015) million negative
impact of increasing the risk discount rates by 2 per cent,
partially offset by a $3,861 million benefit from higher assumed
investment returns. Finally, for a 0.5 per cent decrease in assumed
interest rates, there would be a $1,133 million positive effect
reflecting the benefit of a 0.5 per cent reduction in risk discount
rates being partially offset by lower assumed investment returns.
These offsetting impacts are sensitive to economics and the net
impact can therefore change from period to period depending on the
current level of interest rates.
In order to illustrate the impact of
varying specific economic assumptions, all other assumptions are
held constant in the sensitivities above and therefore, the actual
changes in embedded value, were these economic effects to
materialise, may differ from the sensitivities shown. For example,
market risk allowances would likely be increased within the risk
discount rate if interest rates increased by 1 per cent, leading to
a reduction of $(1,969) million (compared with the $(2,172) million
impact shown above). However, if interest rates actually decreased
by 0.5 per cent, it would lead to a $1,043 million increase
(compared with the $1,133 million increase shown above).
(b) Sensitivity analysis - non-economic
assumptions
The tables below show the
sensitivity of the new business profit and the embedded value for
long-term business operations to:
- 10 per cent proportionate decrease in maintenance expenses
(for example, a 10 per cent sensitivity on a base assumption of $10
per annum would represent an expense assumption of $9 per
annum);
- 10 per cent proportionate decrease in lapse rates (for
example, a 10 per cent sensitivity on a base assumption of 5.0 per
cent would represent a lapse rate of 4.5 per cent per annum);
and
- 5 per cent proportionate decrease in base mortality (ie
increased longevity) and morbidity rates.
New
business profit from insurance business
|
2023
$m
|
2022
$m
|
New
business profit
|
3,125
|
2,184
|
Maintenance expenses - 10%
decrease
|
61
|
48
|
Lapse rates - 10%
decrease
|
212
|
134
|
Mortality and morbidity - 5%
decrease
|
114
|
99
|
Embedded value of insurance business
|
|
|
|
31 Dec 2023
$m
|
31
Dec 2022 $m
|
Embedded value
|
41,528
|
38,857
|
Maintenance expenses - 10%
decrease
|
440
|
411
|
Lapse rates - 10%
decrease
|
1,806
|
1,533
|
Mortality and morbidity - 5%
decrease
|
1,514
|
1,300
|
4
Expected transfer of value of in-force business and required
capital to free surplus for long-term business operations on a
discounted basis
The table below shows how the value
of in-force business (VIF) and the associated required capital for
long-term business operations are projected as emerging into free
surplus over future years. Cash flows are projected on a
deterministic basis and are discounted at the appropriate risk
discount rate. The modelled cash flows use the same methodology
underpinning the Group's EEV reporting and so are subject to the
same assumptions and sensitivities. The projected emergence of VIF
and required capital into free surplus in 2023 will be the starting
point for expected free surplus generation next year, after
updating for operating and economic assumption changes. See note
I(v) of the additional financial information for further
detail.
|
Total
expected
|
Expected
period of conversion of future post-tax distributable earnings and
required capital flows to free surplus at 31 Dec
|
|
Emergence
|
1-5
years
|
6-10
years
|
11-15
years
|
16-20
years
|
21-40
years
|
40+
years
|
2023 ($m)
|
35,223
|
9,897
|
6,744
|
4,884
|
3,749
|
7,590
|
2,359
|
(%)
|
100%
|
28%
|
19%
|
14%
|
11%
|
21%
|
7%
|
|
|
|
|
|
|
|
|
2022 ($m)
|
32,648
|
9,764
|
6,038
|
4,360
|
3,424
|
6,910
|
2,152
|
(%)
|
100%
|
30%
|
19%
|
13%
|
10%
|
21%
|
7%
|
The required capital and value of
in-force business for long-term business operations can be
reconciled to the total discounted emergence of future free surplus
shown above as follows:
|
31 Dec 2023
$m
|
31 Dec
2022 $m
|
Required capital note
2
|
5,984
|
5,556
|
Value of in-force business (VIF)
note 2
|
29,400
|
27,266
|
Other items *
|
(161)
|
(174)
|
Long-term business
operations
|
35,223
|
32,648
|
*'Other items' represent the impact
of the TVOG and amounts incorporated into VIF where there is no
definitive time frame for when the payments will be made or
receipts received. These items are excluded from the expected free
surplus generation profile above.
5
EEV basis results for other (central) operations
EEV results for other income and
expenditure represents the post-tax IFRS results for other
(central) operations (before restructuring and IFRS 17
implementation costs). It mainly includes interest costs on core
structural borrowings and corporate expenditure for head office
functions that are not recharged/allocated to the insurance and
asset management business.
Certain costs incurred within the
head office functions are recharged to the insurance operations and
recorded within the results for those operations. The assumed
future expenses within the value of in-force business for insurance
operations allow for amounts expected to be recharged by the head
office functions on a recurring basis. Other costs that are not
recharged to the insurance operations are shown as part of other
income and expenditure for the current period and are not included
within the projection of future expenses for in-force insurance
business.
In line with the EEV Principles, the
allowance for the future costs of internal asset management
services within the EEV results for long-term insurance operations
excludes the projected future profits generated by any
non-insurance entities within the Group in providing those services
(ie the EEV for long-term insurance operations includes the
projected future profit or loss from asset management and service
companies that support the Group's covered insurance businesses).
Following the implementation of IFRS 17, a similar adjustment is
made to eliminate the intra-group profit within the results of
central operations.
The EEV shareholders' equity for
other operations is taken to be IFRS shareholders' equity, with
central Group debt shown on a market value basis. Free surplus for
other operations is taken to be IFRS shareholders' equity, net of
goodwill attributable to equity holders, with central Group debt
recorded as free surplus to the extent that it is classified as
capital resources under the Group's capital regime. Under the GWS
Framework, debt instruments issued at the date of designation which
met the transitional conditions set by the Hong Kong IA are
included as GWS eligible group capital resources. In addition, debt
issued since the date of designation which met the qualifying
conditions as set out in the Insurance (Group Capital) Rules are
also included as GWS eligible group capital resources.
Shareholders' equity for other
operations can be compared across metrics as shown in the table
below.
|
2023
$m
|
2022
$m
|
IFRS shareholders' equity
|
2,018
|
1,495
|
Mark-to-market value adjustment on
central borrowings note 6
|
274
|
427
|
EEV
shareholders' equity
|
2,292
|
1,922
|
Debt instruments treated as capital
resources
|
3,356
|
3,629
|
Free surplus of other (central)
operations
|
5,648
|
5,551
|
6
Net core structural borrowings of shareholder-financed
businesses
|
31 Dec 2023
$m
|
|
31 Dec
2022 $m
|
|
IFRS
basis
|
Mark-to
-market
value
adjustment
|
EEV
basis at
market
value
|
|
IFRS
basis
|
Mark-to
-market
value
adjustment
|
EEV
basis
at
market
value
|
|
note
(ii)
|
note
(iii)
|
|
|
note
(ii)
|
note
(iii)
|
|
Holding company cash and short-term
investments note (i)
|
(3,516)
|
-
|
(3,516)
|
|
(3,057)
|
-
|
(3,057)
|
Central borrowings:
|
|
|
|
|
|
|
|
Subordinated debt
|
2,297
|
(205)
|
2,092
|
|
2,286
|
(306)
|
1,980
|
Senior debt
|
1,636
|
(69)
|
1,567
|
|
1,975
|
(121)
|
1,854
|
Total central borrowings
|
3,933
|
(274)
|
3,659
|
|
4,261
|
(427)
|
3,834
|
Net
core structural borrowings of shareholder-financed
businesses
|
417
|
(274)
|
143
|
|
1,204
|
(427)
|
777
|
Notes
(i) Holding company
includes centrally managed Group holding companies and service
companies.
(ii) As recorded in note C5.1
of the IFRS consolidated financial statements.
(iii) The movement in the value of
core structural borrowings includes redemptions in the year and
foreign exchange effects for pounds sterling denominated debts. The
movement in the mark-to-market value adjustment can be analysed as
follows:
|
2023 $m
|
2022
$m
|
Mark-to-market value adjustment at
beginning of year
|
(427)
|
438
|
Credit (charge) included in the
income statement
|
153
|
(865)
|
Mark-to-market value adjustment at
end of year
|
(274)
|
(427)
|
7
Methodology and accounting presentation
7.1
Methodology
(a) Covered business
The EEV basis results for the Group
are prepared for 'covered business' as defined by the EEV
Principles. Covered business represents the Group's long-term
insurance business (including the Group's investments in joint
venture and associate insurance operations), for which the value of
new and in-force contracts is attributable to
shareholders.
The EEV results for the Group's
covered business are then combined with the post-tax IFRS results
of the Group's asset management and other operations (including
interest costs on core structural borrowings and corporate
expenditure for head office functions that is not
recharged/allocated to the insurance operations), with an
adjustment to deduct the unwind of expected margins on the internal
management of the assets of the covered business. Under the EEV
Principles, the results for covered business incorporate the
projected margins of attaching internal asset management, as
described in note (g) below.
(b) Valuation of in-force and new
business
The EEV basis results are prepared
incorporating best estimate assumptions about all relevant factors
including levels of future investment returns, persistency,
mortality, morbidity and expenses, as described in note 8(c). These
assumptions are used to project future cash flows. The present
value of the projected future cash flows is then calculated using a
discount rate, as shown in note 8(a), which reflects both the time
value of money and all other non-diversifiable risks associated
with the cash flows that are not otherwise allowed for.
The total profit that emerges over
the lifetime of an individual contract as calculated under the EEV
basis is the same as that calculated under the IFRS basis. Since
the EEV basis reflects discounted future cash flows, under the EEV
methodology the profit emergence is advanced, thus more closely
aligning the timing of the recognition of profit with the efforts
and risks of current management actions, particularly with regard
to business sold during the period.
New
business
In determining the EEV basis value
of new business, premiums are included in projected cash flows on
the same basis of distinguishing regular and single premium
business as set out in the Group's new business sales
reporting.
New business premiums reflect those
premiums attaching to the covered business, including premiums for
contracts classified as investment contracts under IFRS 17. New
business premiums for regular premium products are shown on an
annualised basis.
New business profit represents
profit determined by applying operating and economic assumptions as
at the end of the period. New business profitability is a key
metric for the Group's management of the development of the
business. In addition, new business margins are shown by reference
to annual premium equivalent (APE) and the present value of new
business premiums (PVNBP). These margins are calculated as the
percentage of the value of new business profit to APE and PVNBP.
APE is calculated as the aggregate of regular premiums on new
business written in the period and one-tenth of single premiums.
PVNBP is calculated as the aggregate of single premiums and the
present value of expected future premiums from regular premium new
business, allowing for lapses and the other assumptions made in
determining the EEV new business profit.
(c) Cost of capital
A charge is deducted from the
embedded value for the cost of locked-in required capital
supporting the Group's long-term business. The cost is the
difference between the nominal value of the capital held and the
discounted value of the projected releases of this capital,
allowing for post-tax investment earnings on the
capital.
The EEV results are affected by the
movement in this cost from period to period, which comprises a
charge against new business profit and generally a release in
respect of the reduction in capital requirements for business in
force as this runs off.
Where required capital is held
within a with-profits long-term fund, the value placed on surplus
assets within the fund is already adjusted to reflect its expected
release over time and so no further adjustment to the shareholder
position is necessary.
(d) Financial options and guarantees
Nature of financial options and guarantees
Participating products, principally
written in the Chinese Mainland, Hong Kong, Malaysia, Singapore and
Taiwan, have both guaranteed and non-guaranteed elements. These
products provide returns to policyholders through bonuses that are
smoothed. There are two types of bonuses: regular and final.
Regular bonuses are declared once a year and, once credited, are
guaranteed in accordance with the terms of the particular products.
Final bonuses are guaranteed only until the next bonus
declaration.
There are also various
non-participating long-term products with guarantees. The principal
guarantees are those for whole-of-life contracts with floor levels
of policyholder benefits that typically accrue at rates set at
inception and do not vary subsequently with market conditions.
Similar to participating products, the policyholder charges
incorporate an allowance for the cost of providing these
guarantees, which, for certain whole-of-life products in Hong Kong,
remains constant throughout varying economic conditions, rather
than reducing as the economic environment improves and vice
versa.
Time value
The value of financial options and
guarantees comprises the intrinsic value (arising from a
deterministic valuation on best estimate assumptions) and the time
value (arising from the variability of economic outcomes in the
future).
Where appropriate (ie where
financial options and guarantees are explicitly valued under the
EEV methodology), a full stochastic valuation has been undertaken
to determine the time value of financial options and guarantees.
The economic assumptions used for the stochastic calculations are
consistent with those used for the deterministic calculations.
Assumptions specific to the stochastic calculations reflect local
market conditions and are based on a combination of actual market
data, historic market data and an assessment of long-term economic
conditions. Common principles have been adopted across the Group
for the stochastic asset models, such as separate modelling of
individual asset classes with an allowance for correlations between
various asset classes. Details of the key characteristics of each
model are given in note 8(b).
In deriving the time value of
financial options and guarantees, management actions in response to
emerging investment and fund solvency conditions have been
modelled. Management actions encompass, but are not confined to,
investment allocation decisions, levels of regular and final
bonuses and credited rates. Bonus rates are projected from current
levels and varied in accordance with assumed management actions
applying in the emerging investment and fund solvency conditions.
In all instances, the modelled actions are in accordance with
approved local practice and therefore reflect the options available
to management.
(e) Level of required capital and net
worth
In adopting the EEV Principles,
Prudential has based required capital on the applicable local
statutory regulations, including any amounts considered to be
required above the local statutory minimum requirements to satisfy
regulatory constraints.
For shareholder-backed businesses,
the level of required capital has been based on the
GPCR.
- For CPL, the level of required capital follows the approach
for embedded value reporting issued by the China Association of
Actuaries (CAA) reflecting the C-ROSS regime. The CAA has started a
project to assess whether any changes are required to the embedded
value guidance in the Chinese Mainland given changes in regulatory
rules, regulations and the external market environment since the
standard was first issued. To date, no outcomes have been proposed
by the CAA and Prudential has made no change to its EEV basis for
CPL in 2023. At such time that there is a new basis, Prudential
will consider the effect of proposals.
- For Hong Kong participating business, the HK RBC regime
recognises the value of future shareholder transfers on an economic
basis as available capital with an associated required capital.
Within EEV, the shareholder value of participating business
continues to be recognised as VIF with no recognition within free
surplus and no associated required capital.
- For Singapore life operations, the level of net worth and
required capital is based on the Tier 1 Capital position under the
risk-based capital framework (RBC2), which removes certain negative
reserves permitted to be recognised in the full RBC2 regulatory
position applicable to the Group's GWS capital position, in order
to better reflect free surplus and its generation.
Free surplus is the shareholders'
net worth in excess of required capital. For the Hong Kong
business, the HK RBC framework requires liabilities to be valued on
a best estimate basis and capital requirements to be risk based.
EEV free surplus excludes regulatory surplus that arises where HK
RBC technical provisions are lower than policyholder asset shares
or cash surrender values to more realistically reflect how the
business is managed.
(f) With-profits business and the treatment of the
estate
For the Group's relevant operations,
the proportion of surplus allocated to shareholders from the
with-profits funds has been based on the applicable profit
distribution between shareholders and policyholders. The EEV
methodology includes the value attributed to the shareholders'
interest in the residual estate of the in-force with-profits
business. In any scenarios where the total assets of the life fund
are insufficient to meet policyholder claims in full, the excess
cost is fully attributed to shareholders. As required, adjustments
are also made to reflect any capital requirements for with-profits
business in excess of the capital resources of the with-profits
funds.
(g) Internal asset management
In line with the EEV Principles, the
long-term business EEV includes the projected future profit from
asset management and service companies that support the Group's
covered insurance businesses. The results of the Group's asset
management operations include the current period profit from the
management of both internal and external funds. EEV basis
shareholders' other income and expenditure is adjusted to deduct
the expected profit anticipated to arise in the current period in
the opening VIF from internal asset management and other services.
This deduction is on a basis consistent with that used for
projecting the results for covered insurance business. Accordingly,
Group operating profit includes the actual profit earned in respect
of the management of these assets.
(h) Allowance for risk and risk discount
rates
Overview
Under the EEV Principles, discount
rates used to determine the present value of expected future cash
flows are set by reference to risk-free rates plus a risk
margin.
The risk-free rates are largely
based on local government bond yields at the valuation date and are
assumed to remain constant and do not revert to longer-term rates
over time.
The risk margin reflects any
non-diversifiable risk associated with the emergence of
distributable earnings that is not allowed for elsewhere in the
valuation. In order to better reflect differences in relative
market risk volatility inherent in each product group, Prudential
sets the risk discount rates to reflect the expected volatility
associated with the expected future shareholder cash flows for each
product group in the embedded value model, rather than at a Group
level.
Where financial options and
guarantees are explicitly valued under the EEV methodology, risk
discount rates exclude the effect of these product
features.
The risk margin represents the
aggregate of the allowance for market risk and allowance for
non-diversifiable non-market risk. No allowance is required for
non-market risks where these are assumed to be fully
diversifiable.
Market risk
allowance
The allowance for market risk
represents the beta multiplied by the equity risk
premium.
The beta of a portfolio or product
measures its relative market risk. The risk discount rates reflect
the market risk inherent in each product group and hence the
volatility of product-specific cash flows. These are determined by
considering how the profit from each product is affected by changes
in expected returns across asset classes. By converting this into a
relative rate of return, it is possible to derive a
product-specific beta. This approach contrasts with a top-down
approach to market risk where the risks associated with each
product are not directly reflected in the valuation
basis.
The Group's methodology allows for
credit risk in determining the best estimate returns and through
the market risk allowance, which covers expected long-term
defaults, a credit risk premium (to reflect the volatility in
downgrade and default levels) and short-term downgrades and
defaults.
Allowance for
non-diversifiable non-market risks
The majority of non-market and
non-credit risks are considered to be diversifiable. The allowance
for non-market risk comprises a base Group-wide allowance of 50
basis points plus additional allowances for emerging market risk
where appropriate. The level and application of these allowances
are reviewed and updated based on assessment of the Group's
exposure and experience in the markets.
At 31 December 2023, the total
allowance for non-diversifiable non-market risk is equivalent to a
$(3.0) billion, or (7) per cent, reduction to the embedded value of
insurance business operations.
(i) Foreign currency translation
Foreign currency profits and losses
have been translated at average exchange rates for the period.
Foreign currency transactions are translated at the spot rate
prevailing at the date of the transactions. Foreign currency assets
and liabilities have been translated at closing exchange rates. The
principal exchange rates are shown in note A1 of the Group IFRS
financial statements.
(j) Taxation
In determining the post-tax profit
for the period for covered business, the overall tax rate includes
the impact of tax effects determined on a local regulatory basis.
Tax payments and receipts included in the projected future cash
flows to determine the value of in-force business are calculated
using tax rates that have been announced and substantively enacted
by the end of the reporting period.
7.2
Accounting presentation
(a) Analysis of post-tax profit
To the extent applicable, the
presentation of the EEV profit or loss for the period is consistent
with the classification between operating and non-operating results
that the Group applies for the analysis of IFRS results. Operating
results are determined as described in note (b) below and
incorporate the following:
- New business profit, as defined in note 7.1(b)
above;
- Expected return on existing business, as described in note (c)
below;
- The impact of routine changes of estimates relating to
operating assumptions, as described in note (d) below;
and
- Operating experience variances, as described in note (e)
below.
In addition, operating results
include the effect of changes in tax legislation, unless these
changes are one-off and structural in nature, or primarily affect
the level of projected investment returns, in which case they are
reflected as a non-operating result.
Non-operating results
comprise:
- Short-term fluctuations in investment returns;
- Mark-to-market value movements on core structural
borrowings;
- Effect of changes in economic assumptions; and
- The impact of corporate transactions, if any, undertaken in
the year.
Total profit or loss in the period
attributable to shareholders and basic earnings per share include
these items, together with actual investment returns. The Group
believes that operating profit, as adjusted for these items, better
reflects underlying performance.
(b) Investment returns included in operating
profit
For the investment element of the
assets covering the total net worth of long-term insurance
business, investment returns are recognised in operating results at
the expected long-term rates of return. These expected returns are
calculated by reference to the asset mix of the
portfolio.
(c) Expected return on existing
business
Expected return on existing business
comprises the expected unwind of discounting effects on the opening
value of in-force business and required capital and the expected
return on existing free surplus. The unwind of discount and the
expected return on existing free surplus are determined after
adjusting for the effect of changes in economic and operating
assumptions in the current period on the embedded value at the
beginning of the period, for example, the unwind of discount on the
value of in-force business and required capital is determined after
adjusting both the opening value and the risk discount rates for
the effect of changes in economic and operating assumptions in the
current period.
(d) Effect of changes in operating
assumptions
Operating profit includes the effect
of changes to operating assumptions on the value of in-force
business at the end of the reporting period. For presentational
purposes the effect of changes is delineated to show the effect on
the opening value of in-force business as operating assumption
changes, with the experience variances subsequently being
determined by reference to the assumptions at the end of the
reporting period, as discussed below.
(e) Operating experience variances
Operating profit includes the effect
of experience variances on operating assumptions, such as
persistency, mortality, morbidity, expenses and other factors,
which are calculated with reference to the assumptions at the end
of the reporting period.
(f) Effect of changes in economic
assumptions
Movements in the value of in-force
business at the beginning of the period caused by changes in
economic assumptions, net of the related changes in the time value
of financial options and guarantees, are recorded in non-operating
results.
8
Assumptions
(a) Principal economic assumptions
The EEV results for the Group's
covered business are determined using economic assumptions where
both the risk discount rates and long-term expected rates of return
on investments are set with reference to risk-free rates of return
at the end of the reporting period. Both the risk discount rate and
expected rates of return are updated at each valuation date to
reflect current market risk-free rates, with the effect that
changes in market risk-free rates impact projected future cash
flows. The risk-free rates of return are largely based on local
government bond yields and are assumed to remain constant and do
not revert to longer-term rates over time. The risk-free rates of
return are shown below for each of the Group's insurance
operations. Expected returns on equity and property assets and
corporate bonds are derived by adding a risk premium to the
risk-free rate based on the Group's long-term view and, where
relevant, allowing for market volatility.
As described in note 7.1(h), risk
discount rates are set equal to the risk-free rate at the valuation
date plus allowances for market risk and non-diversifiable
non-market risks appropriate to the features and risks of the
underlying products and markets.
Risks that are explicitly allowed
for elsewhere in the EEV basis, such as via the cost of capital and
the time value of options and guarantees, as set out in note 2(i),
are not included in the risk discount rates.
|
Risk
discount rate %
|
|
10-year
government bond yield %
|
|
Equity
return
(geometric) %
|
|
New
business
|
|
In-force
business
|
|
|
|
31 Dec
|
31
Dec
|
|
31 Dec
|
31
Dec
|
|
31 Dec
|
31
Dec
|
|
31 Dec
|
31
Dec
|
|
2023
|
2022
|
|
2023
|
2022
|
|
2023
|
2022
|
|
2023
|
2022
|
CPL
|
7.1
|
7.4
|
|
7.1
|
7.4
|
|
2.6
|
2.9
|
|
6.6
|
6.9
|
Hong Kong note
(i)
|
4.7
|
4.8
|
|
5.5
|
5.5
|
|
3.9
|
3.9
|
|
7.4
|
7.4
|
Indonesia
|
9.0
|
10.0
|
|
9.9
|
10.6
|
|
6.7
|
7.3
|
|
11.0
|
11.5
|
Malaysia
|
5.6
|
5.8
|
|
6.2
|
6.5
|
|
3.8
|
4.1
|
|
7.3
|
7.6
|
Philippines
|
12.3
|
14.5
|
|
12.3
|
14.5
|
|
6.1
|
7.3
|
|
10.3
|
11.5
|
Singapore
|
4.6
|
5.0
|
|
4.8
|
5.2
|
|
2.7
|
3.1
|
|
6.2
|
6.6
|
Taiwan
|
3.3
|
3.5
|
|
4.2
|
4.0
|
|
1.3
|
1.3
|
|
5.3
|
5.3
|
Thailand
|
10.0
|
10.0
|
|
10.0
|
10.0
|
|
2.8
|
2.7
|
|
7.0
|
7.0
|
Vietnam
|
3.7
|
6.9
|
|
4.1
|
6.7
|
|
2.3
|
5.0
|
|
6.6
|
9.3
|
Total weighted average (new
business)note (ii)
|
5.6
|
6.9
|
|
n/a
|
n/a
|
|
3.8
|
4.2
|
|
7.2
|
7.5
|
Total weighted average (in-force
business) note (ii)
|
n/a
|
n/a
|
|
5.9
|
6.4
|
|
3.6
|
4.0
|
|
7.1
|
7.6
|
Notes
(i) For Hong Kong, the
assumptions shown are for US dollar denominated business. For other
businesses, the assumptions shown are for local currency
denominated business.
(ii) Total weighted average
assumptions have been determined by weighting each business's
assumptions by reference to the EEV basis new business profit and
the closing net value of in-force business. The changes in the risk
discount rates for individual businesses reflect the movements in
the local government bond yields, changes in the allowances for
market risk (including as a result of changes in asset mix), and,
if applicable, non-diversifiable non-market risk, and changes in
product mix.
(iii) Expected long-term
inflation assumptions range from 1.5 per cent to 5.5 per cent for
both years shown above.
(b) Stochastic assumptions
Details are given below of the key
characteristics of the models used to determine the time value of
financial options and guarantees as referred to in note
7.1(d).
- The stochastic cost of guarantees is primarily of significance
for the Hong Kong, Vietnam, Taiwan, Singapore and Malaysia
businesses;
- The principal asset classes are government bonds, corporate
bonds and equity;
- Interest rates are projected using a stochastic interest rate
model calibrated to the current market yields;
- Equity returns are assumed to follow a log-normal
distribution;
- The corporate bond return is calculated based on a risk-free
return plus a mean-reverting spread;
- The volatility of equity returns ranges from 17 per cent to 35
per cent for both years; and
- The volatility of government bond yields ranges from 1.1 per
cent to 2.0 per cent for both years.
(c) Operating assumptions
Best estimate assumptions are used
for projecting future cash flows, where best estimate is defined as
the mean of the distribution of future possible outcomes. The
assumptions are reviewed actively and changes are made when
evidence exists that material changes in future experience are
reasonably certain. Where experience is expected to be adverse over
the short term, a provision may be established.
Assumptions required in the
calculation of the time value of financial options and guarantees,
for example relating to volatilities and correlations, or dynamic
algorithms linking liabilities to assets, have been set equal to
the best estimates and, wherever material and practical, reflect
any dynamic relationships between the assumptions and the
stochastic variables.
Demographic assumptions
Persistency, mortality and morbidity
assumptions are based on an analysis of recent experience, and
reflect expected future experience. When projecting future cash
flows for medical reimbursement business that is repriced annually,
explicit allowance is made for expected future premium inflation
and separately for future medical claims inflation.
Expense assumptions
Expense levels, including those of
the service companies that support the Group's long-term business,
are based on internal expense analysis and are appropriately
allocated to acquisition of new business and renewal of in-force
business. For mature business, it is Prudential's policy not to
take credit for future cost reduction programmes until the actions
to achieve the savings have been delivered. Expense overruns are
reported where these are expected to be short-lived, including
businesses that are growing rapidly or are sub-scale.
Expenses comprise costs borne
directly and costs recharged/allocated from the Group head office
functions in London and Hong Kong that are attributable to the
long-term insurance (covered) business. The assumed future expenses
for the long-term insurance business allow for amounts expected to
be recharged/allocated by the head office functions.
Corporate expenditure, which is
included in other income and expenditure, comprises expenditure of
the Group head office functions in London and Hong Kong that is not
recharged/allocated to the long-term insurance or asset management
operations, primarily for corporate related activities that are
charged as incurred, together with restructuring and IFRS 17
implementation costs incurred across the Group.
Tax
rates
The assumed long-term effective tax
rates for operations reflect the expected incidence of taxable
profit or loss in the projected future cash flows as explained in
note 7.1(j). The local standard corporate tax rates applicable are
as follows:
|
%
|
CPL
|
25.0
|
Hong Kong
|
16.5% on
5% of premium income
|
Indonesia
|
22.0
|
Malaysia
|
24.0
|
Philippines
|
25.0
|
Singapore
|
17.0
|
Taiwan
|
20.0
|
Thailand
|
20.0
|
Vietnam
|
20.0
|
9
Insurance new business
|
Single
premiums
|
|
Regular
premiums
|
|
Annual
premium equivalents (APE)
|
|
Present
value of new business premiums (PVNBP)
|
|
2023 $m
|
2022
$m
|
|
2023 $m
|
2022
$m
|
|
2023 $m
|
2022
$m
|
|
2023 $m
|
2022
$m
|
CPL note (i)
|
487
|
1,254
|
|
485
|
759
|
|
534
|
884
|
|
2,020
|
3,521
|
Hong Kong
|
235
|
842
|
|
1,942
|
438
|
|
1,966
|
522
|
|
10,444
|
3,295
|
Indonesia
|
230
|
250
|
|
254
|
222
|
|
277
|
247
|
|
1,136
|
1,040
|
Malaysia
|
93
|
99
|
|
375
|
350
|
|
384
|
359
|
|
1,977
|
1,879
|
Singapore
|
989
|
2,628
|
|
688
|
507
|
|
787
|
770
|
|
5,354
|
6,091
|
Growth markets:
|
|
|
|
|
|
|
|
|
|
|
|
Africa
|
8
|
9
|
|
157
|
148
|
|
158
|
149
|
|
326
|
308
|
Cambodia
|
1
|
-
|
|
18
|
18
|
|
18
|
18
|
|
74
|
69
|
India note
(ii)
|
270
|
273
|
|
206
|
196
|
|
233
|
223
|
|
1,145
|
1,148
|
Laos
|
-
|
-
|
|
-
|
-
|
|
-
|
-
|
|
2
|
1
|
Myanmar
|
-
|
-
|
|
6
|
3
|
|
6
|
3
|
|
19
|
6
|
Philippines
|
56
|
61
|
|
170
|
176
|
|
175
|
182
|
|
612
|
615
|
Taiwan
|
132
|
157
|
|
882
|
486
|
|
895
|
503
|
|
3,308
|
1,835
|
Thailand
|
143
|
150
|
|
232
|
220
|
|
246
|
235
|
|
999
|
932
|
Vietnam
|
19
|
99
|
|
195
|
288
|
|
197
|
298
|
|
1,321
|
1,666
|
Total
|
2,663
|
5,822
|
|
5,610
|
3,811
|
|
5,876
|
4,393
|
|
28,737
|
22,406
|
Notes
(i) New business in CPL
is included at Prudential's 50 per cent interest in the joint
venture.
(ii) New business in India is
included at Prudential's 22 per cent interest in the
associate.
(iii) The table above is provided as
an indicative volume measure of transactions undertaken in the
reporting period that have the potential to generate profit for
shareholders. The amounts shown are not, and not intended to be,
reflective of revenue recorded in the IFRS consolidated income
statement.
10
Post balance sheet events
Dividends
The second interim dividend for the
year ended 31 December 2023, which was approved by the Board
of Directors after 31 December 2023, is described in note B5
of the Group IFRS consolidated financial statements.
Share repurchase programme to neutralise 2023 employee and
agent share scheme issuance
On
16 January 2024, the Company announced that the share repurchase
programme in respect of 3,851,376 ordinary shares that it announced
on 5 January 2024 and commenced on 8 January has been completed.
The purpose of the share repurchase programme was to offset
dilution from the vesting of awards under employee and agent share
schemes during 2023. The Company has repurchased 3,851,376 ordinary
shares in aggregate (representing 0.14 per cent of the total number
of ordinary shares in issue at the end of the year (as disclosed in
note C8)) at a volume weighted average price of £8.2676 per
ordinary share for a total consideration of approximately £32
million.