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Strategic report

Our performance

To create sustainable economic value for our shareholders we focus on delivering growth and cash while maintaining appropriate capital. We aim to demonstrate how we generate profits under different accounting bases, reflecting the returns we generate on capital invested, and highlight the cash generation of our business.

Find out more about what we measure and why in the table below.

What we measure and why Performance1  

IFRS operating profit based on longer-term investment returns2,3 £m

The Group’s business involves entering into long-term contracts with customers, and hence the Group manages its associated assets and liabilities over a longer-term time horizon. This enables the Group to manage a degree of short-term market volatility. Therefore IFRS operating profit based on longer-term investment returns gives a more relevant measure of the performance of the business. Other items are excluded from IFRS operating profit to allow more relevant period-on-period comparisons of the trading operations of the Group, for example the effects of material corporate transactions are excluded.

IFRS operating profit based on longer term investment returns
  • Group IFRS operating profit in 2016 is 2 per cent lower on a constant exchange rate basis (+7 per cent on an actual exchange rate basis), compared with 2015, reflecting resilient performance in our life businesses, with Asia up 15 per cent (28 per cent on an actual exchange rate basis), and the US up 8 per cent (21 per cent on an actual exchange rate basis), mitigating the lower profit from the UK, down 32 per cent.

EEV new business profit3,4,5,6 £m

Life insurance products are, by their nature, long-term and generate profit over a number of years. Embedded value reporting provides investors with a measure of the future profit streams of the Group. EEV new business profit reflects the value of future profit streams which are not fully captured in the year of sale under IFRS reporting.

EEV new business profit
  • EEV new business profit in 2016 increased by 11 per cent on a constant exchange rate basis (24 per cent on an actual exchange rate basis), compared with 2015, driven by higher, new business sale volumes and pricing and product actions to increase profitably.

EEV operating profit3,4,5 £m

EEV operating profit is provided as an additional measure of profitability. This measure includes EEV new business profit, the change in the value of Group’s long-term in-force business, and profit from our asset management and other businesses. As with IFRS, EEV operating profit reflects the underlying results based on longer-term investment returns.

EEV operating profit
  • Group EEV operating profit in 2016 increased by 3 per cent on a constant exchange rate basis (14 per cent on an actual exchange rate basis), compared with 2015, driven by higher new business profits and higher contributions from the in-force business.

Group free surplus generation3,5,7 £m

Free surplus generation is used to measure the internal cash generation of our business units. For insurance operations it represents amounts maturing from the in-force business during the period less investment in new business and excludes other non-operating items. For asset management it equates to post-tax IFRS operating profit for the year.

Group free surplus generation
  • Underlying free surplus in 2016 increased by 10 per cent, on a constant exchange rate basis (18 per cent on an actual exchange rate basis), compared with 2015, driven by growth of the in-force portfolio, and continued disciplined allocation of free surplus to new business opportunities.

Business unit remittances8 £m

Remittances measure the cash transferred from business units to the Group. Cash flows across the Group reflect our aim of achieving a balance between ensuring sufficient net remittances from business units to cover the dividend (after corporate costs) and the use of cash for reinvestment in profitable opportunities available to the Group.

Business unit remittances
  • Business unit remittances increased by 6 per cent in 2016, compared with 2015, with significant contributions from each of our four major business units.

Group Solvency II capital surplus9,10,13 £bn

Replacing the IGD capital regime, from 1 January 2016, Prudential is subject to the risk-sensitive solvency framework required under European Solvency II Directives (Solvency II) as implemented by the Prudential Regulation Authority in the UK. The Solvency II surplus represents the aggregated capital (own funds) held by the Group less solvency capital requirements.

Group Solvency II capital surplus
  • The high quality and recurring nature of our operating capital generation, beneficial effects of debt issued and disciplined approach to managing balance sheet risks is reflected in the solvency capital surplus, which increased to 12.5 billion at 31 December 2016.

2017 objectives11

We are making good progress towards the objectives we announced in December 2013:

Asia objectives12

Asia IFRS operating profit, £m

Asia life and asset management pre-tax IFRS operating profit to grow at a compound annual rate of at least 15 per cent over the period 2012 to 2017.

Asia IFRS operating profit, £m  

Asia underlying free surplus, £m

Asia underlying free surplus generation7 of £0.9 billion to £1.1 billion in 2017.

Asia underlying free surplus, £m

Group objective

Group cumulative underlying free surplus, £m

Cumulative Group underlying free surplus generation of at least £10 billion over the four-year period from 2014 to end-2017.

Group objective  

Notes:

  1. The comparative results shown above have been prepared using actual exchange rates (AER) basis except where otherwise stated. Comparative results on a constant exchange rate (CER) basis are also shown in financial tables in the Chief Financial Officers’ report on our 2016 financial performance. CAGR is Compound Annual Growth Rate.
  2. IFRS operating profit is management’s primary measure of profitability and provides an underlying operating result based on longer-term investment returns and excludes non-operating items. Further information on its definition and reconciliation to profit for the period is set out in note B1 of the IFRS financial statements.
  3. Following its reclassification to held for sale during 2016, operating results exclude the contribution of the Korea life business. The 2015 comparative results have been similarly adjusted.
  4. Embedded value reporting provides investors with a measure of the future profit streams of the Group. The EEV basis results have been prepared in accordance with EEV principles discussed in note 1 of the EEV basis results. A reconciliation between IFRS and the EEV shareholder funds is included in note C of the Additional EEV financial information.
  5. The 2016 EEV basis results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime, effective from 1 January 2016. The 2015 comparative results for UK insurance reflects the Solvency I basis.
  6. Excluding UK bulk annuities as Prudential has withdrawn from this market.
  7. Free surplus generation represents ‘underlying free surplus’ based on operating movements, including the general insurance commission earned during the period and excludes market movement, foreign exchange, capital movements, shareholders’ other income and expenditure and centrally arising restructuring and Solvency II implementation costs. Further information is set out in note 11 of the EEV basis results.
  8. Cash remitted to the Group forms part of the net cash flows of the holding company. A full holding company cash flow is set out in note II (a) of Additional IFRS financial information. This differs from the IFRS Consolidated Statement of Cash Flows which includes all cash flows relating to both policyholders and shareholders’ funds. The holding company cash flow is therefore a more meaningful indicator of the Group’s central liquidity.
  9. Estimated before allowing for second interim ordinary dividend.
  10. Excludes surplus in ring-fenced policyholder funds. The methodology and assumptions used in calculating the Group Solvency II capital results are set out in note II (c) of the additional financial information.
  11. The objectives assume exchange rates at December 2013 and economic assumptions made by Prudential in calculating the EEV basis supplementary information for the half year ended 30 June 2013, and are based on regulatory and solvency regimes applicable across the Group at the time the objectives were set. The objectives assume that the existing EEV, IFRS and free surplus methodology at December 2013 will be applicable over the period.
  12. Following the announcement of the proposed sale of the Korea life business in November 2016, amounts for all years exclude the results of the Korea life business, as this sale is expected to complete in 2017. The 2017 Asia objectives have been adjusted accordingly.
  13. The Group Solvency II surplus represents the shareholder capital position excluding the contribution to Own Funds and the Solvency Capital Requirement from ring-fenced with-profits funds and staff pension schemes in surplus. The estimated solvency position includes the impact of recalculated transitionals at the valuation date, which has reduced the Group shareholder surplus from £12.9 billion to £12.5 billion. The formal Quantitative Reporting Templates (Solvency II regulatory templates) will include transitional measures without this recalculation.
 
 

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