TIDMPRU
RNS Number : 9814S
Prudential PLC
15 March 2023
EEV results highlights
2022 2021
------ --------------------------------------
AER CER
------------------ ------------------
$m $m % change $m % change
note (i) note (i)
------------------------------------------------------------------ ------ -------- -------- -------- --------
New business profit note (ii) 2,184 2,526 (14)% 2,443 (11)%
Annual premium equivalent (APE) note (ii) 4,393 4,194 5% 4,013 9%
New business margin (APE) (%) 50% 60% (10)pp 61% (11)pp
Present value of new business premiums (PVNBP) 22,406 24,153 (7)% 23,281 (4)%
Operating free surplus generated notes (ii)(iii) 2,193 2,071 6% 2,004 9%
EEV operating profit notes (ii)(iv) 3,952 3,543 12% 3,429 15%
EEV operating profit, net of non-controlling interests 3,923 3,515 12% 3,401 15%
Operating return on average EEV shareholders' equity, net of
non-controlling interests (%) 9% 8%
Closing EEV shareholders' equity, net of non-controlling interests 42,184 47,355 (11)% 46,256 (9)%
Closing EEV shareholders' equity, net of non-controlling interests
per share (in cents) 1,534c 1,725c (11)% 1,684c (9)%
------------------------------------------------------------------ ------ -------- -------- -------- --------
Notes
(i) The 2021 results above are for the Group's continuing
operations only, excluding results from the discontinued US
operations which were demerged in September 2021.
(ii) Results are presented before deducting the amounts
attributable to non-controlling interests. This presentation is
applied consistently throughout this document, unless stated
otherwise.
(iii) Operating free surplus generated is for long-term and
asset management businesses only, before restructuring and IFRS 17
implementation costs, centrally incurred costs and
eliminations.
(iv) Group EEV operating profit is stated after restructuring
and IFRS 17 implementation costs, centrally incurred costs and
eliminations.
European Embedded Value (EEV) basis results
Basis of preparation
IFRS profit for long-term business broadly reflects the
aggregate of results on a traditional accounting basis. By
contrast, EEV is a way of measuring the value of the in-force life
insurance business. The value of future new business is excluded
from the embedded value. The EEV Principles provide consistent
definitions of the components of EEV, a framework for setting
assumptions and an approach to the underlying methodology and
disclosures. The EEV Principles were designed to provide guidance
and common principles that could be understood by both users and
preparers alongside prescribing a minimum level of disclosures to
enable users to understand an entity's methodology, assumptions and
key judgements as well as the sensitivity of an entity's EEV to key
assumptions. Results prepared under the EEV Principles represent
the present value of the shareholders' interest in the post-tax
future profits (generally on a local statutory basis) expected to
arise from the current book of long-term business, after sufficient
allowance has been made for the aggregate risks in the business.
The shareholders' interest in the Group's long-term business is the
sum of the shareholders' total net worth and the value of in-force
business.
For the purposes of preparing EEV results, insurance joint
ventures and associates are included at the Group's proportionate
share of their embedded value and not at their market value. Asset
management and other non-insurance subsidiaries, joint ventures and
associates are included in the EEV results at the Group's
proportionate share of IFRS shareholders' equity, with central
Group debt shown on a market value basis. Post the demerger of the
Group's US operations (Jackson) in September 2021, the Group's
retained interest in Jackson has been included at its fair value
within other (central) operations. This is equivalent to its value
within the Group's IFRS financial results. Further information is
contained in note 5.
Key features of the Group's EEV methodology include:
- Economic assumptions: The projected post-tax profits assume a
level of future investment return and are discounted using a risk
discount rate. Both the risk discount rate and the investment
return assumptions are updated at each valuation date to reflect
current market risk-free rates, such that changes in market
risk-free rates impact all projected future cash flows. Risk-free
rates, and hence investment return assumptions, are based on
observable market data, with current market risk-free rates assumed
to remain constant throughout the projection, with no trending or
mean reversion to longer-term assumptions. Different products will
be sensitive to different assumptions, for example, participating
products or products with guarantees are likely to benefit
disproportionately from higher assumed investment returns.
- Time value of financial options and guarantees: Explicit
quantified allowances are made for the time value of financial
options and guarantees (TVOG). The TVOG is determined by weighting
the probability of outcomes across a large number of different
economic scenarios and is typically less applicable to health and
protection business that generally contains more limited financial
options or guarantees. At 31 December 2022, the TVOG is $(151)
million (31 December 2021: $(784) million). The magnitude of the
TVOG at 31 December 2022 would be approximately equivalent to a
circa 3 basis point (31 December 2021: 10 basis point) increase in
the weighted average risk discount rate.
- Allowance for risk in the risk discount rates: Risk discount
rates are set equal to the risk-free rate at the valuation date
plus product-specific allowances for market and non-market risks.
Risks that are explicitly captured elsewhere, such as via the TVOG,
are not included in the risk discount rates.
The allowance for market risk is based on a product-by-product
assessment of the sensitivity of shareholder cash flows to varying
market returns. This approach reflects the inherent market risk in
each product group and results in lower risk discount rates for
products where the majority of shareholder profit is uncorrelated
to market risk and appropriately higher risk discount rates for
products where there is greater market exposure for
shareholders.
For example, for health and protection products, which represent
51 per cent of the value of in-force business and 43 per cent of
new business profit, the major sources of shareholder profits are
underwriting profits or fixed shareholder charges which have low
market risk sensitivity. There is a lower proportion of health and
protection than in prior periods largely as a result of higher
interest rates, which is adverse on health and protection type
products and positive impact on savings type products. New business
profit is also impacted by the mix of business sold in the
period.
The construct of UK-style with-profits or similar participating
funds in some business units (representing 26 per cent of the value
of in-force and 18 per cent of new business profit) reduce the
market volatility of both policyholder and shareholder cash flows
due to smoothed bonus declarations and for some markets the
presence of an estate. Accordingly, 77 per cent of the value of
in-force is products with low market risk sensitivity and this is
reflected in the overall risk discount rate.
For unit-linked products where fund management charges fluctuate
with the investment return, a portion of the profits will typically
be more sensitive to market risk due to the higher proportion of
equity-type assets in the investment portfolio resulting in a
higher risk discount rate. This business represents 17 per cent of
the value of in-force and 11 per cent of the value of new business
profit which limits the impact on the overall risk discount rate.
The remaining parts of the business (6 per cent of the value of
in-force business and 28 per cent of the value of new business)
relate to non-participating products not covered by the above.
The allowance for non-market risk comprises a base Group-wide
allowance of 50 basis points plus additional allowances for
emerging market risk where appropriate. At 31 December 2022, the
total allowance for non-market risk is equivalent to a $(2.8)
billion (31 December 2021: $(3.7) billion) reduction, or around (7)
per cent (31 December 2021: (8) per cent) of the embedded
value.
Hong Kong Risk-Based Capital regime
In April 2022, Prudential Hong Kong Limited (PHKL), the Group's
100 per cent owned life insurance subsidiary in Hong Kong received
approval from the Hong Kong Insurance Authority (IA) to early adopt
the Hong Kong Risk-Based Capital (HK RBC) regime with effect from 1
January 2022. This impacts PHKL's (and consequentially the Group's)
capital position as described in note I(i) within Additional
unaudited financial information. Under the Group's EEV methodology,
local regulatory and target capital requirements are the basis of
estimating future shareholder cash flows and therefore the changes
to the HK RBC framework will impact the Group's EEV, with effect
from 1 January 2022, as discussed below. Comparatives have not been
restated.
Adjustment to shareholders'
equity at 1 January 2022
Long-term insurance business Free surplus Required capital Net worth Value of in-force business Embedded value
------------------------------- ------------ ---------------- --------- -------------------------- --------------
As reported at 31 Dec 2021 5,960 3,230 9,190 35,456 44,646
Opening adjustment at 1 Jan
2022:
HK RBC impact 1,360 2,853 4,213 (3,984) 229
------------------------------- ------------ ---------------- --------- -------------------------- --------------
Long-term insurance business as
at 1 Jan 2022 7,320 6,083 13,403 31,472 44,875
------------------------------- ------------ ---------------- --------- -------------------------- --------------
The HK RBC framework requires liabilities to be valued on a best
estimate basis and capital requirements to be risk based. As a
result of applying this framework, the EEV net worth increased by
$4,213 million, reflecting the release of prudent regulatory
margins previously included in liabilities, and a reduction in VIF.
EEV free surplus excludes regulatory surplus that arises where HK
RBC technical provisions are lower than policyholder asset shares
or cash surrender values to more realistically reflect how the
business is managed. The introduction of this flooring for PHKL
reduces the increase to its free surplus that would have otherwise
arisen. The impact therefore differs from the effect on Group GWS
surplus as explained in note I(i) of the Additional unaudited
financial information.
Movement in Group EEV shareholders' equity
2022 $m 2021 $m
--------------------------------- --------
Insurance
and asset Other
management (central) Group Group
Note operations operations total total
----------------------------------------------------------------- ---- ----------- ----------- ------- --------
Continuing operations:
New business profit 1 2,184 - 2,184 2,526
Profit from in-force business 2 2,358 - 2,358 1,630
----------------------------------------------------------------- ---- ----------- ----------- ------- --------
Long-term business 4,542 - 4,542 4,156
Asset management 234 - 234 284
----------------------------------------------------------------- ---- ----------- ----------- ------- --------
Operating profit from long-term and asset management businesses 4,776 - 4,776 4,440
Other income (expenditure) 5 - (542) (542) (723)
----------------------------------------------------------------- ---- ----------- ----------- ------- --------
Operating profit (loss) before restructuring and IFRS 17
implementation costs 4,776 (542) 4,234 3,717
Restructuring and IFRS 17 implementation costs (125) (157) (282) (174)
----------------------------------------------------------------- ---- ----------- ----------- ------- --------
Operating profit (loss) for the year 4,651 (699) 3,952 3,543
----------------------------------------------------------------- ---- ----------- ----------- ------- --------
Short-term fluctuations in investment returns 2 (6,893) 19 (6,874) (1,040)
Effect of changes in economic assumptions 2 (1,571) - (1,571) 412
(Loss) profit attaching to corporate transactions (5) 62 57 (35)
Mark-to-market value movements on core structural borrowings 6 - 865 865 357
----------------------------------------------------------------- ---- ----------- ----------- ------- --------
Non-operating results (8,469) 946 (7,523) (306)
----------------------------------------------------------------- ---- ----------- ----------- ------- --------
(Loss) profit from continuing operations (3,818) 247 (3,571) 3,237
Loss from discontinued US operations note (i) - - - (10,852)
----------------------------------------------------------------- ---- ----------- ----------- ------- --------
(Loss) profit for the year (3,818) 247 (3,571) (7,615)
Non-controlling interests share of profit from continuing
operations (29) - (29) (40)
Non-controlling interests share of loss from discontinued US
operations - - - 1,205
----------------------------------------------------------------- ---- ----------- ----------- ------- --------
(Loss) profit for the year attributable to equity holders of the
Company (3,847) 247 (3,600) (6,450)
----------------------------------------------------------------- ---- ----------- ----------- ------- --------
Equity items from continuing operations:
Foreign exchange movements on operations (1,195) - (1,195) (460)
Intra-group dividends and investment in operationsnote (ii) (1,211) 1,211 - -
Demerger dividend in specie from Jackson - - (1,735)
Other external dividends - (474) (474) (421)
New share capital subscribednote (iii) - (4) (4) 2,382
Other movementsnote (iv) 172 (299) (127) 238
Equity items from discontinued US operations net of
non-controlling interest - - - (206)
----------------------------------------------------------------- ---- ----------- ----------- ------- --------
Net (decrease) increase in shareholders' equity (6,081) 681 (5,400) (6,652)
----------- ----------- ------- --------
Shareholders' equity at beginning of year (as previously
disclosed) 46,114 1,241 47,355 54,007
Effect of HK RBC 229 - 229 -
----------- ----------- ------- --------
Shareholders' equity at beginning of year after adoption of HK
RBC 46,343 1,241 47,584 54,007
----------------------------------------------------------------- ---- ----------- ----------- ------- --------
Shareholders' equity at end of year 40,262 1,922 42,184 47,355
----------------------------------------------------------------- ---- ----------- ----------- ------- --------
Contribution to Group EEV:
At end of year:
Long-term business 2 38,857 - 38,857 44,646
Asset management and other 5 643 1,922 2,565 1,931
----------------------------------------------------------------- ---- ----------- ----------- ------- --------
Shareholders' equity, excluding goodwill attributable to equity
holders 39,500 1,922 41,422 46,577
Goodwill attributable to equity holders 762 - 762 778
----------------------------------------------------------------- ---- ----------- ----------- ------- --------
Shareholders' equity at end of year 40,262 1,922 42,184 47,355
----------------------------------------------------------------- ---- ----------- ----------- ------- --------
At beginning of year:
Long-term business 2 44,646 - 44,646 42,861
Asset management and other 5 690 1,241 1,931 (1,756)
----------------------------------------------------------------- ---- ----------- ----------- ------- --------
Shareholders' equity, excluding goodwill attributable to equity
holders 45,336 1,241 46,577 41,105
Goodwill attributable to equity holders 778 - 778 821
----------------------------------------------------------------- ---- ----------- ----------- ------- --------
Total continuing operations (as previously disclosed) 46,114 1,241 47,355 41,926
Discontinued US operations - - - 12,081
----------------------------------------------------------------- ---- ----------- ----------- ------- --------
Shareholders' equity at beginning of year (as previously
disclosed) 46,114 1,241 47,355 54,007
----------------------------------------------------------------- ---- ----------- ----------- ------- --------
2022 2021
---------------------------------------------------------------------- ----------
Insurance
and asset Other
EEV shareholders' equity per management (central) Group Group
share (in cents) note (v) operations operations total total
------------------------------ ---------------------------- ---------------------------- ---------- ----------
At end of year:
Based on shareholders' equity,
net of goodwill attributable
to equity holders 1,437c 70c 1,507c 1,696c
Based on shareholders' equity
at end of year 1,464c 70c 1,534c 1,725c
------------------------------ ---------------------------- ---------------------------- ---------- ----------
At beginning of year:
Based on shareholders' equity,
net of goodwill attributable
to equity holders 1,651c 45c 1,696c 1,576c
Based on shareholders' equity
at beginning of year:
From continuing operations 1,680c 45c 1,725c 1,607c
From discontinued US
operations - - - 463c
----------------------------- ---------------------------- ---------------------------- ---------- ----------
2022 2021
---------------------------------------------------------------------- ----------
Basic Basic
EEV basis basic earnings per Before non-controlling After non-controlling earnings earnings
share in cents note (vi) interests interests per share per share
$m $m cents cents
----------------------------- ---------------------------- ---------------------------- ---------- ----------
Based on operating profit from
continuing operations 3,952 3,923 143.4c 133.8c
Based on (loss) profit for the
year:
From continuing operations (3,571) (3,600) (131.6)c 121.7c
From discontinued US
operations - - - (367.1)c
----------------------------- ---------------------------- ---------------------------- ---------- ----------
Notes
(i) Discontinued operations represent the Group's US business
(Jackson) which was demerged in September 2021.
(ii) Intra-group dividends represent dividends that have been
declared in the year. Investment in operations reflects movements
in share capital.
(iii) New share capital subscribed in 2021 primarily represented
the issuance of new ordinary shares on the Hong Kong Stock Exchange
in October 2021.
(iv) Other movements include reserve movements in respect of
valuation movements on the retained interest in Jackson,
share-based payments, treasury shares and intra-group transfers
between operations that have no overall effect on the Group's
shareholders' equity.
(v) Based on the number of issued shares at 31 December 2022 of
2,750 million shares (31 December 2021: 2,746 million shares).
(vi) Based on weighted average number of issued shares of 2,736
million shares in 2022 (2021: 2,628 million shares).
Movement in Group free surplus
Operating free surplus generation is the financial metric we use
to measure the internal cash generation of our business operations
and for our life operations is generally based on (with adjustments
as discussed below) the capital regimes that apply locally in the
various jurisdictions in which the Group operates. It represents
amounts emerging from the in-force business during the year, net of
amounts reinvested in writing new business. For asset management
businesses, it equates to post-tax adjusted operating profit for
the year.
For long-term business, free surplus is generally based on (with
adjustments including recognition of certain intangibles and other
assets that may be inadmissible on a regulatory basis) the excess
of the regulatory basis net assets (EEV total net worth) over the
EEV capital required to support the covered business. For
shareholder-backed businesses, the level of EEV required capital
has been based on the Group Prescribed Capital Requirements (GPCR)
used in our GWS reporting as set out in note 8.1(e).
Adjustments are also made to enable free surplus to be a better
measure of shareholders' resources available for distribution as
described in the reconciliation to GWS surplus as disclosed in note
I(i) of the Additional unaudited financial information. For asset
management and other non-insurance operations (including the
Group's central operations), free surplus is taken to be IFRS basis
shareholders' equity, net of goodwill attributable to shareholders,
with central Group debt recorded as free surplus to the extent that
it is classified as capital resources under the Group's capital
regime. Following the application of the GWS Framework, both
subordinated and senior debt (excluding the amount issued in 2022)
are treated as capital for the purposes of free surplus at 31
December 2022.
A reconciliation of EEV free surplus to the GWS shareholder
capital surplus over GPCR is set out in note I(i) of the Additional
unaudited financial information.
2022 $m 2021 $m
--------------------------------- -------
Insurance
and asset Other
management (central) Group Group
Note operations operations total total
---------------------------------------------------------------- ---- ----------- ----------- ------- -------
Continuing operations:
Expected transfer from in-force business 2,406 - 2,406 2,340
Expected return on existing free surplus 347 - 347 157
Changes in operating assumptions and experience variances (227) - (227) (173)
---------------------------------------------------------------- ---- ----------- ----------- ------- -------
Operating free surplus generated from in-force long-term
business 2 2,526 - 2,526 2,324
Investment in new businessnote (ii) 2 (567) - (567) (537)
---------------------------------------------------------------- ---- ----------- ----------- ------- -------
Long-term business 1,959 - 1,959 1,787
Asset management 234 - 234 284
---------------------------------------------------------------- ---- ----------- ----------- ------- -------
Operating free surplus generated from long-term and asset
management businesses 2,193 - 2,193 2,071
Other income (expenditure) - (542) (542) (723)
Restructuring and IFRS 17 implementation costs (120) (157) (277) (169)
---------------------------------------------------------------- ---- ----------- ----------- ------- -------
Operating free surplus generated 2,073 (699) 1,374 1,179
Non-operating free surplus generatednote (iii) (2,040) 116 (1,924) 82
---------------------------------------------------------------- ---- ----------- ----------- ------- -------
Free surplus generated from continuing operations 33 (583) (550) 1,261
Free surplus generated from discontinued US operations note (i) - - - 770
---------------------------------------------------------------- ---- ----------- ----------- ------- -------
Free surplus generated for the year 33 (583) (550) 2,031
---------------------------------------------------------------- ---- ----------- ----------- ------- -------
Equity items from continuing operations:
Net cash flows paid to parent companynote (iv) (1,304) 1,304 - -
Demerger dividend in specie from Jackson - - - (1,735)
Other external dividends - (474) (474) (421)
Foreign exchange movements on operations (316) - (316) 10
New share capital subscribednote (v) - (4) (4) 2,382
Other movements and timing differences 265 (392) (127) 238
Treatment of 'grandfathered' debt instruments under the GWS
Framework - - - 1,995
Equity items from discontinued US operations - - - (206)
---------------------------------------------------------------- ---- ----------- ----------- ------- -------
Net movement in free surplus before non-controlling interest and
before net subordinated debt
redemption (1,322) (149) (1,471) 4,294
Net subordinated debt redemption - (1,699) (1,699) (232)
---------------------------------------------------------------- ---- ----------- ----------- ------- -------
Net movement in free surplus before non-controlling interest (1,322) (1,848) (3,170) 4,062
Change in amounts attributable to non-controlling interests (10) - (10) (106)
----------- ----------- ------- -------
Balance at beginning of year (as previously reported) 6,650 7,399 14,049 10,093
Effect of HK RBC 1,360 - 1,360 -
----------- ----------- ------- -------
Balance at beginning of year after adoption of HK RBC 8,010 7,399 15,409 10,093
---------------------------------------------------------------- ---- ----------- ----------- ------- -------
Balance at end of year 6,678 5,551 12,229 14,049
---------------------------------------------------------------- ---- ----------- ----------- ------- -------
Representing:
Free surplus excluding distribution rights and other intangibles 5,727 2,663 8,390 10,083
Distribution rights and other intangibles 951 2,888 3,839 3,966
---------------------------------------------------------------- ---- ----------- ----------- ------- -------
Balance at end of year 6,678 5,551 12,229 14,049
---------------------------------------------------------------- ---- ----------- ----------- ------- -------
Contribution to Group free surplus: 2022 $m 2021 $m
-------------------------------- -------
Insurance
and asset Other
management (central) Group Group
Note operations operations total total
------------------------------------------------- ---- ----------- ----------- ------ -------
At end of year:
Long-term business 2 6,035 - 6,035 5,960
Asset management and other 5 643 5,551 6,194 8,089
-------------------------------------------------- ---- ----------- ----------- ------ -------
Free surplus at end of year 6,678 5,551 12,229 14,049
-------------------------------------------------- ---- ----------- ----------- ------ -------
At beginning of year:
Long-term business 2 5,960 - 5,960 5,348
Asset management and other 5 690 7,399 8,089 2,996
-------------------------------------------------- ---- ----------- ----------- ------ -------
Total continuing operations at beginning of year 6,650 7,399 14,049 8,344
Discontinued US operations - - - 1,749
-------------------------------------------------- ---- ----------- ----------- ------ -------
Free surplus at beginning of year 6,650 7,399 14,049 10,093
-------------------------------------------------- ---- ----------- ----------- ------ -------
Notes
(i) Discontinued operations represent the Group's US business
(Jackson) which was demerged in September 2021.
(ii) Free surplus invested in new business primarily represents
acquisition costs and amounts set aside for required capital.
(iii) Non-operating free surplus generated for other operations
represents the post-tax IFRS basis short-term fluctuations in
investment returns, gain or loss on corporate transactions for
other entities and the movement in the mark-to-market value
adjustment on core structural borrowings which did not meet the
qualifying conditions as set out in the Insurance (Group Capital)
Rules.
(iv) Net cash flows to parent company reflect the cash
remittances as included in the holding company cash flow at
transaction rates. The difference to the intra-group dividends and
investment in operations in the movement in EEV shareholders'
equity primarily relates to intra-group loans, foreign exchange and
other non-cash items.
(v) New share capital subscribed in 2021 primarily represented
the issuance of new ordinary shares on the Hong Kong Stock Exchange
in October 2021.
Notes on the EEV basis results
1 Analysis of new business profit and EEV for long-term business operations
2022
---------------------------------------------------------------------------
Present Closing EEV
New Annual value of new New New shareholders'
business premium business business business equity,
profit equivalent premiums margin margin excluding
(NBP) (APE) (PVNBP) (APE) (PVNBP) goodwill
$m $m $m % % $m
--------------------------- --------- ----------- ------------- --------- --------- --------------
CPL (Prudential's share) 387 884 3,521 44% 11% 3,259
Hong Kong 384 522 3,295 74% 12% 16,576
Indonesia 125 247 1,040 51% 12% 1,833
Malaysia 159 359 1,879 44% 8% 3,695
Singapore 499 770 6,091 65% 8% 6,806
Growth markets and other 630 1,611 6,580 39% 10% 6,688
--------------------------- --------- ----------- ------------- --------- --------- --------------
Total long-term operations 2,184 4,393 22,406 50% 10% 38,857
--------------------------- --------- ----------- ------------- --------- --------- --------------
2021 (AER)
---------------------------------------------------------------------------
Present Closing EEV
New Annual value of new New New shareholders'
business premium business business business equity,
profit equivalent premiums margin margin excluding
(NBP) (APE) (PVNBP) (APE) (PVNBP) goodwill
$m $m $m % % $m
--------------------------- --------- ----------- ------------- --------- --------- --------------
CPL (Prudential's share) 352 776 3,761 45% 9% 3,114
Hong Kong 736 550 4,847 134% 15% 21,460
Indonesia 125 252 1,067 50% 12% 2,237
Malaysia 232 461 2,137 50% 11% 3,841
Singapore 523 743 6,214 70% 8% 7,732
Growth markets and other 558 1,412 6,127 40% 9% 6,262
--------------------------- --------- ----------- ------------- --------- --------- --------------
Total long-term operations 2,526 4,194 24,153 60% 10% 44,646
--------------------------- --------- ----------- ------------- --------- --------- --------------
2021 (CER)
---------------------------------------------------------------------------
Present Closing EEV
New Annual value of new New New shareholders'
business premium business business business equity,
profit equivalent premiums margin margin excluding
(NBP) (APE) (PVNBP) (APE) (PVNBP) goodwill
$m $m $m % % $m
--------------------------- --------- ----------- ------------- --------- --------- --------------
CPL (Prudential's share) 337 743 3,602 45% 9% 2,855
Hong Kong 731 546 4,812 134% 15% 21,436
Indonesia 120 243 1,027 49% 12% 2,048
Malaysia 219 434 2,013 50% 11% 3,633
Singapore 510 724 6,056 70% 8% 7,772
Growth markets and other 526 1,323 5,771 40% 9% 5,852
--------------------------- --------- ----------- ------------- --------- --------- --------------
Total long-term operations 2,443 4,013 23,281 61% 10% 43,596
--------------------------- --------- ----------- ------------- --------- --------- --------------
Note
The movement in new business profit from long-term operations is
analysed as follows:
$m
------------------------------------------------------------------- -----
2021 new business profit 2,526
Foreign exchange movement (83)
Sales volume 231
Effect of changes in interest rates and other economic assumptions (173)
Business mix, product mix and other items (317)
------------------------------------------------------------------- -----
2022 new business profit 2,184
------------------------------------------------------------------- -----
EEV new business profit reflects the value of expected future
profits from the new business sold in the year, and is a measure
used by Prudential to assess profitability of the new business
written. Explanations of changes in new business profitability is
contained in the Group Strategic and Operating Review. Information
on the Group's operating experience variances on the in-force
business is shown in note 2.
2 Analysis of movement in net worth and value of in-force
business for long-term business operations
2022 $m 2021 $m
--------------------------------------------------------- --------
Free Required Net Value of Embedded Embedded
surplus capital worth in-force business value value
--------------------------------------------- -------- -------- ------- ------------------ -------- --------
Balance at beginning of year after adoption
of HK RBC
-------- -------- ------- ------------------ -------- --------
Balance at beginning of year (as previously
reported) 5,960 3,230 9,190 35,456 44,646 42,861
Effect of HK RBC 1,360 2,853 4,213 (3,984) 229 -
-------- -------- ------- ------------------ -------- --------
Balance at beginning of year after adoption
of HK RBC 7,320 6,083 13,403 31,472 44,875 42,861
New business contribution (567) 334 (233) 2,417 2,184 2,526
Existing business - transfer to net worth 2,406 (198) 2,208 (2,208) - -
Expected return on existing businessnote 2(b) 347 289 636 1,923 2,559 1,761
Changes in operating assumptions, experience
variances and other itemsnote 2(c) (227) (266) (493) 292 (201) (131)
--------------------------------------------- -------- -------- ------- ------------------ -------- --------
Operating profit before restructuring and
IFRS 17 implementation costs 1,959 159 2,118 2,424 4,542 4,156
Restructuring and IFRS 17 implementation
costs (111) - (111) (5) (116) (82)
--------------------------------------------- -------- -------- ------- ------------------ -------- --------
Operating profit 1,848 159 2,007 2,419 4,426 4,074
Non-operating resultnote 2(d) (2,040) (548) (2,588) (5,881) (8,469) (603)
--------------------------------------------- -------- -------- ------- ------------------ -------- --------
(Loss) profit for the year (192) (389) (581) (3,462) (4,043) 3,471
Non-controlling interests share of (profit)
loss (3) - (3) (19) (22) (30)
--------------------------------------------- -------- -------- ------- ------------------ -------- --------
(Loss) profit for the year attributable to
equity holders of the Company (195) (389) (584) (3,481) (4,065) 3,441
Foreign exchange movements (283) (94) (377) (769) (1,146) (457)
Intra-group dividends and investment in
operations (999) (44) (1,043) 44 (999) (1,115)
Other movementsnote 2(e) 192 - 192 - 192 (84)
--------------------------------------------- -------- -------- ------- ------------------ -------- --------
Balance at end of year note 2(a) 6,035 5,556 11,591 27,266 38,857 44,646
--------------------------------------------- -------- -------- ------- ------------------ -------- --------
(a) Total embedded value
The total embedded value for long-term business operations at
the end of each year, excluding goodwill attributable to equity
holders, can be analysed as follows:
31 Dec 2022 $m 31 Dec 2021 $m
----------------------------------------------------------------------------------- -------------- --------------
Value of in-force business before deduction of cost of capital and time value of
options and
guarantees 28,126 36,965
Cost of capital (709) (725)
Time value of options and guarantees(note) (151) (784)
----------------------------------------------------------------------------------- -------------- --------------
Net value of in-force business 27,266 35,456
----------------------------------------------------------------------------------- -------------- --------------
Free surplus 6,035 5,960
Required capital 5,556 3,230
----------------------------------------------------------------------------------- -------------- --------------
Net worth 11,591 9,190
----------------------------------------------------------------------------------- -------------- --------------
Embedded value 38,857 44,646
----------------------------------------------------------------------------------- -------------- --------------
Note
The time value of options and guarantees (TVOG) arises from the
variability of economic outcomes in the future and is, where
appropriate, calculated as the difference between an average
outcome across a range of economic scenarios, calibrated around a
central scenario, and the outcome from the central economic
scenario, as described in note 8.1(d). At 31 December 2022, the
TVOG is $(151) million, with the substantial majority arising in
Hong Kong. The TVOG has decreased since 31 December 2021 reflecting
the generally higher government bond yields at 31 December 2022
which mean guarantees are less likely to be in-the-money. The TVOG
reflects the variability of guaranteed benefit payouts across the
range of economic scenarios around interest rates at the valuation
date and represents some of the market risk for the key products in
Hong Kong. As this market risk is explicitly allowed for via the
TVOG, no further adjustment is made for this within the EEV risk
discount rate, as described in note 8.1(h).
(b) Expected return on existing business
The expected return on existing business reflects the effect of
changes in economic and operating assumptions in the current year,
as described in note 8.2(c). The movement in this amount compared
to the prior year from long-term operations is analysed as
follows:
$m
------------------------------------------------------------------- -----
2021 expected return on existing business 1,761
Foreign exchange movement (56)
Effect of changes in interest rates and other economic assumptions 715
Growth in opening value of in-force business and other items 139
------------------------------------------------------------------- -----
2022 expected return on existing business 2,559
------------------------------------------------------------------- -----
(c) Changes in operating assumption, experience variances and other items
Overall, the total impact of operating assumption changes,
experience variances and other items in 2022 was $(201) million
(2021: $(131) million), comprising changes in operating assumptions
of $32 million in 2022 (2021: $118 million) and experience
variances and other items of $(233) million (2021: $(249)
million).
(d) Non-operating results
The EEV non-operating result from long-term operations can be
summarised as follows:
2022 $m 2021 $m
------------------------------------------------------ ------- -------
Short-term fluctuations in investment returnsnote (i) (6,893) (1,015)
Effect of change in economic assumptionsnote (ii) (1,571) 412
Loss attaching to corporate transactions (5) -
------------------------------------------------------ ------- -------
Non-operating results (8,469) (603)
------------------------------------------------------ ------- -------
Notes
(i) The charge of $(6,893) million for short-term fluctuations
in investment returns mainly reflects lower than expected bond
returns, following the rise in interest rates in many markets in
the year, widening credit spreads and falling equity markets.
(ii) The charge of $(1,571) million for effect of change in
economic assumptions primarily arises from increases in interest
rates, resulting in higher risk discount rates, partially offset by
the effect of higher assumed fund earned rates that impact
projected future cash flows. The effects and impacts vary between
businesses and products with the overall negative impact due to
larger weight of health and protection business outweighing
positive impacts for other products.
(e) Other reserve movements
Other movements include reserve movements in respect of
share-based payments, treasury shares, intra-group loans and other
intra-group transfers between operations that have no overall
effect on the Group's shareholders' equity.
3 Sensitivity of results for long-term business operations
(a) Sensitivity analysis - economic assumptions
The tables below show the sensitivity of the new business profit
and the embedded value for long-term business operations to:
- 1 per cent and 2 per cent increases in interest rates and 0.5
per cent decrease in interest rates. This allows for consequential
changes in the assumed investment returns for all asset classes,
market values of fixed interest assets, local statutory reserves,
capital requirements and risk discount rates (but excludes changes
in the allowance for market risk);
- 1 per cent rise in equity and property yields;
- 1 per cent and 2 per cent increases in the risk discount
rates. The main driver for changes in the risk discount rates from
period to period is changes in interest rates, the impact of which
is expected to be partially offset by a corresponding change in
assumed investment returns, the effect of which is not included in
the risk discount rate sensitivities. The impact of higher
investment returns can be approximated as the difference between
the sensitivity to increases in interest rates and the sensitivity
to increases in risk discount rates;
- For embedded value only, 20 per cent fall in the market value
of equity and property assets; and
- For embedded value only, holding the Group Minimum Capital
Requirements (GMCR) under the GWS Framework in contrast to EEV
required capital based on the GPCR. This reduces the level of
capital and therefore the level of charge deducted from the
embedded value for the cost of locked-in required capital. This has
the effect of increasing EEV.
The sensitivities shown below are for the impact of
instantaneous and permanent changes (with no trending or mean
reversion) on the embedded value of long-term business operations
and include the combined effect on the value of in-force business
and net assets (including derivatives) held at the valuation dates
indicated. The results only allow for limited management actions,
such as changes to future policyholder bonuses, where applicable.
If such economic conditions persisted, the financial impacts may
differ to the instantaneous impacts shown below. In this case,
management could also take additional actions to help mitigate the
impact of these stresses. No change in the mix of the asset
portfolio held at the valuation date is assumed when calculating
sensitivities, while changes in the market value of those assets
are recognised. The sensitivity impacts are expected to be
non-linear. To aid understanding of this non-linearity, impacts of
both a 1 per cent and 2 per cent increase to interest rates and
risk discount rates are shown.
If the changes in assumptions shown in the sensitivities were to
occur, the effects shown below would be recorded within two
components of the profit analysis for the following period, namely
the effect of changes in economic assumptions and short-term
fluctuations in investment returns. In addition to the sensitivity
effects shown below, the other components of the profit for the
following period would be calculated by reference to the altered
assumptions, for example, new business profit and expected return
on existing business.
New business profit from long-term business
2022 $m 2021 $m
--------------------------------------------------------- ------- -------
New business profit 2,184 2,526
--------------------------------------------------------- ------- -------
Sensitivity to alternative economic assumptions:
Interest rates and consequential effects - 2% increase 220 88
Interest rates and consequential effects - 1% increase 134 70
Interest rates and consequential effects - 0.5% decrease (97) (64)
Equity/property yields - 1% rise 160 155
Risk discount rates - 2% increase (551) (653)
Risk discount rates - 1% increase (309) (380)
--------------------------------------------------------- ------- -------
Embedded value of long-term business
31 Dec 2022 $m 31 Dec 2021 $m
--------------------------------------------------------- -------------- --------------
Embedded value 38,857 44,646
--------------------------------------------------------- -------------- --------------
Sensitivity to alternative economic assumptions:
Interest rates and consequential effects - 2% increase (3,988) (4,782)
Interest rates and consequential effects - 1% increase (2,067) (2,228)
Interest rates and consequential effects - 0.5% decrease 1,058 223
Equity/property yields - 1% rise 1,884 1,909
Equity/property market values - 20% fall (1,840) (1,959)
Risk discount rates - 2% increase (7,371) (9,717)
Risk discount rates - 1% increase (4,155) (5,443)
Group Minimum Capital Requirements 117 136
--------------------------------------------------------- -------------- --------------
For a 1 per cent increase in assumed interest rates, the
$(2,067) million negative effect comprises a $(4,155) million
negative impact of increasing the risk discount rate by 1 per cent,
partially offset by a $2,088 million benefit from assuming 1 per
cent higher investment returns. Similarly, for a 2 per cent
increase in assumed interest rates the $(3,988) million negative
effect comprises a $(7,371) million negative impact of increasing
the risk discount rates by 2 per cent, partially offset by a $3,383
million benefit from higher assumed investment returns. Finally,
for a 0.5 per cent decrease in assumed interest rates, there would
be a $1,058 million positive effect reflecting the benefit of a 0.5
per cent reduction in risk discount rates being partially offset by
lower assumed investment returns. These offsetting impacts are
sensitive to economics and the net impact can therefore change from
period to period depending on the current level of interest
rates.
In order to illustrate the impact of varying specific economic
assumptions, all other assumptions are held constant in the
sensitivities above and, therefore, the actual changes in embedded
value were these economic effects to materialise may differ from
the sensitivities shown. For example, market risk allowances within
the risk discount rate may change if interest rates change and
these are not allowed for in the above. If market risk allowances
were changed as expected when interest rates are increased by 1 per
cent, the expected reduction in EEV would be $(2,038) million
(compared with the $(2,067) million impact shown above). Similarly,
if interest rates actually decreased by 0.5 per cent, it would lead
to a $1,029 million increase (compared with the $1,058 million
increase shown above).
(b) Sensitivity analysis - non-economic assumptions
The tables below show the sensitivity of the new business profit
and the embedded value for long-term business operations to:
- 10 per cent proportionate decrease in maintenance expenses
(for example, a 10 per cent sensitivity on a base assumption of $10
per annum would represent an expense assumption of $9 per
annum);
- 10 per cent proportionate decrease in lapse rates (for
example, a 10 per cent sensitivity on a base assumption of 5.0 per
cent would represent a lapse rate of 4.5 per cent per annum);
and
- 5 per cent proportionate decrease in base mortality (ie
increased longevity) and morbidity rates.
New business profit from long-term business
2022 $m 2021 $m
-------------------------------------------- ------- -------
New business profit 2,184 2,526
-------------------------------------------- ------- -------
Maintenance expenses - 10% decrease 48 60
Lapse rates - 10% decrease 134 190
Mortality and morbidity - 5% decrease 99 143
-------------------------------------------- ------- -------
Embedded value of long-term business
31 Dec 2022 $m 31 Dec 2021 $m
-------------------------------------- -------------- --------------
Embedded value 38,857 44,646
-------------------------------------- -------------- --------------
Maintenance expenses - 10% decrease 411 455
Lapse rates - 10% decrease 1,533 1,901
Mortality and morbidity - 5% decrease 1,300 1,596
-------------------------------------- -------------- --------------
4 Expected transfer of value of in-force business and required
capital to free surplus for long-term business operations on a
discounted basis
The table below shows how the value of in-force business (VIF)
and the associated required capital for long-term business
operations are projected as emerging into free surplus over future
years. Cash flows are projected on a deterministic basis and are
discounted at the appropriate risk discount rate. The modelled cash
flows use the same methodology underpinning the Group's EEV
reporting and so are subject to the same assumptions and
sensitivities. The projected emergence of VIF and required capital
into free surplus in 2022 will be the starting point for expected
free surplus generation next year, after updating for operating and
economic assumption changes. See note I(vi) of the Additional
unaudited financial information for further detail.
Total Expected period of conversion of future post-tax distributable earnings
expected and required capital flows to free surplus at 31 Dec
---------------------------------------------------------------------------------
emergence 1-5 years 6-10 years 11-15 years 16-20 years 21-40 years 40+ years
--------- --------- ----------- ------------ ------------- ------------- ------------ ----------
2022 ($m) 32,648 9,764 6,038 4,360 3,424 6,910 2,152
--------- --------- ----------- ------------ ------------- ------------- ------------ ----------
(%) 100% 30% 19% 13% 10% 21% 7%
--------- --------- ----------- ------------ ------------- ------------- ------------ ----------
2021 ($m) 38,922 9,520 6,824 5,160 4,190 9,588 3,640
--------- --------- ----------- ------------ ------------- ------------- ------------ ----------
(%) 100% 24% 18% 13% 11% 25% 9%
--------- --------- ----------- ------------ ------------- ------------- ------------ ----------
The required capital and value of in-force business for
long-term business operations can be reconciled to the total
discounted emergence of future free surplus shown above as
follows:
31 Dec 2022 $m 31 Dec 2021 $m
----------------------------------------- -------------- --------------
Required capital(note 2) 5,556 3,230
Value of in-force business (VIF)(note 2) 27,266 35,456
Other items(*) (174) 236
----------------------------------------- -------------- --------------
Long-term business operations 32,648 38,922
----------------------------------------- -------------- --------------
* 'Other items' represent the impact of the TVOG and amounts
incorporated into VIF where there is no definitive time frame for
when the payments will be made or receipts received. These items
are excluded from the expected free surplus generation profile
above.
5 EEV results for other (central) operations
EEV results for other income and expenditure represents the
post-tax IFRS results for other (central) operations (before
restructuring and IFRS 17 implementation costs), together with an
adjustment to deduct the unwind of expected margins on the internal
management of the assets of the covered business, as shown in the
table below. It mainly includes interest costs on core structural
borrowings and corporate expenditure for head office functions that
are not recharged/allocated to the insurance operations.
In line with the EEV Principles, the allowance for the future
costs of internal asset management services within the EEV results
for long-term insurance operations excludes the projected future
profits or losses generated by any non-insurance entities within
the Group in providing those services (ie the EEV for long-term
insurance operations assumes that the cost of internal asset
management services will be that incurred by the Group as a whole,
not the cost that will be borne by the insurance business). The
results of the Group's asset management operations include the
current period profit from the management of both internal and
external funds, consistent with their presentation within the
Group's IFRS basis reporting. An adjustment is accordingly made to
Group EEV operating profit, within the EEV results for other
operations, to deduct the expected profit anticipated to arise in
the current period in the opening value of in-force business from
internal asset management services, such that Group EEV operating
profit includes the actual profit earned in respect of the
management of these assets.
Any costs incurred within the head office functions that are
deemed attributable to the long-term insurance (covered) business
are recharged to the insurance operations and recorded within the
results for those operations. The assumed future expenses within
the value of in-force business for long-term insurance operations
allow for amounts expected to be recharged by the head office
functions. Other costs that are not recharged to the insurance
operations are shown as part of other income and expenditure for
the current period, and are not included within the projection of
future expenses for in-force insurance business.
2022 $m 2021 $m
------------------------------------------------------------------------------------------- ------- --------
IFRS other income (expenditure) (as recorded in note B1.1 of the IFRS financial results) (437) (605)
Tax charge on the above IFRS results (21) (37)
Less: unwind of expected profit on internal management of the assets of long-term business (84) (81)
------------------------------------------------------------------------------------------- ------- --------
EEV other income (expenditure) (542) (723)
------------------------------------------------------------------------------------------- ------- --------
The EEV shareholders' equity for other operations is taken to be
IFRS shareholders' equity, with central Group debt shown on a
market value basis. Free surplus for other operations is taken to
be IFRS shareholders' equity, net of goodwill attributable to
equity holders, with central Group debt recorded as free surplus to
the extent that it is classified as capital resources under the
Group's capital regime. Under the GWS Framework, debt instruments
issued at the date of designation which met the transitional
conditions set by the Hong Kong IA are included as GWS eligible
group capital resources. In addition, debt issued since the date of
designation which met the qualifying conditions as set out in the
Insurance (Group Capital) Rules are also included as GWS eligible
group capital resources. The $350 million senior debt issued in
2022 did not meet the conditions and hence has not been treated as
available capital within free surplus.
Shareholders' equity for other (central) operations can be
compared across metrics as shown in the table below.
2022 $m 2021 $m
--------------------------------------------------------------------------------------- ------- -------
IFRS basis shareholders' equity (as recorded in note C1 of the IFRS financial results) 1,495 1,679
Mark-to-market value adjustment on central borrowings(note 6) 427 (438)
--------------------------------------------------------------------------------------- ------- -------
EEV basis shareholders' equity 1,922 1,241
Debt instruments treated as capital resources 3,629 6,158
--------------------------------------------------------------------------------------- ------- -------
Free surplus of other (central) operations 5,551 7,399
--------------------------------------------------------------------------------------- ------- -------
Jackson shareholding
The fair value of the Group's retained interest in Jackson
equity securities, as included in the Group's EEV at 31 December
2022, was $266 million (31 December 2021: $683 million). Net
unrealised changes in fair value since the date of demerger have
been included in other movements in equity items as part of the EEV
basis results for other (central) operations. This treatment is
consistent with the approach adopted for IFRS. Further information
can be found in note D1.2 of the IFRS financial results.
6 Net core structural borrowings of shareholder-financed businesses
31 Dec 2022 $m 31 Dec 2021 $m
--------------------------------- ---------------------------------
Mark-to EEV Mark-to EEV
-market basis at -market basis at
IFRS value market IFRS value market
basis adjustment value basis adjustment value
note (ii) note (iii) note (ii) note (iii)
------------------------------------------- --------- ----------- --------- --------- ----------- ---------
Holding company cash and short-term
investmentsnote (i) (3,057) - (3,057) (3,572) - (3,572)
Central borrowings:
--------- ----------- --------- --------- ----------- ---------
Subordinated debt 2,286 (306) 1,980 4,075 196 4,271
Senior debt 1,975 (121) 1,854 1,702 242 1,944
Bank loan - - - 350 - 350
--------- ----------- --------- --------- ----------- ---------
Total central borrowings 4,261 (427) 3,834 6,127 438 6,565
-------------------------------------------- --------- ----------- --------- --------- ----------- ---------
Net core structural borrowings of
shareholder-financed businesses 1,204 (427) 777 2,555 438 2,993
-------------------------------------------- --------- ----------- --------- --------- ----------- ---------
Notes
(i) The definition of holding company cash and short-term
investments has been updated. As at 31 December 2022, holding
company includes central holding and service companies. As at 31
December 2021, holding company includes centrally managed group
holding companies. Further information is provided in note I(v) of
the Additional unaudited financial information.
(ii) As recorded in note C5.1 of the IFRS financial results.
(iii) The movement in the value of core structural borrowings
includes issuances and redemptions in the year and foreign exchange
effects for pounds sterling denominated debts. The movement in the
mark-to-market value adjustment can be analysed as follows:
2022 $m 2021 $m
----------------------------------------------------- ------- -------
Mark-to-market value adjustment at beginning of year 438 795
Credit included in the income statement (865) (357)
----------------------------------------------------- ------- -------
Mark-to-market value adjustment at end of year (427) 438
----------------------------------------------------- ------- -------
7 Comparison of EEV basis shareholders' equity with IFRS basis shareholders' equity
31 Dec 2022 $m 31 Dec 2021 $m
--------------------------------------------------------------------------------- -------------- --------------
Assets less liabilities before deduction of insurance funds 140,078 164,810
Less insurance funds (including liabilities in respect of insurance products
classified as
investment contracts under IFRS 4):
-------------- --------------
Policyholder liabilities (net of reinsurers' share) and unallocated surplus of
with-profits
funds (122,951) (147,546)
Shareholders' accrued interest in the long-term business 25,224 30,267
--------------
(97,727) (117,279)
Less non-controlling interests (167) (176)
---------------------------------------------------------------------------------- -------------- --------------
Total net assets attributable to equity holders of the Company 42,184 47,355
---------------------------------------------------------------------------------- -------------- --------------
Share capital 182 182
Share premium 5,006 5,010
IFRS basis shareholders' reserves 11,772 11,896
---------------------------------------------------------------------------------- -------------- --------------
IFRS basis shareholders' equity, net of non-controlling interests 16,960 17,088
Shareholders' accrued interest in the long-term business 25,224 30,267
---------------------------------------------------------------------------------- -------------- --------------
EEV basis shareholders' equity, net of non-controlling interests 42,184 47,355
---------------------------------------------------------------------------------- -------------- --------------
8 Methodology and accounting presentation
8.1 Methodology
(a) Covered business
The EEV basis results for the Group are prepared for 'covered
business' as defined by the EEV Principles. Covered business
represents the Group's long-term insurance business (including the
Group's investments in joint venture and associate insurance
operations), for which the value of new and in-force contracts is
attributable to shareholders. The definition of long-term insurance
business comprises those contracts falling under the definition for
regulatory purposes.
The EEV results for the Group's covered business are then
combined with the post-tax IFRS results of the Group's asset
management and other operations (including interest costs on core
structural borrowings and corporate expenditure for head office
functions that is not recharged/allocated to the insurance
operations), with an adjustment to deduct the unwind of expected
margins on the internal management of the assets of the covered
business. Under the EEV Principles, the results for covered
business incorporate the projected margins of attaching internal
asset management, as described in note (g) below.
(b) Valuation of in-force and new business
The EEV basis results are prepared incorporating best estimate
assumptions about all relevant factors including levels of future
investment returns, persistency, mortality, morbidity and expenses,
as described in note 9(c). These assumptions are used to project
future cash flows. The present value of the projected future cash
flows is then calculated using a discount rate, as shown in note
9(a), which reflects both the time value of money and all other
non-diversifiable risks associated with the cash flows that are not
otherwise allowed for.
The total profit that emerges over the lifetime of an individual
contract as calculated under the EEV basis is the same as that
calculated under the IFRS basis. Since the EEV basis reflects
discounted future cash flows, under the EEV methodology the profit
emergence is advanced, thus more closely aligning the timing of the
recognition of profit with the efforts and risks of current
management actions, particularly with regard to business sold
during the period.
New business
In determining the EEV basis value of new business, premiums are
included in projected cash flows on the same basis of
distinguishing regular and single premium business as set out in
the Group's new business sales reporting.
New business premiums reflect those premiums attaching to the
covered business, including premiums for contracts classified as
investment contracts under IFRS 4. New business premiums for
regular premium products are shown on an annualised basis.
New business profit represents profit determined by applying
operating and economic assumptions as at the end of the period. New
business profitability is a key metric for the Group's management
of the development of the business. In addition, new business
margins are shown by reference to annual premium equivalent (APE)
and the present value of new business premiums (PVNBP). These
margins are calculated as the percentage of the value of new
business profit to APE and PVNBP. APE is calculated as the
aggregate of regular premiums on new business written in the period
and one-tenth of single premiums. PVNBP is calculated as the
aggregate of single premiums and the present value of expected
future premiums from regular premium new business, allowing for
lapses and the other assumptions made in determining the EEV new
business profit.
(c) Cost of capital
A charge is deducted from the embedded value for the cost of
locked-in required capital supporting the Group's long-term
business. The cost is the difference between the nominal value of
the capital held and the discounted value of the projected releases
of this capital, allowing for post-tax investment earnings on the
capital.
The EEV results are affected by the movement in this cost from
period to period, which comprises a charge against new business
profit and generally a release in respect of the reduction in
capital requirements for business in force as this runs off.
Where required capital is held within a with-profits long-term
fund, the value placed on surplus assets within the fund is already
adjusted to reflect its expected release over time and so no
further adjustment to the shareholder position is necessary.
(d) Financial options and guarantees
Nature of financial options and guarantees
Participating products, principally written in China, Hong Kong,
Malaysia, Singapore and Taiwan, have both guaranteed and
non-guaranteed elements. These products provide returns to
policyholders through bonuses that are smoothed. There are two
types of bonuses: regular and final. Regular bonuses are declared
once a year and, once credited, are guaranteed in accordance with
the terms of the particular products. Final bonuses are guaranteed
only until the next bonus declaration.
There are also various non-participating long-term products with
guarantees. The principal guarantees are those for whole-of-life
contracts with floor levels of policyholder benefits that typically
accrue at rates set at inception and do not vary subsequently with
market conditions. Similar to participating products, the
policyholder charges incorporate an allowance for the cost of
providing these guarantees, which, for certain whole-of-life
products in Hong Kong, remains constant throughout varying economic
conditions, rather than reducing as the economic environment
improves and vice versa.
Time value
The value of financial options and guarantees comprises the
intrinsic value (arising from a deterministic valuation on best
estimate assumptions) and the time value (arising from the
variability of economic outcomes in the future).
Where appropriate (ie where financial options and guarantees are
explicitly valued under the EEV methodology), a full stochastic
valuation has been undertaken to determine the time value of
financial options and guarantees. The economic assumptions used for
the stochastic calculations are consistent with those used for the
deterministic calculations. Assumptions specific to the stochastic
calculations reflect local market conditions and are based on a
combination of actual market data, historic market data and an
assessment of long-term economic conditions. Common principles have
been adopted across the Group for the stochastic asset models, such
as separate modelling of individual asset classes with an allowance
for correlations between various asset classes. Details of the key
characteristics of each model are given in note 9 (b).
In deriving the time value of financial options and guarantees,
management actions in response to emerging investment and fund
solvency conditions have been modelled. Management actions
encompass, but are not confined to, investment allocation
decisions, levels of regular and final bonuses and credited rates.
Bonus rates are projected from current levels and varied in
accordance with assumed management actions applying in the emerging
investment and fund solvency conditions. In all instances, the
modelled actions are in accordance with approved local practice and
therefore reflect the options available to management.
(e) Level of required capital and net worth
In adopting the EEV Principles, Prudential has based required
capital on the applicable local statutory regulations, including
any amounts considered to be required above the local statutory
minimum requirements to satisfy regulatory constraints.
For shareholder-backed businesses, the level of required capital
has been based on the GPCR.
- For CPL operations, the level of required capital follows the
approach for embedded value reporting issued by the China
Association of Actuaries (CAA) reflecting the C-ROSS regime. The
CAA has started a project to assess whether any changes are
required to the embedded value guidance in China given changes in
regulatory rules, regulations and the external market environment
since the standard was first issued. To date, no outcomes have been
proposed by the CAA and Prudential has made no change to its EEV
basis for CPL in 2022. At such time that there is a new basis,
Prudential will consider the effect of proposals.
- For Hong Kong participating business, the HK RBC regime
recognises the value of future shareholder transfers on an economic
basis as available capital with an associated required capital.
Within EEV, the shareholder value of participating business
continues to be recognised as VIF with no recognition within free
surplus and no associated required capital.
- For Singapore life operations, the level of net worth and
required capital is based on the Tier 1 Capital position under the
risk-based capital framework (RBC2), which removes certain negative
reserves permitted to be recognised in the full RBC2 regulatory
position applicable to the Group's GWS capital position, in order
to better reflect free surplus and its generation.
Free surplus is the shareholders' net worth in excess of
required capital. For the Hong Kong business, the HK RBC framework
requires liabilities to be valued on a best estimate basis and
capital requirements to be risk based. EEV free surplus excludes
regulatory surplus that arises where HK RBC technical provisions
are lower than policyholder asset shares or cash surrender values
to more realistically reflect how the business is managed.
(f) With-profits business and the treatment of the estate
For the Group's relevant operations, the proportion of surplus
allocated to shareholders from the with-profits funds has been
based on the applicable profit distribution between shareholders
and policyholders. The EEV methodology includes the value
attributed to the shareholders' interest in the residual estate of
the in-force with-profits business. In any scenarios where the
total assets of the life fund are insufficient to meet policyholder
claims in full, the excess cost is fully attributed to
shareholders. As required, adjustments are also made to reflect any
capital requirements for with-profits business in excess of the
capital resources of the with-profits funds.
(g) Internal asset management
In line with the EEV Principles, the in-force and new business
results from long-term business include the projected future profit
or loss from asset management and service companies that support
the Group's covered insurance businesses. The results of the
Group's asset management operations include the current period
profit from the management of both internal and external funds. EEV
basis shareholders' other income and expenditure is adjusted to
deduct the expected profit anticipated to arise in the current
period in the opening VIF from internal asset management and other
services. This deduction is on a basis consistent with that used
for projecting the results for covered insurance business.
Accordingly, Group operating profit includes the actual profit
earned in respect of the management of these assets.
(h) Allowance for risk and risk discount rates
Overview
Under the EEV Principles, discount rates used to determine the
present value of expected future cash flows are set by reference to
risk-free rates plus a risk margin.
The risk-free rates are largely based on local government bond
yields at the valuation date and are assumed to remain constant
throughout the projection, with no trending or mean reversion to
longer-term assumptions that cannot be observed in the current
market.
The risk margin reflects any non-diversifiable risk associated
with the emergence of distributable earnings that is not allowed
for elsewhere in the valuation. In order to better reflect
differences in relative market risk volatility inherent in each
product group, Prudential sets the risk discount rates to reflect
the expected volatility associated with the expected future
shareholder cash flows for each product group in the embedded value
model, rather than at a Group level.
Where financial options and guarantees are explicitly valued
under the EEV methodology, risk discount rates exclude the effect
of these product features.
The risk margin represents the aggregate of the allowance for
market risk and allowance for non-diversifiable non-market risk. No
allowance is required for non-market risks where these are assumed
to be fully diversifiable.
Market risk allowance
The allowance for market risk represents the beta multiplied by
the equity risk premium.
The beta of a portfolio or product measures its relative market
risk. The risk discount rates reflect the market risk inherent in
each product group and hence the volatility of product-specific
cash flows. These are determined by considering how the profit from
each product is affected by changes in expected returns across
asset classes. By converting this into a relative rate of return,
it is possible to derive a product-specific beta. This approach
contrasts with a top-down approach to market risk where the risks
associated with each product are not directly reflected in the
valuation basis.
The Group's methodology allows for credit risk in determining
the best estimate returns and through the market risk allowance,
which covers expected long-term defaults, a credit risk premium (to
reflect the volatility in downgrade and default levels) and
short-term downgrades and defaults.
Allowance for non-diversifiable non-market risks
The majority of non-market and non-credit risks are considered
to be diversifiable. An allowance for non-diversifiable non-market
risks is estimated as set out below.
A base level allowance of 50 basis points is applied to cover
the non-diversifiable non-market risks associated with the Group's
covered business. For the Group's businesses in less mature markets
(such as the Philippines , Thailand and Africa) additional
allowances of 250 basis points are applied. The level and
application of these allowances are reviewed and updated based on
an assessment of the Group's exposure and experience in the
markets. For the Group's business in more mature markets, no
additional allowance is necessary. At 31 December 2022, the total
allowance for non-diversifiable non-market risk is equivalent to a
$(2.8) billion, or (7) per cent, reduction to the embedded value of
long-term business operations.
(i) Foreign currency translation
Foreign currency profits and losses have been translated at
average exchange rates for the period. Foreign currency
transactions are translated at the spot rate prevailing at the date
of the transactions. Foreign currency assets and liabilities have
been translated at closing exchange rates. The principal exchange
rates are shown in note A1 of the Group IFRS financial results.
(j) Taxation
In determining the post-tax profit for the period for covered
business, the overall tax rate includes the impact of tax effects
determined on a local regulatory basis. Tax payments and receipts
included in the projected future cash flows to determine the value
of in-force business are calculated using tax rates that have been
announced and substantively enacted by the end of the reporting
period.
8.2 Accounting presentation
(a) Analysis of post-tax profit or loss
To the extent applicable, the presentation of the EEV profit or
loss for the period is consistent with the classification between
operating and non-operating results that the Group applies for the
analysis of IFRS results. Operating results are determined as
described in note (b) below and incorporate the following:
- New business profit, as defined in note 8.1(b) above;
- Expected return on existing business, as described in note (c) below;
- The impact of routine changes of estimates relating to
operating assumptions, as described in note (d) below; and
- Operating experience variances, as described in note (e) below.
In addition, operating results include the effect of changes in
tax legislation, unless these changes are one-off and structural in
nature, or primarily affect the level of projected investment
returns, in which case they are reflected as a non-operating
result.
Non-operating results comprise:
- Short-term fluctuations in investment returns;
- Mark-to-market value movements on core structural borrowings;
- Effect of changes in economic assumptions; and
- The impact of corporate transactions, if any, undertaken in the year.
Total profit or loss in the period attributable to shareholders
and basic earnings per share include these items, together with
actual investment returns. The Group believes that operating
profit, as adjusted for these items, better reflects underlying
performance.
(b) Investment returns included in operating profit
For the investment element of the assets covering the total net
worth of long-term insurance business, investment returns are
recognised in operating results at the expected long-term rates of
return. These expected returns are calculated by reference to the
asset mix of the portfolio.
(c) Expected return on existing business
Expected return on existing business comprises the expected
unwind of discounting effects on the opening value of in-force
business and required capital and the expected return on existing
free surplus. The unwind of discount and the expected return on
existing free surplus are determined after adjusting for the effect
of changes in economic and operating assumptions in the current
period on the embedded value at the beginning of the period, for
example, the unwind of discount on the value of in-force business
and required capital is determined after adjusting both the opening
value and the risk discount rates for the effect of changes in
economic and operating assumptions in the current period.
(d) Effect of changes in operating assumptions
Operating profit includes the effect of changes to operating
assumptions on the value of in-force business at the end of the
reporting period . For presentational purposes the effect of
changes is delineated to show the effect on the opening value of
in-force business as operating assumption changes, with the
experience variances subsequently being determined by reference to
the assumptions at the end of the reporting period, as discussed
below.
(e) Operating experience variances
Operating profit includes the effect of experience variances on
operating assumptions, such as persistency, mortality, morbidity,
expenses and other factors, which are calculated with reference to
the assumptions at the end of the reporting period.
(f) Effect of changes in economic assumptions
Movements in the value of in-force business at the beginning of
the period caused by changes in economic assumptions, net of the
related changes in the time value of financial options and
guarantees, are recorded in non-operating results.
9 Assumptions
(a) Principal economic assumptions
The EEV results for the Group's covered business are determined
using economic assumptions where both the risk discount rates and
long-term expected rates of return on investments are set with
reference to risk-free rates of return at the end of the reporting
period. Both the risk discount rate and expected rates of return
are updated at each valuation date to reflect current market
risk-free rates, with the effect that changes in market risk-free
rates impact all projected future cash flows. The risk-free rates
of return are largely based on local government bond yields and are
assumed to remain constant throughout the projection, with no
trending or mean reversion to longer-term assumptions that cannot
be observed in the current market . The risk-free rates of return
are shown below for each of the Group's insurance operations.
Expected returns on equity and property assets and corporate bonds
are derived by adding a risk premium to the risk-free rate based on
the Group's long-term view.
As described in note 8.1(h), risk discount rates are set equal
to the risk-free rate at the valuation date plus allowances for
market risk and non-diversifiable non-market risks appropriate to
the features and risks of the underlying products and markets.
Risks that are explicitly allowed for elsewhere in the EEV
basis, such as via the cost of capital and the time value of
options and guarantees, as set out in note 2(a), are not included
in the risk discount rates.
Risk discount rate %
----------------------------------- -------------- -------
Equity return
New business In-force business 10-year government bond yield % (geometric) %
-------------- ------------------- ------------------------------- ----------------
31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec
2022 2021 2022 2021 2022 2021 2022 2021
------------------------ ------ ------ --------- -------- -------------- --------------- ------- -------
CPL 7.4 7.3 7.4 7.3 2.9 2.8 6.9 6.8
Hong Kongnote (i) 4.8 2.5 5.5 2.8 3.9 1.5 7.4 5.0
Indonesia 10.0 9.9 10.6 10.5 7.3 7.0 11.5 11.3
Malaysia 5.8 5.7 6.5 6.1 4.1 3.7 7.6 7.2
Philippines 14.5 12.0 14.5 12.0 7.3 4.8 11.5 9.0
Singapore 5.0 3.4 5.2 3.8 3.1 1.7 6.6 5.2
Taiwan 3.5 3.5 4.0 3.1 1.3 0.7 5.3 4.7
Thailand 10.0 9.3 10.0 9.3 2.7 2.0 7.0 6.3
Vietnam 6.9 4.0 6.7 4.1 5.0 2.2 9.3 6.4
Total weighted average
(new business)note (ii) 6.9 5.0 n/a n/a 4.2 2.7 7.5 6.1
Total weighted average
(in-force business)note
(ii) n/a n/a 6.4 4.3 4.0 2.3 7.6 5.8
------------------------ ------ ------ --------- -------- -------------- --------------- ------- -------
Notes
(i) For Hong Kong, the assumptions shown are for US dollar
denominated business. For other businesses, the assumptions shown
are for local currency denominated business.
(ii) Total weighted average assumptions have been determined by
weighting each business's assumptions by reference to the EEV basis
new business profit and the closing net value of in-force business.
The changes in the risk discount rates for individual businesses
reflect the movements in the local government bond yields, changes
in the allowance for market risk (including as a result of changes
in asset mix) and changes in product mix.
(iii) Expected long-term inflation assumptions range from 1.5
per cent to 5.5 per cent for all periods shown above.
(b) Stochastic assumptions
Details are given below of the key characteristics of the models
used to determine the time value of financial options and
guarantees as referred to in note 8.1(d).
- The stochastic cost of guarantees is primarily of significance
for the Hong Kong, Malaysia, Singapore and Taiwan businesses;
- The principal asset classes are government bonds, corporate bonds and equity;
- Interest rates are projected using a stochastic interest rate
model calibrated to the current market yields;
- Equity returns are assumed to follow a log-normal distribution;
- The corporate bond return is calculated based on a risk-free
return plus a mean-reverting spread;
- The volatility of equity returns ranges from 18 per cent to 35 per cent for both years; and
- The volatility of government bond yields ranges from 1.1 per
cent to 2.0 per cent for both years.
(c) Operating assumptions
Best estimate assumptions are used for projecting future cash
flows, where best estimate is defined as the mean of the
distribution of future possible outcomes. The assumptions are
reviewed actively and changes are made when evidence exists that
material changes in future experience are reasonably certain. Where
experience is expected to be adverse over the short term, a
provision may be established.
Assumptions required in the calculation of the time value of
financial options and guarantees, for example relating to
volatilities and correlations, or dynamic algorithms linking
liabilities to assets, have been set equal to the best estimates
and, wherever material and practical, reflect any dynamic
relationships between the assumptions and the stochastic
variables.
Demographic assumptions
Persistency, mortality and morbidity assumptions are based on an
analysis of recent experience, and reflect expected future
experience. When projecting future cash flows for medical
reimbursement business that is repriced annually, explicit
allowance is made for expected future premium inflation and
separately for future medical claims inflation.
Expense assumptions
Expense levels, including those of the service companies that
support the Group's long-term business, are based on internal
expense analysis and are appropriately allocated to acquisition of
new business and renewal of in-force business. For mature business,
in general, it is Prudential's policy not to take credit for future
cost reduction programmes until the actions to achieve the savings
have been delivered. An allowance is made for short-term required
expenses that are not representative of the longer-term expense
loadings of the relevant businesses. At 31 December 2022, the
allowance held for these costs across the Group was $(173) million.
If future expense overruns are expected to be short-lived, they are
capitalised and subsequently amortised against future overruns.
Expenses comprise costs borne directly and costs recharged from
the Group head office functions that are attributable to the
long-term insurance (covered) business . The assumed future
expenses for the long-term insurance business allow for amounts
expected to be recharged by the head office functions. Development
expenses are allocated to covered business and are charged as
incurred.
Corporate expenditure, which is included in other income and
expenditure, comprises expenditure of the Group head office
functions that is not recharged/allocated to the long-term
insurance or asset management operations, primarily for
corporate-related activities that are charged as incurred, together
with restructuring and IFRS 17 implementation costs incurred across
the Group as recorded in note B1.1 of the IFRS financial
results.
Tax rates
The assumed long-term effective tax rates for operations reflect
the expected incidence of taxable profit or loss in the projected
future cash flows as explained in note 8.1 (j). The local standard
corporate tax rates applicable are as follows:
%
------------ -----------------------------
CPL 25.0
Hong Kong 16.5% on 5% of premium income
Indonesia 22.0
Malaysia* 24.0
Philippines 25.0
Singapore 17.0
Taiwan 20.0
Thailand 20.0
Vietnam 20.0
------------ -----------------------------
* The Malaysia 2022 Budget imposed a one-off tax change in 2022
where the first RM100 million chargeable income will continue to be
taxed at the standard corporate tax rate of 24 per cent and any
excess will be taxed at a rate of 33 per cent. The anticipated
effect was allowed for within EEV at 31 December 2021.
10 Insurance new business
Annual premium equivalents Present value of new
Single premiums Regular premiums (APE) business premiums (PVNBP)
----------------- ------------------ -------------------------- --------------------------
AER 2022 $m 2021 $m 2022 $m 2021 $m 2022 $m 2021 $m 2022 $m 2021 $m
--------------- -------- ------- -------- -------- ------------ ------------ ------------ ------------
CPLnote (i) 1,254 1,760 759 600 884 776 3,521 3,761
Hong Kong 842 808 438 469 522 550 3,295 4,847
Indonesia 250 258 222 226 247 252 1,040 1,067
Malaysia 99 74 350 453 359 461 1,879 2,137
Singapore 2,628 2,412 507 502 770 743 6,091 6,214
Growth markets:
Africa 9 15 148 133 149 134 308 288
Cambodia - - 18 14 18 14 69 59
Indianote (ii) 273 285 196 200 223 228 1,148 1,172
Laos - - - 1 - 1 1 2
Myanmar - - 3 1 3 1 6 3
Philippines 61 89 176 168 182 177 615 655
Taiwan 157 172 486 379 503 397 1,835 1,417
Thailand 150 142 220 204 235 218 932 882
Vietnam 99 55 288 237 298 242 1,666 1,649
-------------- -------- ------- -------- -------- ------------ ------------ ------------ ------------
Total 5,822 6,070 3,811 3,587 4,393 4,194 22,406 24,153
--------------- -------- ------- -------- -------- ------------ ------------ ------------ ------------
Notes
(i) New business in CPL is included at Prudential's 50 per cent interest in the joint venture.
(ii) New business in India is included at Prudential's 22 per
cent interest in the associate.
(iii) The table above is provided as an indicative volume
measure of transactions undertaken in the reporting period that
have the potential to generate profit for shareholders. The amounts
shown are not, and not intended to be, reflective of premium income
recorded in the Group IFRS income statement.
11 Post balance sheet events
Second interim ordinary dividend
The 2022 second interim ordinary dividend approved by the Board
of Directors after 31 December 2022 is as described in note B5 of
the IFRS financial results.
Debt redemption
On 20 January 2023 the Company redeemed senior debt instruments
of GBP300 million, as described in note C5.1 of the IFRS financial
results.
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END
FR EAEDLFSDDEAA
(END) Dow Jones Newswires
March 15, 2023 03:00 ET (07:00 GMT)
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