TIDMPRU
RNS Number : 9412Q
Prudential PLC
03 March 2021
CONSOLIDATED INCOME STATEMENT
Note 2020 $m 2019 $m
------------------------------------------------------------------------------------- ----- -------- --------
Continuing operations:
Gross premiums earned 42,521 45,064
Outward reinsurance premiums (32,209) (1,583)
--------------------------------------------------------------------------------------- ----- -------- --------
Earned premiums, net of reinsurance 10,312 43,481
Investment return 44,991 49,555
Other income 670 700
--------------------------------------------------------------------------------------- ----- -------- --------
Total revenue, net of reinsurance 55,973 93,736
--------------------------------------------------------------------------------------- ----- -------- --------
Benefits and claims (82,176) (85,475)
Reinsurers' share of benefits and claims 34,409 2,985
Movement in unallocated surplus of with-profits funds (438) (1,415)
--------------------------------------------------------------------------------------- ----- -------- --------
Benefits and claims and movement in unallocated surplus of with-profits funds, net of
reinsurance (48,205) (83,905)
Acquisition costs and other expenditure B2 (5,481) (7,283)
Finance costs: interest on core structural borrowings of shareholder-financed
businesses (337) (516)
Loss attaching to corporate transactions D1.1 (48) (142)
--------------------------------------------------------------------------------------- ----- -------- --------
Total charges net of reinsurance (54,071) (91,846)
--------------------------------------------------------------------------------------- ----- -------- --------
Share of profit from joint ventures and associates, net of related tax 517 397
--------------------------------------------------------------------------------------- ----- -------- --------
Profit before tax (being tax attributable to shareholders' and policyholders' returns)
(note) 2,419 2,287
Remove tax charge attributable to policyholders' returns (271) (365)
--------------------------------------------------------------------------------------- ----- -------- --------
Profit before tax attributable to shareholders' returns B1.1 2,148 1,922
-------- --------
Total tax charge attributable to shareholders' and policyholders' returns B3.1 (234) (334)
Remove tax charge attributable to policyholders' returns 271 365
-------- --------
Tax credit attributable to shareholders' returns B3.1 37 31
--------------------------------------------------------------------------------------- ----- -------- --------
Profit from continuing operations 2,185 1,953
Loss from discontinued UK and Europe operations - (1,161)
--------------------------------------------------------------------------------------- ----- -------- --------
Profit for the year 2,185 792
--------------------------------------------------------------------------------------- ----- -------- --------
Attributable to:
Equity holders of the Company
From continuing operations 2,118 1,944
From discontinued operations - (1,161)
Non-controlling interests from continuing operations 67 9
--------------------------------------------------------------------------------------- ----- -------- --------
Profit for the year 2,185 792
--------------------------------------------------------------------------------------- ----- -------- --------
Earnings per share (in cents) Note 2020 2019
----------------------------------------------------------------- ----- ----- -------
Based on profit attributable to equity holders of the Company: B4
Basic
Based on profit from continuing operations 81.6c 75.1c
Based on loss from discontinued operations - (44.8)c
---------------------------------------------------------------------- ----- -------
Total 81.6c 30.3c
Diluted
Based on profit from continuing operations 81.6c 75.1c
Based on loss from discontinued operations - (44.8)c
---------------------------------------------------------------------- ----- -------
Total 81.6c 30.3c
---------------------------------------------------------------- ----- ----- -------
Dividends per share (in cents) Note 2020 2019
------------------------------------------------- ----- ------ ------
Dividends relating to reporting year: B5
First interim ordinary dividend 5.37c 20.29c
Second interim ordinary dividend 10.73c 25.97c
Total 16.10c 46.26c
------------------------------------------------- ----- ------ ------
Dividends paid in reporting year: B5
Current year first interim ordinary dividend 5.37c 20.29c
Second interim ordinary dividend for prior year 25.97c 42.89c
Total 31.34c 63.18c
------------------------------------------------- ----- ------ ------
Note
This measure is the formal profit before tax measure under IFRS
Standards. It is not the result attributable to shareholders
principally because total corporate tax of the Group includes those
on the income of consolidated with-profits and unit-linked funds
that, through adjustments to benefits, are borne by policyholders.
These amounts are required to be included in the tax charge of the
Company under IAS 12. Consequently, the IFRS profit before tax
measure is not representative of pre-tax profit attributable to
shareholders as it is determined after deducting the cost of
policyholder benefits and movements in the liability for
unallocated surplus of with-profits funds after adjusting for tax
borne by policyholders.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Note 2020 $m 2019 $m
------------------------------------------------------------------------------------- ----- ------- -------
Continuing operations:
Profit for the year 2,185 1,953
Other comprehensive income (loss):
Items that may be reclassified subsequently to profit or loss
Exchange movements on foreign operations and net investment hedges:
Exchange movements arising during the year 233 152
Related tax - (15)
-------------------------------------------------------------------------------------- ----- ------- -------
233 137
------------------------------------------------------------------------------------------- ------- -------
Valuation movements on available-for-sale debt securities:
Unrealised gains arising in the year:
------- -------
Net unrealised gains on holdings arising during the year 3,271 4,208
Deduct net gains included in the income statement on disposal and impairment (554) (185)
------- -------
2,717 4,023
Related change in amortisation of deferred acquisition costs C4.2 (41) (631)
Related tax (581) (713)
-------------------------------------------------------------------------------------- ----- ------- -------
2,095 2,679
------------------------------------------------------------------------------------------- ------- -------
Impact of Jackson's reinsurance transaction with Athene:
------- -------
Gains recycled to the income statement on transfer of debt securities to Athene (2,817) -
Related change in amortisation of deferred acquisition costs C4.2 535 -
Related tax 479 -
------- -------
(1,803) -
------------------------------------------------------------------------------------------- ------- -------
Total valuation movements on available -for-sale debt securities 292 2,679
--------------------------------------------------------------------------------------- ----- ------- -------
Total items that may be reclassified subsequently to profit or loss 525 2,816
--------------------------------------------------------------------------------------- ----- ------- -------
Items that will not be reclassified to profit or loss
Shareholders' share of actuarial gains and losses on defined benefit pension schemes:
------- -------
Net actuarial losses on defined benefit pension schemes - (108)
Related tax - 19
------- -------
Total items that will not be reclassified to profit or loss - (89)
--------------------------------------------------------------------------------------- ----- ------- -------
Total other comprehensive income 525 2,727
--------------------------------------------------------------------------------------- ----- ------- -------
Total comprehensive income for the year from continuing operations 2,710 4,680
--------------------------------------------------------------------------------------- ----- ------- -------
Total comprehensive income from discontinued UK and Europe operations - 1,710
--------------------------------------------------------------------------------------- ----- ------- -------
Total comprehensive income for the year 2,710 6,390
--------------------------------------------------------------------------------------- ----- ------- -------
Attributable to:
Equity holders of the Company
From continuing operations 2,657 4,669
From discontinued operations - 1,710
Non-controlling interests from continuing operations 53 11
--------------------------------------------------------------------------------------- ----- ------- -------
Total comprehensive income for the year 2,710 6,390
--------------------------------------------------------------------------------------- ----- ------- -------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Year ended 31 Dec 2020 $m
------------------------------------------------------------------------------------------
Available
-for-sale Non-
Share Share Retained Translation securities Shareholders' controlling Total
Note capital premium earnings reserve reserves equity interests equity
----------------- ----- -------- -------- -------- ----------- ---------- ------------- ----------- -------
Reserves
Profit for the
year - - 2,118 - - 2,118 67 2,185
Other
comprehensive
income (loss)
Exchange movements on
foreign operations and
net investment hedges
net of related tax - - - 239 - 239 (6) 233
Net unrealised
valuation movements
net of related change
in amortisation of
deferred acquisition
costs and related tax - - - - 300 300 (8) 292
----------------------- -------- -------- -------- ----------- ---------- ------------- ----------- -------
Total other
comprehensive
income for the
year - - 2,118 239 300 2,657 53 2,710
----------------- ----- -------- -------- -------- ----------- ---------- ------------- ----------- -------
Dividends B5 - - (814) - - (814) (18) (832)
Reserve movements
in respect of
share-based
payments - - 89 - - 89 - 89
Effect of
transactions
relating to
non-controlling
interests D1.2 - - (484) - - (484) 1,014 530
Share capital and
share premium
New share capital
subscribed C8 1 12 - - - 13 - 13
Treasury shares
Movement in own
shares in
respect of
share-based
payment plans - - (60) - - (60) - (60)
----------------- ----- -------- -------- -------- ----------- ---------- ------------- ----------- -------
Net increase in
equity 1 12 849 239 300 1,401 1,049 2,450
Balance at 1 Jan 172 2,625 13,575 893 2,212 19,477 192 19,669
----------------- ----- -------- -------- -------- ----------- ---------- ------------- ----------- -------
Balance at 31 Dec 173 2,637 14,424 1,132 2,512 20,878 1,241 22,119
----------------- ----- -------- -------- -------- ----------- ---------- ------------- ----------- -------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Year ended 31 Dec 2019 $m
------------------------------------------------------------------------------------------
Available
-for-sale Non-
Share Share Retained Translation securities Shareholders' controlling Total
Note capital premium earnings reserve* reserves equity interests equity
----------------- ----- -------- -------- -------- ----------- ---------- ------------- ----------- -------
Reserves
Profit from
continuing
operations - - 1,944 - - 1,944 9 1,953
Other
comprehensive
income (loss)
from continuing
operations:
Exchange movements on
foreign operations and
net investment hedges
net of related tax - - - 135 - 135 2 137
Net unrealised
valuation movements
net of related change
in amortisation of
deferred acquisition
costs and related tax - - - - 2,679 2,679 - 2,679
Shareholders' share of
actuarial gains and
losses on
defined benefit
pension schemes net of
related tax - - (89) - - (89) - (89)
----------------------- -------- -------- -------- ----------- ---------- ------------- ----------- -------
Total other
comprehensive
income (loss)
from continuing
operations - - (89) 135 2,679 2,725 2 2,727
----------------- ----- -------- -------- -------- ----------- ---------- ------------- ----------- -------
Total
comprehensive
income from
continuing
operations - - 1,855 135 2,679 4,669 11 4,680
Total
comprehensive
income from
discontinued
operations* - - (1,098) 2,808 - 1,710 - 1,710
----------------- ----- -------- -------- -------- ----------- ---------- ------------- ----------- -------
Total
comprehensive
income for the
year - - 757 2,943 2,679 6,379 11 6,390
Demerger dividend
in specie of M&G
plc B5 - - (7,379) - - (7,379) - (7,379)
Other dividends B5 - - (1,634) - - (1,634) - (1,634)
Reserve movements
in respect of
share-based
payments - - 64 - - 64 - 64
Effect of
transactions
relating to
non-controlling
interests - - (143) - - (143) 158 15
Share capital and
share premium
New share capital
subscribed C8 - 22 - - - 22 - 22
Impact of change
in presentation
currency in
relation to
share capital
and share
premium C8 6 101 - - - 107 - 107
Treasury shares
Movement in own
shares in
respect of
share-based
payment plans - - 38 - - 38 - 38
Movement in
Prudential plc
shares purchased
by unit trusts
consolidated
under IFRS - - 55 - - 55 - 55
----------------- ----- -------- -------- -------- ----------- ---------- ------------- ----------- -------
Net increase
(decrease) in
equity 6 123 (8,242) 2,943 2,679 (2,491) 169 (2,322)
Balance at 1 Jan 166 2,502 21,817 (2,050) (467) 21,968 23 21,991
----------------- ----- -------- -------- -------- ----------- ---------- ------------- ----------- -------
Balance at 31 Dec 172 2,625 13,575 893 2,212 19,477 192 19,669
----------------- ----- -------- -------- -------- ----------- ---------- ------------- ----------- -------
* The $2,808 million movement in translation reserve from
discontinued operations was recognised in other comprehensive
income and represented an exchange gain of $140 million on
translating the results from discontinued operations during the
period of ownership in 2019 and the recycling of the cumulative
exchange loss of $2,668 million through the profit or loss upon the
demerger.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Note 31 Dec 2020 $m 31 Dec 2019 $m
---------------------------------------------------------------------- ----- -------------- --------------
Assets
Goodwill C4.1 961 969
Deferred acquisition costs and other intangible assets C4.2 20,345 17,476
Property, plant and equipment 893 1,065
Reinsurers' share of insurance contract liabilitiesnote (i) 46,595 13,856
Deferred tax assets C7.2 4,858 4,075
Current tax recoverable C7.1 444 492
Accrued investment income 1,427 1,641
Other debtors 3,171 2,054
Investment properties 23 25
Investments in joint ventures and associates accounted for using the
equity method 1,962 1,500
Loans 14,588 16,583
Equity securities and holdings in collective investment schemesnote (ii) 278,635 247,281
Debt securitiesnote (ii) 125,829 134,570
Derivative assets 2,599 1,745
Other investmentsnote (ii) 1,867 1,302
Deposits 3,882 2,615
Cash and cash equivalents 8,018 6,965
------------------------------------------------------------------------- ----- -------------- --------------
Total assets C1 516,097 454,214
------------------------------------------------------------------------- ----- -------------- --------------
Equity
Shareholders' equity 20,878 19,477
Non-controlling interests D1.2 1,241 192
------------------------------------------------------------------------- ----- -------------- --------------
Total equity C1 22,119 19,669
------------------------------------------------------------------------- ----- -------------- --------------
Liabilities
Insurance contract liabilities C3.1 436,787 380,143
Investment contract liabilities with discretionary participation features C3.1 479 633
Investment contract liabilities without discretionary participation
features C3.1 3,980 4,902
Unallocated surplus of with-profits funds C3.1 5,217 4,750
Core structural borrowings of shareholder-financed businesses C5.1 6,633 5,594
Operational borrowings C5.2 2,444 2,645
Obligations under funding, securities lending and sale and repurchase
agreements 9,768 8,901
Net asset value attributable to unit holders of consolidated investment
funds 5,975 5,998
Deferred tax liabilities C7.2 6,075 5,237
Current tax liabilities C7.1 280 396
Accruals, deferred income and other creditors 15,508 14,488
Provisions 350 466
Derivative liabilities 482 392
------------------------------------------------------------------------- ----- -------------- --------------
Total liabilities C1 493,978 434,545
------------------------------------------------------------------------- ----- -------------- --------------
Total equity and liabilities C1 516,097 454,214
------------------------------------------------------------------------- ----- -------------- --------------
Notes
(i) At 31 December 2020, reinsurers' share of insurance contract
liabilities included $27.3 billion in respect of the reinsurance of
substantially all of Jackson's in-force fixed and fixed index
annuity liabilities to Athene Life Re Ltd, as discussed in note
D1.1.
(ii) Included within equity securities and holdings in
collective investment schemes, debt securities and other
investments as at 31 December 2020 are $2,007 million of lent
securities and assets subject to repurchase agreements (31 December
2019: $90 million of lent securities only).
CONSOLIDATED STATEMENT OF CASH FLOWS
Note 2020 $m 2019 $m
------------------------------------------------------------------------------------- ----- -------- --------
Continuing operations:
Cash flows from operating activities
Profit before tax (being tax attributable to shareholders' and policyholders' returns) 2,419 2,287
Adjustments to profit before tax for non-cash movements in operating assets and
liabilities:
Investments (19,875) (60,812)
Other non-investment and non-cash assets (35,633) (2,487)
Policyholder liabilities (including unallocated surplus of with-profits funds) 53,593 56,067
Other liabilities (including operational borrowings) 1,372 5,234
Investment income and interest payments included in profit before tax (5,059) (4,803)
Operating cash items:
Interest receipts and payments 4,191 4,277
Dividend receipts 1,297 978
Tax paid (555) (717)
Other non-cash items 216 (96)
--------------------------------------------------------------------------------------- ----- -------- --------
Net cash flows from operating activitiesnote (i) 1,966 (72)
--------------------------------------------------------------------------------------- ----- -------- --------
Cash flows from investing activities
Purchases of property, plant and equipment (59) (64)
Proceeds from disposal of property, plant and equipment 6 -
Acquisition of business and intangiblesnote (ii) (1,142) (635)
Disposal of businesses - 375
--------------------------------------------------------------------------------------- ----- -------- --------
Net cash flows from investing activities (1,195) (324)
--------------------------------------------------------------------------------------- ----- -------- --------
Cash flows from financing activities
Structural borrowings of shareholder-financed operations:note (iii) C5.1
Issuance of debt, net of costs 983 367
Redemption of subordinated debt - (504)
Fees paid to modify terms and conditions of debt issued by the Group - (182)
Interest paid (314) (526)
Payment of principal portion of lease liabilities (138) (137)
Equity capital:
Issues of ordinary share capital 13 22
Non-controlling equity investment by Athene into the US business D1.2 500 -
External dividends:
Dividends paid to the Company's shareholders B5 (814) (1,634)
Dividends paid to non-controlling interests (18) -
-------------------------------------------------------------------------------------- ----- -------- --------
Net cash flows from financing activities 212 (2,594)
--------------------------------------------------------------------------------------- ----- -------- --------
Net increase (decrease) in cash and cash equivalents from continuing operations 983 (2,990)
Net cash flows from discontinued operations - (5,690)
Cash and cash equivalents at 1 Jan 6,965 15,442
Effect of exchange rate changes on cash and cash equivalents 70 203
--------------------------------------------------------------------------------------- ----- -------- --------
Cash and cash equivalents at 31 Dec 8,018 6,965
--------------------------------------------------------------------------------------- ----- -------- --------
Notes
(i) Included in net cash flows from operating activities are
dividends from joint ventures and associates of $118 million (2019:
$85 million).
(ii) Cash flows arising from the acquisition of business and
intangibles includes amounts paid for distribution rights.
(iii) Structural borrowings of shareholder-financed businesses
exclude borrowings to support short-term fixed income securities
programmes, non-recourse borrowings of investment subsidiaries of
shareholder-financed businesses and other borrowings of
shareholder-financed businesses. Cash flows in respect of these
borrowings are included within cash flows from operating
activities. The changes in the carrying value of the structural
borrowings of shareholder-financed businesses for the Group are
analysed below:
Cash movements $m Non-cash movements $m
-------------------------------- -------------------------------------------------
Foreign Demerger of
Balance at Issue Redemption exchange UK and Europe Other Balance at
1 Jan of debt of debt movement operations movements 31 Dec
----- ---------- -------- ---------- --------- -------------- ---------- ----------
2020 5,594 983 - 42 - 14 6,633
2019 9,761 367 (504) 116 (4,161) 15 5,594
----- ---------- -------- ---------- --------- -------------- ---------- ----------
NOTES TO THE FINANCIAL STATEMENTS
A Basis of preparation
A1 Basis of preparation and exchange rates
These consolidated financial statements have been prepared in
accordance with IFRS Standards as issued by the IASB, the
international accounting standards in conformity with the
requirements of the Companies Act 2006 and in accordance with
international financial reporting standards adopted pursuant to
Regulation (EC) No 1606/2002 as it applies in the European Union.
At 31 December 2020 , there were no differences between IFRS
Standards as issued by the IASB, the international accounting
standards as required by the Companies Act 2006 and international
financial reporting standards adopted pursuant to Regulation (EC)
No 1606/2002 as it applies in the European Union.
The Group accounting policies are the same as those applied for
the year ended 31 December 2019 with the exception of the adoption
of the new and amended IFRS Standards as described in note A2.
The financial information set out in this announcement does not
constitute the Company's statutory accounts for the years ended 31
December 2020 or 2019 but is derived from those accounts. The
auditors have reported on the 2020 statutory accounts. Statutory
accounts for 2019 have been delivered to the registrar of
companies, and those for 2020 will be delivered following the
Company's Annual General Meeting. Their report was (i) unqualified,
(ii) did not include a reference to any matters to which the
auditors drew attention by way of emphasis without qualifying their
report and (iii) did not contain a statement under section 498(2)
or (3) of the Companies Act 2006.
Going concern basis of accounting
The Directors have made an assessment of going concern covering
a period of at least 12 months from the date that these financial
statements are approved. In making this assessment, the Directors
have considered both the Group's current performance, solvency and
liquidity and the Group's business plan taking into account the
Group's principal risks and the mitigations available to it which
are described in the Group Chief Risk and Compliance Officer's
report. The assessment also includes the consideration of the
results of a number of stress and scenario testing over the
business plan covering scenarios that reflect the possible impacts
of Covid-19. The stress tests included the assessment of the
potential impact of up or down interest rate movements combined
with corporate credit spread widening, a rating level downgrade on
part of the credit asset portfolio, falling equity values and
insurance stresses (such as changes in policyholder behaviour,
including lapses, and increased morbidity in Asia).
Based on the above, the Directors have a reasonable expectation
that the Company and the Group have adequate resources to continue
their operations for a period of at least 12 months from the date
that these financial statements are approved. No material
uncertainties that may cast significant doubt on the ability of the
Group to continue as a going concern have been identified. The
Directors therefore consider it appropriate to continue to adopt
the going concern basis of accounting in preparing these financial
statements for the year ended 31 December 2020.
Exchange rates
The exchange rates applied for balances and transactions in
currencies other than the presentation currency of the Group, US
dollars (USD) were:
Closing rate at year end Average rate for the year to date
-------------------------- -----------------------------------
USD : local currency 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019
------------------------ ------------ ------------ ----------------- ----------------
Chinese yuan (CNY) 6.54 6.97 6.90 6.91
Hong Kong dollar (HKD) 7.75 7.79 7.76 7.84
Indian rupee (INR) 73.07 71.38 74.12 70.43
Indonesian rupiah (IDR) 14,050.00 13,882.50 14,541.70 14,140.84
Malaysian ringgit (MYR) 4.02 4.09 4.20 4.14
Singapore dollar (SGD) 1.32 1.34 1.38 1.36
Taiwan dollar (TWD) 28.10 29.98 29.44 30.91
Thai baht (THB) 30.02 29.75 31.29 31.05
UK pound sterling (GBP) 0.73 0.75 0.78 0.78
Vietnamese dong (VND) 23,082.50 23,172.50 23,235.84 23,227.64
------------------------ ------------ ------------ ----------------- ----------------
Certain notes to the financial statements present comparative
information at constant exchange rates (CER), in addition to the
reporting at actual exchange rates (AER) used throughout the
consolidated financial statements. AER are actual historical
exchange rates for the specific accounting year, being the average
rates over the year for the income statement and the closing rates
at the balance sheet date for the statement of financial position.
CER 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 statement of financial position.
A2 New accounting pronouncements in 2020
The IASB has issued the following new accounting pronouncements
to be effective from 1 January 2020:
- Amendments to IAS 1 and IAS 8 'Definition of Material';
- Amendment to IFRS 3 'Business Combinations';
- Amendments to IFRS 7, IFRS 9 and IAS 39 'Interest Rate Benchmark Reform'; and
- Amendments to IFRS 16, 'Covid-19-Related Rent Concessions', effective from 1 June 2020.
The adoption of these pronouncements have had no significant
impact on the Group financial statements.
B EARNINGS PERFORMANCE
B1 Analysis of performance by segment
B1.1 Segment results
2020 $m 2019 $m 2020 vs 2019 %
-------- ------------------- ------------------
AER CER AER CER
Note note (i) note (i) note (i) note (i) note (i)
------------------------------------------------ ----- -------- -------- --------- -------- --------
Continuing operations:
Asia
Insurance operations 3,384 2,993 2,978 13% 14%
Asset management 283 283 278 - 2%
-------------------------------------------------- ----- -------- -------- --------- -------- --------
Total Asia 3,667 3,276 3,256 12% 13%
-------------------------------------------------- ----- -------- -------- --------- -------- --------
US
Insurance operations 2,787 3,038 3,038 (8)% (8)%
Asset management 9 32 32 (72)% (72)%
-------------------------------------------------- ----- -------- -------- --------- -------- --------
Total US 2,796 3,070 3,070 (9)% (9)%
-------------------------------------------------- ----- -------- -------- --------- -------- --------
Total segment profit 6,463 6,346 6,326 2% 2%
-------------------------------------------------- ----- -------- -------- --------- -------- --------
Other income and expenditure:
Investment return and other income 6 50 50 (88)% (88)%
Interest payable on core structural borrowings (337) (516) (518) 35% 35%
Corporate expenditurenote (ii) (417) (460) (463) 9% 10%
------------------------------------------------- ----- -------- -------- --------- -------- --------
Total other income and expenditure (748) (926) (931) 19% 20%
-------------------------------------------------- ----- -------- -------- --------- -------- --------
Restructuring and IFRS 17 implementation costsnote
(iii) (208) (110) (110) (89)% (89)%
-------------------------------------------------- ----- -------- -------- --------- -------- --------
Adjusted operating profit B1.3 5,507 5,310 5,285 4% 4%
Short-term fluctuations in investment returns on
shareholder-backed business B1.2 (4,841) (3,203) (3,191) (51)% (52)%
Amortisation of acquisition accounting
adjustmentsnote (iv) (39) (43) (43) 9% 9%
Gain (loss) attaching to corporate transactions D1.1 1,521 (142) (143) n/a n/a
-------------------------------------------------- ----- -------- -------- --------- -------- --------
Profit before tax attributable to shareholders 2,148 1,922 1,908 12% 13%
Tax credit attributable to shareholders' returns B3 37 31 36 19% 3%
-------------------------------------------------- ----- -------- -------- --------- -------- --------
Profit for the year from continuing operations 2,185 1,953 1,944 12% 12%
Loss for the year from discontinued operations - (1,161) (1,165) n/a n/a
-------------------------------------------------- ----- -------- -------- --------- -------- --------
Profit for the year 2,185 792 779 176% 180%
-------------------------------------------------- ----- -------- -------- --------- -------- --------
Attributable to:
Equity holders of the Company
From continuing operations 2,118 1,944 1,935 9% 9%
From discontinued operations - (1,161) (1,165) n/a n/a
Non-controlling interests from continuing
operations 67 9 9 n/a n/a
-------------------------------------------------- ----- -------- -------- --------- -------- --------
2,185 792 779 176% 180%
------------------------------------------------------ -------- -------- --------- -------- --------
Basic earnings per share (in cents) 2020 2019 2020 vs 2019 %
-------- ------------------- ------------------
AER CER AER CER
Note note (i) note (i) note (i) note (i) note (i)
------------------------------------------------ ----- -------- -------- --------- -------- --------
Based on adjusted operating profit, net of tax,
from continuing operations B4 175.5c 175.0c 174.6c 0% 1%
Based on profit for the year from continuing
operations B4 81.6c 75.1c 75.1c 9% 9%
Based on profit (loss) for the year from
discontinued operations B4 - (44.8)c (45.1)c n/a n/a
-------------------------------------------------- ----- -------- -------- --------- -------- --------
Notes
(i) Segment results are attributed to the shareholders of the
Group before deducting the amount attributable to the
non-controlling interests. This presentation is applied
consistently throughout the document. For definitions of AER and
CER refer to note A1.
(ii) Corporate expenditure as shown above is primarily for head
office functions in London and Hong Kong.
(iii) Restructuring and IFRS 17 implementation costs include
those incurred in the US operations of $(46) million (2019: $(7)
million).
(iv) Amortisation of acquisition accounting adjustments arising
on the purchase of business. This comprises principally the charge
for the adjustments arising on the purchase of REALIC in 2012.
B1.2 Short-term fluctuations in investment returns on
shareholder-backed business
2020 $m 2019 $m
------------------------ ------- -------
Asia operationsnote (i) (607) 657
US operationsnote (ii) (4,262) (3,757)
Other operations 28 (103)
------------------------- ------- -------
Total (4,841) (3,203)
------------------------- ------- -------
(i) Asia operations
In Asia, the short-term fluctuations reflect the net value
movements on shareholders' assets and policyholder liabilities (net
of reinsurance) arising from market movements in the year. In 2020,
falling interest rates in certain parts of Asia led to lower
discount rates on policyholder liabilities under the local
reserving basis applied, which were not fully offset by unrealised
bond and equity gains in the year and this led to the overall
negative short-term investment fluctuations in Asia.
(ii) US operations
The short-term fluctuations in investment returns in the US are
reported net of the related charge for amortisation of deferred
acquisition costs (DAC) credit of $812 million as shown in note
C4.2 (2019: credit of $1,248 million) and comprise amounts in
respect of the following items:
2020 $m 2019 $m
-------------------------------------------------------- ------- -------
Net equity hedge resultnote (a) (6,334) (4,582)
Other than equity-related derivativesnote (b) 1,682 678
Debt securitiesnote (c) 474 156
Equity-type investments: actual less longer-term return (40) 18
Other items (44) (27)
--------------------------------------------------------- ------- -------
Total net of related DAC amortisation (4,262) (3,757)
--------------------------------------------------------- ------- -------
Notes
(a) The purpose of the inclusion of the net equity hedge result
in short-term fluctuations in investment returns is to segregate
the amount included within pre-tax profit that relates to the
accounting effect of market movements on both the value of
guarantees in Jackson's products including variable annuities and
on the related derivatives used to manage the exposures inherent in
these guarantees. The level of fees recognised in short-term
fluctuations in investment returns is determined by reference to
that allowed for within the reserving basis. The variable annuity
guarantees are valued in accordance with either Accounting
Standards Codification (ASC) Topic 820, Fair Value Measurements and
Disclosures or ASC Topic 944, Financial Services - Insurance
depending on the type of guarantee. Both approaches require an
entity to determine the total fee ('the fee assessment') that is
expected to fund future projected benefit payments arising using
the assumptions applicable for that method. The method under ASC
Topic 820 requires this fee assessment to be fixed at the time of
issue. As the fees included within the initial fee assessment are
earned, they are included in short-term fluctuations in investment
returns to match the corresponding movement in the guarantee
liability. Other guarantee fees are included in adjusted operating
profit, which in 2020 were $704 million (2019: $699 million),
pre-tax and net of related DAC amortisation. As the Group applies
US GAAP for the measured value of the product guarantees, the net
equity hedge result also includes asymmetric impacts where the
measurement bases of the liabilities and associated derivatives
used to manage the Jackson annuity business differ.
The net equity hedge result therefore includes significant
accounting mismatches and other factors that do not represent the
economic result. These other factors include:
- The variable annuity guarantees and fixed index annuity
embedded options being only partially fair valued under
'grandfathered' US GAAP;
- The interest rate exposure being managed through the other
than equity-related derivative programme explained in note (b)
below; and
- Jackson's management of its economic exposures for a number of
other factors that are treated differently in the accounting
frameworks such as future fees and assumed volatility levels.
The net equity hedge result can be summarised as follows:
2020 $m 2019 $m
------------------------------------------------------------------------------------------ ------- -------
Fair value movements on equity hedge instruments* (5,219) (5,314)
Accounting value movements on the variable and fixed index annuity guarantee liabilities* (2,030) (22)
Fee assessments net of claim payments 915 754
------------------------------------------------------------------------------------------ ------- -------
Total net of related DAC amortisation (6,334) (4,582)
------------------------------------------------------------------------------------------ ------- -------
* The value movements on the variable annuity guarantees and
fixed indexed annuity options and the derivative instruments held
to manage their equity exposures are discussed in the Group Chief
Financial Officer and Chief Operating Officer's report.
(b) The fluctuations for other than equity-related derivatives comprise the net effect of:
- Fair value movements on free-standing, other than equity-related derivatives;
- Fair value movements on the Guaranteed Minimum Income Benefit
(GMIB) reinsurance asset that are not matched by movements in the
underlying GMIB liability, which is not fair valued; and
- Related amortisation of DAC.
The free-standing, other than equity-related derivatives, are
held to manage interest rate exposures and durations within the
general account and the variable annuity guarantees and fixed index
annuity embedded options described in note (a) above. Accounting
mismatches arise because of differences between the measurement
basis and presentation of the derivatives, which are fair valued
with movements recorded in the income statement, and the exposures
they are intended to manage.
(c) Short-term fluctuations related to debt securities is analysed below:
2020 $m 2019 $m
------------------------------------------------------------------------------------------ ------- -------
Credits (charges) in the year:
Losses on sales of impaired and deteriorating bonds (148) (28)
Bond write-downs (32) (15)
Recoveries/reversals 1 1
------------------------------------------------------------------------------------------ ------- -------
Total credits (charges) in the year (179) (42)
Risk margin allowance deducted from adjusted operating profit* 92 109
------------------------------------------------------------------------------------------- ------- -------
(87) 67
------------------------------------------------------------------------------------------ ------- -------
Interest-related realised gains (losses):
Gains (losses) arising in the year 724 220
Amortisation of gains and losses arising in current and prior years to adjusted operating
profit (168) (129)
------------------------------------------------------------------------------------------ ------- -------
556 91
------------------------------------------------------------------------------------------ ------- -------
Related amortisation of DAC 5 (2)
------------------------------------------------------------------------------------------- ------- -------
Total short-term fluctuations related to debt securities net of related DAC amortisation 474 156
------------------------------------------------------------------------------------------- ------- -------
* The debt securities of Jackson are held in the general account
of the business. Realised gains and losses are recorded in the
income statement with normalised returns included in adjusted
operating profit with variations from year to year included in the
short-term fluctuations category. The risk margin reserve charge
for longer-term credit-related losses included in adjusted
operating profit of Jackson for 2020 is based on an average annual
risk margin reserve of 18 basis points (2019: 17 basis points) on
average book values of $51.7 billion (2019: $62.6 billion) as shown
below:
Moody's rating category (or equivalent under NAIC ratings of mortgage-backed securities)
2020 2019
----------------------------------------------------- ----------------------------------
Average Annual Average Annual
book value RMR expected loss book value RMR expected loss
---------------------- ------------- -------------- ------------ ---- --------------
$m % $m $m % $m
---------------------- ---------------------- ------------- -------------- ------------ ---- --------------
A3 or higher 32,541 0.10 (31) 38,811 0.10 (38)
Baa1, 2 or 3 17,513 0.24 (42) 22,365 0.24 (53)
Ba1, 2 or 3 1,314 0.75 (10) 1,094 0.85 (9)
B1, 2 or 3 206 2.36 (5) 223 2.56 (6)
Below B3 108 3.36 (4) 75 3.39 (3)
---------------------- ---------------------- ------------- -------------- ------------ ---- --------------
Total 51,682 0.18 (92) 62,568 0.17 (109)
---------------------- ---------------------- ------------- ------------ ----
Related amortisation of DAC 12 19
-------------- --------------
Risk margin reserve charge to adjusted operating profit for
longer-term credit-related losses (80) (90)
-------------- --------------
Excluding the realised gains that are part of the gain arising
in respect of the reinsured Jackson's in-force fixed and fixed
index annuity liabilities to Athene Life Re Ltd, as discussed in
note D1.1.
In addition to the accounting for realised gains and losses
described above for Jackson general account debt securities,
included within the statement of other comprehensive income is a
pre-tax net unrealised gain of $2,676 million, net of related
amortisation of DAC, arising in the year (2019: $3,392 million) on
debt securities classified as available-for-sale, partially offset
by the recycling of $2,282 million gains, net of related
amortisation of DAC, to the income statement on transfer of debt
securities to Athene (see note D1.1). Temporary market value
movements do not reflect defaults or impairments. Additional
details of the movement in the value of the Jackson portfolio are
included in note C1.1.
B1.3 Determining operating segments and performance measure of
operating segments
Operating segments
The Group's operating segments for financial reporting purposes
are defined and presented in accordance with IFRS 8 'Operating
Segments' on the basis of the management reporting structure and
its financial management information.
Under the Group's management and reporting structure, its chief
operating decision maker is the Group Executive Committee (GEC). In
the management structure, responsibility is delegated to the Chief
Executive Officers of the Group's Asia and US business units for
the day-to-day management of their business units (within the
framework set out in the Group Governance Manual). Financial
management information used by the GEC aligns with these business
segments. These operating segments, Asia operations and US
operations, derive revenue from both insurance and asset management
activities.
Operations which do not form part of any business unit are
reported as 'Unallocated to a segment'. These include head office
costs in London and Hong Kong. The Group's Africa operations do not
form part of any operating segment under the structure, and their
assets and liabilities and profit or loss before tax are not
material to the overall financial position of the Group. The
Group's Africa operations are therefore also reported as
'Unallocated to a segment'.
In preparation for the planned separation of Jackson, the
management information received by the GEC has been revised in
2021, leading to a change in the Group's operating segments which
will be presented in the 2021 half year report as discussed in the
Group Chief Financial Officer and Chief Operating Officer's
report.
Performance measure
The performance measure of operating segments utilised by the
Group is adjusted IFRS operating profit based on longer-term
investment returns (adjusted operating profit) , as described
below. This measurement basis distinguishes adjusted operating
profit from other constituents of total profit or loss for the year
as follows:
- Short-term fluctuations in investment returns on
shareholder-backed business. This includes the impact of short-term
market effects on the carrying value of Jackson's guarantee
liabilities and related derivatives as explained below;
- Amortisation of acquisition accounting adjustments arising on
the purchase of business. This comprises principally the charge for
the adjustments arising on the purchase of REALIC in 2012; and
- Gain or loss on corporate transactions, such as in 2020 the
effect of certain of the Group's reinsurance arrangements and costs
associated with the work to plan for the separation of Jackson, and
in 2019 disposals undertaken and costs connected to the demerger of
M&G plc from Prudential plc.
Determination of adjusted operating profit for investment and
liability movements
(a) With-profits business
For Asia's with-profits business in Hong Kong, Singapore and
Malaysia, the adjusted operating profit reflects the shareholders'
share in the bonuses declared to policyholders. Value movements in
the underlying assets of the with-profits funds only affect the
shareholder results through indirect effects of investment
performance on declared policyholder bonuses and therefore, do not
affect directly the determination of adjusted operating profit.
(b) Unit-linked business including the US variable annuity separate accounts
The policyholder unit liabilities are directly reflective of the
underlying asset value movements. Accordingly, the adjusted
operating profit reflect the current year value movements in both
the unit liabilities and the backing assets.
(c) US general account business
The adjusted operating profit for Jackson included in the
Group's accounts is based on information reviewed by the GEC on an
IFRS basis. This will differ from the financial information that
Jackson will report as part of the demerger process, which will be
prepared under US GAAP and will be based on the information local
management reviews in preparation for them becoming a standalone
entity.
Jackson's variable and fixed index annuity business has
guarantee liabilities which are measured on a combination of fair
value and other US GAAP derived principles. These liabilities are
subject to an extensive derivative programme to manage equity and
interest rate exposures whose fair value movements pass through the
income statement each year.
The following value movements for Jackson's variable and fixed
index annuity business are excluded from adjusted operating profit.
See note B1.2:
- Fair value movements for equity-based derivatives;
- Fair value movements for guaranteed benefit options for the
'not for life' portion of Guaranteed Minimum Withdrawal Benefit
(GMWB) and fixed index annuity business, and Guaranteed Minimum
Income Benefit (GMIB) reinsurance (see below);
- Movements in the accounts carrying value of Guaranteed Minimum
Death Benefit (GMDB), GMIB and the 'for life' portion of GMWB
liabilities, (see below) for which, under the 'grandfathered' US
GAAP applied under IFRS for Jackson's insurance assets and
liabilities, the measurement basis gives rise to a muted impact of
current year market movements (ie they are relatively insensitive
to the effect of current year equity market and interest rate
changes);
- A portion of the fee assessments as well as claim payments, in
respect of guarantee liabilities; and
- Related amortisation of DAC for each of the above items.
Guaranteed benefit options for the 'not for life' portion of
GMWB and equity index options for the fixed index annuity
business
The 'not for life' portion of GMWB guaranteed benefit option
liabilities is measured under the US GAAP basis applied for IFRS in
a manner consistent with IAS 39 under which the projected future
growth rate of the account balance is based on the greater of US
Treasury rates and current swap rates (rather than expected rates
of return) with only a portion of the expected future guarantee
fees included. The discount rates applied in determining the value
of these liabilities is actively updated each year based on market
observed rates and after allowing for Jackson's own credit risk.
Reserve value movements on these liabilities are sensitive to
changes to levels of equity markets, implied volatility and
interest rates. The equity index option for fixed index annuity
business is measured under the US GAAP basis applied for IFRS in a
manner consistent with IAS 39 under which the projected future
growth is based on current swap rates.
Guaranteed benefit option for variable annuity guarantee minimum
income benefit
The GMIB liability, which is substantially reinsured, subject to
a deductible and annual claim limits, is accounted for using
'grandfathered' US GAAP. This accounting basis substantially does
not recognise the effects of market movements. The corresponding
reinsurance asset is measured under the 'grandfathered' US GAAP
basis applied for IFRS in a manner consistent with IAS 39
'Financial Instruments: Recognition and Measurement', and the asset
is therefore recognised at fair value. As the GMIB is economically
reinsured, the mark-to-market element of the reinsurance asset is
included as a component of short-term fluctuations in investment
returns.
(d) Policyholder liabilities that are sensitive to market conditions
Under IFRS, the degree to which the carrying values of
liabilities to policyholders are sensitive to current market
conditions varies between business units depending upon the nature
of the 'grandfathered' measurement basis.
Movements in liabilities for some types of business do require
bifurcation between the elements that relate to longer-term market
condition and short-term effects to ensure that at the net level
(ie after allocated investment return and charge for policyholder
benefits) the adjusted operating profit reflects longer-term market
returns.
For certain Asia non-participating business, for example in Hong
Kong, the economic features are more akin to asset management
products with policyholder liabilities reflecting asset shares over
the contract term. Consequently, for these products, the charge for
policyholder benefits in the adjusted operating profit reflects the
asset share feature rather than volatile movements that would
otherwise be reflected if the local regulatory basis (as applied
for the IFRS balance sheet) was used.
For other types of Asia non-participating business, expected
longer-term investment returns and interest rates are used to
determine the movement in policyholder liabilities for determining
adjusted operating profit. This ensures assets and liabilities are
reflected on a consistent basis.
(e) Assets backing other shareholder-financed long-term insurance business
Except in the case of assets backing liabilities which are
directly matched (such as unit-linked business) adjusted operating
profit for assets backing shareholder-financed business is
determined on the basis of expected longer-term investment returns.
Longer-term investment returns comprise actual income receivable
for the year (interest/dividend income) and for both debt and
equity-type securities longer-term capital returns.
Debt securities and loans
As a general principle, for debt securities and loans, the
longer-term capital returns comprise two elements:
- Risk margin reserve based charge for the expected level of
defaults for the period, which is determined by reference to the
credit quality of the portfolio. The difference between impairment
losses in the reporting period and the risk margin reserve charge
to the adjusted operating profit is reflected in short-term
fluctuations in investment returns; and
- The amortisation of interest-related realised gains and losses
to adjusted operating profit to the date when sold bonds would have
otherwise matured.
At 31 December 2020, the level of unamortised interest-related
realised gains and losses related to previously sold bonds for the
Group's insurance operations in Asia and the US was a net gain of
$1,725 million (31 December 2019: net gain of $916 million).
For Asia insurance operations, realised gains and losses are
principally interest related. Accordingly, all realised gains and
losses to date for these operations are amortised over the period
to the date those securities would otherwise have matured, with no
explicit risk margin reserve charge.
For US insurance operations, Jackson has used the ratings by
Nationally Recognised Statistical Ratings Organisations (NRSRO) or
ratings resulting from the regulatory ratings detail issued by the
National Association of Insurance Commissioners (NAIC) to determine
the average annual risk margin reserve to apply to debt securities
held to back general account business. Debt securities held to back
separate account and reinsurance funds withheld are not subject to
risk margin reserve charge. Further details of the risk margin
reserve charge, as well as the amortisation of interest-related
realised gains and losses, for Jackson are shown in note B1.2.
Equity-type securities
For equity-type securities, the longer-term rates of return are
estimates of the long-term trend investment returns for income and
capital having regard to past performance, current trends and
future expectations. Different rates apply to different categories
of equity-type securities.
For Asia insurance operations, investments in equity securities
held for non-linked shareholder-backed business amounted to $4,954
million as at 31 December 2020 (31 December 2019: $3,473 million).
The longer-term rates of return applied in 2020 ranged from 5.1 per
cent to 16.9 per cent (31 December 2019: 5.0 per cent to 17.6 per
cent) with the rates applied varying by business unit. These rates
are broadly stable from year to year but may be different between
regions, reflecting, for example, differing expectations of
inflation in each local business unit. The assumptions are for the
returns expected to apply in equilibrium conditions. The assumed
rates of return do not reflect any cyclical variability in economic
performance and are not set by reference to prevailing asset
valuations. The longer-term investment returns for the Asia
insurance joint ventures and associates accounted for using the
equity method are determined on a similar basis as the other Asia
insurance operations described above.
For US insurance operations, as at 31 December 2020, the
equity-type securities for non-separate account operations amounted
to $2,128 million (31 December 2019: $1,481 million). For these
operations, the longer-term rates of return for income and capital
applied in 2020 and 2019, which reflect the combination of the
average risk-free rates over the year and appropriate risk premiums
are as follows:
2020 2019
------------------------------------------------------------------------------------------ ------------ ------------
Equity-type securities such as common and preferred stock and portfolio holdings in mutual
funds 4.8% to 5.8% 5.5% to 6.7%
Other equity-type securities such as investments in limited partnerships and private
equity
funds 6.8% to 7.8% 7.5% to 8.7%
------------------------------------------------------------------------------------------ ------------ ------------
Derivative value movements
Generally, derivative value movements are excluded from adjusted
operating profit. The exception is where the derivative value
movements broadly offset changes in the accounting value of other
assets and liabilities included in adjusted operating profit. The
principal example of derivatives whose value movements are excluded
from adjusted operating profit arises in Jackson.
Equity-based derivatives held by Jackson are as discussed in
section (c) above. Non-equity based derivatives held by Jackson are
part of a broad-based hedging programme for features of Jackson's
bond portfolio (for which value movements are booked in the
statement of other comprehensive income rather than the income
statement), product liabilities (for which US GAAP accounting as
'grandfathered' under IFRS 4 does not fully reflect the economic
features being hedged), and the interest rate exposure attaching to
equity-based product options.
(f) Fund management and other non-insurance businesses
For these businesses, the determination of adjusted operating
profit reflects the underlying economic substance of the
arrangements. Generally, realised gains and losses are included in
adjusted operating profit with temporary unrealised gains and
losses being included in short-term fluctuations. In some
instances, realised gains and losses on derivatives and other
financial instruments are amortised to adjusted operating profit
over a time period that reflects the underlying economic substance
of the arrangements.
B2 Acquisition costs and other expenditure
2020 $m 2019 $m
-------------------------------------------------------------------------------------------- ------- -------
Acquisition costs incurred for insurance policies (3,070) (4,177)
Acquisition costs deferred(note C4.2) 1,357 1,422
Amortisation of acquisition costsnote (i) 81 694
Recoveries for expenses associated with Jackson's business ceded to Athenenote (ii) 1,203 -
Administration costs and other expenditure (net of other reinsurance commission)note (iii) (4,609) (5,019)
Movements in amounts attributable to external unit holders of consolidated investment funds (443) (203)
-------------------------------------------------------------------------------------------- ------- -------
Total acquisition costs and other expenditure (5,481) (7,283)
-------------------------------------------------------------------------------------------- ------- -------
Notes
(i ) The credit of $81 million in 2020 reflects $389 million
arising in the US which is offset by a charge of $308 million in
Asia as set out in note C4.2. The credit of $389 million in the US
includes $1,576 million (2019: $1,248 million) recorded in
short-term fluctuations in investment returns largely as a result
of the losses arising from market effects on variable annuity
guarantee liabilities and associated hedging. This is offset by a
charge of $(764) million for the write-off of the DAC held for the
in-force fixed and fixed index annuity liabilities reinsured to
Athene and a charge of $(423) million (2019: $(297) million) for
amortisation of acquisition costs recorded in adjusted operating
profit.
(ii) As part of the reinsurance transaction with Athene Life Re
Ltd discussed in note D1.1, Jackson received $1,203 million of
ceding commission (including post-closing adjustments) as a
recovery for past acquisition expenses associated with the business
ceded.
(iii) Included in total administration costs and other
expenditure is depreciation of property, plant and equipment of
$(218) million (2019: $(227) million), of which $(145) million
(2019: $(141) million) relates to the right-of-use assets
recognised under IFRS 16 and interest on the IFRS 16 lease
liabilities of $16 million (2019: $20 million). The 2020 amount
also includes a credit of $770 million for the commission arising
from the reinsurance transaction entered into by the Hong Kong
business during the year as discussed in note D1.1. Administration
costs and other expenditure includes $1 million (2019: $3 million)
relating to the fee income on financial instruments that are not
held at fair value through profit or loss.
B3 Tax charge
B3.1 Total tax charge by nature
The total tax (charge) credit in the income statement is as
follows:
2020 $m 2019 $m
-------------------------------- -------
Current tax Deferred tax Total Total
----------------------------------------------------------- ----------- ------------ ----- -------
Attributable to shareholders:
Asia operations (229) (209) (438) (468)
US operations 59 408 467 345
Other operations 8 - 8 154
---------------------------------------------------------- ----------- ------------ ----- -------
Tax (charge) credit attributable to shareholders' returns (162) 199 37 31
----------------------------------------------------------- ----------- ------------ ----- -------
Attributable to policyholders:
Asia operations (152) (119) (271) (365)
---------------------------------------------------------- ----------- ------------ ----- -------
Total tax (charge) credit (314) 80 (234) (334)
----------------------------------------------------------- ----------- ------------ ----- -------
The tax credit attributable to shareholders' returns of $37
million is consistent with the tax credit arising in 2019 ($31
million), reflecting the tax credit on US derivative losses largely
offsetting the tax charge on Asia profits.
The reconciliation of the expected to actual tax charge
attributable to shareholders is provided in B3.2 below. The tax
charge attributable to policyholders of $271 million above is equal
to the profit before tax attributable to policyholders of $271
million. This is the result of accounting for policyholder income
after the deduction of expenses and movement on unallocated
surpluses on an after-tax basis.
In 2020, a tax charge of $102 million (2019: charge of $709
million) has been taken through other comprehensive income. The tax
charge principally relates to an increase in the market value on
securities of US insurance operations classified as
available-for-sale partially offset by a tax credit arising on the
recycling of gains to the income statement arising on the
transaction with Athene.
B3.2 Reconciliation of shareholder effective tax rate
In the reconciliation below, the expected tax rates reflect the
corporation tax rates that are expected to apply to the taxable
profit or loss of the relevant business. Where there are profits or
losses of more than one jurisdiction, the expected tax rates
reflect the corporation tax rates weighted by reference to the
amount of profit or loss contributing to the aggregate business
result.
2020 2019
----------------------------------------------------------------- --------------------------
Total Total
attributable Percentage attributable Percentage
Asia US Other to impact to impact
operations operations operations shareholders on ETR shareholders on ETR
$m $m $m $m % $m %
note (vii)
--------------- ----------- ----------- ----------- -------------- ---------- -------------- ----------
Adjusted
operating profit
(loss) 3,667 2,796 (956) 5,507 5,310
Non-operating
profit (loss)* 153 (3,510) (2) (3,359) (3,388)
----------------- ----------- ----------- ----------- -------------- --------------
Profit (loss)
before tax 3,820 (714) (958) 2,148 1,922
----------------- ----------- ----------- ----------- -------------- --------------
Expected tax
rate: 20% 21% 18% 21%
Tax at the
expected rate 764 (150) (172) 442 20.6% 393 20.4%
Effects of
recurring tax
reconciliation
items:
Income not
taxable or
taxable at
concessionary
ratesnote (i) (102) (45) - (147) (6.8)% (126) (6.6)%
Deductions not
allowable for
tax purposes 32 11 - 43 2.0% 55 2.9%
Items related
to taxation of
life insurance
businessesnote
(ii) (152) (106) - (258) (12.0)% (317) (16.5)%
Deferred tax
adjustments 26 - - 26 1.2% (33) (1.7)%
Unrecognised
tax lossesnote
(iii) - - 146 146 6.8% 46 2.4%
Effect of
results of
joint ventures
and
associatesnote
(iv) (123) - (6) (129) (6.0)% (100) (5.2)%
Irrecoverable
withholding
taxes 1 - 34 35 1.6% 59 3.1%
Other (10) (3) (7) (20) (1.0)% 13 0.7%
--------------- ----------- ----------- ----------- -------------- ---------- -------------- ----------
Total (328) (143) 167 (304) (14.2)% (403) (20.9)%
Effects of
non-recurring
tax
reconciliation
items:
Adjustments to
tax charge in
relation to
prior
yearsnote (v) 21 (158) 4 (133) (6.2)% (67) (3.5)%
Movements in
provisions for
open tax
mattersnote
(vi) (20) - (13) (33) (1.5)% (1) (0.1)%
M&G demerger
related
activities - - - - 0.0% 76 4.0%
Impact of carry
back of US
losses under
the CARES Act - (16) - (16) (0.7)% - -
Impact of
changes in
local
statutory tax
rates 1 - - 1 0.0% - -
Adjustments in
relation to
business
disposals and
corporate
transactions - - 6 6 0.3% (29) (1.5)%
--------------- ----------- ----------- ----------- -------------- ---------- -------------- ----------
Total 2 (174) (3) (175) (8.1)% (21) (1.1)%
--------------- ----------- ----------- ----------- -------------- ---------- -------------- ----------
Total actual tax
charge (credit) 438 (467) (8) (37) (1.7)% (31) (1.6)%
----------------- ----------- ----------- ----------- -------------- ---------- -------------- ----------
Analysed into:
----------- ----------- ----------- --------------
Tax charge
(credit) on
adjusted
operating
profit (loss) 495 313 (8) 800 773
Tax credit on
non-operating
profit (loss)* (57) (780) - (837) (804)
----------- ----------- ----------- --------------
Actual tax rate
on:
Adjusted
operating profit
(loss):
Including
non-recurring
tax
reconciling
items 13% 11% 1% 15% 15% note (vii)
Excluding
non-recurring
tax
reconciling
items 13% 16% 0% 17% 15%
Total profit
(loss) 11% 65% 1% (2)% (2)%note (vii)
---------------- ----------- ----------- ----------- -------------- --------------
* 'Non-operating profit (loss)' is used to refer to items
excluded from adjusted operating profit and includes short term
investment fluctuations in investment returns on shareholder-backed
business, corporate transactions and amortisation of acquisition
accounting adjustments.
Notes
(i) The $102 million in Asia operations primarily relates to
non-taxable investment income in Taiwan, Singapore and
Malaysia.
(ii) The principal reason for the decrease in the Asia
operations reconciling items from $192 million in 2019 to $152
million in 2020 is due to a decrease in investment gains in
Indonesia and Philippines which are subject to a lower rate of
taxation under local legislation. The $106 million (2019: $125
million) reconciling item in US operations reflects the impact of
the dividend received deduction on the taxation of profits from
variable annuity business.
(iii) The $146 million (2019: $46 million) adverse reconciling
item in unrecognised tax losses reflects losses arising where it is
unlikely that relief for the losses will be available in future
periods.
(iv) Profit before tax includes Prudential's share of profit
after tax from the joint ventures and associates. Therefore, the
actual tax charge does not include tax arising from profit or loss
of joint ventures and associates and is reflected as a reconciling
item.
(v) The $158 million prior year adjustment in US operations
comprises the truing up from the 2019 tax provision computed in the
2019 accounts to the submitted 2019 tax return and a number of
one-off adjustments to prior year deferred tax balances.
(vi) The complexity of the tax laws and regulations that relate
to our businesses means that from time to time we may disagree with
tax authorities on the technical interpretation of a particular
area of tax law. This uncertainty means that in the normal course
of business the Group will have matters where, upon ultimate
resolution of the uncertainty, the amount of profit subject to tax
may be greater than the amounts reflected in the Group's submitted
tax returns. The statement of financial position contains the
following provisions in relation to open tax matters.
2020 $m
---------------------------------------------------------------------------------- -------
Balance at 1 Jan 198
Movements in the current year included in tax charge attributable to shareholders (33)
Provisions utilised in the year (34)
Other movements* (18)
---------------------------------------------------------------------------------- -------
Balance at 31 Dec 113
----------------------------------------------------------------------------------- -------
* Other movements include interest arising on open tax matters
and amounts included in the Group's share of profits from joint
ventures and associates, net of related tax.
(vii) The 2019 actual tax rates of the relevant business
operations are shown below:
2019
-------------------------------------------------------
Total
Asia US Other attributable to
operations operations operations shareholders
--------------------------------------------- ----------- ----------- ----------- ----------------
Tax rate on adjusted operating profit (loss) 13% 14% 10% 15%
Tax rate on profit (loss) before tax 11% 48% 10% (2)%
--------------------------------------------- ----------- ----------- ----------- ----------------
B4 Earnings per share
2020
----- -------------------------------------------------------------------------------
Net of tax
and non- Basic Diluted
Before controlling earnings earnings
tax Tax Non-controlling interests interests per share per share
$m $m $m $m cents cents
Note B1.1 B3
--------------------------- ----- ------- ----- ------------------------- ------------ ---------- ----------
Based on adjusted operating
profit 5,507 (800) (148) 4,559 175.5c 175.5c
Short-term fluctuations in
investment returns on
shareholder-backed business (4,841) 987 75 (3,779) (145.5)c (145.5)c
Amortisation of acquisition
accounting adjustments (39) 7 2 (30) (1.1)c (1.1)c
Gain (loss) attaching to
corporate transactions 1,521 (157) 4 1,368 52.7c 52.7c
---------------------------- ----- ------- ----- ------------------------- ------------ ---------- ----------
Based on profit for the year 2,148 37 (67) 2,118 81.6c 81.6c
---------------------------- ----- ------- ----- ------------------------- ------------ ---------- ----------
2019
----- -------------------------------------------------------------------------------
Net of tax
and non- Basic Diluted
Before controlling earnings earnings
tax Tax Non-controlling interests interests per share per share
$m $m $m $m cents cents
Note B1.1 B3
--------------------------- ----- ------- ----- ------------------------- ------------ ---------- ----------
Based on adjusted operating
profit 5,310 (773) (9) 4,528 175.0c 175.0c
Short-term fluctuations in
investment returns on
shareholder-backed business (3,203) 772 - (2,431) (94.0)c (94.0)c
Amortisation of acquisition
accounting adjustments (43) 8 - (35) (1.3)c (1.3)c
Loss attaching to corporate
transactions (142) 24 - (118) (4.6)c (4.6)c
---------------------------- ----- ------- ----- ------------------------- ------------ ---------- ----------
Based on profit for the year
from continuing operations 1,922 31 (9) 1,944 75.1c 75.1c
---------------------------- ----- ------- ----- -------------------------
Based on loss for the year
from discontinued
operations (1,161) (44.8)c (44.8)c
------------ ---------- ----------
Based on profit for the year 783 30.3c 30.3c
------------ ---------- ----------
Basic earnings per share are calculated based on earnings
attributable to ordinary shareholders, after related tax and
non-controlling interests, by the weighted average number of
ordinary shares outstanding during the year, excluding those held
in employee share trusts and consolidated investment funds, which
are treated as cancelled. For diluted earnings per share, the
weighted average number of shares in issue is adjusted to assume
conversion of all dilutive potential ordinary shares. The Group's
only class of potentially dilutive ordinary shares are those share
options granted to employees where the exercise price is less than
the average market price of the Company's ordinary shares during
the year. No adjustment is made if the impact is anti-dilutive
overall.
The weighted average number of shares for calculating basic and
diluted earnings per share in 2020 is set out as below:
Number of shares (in millions) 2020 2019
---------------------------------------------------------------------------------------- ----- -----
Weighted average number of shares for calculation of basic earnings per share 2,597 2,587
Shares under option at end of year 2 4
Shares that would have been issued at fair value on assumed option price at end of year (2) (4)
---------------------------------------------------------------------------------------- ----- -----
Weighted average number of shares for calculation of diluted earnings per share 2,597 2,587
---------------------------------------------------------------------------------------- ----- -----
B5 Dividends
2020 2019
-------------------- ----------------------
Cents per share $m Cents per share $m
------------------------------------------------- --------------- --- --------------- -----
Dividends relating to reporting year:
First interim ordinary dividend 5.37c 140 20.29c 528
Second interim ordinary dividend 10.73c 280 25.97c 675
------------------------------------------------ --------------- ---
Total 16.10c 420 46.26c 1,203
------------------------------------------------- --------------- --- --------------- -----
Dividends paid in reporting year:
Current year first interim ordinary dividend 5.37c 140 20.29c 526
Second interim ordinary dividend for prior year 25.97c 674 42.89c 1,108
Total 31.34c 814 63.18c 1,634
------------------------------------------------- --------------- --- --------------- -----
First and second interim dividends are recorded in the period in
which they are paid. In addition to the dividends shown in the
table above, on 21 October 2019, following approval by the Group's
shareholders, Prudential plc demerged its UK and Europe operations
(M&G plc) via a dividend in specie of $7,379 million.
Dividend per share
The 2020 first interim ordinary dividend of 5.37 cents per
ordinary share was paid to eligible shareholders on 28 September
2020.
The second interim ordinary dividend for the year ended 31
December 2020 of 10.73 cents per ordinary share will be paid on 14
May 2021 to shareholders included on the UK and HK registers
respectively on 26 March 2021 (Record Date) and to the Holders of
US American Depositary Receipts as at 26 March 2021. The second
interim ordinary dividend will be paid on or about 21 May 2021 to
shareholders with shares standing to the credit of their securities
accounts with The Central Depository (Pte) Limited (CDP) on the
Record Date.
Shareholders holding shares on the UK or Hong Kong share
registers will continue to receive their dividend payments in
either GBP or HKD respectively, unless they elect otherwise.
Shareholders holding shares on the UK or Hong Kong registers may
elect to receive dividend payments in USD. Elections must be made
through the relevant UK or Hong Kong share registrar on or before
23 April 2021. The corresponding amount per share in GBP and HKD is
expected to be announced on or about 5 May 2021. The USD to GBP and
HKD conversion rates will be determined by the actual rates
achieved by Prudential buying those currencies prior to the
subsequent announcement. Holders of American Depositary Receipts
(ADRs) will continue to receive their dividend payments in USD.
Shareholders holding an interest in Prudential shares through The
Central Depository (Pte) Limited (CDP) in Singapore will continue
to receive their dividend payments in SGD at an exchange rate
determined by CDP.
Shareholders on the UK register are eligible to participate in a
Dividend Reinvestment Plan.
C FINANCIAL POSITION
C1 Group assets and liabilities by business type
The analysis below is structured to show the investments and
other assets and liabilities of the Group by reference to the
differing degrees of policyholder and shareholder economic interest
of the different types of business.
The Group has revised its disclosures relating to the
investments, other assets and liabilities of the Group in these
consolidated financial statements, including combining various
disclosures into a single section and giving further analysis of
the categories of debt securities. The 2019 comparative
information, in particular that relating to investments, has been
re-presented from previously published information to conform to
the current year format and the altered approach to credit ratings
analysis described below.
Debt securities are analysed below according to the issuing
government for sovereign debt and to credit ratings for the rest of
the securities.
From half year 2020, to align more closely with the internal
risk management analysis, the Group altered the compilation of its
credit ratings analysis to use the middle of the Standard &
Poor's, Moody's and Fitch ratings, where available. Where ratings
are not available from these rating agencies, NAIC ratings (for the
US), local external rating agencies' ratings and lastly internal
ratings have been used. Securities with none of the ratings listed
above are classified as unrated and included under the 'below BBB-
and unrated' category. The total securities (excluding sovereign
debt) that were unrated at 31 December 2020 were $780 million (31
December 2019: $648 million). Previously, Standard & Poor's
ratings were used where available and if not, Moody's and then
Fitch were used as alternatives. Additionally, government debt is
shown separately from the rating breakdowns in order to provide a
more focused view of the credit portfolio.
In the table below, AAA is the highest possible rating.
Investment grade financial assets are classified within the range
of AAA to BBB- ratings. Financial assets which fall outside this
range are classified as below BBB-.
31 Dec 2020 $m
--------------------------------------------------------------------------------------------------------
Asia insurance
--------------------------------
Elimination
of
Asia intra-group
With Unit-linked Asset Unallocated debtors
-profits assets and Other manage- Elimina- Total to a and Group
business liabilities business ment tions Asia US segment creditors total
note
note (i) (ii)
----------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Debt securities
note (iii), note
C1.1
Sovereign debt
Indonesia 385 658 564 12 - 1,619 - - - 1,619
Singapore 3,939 551 979 117 - 5,586 - - - 5,586
Thailand - - 1,999 11 - 2,010 - - - 2,010
United Kingdom - 7 - - - 7 - - - 7
United States 24,396 21 2,551 - - 26,968 5,126 - - 32,094
Vietnam - 11 2,881 - - 2,892 - - - 2,892
Other
(predominantly
Asia) 1,322 700 3,508 19 - 5,549 30 173 - 5,752
------------------ -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Subtotal 30,042 1,948 12,482 159 - 44,631 5,156 173 - 49,960
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Other government
bonds
AAA 1,420 96 405 - - 1,921 377 - - 2,298
AA+ to AA- 129 2 28 - - 159 522 - - 681
A+ to A- 811 131 339 - - 1,281 188 - - 1,469
BBB+ to BBB- 452 16 196 - - 664 3 - - 667
Below BBB- and
unrated 631 9 450 - - 1,090 - 1 - 1,091
------------------ -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Subtotal 3,443 254 1,418 - - 5,115 1,090 1 - 6,206
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Corporate bonds
AAA 1,228 221 540 - - 1,989 265 - - 2,254
AA+ to AA- 1,943 476 1,871 - - 4,290 869 - - 5,159
A+ to A- 7,289 695 5,194 1 - 13,179 10,759 - - 23,938
BBB+ to BBB- 9,005 1,299 4,785 - - 15,089 12,686 - - 27,775
Below BBB- and
unrated 2,814 849 1,477 2 - 5,142 1,975 6 - 7,123
------------------ -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Subtotal 22,279 3,540 13,867 3 - 39,689 26,554 6 - 66,249
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Asset-backed
securities
AAA 74 9 24 - - 107 2,110 - - 2,217
AA+ to AA- 2 1 - - - 3 171 - - 174
A+ to A- 15 - 16 - - 31 741 - - 772
BBB+ to BBB- 12 - 9 - - 21 163 - - 184
Below BBB- and
unrated 9 2 8 - - 19 48 - - 67
------------------ -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Subtotal 112 12 57 - - 181 3,233 - - 3,414
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Total debt
securities 55,876 5,754 27,824 162 - 89,616 36,033 180 - 125,829
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Loans
Mortgage
loans(note C1.2) - - 158 - - 158 7,833 - - 7,991
Policy loans 1,231 - 341 - - 1,572 4,507 10 - 6,089
Other loans 492 - 16 - - 508 - - - 508
------------------ -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Total loans 1,723 - 515 - - 2,238 12,340 10 - 14,588
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Equity securities
and holdings in
collective
investment schemes
Direct equities 15,668 13,064 3,321 71 - 32,124 253 4 - 32,381
Collective
investment
schemes 18,125 7,392 1,633 10 - 27,160 25 7 - 27,192
US separate
account
assetsnote (ii) - - - - - - 219,062 - - 219,062
------------------ -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Total equity
securities and
holdings in
collective
investment schemes 33,793 20,456 4,954 81 - 59,284 219,340 11 - 278,635
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Other financial
investments note
(iv) 1,566 405 2,139 97 - 4,207 4,094 47 - 8,348
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Total financial
investments 92,958 26,615 35,432 340 - 155,345 271,807 248 - 427,400
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Investment
properties - - 6 - - 6 7 10 - 23
Investments in
joint ventures and
associates
accounted for
using the equity
method - - 1,689 273 - 1,962 - - - 1,962
Cash and cash
equivalents 1,049 587 1,317 156 - 3,109 1,621 3,288 - 8,018
Reinsurers' share
of insurance
contract
liabilitiesnote
(v) 257 - 11,102 - - 11,359 35,232 4 - 46,595
Other assets 1,538 252 9,254 839 (62) 11,821 19,813 3,788 (3,323) 32,099
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Total assets 95,802 27,454 58,800 1,608 (62) 183,602 328,480 7,338 (3,323) 516,097
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Shareholders'
equity - - 12,785 1,102 - 13,887 8,511 (1,520) - 20,878
Non-controlling
interests - - 2 144 - 146 1,063 32 - 1,241
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Total equity - - 12,787 1,246 - 14,033 9,574 (1,488) - 22,119
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Contract
liabilities and
unallocated
surplus of
with-profits
fundsnote (ii) 86,410 25,433 37,845 - - 149,688 296,513 262 - 446,463
Core structural
borrowings - - - - - - 250 6,383 - 6,633
Operational
borrowings 194 - 99 23 - 316 1,498 630 - 2,444
Other liabilities 9,198 2,021 8,069 339 (62) 19,565 20,645 1,551 (3,323) 38,438
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Total liabilities 95,802 27,454 46,013 362 (62) 169,569 318,906 8,826 (3,323) 493,978
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Total equity and
liabilities 95,802 27,454 58,800 1,608 (62) 183,602 328,480 7,338 (3,323) 516,097
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
31 Dec 2019 $m
--------------------------------------------------------------------------------------------------------
Asia insurance
--------------------------------
Elimination
of
Asia intra-group
With Unit-linked Asset Unallocated debtors
-profits assets and Other manage- Elimina- Total to a and Group
business liabilities business ment tions Asia US segment creditors total
note
note (i) (ii)
----------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Debt securities
note (iii), note
C1.1
Sovereign debt
Indonesia 222 610 488 - - 1,320 - - - 1,320
Singapore 3,514 554 708 94 - 4,870 - - - 4,870
Thailand - - 1,398 19 - 1,417 - - - 1,417
United Kingdom - 7 - - - 7 - 615 - 622
United States 20,479 113 2,827 - - 23,419 6,160 597 - 30,176
Vietnam 1 15 2,900 - - 2,916 - - - 2,916
Other
(predominantly
Asia) 1,745 665 2,809 13 - 5,232 9 116 - 5,357
------------------ -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Subtotal 25,961 1,964 11,130 126 - 39,181 6,169 1,328 - 46,678
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Other government
bonds
AAA 1,752 81 538 - - 2,371 977 - - 3,348
AA+ to AA- 135 8 78 - - 221 495 - - 716
A+ to A- 890 159 389 - - 1,438 245 - - 1,683
BBB+ to BBB- 356 88 201 - - 645 4 - - 649
Below BBB- and
unrated 31 9 381 - - 421 - 2 - 423
------------------ -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Subtotal 3,164 345 1,587 - - 5,096 1,721 2 - 6,819
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Corporate bonds
AAA 732 384 516 - - 1,632 341 - - 1,973
AA+ to AA- 1,574 441 1,908 - - 3,923 1,566 - - 5,489
A+ to A- 5,428 542 5,063 - - 11,033 17,784 - - 28,817
BBB+ to BBB- 5,443 883 3,497 - - 9,823 22,775 - - 32,598
Below BBB- and
unrated 2,111 569 781 3 - 3,464 2,157 2 - 5,623
------------------ -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Subtotal 15,288 2,819 11,765 3 - 29,875 44,623 2 - 74,500
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Asset-backed
securities
AAA 236 19 104 - - 359 3,658 - - 4,017
AA+ to AA- 132 6 46 - - 184 780 - - 964
A+ to A- 1 - 14 - - 15 1,006 - - 1,021
BBB+ to BBB- - - - - - - 359 - - 359
Below BBB- and
unrated - - - - - - 212 - - 212
------------------ -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Subtotal 369 25 164 - - 558 6,015 - - 6,573
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Total debt
securities 44,782 5,153 24,646 129 - 74,710 58,528 1,332 - 134,570
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Loans
Mortgage
loans(note C1.2) - - 165 - - 165 9,904 - - 10,069
Policy loans 1,089 - 316 - - 1,405 4,707 9 - 6,121
Other loans 374 - 19 - - 393 - - - 393
------------------ -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Total loans 1,463 - 500 - - 1,963 14,611 9 - 16,583
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Equity securities
and holdings in
collective
investment schemes
Direct equities 14,143 12,440 1,793 59 - 28,435 150 4 - 28,589
Collective
investment
schemes 15,230 6,652 1,680 14 - 23,576 40 6 - 23,622
US separate
account
assetsnote (ii) - - - - - - 195,070 - - 195,070
------------------ -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Total equity
securities and
holdings in
collective
investment schemes 29,373 19,092 3,473 73 - 52,011 195,260 10 - 247,281
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Other financial
investments note
(iv) 963 383 1,363 106 - 2,815 2,791 56 - 5,662
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Total financial
investments 76,581 24,628 29,982 308 - 131,499 271,190 1,407 - 404,096
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Investment
properties - - 7 - - 7 7 11 - 25
Investments in
joint ventures and
associates
accounted for
using the equity
method - - 1,263 237 - 1,500 - - - 1,500
Cash and cash
equivalents 963 356 1,015 156 - 2,490 1,960 2,515 - 6,965
Reinsurers' share
of insurance
contract
liabilitiesnote
(v) 152 - 5,306 - - 5,458 8,394 4 - 13,856
Other assets 1,277 237 6,983 826 (35) 9,288 17,696 3,440 (2,652) 27,772
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Total assets 78,973 25,221 44,556 1,527 (35) 150,242 299,247 7,377 (2,652) 454,214
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Shareholders'
equity - - 9,801 1,065 - 10,866 8,929 (318) - 19,477
Non-controlling
interests - - 2 153 - 155 - 37 - 192
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Total equity - - 9,803 1,218 - 11,021 8,929 (281) - 19,669
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Contract
liabilities and
unallocated
surplus of
with-profits
fundsnote (ii) 70,308 23,571 26,814 - - 120,693 269,549 186 - 390,428
Core structural
borrowings - - - - - - 250 5,344 - 5,594
Operational
borrowings 303 21 122 27 - 473 1,501 671 - 2,645
Other liabilities 8,362 1,629 7,817 282 (35) 18,055 19,018 1,457 (2,652) 35,878
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Total liabilities 78,973 25,221 34,753 309 (35) 139,221 290,318 7,658 (2,652) 434,545
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Total equity and
liabilities 78,973 25,221 44,556 1,527 (35) 150,242 299,247 7,377 (2,652) 454,214
------------------- -------- ----------- --------- ------- -------- ------- ------- ----------- ----------- -------
Notes
(i) The with-profits business of Asia comprises the with-profits
assets and liabilities of the Hong Kong, Malaysia and Singapore
operations. 'Other business' includes assets and liabilities of
other participating businesses and other non-linked
shareholder-backed business.
(ii) Further analysis of the shareholders' equity by business
type of the US operations is provided below:
31 Dec 2020 $m 31 Dec 2019 $m
----------------------------- --------------
Asset
Insurance management Total Total
--------------------- --------- ----------- ----- --------------
Shareholders' equity 8,506 5 8,511 8,929
--------------------- --------- ----------- ----- --------------
The US separate account assets comprise investments in mutual
funds attaching to the variable annuity business that are held in
the separate account. The related liabilities are reported in
contract liabilities at an amount equal to the separate account
assets.
(iii) The credit ratings, information or data contained in this
report which are attributed and specifically provided by Standard
& Poor's, Moody's and Fitch Solutions and their respective
affiliates and suppliers ('Content Providers') is referred to here
as the 'Content'. Reproduction of any Content in any form is
prohibited except with the prior written permission of the relevant
party. The Content Providers do not guarantee the accuracy,
adequacy, completeness, timeliness or availability of any Content
and are not responsible for any errors or omissions (negligent or
otherwise), regardless of the cause, or for the results obtained
from the use of such Content. The Content Providers expressly
disclaim liability for any damages, costs, expenses, legal fees, or
losses (including lost income or lost profit and opportunity costs)
in connection with any use of the Content. A reference to a
particular investment or security, a rating or any observation
concerning an investment that is part of the Content is not a
recommendation to buy, sell or hold any such investment or
security, nor does it address the suitability of an investment or
security and should not be relied on as investment advice.
(iv) Other financial investments comprise derivative assets,
other investments and deposits.
(v) Reinsurers' share of contract liabilities includes the
reinsurance ceded in respect of the acquired REALIC business by the
Group's US insurance operations and at 31 December 2020 also
includes amounts ceded in respect of the reinsurance of
substantially all of Jackson's in-force fixed and fixed index
annuity liabilities to Athene Life Re Ltd, as discussed in note
D1.1.
C1.1 Additional analysis of debt securities
This note provides additional analysis of the Group's debt
securities. W ith the exception of certain debt securities
classified as 'available-for-sale' under IAS 39, which primarily
relate to US insurance operations as disclosed below, the Group's
debt securities are carried at fair value through profit or
loss.
(a) Holdings by consolidated investment funds of the Group
Of the $125,829 million of Group's debt securities at 31
December 2020 (31 December 2019: $134,570 million), the following
amounts were held by consolidated investment funds:
31 Dec 2020 $m 31 Dec 2019 $m
--------------------- --------------
Asia US Total Total
------------------------------------------------------- ------ ----- ------ --------------
Debt securities held by consolidated investment funds 15,928 1,145 17,073 22,113
------------------------------------------------------- ------ ----- ------ --------------
(b) Additional analysis of US debt securities
Debt securities for US operations included in the statement of
financial position comprise:
31 Dec 2020 $m 31 Dec 2019 $m
----------------------------------- -------------- --------------
Available-for-sale 34,650 57,091
Fair value through profit and loss 1,383 1,437
------------------------------------ -------------- --------------
Total US debt securities 36,033 58,528
------------------------------------ -------------- --------------
The corporate bonds held by the US insurance operations
comprise:
31 Dec 2020 $m 31 Dec 2019 $m
---------------------------------------------- -------------- --------------
Publicly traded and SEC Rule 144A securities* 17,870 34,781
Non-SEC Rule 144A securities 8,684 9,842
----------------------------------------------- -------------- --------------
Total US corporate bonds 26,554 44,623
----------------------------------------------- -------------- --------------
* A 1990 SEC rule that facilitates the resale of privately
placed securities under Rule 144A that are without SEC registration
to qualified institutional investors. The rule was designed to
develop a more liquid and efficient institutional resale market for
unregistered securities.
(c) Movements in unrealised gains and losses on Jackson available-for-sale debt securities
The movement in the statement of financial position value for
debt securities classified as available-for-sale from a net
unrealised gain of $3,496 million at 31 December 2019 to a net
unrealised gain of $3,396 million at 31 December 2020 is analysed
in the table below.
Changes in unrealised appreciation
(depreciation) reflected in other comprehensive
income
------------------------------------------------
Unrealised
Gains recycled to income gains (losses)
statement on transfer of debt arising in
31 Dec 2020 $m securities to Athene the year 31 Dec 2019 $m
note D1.1
--------------------------------- -------------- ------------------------------- --------------- --------------
Assets fair valued at below book
value
Book value 5,111 3,121
Unrealised loss (144) (117) (27)
--------------------------------- -------------- --------------
Fair value (as included in
statement of financial position) 4,967 3,094
--------------------------------- -------------- --------------
Assets fair valued at or above
book value
Book value 26,143 50,474
Unrealised gain 3,540 (2,817) 2,834 3,523
--------------------------------- -------------- --------------
Fair value (as included in
statement of financial position) 29,683 53,997
--------------------------------- -------------- --------------
Total
Book value 31,254 53,595
Net unrealised gain (loss) 3,396 (2,817) 2,717 3,496
--------------------------------- -------------- --------------
Fair value (as included in the
statement of financial position) 34,650 57,091
--------------------------------- -------------- ------------------------------- --------------- --------------
Book value represents cost or amortised cost of the debt
securities. Jackson available-for-sale debt securities fair valued
at below book value (in an unrealised loss position) is analysed
further below.
(i) Fair value as a percentage of book value
The following table shows the fair value of the Jackson
available-for-sale debt securities in a gross unrealised loss
position for various percentages of book value:
31 Dec 2020 $m 31 Dec 2019 $m
------------------ ------------------
Fair Unrealised Fair Unrealised
value loss value loss
--------------------- ------ ---------- ------ ----------
Between 90% and 100% 4,902 (128) 3,083 (25)
Between 80% and 90% 13 (2) 11 (2)
Below 80% 52 (14) - -
---------------------- ------ ---------- ------ ----------
Total 4,967 (144) 3,094 (27)
---------------------- ------ ---------- ------ ----------
(ii) Unrealised losses by maturity of security
31 Dec 2020 $m 31 Dec 2019 $m
------------------------------------------ -------------- --------------
1 year to 5 years (12) (1)
5 years to 10 years (15) (12)
More than 10 years (115) (7)
Mortgage-backed and other debt securities (2) (7)
------------------------------------------ -------------- --------------
Total (144) (27)
------------------------------------------ -------------- --------------
(iii) Age analysis of unrealised losses for the years
indicated
The following table shows the age analysis of all the unrealised
losses in the portfolio by reference to the length of time the
securities have been in an unrealised loss position:
31 Dec 2020 $m 31 Dec 2019 $m
------------------------------ ------------------------------
Non- Non-
investment Investment investment Investment
Age analysis grade grade* Total grade grade* Total
------------------- ----------- ---------- ----- ----------- ---------- -----
Less than 6 months (15) (118) (133) (1) (20) (21)
6 months to 1 year (4) (7) (11) (1) (1) (2)
1 year to 2 years - - - - (1) (1)
2 years to 3 years - - - - (1) (1)
More than 3 years - - - - (2) (2)
------------------- ----------- ---------- ----- ----------- ---------- -----
Total (19) (125) (144) (2) (25) (27)
------------------- ----------- ---------- ----- ----------- ---------- -----
* For Standard & Poor's, Moody's and Fitch rated debt
securities, those with ratings range from AAA to BBB- are
designated as investment grade. For NAIC rated debt securities,
those with ratings 1 or 2 are designated as investment grade.
Further, the following table shows the age analysis of the
securities at 31 December 2020 whose fair values were below 80 per
cent of the book value by reference to the length of time the
securities have been in an unrealised loss position (31 December
2019: nil):
31 Dec 2020 $m
---------------------------
Age analysis Fair value Unrealised loss
--------------------- ---------- ---------------
Less than 3 months - -
3 months to 6 months 51 (14)
More than 6 months 1 -
--------------------- ---------- ---------------
Total below 80% 52 (14)
--------------------- ---------- ---------------
(d) Asset-backed securities
The Group's holdings in asset-backed securities (ABS) comprise
residential mortgage-backed securities (RMBS), commercial
mortgage-backed securities (CMBS), collateralised debt obligations
(CDO) funds and other asset-backed securities.
The US operations' exposure to asset-backed securities
comprises:
31 Dec 2020 $m 31 Dec 2019 $m
---------------------------------------------------------------------------------- -------------- --------------
RMBS
Sub-prime (31 Dec 2020: 1% AAA) 29 93
Alt-A (31 Dec 2020: 30% AAA, 41% A) 12 116
Prime including agency (31 Dec 2020: 90% AAA, 1% AA, 5% A) 224 862
CMBS (31 Dec 2020: 87% AAA, 5% AA, 4% A) 1,588 3,080
CDO funds (31 Dec 2020: 78% AAA, 8% AA, 14% A), $nil exposure to sub-prime 524 696
Other ABS (31 Dec 2020: 14% AAA, 6% AA, 68% A), $27 million exposure to sub-prime 856 1,168
----------------------------------------------------------------------------------- -------------- --------------
Total US asset-backed securities 3,233 6,015
----------------------------------------------------------------------------------- -------------- --------------
(e) Group bank debt exposure
The Group exposures held by the shareholder-backed business and
with-profits funds in bank debt securities are analysed below. The
table excludes assets held to cover linked liabilities and those of
the consolidated investment funds.
Exposure to bank debt securities
31 Dec 2020 $m 31 Dec 2019 $m
----------------------------------------------- --------------
Senior debt Subordinated debt Group total Group total
----------- ---------------------
Shareholder-backed business Total Tier 1 Tier 2 Total
---------------------------- ----------- ------ ------ ----- ----------- --------------
Asia 902 175 242 417 1,319 993
Eurozone 223 4 12 16 239 337
United Kingdom 360 6 79 85 445 723
United States 1,464 7 81 88 1,552 3,134
Other 189 2 41 43 232 647
---------------------------- ----------- ------ ------ ----- ----------- --------------
Total 3,138 194 455 649 3,787 5,834
---------------------------- ----------- ------ ------ ----- ----------- --------------
With-profits funds
---------------------------- ----------- ------ ------ ----- ----------- --------------
Asia 402 557 437 994 1,396 1,130
Eurozone 41 21 10 31 72 131
United Kingdom 198 11 106 117 315 155
United States 1,028 14 82 96 1,124 34
Other 186 8 204 212 398 284
---------------------------- ----------- ------ ------ ----- ----------- --------------
Total 1,855 611 839 1,450 3,305 1,734
---------------------------- ----------- ------ ------ ----- ----------- --------------
C1.2 Additional analysis of US mortgage loans
In the US, mortgage loans of $7,833 million at 31 December 2020
( 31 December 2019: $9,904 million) are all commercial mortgage
loans that are secured by the following property types: industrial,
multi-family residential, suburban office, retail or hotel. The
average loan size is $18.5 million (31 December 2019: $19.3
million). The portfolio has a current estimated average loan to
value of 54 per cent (31 December 2019: 54 per cent ) .
At 31 December 2020, Jackson had mortgage loans with a carrying
value of $493 million (31 December 2019: nil) where the contractual
terms of the agreements had been restructured to grant forbearance
for a period of six to fourteen months. Under IAS 39, restructured
loans are reviewed for impairment with an impairment recorded if
the expected cash flows under the newly restructured terms
discounted at the original yield (the pre-structured interest rate)
are below the carrying value of the loan. No impairment is recorded
for these loans in 2020 as the expected cash flows and interest
rate did not materially change under the restructured terms.
C2 Fair value measurement
C2.1 Determination of fair value
The fair values of the financial instruments for which fair
valuation is required under IFRS Standards are determined by the
use of current market bid prices for exchange-quoted investments,
or by using quotations from independent third parties, such as
brokers and pricing services or by using appropriate valuation
techniques.
The estimated fair value of derivative financial instruments
reflects the estimated amount the Group would receive or pay in an
arm's-length transaction. This amount is determined using quoted
prices if exchange listed, quotations from independent third
parties or valued internally using standard market practices.
Other than the loans which have been designated at fair value
through profit or loss, the carrying value of loans and receivables
is presented net of provisions for impairment. The fair value of
loans is estimated from discounted cash flows expected to be
received. The discount rate used is updated for the market rate of
interest where applicable.
The fair value of the subordinated and senior debt issued by the
Parent Company is determined using quoted prices from independent
third parties.
The fair value of financial liabilities (other than subordinated
debt, senior debt and derivative financial instruments) is
determined using discounted cash flows of the amounts expected to
be paid.
Valuation approach for level 2 fair valued assets and
liabilities
A significant proportion of the Group's level 2 assets are
corporate bonds, structured securities and other non-national
government debt securities. These assets, in line with market
practice, are generally valued using a designated independent
pricing service or quote from third-party brokers. These valuations
are subject to a number of monitoring controls, such as comparison
to multiple pricing sources where available, monthly price
variances, stale price reviews and variance analysis on prices
achieved on subsequent trades.
When prices are not available from pricing services, quotes are
sourced directly from brokers. Prudential seeks to obtain a number
of quotes from different brokers so as to obtain the most
comprehensive information available on their executability. Where
quotes are sourced directly from brokers, the price used in the
valuation is normally selected from one of the quotes based on a
number of factors, including the timeliness and regularity of the
quotes and the accuracy of the quotes considering the spreads
provided. The selected quote is the one which best represents an
executable quote for the security at the measurement date.
Generally, no adjustment is made to the prices obtained from
independent third parties. Adjustment is made in only limited
circumstances, where it is determined that the third-party
valuations obtained do not reflect fair value (eg either because
the value is stale and/or the values are extremely diverse in
range). These are usually securities which are distressed or that
could be subject to a debt restructure or where reliable market
prices are no longer available due to an inactive market or market
dislocation. In these instances, prices are derived using internal
valuation techniques including those as described below in this
note with the objective of arriving at a fair value measurement
that reflects the price at which an orderly transaction would take
place between market participants on the measurement date. The
techniques used require a number of assumptions relating to
variables such as credit risk and interest rates. Examples of such
variables include an average credit spread based on the corporate
bond universe and the relevant duration of the asset being valued.
Prudential determines the input assumptions based on the best
available information at the measurement dates. Securities valued
in such manner are classified as level 3 where these significant
inputs are not based on observable market data.
Valuation approach for l evel 3 fair valued assets and
liabilities
Investments valued using valuation techniques include financial
investments which by their nature do not have an externally quoted
price based on regular trades, and financial investments for which
markets are no longer active as a result of market conditions, eg
market illiquidity. The valuation techniques used include
comparison to recent arm's-length transactions, reference to other
instruments that are substantially the same, discounted cash flow
analysis, option-adjusted spread models and, if applicable,
enterprise valuation.
The Group's valuation policies, procedures and analyses for
instruments categorised as level 3 are overseen by Business Unit
committees as part of the Group's wider financial reporting
governance processes. The procedures undertaken include approval of
valuation methodologies, verification processes, and resolution of
significant or complex valuation issues. In undertaking these
activities, the Group makes use of the extensive expertise of its
asset management functions. In addition, the Group has minimum
standards for independent price verification to ensure valuation
accuracy is regularly independently verified. Adherence to this
policy is monitored across the business units.
C2.2 Fair value measurement hierarchy of Group assets and liabilities
(i) Assets and liabilities carried at fair value on the statement of financial position
The table below shows the assets and liabilities carried at fair
value analysed by level of the IFRS 13 'Fair Value Measurement'
defined fair value hierarchy. This hierarchy is based on the inputs
to the fair value measurement and reflects the lowest level input
that is significant to that measurement.
All assets and liabilities held at fair value are classified as
fair value through profit or loss, except for $34,650 million (31
December 2019: $58,302 million) of debt securities classified as
available-for-sale, principally in the US operations. All assets
and liabilities held at fair value are measured on a recurring
basis. As of 31 December 2020, the Group did not have any financial
instruments that are measured at fair value on a non-recurring
basis.
Financial instruments at fair value
31 Dec 2020 $m
--------------------------------------------------------------
Level 1 Level 2 Level 3
------------------ --------------- --------------- --------
Valuation based Valuation based
Quoted prices on significant on significant
(unadjusted) observable unobservable
in active markets market inputs market inputs Total
note (i) note (ii)
--------------------------------------------------- ------------------ --------------- --------------- --------
Loans - 416 3,461 3,877
Equity securities and holdings in collective
investment schemes 272,863 5,224 548 278,635
Debt securities 75,998 49,769 62 125,829
Other investments (including derivative assets) 123 2,477 1,866 4,466
Derivative liabilities (298) (184) - (482)
---------------------------------------------------- ------------------ --------------- --------------- --------
Total financial investments, net of derivative
liabilities 348,686 57,702 5,937 412,325
Investment contract liabilities without
discretionary participation features held at fair
value - (792) - (792)
Net asset value attributable to unit holders of
consolidated investment funds (5,464) (17) (494) (5,975)
Other financial liabilities held at fair value - - (3,589) (3,589)
---------------------------------------------------- ------------------ --------------- --------------- --------
Total financial instruments at fair value 343,222 56,893 1,854 401,969
Percentage of total (%) 86% 14% 0% 100%
---------------------------------------------------- ------------------ --------------- --------------- --------
Analysed by business type:
Financial investments, net of derivative liabilities
at fair value:
With-profits 78,203 11,481 395 90,079
Unit-linked and variable annuity separate account 244,206 1,075 - 245,281
Non-linked shareholder-backed business 26,277 45,146 5,542 76,965
--------------------------------------------------- ------------------ --------------- --------------- --------
Total financial investments, net of derivative
liabilities at fair value 348,686 57,702 5,937 412,325
Other financial liabilities at fair value (5,464) (809) (4,083) (10,356)
---------------------------------------------------- ------------------ --------------- --------------- --------
Group total financial instruments at fair value 343,222 56,893 1,854 401,969
---------------------------------------------------- ------------------ --------------- --------------- --------
31 Dec 2019 $m
--------------------------------------------------------------
Level 1 Level 2 Level 3
Valuation Valuation
based based
Quoted prices on significant on significant
(unadjusted) observable unobservable
in active markets market inputs market inputs Total
note (i) note (ii)
--------------------------------------------------- ------------------ --------------- --------------- --------
Loans - - 3,587 3,587
Equity securities and holdings in collective
investment schemes 243,285 3,720 276 247,281
Debt securities 67,927 66,637 6 134,570
Other investments (including derivative assets) 70 1,676 1,301 3,047
Derivative liabilities (185) (207) - (392)
---------------------------------------------------- ------------------ --------------- --------------- --------
Total financial investments, net of derivative
liabilities 311,097 71,826 5,170 388,093
Investment contract liabilities without
discretionary participation features held at fair
value - (1,011) - (1,011)
Net asset value attributable to unit holders of
consolidated investment funds (5,973) (23) (2) (5,998)
Other financial liabilities held at fair value - - (3,760) (3,760)
---------------------------------------------------- ------------------ --------------- --------------- --------
Total financial instruments at fair value 305,124 70,792 1,408 377,324
Percentage of total (%) 81% 19% 0% 100%
---------------------------------------------------- ------------------ --------------- --------------- --------
Analysed by business type:
Financial investments, net of derivative liabilities
at fair value:
With-profits 66,061 7,762 260 74,083
Unit-linked and variable annuity separate account 217,838 1,486 - 219,324
Non-linked shareholder-backed business 27,198 62,578 4,910 94,686
--------------------------------------------------- ------------------ --------------- --------------- --------
Total financial investments, net of derivative
liabilities at fair value 311,097 71,826 5,170 388,093
Other financial liabilities at fair value (5,973) (1,034) (3,762) (10,769)
---------------------------------------------------- ------------------ --------------- --------------- --------
Group total financial instruments at fair value 305,124 70,792 1,408 377,324
---------------------------------------------------- ------------------ --------------- --------------- --------
Notes
(i) Of the total level 2 debt securities of $49,769 million at
31 December 2020 (31 December 2019: $66,637 million), $7,676
million (31 December 2019: $8,915 million) are valued internally.
The majority of such securities are valued using matrix pricing,
which is based on assessing the credit quality of the underlying
borrower to derive a suitable discount rate relative to government
securities of a comparable duration. Under matrix pricing, the debt
securities are priced taking the credit spreads on comparable
quoted public debt securities and applying these to the equivalent
debt instruments factoring in a specified liquidity premium. The
majority of the parameters used in this valuation technique are
readily observable in the market and, therefore, are not subject to
interpretation.
(ii) At 31 December 2020, the Group held $1,854 million (31
December 2019: $1,408 million) of net financial instruments at fair
value within level 3. This represents less than 1 per cent (2019:
less than 1 per cent) of the total fair valued financial assets net
of financial liabilities.
Included within these net assets and liabilities are policy
loans of $3,455 million (31 December 2019: $3,587 million) measured
as the loan outstanding balance, plus accrued investment income,
attached to acquired REALIC business and held to back the
liabilities for funds withheld under reinsurance arrangements. The
funds withheld liability of $3,609 million (31 December 2019:
$3,760 million) is also classified within level 3. The fair value
of the liabilities is equal to the fair value of the underlying
assets held as collateral, which primarily consist of policy loans
and debt securities. The assets and liabilities offset and
therefore their movements have no impact on shareholders' profit
and equity.
Excluding the loans and funds withheld liability under Jackson's
REALIC reinsurance arrangements as described above, which amounted
to a net liability of $(154) million (31 December 2019: $(173)
million), the level 3 fair valued financial assets net of financial
liabilities were a net asset of $2,008 million (31 December 2019:
$1,581 million). Of this amount, equity securities of $3 million
(31 December 2019: nil) are internally valued, representing less
than 0.2 per cent of the total fair valued financial assets net of
financial liabilities. Internal valuations are inherently more
subjective than external valuations. The $2,008 million referred to
above includes the following items:
- Private equity investments in both equity securities and
limited partnerships within other financial investments of $1,970
million (31 December 2019: $1,301 million) consisting of
investments held by Jackson which are primarily externally valued
in accordance with International Private Equity and Venture Capital
Association guidelines using the proportion of the company's
investment in each fund as shown in external valuation reports;
- Equity securities and holdings in collective investment
schemes of $445 million (31 December 2019: $276 million) consisting
primarily of property and infrastructure funds held by the Asia
participating funds, which are externally valued using the net
asset value of the invested entities;
- Liabilities of $(494) million (31 December 2019: $(2) million)
for the net asset value attributable to external unit holders in
respect of consolidated investment funds, which are non-recourse to
the Group. These liabilities are valued by reference to the
underlying assets; and
- Other sundry individual financial instruments of a net asset
of $87 million (31 December 2019: net asset of $4 million).
Of the net assets of $2,008 million (31 December 2019: $1,581
million) referred to above:
- A net asset of $395 million (31 December 2019: $258 million)
is held by the Group's Asia participating funds and therefore
shareholders' profit and equity are not impacted by movements in
the valuation of these financial instruments; and
- A net asset of $1,613 million (31 December 2019: $1,323 million) is held to support non-linked shareholder-backed business, all of which are externally valued and are therefore inherently less subjective than internal valuations. These instruments consist primarily of private equity investments held by Jackson as described above. If the value of all these level 3 financial instruments decreased by 20 per cent, the change in valuation would be $(319) million (31 December 2019: $(264) million), which would reduce shareholders' equity by this amount before tax. All of this amount would pass through the income statement substantially as part of short-term fluctuations in investment returns outside of adjusted operating profit.
C3 Policyholder liabilities and unallocated surplus
C3.1 Group overview
(i) Analysis of movements in policyholder liabilities and
unallocated surplus of with-profits funds
Discontinued
UK and
Europe
Asia US operations Total
$m $m $m $m
note C3.2 note C3.3
-------------------------------------------------------------------- --------- --------- ------------ ---------
Balance at 1 Jan 2019note (a) 105,408 236,380 210,002 551,790
Comprising: note (b)
--------------------------------------------------------------------- --------- --------- ------------ ---------
- Policyholder liabilities on the consolidated statement of
financial position
(excludes $50 million classified as unallocated to a segment) 91,836 236,380 193,020 521,236
- Unallocated surplus of with-profits funds on the consolidated
statement of financial position 3,198 - 16,982 20,180
- Group's share of policyholder liabilities of joint ventures and
associates note (c) 10,374 - - 10,374
-------------------------------------------------------------------- --------- --------- ------------ ---------
Removal of discontinued UK and Europe operations - - (210,002) (210,002)
Net flows:note (d)
Premiums 20,094 20,976 - 41,070
Surrenders (4,156) (17,342) - (21,498)
Maturities/deaths/other claim events (2,800) (3,387) - (6,187)
-------------------------------------------------------------------- --------- --------- ------------ ---------
Net flows 13,138 247 - 13,385
Shareholders' transfers post-tax (99) - - (99)
Investment-related items and other movements 12,824 32,922 - 45,746
Foreign exchange translation differences 1,299 - - 1,299
--------------------------------------------------------------------- --------- --------- ------------ ---------
Balance at 31 Dec 2019/1 Jan 2020 132,570 269,549 - 402,119
Comprising:
--------------------------------------------------------------------- --------- --------- ------------ ---------
- Policyholder liabilities on the consolidated statement of
financial position
(excludes $186 million classified as unallocated to a segment) 115,943 269,549 - 385,492
- Unallocated surplus of with-profits funds on the consolidated
statement of financial position 4,750 - - 4,750
- Group's share of policyholder liabilities of joint ventures and
associates note (c) 11,877 - - 11,877
-------------------------------------------------------------------- --------- --------- ------------ ---------
Net flows:note (d)
Premiums 20,760 18,671 - 39,431
Surrenders (4,730) (15,832) - (20,562)
Maturities/deaths/other claim events (2,565) (3,708) - (6,273)
-------------------------------------------------------------------- --------- --------- ------------ ---------
Net flows 13,465 (869) - 12,596
Shareholders' transfers post-tax (116) - - (116)
Investment-related items and other movements 17,269 27,833 - 45,102
Foreign exchange translation differences 2,105 - - 2,105
--------------------------------------------------------------------- --------- --------- ------------ ---------
Balance at 31 Dec 2020 165,293 296,513 - 461,806
--------------------------------------------------------------------- --------- --------- ------------ ---------
Comprising:
--------------------------------------------------------------------- --------- --------- ------------ ---------
- Policyholder liabilities on the consolidated statement of
financial position
(excludes $262 million classified as unallocated to a segment) 144,471 296,513 - 440,984
- Unallocated surplus of with-profits funds on the consolidated
statement of financial position 5,217 - - 5,217
- Group's share of policyholder liabilities of joint ventures and
associates note (c) 15,605 - - 15,605
-------------------------------------------------------------------- --------- --------- ------------ ---------
Average policyholder liability balancesnote (e)
2020 143,948 283,031 - 426,979
2019 115,015 252,965 - 367,980
-------------------------------------------------------------------- --------- --------- ------------ ---------
Notes
(a) The 1 January 2019 policyholder liabilities of the Asia
insurance operations were after deducting the intra-group
reinsurance liabilities ceded by the discontinued UK and Europe
operations (M&G plc) to the Hong Kong with-profits business,
which were recaptured in October 2019 upon demerger.
(b) The items above represent the amount attributable to changes
in policyholder liabilities and unallocated surplus of with-profits
funds as a result of each of the components listed. The
policyholder liabilities shown include investment contracts without
discretionary participation features (as defined in IFRS 4) and
their full movement in the year but exclude liabilities that have
not been allocated to a reporting segment. The items above are
shown gross of external reinsurance.
(c) Including net flows of the Group's insurance joint ventures
and associates. The Group's investment in joint ventures and
associates are accounted for on an equity method basis in the
Group's statement of financial position. The Group's share of the
policyholder liabilities as shown above relates to life businesses
of the China JV, India and the Takaful business in Malaysia.
( d) The analysis includes the impact of movements in premiums,
claims and investment-related items on policyholders' liabilities.
The amount does not represent actual premiums, claims and
investment movements in the year recognised in the income
statement. For example, premiums shown above exclude any deductions
for fees/charges; claims (surrenders, maturities, deaths and other
claim events) shown above represent the release of technical
provision for policyholder liabilities rather than the actual
claims amount paid to the policyholder.
(e) Average policyholder liabilities have been based on opening
and closing balances, adjusted for acquisitions, disposals and
other relevant corporate transactions arising in the year, and
exclude unallocated surplus of with-profits funds.
(ii) Analysis of movements in policyholder liabilities for shareholder-backed business
Discontinued
UK and
Europe
Asia US operations Total
$m $m $m $m
------------------------------------------------------------------------ ------- -------- ------------ --------
Balance at 1 Jan 2019 51,705 236,380 51,911 339,996
Removal of discontinued UK and Europe operations - - (51,911) (51,911)
Net flows:
Premiums 10,372 20,976 - 31,348
Surrenders (3,610) (17,342) - (20,952)
Maturities/deaths/other claim events (1,168) (3,387) - (4,555)
------------------------------------------------------------------------ ------- -------- ------------ --------
Net flows(note) 5,594 247 - 5,841
Investment-related items and other movements 4,186 32,922 - 37,108
Foreign exchange translation differences 777 - - 777
------------------------------------------------------------------------- ------- -------- ------------ --------
Balance at 31 Dec 2019/1 Jan 2020 62,262 269,549 - 331,811
------------------------------------------------------------------------- ------- -------- ------------ --------
Comprising:
------------------------------------------------------------------------- ------- -------- ------------ --------
- Policyholder liabilities on the consolidated statement of financial
position
(excludes $186 million classified as unallocated to a segment) 50,385 269,549 - 319,934
- Group's share of policyholder liabilities relating to joint ventures
and associates 11,877 - - 11,877
------------------------------------------------------------------------ ------- -------- ------------ --------
Net flows:
Premiums 11,028 18,671 - 29,699
Surrenders (3,933) (15,832) - (19,765)
Maturities/deaths/other claim events (970) (3,708) - (4,678)
------------------------------------------------------------------------ ------- -------- ------------ --------
Net flows(note) 6,125 (869) - 5,256
Investment-related items and other movements 9,143 27,833 - 36,976
Foreign exchange translation differences 1,353 - - 1,353
------------------------------------------------------------------------- ------- -------- ------------ --------
Balance at 31 Dec 2020 78,883 296,513 - 375,396
------------------------------------------------------------------------- ------- -------- ------------ --------
Comprising:
------------------------------------------------------------------------- ------- -------- ------------ --------
- Policyholder liabilities on the consolidated statement of financial
position
(excludes $262 million classified as unallocated to a segment) 63,278 296,513 - 359,791
- Group's share of policyholder liabilities relating to joint ventures
and associates 15,605 - - 15,605
------------------------------------------------------------------------ ------- -------- ------------ --------
Note
Including net flows of the Group's insurance joint ventures and
associates.
(iii) Movement in insurance contract liabilities and unallocated
surplus of with-profits funds
Further analysis of the movement in the year of the Group's
gross contract liabilities, reinsurer's share of insurance contract
liabilities and unallocated surplus of with-profits funds
(excluding those held by joint ventures and associates) is provided
below:
Reinsurer's
Gross share of Unallocated
insurance insurance Investment surplus of
contract contract contract with-profits
liabilities liabilities liabilities funds
$m $m $m $m
note (e) note (a),(e) note (b)
------------------------------------------------------------- ------------ ------------ ------------ -------------
Balance at 1 Jan 2019 (410,947) 14,193 (110,339) (20,180)
Removal of discontinued UK and Europe operations 87,824 (2,169) 105,196 16,982
Income and expense included in the income statement for
continuing operationsnote (c) (55,579) 1,795 (311) (1,415)
Other movementsnote (d) - - (63) (112)
Foreign exchange translation differences (1,441) 37 (18) (25)
------------------------------------------------------------- ------------ ------------ ------------ -------------
Balance at 31 Dec 2019/1 Jan 2020 (380,143) 13,856 (5,535) (4,750)
Income and expense included in the income statementnote (c) (55,034) 32,723 349 (438)
Other movementsnote (d) - - 765 -
Foreign exchange translation differences (1,610) 16 (38) (29)
------------------------------------------------------------- ------------ ------------ ------------ -------------
Balance at 31 Dec 2020 (436,787) 46,595 (4,459) (5,217)
------------------------------------------------------------- ------------ ------------ ------------ -------------
Notes
(a) Includes reinsurers' share of claims outstanding of $1,527
million (31 December 2019: $1,094 million). The increase in
reinsurers' share of insurance contract liabilities in 2020
includes $27.3 billion in respect of the reinsurance of
substantially all of Jackson's in-force fixed and fixed index
annuity liabilities to Athene Life Re Ltd.
(b) This comprises investment contracts with discretionary
participation features of $479 million at 31 December 2020 (31
December 2019: $633 million) and investment contracts without
discretionary participation features of $3,980 million at 31
December 2020 (31 December 2019: $4,902 million).
(c) The total charge for benefits and claims in 2020 shown in
the income statement comprises the amounts shown as 'Income and
expense included in the income statement' in the table above of
$(22,400) million (2019: $(55,510) million) together with claims
paid of $(27,491) million (2019: $(29,585) million), net of amounts
attributable to reinsurers of $1,686 million (2019: $1,190
million).
(d) Other movements include premiums received and claims paid on
investment contracts without discretionary participating features,
which are taken directly to the balance sheet in accordance with
IAS 39. In 2019, the changes in the unallocated surplus of
with-profits funds also resulted from the recapture of the
intra-group reinsurance agreement between the discontinued UK and
Europe operations and Asia insurance operations prior to the
demerger, which was eliminated in the income statement.
(e) The movement in the gross contract liabilities and the
reinsurer's share of insurance contract liabilities during 2020
includes the impact of a change to the calculation of the valuation
interest rate (VIR) used to value long-term insurance liabilities
in Hong Kong. The effect of the change to the VIR was such that the
implicit duration of liabilities is reduced and closer to best
estimate expectations. The change reduced policyholder liabilities
(net of reinsurance) of the Hong Kong's shareholder-backed business
at 31 December 2020 by $907 million. The resulting benefit is
included within short-term fluctuations in investment returns.
C3.2 Asia insurance operations
(i) Analysis of movements in policyholder liabilities and
unallocated surplus of with-profits funds
Shareholder-backed business
-----------------------------
With-profits Unit-linked Other
business liabilities business Total
$m $m $m $m
------------------------------------------------------------- ------------ ---------------- ----------- -------
Balance at 1 Jan 2019 53,703 25,704 26,001 105,408
Comprising:
-------------------------------------------------------------- ------------ ---------------- ----------- -------
- Policyholder liabilities on the consolidated statement of
financial position 50,505 20,846 20,485 91,836
- Unallocated surplus of with-profits funds on the
consolidated statement of financial position 3,198 - - 3,198
- Group's share of policyholder liabilities relating to joint
ventures and associates note
(a) - 4,858 5,516 10,374
------------------------------------------------------------- ------------ ---------------- ----------- -------
Premiums
New business 1,611 1,837 2,419 5,867
In-force 8,111 2,361 3,755 14,227
------------------------------------------------------------- ------------ ---------------- ----------- -------
9,722 4,198 6,174 20,094
Surrendersnote (b) (546) (2,929) (681) (4,156)
Maturities/deaths/other claim events (1,632) (149) (1,019) (2,800)
-------------------------------------------------------------- ------------ ---------------- ----------- -------
Net flows 7,544 1,120 4,474 13,138
Shareholders' transfers post-tax (99) - - (99)
Investment-related items and other movements 8,638 1,663 2,523 12,824
Foreign exchange translation differencesnote (d) 522 363 414 1,299
-------------------------------------------------------------- ------------ ---------------- ----------- -------
Balance at 31 Dec 2019/1 Jan 2020 70,308 28,850 33,412 132,570
Comprising:
-------------------------------------------------------------- ------------ ---------------- ----------- -------
- Policyholder liabilities on the consolidated statement of
financial position 65,558 23,571 26,814 115,943
- Unallocated surplus of with-profits funds on the
consolidated statement of financial position 4,750 - - 4,750
- Group's share of policyholder liabilities relating to joint
ventures and associates note
(a) - 5,279 6,598 11,877
------------------------------------------------------------- ------------ ---------------- ----------- -------
Premiums
New business 1,338 1,851 2,063 5,252
In-force 8,393 2,358 4,757 15,508
------------------------------------------------------------- ------------ ---------------- ----------- -------
9,731 4,209 6,820 20,760
Surrendersnote (b) (797) (2,982) (951) (4,730)
Maturities/deaths/other claim events (1,595) (196) (774) (2,565)
-------------------------------------------------------------- ------------ ---------------- ----------- -------
Net flows 7,339 1,031 5,095 13,465
Shareholders' transfers post-tax (116) - - (116)
Investment-related items and other movementsnote (c) 8,127 2,107 7,035 17,269
Foreign exchange translation differencesnote (d) 752 518 835 2,105
-------------------------------------------------------------- ------------ ---------------- ----------- -------
Balance at 31 Dec 2020 86,410 32,506 46,377 165,293
-------------------------------------------------------------- ------------ ---------------- ----------- -------
Comprising:
-------------------------------------------------------------- ------------ ---------------- ----------- -------
- Policyholder liabilities on the consolidated statement of
financial position 81,193 25,433 37,845 144,471
- Unallocated surplus of with-profits funds on the
consolidated statement of financial position 5,217 - - 5,217
- Group's share of policyholder liabilities relating to joint
ventures and associates note
(a) - 7,073 8,532 15,605
------------------------------------------------------------- ------------ ---------------- ----------- -------
Average policyholder liability balancesnote (e)
2020 73,375 30,678 39,895 143,948
2019 58,032 27,277 29,706 115,015
------------------------------------------------------------- ------------ ---------------- ----------- -------
Notes
(a) The Group's investment in joint ventures and associates are
accounted for on an equity method and the Group's share of the
policyholder liabilities as shown above relate to the life business
of the China JV, India and the Takaful business in Malaysia.
(b) The rate of surrenders for shareholder-backed business
(expressed as a percentage of opening policyholder liabilities) is
6.3 per cent in 2020 (2019: 7.0 per cent).
(c) Investment-related items and other movements in 2020
primarily represents equity market gains as well as fixed income
asset gains and lower discount rates due to falling interest
rates.
(d) Movements in the year have been translated at the average
exchange rates for the year ended 31 December 2020 and 2019. The
closing balance has been translated at the closing spot rates as at
31 December 2020 and 2019. Differences upon retranslation are
included in foreign exchange translation differences.
(e) Average policyholder liabilities have been based on opening
and closing balances, adjusted for any acquisitions, disposals and
other relevant corporate transactions arising in the year, and
exclude unallocated surplus of with-profits funds.
(ii) Duration of policyholder liabilities
The table below shows the carrying value of policyholder
liabilities and the maturity profile of the cash flows on a
discounted basis, taking account of expected future premiums and
investment returns:
31 Dec 2020 $m 31 Dec 2019 $m
------------------------- -------------- --------------
Policyholder liabilities 144,471 115,943
-------------------------- -------------- --------------
Expected maturity: 31 Dec 2020 % 31 Dec 2019 %
-------------------------- -------------- --------------
0 to 5 years 20 18
5 to 10 years 19 18
10 to 15 years 15 15
15 to 20 years 12 13
20 to 25 years 10 11
Over 25 years 24 25
------------------------- -------------- --------------
C3.3 US insurance operations
(i) Analysis of movements in policyholder liabilities
Variable
annuity General
separate account
account and other
liabilities business Total
$m $m $m
----------------------------------------------------- ------------ ---------- --------
Balance at 1 Jan 2019 163,301 73,079 236,380
Premiums 12,776 8,200 20,976
Surrenders (12,767) (4,575) (17,342)
Maturities/deaths/other claim events (1,564) (1,823) (3,387)
------------------------------------------------------ ------------ ---------- --------
Net flowsnote (a) (1,555) 1,802 247
Transfers from general to separate account 951 (951) -
Investment-related items and other movementsnote (b) 32,373 549 32,922
------------------------------------------------------ ------------ ---------- --------
Balance at 31 Dec 2019/1 Jan 2020 195,070 74,479 269,549
Premiums 14,990 3,681 18,671
Surrenders (11,300) (4,532) (15,832)
Maturities/deaths/other claim events (1,854) (1,854) (3,708)
------------------------------------------------------ ------------ ---------- --------
Net flowsnote (a) 1,836 (2,705) (869)
Transfers from separate to general account (2,190) 2,190 -
Investment-related items and other movementsnote (b) 24,346 3,487 27,833
------------------------------------------------------ ------------ ---------- --------
Balance at 31 Dec 2020 219,062 77,451 296,513
------------------------------------------------------ ------------ ---------- --------
Average policyholder liability balancesnote (c)
2020 207,066 75,965 283,031
2019 179,186 73,779 252,965
----------------------------------------------------- ------------ ---------- --------
Notes
(a) Net outflows in 2020 were $(869) million (2019 inflows: $247
million) with surrenders and withdrawals from general account and
other business exceeding new inflows on this business given lower
volumes of institutional and fixed and fixed-index annuities sales
in the year, partially offset by net inflows into the variable
annuity separate accounts. This is discussed further in the Group
Chief Financial Officer and Chief Operating Officer's report.
(b) Positive investment-related items and other movements in
variable annuity separate account liabilities of $24,346 million
for 2020 largely represent positive separate account return
following the increase in the US equity market growth in the year
and asset gains arising from declining bond yields.
(c) Average policyholder liabilities have been based on opening
and closing balances, adjusted for any acquisitions, disposals and
other corporate transactions arising in the year. Included within
the policyholder liabilities for the general account and other
business of $77,451 million at 31 December 2020 are $27.3 billion
in respect of the reinsured Jackson's in-force fixed and fixed
index annuity liabilities to Athene Life Re Ltd, as discussed in
note D1.1.
(ii) Duration of policyholder liabilities
The table below shows the carrying value of policyholder
liabilities and maturity profile of the cash flows on a discounted
basis at the balance sheet date:
31 Dec 2020 31 Dec 2019
----------------------------------------- -----------------------------------------
General General
Variable account Variable account
annuity separate and other annuity separate and other
account liabilities business Total account liabilities business Total
$m $m $m $m $m $m
------------------------- -------------------- ---------- ------- -------------------- ---------- -------
Policyholder liabilities 219,062 77,451 296,513 195,070 74,479 269,549
-------------------------- -------------------- ---------- ------- -------------------- ---------- -------
Expected maturity: %% % % %%
-------------------------- -------------------- --------- ------- ------------------- ---------- ------
0 to 5 years 39 36 39 41 45 42
5 to 10 years 27 22 26 27 27 27
10 to 15 years 16 17 16 16 13 15
15 to 20 years 9 11 10 9 89
20 to 25 years 56 5 4 44
Over 25 years 48 4 3 33
------------------------- -------------------- --------- ------- ------------------- ---------- ------
C4 Intangible assets
C4.1 Goodwill
Goodwill shown on the consolidated statement of financial
position represents amounts attributable to shareholders and are
allocated to businesses in Asia and Africa in respect of both
acquired asset management and life businesses. There has been no
impairment as at 31 December 2020 and 2019.
2020 $m 2019 $m
------------------------------------------------- ------- -------
Carrying value at 1 Jan 969 2,365
Removal of discontinued UK and Europe operations - (1,731)
Additions in the year - 299
Exchange differences (8) 36
------------------------------------------------- ------- -------
Carrying value at 31 Dec 961 969
------------------------------------------------- ------- -------
C4.2 Deferred acquisition costs and other intangible assets
31 Dec 2020 $m 31 Dec 2019 $m
-------------------------------------------------------------------------------------- -------------- --------------
DAC and other intangible assets attributable to shareholders 20,275 17,409
Other intangible assets, including computer software, attributable to with-profits
funds 70 67
-------------------------------------------------------------------------------------- -------------- --------------
Total of DAC and other intangible assets 20,345 17,476
-------------------------------------------------------------------------------------- -------------- --------------
The DAC and other intangible assets attributable to shareholders
comprise:
31 Dec 2020 $m 31 Dec 2019 $m
-------------------------------------------------------------------------------------- -------------- --------------
DAC related to insurance contracts as classified under IFRS 4 16,182 14,206
DAC related to investment management contracts, including life assurance contracts
classified
as financial instruments and investment management contracts under IFRS 4 34 33
-------------------------------------------------------------------------------------- -------------- --------------
DAC related to insurance and investment contracts 16,216 14,239
-------------------------------------------------------------------------------------- -------------- --------------
Present value of acquired in-force policies for insurance contracts as classified
under IFRS
4 (PVIF) 34 38
Distribution rights and other intangibles 4,025 3,132
-------------------------------------------------------------------------------------- -------------- --------------
Present value of acquired in-force (PVIF) and other intangibles attributable to
shareholders 4,059 3,170
-------------------------------------------------------------------------------------- -------------- --------------
Total of DAC and other intangible assetsnote (a) 20,275 17,409
-------------------------------------------------------------------------------------- -------------- --------------
Notes
(a) Total DAC and other intangible assets attributable to
shareholders can be further analysed by business operations as
follows:
2020 $m 2019 $m
------------------------------------- -------
DAC PVIF and
---------------
other
Asia US* intangibles Total Total
note (b)
---------------------------------------------------------- ----- -------- ------------ ------ -------
Balance at 1 Jan 1,999 12,240 3,170 17,409 15,008
Removal of discontinued UK and Europe operations - - - - (143)
Additions(++) 617 740 1,114 2,471 2,601
Amortisation to the income statement:note (c)
----- -------- ------------ ------ -------
Adjusted operating profit (308) (423) (220) (951) (792)
Non-operating profit (loss)** - 812 (5) 807 1,243
----- -------- ------------ ------ -------
(308) 389 (225) (144) 451
Disposals and transfers - - (12) (12) (11)
Exchange differences and other movements 45 - 12 57 134
Amortisation of DAC related to net unrealised valuation
movements on the US insurance operation's
available-for-sale securities recognised within other
comprehensive income - 494 - 494 (631)
----------------------------------------------------------- ----- -------- ------------ ------ -------
Balance at 31 Dec 2,353 13,863 4,059 20,275 17,409
----------------------------------------------------------- ----- -------- ------------ ------ -------
* Under the Group's application of IFRS 4, US GAAP is used for
measuring the insurance assets and liabilities of its US and
certain Asia operations. Under US GAAP, most of the US insurance
operation's products are accounted for under Accounting Standard
no. 97 of the Financial Accounting Standards Board (FAS 97) whereby
DAC are amortised in line with the emergence of actual and expected
gross profits which are determined using an assumption for
long-term investment returns for the separate account of 7.15 per
cent (2019: 7.4 per cent) gross of asset management fees and other
charges to policyholders, but net of external fund management fees.
The other assumptions impacting expected gross profits include
mortality assumptions, lapses, assumed unit costs and future hedge
costs. The amounts included in the income statement and other
comprehensive income affect the pattern of profit emergence and
thus the DAC amortisation attaching. DAC amortisation is allocated
to the operating and short-term investment fluctuations in
investment returns of the Group's supplementary analysis of profit
and other comprehensive income by reference to the underlying
items. The gain of $389 million in 2020 in the US operations
includes $(764) million for the write-off of the DAC in respect of
the reinsured Jackson's in-force fixed and fixed index annuity
liabilities to Athene Life Re Ltd. The US DAC amortisation charge
within adjusted operating profit of $(423) million increased from
the 2019 corresponding amount of $(297) million largely as a result
of changes to the longer-term economic assumptions underpinning the
amortisation calculation following an expectation of lower interest
rates in the future, partially offset by the benefits of increases
in DAC amortisation deceleration in the year described in note (c)
below.
**'Non-operating profit (loss)' is used to refer to items
excluded from adjusted operating profit and includes short-term
investment fluctuations in investment returns on shareholder-backed
business, corporate transactions and amortisation of acquisition
accounting adjustments.
PVIF and other intangibles comprise present value of acquired
in-force (PVIF), distribution rights and other intangibles such as
software rights. Distribution rights relate to amounts that have
been paid or have become unconditionally due for payment as a
result of past events in respect of bancassurance partnership
arrangements in Asia. These agreements allow for bank distribution
of Prudential's insurance products for a fixed period of time.
Software rights include additions of $54 million, amortisation of
$(34) million, disposals of $(6) million, foreign exchange of $3
million and closing balance at 31 December 2020 of $102 million (31
December 2019: $85 million).
(++) On 19 March 2020, the Group signed a new bancassurance
agreement with TMB Bank for a period of 15 years. This extended
exclusive partnership agreement required the novation of TMB Bank's
current bancassurance distribution agreement with another insurance
group. The agreement cost Thai Baht 24.5 billion, which were paid
in two instalments with Thai Baht 12.0 billion paid in April 2020
and the remainder in January 2021. The amount included in additions
in the table above is $788 million.
(b) The DAC amount in respect of US arises in the insurance
operations which comprises the following amounts:
31 Dec 2020 $m 31 Dec 2019 $m
----------------------------------------------------------------------------------- -------------- --------------
Variable annuity and other business 14,064 12,935
Cumulative shadow DAC (for unrealised gains/losses booked in other comprehensive
income)* (201) (695)
----------------------------------------------------------------------------------- -------------- --------------
Total DAC for US operations 13,863 12,240
----------------------------------------------------------------------------------- -------------- --------------
* A net gain of $494 million (2019: a net loss of $(631)
million) for shadow DAC amortisation is booked within other
comprehensive income to reflect a reduction in shadow DAC of $535
million as a result of the reinsurance of substantially all of
Jackson's fixed and fixed index annuity business to Athene Life
offset by the impact from the positive unrealised valuation
movement for 2020 of $2,717 million (2019: positive unrealised
valuation movement of $4,023 million). These adjustments reflect
the movement from year to year, in the changes to the pattern of
reported gross profits that would have happened if the assets
reflected in the statement of financial position had been sold,
crystallising the unrealised gains and losses, and the proceeds
reinvested at the yields currently available in the market.
(c) Sensitivity of US DAC amortisation charge
The amortisation charge to the income statement in respect of
the US DAC asset is reflected in both adjusted operating profit and
short-term fluctuations in investment returns. The amortisation
charge to adjusted operating profit in a reporting period generally
comprises:
- A core amount that reflects a relatively stable proportion of
underlying premiums or profit; and
- An element of acceleration or deceleration arising from market
movements differing from expectations.
In periods where the cap and floor features of the mean
reversion technique (which is used for moderating the effect of
short-term volatility in investment returns) are not relevant, the
technique operates to dampen the second element above.
Nevertheless, extreme market movements can cause material
acceleration or deceleration of amortisation in spite of this
dampening effect. It is currently estimated that DAC amortisation
will accelerate (decelerate) by $17 million for every 1 per cent
under (over) the mean reversion rate (set using the calculation
described below to give an average over an 8-year period of 7.15
per cent (2019: 7.4 per cent)) the actual separate account growth
rate differs by.
Furthermore, in those periods where the cap or floor is
relevant, the mean reversion technique provides no further
dampening and additional volatility may result.
In 2020, the DAC amortisation charge for adjusted operating
profit was determined after including a credit for decelerated
amortisation of $330 million ( 2019: credit for deceleration: $280
million). DAC amortisation for variable annuities is sensitive to
separate account performance. The deceleration arising in 2020
reflected a mechanical decrease in the projected separate account
return for the next five years under the mean-reversion technique.
Under this technique, the projected level of return for each of the
next five years is adjusted so that in combination with the actual
rates of return for the preceding three years (including the
current year) the assumed long-term annual separate account return
of 7.15 per cent is realised on average over the entire eight-year
period.
The application of the mean reversion formula has the effect of
dampening the impact of equity market movements on DAC amortisation
while the mean reversion assumption lies within the corridor. At 31
December 2020 , it would take approximate movements in separate
account values of more than either negative 40 per cent or positive
19 per cent for mean reversion assumption to move outside the
corridor.
Changes to the assumed long-term separate account return will
also impact the calculation of the DAC balance and could increase
or decrease the DAC amortisation charge in a given period. If the
assumption for the long-term separate account investment returns
(net of external fund management fees) was reduced by 0.5 per cent
from 7.15 per cent to 6.65 per cent at 31 December 2020, the 2020
amortisation charge for adjusted operating profit would have
increased by around $70 million with a corresponding reduction in
the DAC balance at 31 December 2020. In addition, pre-tax
short-term fluctuations in investment returns would reduce by circa
$64 million following changes to the policyholder liabilities
valued using longer-term equity assumptions under SOP03-1,
resulting in a total impact on profit before tax of $134
million.
C5 Borrowings
C5.1 Core structural borrowings of shareholder-financed
businesses
31 Dec 2020 $m 31 Dec 2019 $m
-------------------------------------------------------------------- -------------- --------------
Central operations:
Subordinated debt:
US$250m 6.75% Notesnote (i) 250 250
US$300m 6.5% Notesnote (i) 300 300
US$700m 5.25% Notes 700 700
US$1,000m 5.25% Notes 999 996
US$725m 4.375% Notes 723 721
US$750m 4.875% Notes 746 744
EUR20m Medium Term Notes 2023 24 22
GBP435m 6.125% Notes 2031 590 571
Senior debt:note (ii)
GBP300m 6.875% Notes 2023 406 392
GBP250m 5.875% Notes 2029 312 298
$1,000m 3.125% Notes 2030note (iii) 983 -
$350m Loan 2024note (iv) 350 350
--------------------------------------------------------------------- -------------- --------------
Total central operations 6,383 5,344
Jackson US$250m 8.15% Surplus Notes 2027note (v) 250 250
--------------------------------------------------------------------- -------------- --------------
Total core structural borrowings of shareholder-financed businesses 6,633 5,594
--------------------------------------------------------------------- -------------- --------------
Notes
(i) These borrowings can be converted, in whole or in part, at
the Company's option and subject to certain conditions, on any
interest payment date, into one or more series of Prudential
preference shares.
(ii) The senior debt ranks above subordinated debt in the event of liquidation.
(iii) In April 2020, the Company issued $1,000 million 3.125 per
cent senior debt maturing on 14 April 2030 with proceeds, net of
costs of $983 million.
(iv) In November 2020, the $350 million term loan was settled,
and the Group entered into a replacement $350 million term loan
facility at a cost of daily compounded Secured Overnight Financing
Rate (SOFR) plus 59 basis points. The new term loan matures in
2024.
(v) Jackson's borrowings are unsecured and subordinated to all
present and future indebtedness, policy claims and other creditor
claims of Jackson.
C5.2 Operational borrowings
31 Dec 2020 $m 31 Dec 2019 $m
-------------------------------------------------------------------------------------- -------------- --------------
Borrowings in respect of short-term fixed income securities programmes - commercial
paper 501 520
Lease liabilities under IFRS 16 302 371
Non-recourse borrowings of consolidated investment fundsnote (a) 994 1,045
Bank loans and overdrafts - 29
Other borrowingsnote (b) 453 377
-------------------------------------------------------------------------------------- -------------- --------------
Operational borrowings attributable to shareholder-financed businesses 2,250 2,342
-------------------------------------------------------------------------------------- -------------- --------------
Lease liabilities under IFRS 16 194 259
Other borrowings - 44
-------------------------------------------------------------------------------------- -------------- --------------
Operational borrowings attributable to with-profits businesses 194 303
-------------------------------------------------------------------------------------- -------------- --------------
Total operational borrowings 2,444 2,645
-------------------------------------------------------------------------------------- -------------- --------------
Notes
(a) In all instances, the holders of the debt instruments issued
by consolidated investment funds do not have recourse beyond the
assets of those funds.
(b) Other borrowings attributable to shareholder-financed
business mainly represent s enior debt issued through the Federal
Home Loan Bank of Indianapolis (FHLB), secured by collateral posted
with the FHLB by Jackson.
C6 Risk and sensitivity analysis
C6.1 Group overview
The Group's risk framework and the management of risks,
including those attached to the Group's financial statements
including financial assets, financial liabilities and insurance
liabilities, together with the inter-relationship with the
management of capital, have been included in the Group Chief Risk
and Compliance Officer's report on the risks facing our business
and how these are managed.
The financial and insurance assets and liabilities on the
Group's statement of financial position are, to varying degrees,
subject to market and insurance risk and other changes of
experience assumptions that may have a material effect on IFRS
basis profit or loss and shareholders' equity. The market and
insurance risks and also ESG-related risks, including how they
affect Group's operations and how these are managed are discussed
in the Risk report referred to above. The ESG-related risks
discussed in the Risk report include in particular the potential
long-term impact of environmental risks associated with climate
change (including physical and transition risks) on the Group's
investments.
The most significant items that the IFRS shareholders' profit or
loss and shareholders' equity for the Group's life assurance
business are sensitive to, are shown in the following tables. The
distinction between direct and indirect exposure is not intended to
indicate the relative size of the sensitivity.
Insurance and lapse
Type of business Market and credit risk risk
--------------------------------------------------------------
Asia insurance operations
All business Mortality and/or
morbidity risk
Persistency risk
---------------------- -------------------------------------------------------------- ----------------------
With-profits business Net neutral direct exposure (indirect exposure to investment
performance, which is subject
to smoothing through declared bonuses)
Unit-linked business Net neutral direct exposure (indirect exposure to investment
performance, through asset management
fees)
---------------------- --------------------------------------------------------------
Non-participating Asset/liability mismatch risk which results in sensitivity to
business interest rates and credit spreads,
particularly for operations where the insurance liability
basis is sensitive to current market
movements
Indirect exposure to investment performance through
policyholder charges and guarantees in
some cases
---------------------- -------------------------------------------------------------- ----------------------
US insurance
operations
----------------------
All business Asset/liability mismatch risk Mortality risk
Adjusted operating profit is sensitive to market conditions,
both with respect to income earned
on spread-based products and indirectly with respect to income
earned on variable annuity
asset management fees.
---------------------- -------------------------------------------------------------- ----------------------
Variable annuity Net effect of market risk (equity and interest rates) arising Persistency and
business from incidence of guarantee utilisation risk (risk
features and variability of asset management fees, offset by that utilisation of
derivative hedging programme* withdrawal benefits or
lapse levels
differ from those
assumed)
---------------------- -------------------------------------------------------------- ----------------------
General account Credit risk and market risk (equity and interest rate) in Persistency risk,
business meeting guaranteed rates of accumulation mitigated in some
on general account annuity and interest sensitive life cases by the
products which may lead to smaller application of market
spread profits, being the difference between the earned rate value adjustments
and the policyholder crediting
rate. As at 1 June 2020, the risk has been substantially
transferred for the fixed and fixed
index annuity products as part of the reinsurance transaction
with Athene described in note
D1.1.
Shareholders' equity is impacted by interest rate and credit
risk via impairments and unrealised
gains/losses on fixed income securities. For those instruments
classified as available-for-sale
under IAS 39, unrealised gains/losses do not directly impact
profit, unless they are considered
permanent reductions in value.
---------------------- -------------------------------------------------------------- ----------------------
* Jackson's derivative programme, is used to manage the economic
interest rate risk associated with a broad range of products and
equity market risk attaching to its equity-based products.
Movements in equity markets, equity volatility, interest rates and
credit spreads materially affect the carrying value of derivatives
that are used to manage the liabilities to policyholders and
backing investment assets. Movements in the carrying value of
derivatives combined with the use of US GAAP measurement (as
'grandfathered' under IFRS 4) for the insurance contracts assets
and liabilities, which is largely insensitive to current year
market movements, mean that the Jackson total profit (ie including
short-term fluctuations in investment returns) is sensitive to
market movements.
The profit for the year of asset management operations is
sensitive to the level of assets under management, as this
significantly affects the value of management fees earned by the
business in the current and future periods. Assets under management
will rise and fall as market conditions change, with a
consequential impact on profitability. Other than this, there is
limited sensitivity to market risks since the Group's asset
management and other operations do not hold significant financial
investments. At 31 December 2020, the financial investments of the
other operations are principally short-term investments held by the
Group's treasury function for liquidity purposes and so there is
limited sensitivity to interest rate movements.
Sensitivity analyses of IFRS shareholders' equity to key market
and other risks by business unit are provided below. The
sensitivity analyses provided show the effect on shareholders'
equity to changes in the relevant risk variables, all of which are
considered to be reasonably possible at the relevant balance sheet
date.
The sensitivities reflect all consequential impacts from market
movements at the valuation date. The sensitivities below only allow
for limited management actions such as changes to policyholder
bonuses, where applicable. If the economic conditions set out in
the sensitivities persisted, the financial impacts may differ to
the instantaneous impacts. Given the continuous risk management
processes in place, management could take additional actions to
help mitigate the impact of these stresses, including (but not
limited to) rebalancing investment portfolios, further market risk
hedging, increased use of reinsurance, repricing of in-force
benefits, changes to new business pricing and the mix of new
business being sold.
Other limitations of the sensitivities include: the use of
hypothetical market movements that cannot be predicted with any
certainty to demonstrate potential risk, which only represent
Prudential's view of reasonably possible near-term market changes;
the assumption that interest rates in all countries move
identically; and the lack of consideration of the inter-relation of
interest rates, equity markets and foreign currency exchange
rates.
The Group benefits from diversification benefits achieved
through the geographical spread of the Group's operations and,
within those operations, through a broad mix of product types.
These benefits are not reflected in the simplified sensitivities
below. Relevant correlation factors include:
- Correlation across geographic regions for both financial and non-financial risk factors; and
- Correlation across risk factors for longevity risk, expenses, persistency and other risks.
The geographical diversity of the Group's business means that it
has some exposure to the risk of foreign exchange rate
fluctuations. The Group has no exposure to currency fluctuation
from business units that operate in USD, or currencies pegged to
the USD (such as HKD), and reduced exposure to currencies partially
managed to the USD within a basket of currencies (such as SGD).
Sensitivities to exchange rate movements in the Group's key markets
are therefore expected to be limited.
C6.2 Sensitivity to interest rate risk
The sensitivities shown below are for movements in risk-free
rates (based on local government bond yields at the valuation date)
in isolation and are subject to a floor of zero. They do not
include movements in credit risk that may affect credit spreads and
hence the valuation of debt securities and policyholder
liabilities. A one-letter credit downgrade in isolation (ie
ignoring any consequential change in valuation) would not have a
material impact on IFRS profit or shareholders' equity.
To reflect the substantial fall and current level of low
interest rates in 2020, the estimated sensitivity to a decrease in
interest rates at 31 December 2020 has been updated to a decrease
of 0.5 per cent. This compares to a 1 per cent change at 31
December 2019. The estimated sensitivity to a decrease and increase
in interest rates at 31 December 2020 is as follows:
31 December 2020 Asia insurance $m US insurance $m
-------------------------------- --------------------------------
Decrease of 0.5% Increase of 1% Decrease of 0.5% Increase of 1%
------------------------------------ ---------------- -------------- ---------------- --------------
Net effect on shareholders' equity* (1,274) (318) (594) (68)
------------------------------------- ---------------- -------------- ---------------- --------------
* The effect from the instantaneous changes in interest rates
above, if they arose, would impact profit after tax for Asia
insurance operations and would mostly be recorded within short-term
fluctuations in investment returns. The impact on profit after tax
would be the same as the net effect on shareholders' equity. For US
insurance operations, the instantaneous changes in interest rates
above, if they arose, would cause the net effect on equity shown
above through two constituent movements. Firstly, profit after tax,
net of related changes in the amortisation of DAC, would be
impacted (decrease of 0.5 per cent: $(1,319) million; increase of 1
per cent: $1,976 million), and would mostly be recorded within
short-term fluctuations in investment returns. Secondly, the effect
would also impact other comprehensive income (decrease of 0.5 per
cent: $725 million; increase of 1 per cent: $(2,044) million) in
respect of the direct effect on the carrying value of the
available-for-sale debt securities, net of related changes in the
amortisation of DAC and related tax effects.
The estimated sensitivity to a decrease and increase in interest
rates at 31 December 2019 was as follows:
31 December 2019 Asia insurance $m US insurance $m
------------------------------ ------------------------------
Decrease of 1% Increase of 1% Decrease of 1% Increase of 1%
------------------------------------ -------------- -------------- -------------- --------------
Net effect on shareholders' equity* (702) (718) 20 (553)
------------------------------------- -------------- -------------- -------------- --------------
* The effect from the instantaneous changes in interest rates
above, if they arose, would impact profit after tax for Asia
insurance operations and would mostly be recorded within short-term
fluctuations in investment returns. The impact on profit after tax
would be the same as the net effect on shareholders' equity. For US
insurance operations, the instantaneous changes in interest rates
above, if they arose, would cause the net effect on equity shown
above through two constituent movements. Firstly, profit after tax,
net of related changes in the amortisation of DAC, would be
impacted (decrease of 1 per cent: $(2,224) million; increase of 1
per cent: $1,691 million), and would mostly be recorded within
short-term fluctuations in investment returns. Secondly, the effect
would also impact other comprehensive income (decrease of 1 per
cent: $2,244 million; increase of 1 per cent: $(2,244) million) in
respect of the direct effect on the carrying value of the
available-for-sale debt securities, net of related changes in the
amortisation of DAC and related tax effects.
Asia insurance operations
The degree of sensitivity of the results of the non-linked
shareholder-backed business of the Asia operations to movements in
interest rates depends upon the degree to which the liabilities
under the 'grandfathered' IFRS 4 measurement basis reflects market
interest rates from year to year. This varies by local business
unit.
For example:
- Certain Asia businesses apply US GAAP, for which the results
can be more sensitive as the effect of interest rate movements on
the backing investments may not be offset by liability
movements;
- The level of options and guarantees in the products written in
the particular business unit will also affect the degree of
sensitivity to interest rate movements; and
- The degree of sensitivity of the results is dependent on the
interest rate level at that point of time.
The sensitivity of the Asia operations presented as a whole at a
given point in time will also be affected by a change in the
relative size of the individual businesses.
For many operations the sensitivities are dominated by the
impact of interest rate movements on the value of government and
corporate bond investments, which are expected to increase in value
as interest rates fall to a greater extent than the offsetting
increase in liabilities (and vice versa if rates rise). This arises
because the discount rate in some operations does not fluctuate in
line with interest rate movements. At higher levels of interest
rates the liabilities become less sensitive to interest rate
movements and the effects on assets becomes more dominant. This
pattern is evident in the 'increase of 1 per cent' sensitivity at
31 December 2020.
The 'decrease of 0.5%' sensitivities reflects that some local
business units' liabilities become more sensitive at lower interest
rates and the fluctuations in liabilities begin to exceed asset
gains. The liability movements also reflect the prudent nature of
some of the regulatory regimes which leads to duration of
liabilities that are longer than would be expected on a more
economic basis and hence results in a mismatch with the assets that
are managed on a more realistic basis. Following the substantial
fall in interest rates over 2020, at 31 December 2020, the
'decrease of 0.5 per cent' sensitivity is dominated by the impact
of interest rate movements on some local business units'
policyholder liabilities, which are expected to increase more than
the offsetting increase in the value of government and corporate
bond investments, if interest rates were to fall further from the
historically low levels seen at 31 December 2020. As noted above,
the results only allow for limited management actions, and if such
economic conditions persisted management could take additional
actions to help mitigate the impact of these stresses, including
(but not limited to) rebalancing investment portfolios, increased
use of reinsurance, changes to new business pricing and the mix of
new business being sold.
US insurance operations
The GMWB features attached to variable annuity business (other
than 'for life' components) are accounted for under US GAAP at fair
value and, therefore, will be sensitive to changes in interest
rates. Debt securities and related derivatives are marked to fair
value. Value movements on derivatives, net of related changes to
amortisation of DAC and deferred tax, are recorded within the
income statement. Fair value movements on debt securities, net of
related changes to amortisation of DAC and deferred tax, are
recorded within other comprehensive income.
As at 1 June 2020, the interest rate risks relating to Jackson's
fixed and fixed index annuity products have been substantially
transferred as part of the reinsurance transaction with Athene
described in note D1.1, leaving only a limited exposure from
residual policies and new policies written post 1 June 2020.
Jackson is exposed primarily to the following interest rate
risks:
- Related to meeting guaranteed rates of accumulation on general
account annuity and interest sensitive life products following a
sustained fall in interest rates;
- Related to increases in the present value of projected
benefits related to guarantees issued in connection with its
variable annuity contracts following a sustained fall in interest
rates especially if in conjunction with a fall in equity
markets;
- Related to the surrender value guarantee features attached to
the Company's general account annuity and interest sensitive life
products and to policyholder withdrawals following a sharp and
sustained increase in interest rates; and
- The risk of mismatch between the expected duration of certain
annuity liabilities and prepayment risk and extension risk inherent
in mortgage-backed securities.
A prolonged low interest rate environment may result in a
lengthening of maturities of the general account annuity and
interest-sensitive life contract holder liabilities from initial
estimates, primarily due to lower policy lapses. As interest rates
remain at low levels, Jackson may also have to reinvest the cash it
receives as interest or proceeds from investments that have matured
or that have been sold at lower yields, reducing its investment
margins. Moreover, borrowers may prepay or redeem the securities in
their investment portfolios with greater frequency in order to
borrow at lower market rates, which exacerbates this risk. The
majority of Jackson's general account business was designed with
contractual provisions that allow crediting rates to be re-set
annually, subject to minimum crediting rate guarantees.
The sensitivity movements provided in the table above are at a
point in time and reflect the hedging programme in place on the
balance sheet date, while the actual impact on financial results
would vary contingent upon a number of factors. Jackson's hedging
programme is primarily focused on managing the economic risks in
the business and protecting statutory solvency under larger market
movements, and does not explicitly aim to hedge the IFRS accounting
results. The magnitude of the impact of the sensitivities on profit
after tax at 31 December 2020 is larger than the impact at 31
December 2019, reflecting the liabilities being more sensitive to
further interest rate movements at the current low interest rate
levels (after taking into account the impact of interest rate
movements on derivatives). In determining the value of liabilities,
assumed future separate account return is based on risk-free rates
under grandfathered US GAAP. The reduction in the magnitude of the
impact of the sensitivities on other comprehensive income, and
hence shareholders' equity, reflects the impact of the Athene
reinsurance transaction described in note D1.1 on the profile of
Jackson's general account liabilities and the consequential
reduction in available-for-sale debt securities.
C6.3 Sensitivity to equity and property price risk
In the equity risk sensitivity analysis shown, the Group has
considered the impact of an instantaneous 20 per cent fall in
equity markets. If equity markets were to fall by more than 20 per
cent, the Group believes that this would not be an instantaneous
fall but rather would be expected to occur over a longer period of
time, during which the hedge positions within Jackson, where the
underlying equity risk is greatest, would be rebalanced. The equity
risk sensitivity analysis provided assumes that all equity indices
fall by the same percentage.
Asia insurance operations
The estimated sensitivity to a 10 per cent increase and 20 per
cent decrease in equity and property prices is as follows:
31 Dec 2020 $m 31 Dec 2019 $m
-------------------------------- --------------------------------
Decrease of 20% Increase of 10% Decrease of 20% Increase of 10%
------------------------------------ --------------- --------------- --------------- ---------------
Net effect on shareholders' equity* (848) 410 (816) 408
------------------------------------ --------------- --------------- --------------- ---------------
* The effect from the instantaneous changes in equity and
property prices above, if they arose, would impact profit after tax
for Asia insurance operations, which would mostly be recorded
within short-term fluctuations in investment returns.
Generally, changes in equity and property investment values are
not directly offset by movements in non-linked policyholder
liabilities. Movements in equities backing with-profits and
unit-linked business have been excluded as they are generally
matched by an equal movement in insurance liabilities (including
unallocated surplus of with-profits funds). The impact on changes
to future profitability as a result of changes to the asset values
within unit-linked or with-profits funds have not been included in
the instantaneous sensitivity above. The estimated sensitivities
shown above include equity and property investments held by the
Group's joint venture and associate businesses.
US insurance operations
At December 31, 2020 and 2019, the Company provided variable
annuity contracts with guarantees, for which the net amount at risk
("NAR") is defined as the amount of guaranteed benefit in excess of
current account value, as follows (dollars in millions):
31 Dec 2020 $m 31 Dec 2019 $m
----------------- -----------------
Net Net
Account amount Account amount
value at risk value at risk
--------------------------------------------------------------------------- ------- -------- ------- --------
Return of net deposits plus a minimum return
GMDB 170,510 2,340 150,576 2,477
GMWB - premium only 2,858 12 2,753 16
GMWB 248 11 257 14
GMAB - premium only 39 - 37 -
Highest specified anniversary account value minus withdrawals
post-anniversary - -
GMDB 13,512 86 12,547 69
GMWB - highest anniversary only 3,459 41 3,232 51
GMWB 646 55 698 52
Combination net deposits plus minimum return, highest specified anniversary
account value
minus withdrawals post-anniversary - -
GMDB 8,891 615 8,159 687
GMIB 1,675 556 1,688 616
GMWB 159,857 5,656 140,529 7,160
--------------------------------------------------------------------------- ------- -------- ------- --------
* Ranges shown based on simple interest. The upper limits of 5%
or 8% simple interest are approximately equal to 4.1% and 6%,
respectively, on a compound interest basis over a typical 10-year
bonus period. The combination GMWB category also includes benefits
with a defined increase in the withdrawal percentage under
pre-defined non-market conditions.
Jackson is primarily exposed to equity risk through the
guarantees included in certain variable annuity benefits. This risk
is managed using an equity hedging programme to minimise the risk
of a significant economic impact as a result of increases or
decreases in equity market levels. Jackson purchases futures and
options that hedge the risks inherent in these products, while also
considering the impact of rising and falling guaranteed benefit
fees.
Due to the nature of valuation under IFRS of the free-standing
derivatives and certain of the variable annuity guarantee features,
this hedge, while effective on an economic basis, would not
automatically offset within the financial statements as the impact
of equity market movements resets the free-standing derivatives
immediately while the hedged liabilities reset more slowly and fees
are recognised prospectively in the year in which they are earned.
Jackson's hedging programme is focused on managing the economic
risks in the business and protecting statutory solvency in the
circumstances of large market movements. The hedging programme does
not aim to hedge IFRS accounting results, which can lead to
volatility in the IFRS results in a period of significant market
movements, as was seen in 2020.
In addition to the exposure explained above, Jackson is also
exposed to equity risk from its holding of equity securities,
partnerships in investment pools and other financial
derivatives.
The estimated sensitivity to a 10 per cent increase and 20 per
cent decrease in equity and property prices is shown below.
31 Dec 2020 $m 31 Dec 2019 $m
-------------------------------- --------------------------------
Decrease of 20% Increase of 10% Decrease of 20% Increase of 10%
------------------------------------ --------------- --------------- --------------- ---------------
Net effect on shareholders' equity* 744 299 762 608
------------------------------------ --------------- --------------- --------------- ---------------
* The effect from the instantaneous changes in equity and
property prices above, if they arose, would impact profit after tax
for US insurance operations, which would mostly be recorded within
short-term fluctuations in investment returns.
The table above excludes the impact of instantaneous equity
movements on future separate account fee income.
The above sensitivities assume instantaneous market movements
while the actual impact on financial results would vary contingent
upon the volume of new product sales and lapses, changes to the
derivative portfolio, correlation of market returns and various
other factors including volatility, interest rates and elapsed
time.
The directional movements in the sensitivities reflect the
hedging programme in place at 31 December 2020 and 2019
respectively. The nature of Jackson's dynamic hedging programme
means that the portfolio, and hence the results of these
sensitivities, will change on an ongoing basis. The impacts shown
under an increase or a decrease in equity markets reflect the
factors discussed above.
Jackson had variable annuity contracts with guarantees. Account
balances of contracts with guarantees were invested in variable
separate accounts as follows:
Mutual fund type: 31 Dec 2020 $m 31 Dec 2019 $m
------------------- -------------- --------------
Equity 132,213 121,520
Bond 20,203 19,341
Balanced 39,626 30,308
Money market 1,862 956
------------------ -------------- --------------
Total 193,904 172,125
------------------ -------------- --------------
C6.4 Sensitivity to insurance risk
Asia insurance operations
In Asia, adverse persistency experience can impact the IFRS
profitability of certain types of business written in the region.
This risk is managed at a local business unit level through regular
monitoring of experience and the implementation of management
actions as necessary. These actions could include product
enhancements, increased management focus on premium collection, as
well as other customer retention efforts. The potential financial
impact of lapses is often mitigated through the specific features
of the products, eg surrender charges, or through the availability
of premium holiday or partial withdrawal policy features. The
reserving basis in Asia is generally such that a change in lapse
assumptions has an immaterial effect on immediate
profitability.
Many of the business units in Asia are exposed to mortality and
morbidity risk and a provision is made within policyholder
liabilities to cover the potential exposure. If all these
assumptions were strengthened by 5 per cent then it is estimated
that post-tax profit and shareholders' equity would decrease by
approximately $77 million (2019: $77 million). Weakening these
assumptions by 5 per cent would have a similar opposite impact.
US insurance operations
Jackson is sensitive to mortality risk, lapse risk and other
types of policyholder behaviour, such as the utilisation of its
GMWB product features. Jackson's persistency assumptions reflect a
combination of recent experience for each relevant line of business
and expert judgement, especially where a lack of relevant and
credible experience data exists. These assumptions vary by relevant
factors, such as product, policy duration, attained age and for
variable annuity lapse assumptions, the extent to which guaranteed
benefits are 'in the money' relative to policy account values.
Changes in these assumptions, which are assessed on an annual basis
after considering recent experience, could have a material impact
on policyholder liabilities and therefore on profit before tax. Any
changes in these assumptions are recorded within short-term
fluctuations in investment returns in the Group's supplementary
analysis of profit (see note B1.2).
In addition, in the absence of hedging, equity and interest rate
movements can both cause a direct loss or increase the future
sensitivity to policyholder behaviour. Jackson has an extensive
derivative programme that seeks to manage the exposure to such
altered equity markets and interest rates.
The amount of amortisation charged in any one period is
sensitive to separate account investment returns. The sensitivity
of DAC amortisation charge is discussed in note C4.2.
C7 Tax assets and liabilities
C7.1 Current tax
At 31 December 2020, of the $444 million (31 December 2019: $492
million) current tax recoverable, the majority is expected to be
recovered more than 12 months after the reporting period.
At 31 December 2020, the current tax liability of $280 million
(31 December 2019: $396 million) includes $113 million (31 December
2019: $198 million) of provisions for uncertain tax matters.
Further detail is provided in note B3.2.
C7.2 Deferred tax
The statement of financial position contains the following
deferred tax assets and liabilities in relation to:
2020 $m
--------------------------------------------------------------
Movement Other
through movements
other including
Movement in comprehensive foreign
Balance income income currency Balance
at 1 Jan statement and equity movements at 31 Dec
------------------------------------------------------ --------- ----------- -------------- ---------- ----------
Deferred tax assets
Unrealised losses or gains on investments - - - - -
Balances relating to investment and insurance
contracts 32 55 - - 87
Short-term temporary differences 3,889 765 - 8 4,662
Unused tax losses 154 (50) - 5 109
------------------------------------------------------ --------- ----------- -------------- ---------- ----------
Total 4,075 770 - 13 4,858
------------------------------------------------------ --------- ----------- -------------- ---------- ----------
Deferred tax liabilities
Unrealised losses or gains on investments (877) (78) (102) (6) (1,063)
Balances relating to investment and insurance
contracts (1,507) (235) - (23) (1,765)
Short-term temporary differences (2,853) (377) - (17) (3,247)
------------------------------------------------------ --------- ----------- -------------- ---------- ----------
Total (5,237) (690) (102) (46) (6,075)
------------------------------------------------------ --------- ----------- -------------- ---------- ----------
2019 $m
--------- ----------- ----------- -------------- ---------- ----------
Movement Other
through movements
Demerger other including
of UK and Movement in comprehensive foreign
Balance Europe income income currency Balance
at 1 Jan operations statement and equity movements at 31 Dec
----------------------------------------- --------- ----------- ----------- -------------- ---------- ----------
Deferred tax assets
Unrealised losses or gains on investments 144 - (16) - (128) -
Balances relating to investment and
insurance contracts 1 - 60 - (29) 32
Short-term temporary differences 2,998 (160) 1,066 (15) - 3,889
Unused tax losses 162 - 8 - (16) 154
----------------------------------------- --------- ----------- ----------- -------------- ---------- ----------
Total 3,305 (160) 1,118 (15) (173) 4,075
----------------------------------------- --------- ----------- ----------- -------------- ---------- ----------
Deferred tax liabilities
Unrealised losses or gains on investments (1,104) 1,053 (231) (713) 118 (877)
Balances relating to investment and
insurance contracts (1,276) - (246) - 15 (1,507)
Short-term temporary differences (2,742) 298 (414) 19 (14) (2,853)
----------------------------------------- --------- ----------- ----------- -------------- ---------- ----------
Total (5,122) 1,351 (891) (694) 119 (5,237)
----------------------------------------- --------- ----------- ----------- -------------- ---------- ----------
C8 Share capital, share premium and own shares
2020 2019
--------------------------------- ---------------------------------
Number of Number of
ordinary Share Share ordinary Share Share
Issued shares of 5p each fully paid shares capital premium shares capital premium
$m $m $m $m
------------------------------------------ ------------- -------- -------- ------------- -------- --------
Balance at 1 Jan 2,601,159,949 172 2,625 2,593,044,409 166 2,502
Shares issued under share-based schemes 8,329,753 1 12 8,115,540 - 22
Impact of change in presentation currency - - - - 6 101
------------------------------------------ ------------- -------- -------- ------------- -------- --------
Balance at 31 Dec 2,609,489,702 173 2,637 2,601,159,949 172 2,625
------------------------------------------ ------------- -------- -------- ------------- -------- --------
Options outstanding under save as you earn schemes to subscribe
for shares at each year end shown below are as follows:
Share price range
----------------------------
Number of shares to subscribe for from to Exercisable by year
------------ --------------------------------- ------------- ------------- -------------------
31 Dec 2020 2,320,320 964p 1,455p 2026
31 Dec 2019 3,805,447 1,104p 1,455p 2025
------------ --------------------------------- ------------- ------------- -------------------
Transactions by Prudential plc and its subsidiaries in
Prudential plc shares
The Group buys and sells Prudential plc shares ('own shares')
either in relation to its employee share schemes or, up until the
demerger of its UK and Europe operations (M&G plc) in October
2019, via transactions undertaken by authorised investment funds
that the Group is deemed to control. The cost of own shares of $243
million at 31 December 2020 (31 December 2019: $183 million) is
deducted from retained earnings. The Company has established trusts
to facilitate the delivery of shares under employee incentive
plans. At 31 December 2020, 11.2 million (31 December 2019: 8.4
million) Prudential plc shares with a market value of $205 million
(31 December 2019: $161 million) were held in such trusts, all of
which are for employee incentive plans. The maximum number of
shares held during the year was 11.5 million which was in June
2020.
Within the trusts, shares are notionally allocated by business
unit reflecting the employees to which the awards were made.
The Company purchased the following number of shares in respect
of employee incentive plans:
2020 2019
------------- -------------
Number Share price Number Share price
of shares Low High Cost* of shares Low High Cost*
GBP GBP $ GBP GBP $
---------- --------- ------ ----- ---------- --------- ------ ----- ----------
January 62,395 14.42 14.68 1,195,275 75,165 14.25 14.29 1,384,926
February 62,680 14.57 14.60 1,183,717 71,044 15.00 15.18 1,390,865
March 79,057 11.18 11.40 1,110,374 68,497 15.20 16.32 1,385,182
April 5,363,563 10.21 10.48 68,010,967 2,638,429 15.65 16.73 54,052,710
May 81,377 11.16 11.30 1,117,783 73,417 16.35 16.45 1,550,109
June 167,724 11.86 12.67 2,540,749 217,800 16.20 16.36 4,484,773
July 87,239 12.30 12.51 1,365,109 60,514 17.47 17.71 1,321,427
August 72,287 12.21 12.33 1,167,008 72,671 14.86 15.21 1,318,593
September 75,368 11.61 11.68 1,138,447 73,284 14.14 14.76 1,318,767
October 116,802 11.49 11.71 1,764,694 178,359 13.78 14.24 3,148,811
November 74,178 10.62 12.76 1,233,127 75,904 13.38 13.85 1,309,146
December 70,814 12.78 12.83 1,217,842 68,573 13.07 13.13 1,178,206
---------- --------- ------ ----- ---------- --------- ------ ----- ----------
Total 6,313,484 83,045,092 3,673,657 73,843,515
---------- --------- ------ ----- ---------- --------- ------ ----- ----------
* The cost in USD shown has been calculated from the share
prices in GBP using the monthly average exchange rate for the month
in which those shares were purchased.
Up until the demerger of M&G plc in October 2019, the Group
consolidated a number of authorised investment funds managed by
M&G plc that held shares in Prudential plc. The cost of
acquiring these shares was included in the cost of own shares in
2019.
All share transactions were made on an exchange other than the
Stock Exchange of Hong Kong.
Other than set out above, the Group did not purchase, sell or
redeem any Prudential plc listed securities during 2020 or
2019.
D OTHER INFORMATION
D1 C orporate transactions
D1.1 Gain (loss) attaching to corporate transactions
2020 $m 2019 $m
---------------------------------------------------------------------------------------------- ------- -------
Gain on disposalsnote (i) - 265
Other transactionsnote (ii) (48) (407)
---------------------------------------------------------------------------------------------- ------- -------
Total gain (loss) attaching to corporate transactions as shown separately on the consolidated
income statement (48) (142)
Gain arising on reinsurance of Jackson's in-force fixed and fixed index annuity businessnote
(iii) 804 -
Gain arising on reinsurance transaction undertaken by the Hong Kong businessnote (iv) 765 -
Total gain (loss) attaching to corporate transactions 1,521 (142)
---------------------------------------------------------------------------------------------- ------- -------
Notes
(i) In 2019, the gain on disposals principally related to
profits arising from a 4 per cent reduction in the Group's stake in
its associate in India, ICICI Prudential Life Insurance Company,
and the disposal of Prudential Vietnam Finance Company Limited, a
wholly-owned subsidiary that provides consumer finance.
(ii) In 2020, other transactions include $(38) million of costs
associated with the work to plan for the separation of Jackson. In
2019, other transactions primarily reflected costs related to the
demerger of the Group's UK and Europe operations (M&G plc).
(iii) With effect from 1 June 2020, Jackson reinsured
substantially all of its in-force portfolio of US fixed and fixed
index annuities with Athene Life Re Ltd, which resulted in a
pre-tax gain of $804 million, after allowing for the write-off of
DAC associated with the business reinsured and after reflecting
post-closing adjustments made in the second half of 2020. The
transaction excluded Jackson's legacy life and institutional
business as well as the REALIC portfolio and group pay-out annuity
business reinsured from John Hancock and was collateralised to
reduce the exposure to counterparty risk. Under the reinsurance
arrangement, Jackson reinsured $27.6 billion liabilities (valued at
1 June 2020) in return for a premium of $28.9 billion net of ceding
commission, comprising principally of bonds. The pre-tax gain also
includes the realised gains arising on the bonds net of the DAC
written off as a result of the transaction of $2.1 billion. After
allowing for tax of $(0.2) billion and the reduction in unrealised
gains recorded directly in other comprehensive income of $(1.8)
billion, the impact of the reinsurance transaction on IFRS
shareholders' equity is a reduction of $(1.2) billion.
(iv) The benefit arises from a co-reinsurance quota share
transaction undertaken by the Hong Kong business in December 2020
as part of the Group's on-going asset/liability management. Future
surpluses (or losses) arising from the business being reinsured
will be shared with the reinsurer in accordance with the terms of
the treaty. This treaty helps mitigate the effect of the accounting
mismatch under the existing regulatory framework in Hong Kong and
is part of our management of the transition to the new RBC
regime.
D1.2 Equity investment by Athene into the US business
In 2020, all of the $1,014 million effect of transactions
relating to non-controlling interests recognised in the
consolidated statement of changes in equity relates to the equity
investment by Athene Life Re Ltd ('Athene') into the US business
completed on 17 July 2020. Under the transaction, Athene invested
$500 million in Prudential's US business in return for an 11.1 per
cent economic interest for which the voting interest is 9.9 per
cent. Athene's investment is in the form of a cash subscription for
the issuance of new common equity in the holding company containing
Prudential's US businesses, including Jackson National Life
Insurance Company and PPM America.
The following is summarised financial information for
non-controlling interest in Prudential's US operations currently
held by Athene since July 2020:
- The profit after tax generated by the US operations and attributable to Athene is $57 million;
- The comprehensive loss generated by the US operations and
attributable to Athene is $(8) million; and
- Of the US operations' total equity, the amount attributable to Athene is $1,063 million.
D2 Contingencies and related obligations
The Group is involved in various litigation and regulatory
proceedings. These may from time to time include class actions
involving Jackson. While the outcome of such litigation and
regulatory issues cannot be predicted with certainty, the Group
believes that their ultimate outcome will not have a material
adverse effect on the Group's financial condition, results of
operations or cash flows.
D3 Post balance sheet events
Dividends
The 2020 second interim ordinary dividend approved by the Board
of Directors after 31 December 2020 is as described in note B5.
Intention to demerge the Group's US operations in the second
quarter of 2021
In January 2021, the Board announced that it had decided to
pursue the separation of its US operations (Jackson) from the Group
through a demerger, whereby shares in Jackson would be distributed
to Prudential shareholders.
Subject to shareholder and regulatory approvals, the planned
demerger is expected to complete in the second quarter of 2021 and
would lead to a significantly earlier separation of Jackson from
the Group than would have been possible through a minority IPO and
future sell-downs, which from market precedent may have lasted
until 2023. At the point of demerger, Prudential is planning to
retain a 19.9 per cent non-controlling interest in Jackson, which
will be reported within the consolidated financial position as a
financial investment at fair value. Subject to market conditions,
the Group intends to monetise a portion of this investment to
support investment in Asia within 12 months of the planned
demerger, such that the Group will own less than 10 per cent at the
end of such period.
Following this decision in January 2021, the US operations
(equivalent to the US segment disclosed in these financial
statements) are considered to meet the held for distribution
criteria in accordance with IFRS 5 'Non-current assets held for
sale and discontinued operations'. It is not practicable to
quantify the potential financial effect of the planned demerger and
the retained non-controlling interest at this stage.
I Additional financial information
I(i) Group capital position
Overview
Prudential plc applies the local capital summation method (LCSM)
that has been agreed with the Hong Kong Insurance Authority (IA) to
determine group regulatory capital requirements (both minimum and
prescribed levels). Ultimately, Prudential will become subject to
the Group-wide Supervision (GWS) Framework . The primary
legislation was enacted in July 2020 and will come into operation
on 29 March 2021. The relevant subsidiary legislation, including
the Insurance (Group Capital) Rules, was tabled before the
Legislative Council on 6 January 2021 and will also come into
operation on 29 March 2021 . The GWS Framework is expected to be
effective for Prudential upon designation by the Hong Kong IA in
the second quarter of 2021, subject to transitional
arrangements.
The GWS methodology is expected to be largely consistent with
that applied under LCSM with the exception of the treatment of debt
instruments which will be subject to transitional arrangements
under the GWS Framework. As agreed with the Hong Kong IA, only
specific bonds (being those subordinated debt instruments issued by
Prudential plc at the date of demerger of M&G plc) are
currently included as eligible Group LCSM capital resources for the
purposes of satisfying group minimum and prescribed capital
requirements. Senior debt instruments issued by Prudential plc have
not been included as part of the Group capital resources and are
treated as a liability in the LCSM results. Under the GWS
Framework, Prudential's initial analysis indicates that all debt
instruments (senior and subordinated) issued by Prudential plc will
meet the transitional conditions set by the Hong Kong IA and will
be included as eligible Group capital resources. If this were to be
the case, the 31 December 2020 Group shareholder LCSM coverage
ratio (over GMCR) presented below would increase by 35 percentage
points to 363 per cent. This is subject to final approval by the
Hong Kong IA .
Further detail on the LCSM is included in the basis of
preparation section below.
For regulated insurance entities, the capital resources and
required capital included in the LCSM measure for Hong Kong IA
Group regulatory purposes are based on the local solvency regime
applicable in each jurisdiction. At 31 December 2020, the
Prudential Group's total surplus of capital resources over the
regulatory Group Minimum Capital Requirement (GMCR), calculated
using this LCSM was $26.4 billion, before allowing for the payment
of the 2020 second interim ordinary dividend, equating to a
coverage ratio of 329%.
The Group holds material participating business in Hong Kong,
Singapore and Malaysia. If the capital resources and minimum
capital requirement attributed to this policyholder business are
excluded, then the Prudential Group shareholder LCSM surplus of
capital resources over the regulatory GMCR at 31 December 2020 was
$11.0 billion, before allowing for the payment of the 2020 second
interim ordinary dividend, equating to a coverage ratio of
328%.
Estimated Group LCSM capital position based on Group Minimum
Capital Requirement (GMCR)
31 Dec 2020 31 Dec 2019
--------------------------------- ---------------------------------
Less Less
Amounts attributable to Prudential plc Total policyholder Shareholder Total policyholder Shareholder
---------------------------------------- ----- ------------- ----------- ----- ------------- -----------
Capital resources ($bn) 37.9 (22.1) 15.8 33.1 (19.1) 14.0
Group Minimum Capital Requirement ($bn) 11.5 (6.7) 4.8 9.5 (5.0) 4.5
LCSM surplus (over GMCR) ($bn) 26.4 (15.4) 11.0 23.6 (14.1) 9.5
LCSM ratio (over GMCR) (%) 329% 328% 348% 309%
---------------------------------------- ----- ------------- ----------- ----- ------------- -----------
The shareholder LCSM capital position by segment is presented
below at 31 December 2020 and 31 December 2019 for comparison:
Amounts attributable to Prudential plc Shareholder
--------------------------------------
Total Less Unallocated to
31 Dec 2020 ($bn) Asia policyholder Asia US a segment Group total
--------------------------------------- ----- ------------- ---- --- -------------- -----------
Capital resources 33.7 (22.1) 11.6 4.6 (0.4) 15.8
Group Minimum Capital Requirement 10.1 (6.7) 3.4 1.4 - 4.8
LCSM surplus (over GMCR) 23.6 (15.4) 8.2 3.2 (0.4) 11.0
--------------------------------------- ----- ------------- ---- --- -------------- -----------
Amounts attributable to Prudential plc Shareholder
--------------------------------------
Total Less Unallocated to
31 Dec 2019 ($bn) Asia policyholder Asia US a segment Group total
--------------------------------------- ----- ------------- ---- --- -------------- -----------
Capital resources 26.8 (19.1) 7.7 5.3 1.0 14.0
Group Minimum Capital Requirement 8.0 (5.0) 3.0 1.5 - 4.5
LCSM surplus (over GMCR) 18.8 (14.1) 4.7 3.8 1.0 9.5
--------------------------------------- ----- ------------- ---- --- -------------- -----------
All the amounts above are presented excluding amounts
attributable to non-controlling interests. For example, the US
amounts relate solely to Prudential's 88.9 per cent economic
interest in Jackson Financial Inc.
Sensitivity analysis
The estimated sensitivity of the Group shareholder LCSM capital
position (based on GMCR) to significant changes in market
conditions is as follows:
31 Dec 2020 31 Dec 2019
------------------------ ------------------------
LCSM surplus LCSM ratio LCSM surplus LCSM ratio
Impact of market sensitivitiesnote (1) ($bn) (%) ($bn) (%)
----------------------------------------------------- ------------ ---------- ------------ ----------
Base position 11.0 328% 9.5 309%
Impact of:
10% instantaneous increase in equity markets 0.3 15% n/a n/a
20% instantaneous fall in equity markets 0.6 (13)% 1.5 (9)%
40% fall in equity marketsnote (2) (0.2) (23)% (0.2) (39)%
50 basis points reduction in interest rates (1.2) (39)% (0.2) (17)%
100 basis points increase in interest rates (1.0) 11% (1.3) (19)%
100 basis points increase in credit spreadsnote (3) 0.1 14% (1.6) (36)%
---------------------------------------------------- ------------ ---------- ------------ ----------
Notes
(1) The Group results consist of the combined impact from the
movement in Asia and US LCSM surplus under these stresses. The
equity fall and the interest rate reduction sensitivities consist
of positive surplus impacts from the US, driven by expected
derivative gains, and negative surplus impacts from Asia, which for
the interest rate reduction sensitivity is driven by Hong Kong
reflecting the accounting mismatch that exists under the current
regulatory framework .
(2) Where hedges are dynamic, rebalancing is allowed for by
assuming an instantaneous 20 per cent fall followed by a further 20
per cent fall over a four-week period.
(3) At 31 December 2019 the US RBC solvency position was
included using a stress of 10 times expected credit defaults rather
than the 100 basis points increase in credit spreads applied at 31
December 2020 .
The sensitivity results above assume instantaneous market
movements and reflect all consequential impacts as at the valuation
dates. An exception to the instantaneous market movements assumed
is the -40 per cent equity sensitivity where for Jackson an
instantaneous 20 per cent market fall is assumed to be followed by
a further market fall of 20 per cent over a four-week period with
dynamic hedges assumed to be rebalanced over the period. Aside from
this assumed dynamic hedge rebalancing for Jackson in the -40 per
cent equity sensitivity, the sensitivity results only allow for
limited management actions such as changes to future policyholder
bonuses. If such economic conditions persisted, the financial
impacts may differ to the instantaneous impacts shown above. In
this case management could also take additional actions to help
mitigate the impact of these stresses. These actions include, but
are not limited to, rebalancing investment portfolios, further
market risk hedging, increased use of reinsurance, repricing of
in-force benefits, changes to new business pricing and the mix of
new business being sold.
Analysis of movement in Group shareholder LCSM surplus
A summary of the estimated movement in the Group shareholder
LCSM surplus (based on GMCR) from $9.5 billion at 31 December 2019
to $11.0 billion at 31 December 2020 is set out in the table
below.
2020 ($bn) 2019 ($bn)
------------------------------------------------------------------------------- ---------- ----------
Balance at 1 Jan 9.5 9.7
Operating:
Operating capital generation from the in-force business 2.2 2.5
Investment in new business (0.2) (0.6)
------------------------------------------------------------------------------- ---------- ----------
Operating capital generation 2.0 1.9
-------------------------------------------------------------------------------- ---------- ----------
Non-operating and other capital movements:
Non-operating experience (including market movements) (2.0) (0.6)
Regulatory changes 2.2 0.1
Reinsurance of US fixed and fixed indexed annuity in-force portfolio to Athene 0.8 -
Athene US equity investment (0.2) -
US hedge modelling revision (0.4) -
Other corporate activities (0.1) (0.8)
M&G Demerger costs - (0.4)
Subordinated debt redemption - (0.5)
M&G Demerger related impacts - 1.0
------------------------------------------------------------------------------- ---------- ----------
Non-operating results 0.3 (1.2)
-------------------------------------------------------------------------------- ---------- ----------
Remittances from discontinued operations (M&G plc) - 0.7
External dividends (0.8) (1.6)
------------------------------------------------------------------------------- ---------- ----------
Net dividend impact (0.8) (0.9)
-------------------------------------------------------------------------------- ---------- ----------
Net movement in LCSM surplus 1.5 (0.2)
-------------------------------------------------------------------------------- ---------- ----------
Balance at 31 Dec 11.0 9.5
-------------------------------------------------------------------------------- ---------- ----------
The estimated movement in the Group shareholder LCSM surplus
over 2020 is driven by:
- Operating capital generation of $2.0 billion: generated by the
expected return on in-force business partially offset by the strain
on new business written during the year
- Non-operating experience of $(2.0) billion : this includes the
negative impact of higher equity markets on Jackson's derivatives
net of policyholder reserves and required capital movements, and
the negative impact of falling interest rates on the US and Asia
surplus over the year, partially offset by management actions,
including the benefit from the change to the Hong Kong valuation
interest rate as granted by the regulator in July 2020 ;
- Regulatory changes of $2.2 billion: reflecting the benefit
from the new Singapore risk-based capital framework (RBC2)
effective at 31 March 2020;
- Reinsurance of US fixed and fixed indexed annuity in-force
portfolio to Athene of $0.8 billion: the impact of the transaction,
which was effective at 1 June 2020, was an increase to LCSM surplus
comprising of the ceding commission received and required capital
released less tax and adverse consequential effects on the US's
capital resources;
- Athene equity investment $(0.2) billion: this is the net
effect on LCSM surplus of Athene's $500 million equity investment
in Prudential's US business in return for an 11.1 per cent economic
interest in that same business, which completed in July 2020;
- US hedge modelling revision of $(0.4) billion: At 31 December
2019, Jackson early adopted the provisions of the National
Association of Insurance Commissioners Valuation Manual Minimum
Standards No. VM-21. During 2020, Jackson determined that a
simplifying modelling assumption was not consistent with its intent
in the adoption of VM-21 and the revised modelling adopted for
calculating reserves and capital reduced surplus by $390
million;
- Other Corporate activities (excluding demerger items) of
$(0.1) billion : this is the effect on LCSM surplus of other
corporate transactions in the period, which in 2020 comprised
mainly of a $0.8 billion benefit from the reinsurance transaction
in Hong Kong described in note D1.1 of the IFRS financial
statements, offset by $(0.9) billion principally from the strategic
bancassurance partnership with TMB in Thailand; and
- Net dividend impact of $(0.8) billion: this is the payment of
external dividends during 2020.
Reconciliation of Group shareholder LCSM surplus to EEV free
surplus (excluding intangibles)
31 Dec 2020 $bn 31 Dec 2019 $bn
--------------------------------------------------- ---------------
Asia US Unallocated to a segment Group total Group total
---------------------------------------------- ----- ----- ------------------------ ----------- ---------------
Estimated Group shareholder LCSM surplus (over
GMCR) 8.2 3.2 (0.4) 11.0 9.5
Increase required capital for EEV free
surplusnote (1) (0.8) (2.0) - (2.8) (2.8)
Adjust surplus assets and core structural
borrowings to market valuenote (2) 0.5 0.3 (0.4) 0.4 0.3
Add back inadmissible assetsnote (3) 0.2 0.1 - 0.3 0.2
Deductions applied to EEV free surplusnote (4) (3.1) - - (3.1) (0.9)
Other - 0.1 0.2 0.3 0.3
---------------------------------------------- ----- ----- ------------------------ ----------- ---------------
EEV free surplus excluding intangibles* 5.0 1.7 (0.6) 6.1 6.6
---------------------------------------------- ----- ----- ------------------------ ----------- ---------------
* As per the 'Free surplus excluding distribution rights and
other intangibles' shown in the statement of Movement in Group free
surplus of the Group's EEV basis results.
Notes
(1) Required capital under EEV is set at least equal to local
statutory notification requirements for Asia and so can differ from
the minimum capital requirement. Jackson required capital is set at
250 per cent of the risk-based capital (RBC) required by the NAIC
at the Company Action Level (CAL). This is higher than the solo
legal entity statutory minimum capital requirement of 100 per cent
CAL that is included in the LCSM surplus (over GMCR).
(2) The EEV Principles require surplus assets to be included at
fair value and central core senior debt is held at market value.
Within LCSM surplus, some local regulatory regimes value certain
assets at cost and core senior debt is held at amortised cost.
(3) LCSM restricts the valuation of certain sundry
non-intangible assets. In most cases these assets are considered
fully recognisable in free surplus. As an exception to this, both
LCSM surplus and EEV free surplus restrict the deferred tax asset
held by Jackson to the level allowed to be admitted by the local
regulator in local statutory capital resources.
(4) Deductions applied to EEV free surplus primarily include:
the impact of reporting EEV free surplus for Singapore based on the
Tier 1 requirements under the RBC2 framework, which removes certain
negative reserves permitted to be recognised in the full RBC 2
regulatory position used for LCSM, and applying the embedded value
reporting approach issued by the China Association of Actuaries
(CAA) within EEV free surplus as compared to the C-ROSS surplus
reported for local regulatory purposes (predominantly arising from
the requirement under the CAA embedded value methodology to
establish a deferred profit liability within EEV net worth).
Reconciliation of Group IFRS shareholders' equity to shareholder
LCSM capital resources position
31 Dec 2020 $bn 31 Dec 2019 $bn
------------------------------------------------------------------------------------ --------------- ---------------
Group IFRS shareholders' equity 20.9 19.5
Remove DAC, goodwill and intangibles recognised on the IFRS statement of financial
position (21.1) (18.2)
Add subordinated debt at IFRS book valuenote (1) 4.6 4.6
Valuation differencesnote (2) 11.3 8.6
Othernote (3) 0.1 (0.5)
------------------------------------------------------------------------------------ --------------- ---------------
Estimated Group shareholder LCSM capital resources 15.8 14.0
------------------------------------------------------------------------------------ --------------- ---------------
Notes
(1) Subordinated debt is treated as capital resources under LCSM but as a liability under IFRS.
(2) Valuation differences reflect differences in the basis of
valuing assets and liabilities between IFRS and local statutory
valuation rules, including deductions for inadmissible assets.
Material differences arise in Jackson where IFRS variable annuity
guarantee reserves are valued on a fair value basis compared to
local statutory reserves which reflect long-term historic rates.
Further, local US statutory reserves are reduced by an expense
allowance linked to surrender charges, whereas IFRS makes no such
allowance but instead defers acquisition costs on the balance sheet
as a separate asset (which is not recognised on the statutory
balance sheet). Other material differences include in Singapore
where the local capital resources under RBC2 permits the
recognition of certain negative reserves in the local statutory
position that are not recognised under IFRS.
(3) Other differences include the consequential impact on
non-controlling interests arising from the other reconciling
items.
Basis of preparation
In advance of the GWS Framework coming into force, Prudential
applies the local capital summation method (LCSM) that has been
agreed with the Hong Kong IA to determine group regulatory capital
requirements (both minimum and prescribed levels). The summation of
local statutory capital requirements across the Group is used to
determine group regulatory capital requirements, with no allowance
for diversification between business operations. The Group capital
resources is determined by the summation of capital resources
across local solvency regimes for regulated entities and IFRS net
assets (with adjustments described below) for non-regulated
entities.
In determining the LCSM capital resources and required capital
the following principles have been applied:
- For regulated insurance entities, capital resources and
required capital are based on the local solvency regime applicable
in each jurisdiction, with minimum required capital set at the solo
legal entity statutory minimum capital requirements. The treatment
of participating funds is consistent with the local basis;
- For the US insurance entities, capital resources and required
capital are based on the local US RBC framework set by the NAIC,
with minimum required capital set at 100 per cent of the CAL
RBC;
- For asset management operations and other regulated entities,
the shareholder capital position is derived based on the sectoral
basis applicable in each jurisdiction, with minimum required
capital based on the solo legal entity statutory minimum capital
requirement;
- For non-regulated entities, the capital resources is based on
IFRS net assets after deducting intangible assets. No required
capital is held in respect of unregulated entities;
- For entities where the Group's shareholding is less than 100%,
the contribution of the entity to the Group LCSM capital resources
and required capital represents the Group's share of these amounts
and excludes any amounts attributable to non-controlling
interests;
- Investments in subsidiaries, joint ventures and associates
(including, if any, loans that are recognised as capital on the
receiving entity's balance sheet) are eliminated from the relevant
holding company to prevent the double counting of capital
resources; and
- The Hong Kong IA has agreed that specific bonds (being those
subordinated debt instruments issued by Prudential plc at the date
of demerger of M&G plc) can be included as part of the Group's
capital resources for the purposes of satisfying group minimum and
prescribed capital requirements. Senior debt instruments issued by
Prudential plc have not been included as part of the Group capital
resources and are treated as a liability in the LCSM results
presented above.
I(ii) Funds under management
For Prudential's asset management businesses, funds managed on
behalf of third parties are not recorded on the statement of
financial position. They are, however, a driver of profitability.
Prudential therefore analyses the movement in the funds under
management each year, focusing on those which are external to the
Group and those primarily held by the Group's insurance businesses.
The table below analyses, by segment, the funds of the Group held
in the statement of financial position and the external funds that
are managed by Prudential's asset management businesses.
31 Dec 2020 $bn 31 Dec 2019 $bn
------------------------------------------------------------------------------ --------------- ---------------
Asia operations:
Internal funds 171.4 141.9
Eastspring Investments external funds, including M&G plc* (as analysed in note
I(v)) 109.6 124.7
------------------------------------------------------------------------------- --------------- ---------------
281.0 266.6
US operations - internal funds 273.7 273.4
Other operations 3.6 3.9
-------------------------------------------------------------------------------- --------------- ---------------
Total Group funds under management 558.3 543.9
-------------------------------------------------------------------------------- --------------- ---------------
* Funds managed on behalf of M&G plc are presented as
external rather than internal funds under management to align to
the presentation since the demerger in October 2019.
Note
Total Group funds under management comprise:
31 Dec 2020 $bn 31 Dec 2019 $bn
------------------------------------------------------------------------------ --------------- ---------------
Total investments and cash and cash equivalents on the consolidated statement
of financial
position 437.4 412.6
External funds of Eastspring Investments, including M&G plc 109.6 124.7
Internally managed funds held in joint ventures and associate, excluding assets
attributable
to external unit holders of the consolidated collective investment schemes and
other adjustments 11.3 6.6
------------------------------------------------------------------------------- --------------- ---------------
Total Group funds under management 558.3 543.9
------------------------------------------------------------------------------- --------------- ---------------
I(iii) Holding company cash flow
The holding company cash flow describes the movement in the cash
and short-term investments of the centrally managed group holding
companies and differs from the IFRS cash flow statement, which
includes all cash flows in the year including those relating to
both policyholder and shareholder funds. The holding company cash
flow is therefore a more meaningful indication of the Group's
central liquidity.
2020 $m 2019 $m
------------------------------------------------------------------------------- ------- -------
Net cash remitted by business unitsnote (a) :
From continuing operations
------- -------
Asianote (b) 716 950
Jacksonnote (b) - 509
Other operationsnote (c) 55 6
------- -------
Total continuing operations 771 1,465
From discontinued UK and Europe operations - 684
-------------------------------------------------------------------------------- ------- -------
Net cash remittances by business units 771 2,149
Net interest paidnote (d) (294) (527)
Tax received 94 265
Corporate activities (235) (260)
-------------------------------------------------------------------------------- ------- -------
Total central outflows (435) (522)
-------------------------------------------------------------------------------- ------- -------
Holding company cash flow before dividends and other movements 336 1,627
Dividends paid (814) (1,634)
-------------------------------------------------------------------------------- ------- -------
Operating holding company cash flow after dividends but before other movements (478) (7)
Other movements
------- -------
Issuance and redemption of debt for continuing operations 983 (504)
Other non-operating transactions relating to continuing operationsnote (e) (1,230) (338)
Transactions to effect the demerger, including debt substitutionnote (f) - (146)
Demerger costs associated with the discontinued UK and Europe operations (17) (424)
Early settlement of UK-inflation-linked derivative liability - (587)
------- -------
Total other movements (264) (1,999)
-------------------------------------------------------------------------------- ------- -------
Total holding company cash flow (742) (2,006)
Cash and short-term investments at 1 Jan 2,207 4,121
Foreign exchange movements (2) 92
-------------------------------------------------------------------------------- ------- -------
Cash and short-term investments at 31 Dec 1,463 2,207
-------------------------------------------------------------------------------- ------- -------
Notes
(a) Net cash remittances comprise dividends and other transfers
from business units that are reflective of emerging earnings and
capital generation.
(b) Significant cash remittances from business units were hedged
into sterling using forward contracts during 2019 and these
contracts determine the amount of sterling recorded in the holding
company cash flow for the relevant remittances. The implicit rates
may therefore differ from that applied to present the holding
company cash flow in US dollars (see note (g)).
(c) $ 55 million remittances from other operations reflects
intragroup interest income which is not expected to recur.
(d) The net interest paid in 2019 included $231 million on debt
substituted to M&G plc prior to its demerger in October
2019.
(e) Other corporate activities relating to continuing operations
primarily reflect payments made for bancassurance arrangements
including those with UOB and TMB Bank.
(f) Transactions to effect the demerger represented the effects
on holding company cash flow of steps taken in 2019 as part of the
preparation for the demerger of the UK and Europe operations
(M&G plc). These included the transfer of subsidiaries,
settlement of intercompany loans, receipt of the pre-demerger
dividend and the substitution of M&G plc as issuer of certain
sub-ordinated debt in place of Prudential plc.
(g) At 31 December 2019, the Group changed its basis of managing
central cash-holdings from sterling to US dollars. Accordingly, the
2020 holding company cash flow statement presented above has been
prepared directly in US dollars and 2019 amounts are re-presented
from those previously published to reflect the change. 2019
comparatives were prepared in sterling, reflecting the management
of holding company cash at that time. Cash movements in the year
were converted from sterling into US dollars by using the month-end
sterling to US dollar exchange rate for the month in which the
transaction occurred. Cash balances at the start and end of the
year were translated from sterling to US dollars using the spot
rates at the beginning and end of the year respectively. As an
exception to the above, external dividends paid during 2019 were
translated at the exchange rate relevant to the day they were paid
to ensure consistency with the financial statements.
I(iv) Analysis of adjusted operating profit by driver
This schedule classifies the Group's adjusted operating profit
from continuing operations into the underlying drivers using the
following categories:
- Spread income represents the difference between net investment
income and amounts credited to certain policyholder accounts. It
excludes the operating investment return on shareholder net assets,
which has been separately disclosed as expected return on
shareholder assets.
- Fee income represents profit driven by net investment
performance, being fees that vary with the size of the underlying
policyholder funds, net of investment management expenses.
- With-profits represents the pre-tax shareholders' transfer
from the with-profits business for the period .
- Insurance margin primarily represents profit derived from the
insurance risks of mortality and morbidity.
- Margin on revenues primarily represents amounts deducted from
premiums to cover acquisition costs and administration expenses
(see below).
- Acquisition costs and administration expenses represent
expenses incurred in the period attributable to shareholders. These
exclude items such as restructuring and IFRS 17 implementation
costs, which are not included in the segment profit, as well as
items that are more appropriately included in other categories (eg
investment expenses are netted against investment income as part of
spread income or fee income as appropriate).
- DAC adjustments comprise DAC amortisation for the period ,
excluding amounts related to short-term fluctuations in investment
returns, net of costs deferred in respect of new business written
in the period.
(a) Margin analysis
The following analysis expresses certain of the Group's sources
of adjusted operating profit as a margin of policyholder
liabilities or other relevant drivers. The 2019 comparative
information has been presented at both AER and CER to eliminate the
impact of exchange translation. CER results are calculated by
translating prior year results using the current year foreign
exchange rates. All CER profit figures have been translated at
current year average rates. For Asia, CER average liabilities have
been translated using the corresponding current year opening and
closing or quarter-end closing exchange rates.
2020
-----------------------------------------------
Group Average
Asia US total liability Margin
$m $m $m $m bps
note (b) note (c)
---------------------------------------------------------------- -------- -------- ------- ---------- ------
Spread income 296 521 817 86,596 94
Fee income 282 3,386 3,668 217,863 168
With-profits 117 - 117 73,375 16
Insurance margin 2,648 1,298 3,946
Margin on revenues 2,936 - 2,936
Expenses:
Acquisition costs* (1,904) (991) (2,895) 5,619 (52)%
Administration expenses (1,539) (1,744) (3,283) 312,215 (105)
DAC adjustments 382 317 699
Expected return on shareholder assets 212 - 212
----------------------------------------------------------------- -------- -------- -------
3,430 2,787 6,217
Share of related tax charges from joint ventures and associates (46) - (46)
----------------------------------------------------------------- -------- -------- -------
Adjusted operating profit from long-term business 3,384 2,787 6,171
Adjusted operating profit from asset management 283 9 292
----------------------------------------------------------------- -------- -------- -------
Total segment adjusted operating profit 3,667 2,796 6,463
----------------------------------------------------------------- -------- -------- -------
* The ratio of acquisition costs is calculated as a percentage
of APE sales in the year.
2019 AER
-----------------------------------------------
Group Average
Asia US total liability Margin
$m $m $m $m bps
note (b) note (c)
---------------------------------------------------------------- -------- -------- ------- ---------- ------
Spread income 321 642 963 86,887 111
Fee income 286 3,292 3,578 208,353 172
With-profits 107 - 107 58,032 18
Insurance margin 2,244 1,317 3,561
Margin on revenues 3,035 - 3,035
Expenses:
Acquisition costs* (2,156) (1,074) (3,230) 7,384 (44)%
Administration expenses (1,437) (1,675) (3,112) 303,339 (103)
DAC adjustments 430 510 940
Expected return on shareholder assets 194 26 220
----------------------------------------------------------------- -------- -------- -------
3,024 3,038 6,062
Share of related tax charges from joint ventures and associates (31) - (31)
----------------------------------------------------------------- -------- -------- -------
Adjusted operating profit from long-term business 2,993 3,038 6,031
Adjusted operating profit from asset management 283 32 315
----------------------------------------------------------------- -------- -------- -------
Total segment adjusted operating profit 3,276 3,070 6,346
----------------------------------------------------------------- -------- -------- -------
* The ratio of acquisition costs is calculated as a percentage
of APE sales in the year.
2019 CER
-----------------------------------------------
Group Average
Asia US total liability Margin
$m $m $m $m bps
note (b) note (c)
---------------------------------------------------------------- -------- -------- ------- ---------- ------
Spread income 319 642 961 87,413 110
Fee income 283 3,292 3,575 208,095 172
With-profits 107 - 107 58,492 18
Insurance margin 2,234 1,317 3,551
Margin on revenues 3,032 - 3,032
Expenses:
Acquisition costs* (2,156) (1,074) (3,230) 7,391 (44)%
Administration expenses (1,430) (1,675) (3,105) 303,607 (102)
DAC adjustments 426 510 936
Expected return on shareholder assets 193 26 219
----------------------------------------------------------------- -------- -------- -------
3,008 3,038 6,046
Share of related tax charges from joint ventures and associates (30) - (30)
----------------------------------------------------------------- -------- -------- -------
Adjusted operating profit from long-term business 2,978 3,038 6,016
Adjusted operating profit from asset management 278 32 310
----------------------------------------------------------------- -------- -------- -------
Total segment adjusted operating profit 3,256 3,070 6,326
----------------------------------------------------------------- -------- -------- -------
* The ratio of acquisition costs is calculated as a percentage
of APE sales in the year.
(b) Margin analysis - Asia
2020 2019 AER 2019 CER
-------------------------- --------------------------- ---------------------------
Average Average Average
Profit liability Margin Profit liability Margin Profit liability Margin
$m $m bps $m $m bps $m $m bps
note note note
note (1) (2) note (1) (2) note (1) (2)
-------------------------- ------- --------- ------ ------- --------- ------- ------- --------- -------
Spread income 296 39,895 74 321 29,706 108 319 30,232 106
Fee income 282 28,014 101 286 27,413 104 283 27,155 104
With-profits 117 73,375 16 107 58,032 18 107 58,492 18
Insurance margin 2,648 2,244 2,234
Margin on revenues 2,936 3,035 3,032
Expenses:
Acquisition costsnote (3) (1,904) 3,696 (52)% (2,156) 5,161 (42)% (2,156) 5,168 (42)%
Administration expenses (1,539) 67,909 (227) (1,437) 57,119 (252) (1,430) 57,387 (249)
DAC adjustmentsnote (4) 382 430 426
Expected return on
shareholder assets 212 194 193
-------------------------- ------- --------- ------ ------- --------- ------- ------- --------- -------
3,430 3,024 3,008
Share of related tax
charges from joint
ventures and
associatesnote (5) (46) (31) (30)
-------------------------- ------- --------- ------ ------- --------- ------- ------- --------- -------
Adjusted operating profit
from long-term business 3,384 2,993 2,978
Adjusted operating profit
from asset management
(Eastspring Investments) 283 283 278
-------------------------- ------- --------- ------ ------- --------- ------- ------- --------- -------
Total Asia adjusted
operating profit 3,667 3,276 3,256
-------------------------- ------- --------- ------ ------- --------- ------- ------- --------- -------
Notes
(1) The calculation of average liabilities for Asia is generally
derived from opening and closing balances. In 2020, given the
significant market volatility in certain months during the year,
average liabilities used to derive the margin for fee income in
Asia have been calculated using quarter-end balances throughout the
year as opposed to opening and closing balances only to provide a
more meaningful analysis. The 2019 margins have been amended for
consistency albeit impacts are minimal.
(2) Margin represents the operating return earned in the year as
a proportion of the relevant class of policyholder liabilities
excluding unallocated surplus.
(3) 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. The
ratio of shareholder acquisition cost to shareholder-related APE
sales in 2020 (excluding with-profits) is 68 per cent (2019: 66 per
cent).
(4) The DAC adjustments contain a credit of $73 million in
respect of joint ventures and associates in 2020 (2019: credit of
$72 million on an AER basis).
(5) Under IFRS, the Group's share of results from its
investments in joint ventures and associates accounted for using
the equity method is included in the Group's profit before tax on a
net of related tax basis. These tax charges are shown separately in
the analysis of Asia operating profit drivers in order for the
contribution from the joint ventures and associates to be included
in the margin analysis on a consistent basis with the rest of Asia
operations.
(c) Margin analysis - US
2020 2019
---------------------------- ----------------------------
Average Average
Profit liability Margin Profit liability Margin
$m $m bps $m $m bps
note (1) note (2) note (1) note (2)
----------------------------------------------------- ------- --------- -------- ------- --------- --------
Spread income 521 46,701 112 642 57,181 112
Fee income 3,386 189,849 178 3,292 180,940 182
Insurance margin 1,298 1,317
Expenses
Acquisition costsnote (3) (991) 1,923 (52)% (1,074) 2,223 (48)%
Administration expenses (1,744) 244,306 (71) (1,675) 246,220 (68)
DAC adjustments 317 510
Expected return on shareholder assets - 26
------------------------------------------------------ ------- --------- -------- ------- --------- --------
Adjusted operating profit from long-term businessnote
(4) 2,787 3,038
Adjusted operating profit from asset management 9 32
------------------------------------------------------ ------- --------- -------- ------- --------- --------
Total US adjusted operating profit 2,796 3,070
------------------------------------------------------ ------- --------- -------- ------- --------- --------
Notes
(1) The calculation of average liabilities for the US is
generally derived from month-end balances throughout the period as
opposed to opening and closing balances only. The average
liabilities for fee income in the US have been calculated using
daily balances instead of month-end balances in order to provide a
more meaningful analysis of the fee income, which is charged on the
daily account balance. Average liabilities for spread income are
based on the general account liabilities to which spread income is
attached and exclude the liabilities reinsured to Athene since the
June 2020 month-end balance. Average liabilities used to calculate
the administration expenses margin exclude the REALIC liabilities
reinsured to third parties prior to the acquisition by Jackson and
the liabilities reinsured to Athene since the June 2020 month-end
balance.
(2) Margin represents the operating return earned in the period
as a proportion of the relevant class of policyholder
liabilities.
(3) The ratio of acquisition costs is calculated as a percentage
of APE sales relating to shareholder-backed business.
(4) Analysis of adjusted operating profit from long-term
business before and after acquisition costs and DAC adjustments is
shown below:
2020 $m
-----------------------------------------------------------------------------------------
Before acquisition
costs Acquisition costs and DAC adjustments After acquisition costs
---------------------------------------
and DAC adjustments Incurred Deferred and DAC adjustments
------------------------ ----------------------- ------------------- ------------------ -----------------------
Total adjusted operating
profit before
acquisition costs and
DAC adjustments 3,461 - - 3,461
Acquisition costs - (991) 740 (251)
DAC adjustments -
amortisation of
previously deferred
acquisition costs:
Normal - - (753) (753)
Deceleration - - 330 330
------------------------ ----------------------- ------------------- ------------------ -----------------------
Total US adjusted
operating profit -
long-term business 3,461 (991) 317 2,787
------------------------- ----------------------- ------------------- ------------------ -----------------------
2019 $m
-----------------------------------------------------------------------------------------
Before acquisition
costs Acquisition costs and DAC adjustments After acquisition costs
---------------------------------------
and DAC adjustments Incurred Deferred and DAC adjustments
------------------------ ----------------------- ------------------- ------------------ -----------------------
Total adjusted operating
profit before
acquisition costs and
DAC adjustments 3,602 - - 3,602
Acquisition costs - (1,074) 807 (267)
DAC adjustments -
amortisation of
previously deferred
acquisition costs:
Normal - - (577) (577)
Deceleration - - 280 280
------------------------ ----------------------- ------------------- ------------------ -----------------------
Total US adjusted
operating profit -
long-term business 3,602 (1,074) 510 3,038
------------------------- ----------------------- ------------------- ------------------ -----------------------
I(v) Asia operations - analysis of adjusted operating profit by business unit
(a) Analysis of adjusted operating profit by business unit
Adjusted operating profit for Asia operations are analysed
below. The table below presents the 2019 results on both AER and
CER bases to eliminate the impact of exchange translation.
2020 $m 2019 $m 2020 vs 2019 %
------- ------------ ----------------
AER CER AER CER
--------------------------------------------------------------- ------- ----- ----- ------- -------
China JV 251 219 219 15% 15%
Hong Kong 891 734 742 21% 20%
Indonesia 519 540 525 (4)% (1)%
Malaysia 309 276 272 12% 14%
Philippines 95 73 76 30% 25%
Singapore 574 493 487 16% 18%
Taiwan 85 74 77 15% 10%
Thailand 210 170 169 24% 24%
Vietnam 270 237 237 14% 14%
Other 73 70 68 4% 7%
Non-recurrent items* 153 138 136 11% 13%
--------------------------------------------------------------- ------- ----- ----- ------- -------
Total insurance operations 3,430 3,024 3,008 13% 14%
Share of related tax charges from joint ventures and associate (46) (31) (30) (48)% (53)%
--------------------------------------------------------------- ------- ----- ----- ------- -------
Total long-term business 3,384 2,993 2,978 13% 14%
Asset management (Eastspring Investments) 283 283 278 - 2%
--------------------------------------------------------------- ------- ----- ----- ------- -------
Total Asia adjusted operating profit 3,667 3,276 3,256 12% 13%
--------------------------------------------------------------- ------- ----- ----- ------- -------
* Representing a number of small items that are not expected to
reoccur.
(b) Analysis of Eastspring Investments adjusted operating profit
2020 $m 2019 $m
--------------------------------------------------------- -------- --------
Operating income before performance-related feesnote (1) 646 636
Performance-related fees 7 12
--------------------------------------------------------- -------- --------
Operating income (net of commission)note (2) 653 648
Operating expensenote (2) (336) (329)
Group's share of tax on joint ventures' operating profit (34) (36)
--------------------------------------------------------- -------- --------
Adjusted operating profit 283 283
--------------------------------------------------------- -------- --------
Average funds managed by Eastspring Investments $227.1bn $214.0bn
Margin based on operating income* 28bps 30bps
Cost/income ratio 52% 52%
-------- --------
Notes
(1) Operating income before performance-related fees for
Eastspring Investments can be further analysed as follows:
Retail Margin* Institutional(++) Margin* Total Margin*
$m bps $m bps $m bps
----- ------ ------- ----------------- ------- ----- -------
2020 390 52 256 17 646 28
2019 392 52 244 18 636 30
----- ------ ------- ----------------- ------- ----- -------
* Margin represents operating income before performance-related
fees as a proportion of the related funds under management (FUM).
Monthly closing internal and external funds managed by Eastspring
have been used to derive the average. Any funds held by the Group's
insurance operations that are managed by third parties outside the
Prudential Group are excluded from these amounts.
Cost/income ratio represents cost as a percentage of operating
income before performance-related fees.
(++) Institutional includes internal funds.
(2) Operating income and expense include the Group's share of
contribution from joint ventures and associates. In the
consolidated income statement of the Group IFRS basis results, the
net income after tax from the joint ventures and associates is
shown as a single line item.
(c) Eastspring Investments total funds under management
Eastspring Investments, the Group's asset management business in
Asia, manages funds from external parties and also funds for the
Group's insurance operations. The table below analyses the total
funds managed and Eastspring Investments.
31 Dec 2020 $bn 31 Dec 2019 $bn
--------------------------------------------------------------------------------- --------------- ---------------
External funds under management, excluding funds managed on behalf of M&G plcnote
(1)
--------------- ---------------
Retail 66.9 73.7
Institutional 13.8 11.0
Money market funds (MMF) 13.2 13.3
--------------- ---------------
93.9 98.0
Funds managed on behalf of M&G plcnote (2) 15.7 26.7
---------------------------------------------------------------------------------- --------------- ---------------
External funds under management including M&G plc 109.6 124.7
Internal funds under management 138.2 116.4
---------------------------------------------------------------------------------- --------------- ---------------
Total funds under managementnote (3) 247.8 241.1
---------------------------------------------------------------------------------- --------------- ---------------
Notes
(1) The movements of external funds under management, excluding
those managed on behalf of M&G plc, are analysed below:
2020 $m 2019 $m
--------------------------- --------- ---------
At 1 Jan 98,005 77,762
Market gross inflows 116,743 282,699
Redemptions (126,668) (276,215)
Market and other movements 5,783 13,759
---------------------------- --------- ---------
At 31 Dec 93,863 98,005
---------------------------- --------- ---------
The analysis of movements above includes $13,198 million
relating to Asia Money Market Funds at 31 December 2020 (31
December 2019: $13,337 million). Investment flows for 2020 include
Eastspring Money Market Funds gross inflows of $76,317 million
(2019: $236,603 million) and net inflows of $48 million (2019: net
outflows of $(1,856) million).
(2) The movements of funds managed on behalf of M&G plc are analysed below:
2020 $m
---------- --------
At 1 Jan 26,717
Net flows (10,033)
Other (947)
----------- --------
At 31 Dec 15,737
----------- --------
(3) Total funds under management by asset class are analysed below:
31 Dec 2020 31 Dec 2019
----------------- -----------------
$bn % of total $bn % of total
----------------------------- ----- ---------- ----- ----------
Equity 103.9 42% 107.0 44%
Fixed income 125.7 51% 116.2 48%
Alternatives 2.7 1% 3.4 2%
Money Market Funds 15.5 6% 14.5 6%
----------------------------- ----- ---------- ----- ----------
Total funds under management 247.8 100% 241.1 100%
----------------------------- ----- ---------- ----- ----------
II Calculation of alternative performance measures
The annual report uses alternative performance measures (APMs)
to provide more relevant explanations of the Group's financial
position and performance. This section sets out explanations for
each APM and reconciliations to relevant IFRS balances.
II(i) Reconciliation of adjusted operating profit to profit before tax
Adjusted operating profit presents the operating performance of
the business. This measurement basis adjusts for the following
items within total IFRS profit before tax:
- Short-term fluctuations in investment returns on shareholder-backed business;
- Amortisation of acquisition accounting adjustments arising on
the purchase of business. This comprises principally the charge for
the adjustments arising on the purchase of REALIC in 2012; and
- Gain or loss on corporate transactions, as described in note
D1.1 in the IFRS financial statements.
More details on how adjusted operating profit is determined are
included in note B1.3 of the Group IFRS basis results. A full
reconciliation to profit after tax is given in note B1.1.
II(ii) Calculation of IFRS net gearing ratio
The IFRS net gearing ratio is calculated as net core structural
borrowings of shareholder-financed businesses divided by closing
IFRS shareholders' equity plus net core structural borrowings.
31 Dec 2020 $m 31 Dec 2019 $m
------------------------------------------------------------------ -------------- --------------
Core structural borrowings of shareholder-financed businesses 6,633 5,594
Less holding company cash and short-term investments (1,463) (2,207)
------------------------------------------------------------------ -------------- --------------
Net core structural borrowings of shareholder-financed businesses 5,170 3,387
Closing shareholders' equity 20,878 19,477
------------------------------------------------------------------ -------------- --------------
Closing shareholders' equity plus net core structural borrowings 26,048 22,864
------------------------------------------------------------------ -------------- --------------
IFRS net gearing ratio 20% 15%
------------------------------------------------------------------ -------------- --------------
II(iii) Return on IFRS shareholders' equity
As stated in the 2019 Annual Report, the Group has introduced a
new return on equity performance measure for the Group's 2020
Prudential Long-Term Incentive Plan (PLTIP) awards alongside other
metrics. This measure has been calculated as adjusted operating
profit after tax, and net of non-controlling interests, divided by
average shareholders' equity. Accordingly, the calculation of the
return on IFRS shareholders' equity has been aligned to be based on
average shareholders' equity. The 2019 returns disclosed in the
table below are consistent with those previously published and use
profit from continuing operations and closing shareholders' equity.
As supplementary information, 2019 Asia and US returns on
shareholders' equity have also been presented on an average
shareholders' equity basis.
A detailed reconciliation of adjusted operating profit to IFRS
profit before tax for the Group is shown in note B1.1 to the Group
IFRS basis results.
2020 $m
----------------------------
Asia US Other Group
-------------------------------------------------------------------- ------ ----- ----- ------
Adjusted operating profit 3,667 2,796 (956) 5,507
Tax on adjusted operating profit (495) (313) 8 (800)
Operating profit attributable to non-controlling interests (11) (138) 1 (148)
-------------------------------------------------------------------- ------ ----- ----- ------
Adjusted operating profit, net of tax and non-controlling interests 3,161 2,345 (947) 4,559
Average shareholders' equity 12,377 8,720 (919) 20,178
-------------------------------------------------------------------- ------ ----- ----- ------
Operating return on average shareholders' equity (%) 26% 27% n/a 23%
-------------------------------------------------------------------- ------ ----- ----- ------
2019 $m
-------------------------------------------------------
Adjusted
Group
Add back (excluding
demerger- demerger-
related related
Continuing operations Asia US Other Group items* items)
------------------------------------------------------------- ------ ----- ------- ------ ---------- -----------
Adjusted operating profit 3,276 3,070 (1,036) 5,310 179 5,489
Tax on adjusted operating profit (436) (437) 100 (773) (34) (807)
Operating profit attributable to non-controlling interests (6) - (3) (9) - (9)
------------------------------------------------------------- ------ ----- ------- ------ ---------- -----------
Adjusted operating profit, net of tax and non-controlling
interests 2,834 2,633 (939) 4,528 145 4,673
Closing shareholders' equity 10,866 8,929 (318) 19,477 - 19,477
------------------------------------------------------------- ------ ----- ------- ------ ---------- -----------
Operating return on closing shareholders' equity (%) 26% 29% n/a 23% - 24%
Supplementary information:
Average shareholders' equity 9,521 8,046
Operating return on average shareholders' equity (%) 30% 33%
------------------------------------------------------------- ------ -----
* Demerger-related items comprise interest on the subordinated
debt that was substituted to M&G plc prior to the demerger
($179 million pre-tax) and one-off costs of the demerger ($407
million pre-tax).
Average shareholders' equity has been based on opening and
closing balances as follows:
2020 $m 2019 $m
------------------------------ -------------
Asia US Other Group Asia US
----------------------------- ------ ----- ------- ------ ------ -----
Balance at 1 Jan 10,866 8,929 (318) 19,477 8,175 7,163
Balance at 31 Dec 13,887 8,511 (1,520) 20,878 10,866 8,929
----------------------------- ------ ----- ------- ------ ------ -----
Average shareholders' equity 12,377 8,720 (919) 20,178 9,521 8,046
----------------------------- ------ ----- ------- ------ ------ -----
II(iv) Calculation of IFRS shareholders' equity per share
IFRS shareholders' equity per share is calculated as closing
IFRS shareholders' equity divided by the number of issued shares at
31 December 2020 of 2,609 million shares (31 December 2019: 2,601
million shares) .
2020
------------------------------
Group
Asia US Other total
---------------------------------------------- ------ ----- ------- ------
Closing IFRS shareholders' equity ($ million) 13,887 8,511 (1,520) 20,878
Shareholders' equity per share (cents) 532 c 326 c (58) c 800 c
---------------------------------------------- ------ ----- ------- ------
2019
------------------------------
Group
Asia US Other total
---------------------------------------------- ------ ----- ------- ------
Closing IFRS shareholders' equity ($ million) 10,866 8,929 (318) 19,477
Shareholders' equity per share (cents) 418c 343c (12)c 749c
---------------------------------------------- ------ ----- ------- ------
II(v) Calculation of asset management cost/income ratio
The asset management cost/income ratio is calculated as asset
management operating expenses, adjusted for commission and joint
venture contribution, divided by asset management total IFRS
revenue adjusted for commission, joint venture contribution,
performance-related fees and non-operating items.
Eastspring Investments
-------------------------
2020 $m 2019 $m
-------------------------------------------------------------------------------------- ------------ -----------
Operating income before performance-related fees(note) 646 636
Share of joint venture revenue (235) (244)
Commission 194 165
Performance-related fees 7 12
-------------------------------------------------------------------------------------- ------------ -----------
IFRS revenue 612 569
-------------------------------------------------------------------------------------- ------------ -----------
Operating expense 336 329
Share of joint venture expense (84) (102)
Commission 194 165
-------------------------------------------------------------------------------------- ------------ -----------
IFRS charges 446 392
-------------------------------------------------------------------------------------- ------------ -----------
Cost/income ratio: operating expense/operating income before performance-related fees 52% 52%
-------------------------------------------------------------------------------------- ------------ -----------
Note
IFRS revenue and charges for Eastspring Investments are included
within the IFRS Income statement in 'other income' and 'acquisition
costs and other expenditure' respectively. Operating income and
expense include the Group's share of contribution from joint
ventures and associates. In the consolidated income statement of
the Group IFRS basis results, the net income after tax from the
joint ventures and associates is shown as a single line item.
II(vi) Reconciliation of Asia renewal insurance premium to gross
premiums earned
Reconciliation of Asia renewal insurance premium to gross earned
premiums and calculation of Asia Life weighted premium income.
2020 $m 2019 $m
------- ----------------
AER CER
---------------------------------------------------------------------------- ------- ------- -------
Asia renewal insurance premium 20,123 19,007 19,011
Add: General insurance premium 130 135 136
Add: IFRS gross earned premium from new regular and single premium business 5,045 6,386 6,404
Less: Renewal premiums from joint ventures (1,957) (1,771) (1,733)
---------------------------------------------------------------------------- ------- ------- -------
Asia segment IFRS gross premiums earned 23,341 23,757 23,818
---------------------------------------------------------------------------- ------- ------- -------
Asia renewal insurance premium (as above) 20,123 19,007 19,011
Asia APE 3,696 5,161 5,168
---------------------------------------------------------------------------- ------- ------- -------
Asia life weighted premium income 23,819 24,168 24,179
---------------------------------------------------------------------------- ------- ------- -------
II(vii) Reconciliation of APE new business sales to gross
premiums earned
The Group reports annual premiums equivalent (APE) as a measure
of new business sales, which is a key metric for the Group's
management of the development and growth of the business. APE is
calculated as the aggregate of regular premiums and one-tenth of
single premiums on new business written during the year for all
insurance products, including premiums for contracts designated as
investment contracts under IFRS 4. The use of the one-tenth of
single premiums is to normalise policy premiums into the equivalent
of regular annual payments. This measure is commonly used in the
insurance industry to allow comparisons of the amount of new
business written in a period by life insurance companies,
particularly when the sales contain both single premium and regular
premium business.
This differs from the IFRS measure of gross premiums earned as
shown below:
2020 $m 2019 $m
---------------------------- ----------------------------
Total Asia US Total
Asia US segment segment
note (a) note (a)
-------------------------------------------------------- -------- -------- -------- -------- -------- --------
Gross premiums earned 23,341 19,026 42,367 23,757 21,209 44,966
Less: premiums from in-force renewal businessnote (b) (18,166) (845) (19,011) (17,236) (956) (18,192)
Adjustment to include 10% of single premiumsnote (c) (2,131) (17,306) (19,437) (2,606) (20,008) (22,614)
Add: deposit accounting for investment contractsnote (d) - 1,284 1,284 255 2,522 2,777
Inclusion of APE Sales from joint ventures and
associates on equity accounting methodnote
(e) 820 - 820 899 - 899
Other adjustmentsnote (f) (168) (236) (404) 92 (544) (452)
-------------------------------------------------------- -------- -------- -------- -------- -------- --------
Annual premium equivalents (APE) 3,696 1,923 5,619 5,161 2,223 7,384
-------------------------------------------------------- -------- -------- -------- -------- -------- --------
Notes
(a) Gross premiums earned of $154 million (2019: $98 million) in
the Group's Africa operations are unallocated to a segment, giving
total Group gross premiums earned of $42,521 million (2019: $45,064
million) in the income statement. The Africa business sold new
business APE of $112 million (2019: $82 million). Given the
relative immaturity of the Africa business, it is excluded from the
APE metric.
(b) Gross premiums earned include premiums from existing
in-force business as well as new business. The most significant
amount is recorded in Asia, where a significant portion of regular
premium business is written.
(c) APE new business sales only include one - tenth of single
premiums, recorded on policies sold in the year . Gross premiums
earned include 100 per cent of such premiums.
(d) APE includes new policies written in the year which are
classified as investment contracts without discretionary
participation features under IFRS 4, arising mainly in Jackson for
guaranteed investment contracts. These are excluded from gross
premiums earned and recorded as deposits;
(e) For the purpose of reporting APE new business sales, the
Group's share of amounts sold by the Group's insurance joint
ventures and associates are included. Under IFRS, joint ventures
and associates are equity accounted and so no amounts are included
within gross premiums earned.
(f) APE new business sales are annualised while gross premiums
earned are recorded only when revenues are due. Other adjustments
also reflect the exclusion of general insurance and reinsurance
premiums earned on an IFRS basis.
II(viii) Reconciliation between IFRS and EEV shareholders'
equity
The table below shows the reconciliation of EEV shareholders'
equity and IFRS shareholders' equity at the end of the year:
31 Dec 2020 $m 31 Dec 2019 $m
---------------------------------------------------------------- -------------- --------------
EEV shareholders' equity 54,007 54,711
Less: Value of in-force business of long-term businessnote (a) (41,007) (41,893)
Deferred acquisition costs assigned zero value for EEV purposes 16,216 14,239
Othernote (b) (8,338) (7,580)
---------------------------------------------------------------- -------------- --------------
IFRS shareholders' equity 20,878 19,477
---------------------------------------------------------------- -------------- --------------
Notes
(a) The EEV shareholders' equity comprises the present value of
the shareholders' interest in the value of in-force business, total
net worth of long-term business operations and IFRS shareholders'
equity of asset management and other operations. The value of
in-force business reflects the present value of expected future
shareholder cash flows from long-term in-force business which are
not captured as shareholders' interest on an IFRS basis. Total net
worth represents the net assets for EEV reporting that reflect the
regulatory basis position, with adjustments to achieve consistency
with the IFRS treatment of certain items as appropriate.
(b) Other adjustments represent asset and liability valuation
differences between IFRS and the local regulatory reporting basis
used to value total net worth for long-term insurance operations.
These also include the mark-to-market value movements of the
Group's core structural borrowings which are fair valued under EEV
but are held at amortised cost under IFRS. The most significant
valuation differences relate to changes in the valuation of
insurance liabilities. For example, in Jackson, IFRS liabilities
are higher than the local regulatory basis as they are principally
based on policyholder account balances (with a deferred acquisition
costs recognised as an asset), whereas the local regulatory basis
used for EEV reporting is based on expected future cash flows due
to the policyholder on a prudent basis, with the consideration of
an expense allowance, as applicable, but with no separate deferred
acquisition cost asset.
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END
FR JTMJTMTTMTMB
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