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Additional unaudited financial information

I: IFRS profit and loss information
I(a) Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment returns by driver
I(b) Asia operations – analysis of IFRS operating profit by territory
I(c) Analysis of asset management operating profit based on longer-term investment returns
I(d) Contribution to UK Life financial metrics from specific management actions undertaken to position the balance sheet more efficiently under the new Solvency II regime
II: Other information
II(a) Holding company cash flow*
II(b) Funds under management
II(c) Solvency II capital position at 31 December 2016
II(d) Reconciliation of expected transfer of value of in-force business (VIF) and required capital to free surplus
II(e) Foreign currency source of key metrics
II(f) Option schemes
II(g) Selected historical financial information of Prudential
II(h) Reconciliation between IFRS and EEV shareholders’ funds
II(i) Reconciliation of APE new business sales to earned premiums

I IFRS profit and loss information

I(a) Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment returns by driver

This schedule classifies the Group’s pre-tax operating earnings from long-term insurance operations into the underlying drivers of those profits, using the following categories:

  • Spread income represents the difference between net investment income (or premium income in the case of the UK annuities new business) 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 profits driven by net investment performance, being asset management fees that vary with the size of the underlying policyholder funds net of investment management expenses.
  • With-profits business represents the gross of tax shareholders’ transfer from the with-profits fund for the year.
  • Insurance margin primarily represents profits 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.
  • Acquisition costs and administration expenses represent expenses incurred in the year attributable to shareholders. It excludes items such as restructuring costs and Solvency II costs which are not included in the segment profit for insurance, as well as items that are more appropriately included in other sources of earnings lines (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 year, excluding amounts related to short-term fluctuations in investment returns, net of costs deferred in respect of new business.

Analysis of pre-tax IFRS operating profit by source and margin analysis of Group long-term insurance business

The following analysis expresses certain of the Group’s sources of operating profit as a margin of policyholder liabilities or other suitable driver. Details on the calculation of the Group’s average policyholder liability balances are given in note (iv) at the end of this section.

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  2016 £m
Asia
note (vi)
US UK Total Average liability note (iv) Total
bps
note (ii)
See notes at the end of this section
Spread income 192 802 177 1,171 83,054 141
Fee income 174 1,942 59 2,175 139,451 156
With-profits 48 269 317 118,334 27
Insurance margin 1,040 888 63 1,991    
Margin on revenues 1,919 207 2,126    
Expenses:            
Acquisition costs note (i) (1,285) (877) (89) (2,251) 6,320 (36)%
Administration expenses (832) (959) (152) (1,943) 229,477 (85)
DAC adjustments note (v) 148 244 (2) 390    
Expected return on shareholder assets 99 12 110 221    
  1,503 2,052 642 4,197    
Longevity reinsurance and other management actions to improve solvency     332 332    
Provision for review of past annuity sales     (175) (175)    
Long-term business operating profit based on longer-term investment returns 1,503 2,052 799 4,354    

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  2015 AER £m
Asia
note (vi)
US UK Total Average liability note (iv) Total
bps
note (ii)
See notes at the end of this section
Spread income 149 746 258 1,153 72,900 158
Fee income 154 1,672 62 1,888 123,232 153
With-profits 45 269 314 106,749 29
Insurance margin 756 796 119 1,671    
Margin on revenues 1,643 179 1,822    
Expenses:            
Acquisition costs note (i) (1,075) (939) (86) (2,100) 5,466 (38)%
Administration expenses (669) (828) (159) (1,656) 203,664 (81)
DAC adjustments note (v) 97 218 (2) 313    
Expected return on shareholder assets 71 26 127 224    
  1,171 1,691 767 3,629    
Longevity reinsurance and other management actions to improve solvency     400 400    
Long-term business operating profit based on longer-term investment returns 1,171 1,691 1,167 4,029    

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  2015 CER £m
note (iii)
Asia
note (vi)
US UK Total Average liability note (iv) Total
bps
note (ii)

See notes at the end of this section

Spread income 164 845 258 1,267 78,026 162
Fee income 170 1,886 62 2,118 135,717 156
With-profits 50 269 319 108,551 29
Insurance margin 841 898 119 1,858    
Margin on revenues 1,821 179 2,000    
Expenses:            
Acquisition costs note (i) (1,194) (1,059) (86) (2,339) 5,995 (39)%
Administration expenses (736) (934) (159) (1,829) 222,250 (82)
DAC adjustments note (v) 108 246 (2) 352    
Expected return on shareholder assets 79 26 127 232    
  1,303 1,908 767 3,978    
Longevity reinsurance and other management actions to improve solvency     400 400    
Long-term business operating profit based on longer-term investment returns 1,303 1,908 1,167 4,378    

Margin analysis of long-term insurance business – Asia

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Long-term business Asia
note (vi)
2016   2015 AER   2015 CER
note (iii)
Profit
£m
Average liability
note (iv)
£m
Margin
note (ii)
bps
  Profit
£m
Average liability
note (iv)
£m
Margin
note (ii)
bps
  Profit
£m
Average liability
note (iv)
£m
Margin
note (ii)
bps

See notes at the end of this section

Spread income 192 13.299 144   149 10,428 143   164 11,466 143
Fee income 174 15,643 111   154 13,940 110   170 14,944 114
With profits 48 22,823 21   45 17,446 26   50 19,247 26
Insurance margin 1,040       756       841    
Margin on revenues 1,919       1,643       1,821    
Expenses:                      
Acquisition costs note (i) (1,285) 3,599 (36)%   (1,075) 2,712 (40)%   (1,194) 3,020 (40)%
Administration expenses (832) 28,942 (287)   (669) 24,368 (274)   (736) 26,410 (279)
DAC adjustments note (v) 148       97       108    
Expected return on shareholder assets 99       71       79    
Operating profit based on longer-term investment return 1,503       1,171       1,303    

Analysis of Asia operating profit drivers:

  • Spread income increased on a constant exchange rate basis by 17 per cent to £192 million in 2016 (AER: 29 per cent), predominantly reflecting the growth of the Asia non-linked policyholder liabilities.
  • Fee income increased by 2 per cent on a constant exchange rate basis to £174 million in 2016 (AER: 13 per cent), broadly in line with the increase in movement in average unit-linked liabilities.
  • Insurance margin increased on a constant exchange rate basis by 24 per cent to £1,040 million in 2016 (AER: 38 per cent), primarily reflecting the continued growth of the in-force book, which contains a relatively high proportion of risk-based products. Insurance margin includes non-recurring items of £49 million (2015: £17 million on CER basis; £15 million on AER basis).
  • Margin on revenues increased by £98 million on a constant exchange rate basis from £1,821 million to £1,919 million in 2016, primarily reflecting higher regular premium income recognised in the year.
  • Acquisition costs increased on a constant exchange rate basis by 8 per cent to £1,285 million in 2016, (AER: 19 per cent) compared to the 19 per cent increase in APE sales (AER: 33 per cent increase), resulting in a decrease in the acquisition costs ratio. The analysis above uses shareholder acquisition costs as a proportion of total APE sales. If with-profits APE sales were excluded from the denominator the acquisition cost ratio would become 70 per cent, which is broadly in line with the 69 per cent on a constant exchange rate basis in 2015.
  • Administration expenses increased on a constant exchange rate basis by 13 per cent to £832 million in 2016 (AER: 24 per cent) as the business continues to expand. On a constant exchange rate basis, the administration expense ratio has increased from 279 basis points in 2015 to 287 basis points in 2016, the result of changes in country and product mix.

Margin analysis of long-term insurance business – US

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Long-term business US
2016   2015 AER   2015 CER
note (iii)
Profit
£m
Average liability
note (iv)
£m
Margin
note (ii)
bps
  Profit
£m
Average liability
note (iv)
£m
Margin
note (ii)
bps
  Profit
£m
Average liability
note (iv)
£m
Margin
note (ii)
bps

See notes at the end of this section

Spread income 802 37,044 217   746 30,927 241   845 35,015 241
Fee income 1,942 102,027 190   1,672 86,921 192   1,886 98,402 192
Insurance margin 888       796       898    
Expenses                      
Acquisition costs note (i) (877) 1,561 (56)%   (939) 1,729 (54)%   (1,059) 1,950 (54)%
Administration expenses (959) 146,043 (66)   (828) 125,380 (66)   (934) 141,924 (66)
DAC adjustments 244       218       246    
Expected return on shareholder assets 12       26       26    
Operating profit based on longer-term investment returns 2,052       1,691       1,908    

Analysis of US operating profit drivers:

  • Spread income declined on a constant exchange rate basis by 5 per cent to £802 million in 2016 (AER increased by 8 per cent). The reported spread margin decreased to 217 basis points from 241 basis points in 2015, primarily due to lower investment yields. Spread income benefited from swap transactions previously entered into to more closely match the asset and liability duration. Excluding this effect, the spread margin would have been 153 basis points (2015 CER: 167 basis points and AER: 166 basis points).
  • Fee income increased on a constant exchange rate basis by 3 per cent to £1,942 million in 2016 (AER: 16 per cent), primarily due to positive net inflows from variable annuity business and fund appreciation during the second half of the year. Fee income margin has remained broadly in line with the prior year at 190 basis points (2015 CER and AER: 192 basis points).
  • Insurance margin represents operating profits from insurance risks, including variable annuity guarantees and other sundry items. Insurance margin of £888 million in 2016 was broadly in line with last year on a constant exchange rate basis, with higher income from the variable annuity guarantees offset by a decline in the contribution from the closed books of acquired business.
  • Acquisition costs, which are commissions and expenses incurred to acquire new business, including those that are not deferrable, have decreased by 17 per cent at a constant exchange rate basis, largely due to lower sales in 2016.
  • Administration expenses increased to £959 million in 2016 compared to £934 million for 2015 at constant exchange rates (AER £828 million), primarily as a result of higher asset-based commissions . These are paid on policy anniversary dates and are treated as an administration expense in this analysis. Excluding these trail commissions, the resulting administration expense ratio would be 34 basis points (2015 CER and AER: 36 basis points).

Analysis of pre-tax operating profit before and after acquisition costs and DAC adjustments

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  2016 £m   2015 AER £m   2015 CER £m
note (iii)
  Acquisition costs   Acquisition costs   Acquisition costs
  Other operating profits Incurred Deferred Total   Other operating profits Incurred Deferred Total   Other operating profits Incurred Deferred Total
Total operating profit before acquisition costs and DAC adjustments 2,685     2,685   2,412     2,412   2,721     2,721
Less new business strain   (877) 678 (199)     (939) 734 (205)     (1,059) 828 (231)
Other DAC adjustments – amortisation of previously deferred acquisition costs:                            
Normal     (527) (527)       (514) (514)       (580) (580)
(Accelerated)/ Decelerated     93 93       (2) (2)       (2) (2)
Total 2,685 (877) 244 2,052   2,412 (939) 218 1,691   2,721 (1,059) 246 1,908

Analysis of operating profit based on longer-term investment returns for US operations by product

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  2016 £m   2015 £m   %
    AER CER   2016 vs 2015 AER 2016 vs 2015 CER
Spread business note (a) 323   380 428   (15)% (25)%
Fee business note (b) 1,523   1,114 1,257   37% 21%
Life and other business note (c) 206   197 223   5% (8)%
Total insurance operations 2,052   1,691 1,908   21% 8%
US asset management and broker-dealer (4)   11 13   n/a n/a
Total US operations 2,048   1,702 1,921   20% 7%

The analysis of operating profit based on longer-term investment returns for US operations by product represents the net profit generated by each line of business after allocation of costs. Broadly:

  1. Spread business is the net operating profit for fixed annuity, fixed indexed annuity and guaranteed investment contracts and largely comprises spread income less costs.
  2. Fee business represents profits from variable annuity products. As well as fee income, revenue for this product line includes spread income from investments directed to the general account and other variable annuity fees included in insurance margin.
  3. Life and other business includes the profits from the REALIC business and other closed life books. Revenue allocated to this product line includes spread income and premiums and policy charges for life protection, which are included in insurance margin after claim costs. Insurance margin forms the vast majority of revenue.

Margin analysis of long-term insurance business – UK

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  UK
  2016   2015 note (v)
Long-term business Profit
£m
Average liability
note (iv)
£m
Margin
note (ii)
bps
  Profit
£m
Average liability
note (iv)
£m
Margin
note (ii)
bps
See notes at the end of the section
Spread income 177 32,711 54   258 31,545 82
Fee income 59 21,781 27   62 22,371 28
With-profits 269 95,511 28   269 89,303 30
Insurance margin 63       119    
Margin on revenues 207       179    
Acquisition costs note (i) (89) 1,160 (8)%   (86) 1,025 (8)%
Administration expenses (152) 54,492 (28)   (159) 53,916 (29)
DAC adjustments (2)       (2)  
Expected return on shareholder assets 110       127    
  642       767    
Longevity reinsurance and other management actions to improve solvency 332       400    
Provision for review of past annuity sales (175)          
Operating profit based on longer-term investment returns 799       1,167    

Analysis of UK operating profit drivers:

  • Spread income reduced from £258 million in 2015 to £177 million in 2016, mainly due to lower annuity sales. Spread income has two components:
    • A contribution from new annuity business which was lower at £41 million in 2016 compared to £123 million in 2015, as we withdrew our participation from this business. IFRS accounting (based on grandfathered GAAP) permits up front recognition of a considerable proportion of the spread to be earned over the entire term of the new contracts.
    • A contribution from in-force annuity and other business, which was broadly in line with last year at £136 million (2015: £135 million), equivalent to 42 basis points of average reserves (2015: 43 basis points).
  • Fee income principally represents asset management fees from unit-linked business, including direct investment only business to group pension schemes, where liability flows are driven by a small number of large single mandate transactions and fee income mostly arises within our UK asset management business. Excluding these schemes, the fee margin on the remaining balances was 40 basis points (2015: 43 basis points).
  • The lower 2016 insurance margin mainly reflects the more positive experience variance seen in 2015 compared to 2016, together with the fall in annual mortality profits following the extension of our longevity reinsurance programme in 2015 and 2016.
  • Margin on revenues represents premium charges for expenses and other sundry net income received by the UK.
  • Acquisition costs incurred were broadly consistent with 2015 at £89 million, equivalent to 8 per cent of total APE sales in 2016 (2015: 8 per cent). The ratio above expresses the percentage of shareholder acquisition costs as a percentage of total APE sales. The year on year comparison of the ratio is therefore impacted by the level of with-profits business (where acquisition costs are funded by the estate) in the year and the contribution from the bulk annuities transactions in the prior year. Acquisition costs expressed as a percentage of shareholder-backed APE sales (excluding the bulk annuity transactions) were 37 per cent (2015: 36 per cent).
  • The contribution from longevity reinsurance and other management actions to improve solvency during 2016 was £332 million (2015: £400 million). Further explanation and analysis is provided in Additional Unaudited IFRS Financial Information section I(d).
  • The 2016 provision for the cost of undertaking a review of past non-advised annuity sales and potential redress of £175 million is explained in note C11, ‘Provisions’.

Notes to sources of earnings tables

  1. The ratio for acquisition costs is calculated as a percentage of APE sales including with-profits sales. Acquisition costs include only those relating to shareholder-backed business.
  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 2015 comparative information has been presented at AER and CER so as 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 liability calculations, the policyholder liabilities have been translated using current year opening and closing exchange rates. For the US CER average liability calculations, the policyholder liabilities have been translated at the current year month end closing exchange rates. See also Note A1.
  4. For UK and Asia, opening and closing policyholder liabilities have been used to derive an average balance for the year, as a proxy for average balances throughout the year. The calculation of average liabilities for Jackson is generally derived from month end balances throughout the year, as opposed to opening and closing balances only. In 2016, given the significant equity market fluctuations in certain months during the year, average liabilities for fee income in Jackson 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. The 2015 average liabilities for fee income in Jackson have been calculated based on average of month end balances. The alternative use of the daily balances to calculate the average would have resulted in no change to the margin on the CER basis. Average liabilities for spread income are based on the general account liabilities to which spread income attaches. Average liabilities used to calculate the administration expense margin exclude the REALIC liabilities reinsured to third parties prior to the acquisition by Jackson. Average liabilities are adjusted for business acquisitions and disposals in the year.
  5. The DAC adjustments contain a credit of £28 million in respect of joint ventures and associate in 2016 (2015: AER credit of £3 million).
  6. In order to show the Asia long-term business on a comparable basis, the 2015 comparative results exclude the contribution from the held for sale Korea life business.

I(b) Asia operations – analysis of IFRS operating profit by territory

Operating profit based on longer-term investment returns for Asia operations is analysed as follows:

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  2016 £m   AER 2015 £m CER 2015 £m   2015 AER vs 2016 2015 CER vs 2016

Notes

  1. Analysis of operating profit between new and in-force business.
    The result for insurance operations comprises amounts in respect of new business and business in force as follows:

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      2016 £m   2015 £m
        AER CER
    New business strain* (29)   5 7
    Business in force 1,469   1,108 1,234
    Non-recurrent items note (ii) 67   62 66
    Total 1,507   1,175 1,307

    * The IFRS new business strain corresponds to approximately (0.8) per cent of new business APE premiums for 2016 (2015: approximately 0.2 per cent of new business APE).

    The strain reflects the aggregate of the pre-tax regulatory basis strain to net worth after IFRS adjustments for deferral of acquisition costs and deferred income where appropriate.

  2. Other non-recurrent items of £67 million in 2016 (2015: £62 million) represent a number of items, including a gain from entering into a reinsurance contract in the year.
  3. In order to show the Asia long-term business on a comparable basis, the 2015 comparative results exclude the contribution from the held for sale Korea life business.
Hong Kong 238   150 170   59% 40%
Indonesia 428   356 404   20% 6%
Malaysia 147   120 128   23% 15%
Philippines 38   32 35   19% 9%
Singapore 235   204 229   15% 3%
Thailand 92   70 76   31% 21%
Vietnam 114   86 94   33% 21%
South-east Asia operations including Hong Kong 1,292   1,018 1,136   27% 14%
China 64   32 35   100% 83%
Taiwan 35   25 28   40% 25%
Other 49   38 42   29% 17%
Non-recurrent items note (ii) 67   62 66   8% 2%
Total insurance operations note (i),(iii) 1,507   1,175 1,307   28% 15%
Development expenses (4)   (4) (4)   0% 0%
Total long-term business operating profit 1,503   1,171 1,303   28% 15%
Eastspring Investments 141   115 128   23% 10%
Total Asia operations note (iii) 1,644   1,286 1,431   28% 15%

I(c) Analysis of asset management operating profit based on longer-term investment returns

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  2016 £m
M&G
note (ii)
Eastspring Investments note (ii) Prudential Capital US Total
Operating income before performance-related fees 923 353 118 235 1,629
Performance-related fees 33 7 40
Operating income (net of commission) note (i) 956 360 118 235 1,669
Operating expense note (i) (544) (198) (91) (239) (1,072)
Share of associate’s results 13 13
Group’s share of tax on joint ventures’ operating profit (21) (21)
Operating profit based on longer-term investment returns 425 141 27 (4) 589
Average funds under management £250.4bn £109.0bn      
Margin based on operating income* 37bps 32bps      
Cost/income ratio 59% 56%      

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  2015 £m
M&G
note (ii)
Eastspring Investments note (ii) Prudential Capital US Total

Notes

  1. Operating income and expense includes the Group’s share of contribution from joint ventures (but excludes any contribution from associates). In the income statement as shown in note B2 of the IFRS financial statements, these amounts are netted and tax deducted and shown as a single amount.
  2. M&G and Eastspring Investments can be further analysed as follows:

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      M&G
    Operating income before performance-related fees
    Retail
    £m
    Margin of FUM*
    bps
    Institutional
    £m
    Margin of FUM*
    bps
    Total
    £m
    Margin of FUM*
    bps
    2016 504 86 419 22 923 37
    2015 582 87 357 19 939 37

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    Eastspring Investments
    Operating income before performance-related fees
    Retail
    £m
    Margin of FUM*
    bps
    Institutional
    £m
    Margin of FUM*
    bps
    Total
    £m
    Margin of FUM*
    bps

    * 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 the respective entity have been used to derive the average. Any funds held by the Group’s insurance operations that are managed by third parties outside of 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.

    2016 211 58 142 20 353 32
    2015 188 61 116 21 304 36
Operating income before performance-related fees 939 304 118 321 1,682
Performance-related fees 22 3 25
Operating income (net of commission) note (i) 961 307 118 321 1,707
Operating expense note (i) (533) (176) (99) (310) (1,118)
Share of associate’s results 14   14
Group’s share of tax on joint ventures’ operating profit (16)   (16)
Operating profit based on longer-term investment returns 442 115 19 11 587
Average funds under management £252.5bn £85.1bn      
Margin based on operating income* 37bps 36bps      
Cost/income ratio 57% 58%      

I(d) Contribution to UK Life financial metrics from specific management actions undertaken to position the balance sheet more efficiently under the new Solvency II regime

During 2016 management actions were taken to improve the solvency of UK insurance operations and to mitigate market risks. These actions included extending the reinsurance of longevity risk to cover a further £5.4 billion of IFRS annuity liabilities. As at 31 December 2016, the total IFRS annuity liabilities subject to longevity reinsurance were £14.4 billion. Management actions also repositioned the fixed income asset portfolio to improve the trade-off between yield and credit risk and to increase the proportion of the annuity business that benefits from the matching adjustment under Solvency II.

During 2015, longevity risk of £6.4 billion on a Pillar 1 basis was reinsured. In addition, a number of other management actions were also taken to reposition the fixed income portfolio and improve matching adjustment efficiency.

The effect of these actions on the UK’s long-term IFRS operating profit, underlying free surplus generation and EEV operating profit is shown in the tables below.

IFRS operating profit of UK long-term business

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  First half 2016
£m
Second half 2016
£m
Full year 2016
£m
Full year 2015
£m
Shareholder-backed annuity new business:        
Retail 27 14 41 34
Bulks 89
  27 14 41 123
In-force business:        
Longevity reinsurance transactions 66 131 197 231
Other management actions to improve solvency 74 61 135 169
Provision for the review of past annuity sales (175) (175)
  140 17 157 400
With-profits and other in-force 306 295 601 644
Total Life IFRS operating profit 473 326 799 1,167

Underlying free surplus generation of UK long-term business*

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  First half 2016
£m
Second half 2016
£m
Full year 2016
£m
Full year 2015
£m
Expected in-force and return on net worth 334 359 693 620
Longevity reinsurance transactions 53 73 126 200
Other management actions to improve solvency 137 88 225 75
Provision for the review of past annuity sales (145) (145)
  190 16 206 275
Changes in operating assumptions, experience variances and Solvency II and other restructuring costs 31 (23) 8 (17)
Underlying free surplus generated from in-force business 555 352 907 878
New business strain (56) (73) (129) (65)
Total underlying free surplus generation 499 279 778 813

EEV post-tax operating profit of UK long-term businesses*

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  First half 2016
£m
Second half 2016
£m
Full year 2016
£m
Full year 2015
£m

*The 2016 results for the 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 operations reflect the Solvency I basis being the regime applicable for the year.

Unwind of discount and other expected return 205 240 445 488
Longevity reinsurance transactions (10) (80) (90) (134)
Other management actions to improve solvency 41 69 110 75
Provision for the review of past annuity sales (145) (145)
  31 (156) (125) (59)
Changes in operating assumptions and experience variances 23 32 55 116
Operating profit from in-force business 259 116 375 545
New business profit:        
Shareholder-backed annuity 17 15 32 148
Other products 108 128 236 170
  125 143 268 318
Total post-tax Life EEV operating profit 384 259 643 863

II: Other information

II(a) Holding company cash flow*

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  2016 £m 2015 £m

*The holding company cash flow differs from the IFRS cash flow statement, which includes all cash flows in the period 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.

  1. Net cash remittances comprise dividends and other transfers from business units that are reflective of emerging earnings and capital generation.
  2. Non-operating net cash flow principally relates to the issue of subordinated debt less the repayment of debt and payments for distribution rights.
  3. Including central finance subsidiaries.
Net cash remitted by business units:    
UK life net remittances to the Group    
With-profits remittance 215 201
Shareholder-backed business remittance 85 100
  300 301
Other UK paid to the Group 147 30
Total UK net remittances to the Group 447 331
     
US remittances to the Group 420 470
     
Asia net remittances to the Group    
Asia paid to the Group:    
Long-term business 546 494
Other operations 81 74
  627 568
Group invested in Asia:    
Long-term business (10) (5)
Other operations (including funding of regional head office costs) (101) (96)
  (111) (101)
Total Asia net remittances to the Group 516 467
     
M&G remittances to the Group 290 302
PruCap remittances to the Group 45 55
Net remittances to the Group from business units1 1,718 1,625
Net interest paid (333) (290)
Tax received 132 145
Corporate activities (215) (209)
Total central outflows (416) (354)
Operating holding company cash flow before dividend 1,302 1,271
Dividend paid (1,267) (974)
Operating holding company cash flow after dividend* 35 297
     
Non-operating net cash flow2 335 376
Total holding company cash flow 370 673
Cash and short-term investments at beginning of year 2,173 1,480
Foreign exchange movements 83 20
Cash and short-term investments at end of year3 2,626 2,173

II(b) Funds under management

(a) Summary

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  2016 £bn 2015 £bn

Notes

  1. Prudential Group funds under management comprise:

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      2016 £bn 2015 £bn
    Total investments per the consolidated statement of financial position 421.7 352.0
    Less: investments in joint ventures and associates accounted for using the equity method (1.2) (1.0)
    Investment properties which are held for sale or occupied by the Group (included in other IFRS captions) 0.4 0.4
    Internally managed funds held in joint ventures 7.0 5.6
    Prudential Group funds under management 427.9 357.0
  2. External funds shown above as at 31 December 2016 of £171.4 billion (2015: £151.6 billion) comprise £182.5 billion (2015: £162.7 billion) of funds managed by M&G and Eastspring Investments as shown in note (b) below less £11.1 billion (2015: £11.1 billion) that are classified within Prudential Group’s funds.
Business area:    
Asia operations 69.6 54.0
US operations 173.3 134.6
UK operations 185.0 168.4
Prudential Group funds under management note (i) 427.9 357.0
External funds note (ii) 171.4 151.6
Total funds under management 599.3 508.6

(b) Investment products – external funds under management

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  2016 £m   2015 £m
  Eastspring Investments note M&G Group
total
  Eastspring Investments note M&G Group
total

Note

The £182.5 billion (2015: £162.7 billion) investment products comprise £174.8 billion (2015: £156.7 billion) plus Asia Money Market Funds of £7.7 billion (2015: £6.0 billion).

1 January 36,287 126,405 162,692   30,133 137,047 167,180
Market gross inflows 164,004 22,841 186,845   110,396 33,626 144,022
Redemptions (161,766) (30,931) (192,697)   (103,360) (40,634) (143,994)
Market exchange translation and other movements 7,231 18,448 25,679   (882) (3,634) (4,516)
31 December 45,756 136,763 182,519   (36,287) (126,405) (162,692)

(c) M&G and Eastspring Investments – total funds under management

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  Eastspring Investments   M&G
  2016
£bn
note
  2015
£bn
note
  2016
£bn
  2015
£bn

Note

The external funds under management for Eastspring Investments include Asia Money Market Funds at 31 December 2016 of £7.7 billion (2015: £6.0 billion).

External funds under management 45.7   36.3   136.8   126.4
Internal funds under management 72.2   52.8   128.1   119.7
Total funds under management 117.9   89.1   264.9   246.1

II(c) Solvency II capital position at 31 December 2016

The estimated Group shareholder Solvency II surplus at 31 December 2016 was £12.5 billion, before allowing for payment of the 2016 second interim ordinary dividend and after allowing for recalculation of transitional measures as at 31 December 2016.

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Estimated Group shareholder Solvency II capital position* 31 Dec 2016 £bn 31 Dec 2015 £bn

* The Group shareholder capital position excludes the contribution to Own Funds and the Solvency Capital Requirement from ring-fenced With-Profit Funds and staff pension schemes in surplus. The 31 December 2016 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.

Own Funds 24.8 20.1
Solvency Capital Requirement 12.3 10.4
Surplus 12.5 9.7
Solvency ratio 201% 193%

In accordance with Solvency II requirements, these results allow for:

  • Capital in Jackson in excess of 250 per cent of the US local Risk Based Capital requirement. As agreed with the Prudential Regulation Authority, this is incorporated in the result above as follows:
    • Own funds: represents Jackson’s local US Risk Based available capital less 100 per cent of the US Risk Based Capital requirement (Company Action Level);
    • Solvency Capital Requirement: represents 150 per cent of Jackson’s local US Risk Based Capital requirement (Company Action Level); and
    • No diversification benefits are taken into account between Jackson and the rest of the Group.
  • Matching adjustment for UK annuities and volatility adjustment for US dollar denominated Hong Kong with-profits business, based on approvals from the Prudential Regulation Authority and calibrations published by the European Insurance and Occupational Pensions Authority; and
  • UK transitional measures, which have been recalculated at the valuation date, reducing the estimated 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.

The Group shareholder Solvency II capital position excludes:

  • A portion of Solvency II surplus capital (£1.4 billion at 31 December 2016) relating to the Group’s Asian life operations, including due to ‘contract boundaries’;
  • The contribution to Own Funds and the Solvency Capital Requirement from ring-fenced with-profits funds in surplus (representing £3.7 billion of surplus capital from UK with-profits funds at 31 December 2016) and from the shareholders’ share of the estate of with-profits funds; and
  • The contribution to Own Funds and the Solvency Capital Requirement from pension funds in surplus.

It also excludes unrealised gains on certain derivative instruments taken out to protect Jackson against declines in long-term interest rates. At Jackson’s request, the Department of Insurance Financial Services renewed its approval to carry these instruments at book value in the local statutory returns for the period 31 December 2016 to 1 October 2017. At 31 December 2016, this approval had the effect of decreasing local statutory capital and surplus (and by extension Solvency II Own Funds and Solvency II surplus) by £0.3 billion, net of tax. This arrangement reflects an elective long-standing practice first put in place in 2009, which can be unwound at Jackson’s discretion.

Korea is included in the Solvency II results above, pending local regulatory approval for the sale, which once complete will increase the shareholder Solvency II ratio by around 1 percentage point.

Analysis of movement in Group capital position

A summary of the estimated movement in Group Solvency II surplus from £9.7 billion at year end 2015 to £12.5 billion at year end 2016 is set out in the table below. The movement from the previously reported economic capital basis solvency surplus at 31 December 2014 to the Solvency II surplus at 31 December 2015 is included for comparison.

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Analysis of movement in Group shareholder surplus Full year 2016 £bn Full year 2015 £bn
Estimated Solvency II surplus at 1 January 2016/economic capital surplus at 1 January 2015 9.7 9.7
Underlying operating experience 2.3 2.0
Management actions 0.4 0.4
Operating experience 2.7 2.4
Non-operating experience (including market movements) (1.1) (0.6)
Other capital movements    
Subordinated debt issuance 1.2 0.6
Foreign currency translation impacts 1.6 0.2
Dividends paid (1.3) (1.0)
Methodology and calibration changes    
Changes to Own Funds (net of transitionals) and SCR calibration strengthening (0.3) (0.2)
Effect of partial derecognition of Asia Solvency II surplus (1.4)
Estimated Solvency II surplus at end of period 12.5 9.7

The estimated movement in Group Solvency II surplus over 2016 is driven by:

  • Operating experience of £2.7 billion: generated by in-force business and new business written in 2016 and also the impact of one-off management optimisations implemented in 2016;
  • Non-operating experience of £(1.1) billion: mainly arising from negative market experience during 2016, allowing for the recalculation of UK transitional measures at the valuation date;
  • Other capital movements: comprising a gain from foreign currency translation effects and the issuance of debt during 2016 offset by a reduction in surplus from payment of dividends; and
  • Methodology and calibration changes £(0.3) billion: reflecting model changes during 2016 and true-ups relating to opening balance estimates.

Analysis of Group Solvency Capital Requirements

The split of the Group’s estimated Solvency Capital Requirement by risk type including the capital requirements in respect of Jackson’s risk exposures based on 150 per cent of US Risk Based Capital requirements (Company Action Level) but with no diversification between Jackson and the rest of the Group, is as follows:

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  31 Dec 2016   31 Dec 2015
Split of the Group’s estimated Solvency Capital Requirements % of undiversified Solvency Capital Requirements % of diversified Solvency Capital Requirements   % of undiversified Solvency Capital Requirements % of diversified Solvency Capital Requirements
Market 55% 68%   55% 72%
Equity 12% 19%   11% 16%
Credit 25% 41%   28% 47%
Yields (interest rates) 13% 7%   13% 6%
Other 5% 1%   3% 3%
Insurance 28% 23%   27% 20%
Mortality/morbidity 5% 2%   5% 2%
Lapse 16% 19%   14% 14%
Longevity 7% 2%   8% 4%
Operational/expense 11% 7%   11% 7%
FX translation 6% 2%   7% 1%

Reconciliation of IFRS equity to Group Solvency II Shareholder Own Funds

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Reconciliation of IFRS equity to Group Solvency II Shareholder Own Funds 31 Dec 2016 £bn 31 Dec 2015 £bn
IFRS shareholders’ equity 14.7 13.0
Restate US insurance entities from IFRS onto local US statutory basis (2.2) (1.5)
Remove DAC, goodwill and intangibles (3.8) (3.7)
Add subordinated debt 6.3 4.4
Impact of risk margin (net of transitionals) (3.4) (2.5)
Add value of shareholder transfers 4.0 3.1
Liability valuation differences 10.5 8.6
Increase in value of net deferred tax liabilities (resulting from valuation differences above) (1.3) (0.9)
Other 0.0 (0.4)
Estimated Solvency II Shareholder Own Funds 24.8 20.1

The key items of the reconciliation as at 31 December 2016 are:

  • £2.2 billion represents the adjustment required to the Group’s shareholders’ funds in order to convert Jackson’s contribution from an IFRS basis to the local statutory valuation basis. This item also reflects a derecognition of Own Funds of £0.9 billion, equivalent to the value of 100 per cent of Risk Based Capital requirements (Company Action Level), as agreed with the Prudential Regulation Authority;
  • £3.8 billion due to the removal of DAC, goodwill and intangibles from the IFRS balance sheet;
  • £6.3 billion due to the addition of subordinated debt which is treated as available capital under Solvency II but as a liability under IFRS;
  • £3.4 billion due to the inclusion of a risk margin for UK and Asia non-hedgeable risks, net of £2.5 billion transitionals, all of which are not applicable under IFRS;
  • £4.0 billion due to the inclusion of the value of future shareholder transfers from with-profits business (excluding the shareholders’ share of the with-profits estate, for which no credit is given under Solvency II), which is excluded from the determination of the Group’s IFRS shareholders’ funds;
  • £10.5 billion due to differences in insurance valuation requirements between Solvency II and IFRS, with Solvency II Own Funds partially capturing the value of in-force business which is excluded from IFRS; and
  • £1.3 billion due to the impact on the valuation of deferred tax assets and liabilities resulting from the other valuation differences noted above.

Sensitivity analysis

The estimated sensitivity of the Group shareholder Solvency II capital position to significant changes in market conditions is as follows:

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  31 Dec 2016   31 Dec 2015
Impact of market sensitivities Surplus £bn Ratio   Surplus £bn Ratio

Notes

  1. 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.
  2. Subject to a floor of zero.
  3. Allowing for further transitional recalculation after the interest rate stress.
  4. US Risk Based Capital solvency position included using a stress of 10 times expected credit defaults.
Base position 12.5 201%   9.7 193%
Impact of:          
20% instantaneous fall in equity markets 0.0 3%   (1.0) (7)%
40% fall in equity markets1 (1.5) (7)%   (1.8) (14)%
50 basis points reduction in interest rates2,3 (0.6) (9)%   (1.1) (14)%
100 basis points increase in interest rates3 1.0 13%   1.1 17%
100 basis points increase in credit spreads4 (1.1) (3)%   (1.2) (6)%

The Group is positioned to withstand significant deteriorations in market conditions and we continue to use market hedges to manage some of this exposure across the Group, where we believe the benefit of the protection outweighs the cost. The sensitivity analysis above allows for predetermined management actions and those taken to date, but does not reflect all possible management actions which could be taken in the future.

UK Solvency II capital position1,2

On the same basis as above, the estimated UK shareholder Solvency II surplus at 31 December 2016 was £4.6 billion, after allowing for recalculation of transitional measures as at 31 December 2016. This relates to shareholder-backed business including future with-profits shareholder transfers, but excludes the shareholders’ share of the estate in line with Solvency II requirements.

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Estimated UK shareholder Solvency II capital position* 31 Dec 2016
£bn
31 Dec 2015
£bn

* The UK shareholder capital position excludes 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 at 31 December 2016 includes the impact of recalculated transitionals at the valuation date which has reduced the UK shareholder surplus from £5.0 billion to £4.6 billion.

Own Funds 12.0 10.5
Solvency Capital Requirement 7.4 7.2
Surplus 4.6 3.3
Solvency ratio 163% 146%

While the surplus position of the UK with-profits funds remains strong on a Solvency II basis, it is ring-fenced from the shareholder balance sheet and is therefore excluded from both the Group and the UK shareholder Solvency II surplus results. The estimated UK with-profits funds Solvency II surplus at 31 December 2016 was £3.7 billion, after allowing for recalculation of transitional measures as at 31 December 2016.

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Estimated UK with-profits Solvency II capital position 31 Dec 2016
£bn
31 Dec 2015
£bn
Own funds 8.4 7.6
Solvency capital requirement 4.7 4.4
Surplus 3.7 3.2
Solvency ratio 179% 175%

Reconciliation of UK with-profits IFRS unallocated surplus to Solvency II Own Funds2

A reconciliation between the IFRS unallocated surplus and Solvency II Own Funds for UK with-profits business is as follows:

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Reconciliation of UK with-profits funds 31 Dec 2016
£bn
31 Dec 2015
£bn
IFRS unallocated surplus of UK with-profits funds 11.7 10.5
Adjustments from IFRS basis to Solvency II    
Value of shareholder transfers (2.3) (2.1)
Risk margin (net of transitional) (0.7) (0.7)
Other valuation differences (0.3) (0.1)
Estimated Solvency II Own Funds 8.4 7.6

Annual regulatory reporting

The Group will publish its Solvency and Financial Condition Report and related quantitative templates no later than 1 July 2017. The templates will require us to combine the Group shareholder solvency position with those of all other ring-fenced funds across the Group. In combining these solvency positions, the contribution to own funds from these ring-fenced funds will be set equal to their aggregate solvency capital requirements, estimated at £6.2 billion (ie the solvency surplus in these ring-fenced funds will not be captured in the templates). There will be no impact on the reported Group Solvency II surplus.

Statement of independent review

The methodology, assumptions and overall result have been subject to examination by KPMG LLP.

Notes

  1. The UK shareholder capital position represents the consolidated capital position of the shareholder funds of The Prudential Assurance Company Ltd (PAC) and all its subsidiaries.
  2. The UK with-profits capital position includes the PAC with-profits sub-fund, the Scottish Amicable Insurance Fund and the Defined Charge Participating Sub-Fund.

II(d) Reconciliation of expected transfer of value of in-force business (VIF) and required capital to free surplus

The tables below show how the value of in-force business (VIF) generated by the in-force long-term business and the associated required capital is modelled as emerging into free surplus over the next 40 years. Although a small amount (less than 3 per cent) of the Group’s embedded value emerges after this date, analysis of cash flows emerging in the years shown in the tables is considered most meaningful. The modelled cash flows use the same methodology underpinning the Group’s embedded value reporting and so are subject to the same assumptions and sensitivities used to prepare our 2016 results.

In addition to showing the amounts, both discounted and undiscounted, expected to be generated from all in-force business at 31 December 2016, the tables also present the expected future free surplus to be generated from the investment made in new business during 2016 over the same 40-year period.

(i) Expected transfer of value of in-force business (VIF) and required capital to free surplus

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  2016 £m
  Undiscounted expected generation from all in-force business at 31 December*   Undiscounted expected generation from new business written*
Expected period of emergence Asia US UK Total   Asia US UK Total

* The analysis excludes amounts incorporated into VIF at 31 December 2016 where there is no definitive timeframe for when the payments will be made or receipts received. In particular, it excludes the value of the shareholders’ interest in the estate. It also excludes any free surplus emerging after 2056.

† Asia operations exclude the cash flows in respect of the held for sale Korea life business.

2017 1,320 1,446 675 3,441   188 270 27 485
2018 1,247 1,279 669 3,195   157 116 29 302
2019 1,202 1,273 636 3,111   170 123 29 322
2020 1,167 1,281 622 3,070   158 136 31 325
2021 1,142 1,282 606 3,030   170 151 33 354
2022 1,122 1,152 591 2,865   148 84 30 262
2023 1,122 1,116 576 2,814   159 79 29 267
2024 1,098 1,067 557 2,722   154 165 29 348
2025 1,076 914 534 2,524   148 144 28 320
2026 1,050 865 508 2,423   160 159 27 346
2027 1,001 708 486 2,195   137 110 24 271
2028 991 597 451 2,039   142 100 23 265
2029 958 547 434 1,939   135 82 22 239
2030 940 424 409 1,773   132 72 21 225
2031 921 351 381 1,653   146 70 20 236
2032 879 321 490 1,690   130 53 18 201
2033 859 215 465 1,539   130 36 18 184
2034 834 162 438 1,434   127 35 17 179
2035 821 153 413 1,387   123 31 16 170
2036 805 118 392 1,315   130 30 15 175
2037-2041 3,905 699 1,542 6,146   621 55 65 741
2042-2046 3,564 1,053 4,617   607 66 673
2047-2051 3,257 554 3,811   593 14 607
2052-2056 2,999 301 3,300   585 8 593
Total free surplus expected to emerge in the next 40 years 34,280 15,970 13,783 64,033   5,350 2,101 639 8,090

The above amounts can be reconciled to the new business amounts as follows:

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  2016 £m
Asia US UK Total

‡ Other items represent the impact of the time value of options and guarantees on new business, foreign exchange effects and other non-modelled items. Foreign exchange effects arise as EEV new business profit amounts are translated at average exchange rates and the expected free surplus generation uses year end closing rates.

Undiscounted expected free surplus generation for years 2017 to 2056 5,350 2,101 639 8,090
Less: discount effect (2,968) (746) (259) (3,973)
Discounted expected free surplus generation for years 2017 to 2056 2,382 1,355 380 4,117
Discounted expected free surplus generation for years 2056+ 292 1 293
Less: Free surplus investment in new business (476) (298) (129) (903)
Other items (168) (267) 16 (419)
Post-tax EEV new business profit 2,030 790 268 3,088

The undiscounted expected free surplus generation from all in-force business at 31 December 2016 shown below can be reconciled to the amount that was expected to be generated as at 31 December 2015 as follows:

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Group 2016
£m
2017
£m
2018
£m
2019
£m
2020
£m
2021
£m
Other
£m
Total
£m
2015 expected free surplus generation for years 2016 to 2055:
As previously published
2,621 2,463 2,383 2,378 2,388 2,369 36,173 50,775
Effect of Solvency II implementation 46 55 49 45 43 48 1,350 1,636
  2,667 2,518 2,432 2,423 2,431 2,417 37,523 52,411
Less: Amounts expected to be realised in the current year (2,667) (2,667)
Less: Contribution from the held for sale Korea life business (40) (40) (37) (35) (33) (537) (722)
Add: Expected free surplus to be generated in year 2056* 394 394
Foreign exchange differences 370 355 350 354 346 5,023 6,798
New business 485 302 322 326 354 6,304 8,093
Operating movements 11 18 (16) 5 (36)    
Non-operating and other movements 97 128 69 (11) (18) (521) (274)
2016 expected free surplus generation for years 2017 to 2056 3,441 3,195 3,111 3,070 3,030 48,186 64,033

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Asia 2016
£m
2017
£m
2018
£m
2019
£m
2020
£m
2021
£m
Other
£m
Total
£m
2015 expected free surplus generation for years 2016 to 2055 1,015 962 926 905 871 889 20,640 26,208
Less: Amounts expected to be realised in the current year (1,015) (1,015)
Less: Contribution from the held for sale Korea life business‡ (40) (40) (37) (35) (33) (537) (722)
Add: Expected free surplus to be generated in year 2056* 358 358
Foreign exchange differences 179 172 163 158 157 3,737 4,566
New business 188 157 170 158 170 4,507 5,350
Operating movements 33 34 8 24 (23)    
Non-operating and other movements (2) (2) (7) (9) (18) (503) (465)
2016 expected free surplus generation for years 2017 to 2056 1,320 1,247 1,202 1,167 1,142 28,202 34,280

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US 2016
£m
2017
£m
2018
£m
2019
£m
2020
£m
2021
£m
Other
£m
Total
£m
2015 expected free surplus generation for years 2016 to 2055: 1,120 991 951 970 1,018 982 6,665 12,697
Less: Amounts expected to be realised in the current year (1,120) (1,120)
Foreign exchange differences 191 183 187 196 189 1,286 2,232
New business 270 116 123 136 151 1,305 2,101
Operating movements (5) (5) (15) (15) (7)    
Non-operating and other movements (1) 34 8 (54) (33) 153 60
2016 expected free surplus generation for years 2017 to 2056 1,446 1,279 1,273 1,281 1,282 9,409 15,970

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UK 2016
£m
2017
£m
2018
£m
2019
£m
2020
£m
2021
£m
Other
£m
Total
£m

* Excluding 2016 new business.

† In order to show the cash flows for UK insurance operations on a comparable basis, the 2015 comparative results for UK insurance operations reflect the impact of the implementation of Solvency II at 1 January 2016 (see note 2 for details).

‡ The contribution from the Korea life business has been removed from expected free surplus generation following its reclassification as held for sale.

2015 expected free surplus generation for years 2016 to 2055
As previously published
486 510 506 503 499 498 8,868 11,870
Effect of Solvency II implementation† 46 55 49 45 43 48 1,350 1,636
  532 565 555 548 542 546 10,218 13,506
Less: Amounts expected to be realised in the current year (532) (532)
Add: Expected free surplus to be generated in year 2056* 36 36
New business 27 29 29 31 33 490 639
Operating movements (17) (11) (9) (4) (6)    
Non-operating and other movements 100 96 68 53 33 (169) 134
2016 expected free surplus generation for years 2017 to 2056 675 669 636 622 606 10,575 13,783

At 31 December 2016, the total free surplus expected to be generated over the next five years (2017 to 2021 inclusive), using the same assumptions and methodology as those underpinning our 2016 embedded value reporting was £15.8 billion, an increase of £3.3 billion from the £12.5 billion expected over an equivalent period from the end of 2015, after allowing for the effect of the implementation of Solvency II on the opening balance sheet.

This increase primarily reflects the new business written in 2016, which is expected to generate £1,788 million of free surplus over the next five years.

At 31 December 2016, the total free surplus expected to be generated on an undiscounted basis in the next 40 years is £64.0 billion, up from the £52.4 billion expected at the end of 2015, after allowing for the effect of the implementation of Solvency II on the opening balance sheet, reflecting the effect of new business written across all three business operations of £8.1 billion and a positive foreign exchange translation effect of £6.8 billion. These positive effects have been offset by the negative impact of £(0.7) billion for the removal of the contribution from the Korea life business following its reclassification as held for sale and a £(0.3) billion net effect reflecting operating, market assumption changes and other items. In Asia, these include the negative impact from movements in long-term interest rates and other regular operating assumption changes. In the US, these mainly reflect the positive effect of higher future separate account growth due to the increase in interest rates and the impact of an increase in equity market returns in 2016, partially offset by the negative effect from the acceleration of free surplus from the contingent financing of specific US statutory reserves. In the UK, these mainly arise from the positive effect of higher than assumed investment returns on with-profits funds, partially offset by the negative effect of longevity reinsurance transactions entered into during the year. The longevity reinsurance transactions executed this year had the effect of accelerating the generation of future free surplus into 2016. The overall growth in the Group’s undiscounted value of free surplus reflects our ability to write both growing and profitable new business.

Actual underlying free surplus generated in 2016 from life business in-force at the end of 2016 was £4.0 billion including £0.8 billion of changes in operating assumptions and experience variances. This compares with the expected 2016 realisation at the end of 2015 of £2.7 billion. This can be analysed further as follows:

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  Asia
£m
US
£m
UK
£m
Total
£m
Transfer to free surplus in 2016 1,157 1,223 680 3,060
Expected return on free assets 39 47 13 99
Changes in operating assumptions and experience variances 14 596 214 824
Underlying free surplus generated from in-force life business in 2016 1,210 1,866 907 3,983
2016 free surplus expected to be generated at 31 December 2015 1,015 1,120 532 2,667

The equivalent discounted amounts of the undiscounted expected transfers from in-force business and required capital into free surplus shown previously are as follows:

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  2016 £m
  Discounted expected generation from all in-force business at 31 December   Discounted expected generation from long-term 2015 new business written
Expected period of emergence Asia US UK Total   Asia US UK Total
2017 1,262 1,371 659 3,292   180 261 26 467
2018 1,113 1,141 628 2,882   137 105 27 269
2019 1,007 1,069 572 2,648   141 105 27 273
2020 916 1,009 535 2,460   124 108 28 260
2021 843 952 496 2,291   127 116 28 271
2022 769 803 458 2,030   104 60 25 189
2023 724 734 423 1,881   107 52 23 182
2024 664 658 387 1,709   99 101 21 221
2025 612 531 349 1,492   89 83 19 191
2026 562 477 314 1,353   91 90 17 198
2027 508 365 282 1,155   73 56 15 144
2028 476 292 245 1,013   72 48 14 134
2029 436 251 222 909   65 36 12 113
2030 408 185 197 790   60 30 11 101
2031 381 147 173 701   63 28 10 101
2032 346 131 218 695   55 19 9 83
2033 322 80 197 599   52 12 8 72
2034 299 61 178 538   49 11 7 67
2035 282 57 160 499   46 9 6 61
2036 266 43 148 457   47 8 6 61
2037-2041 1,154 199 515 1,868   203 17 24 244
2042-2046 853 197 1,050   163 12 175
2047-2051 638 129 767   131 3 134
2052-2056 473 58 531   104 2 106
Total discounted free surplus expected to emerge in the next 40 years 15,314 10,556 7,740 33,610   2,382 1,355 380 4,117

The above amounts can be reconciled to the Group’s financial statements as follows:

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  2016 £m
Discounted expected generation from all in-force business for years 2017 to 2056 33,610
Discounted expected generation from all in-force business for years after 2056 1,115
Discounted expected generation from all in-force business at 31 December 2016 34,725
Add: Free surplus of life operations held at 31 December 2016 5,351
Less: Time value of guarantees (998)
Expected free surplus generation from the sale of Korea life business 76
Other non-modelled items 1,430
Total EEV for life operations 40,584

(ii) Expected emergence of risk margin release and amortisation of transitional

The 31 December 2016 Solvency II own funds included £2.5 billion of transitional relief (recalculated at the valuation date), the majority of which relates to UK annuity business in force on 1 January 2016, established to substantially mitigate the impact of recognising the related risk margin on transition to Solvency II. The following table sets out the expected UK annuity business risk margin release net of the related transitional amortisation over the next 15 years.

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  2016 £m
  Undiscounted expected generation from all in-force business at 31 December
  Shareholder-backed annuity business    
Expected period of emergence Risk margin release Amortisation of transitional Other* Total UK

* Including other UK business lines and other cash flows from annuity business.

2017 163 (116) 628 675
2018 153 (116) 632 669
2019 143 (116) 609 636
2020 141 (116) 597 622
2021 136 (116) 586 606
2022 134 (116) 573 591
2023 132 (116) 560 576
2024 127 (116) 546 557
2025 122 (116) 528 534
2026 117 (116) 507 508
2027 114 (116) 488 486
2028 104 (116) 463 451
2029 102 (116) 448 434
2030 97 (116) 428 409
2031 91 (116) 406 381
UK free surplus expected to emerge by 2031 1,876 (1,740) 7,999 8,135
Total UK free surplus expected to emerge from 2032 to 2056       5,648
Total UK free surplus expected to emerge in the next 40 years(note B(i))       13,783

The UK annuity risk margin release and related transitional amortisation, together with associated tax reconcile to the amounts shown in the Group Solvency II balance sheet (note II(c) of the IFRS additional unaudited financial information) as follows:

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  Risk margin release
£bn
Amortisation of transitional
£bn
Annuity in-force business:    
– Risk margin release less amortisation of transitional expected to emerge by 2031 1.9 (1.7)
– Risk margin release expected to emerge after 2031 and gross up for tax 1.1 (0.4)
  3.0 (2.1)
Risk margin release and transitional for other business operations (pre-tax) 2.9 (0.4)
Total (pre-tax) 5.9 (2.5)

II(e) Foreign currency source of key metrics

The tables below show the Group’s key free surplus, IFRS and EEV metrics analysis by contribution by currency group:

Free surplus and IFRS 2016 results

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  Underlying free surplus generated for total insurance and asset management operations
note (2)
%
Pre-tax operating profit
notes (2),(3),(4)
%
Shareholders’ funds
notes (2),(3),(4)
%
US$ linked note (1) 15 21 19
Other Asia currencies 9 17 17
Total Asia 24 38 36
UK£ sterling notes (3),(4) 32 14 51
US$ note (4) 44 48 13
Total 100 100 100

EEV 2016 results

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  Post-tax new business profits
%
Post-tax operating profit
notes (2),(3),(4)
%
Shareholders’ funds
notes (2),(3),(4)
%
US$ linked note (1) 55 46 36
Other Asia currencies 10 12 13
Total Asia 65 58 49
UK£ sterling notes (3),(4) 9 6 29
US$ note (4) 26 36 22
Total 100 100 100

Notes

  1. US$ linked comprising the Hong Kong and Vietnam operations where the currencies are pegged to the US dollar and the Malaysia and Singapore operations where the currencies are managed against a basket of currencies including the US dollar.
  2. Includes long-term, asset management business and other businesses.
  3. For operating profit and shareholders’ funds, UK sterling includes amounts in respect of central operations as well as UK insurance operations and M&G.
  4. For shareholders’ funds, the US$ grouping includes US$ denominated core structural borrowings. Sterling operating profits include all interest payable as sterling denominated, reflecting interest rate currency swaps in place.

II(f) Option schemes

The Group presently grants share options through four schemes, and exercises of the options are satisfied by the issue of new shares. Executive directors and eligible employees based in the UK may participate in the UK savings-related share option scheme. Executives and eligible employees based in Asia as well as eligible employees based in Europe can participate in the international savings-related share option scheme, while agents based in certain regions of Asia can participate in the international savings-related share option scheme for non-employees. Employees based in Dublin are eligible to participate in the Prudential International Assurance sharesave plan, which currently has no outstanding options in issue. Further details of the schemes and accounting policies are detailed in Note B3.2 of the IFRS basis consolidated financial statements.

All options were granted at £nil consideration. No options have been granted to substantial shareholders, suppliers of goods or services (excluding options granted to agents under the non-employee savings-related share option scheme) or in excess of the individual limit for the relevant scheme.

The options schemes will terminate as follows, unless the directors resolve to terminate the plans at an earlier date:

  • UK savings-related share option scheme: 16 May 2023;
  • International savings-related share option scheme: 31 May 2021;
  • Prudential International Assurance sharesave plan: 3 August 2019; and
  • International savings-related share option scheme for non-employees 2012: 17 May 2022.

The weighted average share price of Prudential plc for the year ended 31 December 2016 was £13.56 (2015: £15.49).

Particulars of options granted to directors are included in the Directors’ remuneration report.

The closing price of the shares immediately before the date on which the options were granted during the year was £13.71.

The following analyses show the movement in options for each of the option schemes for the year ended 31 December 2016.

UK savings-related share option scheme

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  Exercise period   Number of options
Date of grant Exercise price £ Beginning End   Beginning of year Granted Exercised Cancelled Forfeited Lapsed End of year
25 Sep 08 4.38 01 Dec 15 31 May 16   3,071 (3,071)
27 Apr 09 2.88 01 Jun 16 30 Nov 16   154,981 (154,948) (33)
28 Sep 10 4.61 01 Dec 15 31 May 16   45,959 (45,290) (669)
16 Sep 11 4.66 01 Dec 16 31 May 17   160,392 (115,689) (653) (6,536) (1,508) 36,006
21 Sep 12 6.29 01 Dec 15 31 May 16   215,520 (211,172) (2,862) (1,486)
21 Sep 12 6.29 01 Dec 17 31 May 18   127,520 (3,426) (3,101) (1,107) 119,886
20 Sep 13 9.01 01 Dec 16 31 May 17   324,479 (230,295) (9,992) (6,050) (4,330) 73,812
20 Sep 13 9.01 01 Dec 18 31 May 19   70,590 (749) (332) 749 70,258
23 Sep 14 11.55 01 Dec 17 31 May 18   870,308 (14,177) (53,204) (22,430) (21,409) 759,088
23 Sep 14 11.55 01 Dec 19 31 May 20   440,551 (6,485) (17,566) (7,997) (17,742) 390,761
22 Sep 15 11.11 01 Dec 18 31 May 19   1,039,759 (3,801) (74,163) (14,618) (13,936) 933,241
22 Sep 15 11.11 01 Dec 20 31 May 21   234,607 (585) (2,970) (4,590) (2,655) 223,807
21 Sep 16 11.04 01 Dec 19 31 May 20   728,729 (9,582) 719,147
21 Sep 16 11.04 01 Dec 21 31 May 22   166,084 (1,358) (298) 164,428
          3,687,737 894,813 (789,688) (169,488) (68,814) (64,126) 3,490,434

The total number of securities available for issue under the scheme is 3,490,434 which represents 0.135 per cent of the issued share capital at 31 December 2016.

The weighted average closing price of the shares immediately before the dates on which the options were exercised during the current period was £14.40.

The weighted average fair value of options granted under the plan in the period was £3.02.

International savings-related share option scheme

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  Exercise period   Number of options
Date of grant Exercise price £ Beginning End   Beginning of year Granted Exercised Cancelled Forfeited Lapsed End of year
16 Sep 11 4.66 01 Dec 16 31 May 17   17,617 (16,895) 722
21 Sep 12 6.29 01 Dec 15 31 May 16   249,429 (224,996) (21,708) 2,725
21 Sep 12 6.29 01 Dec 17 31 May 18   14,501 14,501
20 Sep 13 9.01 01 Dec 16 31 May 17   571,967 (395,294) (32,330) (3,907) (8,756) 131,680
20 Sep 13 9.01 01 Dec 18 31 May 19   47,004 (3,328) 43,676
23 Sep 14 11.55 01 Dec 17 31 May 18   8,643 (934) 7,709
23 Sep 14 11.55 01 Dec 19 31 May 20   4,464 4,464
22 Sep 15 11.11 01 Dec 18 31 May 19   24,284 (469) (259) 23,556
22 Sep 15 11.11 01 Dec 20 31 May 21   3,240 3,240
21 Sep 16 11.04 01 Dec 19 31 May 20   15,516 15,516
          941,149 15,516 (620,290) (37,061) (3,907) (47,618) 247,789

The total number of securities available for issue under the scheme is 247,789 which represents 0.010 per cent of the issued share capital at 31 December 2016.

The weighted average closing price of the shares immediately before the dates on which the options were exercised during the current period was £14.80.

The weighted average fair value of options granted under the plan in the period was £2.96.

Prudential International Assurance sharesave plan

There are no securities available for issue under the scheme at 31 December 2016.

Non-employee savings-related share option scheme

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  Exercise period   Number of options
Date of grant Exercise price £ Beginning End   Beginning of year Granted Exercised Cancelled Forfeited Lapsed End of year
28 Sep 10 4.61 01 Dec 15 31 May 16   341,948 (25,357) (316,591)
16 Sep 11 4.66 01 Dec 16 31 May 17   243,641 (30,064) (183,641) 29,936
21 Sep 12 6.29 01 Dec 15 31 May 16   273,565 (148,635) (124,930)
21 Sep 12 6.29 01 Dec 17 31 May 18   82,872 (54,871) 28,001
20 Sep 13 9.01 01 Dec 16 31 May 17   755,540 (397,020) (2,275) (5,488) (4,436) 346,321
20 Sep 13 9.01 01 Dec 18 31 May 19   419,452 (12,602) 406,850
23 Sep 14 11.55 01 Dec 17 31 May 18   615,326 (389) (2,700) (15,802) 596,435
23 Sep 14 11.55 01 Dec 19 31 May 20   512,917 (10,124) 502,793
22 Sep 15 11.11 01 Dec 18 31 May 19   499,276 (3,078) (15,373) 480,825
22 Sep 15 11.11 01 Dec 20 31 May 21   422,194 (779) (15,421) 405,994
21 Sep 16 11.04 01 Dec 19 31 May 20   334,813 (537) 334,276
21 Sep 16 11.04 01 Dec 21 31 May 22   200,588 (1,358) 199,230
          4,166,731 535,401 (601,465) (690,760) (5,488) (73,758) 3,330,661

The total number of securities available for issue under the scheme is 3,330,661 which represents 0.129 per cent of the issued share capital at 31 December 2016.

The weighted average closing price of the shares immediately before the dates on which the options were exercised during the current period was £15.01.

The weighted average fair value of options granted under the plan in the period was £3.09.

II(g) Selected historical financial information of Prudential

The following table sets forth Prudential’s selected consolidated financial data for the periods indicated. Certain data is derived from Prudential’s audited consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and as adopted by the European Union (EU) and European Embedded Value (EEV).

This table is only a summary and should be read in conjunction with Prudential’s consolidated financial statements and the related notes included elsewhere in this document.

Income statement data

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  Year ended 31 December
  2016 £m 2015 £m 2014 £m 2013 £m 2012 £m
IFRS basis results          
Gross premium earned 38,981 36,663 32,832 30,502 29,113
Outward reinsurance premiums (2,020) (1,157) (799) (658) (491)
Earned premiums, net of reinsurance 36,961 35,506 32,033 29,844 28,622
Investment return 32,511 3,304 25,787 20,347 23,931
Other income 2,370 2,495 2,306 2,184 1,885
Total revenue, net of reinsurance 71,842 41,305 60,126 52,375 54,438
Benefits and claims and movement in unallocated surplus of with-profits funds, net of reinsurance (59,366) (29,656) (50,169) (43,154) (45,144)
Acquisition costs and other expenditure (8,848) (8,208) (6,752) (6,861) (6,032)
Finance costs: interest on core structural borrowings of shareholder-financed operations (360) (312) (341) (305) (280)
Remeasurement of carrying value of Korea life business classified as held for sale (238)  
Disposal of Japan life business:          
Cumulative exchange loss recycled from other comprehensive income (46)
Remeasurement adjustments (13) (120)
Total charges, net of reinsurance (68,812) (38,222) (57,275) (50,440) (51,456)
Share of profits from joint ventures and associates, net of related tax 182 238 303 147 135
Profit before tax (being tax attributable to shareholders’ and policyholders’ returns) note 1 3,212 3,321 3,154 2,082 3,117
Tax charges attributable to policyholders’ returns (937) (173) (540) (447) (370)
Profit before tax attributable to shareholders 2,275 3,148 2,614 1,635 2,747
Tax credit (charge) attributable to shareholders’ returns (354) (569) (398) (289) (584)
Profit for the year 1,921 2,579 2,216 1,346 2,163

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  2016 2015 2014 2013 2012
Based on profit for the year attributable to the equity holders of the Company:          
Basic earnings per share (in pence) 75.0p 101.0p 86.9p 52.8p 85.1p
Diluted earnings per share (in pence) 75.0p 100.9p 86.8p 52.7p 85.0p
Dividend per share declared and paid in reporting period (in pence) 49.40p 38.05p 35.03p 30.52p 25.64p
Interim ordinary dividend/final ordinary dividend 39.40p 38.05p 35.03p 30.52p 25.64p
Special dividend 10.00p        

Supplementary IFRS income statement data

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  Year ended 31 December £m
  2016 2015 2014 2013 2012
Operating profit based on longer-term investment returns note 2 4,256 3,969 3,154 2,937 2,504
Non-operating items (1,981) (821) (540) (1,302) 243
Profit before tax attributable to shareholders 2,275 3,148 2,614 1,635 2,747
Operating earnings per share (in pence) 131.3p 124.6p 95.7p 90.4p 76.4p

Supplementary EEV income statement data (post-tax)

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  Year ended 31 December £m
  2016 2015 2014 2013 2012
Operating profit based on longer-term investment returns note 2 5,497 4,840 4,108 4,224 3,161
Non-operating items (981) (889) 235 134 608
Profit attributable to shareholders 4,516 3,951 4,343 4,358 3,769
Operating earnings per share (in pence) 214.7p 189.6p 161.2p 165.8p 124.4p

New business data

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  Year ended 31 December £m
  2016 2015 2014* 2013 2012
Annual premium equivalent (APE) sales 6,320 5,466 4,514 4,310 4,100
EEV new business profit (NBP) (post-tax) 3,088 2,609 2,104 2,057 1,766
NBP margin (% APE) 49% 48% 47% 48% 43%

* Excluding the £23 million APE and £11 million NBP for the sold PruHealth and PruProtect businesses.

Statement of financial position data

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  £m
As of and for the year ended 31 December 2016 2015 2014 2013 2012
Total assets 470,498 386,985 369,204 325,932 307,644
Total policyholder liabilities and unallocated surplus of with-profits funds 403,313 335,614 321,989 286,014 268,263
Core structural borrowings of shareholder-financed operations 6,798 5,011 4,304 4,636 3,554
Total liabilities 455,831 374,029 357,392 316,281 297,280
Total equity 14,667 12,956 11,812 9,651 10,364

Other data

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  £bn
As of and for the year ended 31 December 2016 2015 2014 2013 2012
Funds under management note 3 599 509 496 443 406
EEV shareholders’ equity, excluding non-controlling interests 39.0 32.4 29.2 24.9 22.4
Group shareholder Solvency II surplus note 4 12.5 9.7 n/a n/a n/a
Insurance Groups Directive capital surplus before final dividend n/a 5.5 4.7 5.1 5.1

Notes

  1. This measure is the formal profit (loss) before tax measure under IFRS but is not the result attributable to shareholders.
  2. Operating profits are determined on the basis of including longer-term investment returns. EEV and IFRS operating profits are stated after excluding the effect of short-term fluctuations in investment returns against long-term assumptions, gain on dilution of Group’s holdings, the costs arising from the domestication of the Hong Kong business, profit (loss) attaching to the sale of Japan life and profit (loss) attaching to the held for sale Korea life business. Separately on the IFRS basis, operating profit also excludes amortisation of acquisition accounting adjustments. In addition, for EEV basis results, operating profit excludes the effect of changes in economic assumptions, the market value movement on core borrowings and in 2012, the gain arising on the acquisition of REALIC.
  3. Funds under management comprise funds of the Group held in the statement of financial position and external funds that are managed by Prudential asset management operations.
  4. The 2016 surplus is estimated.

II(h) Reconciliation between IFRS and EEV shareholders’ funds

The table below shows the reconciliation of EEV shareholders’ funds and IFRS shareholders’ funds at the end of the year:

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  31 Dec 2016
£m
31 Dec 2015
£m

Notes

  1. The EEV shareholders’ funds comprises the present value of the shareholders’ interest in the value of in-force business, net worth of long-term business operations and IFRS shareholders’ funds of asset management and other operations. The value of in-force business reflects the present value of future shareholder cash flows from long-term in-force business which are not captured as shareholders’ interest on an IFRS basis. Net worth represents the net assets for EEV reporting purposes that reflect the regulatory basis position, sometimes with adjustments to achieve consistency with the IFRS treatment of certain items.
  2. Other adjustments represent asset and liability valuation differences between IFRS and the local regulatory reporting basis used to value net worth for long-term insurance operations. It also includes the mark to market of the Group’s core borrowings which are fair valued under EEV but not IFRS. The most significant valuation differences relate to changes in the valuation of insurance liabilities. For example, in Jackson where 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 is based on future cash flows due to the policyholder on a prudent basis with consideration of an expense allowance as applicable, but with no separate deferred acquisition cost asset.
  3. The 2016 EEV results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime, effective from 1 January 2016. The 2015 EEV results for UK insurance operations were prepared on a basis reflecting the Solvency I regime. As noted in (b) above, ‘other adjustments’ represent asset and liability valuation differences between IFRS and the local regulatory basis used to value net worth for long-term insurance operations. At 31 December 2016 for the UK this would be the difference between IFRS and Solvency II, and at 31 December 2015 the difference between IFRS and Solvency I.
EEV shareholders’ funds 38,968 32,359
Less: Value of in-force business of long-term business note (a) (24,937) (22,431)
Deferred acquisition costs assigned zero value for EEV purposes 9,170 7,010
Other notes (b),(c) (8,535) (3,983)
IFRS shareholders’ funds 14,666 12,955

II(i) Reconciliation of APE new business sales to earned premiums

The Group reports annual premium equivalent (APE) new business sales as a measure of the new policies sold in the period. This differs from the IFRS measure of premiums earned as shown below:

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  2016 £m 2015 £m
Annual premium equivalents (APE) as published 6,320 5,466
Adjustment to include 100% of single premiums on new business sold in the period note (a) 25,057 24,918
Contribution from the held for sale Korea life business 192 305
Premiums from in-force business and other adjustments note (b) 7,412 5,974
Gross premiums earned 38,981 36,663
Outward reinsurance premiums (2,020) (1,157)
Earned premiums, net of reinsurance as shown in the IFRS financial statements 36,961 35,506

Notes

  1. APE new business sales only include one-tenth of single premiums, recorded on policies sold in the period. Gross premiums earned include 100 per cent of such premiums.
  2. Other adjustments principally include amounts in respect of the following:
    • Gross premiums earned includes 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. Asia in-force premiums form the vast majority of the other adjustment amount;
    • APE includes new policies written in the period which are classified as investment contracts without discretionary participation features under IFRS 4, arising mainly in Jackson for guaranteed investment contracts and in the UK for certain unit-linked savings and similar contracts. These are excluded from gross premiums earned and recorded as deposits;
    • APE new business sales are annualised while gross premiums earned are recorded only when revenues are due; and
    • For the purpose of reporting APE new business sales, we include the Group’s share of amounts sold by the Group’s insurance joint ventures. Under IFRS, joint ventures are equity accounted and so no amounts are included within gross premiums earned.

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