TIDMMNG
RNS Number : 0756I
M&G PLC
10 August 2021
M&G plc NEWS RELEASE
10 August 2021
M&G plc half year 2021 results
Results show good progress on strategy and strong total capital
generation
John Foley, Chief Executive, said:
"Today's results show good progress on our actions to reposition
the business for sustainable growth and continued strong total
capital generation.
"Institutional assets under management reached a record GBP89.7
billion following net client inflows of GBP2.2 billion, primarily
from European clients.
"In Retail Asset Management, net client outflows more than
halved as investment performance improved, with 63% of funds in the
top two quartiles over one year.
"In July, we launched PruFund Planet, the UK's first smoothed
savings proposition that offers positive societal and environmental
outcomes.
"The dividend of 6.1 pence per share takes the cumulative payout
since our shares were listed in October 2019 to 40.1 pence per
share."
H1 financial highlights
- Adjusted operating profit before tax of GBP327 million, up 6% on the first half of 2020
- IFRS loss after tax of GBP248 million; impacted by short-term
fluctuations in the fair value of the surplus assets in our annuity
portfolio and derivatives used to hedge the Solvency II balance
sheet caused by increasing yields and rising equity markets
- Assets under management and administration increased to
GBP370.0 billion, with positive market movements and net client
inflows to Institutional Asset Management more than offsetting net
client outflows in other areas of the business
- Total capital generation of GBP869 million, on track for
target of GBP2.2 billion by the end of 2022
- Shareholder Solvency II coverage ratio strengthens to 198%
- Interim dividend of 6.1 pence per share (estimated to be
GBP155 million) in line with our policy of paying one-third of the
previous year's total dividend
H1 operational highlights
- Record level of GBP89.7 billion in institutional public and
private assets under management following net client inflows of
GBP2.2 billion
- Improvement in fund performance in Retail Asset Management,
with 63%(1) of funds in upper two performance quartiles over one
year (2020: 20%)
- Retail Asset Management net client outflows reduced by 56% to
GBP3.4 billion, with sales in Europe and Asia returning to net
positive territory in May and June
- M&G Wealth formed a new software partnership to develop
hybrid advice for UK savers, with the launch scheduled for later
this year
- Started process to convert EUR 15 billion of European mutual
fund assets to meet articles 8 and 9 of the EU's Sustainable
Finance Disclosure Regulations, and in July launched PruFund Planet
in the UK
- On track to achieve annual run-rate shareholder cost savings
of GBP145 million through business transformation and modernisation
by 2022
(1) As at 30 June 2021.
Outlook
- Optimistic about the recovery in Retail Asset Management in
light of continued action on investment performance, net inflows
into our new generation of thematic funds and improved
value-for-money for customers
- Institutional Asset Management well-placed for strong growth,
with GBP4 billion of committed client capital and a further GBP5.5
billion of client wins yet to be funded
- Good pipeline of new propositions, with sustainable investment
offerings gaining increased traction among clients
- Strong balance sheet continues to underpin capital generation and dividend policy
For the For the For the
six months six months year
ended ended ended
30 June 30 June 31 December
=========== =========== ============
Performance highlights 2021 2020 2020
====================================================== =========== =========== ============
Adjusted operating profit before tax (GBPm) 327 309 788
IFRS (loss)/profit after tax (GBPm) (248) 826 1,142
Assets under management and administration (GBPbn) 370.0 338.7 367.2
Savings and Asset Management net client flows (GBPbn) (2.0) (4.1) (6.6)
Total capital generation (GBPm) 869 (202) 995
Shareholder Solvency II coverage ratio (%) 198 164 182
Enquiries:
Media Investors/Analysts
Richard Miles +44 (0)7833 481923 Luca Gagliardi +44(0)20 8162 7307
Jonathan Miller +44(0)20 8162 0165
Notes to editors
1. The condensed consolidated financial statements have been
prepared in accordance with IAS 34 Interim Financial Reporting
('IAS 34'), as adopted by the UK, and the Disclosure and
Transparency Rules of the Financial Conduct Authority based on the
consolidated financial statements of M&G plc.
2. All key performance measures relate to continuing operations.
3. The shareholder view and regulatory view of the Solvency II
coverage ratio as at 30 June 2021 assumes transitional measures on
technical provisions which have been recalculated using
management's estimate of the impact of operating and market
conditions at the valuation date.
4. Total number of M&G plc shares in issue as at 30 June 2021 was 2,599,906,866.
5. A Q&A webcast will be hosted by John Foley (CEO) and
Clare Bousfield (CFO) on Tuesday 10 August at 10:30 GMT. You can
register for the Q&A and view the investor presentation here
(the presentation will be available from 07:00 GMT):
https://mngresults.connectid.cloud/register
Dial in: UK freephone 0800 640 6441/ All other locations +44 203
936 2999 Participant code: 095776
6. Ordinary dividend to be paid in September 2021
Ex-dividend date August 19, 2021
Record date August 20, 2021
Payment of dividend September 29, 2021
7. About M&G plc
M&G plc is a leading international savings and investments
business, managing money for both individual savers and
institutional investors in 28 markets. With a heritage dating back
more than 170 years, M&G plc has a long history of innovation
in savings and investments, combining asset management and
insurance expertise to offer a wide range of solutions. We serve
our savings and insurance customers under the Prudential brand in
the UK and Europe and for asset management in South Africa, and
under the M&G Investments brand for asset management clients in
the rest of the world.
8. Additional Information
M&G plc, a company incorporated in the United Kingdom, is
the ultimate parent company of The Prudential Assurance Company
Limited. The Prudential Assurance Company Limited is not affiliated
in any manner with Prudential Financial, Inc., a company whose
principal place of business is in the United States of America or
Prudential plc, an international group incorporated in the United
Kingdom.
9. Forward-Looking Statements
This announcement may contain certain 'forward-looking
statements' with respect to M&G plc and its affiliates (the
"M&G Group"), its plans, its current goals and expectations
relating to its future financial condition, performance, results,
operating environment, strategy and objectives. Statements that are
not historical facts, including statements about M&G plc's
beliefs and expectations and including, without limitation,
statements containing the words 'may', 'will', 'should',
'continue', 'aims', 'estimates', 'projects', 'believes', 'intends',
'expects', 'plans', 'seeks', 'outlook' and 'anticipates', and words
of similar meaning, are forward-looking statements. These
statements are based on plans, estimates and projections as at the
time they are made, and therefore persons reading this announcement
are cautioned against placing undue reliance on forward-looking
statements. By their nature, all forward-looking statements involve
inherent assumptions, risk and uncertainty, as they generally
relate to future events and circumstances that may be beyond the
M&G Group's control. A number of important factors could cause
M&G plc's actual future financial condition or performance or
other indicated results to differ materially from those indicated
in any forward-looking statement. Such factors include, but are not
limited to, UK domestic and global economic and business conditions
(including the political, legal and economic effects of the UK's
decision to leave the European Union); market-related conditions
and risk, including fluctuations in interest rates and exchange
rates, the potential for a sustained low-interest rate environment,
corporate liquidity risk and the future trading value of the shares
of M&G plc; investment portfolio-related risks, such as the
performance of financial markets generally; the policies and
actions of regulatory authorities, including, for example, new
government initiatives; the impact of competition, economic
uncertainty, inflation and deflation; the effect on M&G plc's
business and results from, in particular, mortality and morbidity
trends, longevity assumptions, lapse rates and policy renewal
rates; the timing, impact and other uncertainties of future
acquisitions or combinations within relevant industries; the impact
of internal projects and other strategic actions, such as
transformation programmes, failing to meet their objectives; the
impact of operational risks, including risk associated with third
party arrangements, reliance on third party distribution channels
and disruption to the availability, confidentiality or integrity of
M&G plc's IT
systems (or those of its suppliers); the impact of changes in
capital, solvency standards, accounting standards or relevant
regulatory frameworks, and tax and other legislation and
regulations in the jurisdictions in which the M&G Group
operates; and the impact of legal and regulatory actions,
investigations and disputes. These and other important factors may,
for example, result in changes to assumptions used for determining
results of operations or re-estimations of reserves for future
policy benefits. Any forward-looking statements contained in this
document speak only as of the date on which they are made. M&G
plc expressly disclaims any obligation to update any of the
forward-looking statements contained in this document or any other
forward-looking statements it may make, whether as a result of
future events, new information or otherwise except as required
pursuant to the UK Prospectus Rules, the UK Listing Rules, the UK
Disclosure and Transparency Rules, or other applicable laws and
regulations. Nothing in this announcement shall be construed as a
profit forecast, or an offer to sell or the solicitation of an
offer to buy any securities.
LEI: 254900TWUJUQ44TQJY84 Classification: 3.1 Additional
regulated information required to be disclosed under the laws of a
Member State
Management statement
Our results for the first half of 2021 show we have made good
progress on our actions to reposition the business for sustainable
growth, while at the same time delivering strong total capital
generation.
Total assets under management and administration increased by
GBP2.8 billion to GBP370.0 billion over the six months to 30 June
2021, with positive market and other movements of GBP8.1 billion
more than offsetting Savings and Asset Management net client
outflows of GBP2.0 billion and expected redemptions of GBP3.3
billion in the Heritage business.
Adjusted operating profit before tax of GBP327 million (30 June
2020: GBP309 million) reflects the stability of the earnings of the
underlying business.
Total capital generation during the period was GBP869 million
(30 June 2020: GBP(202) million), taking our shareholder Solvency
II coverage ratio to 198% (31 December 2020: 182%). This
demonstrates our continued focus on proactively and efficiently
generating capital which includes our strategy of hedging the
impact of market volatility on the Solvency II balance sheet.
However, this hedging strategy to protect our Solvency II
balance sheet has contributed to an IFRS loss after tax of GBP248
million as markets recovered and yields increased in the period,
reversing gains in the first half of the previous year when we
recognised an IFRS profit after tax of GBP826 million.
We continue to invest in the modernisation of the business and
remain on track with our transformation programme to achieve GBP145
million annual run-rate shareholder cost savings in 2022. We are
also well positioned to achieve our capital generation targets by
the end of 2022 and 2023.
Asset Management
Assets under management in our Institutional business reached a
new high of GBP89.7 billion, including net client inflows of GBP2.2
billion. This included notable wins in Europe in line with our
strategy to internationalise this business. The pipeline of new
institutional business remains very strong, with GBP4 billion of
committed client capital, and GBP5.5 billion of new wins not yet
funded.
Performance of institutional investment strategies remains
strong. Over one year, 92% of investment strategies outperformed
their benchmarks, while 78% of strategies beat their benchmarks
over three years.
Net client outflows in Retail Asset Management more than halved
to GBP3.4 billion (30 June 2020: net client outflows of GBP7.7
billion) following an improvement in fund performance and the
launch of our new generation of sustainable and thematic funds
which delivered net client inflows of GBP0.6bn in the period. Over
one year, 63% of our retail funds outperformed their respective
peer groups (2020: 20%).
Net client outflows of GBP3.4 billion includes GBP0.9 billion
redemption from our European Strategic Value fund in the period in
relation to withdrawals by Prudential plc and redemptions of
GBP0.9bn from the M&G Property Portfolio fund which was
reopened in May 2021 following 17 months suspension. Excluding
these two one-offs, Retail Asset Management net client outflows
would have been GBP1.6 billion. Internationally, our retail funds
moved into positive net client inflow for two consecutive months in
May and June, the first net client inflows for more than three
years.
Retail Savings
In UK Retail Savings, which includes our flagship proposition
PruFund, we experienced net client outflows of GBP0.8 billion
during the first half of this year (30 June 2020: GBP0.8 billion
net client inflows). This reflected the continued impact of
lockdown restrictions, as well as a shift by advisers to favour
platform business and the ongoing consolidation among advisory
firms. We acknowledge that temporary service issues experienced by
our corporate pensions customers may also have had an impact on
Retail Savings flows.
We anticipated the changes in adviser behaviour with the
acquisition of the Ascentric platform business in May 2020 and the
subsequent launch of M&G Wealth in September that year.
Completion of the integration of the Ascentric business is on
track.
During the first half of 2021, M&G Wealth agreed a new
partnership with software house Ignition Advice to launch later
this year to develop hybrid advice, a blend of human and digital
practices. In July we also launched PruFund Planet, an innovative
proposition which offers both smoothed market returns and positive
environmental or social outcomes.
Sustainability
In May 2021 we published our first Sustainability Report,
setting out our 10-point plan to embed sustainability in everything
we do. This includes our commitment to phase out thermal coal from
our portfolios by 2030 in developed markets and by 2040 in
developing markets - in line with our pledge to achieve net zero
carbon emissions across our investment portfolios by 2050 at the
latest.
In Europe, we have converted, or sought regulatory approval to
convert, EUR 15 billion of mutual fund assets to meet articles 8
and 9 of the EU's Sustainable Finance Disclosure Regulations. We
will seek approval to convert more assets later in the year. Since
inception this year, Catalyst, our team specialising in sourcing
attractive sustainable and impact investment opportunities in
privately held businesses, has invested GBP500 million of a GBP5
billion mandate from the With-Profits Fund and has approved a
further GBP700 million of investments.
Customers, clients and colleagues
Our thanks to our customers and clients for their support and
loyalty during these difficult times. We would like to apologise to
our corporate pensions customers who have experienced significant
service issues. Additional resource has been deployed to remedy the
situation. We thank you for your patience.
Our colleagues have continued to work extremely hard from their
homes for the last six months and our offices remain closed for the
majority of colleagues. When we return, we expect to adopt a hybrid
approach to work, with colleagues in the office two to three days
per week.
Following Mike Evan's resignation in April due to ill-health,
our search for a new Chair is progressing well. Fiona Clutterbuck
continues to act as Interim Chair while the search is
completed.
Dividend
We have declared an interim ordinary dividend of 6.1 pence per
share (estimated to be GBP155 million) payable on 29 September
2021, in line with our policy of paying one-third of the previous
year's total dividend. Following the payment of this dividend,
dividend payments will have totalled 40.1 pence per share since our
shares were listed in October 2019.
Outlook
M&G's strategy is to leverage our capabilities as asset
manager and asset owner to meet the structural growth in demand for
savings and investments, in the UK and internationally. Over time,
we anticipate M&G will become a more international business,
with this reflected in the composition of both revenues and assets
under management.
In the near term, the improvement in Retail Asset Management
performance is encouraging, with European funds leading the way.
Europe presents us with the most attractive opportunities over the
next few years, both in retail funds and in institutional asset
management. Our 20-year investment in brand and distribution in the
region gives us a powerful platform for growth.
In the UK, our continued investment to broaden the M&G
Wealth business means we are well-placed to meet the growing demand
for financial advice at a price point affordable to all, while we
expect our innovative new propositions such as PruFund Planet to
attract savers wanting sustainable investments.
We feel confident that our combination of public and private
investment capabilities, complemented by our deep and strong
relationships with clients and customers, puts M&G on a strong
footing for future growth and success.
Overview of Group results
Adjusted operating profit before tax
The following table shows a reconciliation of adjusted operating
profit before tax to IFRS profit after tax:
For the six months For the
ended year ended
30 June 31 December
==============
GBPm 2021 2020 2020
====================================================== ========= ========= ============
Asset Management fee-based revenues 473 469 988
Other fee-based revenues 133 111 232
====================================================== ========= ========= ============
Total fee-based revenues 606 580 1,220
====================================================== ========= ========= ============
Annuity margin 157 139 438
With-profit shareholder transfer net of hedging 154 134 251
====================================================== ========= ========= ============
Adjusted operating income 917 853 1,909
====================================================== ========= ========= ============
Asset Management operating expenses (333) (306) (672)
Other operating expenses (183) (181) (348)
====================================================== ========= ========= ============
Adjusted operating expenses (516) (487) (1,020)
====================================================== ========= ========= ============
Other shareholder loss (80) (62) (111)
Share of profit from joint ventures and associates 6 5 10
Adjusted operating profit before tax 327 309 788
====================================================== ========= ========= ============
Short-term fluctuations in investment returns (549) 746 678
Restructuring and other costs (i) (85) (22) (73)
IFRS profit attributable to non-controlling interests 3 2 4
====================================================== ========= ========= ============
IFRS (loss)/profit before tax attributable to equity
holders (304) 1,035 1,397
====================================================== ========= ========= ============
Tax credit/(charge) attributable to equity holders 56 (209) (255)
====================================================== ========= ========= ============
IFRS (loss)/ profit after tax attributable to equity
holders (248) 826 1,142
====================================================== ========= ========= ============
(i) Restructuring and other costs excluded from adjusted
operating profit relate to merger and transformation costs
allocated to the shareholder. These differ to restructuring costs
included in the analysis of administrative and other expenses in
Note 5 which include costs allocated to the policyholder.
Additionally in the six months to 30 June 2021 restructuring and
other costs include an impairment of GBP29m which is presented in
impairment of property, plant and equipment in the analysis of
administrative and other expenses in Note 5.
The following table shows adjusted operating profit before tax
split by segment and source of earnings:
For the
For the six year
months ended ended
30 June 31 December
==============
GBPm 2021 2020 2020
===================================== ======= ====== ============
Asset Management 140 163 316
With-Profits 46 24 44
Other (25) (25) (28)
===================================== ======= ====== ============
Savings and Asset Management 161 162 332
===================================== ======= ====== ============
With-Profits 108 110 207
Annuities 157 139 438
Other 17 49 54
===================================== ======= ====== ============
Heritage 282 298 699
===================================== ======= ====== ============
Corporate Centre (116) (151) (243)
===================================== ======= ====== ============
Adjusted operating profit before tax 327 309 788
===================================== ======= ====== ============
Adjusted operating profit before tax increased to GBP327 million
in the six months to 30 June 2021 (30 June 2020: GBP309 million).
In Savings and Asset Management, Asset Management revenue has
remained stable, but the associated expenses have increased as we
continue building out the capability and operations of our global
investment function. This led to a reduction in Asset Management
adjusted operating profit of GBP23 million to GBP140 million. This
has been partly offset by a GBP22 million increase in shareholder
with-profits transfer in Savings and Asset Management, primarily
attributable to PruFund. In Heritage, the annuity margin has
increased by GBP18 million in the period. The prior period
benefited from insurance reserve releases which have not been
repeated in 2021 totaling GBP39 million, resulting in an overall
reduction in Heritage adjusted operating profit of GBP16 million to
GBP282 million. The cost of corporate centre reduced by GBP35
million to GBP116 million due to positive foreign exchange
movements on the USD subordinated debt, with a GBP4 million gain
compared to a loss of GBP30 million in the prior period.
IFRS result after tax
The IFRS result after tax attributable to equity holders
decreased to a loss of GBP248 million compared to a GBP826 million
profit for the six months ended 30 June 2020. This GBP1,074 million
adverse variance is reflective of a GBP549 million loss in the
period (30 June 2020: GBP746 million gain) from short-term
fluctuations in the valuation of hedging instruments and surplus
assets in the annuity portfolio, a GBP63 million increase in
restructuring and other costs and a GBP265 million decrease in the
equity holders tax charge.
Market conditions have led to losses from short-term
fluctuations in investment returns in the current period as
financial markets recover and the sizeable gains in previous
periods are reversed. These losses primarily comprise a GBP182
million loss (30 June 2020: GBP201 million gain) from fair value
movements on surplus assets in the annuity portfolio and a GBP124
million loss (30 June 2020: GBP134 million gain) on interest rate
swaps purchased to protect PAC's Solvency II capital position
against falls in interest rates, both due to rising yields in the
period. In addition there was a GBP156 million loss (30 June 2020:
GBP308 million gain) as stock markets recovered in the period on
the equity hedges used to protect the value of future shareholder
transfers from the With-Profits Fund on PAC's Solvency II balance
sheet. While these hedges protect the Solvency II balance sheet
there is no corresponding item to protect on the IFRS balance
sheet, and therefore when the fair value of the derivatives fall as
interest rates increase and equity markets improve, there are no
offsetting fair value gains on an IFRS basis.
Restructuring and other costs of GBP85 million (30 June 2020:
GBP22 million) relate to merger and transformation costs. In the
half year to 30 June 2021, restructuring and other costs also
includes GBP29m associated with changes to our office space in
respect of our future ways of working, and costs in relation to the
integration of Ascentric.
The equity holders' effective tax rate for the six months ended
30 June 2021 was 18.4% compared to 20.2% for the six months ended
30 June 2020. Excluding non-recurring items, the equity holders'
effective tax rate was 17.1% (30 June 2020: 18.2%). The equity
holders' effective tax rate of 18.4% was lower than the UK
statutory rate of 19% (30 June 2020: 19%). This reflects a
detrimental position (lower tax benefit on the pre-tax loss
position) primarily due to the adverse impact of non-deductible
expenses, partially offset by beneficial impacts arising from the
utilisation of tax capital losses on which no deferred tax was
previously recognised, together with the revaluation of equity
holder deferred tax assets following the change to the UK statutory
rate of corporation tax (increase from 19% to 25% with effect from
1 April 2023) that was enacted in the period. The majority of the
UK deferred tax balances are measured at the policyholder rate of
tax, which was not impacted by the changes to the UK statutory rate
of corporation tax.
Capital generation
The following table shows an analysis of total capital
generation:
For the
For the six months year
ended ended
30 June 31 December
==============
GBPm 2021 2020 2020
=========================================================== ========= ========= ============
Savings and Asset Management underlying capital generation 176 186 417
Heritage underlying capital generation 182 209 446
Corporate Centre underlying capital generation (142) (132) (286)
=========================================================== ========= ========= ============
Underlying capital generation 216 263 577
=========================================================== ========= ========= ============
Other operating capital generation 93 276 735
=========================================================== ========= ========= ============
Operating capital generation 309 539 1,312
=========================================================== ========= ========= ============
Market movements 600 (614) (118)
Restructuring and other costs (113) (20) (73)
Tax 73 (107) (126)
=========================================================== ========= ========= ============
Total capital generation 869 (202) 995
=========================================================== ========= ========= ============
Total capital generation was GBP869 million for the six months
ended 30 June 2021 (30 June 2020: GBP(202) million), reflecting
positive market movements compared to the substantial negative
market movements experienced in the first half of 2020.
Underlying capital generation fell to GBP216 million (30 June
2020: GBP263 million). This was primarily due to a lower expected
return on surplus assets in the annuity portfolio in the period
given the falls in yields over 2020.
The decrease in operating capital generation in the first half
of 2021 to GBP309 million (30 June 2020: GBP539 million) mainly
reflects a reduction in the overall benefit from management actions
from GBP235 million in 2020 to GBP162 million in 2021 and a benefit
of GBP48 million in 2020 which was not repeated in relation to
longevity assumption changes that represented a change to the
proportion of the annuitant population assumed to be married.
Market movements in 2021 have resulted in a positive impact of
GBP600 million (30 June 2020: GBP(614) million) as a result of
improved equity market conditions and increased yields; offset by a
loss on surplus assets in the annuity portfolio. Market movements
are net of a negative impact of GBP169 million from equity hedges
and GBP126 million from interest rate swaps that both protect
against volatility in the Solvency II capital position.
Restructuring and other costs of GBP113 million reflect the
impact on the capital position of merger and transformation,
integration of Ascentric and changes to our office space in respect
of our future ways of working.
Capital position
The Group's Solvency II surplus increased to GBP5.4 billion as
at 30 June 2021 (31 December 2020: GBP4.8 billion), equivalent to a
shareholder Solvency II coverage ratio of 198% (31 December 2020:
182%), driven by total capital generation of GBP869 million offset
by reductions of GBP310 million from dividends paid to
shareholders, and increases of GBP17 million from other capital
movements.
Our With-Profits Fund continues to have a strong Solvency II
coverage ratio of 301%. This is higher than the 242% reported at 31
December 2020, reflecting the expected surplus from in-force
business, management actions including hedging and managing credit
risk, and market movements in the period . The merger of the SAIF
with-profits sub-fund into PAC's in April 2021 resulted in a
one-off reduction in surplus of GBP203 million.
The regulatory Solvency II coverage ratio of the Group as at 30
June 2021 was 159% (31 December 2020: 144%). This view of solvency
combines the shareholder position and the With-Profits Fund, but
excludes all surplus within the With-Profits Fund .
Financing and liquidity
The following table shows key financing and liquidity
information:
As at As at
30 June 31 December
======== ==============
GBPm 2021 2020
====================================== ======== ==============
Parent company cash and liquid assets 1,684 1,040
Nominal value of debt 3,212 3,216
Leverage ratio (i) 30% 30%
====================================== ======== ====== =====
(i) Calculated as GBP3,212m nominal value of debt divided by
GBP10.8 billion Group shareholder Solvency II own funds for the six
months ended 30 June 2021 (GBP3,216 million nominal value of debt
divided by GBP10.6 billion Group shareholder Solvency II own funds
for the year ended 31 December 2020).
The key metric we use to manage our debt is the leverage ratio,
defined as nominal value of debt as a percentage of the Group's
shareholder Solvency II own funds. Our leverage ratio remained
stable at 30% (31 December 2020: 30%).
The following table shows the movement in cash and liquid assets
held by the parent company during the period:
For the
six months For the
ended year ended
30 June 31 December
=========== ==============
GBPm 2021 2020
==================================================== =========== ============
Opening cash and liquid assets at 1 January 1,040 1,274
Cash remittances from subsidiaries 1,116 737
Corporate costs (54) (45)
Interest paid on core structural borrowings (93) (189)
Cash dividends paid to equity holders (310) (562)
Capital injection to subsidiaries (15) -
Acquisition of subsidiaries - (86)
Acquisition of shares - (105)
Other shareholder income - 16
==================================================== =========== ============
Closing cash and liquid assets at end of period (i) 1,684 1,040
==================================================== =========== ============
(i) Closing cash and liquid assets at 30 June 2021 included a
GBP1,630 million (31 December 2020: GBP1,001 million) inter-company
loan asset with Prudential Capital plc, which acts as the Group's
treasury function.
Movements in cash and liquid assets held by the parent company
for the six months ended 30 June 2021 represent the remittances and
payments that will arise in the normal course of business. Total
cash and liquid assets have increased with cash remittances of
GBP1,116 million (31 December 2020: GBP737 million) received
from our subsidiaries more than covering the cash dividend payments
to equity holders of GBP310 million (31 December 2020: GBP562
million) and interest paid on structural borrowings of GBP93
million (31 December 2020: GBP189 million). The remittance received
from PAC in the six months to 30 June 2021 was higher than the
prior period, driven by PAC's higher solvency ratio at 31 December
2020 and in line with our active capital management policy.
Savings and Asset Management
The performance of the Savings and Asset Management segment has
continued to be impacted by economic uncertainty and changing
customer behaviours following the COVID-19 pandemic. Our
Institutional Asset Management business continues to perform
strongly with net client inflows reflecting our consistent
investment performance and range of innovative investment
solutions.
Assets under management and administration and net client
flows
Net client flows AUMA
For the For the For the
six months six months year
to 30 to 30 ended As at As at
June June 31 December 30 June 31 December
GBPbn 2021 2020 2020 2021 2020
======================================= =========== =========== ============ ======== ==============
Retail Savings (0.8) 0.8 0.4 84.8 81.8
of which: PruFund (0.7) 0.6 0.4 57.3 55.5
Retail Asset Management (3.4) (7.7) (12.1) 62.8 64.2
Institutional Asset Management 2.2 2.8 5.1 89.7 85.5
Other - - - 0.7 0.8
======================================= =========== =========== ============ ======== ============
Total Savings and Asset Management (i) (2.0) (4.1) (6.6) 238.0 232.3
======================================= =========== =========== ============ ======== ============
(i) Included in total Savings and Asset Management AUMA of
GBP238.0 billion (31 December 2020: GBP232.3 billion) is GBP6.8
billion assets under advice (31 December 2020: GBP6.5 billion).
Retail Savings AUMA increased to GBP84.8 billion with positive
market movements offsetting net client outflows. Our Retail Savings
business saw net outflows of GBP0.8bn in the period as COVID-19
restrictions continued to impact new business sales given the
limited extent to which advisors were able to interact face to face
with customers and with advisors shifting to favour platform
services. Additionally the mechanics of the smoothing in PruFund
products mean that while adverse market shocks can be softened,
benefits from the recent rise in equity markets are not seen as
immediately as is the case with traditional funds. The advice
market has also seen increased competition as a result of ongoing
consolidation which has impacted the number of advisors we interact
with. The trends underscore the importance of completing the
integration of the Ascentric platform and broadening the
proposition offered by M&G Wealth.
Continued improvements in investment performance, the expansion
of our sustainable fund ranges and recent pricing initiatives have
underpinned the increase in inflows into our Retail Asset
Management business since late 2020 with positive sales momentum
evident in our larger European markets. However, the re-opening of
the M&G Property Portfolio Fund on 10 May 2021 resulted in net
client outflows of GBP0.9 billion and there was a further GBP0.9
billion of one-off outflows from our European Strategic Value fund
in the period in relation to withdrawals by Prudential plc.
Excluding these two one-offs in the period, net client outflows
would have been GBP1.6 billion, a significant reduction on the
GBP7.7 billion net client outflows in the prior period. Retail
Asset Management AUMA decreased 2% to GBP62.8 billion with positive
market movements partly offsetting the net client outflows in the
period.
Institutional Asset Management AUMA increased 5% to GBP89.7
billion with net client inflows of GBP2.2 billion and positive
market and other movements in the period. Strong investment
performance across our Institutional business has resulted in some
large wins in the period in our Public Debt, Asset Backed
Securities and Real Estate offerings, with a strong pipeline for
the remainder of the year. Institutional business was also impacted
by a one-off withdrawal from Prudential plc of almost GBP0.2
billion from our European Investment Grade Bond Fund in the
period.
Adjusted operating profit before tax
The following table shows an analysis of adjusted operating
profit before tax:
For the
For the six months year
ended ended
30 June 31 December
==================== ==============
GBPm 2021 2020 2020
=================================================== ========= ========= ============
Asset Management fee-based revenues 473 469 988
Other fee-based revenues 92 72 158
=================================================== ========= ========= ============
Total fee-based revenues 565 541 1,146
=================================================== ========= ========= ============
With-profits shareholder transfer net of hedging 46 24 44
=================================================== ========= ========= ============
Adjusted operating income 611 565 1,190
=================================================== ========= ========= ============
Asset Management operating expenses (333) (306) (672)
Other operating expenses (99) (76) (168)
=================================================== ========= ========= ============
Adjusted operating expenses (432) (382) (840)
=================================================== ========= ========= ============
Other shareholder loss (24) (26) (28)
Share of profit from joint ventures and associates 6 5 10
Adjusted operating profit before tax 161 162 332
=================================================== ========= ========= ============
The following table shows adjusted operating profit before tax
split by source of earnings:
For the six months For the
ended year ended
30 June 31 December
==============
GBPm 2021 2020 2020
===================================== ========= ========= ============
Asset Management 140 163 316
With-Profits 46 24 44
Other (25) (25) (28)
===================================== ========= ========= ============
Adjusted operating profit before tax 161 162 332
===================================== ========= ========= ============
Adjusted operating profit before tax from our Savings and Asset
Management activities has remained stable at GBP161 million in the
six months to 30 June 2021 (30 June 2020: GBP162 million) driven by
an increase in the with-profits shareholder transfer and favourable
market returns on seed capital investments offset by an increase in
Asset Management operating expenses.
The reduction in AUMA combined with the downward pressure on
retail margins, resulted in lower Retail Asset Management fee-based
revenues of GBP213 million during the period (30 June 2020: GBP230
million). The lower pricing structure applied to our UK OEICs in
February 2021 contributed to an GBP18m reduction along with a GBP12
million reduction following the lower administration fees on our
SICAVs applied in November 2020. In contrast, revenue earned by
Institutional Asset Management increased to GBP260 million (30 June
2020: GBP239 million) due to strong inflows in 2020. Asset
Management operating expenses increased by GBP27 million compared
to the six months ending 30 June 2020 driven by costs relating to
further development of our capabilities and operations across the
global investment function.
The Asset Management average fee margin of 33 basis points (bps)
was 3 bps lower at 30 June 2021 compared to 30 June 2020. This
reduction largely reflects the new sustainable pricing structure
implemented in Retail Asset Management resulting in a decrease of 8
bps from 50 bps at 30 June 2020 to 42 bps at 30 June 2021. Average
revenue margins in the Institutional Asset Management business
remained stable at 28 bps.
The cost/income ratio for Asset Management business was 71% (30
June 2020: 66%), with the increase driven by additional costs as we
build out our global investment function.
The with-profits shareholder transfer, driven by PruFund, inc
reased to GBP53 million (30 June 2020: GBP28 million) as a result
of improved market conditions and increased outflows in our
Retirement Account product over the first half of the year. In
addition, there were fair value losses of GBP7 million (30 June
2020: GBP4 million loss) on the derivative instruments used to
mitigate the equity risk in respect of shareholder transfers.
Other shareho lder loss in the six months to 30 June 2021 is in
line with prior period wit h the loss being largely made up of a
PruFund expense overrun due to recent lower sales volumes which do
not allow us to fully absorb the operational fixed costs, and an
expected GBP5m loss from Ascentric.
Capital generation
The following table shows an analysis of operating capital
generation:
For the
For the six months year
ended ended
30 June 31 December
==================== ==============
GBPm 2021 2020 2020
=============================================== ========= ========= ============
Asset Management underlying capital generation 144 155 308
With-profits underlying capital generation 26 18 88
of which: in-force 50 39 100
of which: new business (24) (21) (12)
Other underlying 6 13 21
=============================================== ========= ========= ============
Underlying capital generation 176 186 417
=============================================== ========= ========= ============
Other operating capital generation (4) 18 83
=============================================== ========= ========= ============
Operating capital generation 172 204 500
=============================================== ========= ========= ============
Underlying capital generation for the six months ended 30 June
2021 decreased to GBP176 million (30 June 2020: GBP186 million).
The contribution from Asset Management business fell to GBP144
million (30 June 2020: GBP155 million) primarily due to the
decrease in adjusted operating profit in the period offset by a
GBP5 million reduction in capital requirements.
The contribution from in-force with-profits business increased
to GBP50 million (30 June 2020: GBP39 million) due to the gap
between expected return and risk-free rates widening as yields fell
during 2020. New business strain remained relatively stable at
GBP24 million (30 June 2020: GBP21 million). The fall in other
underlying capital generation to GBP6 million (30 June 2020: GBP13
million) primarily relates to the adjusted operating loss of GBP5
million from Ascentric.
Other operating capital generation of GBP(4) million (30 June
2020: GBP18 million) includes the PruFund expense overrun.
Heritage
Our Heritage business has delivered a stable financial
performance over the first half of 2021 and continues to provide a
solid foundation to our results.
AUMA reduction of GBP3.6 billion in the Heritage business to
GBP130.1 billion at 30 June 2021 (31 December 2020: GBP133.7
billion) was driven by net client outflows of GBP3.3 billion, in
line with expectations (30 June 2020: GBP3.3 billion) and adverse
market movements of GBP0.3 billion.
Adjusted operating profit before tax
The following table shows an analysis of adjusted operating
profit before tax:
For the six For the
months ended year ended
30 June 31 December
==============
GBPm 2021 2020 2020
================================================= ======= ====== ============
Fee-based revenues 41 39 74
Annuity margin 157 139 438
With-profits shareholder transfer net of hedging 108 110 207
================================================= ======= ====== ==============
Adjusted operating income 306 288 719
================================================= ======= ====== ==============
Adjusted operating expenses (36) (30) (79)
Other shareholder profit 12 40 59
================================================= ======= ====== ============
Adjusted operating profit before tax 282 298 699
================================================= ======= ====== ==============
Income for the Heritage business increased to GBP306m in the
period (30 June 2020: GBP288m) driven by an increase of GBP18m in
the annuity margin. The shareholder transfer for traditional
with-profit business has remained in line with the prior year
period.
Adjusted operating expenses and other shareholder profit in the
period to 30 June 2020 benefited primarily from insurance reserve
releases in relation to a number of legacy remediation programmes
and other one off items, not repeated in 2021. Excluding these
items adjusted operating expenses and other shareholder profit
remained flat.
The following table provides further analysis of the annuity
margin:
For the six months For the
ended year ended
30 June 31 December
==============
GBPm 2021 2020 2020
=============================================== ========= ========= ============
Return on excess assets and margin release 87 94 188
Asset trading and portfolio management actions 4 40 59
Longevity assumption changes - 23 217
Mismatching (losses)/profits (15) 28 38
Other assumption and model changes 33 (15) (52)
Experience variances and model improvements 26 11 19
Other provisions and reserves 22 (42) (31)
=============================================== ========= ========= ============
Annuity margin 157 139 438
=============================================== ========= ========= ============
Recurring sources of earnings from the annuity book, primarily
the return on assets held to back capital requirements and the
release of the margins in respect of credit risk, mortality and
expenses, decreased by 7% to GBP87 million (30 June 2020: GBP94
million). This was mainly due to a switch from debt securities held
in the surplus assets of the annuity portfolio to cash to pay
remittances to the holding company.
During the six months to 30 June 2020, we earned GBP40 million
from the optimisation of assets in the annuity portfolio which were
not repeated in 2021. Mismatching losses of GBP15 million (30 June
2020: GBP28m gain) were driven by the increase in yields in the
period.
In the first half of 2020 there was a GBP23 million benefit from
longevity assumption changes that represented a change to the
proportion of the annuitant population assumed to be married. There
were no longevity assumption changes in the first half of 2021
although we continue to monitor the impacts of COVID-19 on our
longevity assumptions. Other assumption changes relate to a GBP33
million benefit in the period from updating the future expense
assumptions to reflect the expected impact of the Part VII transfer
to Rothesay Life PLC. Other includes a GBP31 million benefit from
the release of the annuity sales practices review provision in the
period compared to a GBP44 million increase in the provision in the
prior period.
Credit quality of fixed income assets in the annuity portfolio
remained strong over the first half of 2021. Over 96% of the debt
securities held by the shareholder annuity portfolio are investment
grade and only 18% are BBB. In addition 82% of the shareholder
annuity portfolio is held in debt securities either categorised as
Risk Free or Secured (including cash). Downgrades experienced in
the period have been relatively light, with less than 2% of bonds
in the shareholder annuity portfolio subject to a downgrade.
Capital generation
The following table shows an analysis of operating capital
generation:
For the
For the six year
months ended ended
30 June 31 December
=============== ==============
GBPm 2021 2020 2020
================================================================ ======= ====== ============
With-profits underlying capital generation 68 40 105
Shareholder annuity and other underlying capital generation 114 169 341
================================================================ ======= ====== ============
Underlying capital generation 182 209 446
================================================================ ======= ====== ============
Model improvements 19 (18) (19)
Assumption changes (1) 46 185
Management actions and other (including experience variances) 80 234 398
Other operating capital generation 98 262 564
================================================================ ======= ====== ============
Operating capital generation 280 471 1,010
================================================================ ======= ====== ============
Traditional with-profits business generated underlying capital
of GBP68 million during the six months to 30 June 2021 (30 June
2020: GBP40 million) increasing as a result of a widening of the
gap between expected return and risk-free rates as yields fell
during 2020, partly offset by a reduction in the value of equity
hedges as equity markets improved. There also continued to be
significant, though reduced, capital generation from the
shareholder annuity and other business, contributing GBP114 million
(30 June 2020: GBP169 million). The underlying capital generation
for annuity business has fallen because the expected return on
surplus assets in the annuity portfolio is lower due to falls in
yields over 2020.
Other operating capital generation decreased to GBP98 million
(30 June 2020: GBP262 million), partly reflecting that assumption
changes of GBP46 million in the first half of 2020, primarily in
relation to longevity assumption changes as discussed in the
adjusted operating profit section, were not repeated in 2021.
Management actions and other generated capital of GBP80 million,
including asset trading of GBP118 million and the impact of GBP44
million from the release of provisions of the annuity sales
practice review provision. This was partially offset by GBP77
million strain in anticipation of a change to the Solvency II
regulations in respect of equity release mortgages. In the first
half of 2020 there was significant benefit of GBP220 million from a
series of management actions taken to strengthen the solvency
position in response to adverse market conditions.
Risk management statement
Principal risks and uncertainties
The principal risks we are currently facing and to which we will
continue to be exposed to remain broadly unchanged from those
detailed in the 2020 Annual Report and Accounts, namely: business
environment and market forces; sustainability; investment
performance and risk; financial risks (market, credit, corporate
liquidity and longevity); operational risks (including resilience,
third party suppliers and technology); change; people; regulatory
compliance; and reputational.
There remains considerable uncertainty due to COVID-19, with the
threat of new variants and the upcoming winter season potentially
leading to a rise in cases and new restrictions. However, continued
progress in vaccination programmes in major economies, coupled with
an increase in economic activity, has resulted in improved market
conditions and increased solvency levels, which remain comfortably
inside M&G plc's risk appetite. However, the pending removal of
state support for businesses and individuals could dampen the
recovery. Major central banks continue to provide significant
liquidity through quantitative easing type activity. While this
continues to underpin asset prices there is an increased
uncertainty around the risk of significant inflation. In the longer
term the wind down of central bank balance sheets will need to be
managed carefully to avoid unwanted market volatility.
COVID-19
Whilst COVID-19 continues to impact daily life, there remains a
heightened level of operational risk, in particular security risks
due to new working practices and the potential for increased levels
of cyber-attacks. We are maintaining our monitoring of the control
environment and enhanced incident management processes to increase
the visibility of security threats ensuring that appropriate
priority is given and experts are engaged to respond to malicious
actions which may impact the availability of systems or services,
or the confidentiality or integrity of IT systems or digital
data.
The COVID-19 incident response group we established in 2020 is
continuing to focus on the "return to office" plan for the business
over the course of 2021 as the restrictions lift. There have been
no material changes in the control environment relating to the
COVID-19 incident over 2021, although we constantly monitor the
impact that the pandemic has on customers and employees including
well-being issues. We have put the safety and well-being of our
customers and staff at the forefront of our response to the
pandemic, and will continue to do so.
Sustainability
In May 2021 we published our first sustainability report as an
independent company which included our approach to sustainability
and ESG risk management. This set out the strategic importance of
sustainability to our business. Recognising the impact of
sustainability on our risk profile, an ESG Risk Management
framework has been developed to manage the risk that we fail to
address and embed sustainability within our business and operating
model. Our ESG Risk policy will outline the requirements to ensure
ESG risk and control integration across M&G plc.
Our stakeholders increasingly expect that we consider a range of
sustainability issues, arising across a broad spectrum of themes.
We use an ESG lens to identify, assess and manage risk, enabling us
and others to benchmark our success. ESG Risk is pervasive across
the business, and can be thought about through a financial,
strategic or reputational risk lens.
We have conducted detailed work with analytics providers on
scenario analysis to evaluate how various climate scenarios could
affect the future value, income, or credit ratings of our
investments. These climate scenario models build awareness and
understanding, highlighting physical and transition risks present
across our holdings. This will better equip us to enact mitigation
and adaptation planning in our portfolios, while steering our
sizeable assets towards net zero by 2050. ESG and climate change
risk have also been built into our Own Risk and Solvency Assessment
(ORSA) with detail on climate change scenario analysis
undertaken.
Statement of Directors' responsibilities
The Directors (as listed below) are responsible for preparing
the Interim financial report in accordance with applicable law and
regulations.
Accordingly, the Directors confirm that to the best of their
knowledge:
- the condensed consolidated set of financial statements has
been prepared in accordance with IAS 34 'Interim Financial
Reporting' as adopted by the UK;
- the Interim financial report includes a fair review of the information required by:
a. DTR 4.2.7R of the Disclosure Guidance and Transparency Rules
being an indication of important events that have occurred during
the first six months of the financial year and their impact on the
condensed consolidated set of financial statements; and a
description of the principal risks and uncertainties for the
remaining six months of the year; and
b. DTR 4.2.8R of the Disclosure Guidance and Transparency Rules
being related party transactions that have taken place in the first
six months of the current financial year and that have materially
affected the financial position or performance of the Group during
that period; and any changes in the related party transactions
described in the Group's consolidated financial statements for the
year ended 31 December 2020 that could do so.
By order of the Board:
John Foley Clare Bousfield
Chief Executive Chief Financial Officer
9 August 2021 9 August 2021
M&G plc Board of Directors
Interim Chair
Fiona Clutterbuck
Executive Directors
John Foley
Clare Bousfield
Non-Executive Directors
Clive Adamson
Clare Chapman
Clare Thompson
Massimo Tosato
Independent review report to M&G plc
Conclusion
We have been engaged by M&G plc ('the Company') to review
the condensed consolidated set of interim financial statements
('the interim financial statements') in the Company's interim
financial report for the six months ended 30 June 2021 which
comprises the condensed consolidated income statement, the
condensed consolidated statement of comprehensive income, the
condensed consolidated statement of changes in equity, the
condensed consolidated statement of financial position, the
condensed consolidated statement of cash flows and the related
explanatory notes.
Based on our review, nothing has come to our attention that
causes us to believe that the interim financial statements in the
Company's interim financial report for the six months ended 30 June
2021 is not prepared, in all material respects, in accordance with
IAS 34 Interim Financial Reporting as adopted for use in the UK and
the Disclosure Guidance and Transparency Rules ("the DTR") of the
UK's Financial Conduct Authority ("the UK FCA").
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity issued by the Auditing Practices Board for use in the
UK. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures. We read the other information contained in the
half-yearly financial report and consider whether it contains any
apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
Directors' responsibilities
The Company's interim financial report is the responsibility of,
and has been approved by, the directors. The directors are
responsible for preparing the half-yearly financial report in
accordance with the DTR of the UK FCA.
As disclosed in Note 1.1, the latest annual financial statements
of the Group are prepared in accordance with International
Financial Reporting Standards adopted pursuant to Regulation (EC)
No 1606/2002 as it applies in the European Union and in accordance
with international accounting standards in conformity with the
requirements of the Companies Act 2006 and the next annual
financial statements will be prepared in accordance with UK-adopted
international accounting standards. The directors are responsible
for preparing the interim financial statements included in the
Company's interim financial report in accordance with IAS 34 as
adopted for use in the UK.
Our responsibility
Our responsibility is to express to the Company a conclusion on
the interim financial statements in the Company's interim financial
report based on our review.
The purpose of our review work and to whom we owe our
responsibilities
This report is made solely to the Company in accordance with the
terms of our engagement to assist the Company in meeting the
requirements of the DTR of the UK FCA. Our review has been
undertaken so that we might state to the Company those matters we
are required to state to it in this report and for no other
purpose. To the fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than the Company for our
review work, for this report, or for the conclusions we have
reached.
Stuart Crisp
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
E14 5GL
9 August 2021
Condensed consolidated income statement
For the six months ended 30 June 2021
For the six For the
months ended year ended
30 June 31 December
==============
2021 2020 2020
Note GBPm GBPm GBPm
Gross premiums earned 2,390 3,459 5,796
Outward reinsurance premiums (466) (440) (927)
=========================================== ==== ======= ======= ============
Earned premiums, net of reinsurance 1,924 3,019 4,869
=========================================== ==== ======= ======= ============
Investment return 6,766 (2,116) 9,255
Fee income 4 490 540 1,031
Other income 27 31 61
=========================================== ==== ======= ======= ============
Total revenue, net of reinsurance 9,207 1,474 15,216
=========================================== ==== ======= ======= ============
Benefits and claims 10 (6,820) (1,373) (12,674)
Outward reinsurers' share of benefit
and claims 10 217 790 1,477
Movement in unallocated surplus of the
With-Profits Fund 10 (565) 1,200 433
=========================================== ==== ======= ======= ============
Benefits and claims and movement in
unallocated surplus of the With-Profits
Fund, net of reinsurance (7,168) 617 (10,764)
=========================================== ==== ======= ======= ============
Administrative and other expenses 5 (1,384) (1,209) (2,734)
Movements in third party interest in
consolidated funds (534) (103) 109
Finance costs 5 (80) (79) (167)
Total charges, net of reinsurance (9,166) (774) (13,556)
=========================================== ==== ======= ======= ============
Share of profit/(loss) from joint ventures
and associates 33 (35) (55)
=========================================== ==== ======= ======= ============
Profit before tax (i) 74 665 1,605
=========================================== ==== ======= ======= ============
Tax (charge)/credit attributable to
policyholders' returns 6 (378) 370 (208)
=========================================== ==== ======= ======= ============
(Loss)/profit before tax attributable
to equity holders (304) 1,035 1,397
=========================================== ==== ======= ======= ============
Total tax (charge)/credit 6 (322) 161 (463)
Less tax charge/(credit) attributable
to policyholders' returns 378 (370) 208
=========================================== ==== ======= ======= ============
Tax credit/(charge) attributable to
equity holders 6 56 (209) (255)
=========================================== ==== ======= ======= ============
(Loss)/profit for the period (248) 826 1,142
=========================================== ==== ======= ======= ============
Attributable to equity holders of M&G
plc (251) 824 1,138
Attributable to non-controlling interests 3 2 4
(Loss)/profit for the period (248) 826 1,142
=========================================== ==== ======= ======= ============
Earnings per share:
Basic (loss)/earnings (pence per share) 7 (9.8) 31.8 44.4
Diluted (loss)/earnings (pence per share) 7 (9.8) 31.8 44.0
(i) This measure is the profit before tax measure under IFRS but
it is not the result attributable to equity holders. This is
principally because the corporate taxes of the Group include those
on the income of consolidated with-profits and unit-linked funds
that, through adjustments to benefits, are borne by policyholders.
These amounts are required to be included in the tax charge of the
Company under IFRS. Consequently, profit before tax is not
representative of pre-tax profits attributable to equity holders.
Profit before tax is determined after deducting the cost of
policyholder benefits and movements in the liability for
unallocated surplus of the With-Profits Fund after adjusting for
taxes borne by policyholders.
Condensed consolidated statement of comprehensive income
For the six months ended 30 June 2021
For the six months For the
ended year ended
30 June 31 December
==================== ==============
2021 2020 2020
GBPm GBPm GBPm
========================================================== ========== ======== ==============
(Loss)/profit for the period (248) 826 1,142
Items that may be reclassified subsequently to profit
or loss:
Exchange movements arising on foreign operations (6) 5 3
(6) 5 3
========================================================== ========== ======== ============
Items that will not be reclassified to profit or loss:
Gain/(loss) on remeasurement of defined benefit pension
scheme 67 (41) (117)
Tax on remeasurement of defined benefit pension scheme (18) 9 23
========================================================== ========== ======== ============
49 (32) (94)
========================================================== ========== ======== ============
Transferred to unallocated surplus of the With-Profits
Fund, net of related tax (5) 9 13
========================================================== ========== ======== ============
Other comprehensive income on items that will not be
reclassified to profit or loss 44 (23) (81)
========================================================== ========== ======== ============
Other comprehensive income for the period, net of related
tax 38 (18) (78)
========================================================== ========== ======== ============
Total comprehensive income for the period (210) 808 1,064
========================================================== ========== ======== ============
Attributable to equity holders of M&G plc (213) 806 1,060
Attributable to non-controlling interests 3 2 4
Total comprehensive income for the period (210) 808 1,064
========================================================== ========== ======== ============
Condensed consolidated statement of financial position
As at 30 June 2021
As at As at
30 June 31 December
======== ==============
2021 2020
Note GBPm GBPm
================================================================= ==== ======== ==============
Assets
Goodwill and intangible assets 1,487 1,495
Deferred acquisition costs 97 98
Investment in joint ventures and associates accounted
for using the equity method 468 456
Property, plant and equipment 2,321 2,066
Investment property 19,097 19,106
Defined benefit pension asset 9 42 58
Deferred tax assets 6 138 108
Reinsurance assets 10 1,569 11,761
Loans 5,930 6,031
Derivative assets 3,519 5,705
Equity securities and pooled investment funds 72,995 68,419
Deposits 19,916 17,629
Debt securities 84,273 85,439
Current tax assets 6 373 418
Accrued investment income and other debtors 3,112 3,023
Assets held for sale 2 9,783 138
Cash and cash equivalents 6,067 6,776
================================================================= ==== ======== ============
Total assets 231,187 228,726
Equity
Share capital 130 130
Share premium reserve 370 370
Shares held by employee benefit trust (95) (117)
Treasury shares (1) (1)
Retained earnings 16,354 16,853
Other reserves (11,668) (11,658)
================================================================= ==== ======== ============
Equity attributable to equity holders of M&G plc 5,090 5,577
================================================================= ==== ======== ============
Non-controlling interests 6 8
================================================================= ==== ======== ============
Total equity 5,096 5,585
================================================================= ==== ======== ============
Liabilities
Insurance contract liabilities 10 64,609 76,650
Investment contract liabilities with discretionary participation
features 10 81,820 79,623
Investment contract liabilities without discretionary
participation features 10 15,198 15,547
Unallocated surplus of the With-Profits Fund 10 16,150 15,621
Third party interest in consolidated funds 13,386 13,265
Subordinated liabilities and other borrowings 11 8,487 8,267
Defined benefit pension liability 9 124 170
Deferred tax liabilities 6 1,072 916
Current tax liabilities 6 300 276
Derivative liabilities 2,947 3,460
Lease liabilities 427 354
Other financial liabilities 2,775 3,391
Provisions 144 235
Accruals, deferred income and other liabilities 9,022 5,291
Liabilities held for sale 2 9,630 75
================================================================= ==== ======== ============
Total liabilities 226,091 223,141
================================================================= ======== ============
Total equity and liabilities 231,187 228,726
================================================================= ==== ======== ============
Condensed consolidated statement of changes in equity
For the six months ended 30 June 2021
Total
Shares equity
held attributable
by to equity
employee holders
Share Share benefit Treasury Retained Other of M&G Non-controlling Total
capital premium trust shares earnings reserves plc interests equity
======= ======= ======== ======== ======== ======== ============ =============== =========
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
==================== ======= ======= ======== ======== ======== ======== ============ =============== =========
At 1 January 2021 130 370 (117) (1) 16,853 (11,658) 5,577 8 5,585
(Loss)/profit for
the period - - - - (251) - (251) 3 (248)
Other comprehensive
income
for the period - - - - 44 (6) 38 - 38
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
Total comprehensive
income
for the period - - - - (207) (6) (213) 3 (210)
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
Dividends paid to
non-controlling
interests - - - - - - - (5) (5)
Dividends paid to
equity
holders - - - - (310) - (310) - (310)
Shares distributed
by employee
trusts - - 22 - (22) - - - -
Vested employee
share-based
payments - - - - 20 (20) - - -
Expense recognised
in respect
of share-based
payments - - - - - 17 17 - 17
Tax effect of items
recognised
directly in equity - - - - 20 (1) 19 - 19
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
Net
increase/(decrease)
in equity - - 22 - (499) (10) (487) (2) (489)
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
As at 30 June 2021 130 370 (95) (1) 16,354 (11,668) 5,090 6 5,096
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
For the six months ended 30 June 2020
Total
Shares equity
held attributable
by to equity
employee holders
Share Share benefit Treasury Retained Other of M&G Non-controlling Total
capital premium trust shares earnings reserves plc interests equity
======= ======= ======== ======== ======== ======== ============ =============== =========
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
==================== ======= ======= ======== ======== ======== ======== ============ =============== =========
At 1 January 2020 130 370 (26) (1) 16,342 (11,690) 5,125 6 5,131
Profit for the
period - - - - 824 - 824 2 826
Other comprehensive
income
for the period - - - - (23) 5 (18) - (18)
Total comprehensive
income
for the period - - - - 801 5 806 2 808
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
Dividends paid to
non-controlling
interests - - - - - - - (1) (1)
Dividends paid to
equity
holders - - - - (410) - (410) - (410)
Shares distributed
by employee
trusts - - 12 - (12) - - - -
Vested employee
share-based
payments - - - - 13 (13) - - -
Expense recognised
in respect
of share-based
payments - - - - - 23 23 - 23
Shares acquired by
employee
trusts - - (23) - - - (23) - (23)
Tax effect of items
recognised
directly in equity - - - - 10 (2) 8 - 8
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
Net
(decrease)/increase
in equity - - (11) - 402 13 404 1 405
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
At 30 June 2020 130 370 (37) (1) 16,744 (11,677) 5,529 7 5,536
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
For the year ended 31 December 2020
Total
Shares equity
held attributable
by to equity
employee holders
Share Share benefit Treasury Retained Other of M&G Non-controlling Total
capital premium trust shares earnings reserves plc interests equity
======= ======= ======== ======== ======== ======== ============ =============== =========
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
==================== ======= ======= ======== ======== ======== ======== ============ =============== =========
At 1 January 2020 130 370 (26) (1) 16,342 (11,690) 5,125 6 5,131
Profit for the year - - - - 1,138 - 1,138 4 1,142
Other comprehensive
income
for the year - - - - (81) 3 (78) - (78)
Total comprehensive
income
for the year - - - - 1,057 3 1,060 4 1,064
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
Dividends paid to
non-controlling
interests - - - - - - - (2) (2)
Dividends paid to
equity
holders - - - - (562) - (562) - (562)
Shares distributed
by
employee trusts - - 14 - (14) - - - -
Vested employee
share-based
payments - - - - 17 (17) - - -
Expense recognised
in
respect of
share-based
payments - - - - - 51 51 - 51
Shares acquired by
employee
trusts - - (105) - - - (105) - (105)
Tax effect of items
recognised
directly in equity - - - - 13 (5) 8 - 8
Net
(decrease)/increase
in equity - - (91) - 511 32 452 2 454
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
At 31 December 2020 130 370 (117) (1) 16,853 (11,658) 5,577 8 5,585
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
Condensed consolidated statement of cash flows
For the six months ended 30 June 2021
For the
year
For the six months ended
ended 30 June 31 December
==================== ==============
2021 2020 2020
GBPm GBPm GBPm
============================================================= ========= ========= ==============
Cash flows from operating activities:
Profit before tax 74 665 1,605
Non-cash and other movements in operating assets and
liabilities included in profit before tax:
Investments (4,430) 6,932 399
Other non-investment and non-cash assets 546 (540) (133)
Policyholder liabilities (including unallocated surplus) (36) (7,347) (895)
Other liabilities (including operational borrowings) 3,588 1,133 1,902
Interest income, interest expense and dividend income (2,117) (2,316) (3,884)
Other non-cash items 147 63 229
Operating cash items:
Interest receipts and payments 1,213 1,253 2,282
Dividend receipts 1,092 1,140 1,704
Tax paid (i) (128) (509) (633)
============================================================= ========= ========= ============
Net cash flows from operating activities (ii) (51) 474 2,576
============================================================= ========= ========= ============
Cash flows from investing activities:
Purchases of property, plant and equipment (452) (220) (821)
Proceeds from disposal of property, plant and equipment 44 2 -
Net investment in subsidiaries (iii) 190 (26) (136)
Net cash flows from investing activities (218) (244) (957)
============================================================= ========= ========= ============
Cash flows from financing activities:
Interest paid (93) (95) (189)
Lease repayments (22) (7) (24)
Shares purchased by employee benefit trust - (23) (105)
Dividends paid (310) (410) (562)
Net cash flows from financing activities (425) (535) (880)
============================================================= ========= ========= ============
Net decrease in cash and cash equivalents (694) (305) 739
Cash and cash equivalents at 1 January 6,776 6,046 6,046
Effect of exchange rate changes on cash and cash equivalents (15) 9 (9)
============================================================= ========= ========= ============
Cash and cash equivalents at end of period 6,067 5,750 6,776
============================================================= ========= ========= ============
(i) Tax paid for the six months ended 30 June 2021 includes
GBP76m (30 June 2020: GBP244m, year ended 31 December 2020:
GBP264m) paid on profit taxable at policyholder rather than
shareholder rates.
(ii) Cash flows in respect of other borrowings of the
With-Profits Fund, which principally relate to consolidated
investment funds, are included within cash flows from operating
activities.
(iii) Net investment in subsidiaries represents the cash impact
of further investment/disinvestment by the Group's consolidated
infrastructure capital private equity vehicles. For the year ended
31 December 2020 it also included the total cash consideration in
respect of the acquisition of Wrap IFA Services Limited and all of
its subsidiaries of GBP86m, of which GBP49m represented a repayment
of loan to Royal London.
1 Basis of preparation and significant accounting policies
1.1 Basis of preparation
The condensed consolidated financial statements for the half
year ended 30 June 2021 comprise the condensed consolidated
financial statements of M&G plc ('the Company') and its
subsidiaries (together referred to as 'the Group'). The condensed
consolidated financial statements are unaudited but have been
reviewed by the auditors, KPMG LLP.
The condensed consolidated financial statements have been
prepared in accordance with IAS 34 Interim Financial Reporting
('IAS 34'), as adopted by the United Kingdom, and the Disclosure
Guidance and Transparency Rules of the Financial Conduct Authority.
The accounting policies applied in the condensed consolidated
financial statements are consistent with those set out in the 2020
consolidated financial statements, except for the new standards,
interpretations and amendments that became effective in the current
period, as stated below.
The condensed consolidated financial statements do not include
all the information and disclosures required in the Group's 2020
consolidated financial statements. Therefore, these condensed
consolidated financial statements should be read in conjunction
with the Group's 2020 consolidated financial statements prepared in
accordance with international accounting standards in conformity
with the requirements of the Companies Act 2006 and in accordance
with International Financial Reporting Standards ('IFRS') issued by
the International Accounting Standards Board ('IASB') adopted
pursuant to Regulation (EC) No 1606/2002 as it applies in the
European Union ('EU'), with interpretations issued by the IFRS
Interpretations Committee ('IFRICs').
The condensed consolidated financial statements are stated in
million pounds Sterling, the Group's presentation currency.
These condensed consolidated financial statements do not
comprise statutory accounts within the meaning of section 434 of
the Companies Act 2006. The Group's 2020 annual report and accounts
for the year ended 31 December 2020 were delivered to the Registrar
of Companies. The report of the auditors on those accounts was
unqualified, did not contain an emphasis of matter paragraph and
did not contain any statement under section 498 of the Companies
Act 2006.
In preparing the condensed consolidated financial statements the
Group has adopted the following standards, interpretations and
amendments effective during the period:
- Amendments to IFRS 4, IFRS 7, IFRS 16 and IAS 39: Phase 2 of
Interest rate benchmark reform
- Amendment to IFRS 4: Deferral of IFRS 9
The Phase 2 amendments allow a practical expedient where any
changes in the fair value of financial instruments as a direct
consequence from the Interbank offered rate ('IBOR') reform are
managed by updating the effective interest rate, therefore removing
the recognition of gains or losses in the income statement as a
result of the reform. This is also applicable for leases accounted
for under IFRS 16, where a revised discount rate is applied to
reflect the change in interest rates. These amendments also allow
relief from applying specific hedge accounting and financial
instrument de-recognition requirements which would result from the
IBOR reform. Applying the practical expedient means the Group would
not be required to discontinue any hedging relationships as a
result of changes in reference rates due to the IBOR reform. The
Group intend to use the practical expedients when they become
applicable. The Group has reviewed the output from the various
industry working groups managing the transition to new benchmark
interest rates. This includes announcements made by LIBOR
regulators (including the Financial Conduct Authority ('FCA'))
regarding the transition away from GBP LIBOR to the Sterling
Overnight Index Average Rate ('SONIA'). It is anticipated that
LIBOR will no longer exist from 31 December 2021 with banks no
longer required to submit LIBOR, as confirmed by the FCA in March
2021. Of the Group's non derivative financial assets as at 30 June
2021, GBP1.6bn reference LIBOR. The notional amount of derivatives
which are required to transition is GBP8.7bn as at 30 June 2021.
The Group is currently undertaking a project to transition all of
these instruments to an alternative benchmark, the vast majority of
which will transition in the second half of 2021. There has been no
significant impact on the condensed consolidated financial
statements of the transition to alternative benchmarks in the six
months ended 30 June 2021.
The above interpretations and amendments to standards are not
considered to have a material effect on these condensed
consolidated financial statements .
The Group has not early adopted any other standard,
interpretation or amendment that has been issued but is not yet
effective.
The Group continues to defer the adoption of IFRS 9 to coincide
with the adoption of IFRS 17, and the relevant disclosures required
by amendments to IFRS 4 to avail this exemption are presented below
. These are provided to enable users to compare results with those
entities that have adopted IFRS 9. As required by the amendment,
the table shows the fair value of the Group's directly held
financial assets as at 30 June 2021, distinguishing those financial
assets which have contractual terms that give rise on specified
dates to cash flows that are solely payments of principle and
interest (SPPI) as defined by IFRS 9.
Financial assets All other financial
that pass the SPPI assets, net of derivative
test (i) liabilities
============================= =================================
Movement Movement
Fair value in fair Fair value in fair
as at 30 value during as at 30 value during
June 2021 the period June 2021 the period
Financial assets on the consolidated
statement of financial position GBPm GBPm GBPm GBPm
============================================ ============== ============= ================ ===============
Loans 2,605 (22) 3,407 (57)
Derivative assets - net of derivative
liabilities - - 572 183
Equity securities and pooled investment
funds - - 72,995 6,370
Deposits 19,916 - - -
Debt securities - - 84,273 (2,699)
Accrued investment income and other debtors 2,851 - - -
Cash and cash equivalents 6,213 - - -
============================================ ============== ============= ================ =============
Total financial assets, net of derivative
liabilities 31,585 (22) 161,247 3,797
============================================ ============== ============= ================ =============
(i) Financial assets classified as held for trading or that are
managed and whose performance is evaluated on a fair value basis do
not require an SPPI test to be performed. These assets are reported
in all other financial assets.
Financial assets All other financial
that pass the SPPI assets, net of derivative
test (i) liabilities
============================= ===================================
Fair value Movement Fair value Movement
as at 31 in fair as at 31 in fair
December value during December value during
2020 the period 2020 the period
Financial assets on the consolidated
statement of financial position GBPm GBPm GBPm GBPm
============================================ ============== ============= ================== ===============
Loans 2,647 (14) 3,475 33
Derivative assets - net of derivative
liabilities - - 2,245 1,527
Equity securities and pooled investment
funds - - 68,419 (533)
Deposits 17,629 - - -
Debt securities - - 85,439 4,092
Accrued investment income and other debtors 3,023 - - -
Cash and cash equivalents 6,776 - - -
============================================ ============== ============= ================== =============
Total financial assets, net of derivative
liabilities 30,075 (14) 159,578 5,119
============================================ ============== ============= ================== =============
Going concern
The Directors have reasonable expectation that the Group as a
whole has adequate resources to continue in operational existence
over a period of at least twelve months from the date of approval
of the condensed consolidated financial statements.
To satisfy themselves of the appropriateness of the use of the
going concern assumptions in relation to the condensed consolidated
financial statements, the Directors have considered the liquidity
projections of the Group, including the impact of applying specific
liquidity stresses. The Directors also considered the ability of
the Group to access external funding sources and the management
actions that could be used to manage liquidity.
In addition, the Directors also gave particular attention to the
solvency projections of the Group under a base scenario and its
sensitivity to various individual economic stresses and certain
stressed scenarios based on the Group's solvency risk appetite.
The results of the assessment demonstrated the ability of the
Group to meet all obligations and future business requirements for
the foreseeable future. In addition, the assessment demonstrated
that the Group was able to remain above its regulatory solvency
requirements in a stressed scenario.
For this reason, the Directors continue to adopt the going
concern basis in preparing the condensed consolidated financial
statements.
Presentation of risk and capital management disclosures
We have provided additional disclosures relating to the nature
and extent of certain financial risks and capital management in the
Supplementary Information section of this report.
2 Group structure and products
2.1 Group composition
The Group structure is available in the full PDF version of this
interim report via the following link
https://global.mandg.com/investors/results-reports-and-presentations
2.2 Corporate transactions
2.2.1 Proposed sale of annuity portfolio to Rothesay Life
PLC
On 14 March 2018, Prudential plc announced the reinsurance of
GBP12,149m (as at 31 December 2017) of PAC's shareholder-backed
annuity portfolio to Rothesay Life PLC by way of a collateralised
reinsurance arrangement followed by an insurance business transfer
scheme (the 'Scheme') under Part VII of Financial Services and
Markets Act 2000. The terms of the reinsurance arrangement
transferred substantially all of the economic risk and capital
requirements associated with the annuity portfolio to Rothesay Life
PLC, subject to a residual counterparty credit risk attaching to
reinsurance receivables.
On 17 May 2019, the independent expert who was appointed to
report to the High Court concluded that the transfer would have no
material adverse effect on the security of benefits or the
reasonable benefit expectations of PAC's policyholders. However, on
16 August 2019, the High Court declined to sanction the Scheme. PAC
and Rothesay Life PLC have successfully appealed that decision in
the Court of Appeal. The associated process has now been clarified
and there will be a further sanction hearing in the High Court
scheduled for November with the expectation that the Part VII
transfer will complete later in 2021.
The annuity portfolio has been classified as held for sale in
these condensed consolidated financial statements. The total amount
of assets and liabilities now classified as held for sale in
relation to this arrangement are GBP9,578m of reinsurance assets,
GBP9,578m of insurance contract liabilities, other assets of GBP52m
and other liabilities of GBP52m.
2.2.2 Assets and liabilities held for sale
As at As at
30 June 31 December
======== ============
2021 2020
GBPm GBPm
======================================================= ======== ============
Assets:
Reinsurance assets 9,578 -
Other assets (including cash and cash equivalents) (i) 205 138
======================================================= ======== ============
Assets held for sale 9,783 138
======================================================= ======== ============
Liabilities:
Insurance contract liabilities 9,578 -
Other liabilities (i) 52 75
======================================================= ======== ============
Liabilities held for sale 9,630 75
======================================================= ======== ============
(i) Other Assets held for sale as at 30 June 2021 include GBP25m
(31 December 2020 : GBP18m) of seed capital classified as held for
sale as it is expected to be divested within 12 months and GBP125m
of investment property classified as held for sale (31 December
2020: GBP24m). Additionally GBP3m (31 December 2020: GBP96m) of
assets held for sale and GBPnil (31 December 2020: GBP75m) of
liabilities of operations held for sale are in relation to the
Group's consolidated infrastructure capital private equity
vehicles.
2.3 Insurance and investment products
A full description of the main contract types written by the
Group's insurance entities can be found in the Annual Report and
Accounts 2020. On 1 April 2021 Scottish Amicable Insurance Fund
(SAIF), a ring fenced with-profits sub-fund, merged with PAC's main
With-Profits Sub-Fund (WPSF) and the assets and liabilities of SAIF
were combined with those of the WPSF. SAIF is a closed fund solely
for the benefit of SAIF policyholders. Shareholders will continue
to have no entitlement to profit transfers and will continue to
receive asset management fees.
3 Segmental analysis
The Group's operating segments are defined and presented in
accordance with IFRS 8: Operating Segments on the basis of the
Group's management reporting structure and its financial management
information. The Group's primary reporting format is by customer
type, with supplementary information being given by product type.
The Chief Operating Decision Maker for the Group is the Group
Executive Committee.
3.1 Operating and reportable segments
Savings and Asset Management
The Group's Savings and Asset Management business provides a
range of retirement, savings and investment management solutions to
its retail and institutional customers and clients. The Group's
retirement and savings products are distributed to retail customers
through the wrap platform, intermediaries and advisors, and include
the Retirement Account (a combined individual pension and income
drawdown product), individual pensions, ISAs, collective
investments and a range of on-shore and off-shore bonds.
All of the Group's products that give access to the PruFund
investment proposition are included in the Savings and Asset
Management segment. The PruFund investment proposition gives retail
customers access to savings contracts with smoothed investment
returns and a wide choice of investment profiles. Unlike the
conventional and accumulating with-profits contracts in the Group's
Heritage business, no regular or final bonuses are declared.
Instead, policyholders participate in profits by means of an
increase in their investment, which grows in line with an Expected
Growth Rate.
The Group's investment management capability is offered to both
retail customers and institutional clients. The Group's retail
customers invest through either UK domiciled Open Ended Investment
Companies (OEICs) or Luxembourg domiciled Sociétés d'Investissement
à Capital Variable (SICAVs) and have access to a broad range of
actively managed investment products, including Equities, Fixed
Income, Multi-Asset and Real Estate. The Group serves these
customers through its many business-to-business relationships both
in the UK and overseas, which include independent financial
advisers, high-street banks and wealth managers. The Group's
institutional investors, include pension funds, insurance companies
and banks from around the world, who invest through segregated
mandates and pooled funds into a diverse range of Fixed Income and
Real Estate investment products and services.
The Savings and Asset Management segment also earns investment
management revenues from the significant proportion of Heritage
assets it manages.
Heritage
The Group's Heritage business includes individual and corporate
pensions, annuities, life, savings and investment products. The
majority of the products in the Heritage business are closed to new
customers but may accept further contributions from existing
policyholders [1] . The annuity contracts include: level annuities,
which provide a fixed annuity payment; fixed increase annuities,
which incorporate a periodic automatic fixed increase in annuity
payments; and inflation-linked annuities, which incorporate a
periodic increase based on a defined inflation index. Some
inflation-linked annuities have minimum and/or maximum increases
relative to the corresponding inflation index.
The life products in Heritage are primarily whole of life
assurance, endowment assurances, term assurance contracts, lifetime
mortgages, income protection, and critical illness products.
Investment products include unit-linked contracts and the
Prudential bond offering, which mainly consists of
single-premium-invested whole of life policies, where the customer
has the option of taking ad-hoc withdrawals, regular income or the
option of fully surrendering their bond.
Some of the Group's Heritage products written through
conventional and accumulating with-profits contracts, in the PAC
With-Profits Sub-Fund, provide returns to policyholders through
'regular' and 'final' bonuses that reflect a smoothed investment
return.
The Heritage segment includes the closed SAIF business which
participates in profits on a 100:0 basis with no shareholder profit
transfers. Shareholders are entitled to asset management fees. This
business is now included in PAC's main With-Profits Sub-Fund
following the merger of the SAIF with-profits sub-fund on 1 April
2021 discussed in Note 2.3.
The Heritage business also includes the Defined Charge
Participating Sub-Fund (DCPSF), which consists of two types of
business:
i. the Defined Charge Participating business, primarily business reinsured from Prudential International Assurance plc; and
ii. the with-profits annuities transferred from Equitable Life
Assurance Society on 31 December 2007.
Corporate Centre
Corporate Centre is the Group's other reportable segment which
includes central corporate costs and debt costs.
3.2 Adjusted operating profit before tax methodology
Adjusted operating profit before tax is the Group's non-GAAP
alternative performance measure, which complements IFRS GAAP
measures and is key to decision making and the internal performance
management of operating segments.
Adjusted operating profit before tax includes IFRS profit from
continuing operations only.
For the Group's fee based business, adjusted operating profit
before tax includes fees received from customers and operating
costs for the business including overheads, expenses required to
meet regulatory requirements and regular business
development/restructuring and other costs. Costs associated with
fundamental one-off Group-wide restructuring and transformation are
not included in adjusted operating profit before tax.
For the Group's business written in the With-Profits Fund,
adjusted operating profit before tax includes the statutory
transfer to shareholders gross of attributable shareholder tax.
Derivative instruments are held to mitigate the risk to the
shareholder of lower future shareholder transfers, and can be
separated into two types:
1. Cash flow hedges [2] : those instruments that are held to
mitigate volatility in the Group's IFRS results by being explicitly
matched to the expected future shareholder transfers.
2. Capital hedges: instruments that hedge the economic present
value of shareholder transfers on a Solvency II basis, to optimise
the capital position.
The realised gains or losses on the cash flow hedges are
allocated to adjusted operating profit before tax in line with
emergence of the corresponding shareholder transfer within IFRS
profit. Any short-term temporary movements in the fair value of
these instruments, not relating to the current year's shareholder
transfer are excluded from adjusted operating profit before tax. As
the capital hedges do not explicitly hedge future IFRS profit
before tax, all movements in the fair value of these instruments
are excluded from adjusted operating profit before tax.
For the Group's shareholder annuity products written by the
Heritage segment, adjusted operating profit before tax excludes the
impact of short-term components of credit risk provisioning, the
impact of credit risk experience variances over the period, and
total fair value movements on surplus assets backing the
shareholder annuity capital, that are not reflective of the
longer-term performance of the business.
Certain adjustments that are considered to be non-recurring or
strategic, or due to short-term movements not reflective of
longer-term performance are made to IFRS profit before tax.
Adjustments in respect of short-term fluctuations in investment
returns, costs associated with fundamental one-off Group-wide
restructuring and transformation, profits or losses arising on
corporate transactions and profit/(loss) before tax from
discontinued operations.
The key adjusting items between IFRS profit before tax and
adjusted operating profit before tax are:
Short-term fluctuations in investment returns
The adjustment for short-term fluctuations in investment returns
represents:
i. Short-term temporary movements in the fair value of
instruments held to mitigate equity risk in the with-profits
shareholder transfer, including both cash flow and capital
hedges.
ii. Total fair value movements on other capital hedges, which
are held solely to optimise the Solvency II capital position.
iii. Total fair value movements on surplus assets backing the
shareholder annuity capital, and the impact of short-term credit
risk provisioning and experience variances over the period which
are not reflective of the longer-term performance of the business,
specifically:
- The impact of credit risk provisioning for short-term adverse credit risk experience;
- The impact of credit risk provisioning for actual upgrade and
downgrade experience during the year. This is calculated by
reference to current interest rates;
- Credit experience variance relative to assumptions, reflecting
the impact of defaults and other similar experience, such as asset
exchanges arising from debt restructuring;
- The impact of market movements on bond portfolio weightings
and the subsequent impact on credit provisions.
Items relating to investment returns which are included in
adjusted operating profit before tax are:
- The net impact of movements in the value of policyholder
liabilities and fair value of the assets backing these liabilities,
excluding the items included in short-term fluctuations above. The
fair value movements of the assets backing the liabilities are
closely correlated with the related change in liabilities;
- The unwind of the credit risk premium, which is the opening
value of the assets multiplied by the credit risk premium
assumption, with an adjustment for claims paid over the year. The
credit risk premium assumption is the difference between the total
long-term credit allowance and a best estimate credit allowance
(both of which allow for the combination of defaults and
downgrades);
- Actual income received in the year, such as coupon payments,
redemption payments and rental income, on surplus assets backing
the shareholder annuity capital, less an allowance for
expenses;
- The net effect of changes to the valuation rate of interest
due to asset trading and portfolio rebalancing;
- The impact of changes in the long-term component of credit provisioning.
Profit/(loss) on disposal of businesses and corporate
transactions
Certain additional items are excluded from adjusted operating
profit before tax where those items are considered to be
non-recurring or strategic, or considered to be one-off, due to
their size or nature, and therefore not indicative of the long term
operating performance of the Group, including profits or losses
arising on corporate transactions and profits or losses on
discontinued operations.
Restructuring costs
Restructuring costs primarily reflect the shareholder allocation
of costs associated with the merger and transformation. These costs
represent fundamental one-off Group-wide restructuring and
transformation and are therefore excluded from IFRS adjusted
operating profit.
3.3 Analysis of Group adjusted operating profit before tax by
segment
For the six months ended 30 June 2021
================================================
Savings
and Asset Corporate
Management Heritage Centre Total
GBPm GBPm GBPm GBPm
================================================== ================ ======== ========= =========
Fee based revenues (i) 565 41 - 606
Annuity margin - 157 - 157
With-profits shareholder transfer net
of hedging gains/(losses) (ii) 46 108 - 154
================================================== ================ ======== ========= =======
Adjusted operating income 611 306 - 917
================================================== ================ ======== ========= =======
Adjusted operating expenses (432) (36) (48) (516)
Other shareholder (loss)/profit (24) 12 (68) (80)
Share of profit from joint ventures
and associates (iii) 6 - - 6
Adjusted operating profit/(loss) before
tax 161 282 (116) 327
================================================== ================ ======== ========= =======
Short-term fluctuations in investment
returns (66) (483) - (549)
Restructuring and other costs (iv) (44) (10) (31) (85)
================================================== ================ ======== ========= =======
IFRS profit/(loss) before tax and non-controlling
interests attributable to equity holders 51 (211) (147) (307)
================================================== ================ ======== ========= =======
IFRS profit attributable to non controlling
interests 3 - - 3
================================================== ================ ======== ========= =======
IFRS profit/(loss) before tax attributable
to equity holders 54 (211) (147) (304)
================================================== ================ ======== ========= =======
(i) Included in fee based revenues for the six months ended 30
June 2021 is GBP55m (30 June 2020: GBP46m, 31 December 2020:
GBP114m) revenues that the Savings and Asset Management segment has
earned from the Heritage segment, and other presentational
differences. These amounts are excluded from the analysis of fee
income by segment in Note 4.
(ii) The with-profits shareholder transfer is paid to the
shareholder net of tax. The shareholder transfer amount is grossed
up for tax purposes in determining adjusted operating profit.
(iii) Excludes adjusted operating profit from joint ventures in
the With-Profits Fund.
(iv) Restructuring and other costs excluded from adjusted
operating profit relate to merger and transformation costs
allocated to the shareholder. These differ to Restructuring costs
included in the analysis of administrative and other expenses in
Note 5 which include costs allocated to the policyholder.
Additionally in the six months to 30 June 2021 restructuring and
other costs include an impairment of GBP29m which is presented in
impairment of property, plant and equipment in the analysis of
administrative and other expenses in Note 5.
For the six months ended 30 June 2020
=================================================
Savings
and Asset Corporate
Management Heritage Centre Total
GBPm GBPm GBPm GBPm
================================================== ================= ======== ========= =========
Fee based revenues (i) 541 39 - 580
Annuity margin - 139 - 139
With-profits shareholder transfer net
of hedging gains/(losses) (ii) 24 110 - 134
================================================== ================= ======== ========= =======
Adjusted operating income 565 288 - 853
================================================== ================= ======== ========= =======
Adjusted operating expenses (382) (30) (75) (487)
Other shareholder (loss)/profit (26) 40 (76) (62)
Share of profit from joint ventures
and associates (iii) 5 - - 5
================================================== ================= ======== ========= =======
Adjusted operating profit/(loss) before
tax 162 298 (151) 309
================================================== ================= ======== ========= =======
Short-term fluctuations in investment
returns 74 672 - 746
Restructuring and other costs (iv) (17) (4) (1) (22)
================================================== ================= ======== ========= =======
IFRS profit/(loss) before tax and non-controlling
interests attributable to equity holders 219 966 (152) 1,033
================================================== ================= ======== ========= =======
IFRS profit attributable to non controlling
interests 2 - - 2
================================================== ================= ======== ========= =======
IFRS profit/(loss) before tax attributable
to equity holders 221 966 (152) 1,035
================================================== ================= ======== ========= =======
For the year ended 31 December 2020
===============================================
Savings
and Asset Corporate
Management Heritage Centre Total
GBPm GBPm GBPm GBPm
================================================== ============== ======== ========= ==========
Fee based revenues (i) 1,146 74 - 1,220
Annuity margin - 438 - 438
With-profits shareholder transfer net
of hedging gains/(losses) (ii) 44 207 - 251
================================================== ============== ======== ========= ========
Adjusted operating income 1,190 719 - 1,909
================================================== ============== ======== ========= ========
Adjusted operating expenses (840) (79) (101) (1,020)
Other shareholder (loss)/profit (28) 59 (142) (111)
Share of profit from joint ventures
and associates (iii) 10 - - 10
================================================== ============== ======== ========= ========
Adjusted operating profit/(loss) before
tax 332 699 (243) 788
================================================== ============== ======== ========= ========
Short-term fluctuations in investment
returns 58 620 - 678
Restructuring and other costs (iv) (51) (22) - (73)
================================================== ============== ======== ========= ========
IFRS profit/(loss) before tax and non-controlling
interests attributable to equity holders 339 1,297 (243) 1,393
================================================== ============== ======== ========= ========
IFRS profit attributable to non controlling
interests 4 - - 4
================================================== ============== ======== ========= ========
IFRS profit/(loss) before tax attributable
to equity holders 343 1,297 (243) 1,397
================================================== ============== ======== ========= ========
The Group has a widely diversified customer base. There are no
customers whose revenue represents greater than 10% of fee-based
revenue.
Each reportable segment reports adjusted operating income as its
measure of revenue. Fee based revenues represent asset management
charges, transactional charges and annual management charges on
unit-linked business. The annuity margin reflects the margin earned
on annuity business and includes net earned premiums, claims and
benefits paid, net investment return for assets backing the
liabilities, net investment income for surplus assets backing the
annuity capital, actuarial reserving changes, investment management
expenses and administrative expenses. The with-profits shareholder
transfer reflects the statutory transfer gross of attributable tax
net of hedging gains or losses on cash flow hedges held to match
those transfers.
Adjusted operating expenses includes shareholders operating
expenses incurred outside of the annuity and with-profits
portfolios. Other shareholder (loss)/profit includes non-recurring
costs, movements in provisions that are an expense to the
shareholder and shareholder investment return earned outside of the
annuity portfolio. Share of profit from joint ventures and
associates represents the Group's share of the operating profits of
Prudential Portfolio Managers South Africa (Pty) Limited, which was
accounted for under the equity method during the period.
4 Fee income
The following table disaggregates management fee revenue by
segment:
For the
For the six year
months ended ended
30 June 31 December
==============
2021 2020 2020
GBPm GBPm GBPm
========================================================= ======= ====== ==============
Savings and Asset Management:
Management fees 435 501 910
Rebates (15) (17) (34)
========================================================= ======= ====== ============
Total management fees, less rebates 420 484 876
========================================================= ======= ====== ============
Performance fees 5 4 42
Investment contracts without discretionary participation
features 17 16 32
Platform fees 17 - 11
Other fees and commissions 24 28 55
========================================================= ======= ====== ============
Total Savings and Asset Management fee income 483 532 1,016
========================================================= ======= ====== ============
Heritage:
Investment contracts without discretionary participation
features 7 8 15
========================================================= ======= ====== ============
Total Heritage fee income 7 8 15
========================================================= ======= ====== ============
Total fee income 490 540 1,031
========================================================= ======= ====== ============
5 Administrative and other expenses
For the
For the six year
months ended ended
30 June 31 December
==============
2021 2020 2020
GBPm GBPm GBPm
================================================ ======= ====== ==============
Staff and employment costs 388 358 650
Acquisition costs incurred:
Insurance contracts 63 74 145
Other contracts 16 14 27
Acquisition costs deferred:
Insurance contracts (5) (7) (11)
Other contracts (1) (1) (2)
Amortisation of deferred acquisition costs:
Insurance contracts 4 3 7
Other contracts 2 2 9
Impairment of deferred acquisition costs - 3 3
Depreciation of property, plant and equipment 55 52 109
Impairment of property, plant and equipment (i) 77 5 98
Amortisation of intangible assets 12 8 19
Impairment of goodwill and intangible assets - 5 16
Restructuring costs 77 65 148
Interest expense 55 93 153
Commission expense 98 117 224
Investment management fees 97 119 191
Property-related costs 87 98 215
Other expenses 359 201 733
================================================ ======= ====== ============
Total administrative and other expenses 1,384 1,209 2,734
================================================ ======= ====== ============
(i) Includes impairment recognised in respect of our future ways
of working of GBP29m (30 June 2020: GBPnil, 31 December 2020:
GBPnil) included in 'restructuring and other costs' within the
Segmental Analysis in Note 3, and of certain property, plant and
equipment held by the Group's infrastructure capital private equity
vehicles of GBP48m (30 June 2020: GBP5m, 31 December 2020:
GBP95m).
In addition to the interest expense shown above of GBP55m (30
June 2020: GBP93m, 31 December 2020: GBP153m), the interest expense
incurred in respect of subordinated liabilities for the six months
ended 30 June 2021 was GBP80m (30 June 2020: GBP79m, year ended 31
December 2020: GBP167m). This is shown as finance costs in the
condensed consolidated income statement. Total finance costs
incurred for the six months ended 30 June 2021 were GBP135m (30
June 2020: GBP172m, year ended 31 December 2020: GBP320m).
6 Tax
6.1 Tax charged/(credited) to the condensed consolidated income
statement
6.1.1 Income statement tax charge/(credit)
For the
For the six months year
ended ended
30 June 31 December
==================== ==============
2021 2020 2020
GBPm GBPm GBPm
========================== ======== ========== ==============
Total current tax 190 300 598
Total deferred tax 132 (461) (135)
========================== ======== ========== ============
Total tax charge/(credit) 322 (161) 463
========================== ======== ========== ============
6.1.2 Allocation of profit before tax and tax charge between
equity holders and policyholders
The loss before tax reflected in the condensed consolidated
income statement for the 6 months ended 30 June 2021 of GBP304m (30
June 2020:GBP1,035m profit) comprises the pre-tax result
attributable to equity holders and pre-tax result attributable to
policyholders of unit-linked and with-profits funds and unallocated
surplus of with-profits fund. This is the formal measure of profit
or loss before tax under IFRS but it is not the result attributable
to equity holders. This is principally because the corporate taxes
of the Group include those on the income of consolidated
with-profits and unit-linked funds that, through adjustments to
benefits, are borne by policyholders. These amounts are required to
be included in the tax charge of the Company under IAS 12.
Consequently, this measure of profit or loss before all taxes is
not representative of pre-tax profits attributable to equity
holders.
The tax charge attributable to policyholder returns is removed
from the Group's total profit or loss before tax in arriving at the
Group's profit or loss before tax attributable to equity holders.
As the net of tax profits attributable to policyholders is zero,
the Group's pre-tax profit attributable to policyholders is an
amount equal and opposite to the tax charge attributable to
policyholders included in the total tax charge.
For the year ended
For the six months ended 30 June 31 December
2021 2020 2020
Equity Equity Equity
holders Policyholders Total holders Policyholders Total holders Policyholders Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
================ ========= ============= ===== ======== ============= ===== ======== ============= =======
(Loss)/profit
before
tax (304) 378 74 1,035 (370) 665 1,397 208 1,605
Tax
credit/(charge) 56 (378) (322) (209) 370 161 (255) (208) (463)
================ ========= ============= ===== ======== ============= ===== ======== ============= =====
(Loss)/profit
for
the period (248) - (248) 826 - 826 1,142 - 1,142
================ ========= ============= ===== ======== ============= ===== ======== ============= =====
6.1.3 Equity holders effective tax rate
The equity holders tax benefit for the six months ended 30 June
2021 was GBP56m (30 June 2020: tax charge of GBP209m) representing
an effective tax rate of 18.4% (30 June 2020: 20.2%). The equity
holders' effective tax rate of 18.4% was lower than the UK
statutory rate of 19% (30 June 2020: 19%), which reflects a
detrimental position (lower tax benefit on the pre-tax loss
position) primarily due to the adverse impact of non-deductible
expenses, partially offset by beneficial impacts arising from the
utilisation of tax losses on which no deferred tax was previously
recognised, together with the remeasurement of equity holder
deferred tax assets following the change to the UK statutory rate
of corporation tax (increase from 19% to 25% with effect from 1
April 2023) that was enacted in the period. The majority of the UK
deferred tax balances are measured at the policyholder rate of tax,
which was not impacted by the changes to the UK statutory rate of
corporation tax.
6.2 Current tax assets and liabilities
Current tax assets Current tax liabilities
============================ ================================
For the For the
six months For the six months For the
ended year ended ended year ended
30 June 31 December 30 June 31 December
============== ============ ================ ==============
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
================ ============== ============ ================ ==============
Corporation tax 346 389 (237) (222)
Other taxes 27 29 (63) (54)
================ ============== ============ ================ ============
Total 373 418 (300) (276)
================ ============== ============ ================ ============
PAC is the lead litigant in a combined group action against HM
Revenue and Customs ('HMRC') concerning the correct historical tax
treatment applying to dividends received from overseas portfolio
investments of its with-profits fund.
In February 2018 the Supreme Court heard HMRC's appeal against
the earlier Court of Appeal decision in PAC's favour. The decision
of the Supreme Court released in July 2018 upheld the main point in
dispute in PAC's favour but reversed the decisions of the lower
courts on some practical points of how to apply that principle. The
Supreme Court issued its order giving effect to its decision in
October 2019 stating any remaining issues of computation be
remitted back to the High Court. PAC and HMRC are working through
the mechanics of implementing the Supreme Court decisions. This
work, to date, has led to a reduction in the estimate for
policyholder tax credit recoverable during 2019 and 2021 and the
estimate of interest receivable. As at 30 June 2021, PAC has
recognised a total policyholder tax credit of GBP114m (30 Dec 2020:
GBP122m) in respect of its claim against HMRC. Of this amount,
GBP40m has been paid by HMRC leaving a tax recoverable balance of
GBP74m recorded as an amount of tax due from HMRC. PAC will be
entitled to interest on the tax repaid. It is now expected the
issue will be finalised in the second half of 2021 at which point
PAC should receive full and final payment.
6.3 Deferred tax assets and liabilities
For the For the
six months year
ended ended
30 June 31 December
=========== ==============
2021 2020
GBPm GBPm
=============================================== =========== ==============
Unrealised gains on investments (1,037) (876)
Life tax transitional adjustments (51) (68)
Other short term timing differences 129 104
Deferred acquisition costs 40 45
Defined benefit pensions (38) (17)
Capital allowances (4) (21)
Tax losses carried forward 11 10
Share based payments and deferred compensation 16 15
=============================================== =========== ============
Net deferred tax liability (934) (808)
=============================================== =========== ============
Assets 138 108
Liabilities (1,072) (916)
=============================================== =========== ============
Net deferred tax liability (934) (808)
=============================================== =========== ============
7 Earnings per share
Basic earnings per share is based on the weighted average
ordinary shares in issue after deducting treasury shares and shares
held by the employee benefit trust. Diluted earnings per share is
based on the potential future shares in issue resulting from
exercise of options under the various share-based payment schemes
in addition to the weighted average ordinary shares in issue.
The following table shows details of basic and diluted earnings
per share:
For the
For the six year
months ended ended
30 June 31 December
==============
2021 2020 2020
GBPm GBPm GBPm
======================================================== ======== ===== ==============
(Loss)/profit attributable to equity holders of M&G plc (251) 824 1,138
======================================================== ======== ===== ============
For the
For the six year
months ended ended
30 June 31 December
==============
2021 2020 2020
millions millions millions
=============================================================== ======== ======== ==============
Weighted average number of ordinary shares outstanding 2,552 2,589 2,563
Dilutive effect of share options and awards - 4 24
=============================================================== ======== ======== ============
Weighted average number of diluted ordinary shares outstanding 2,552 2,593 2,587
=============================================================== ======== ======== ============
For the
For the six year
months ended ended
30 June 31 December
================ ==============
2021 2020 2020
Pence Pence Pence
per per per
share share share
================================== ======== ====== ==============
Basic (loss)/earnings per share (9.8) 31.8 44.4
================================== ======== ====== ============
Diluted (loss)/earnings per share (9.8) 31.8 44.0
================================== ======== ====== ============
8 Dividends
For the six
For the six months For the year
months ended ended 30 June ended 31 December
30 June 2021 2020 2020
=============== ================ ====================
Pence Pence Pence
per per per
share GBPm share GBPm share GBPm
======================================== ======== ===== ========= ===== =========== =======
Dividends relating to reporting period:
First interim dividend - Ordinary 6.1 155 6.0 152 6.0 152
Second interim dividend - Ordinary - - - - 12.2 310
======================================== ======== ===== ========= ===== =========== =======
Total 6.1 155 6.0 152 18.2 462
======================================== ======== ===== ========= ===== =========== =======
Dividends paid in reporting period:
Prior year's Second interim dividend
- Ordinary 12.2 310 11.9 310 11.9 310
Prior year's interim dividend - Special
dividends - - 3.9 100 3.9 100
First interim dividend - Ordinary - - - - 6.0 152
======================================== ======== ===== ========= ===== =========== =======
Total 310 410 562
======================================== ======== ===== ========= ===== =========== =======
Subsequent to 30 June 2021, the Board has declared a first
interim dividend for 2021 of 6.1 pence per ordinary share, an
estimated GBP155m in total. The dividend is expected to be paid on
29 September 2021 and will be recorded as an appropriation of
retained earnings in the financial statements at the time that it
is paid.
9 Defined benefit pension schemes
The Group operates three defined benefit pension schemes. The
largest defined benefit scheme as at 30 June 2021 is the Prudential
Staff Pension Scheme (PSPS), which accounts for 81% (31 December
2020: 81%) of the present value of the defined benefit pension
obligation.
The Group also operates two smaller defined benefit pension
schemes that were originally established by the M&G
(M&GGPS) and Scottish Amicable (SASPS) businesses.
Under IAS 19: Employee Benefits and IFRIC 14: IAS 19 - The Limit
on a Defined Benefit Asset, Minimum Funding Requirements and their
Interaction, the Group can only recognise a surplus to the extent
that it is able to access the surplus either through an
unconditional right of refund or through reduced future
contributions relating to ongoing service of active members. The
Group has no unconditional right of refund to any surplus in PSPS.
Accordingly, PSPS's net economic pension surplus is restricted up
to the present value of the Group's economic benefit, which is
calculated as the difference between the estimated future cost of
service for active members and the estimated future ongoing
contributions. In contrast, the Group is able to access the surplus
of SASPS and M&GGPS through an unconditional right of refund.
Therefore, the surplus resulting from the schemes (if any) would be
recognised in full. As at 30 June 2021 the SASPS and M&GGPS
schemes are in deficit based on the IAS 19 valuation.
The IAS 19 surplus for M&GGPS is lower than the economic
surplus position, as the pension scheme has investments in
insurance policies issued by Prudential Pensions Limited, a
subsidiary of the Group, through which it invests in certain pooled
funds. Under IAS 19, insurance policies issued by a related party
do not qualify as plan assets. SASPS's net economic pension deficit
is funded 40% by the With-Profits Fund and 60% by the Group's
shareholders.
The pension assets and liabilities for the defined benefit
pension schemes are as follows:
As at 30 June 2021
PSPS SASPS M&GGPS Total
GBPm GBPm GBPm GBPm
============================================ ======= ===== ====== =========
Fair value of plan assets 7,364 914 713 8,991
Present value of defined benefit obligation (6,466) (972) (544) (7,982)
Effect of restriction on surplus (856) - - (856)
============================================ ======= ===== ====== =======
Net economic pension surplus/(deficit) (i) 42 (58) 169 153
============================================ ======= ===== ====== =======
Eliminate group issued insurance policies - - (235) (235)
============================================ ======= ===== ====== =======
Net total pension surplus/(deficit) 42 (58) (66) (82)
============================================ ======= ===== ====== =======
As at 30 June 2021
PSPS SASPS M&GGPS Total
GBPm GBPm GBPm GBPm
==================================== ===== ===== ====== =======
Attributable to:
Shareholder--backed business 13 (35) (66) (88)
With-Profits Fund 29 (23) - 6
==================================== ===== ===== ====== =====
Net total pension surplus/(deficit) 42 (58) (66) (82)
==================================== ===== ===== ====== =====
(i) The economic basis reflects the position of the defined
benefit schemes from the perspective of the pension schemes,
adjusted for the effect of IFRIC 14 for the derecognition of PSPS's
unrecognisable surplus and before adjusting for any non-qualifying
assets.
As at 31 December 2020
PSPS SASPS M&GGPS Total
GBPm GBPm GBPm GBPm
============================================ ======= ======= ====== =========
Fair value of plan assets 7,884 967 742 9,593
Present value of defined benefit obligation (7,109) (1,073) (605) (8,787)
Effect of restriction on surplus (717) - - (717)
============================================ ======= ======= ====== =======
Net economic pension surplus/(deficit) (i) 58 (106) 137 89
============================================ ======= ======= ====== =======
Eliminate group issued insurance policies - - (201) (201)
============================================ ======= ======= ====== =======
Net total pension surplus/(deficit) 58 (106) (64) (112)
============================================ ======= ======= ====== =======
As at 31 December 2020
PSPS SASPS M&GGPS Total
GBPm GBPm GBPm GBPm
==================================== ===== ======= ====== ========
Attributable to:
Shareholder--backed business 17 (64) (64) (111)
With--Profits Fund 41 (42) - (1)
==================================== ===== ======= ====== ======
Net total pension surplus/(deficit) 58 (106) (64) (112)
==================================== ===== ======= ====== ======
10 Policyholder liabilities and unallocated surplus
10.1 Determination of insurance and investment contract
liabilities for different components of business
A description relating to the determination of the policyholder
liabilities and the key assumptions for each component of business
is set out below:
10.1.1 With-profits business
The With-Profits Fund mainly contains with-profits contracts but
also contains some non-profit business (annuities, unit-linked, and
term assurances). The liabilities of the With-Profits Fund are
accounted for on a realistic basis in accordance with the
requirements of FRS 27 Life Assurance. The basis is consistent with
the rules for the determination of reserves on the realistic basis
under the Solvency I capital regime. Though no longer in force for
regulatory purposes, these rules continue to be applied to
determine with-profits contract liabilities in accordance with IFRS
4 Insurance Contracts. In aggregate, the regime has the effect of
placing a market-consistent value on the liabilities of
with-profits contracts, which reflects the amounts expected to be
paid based on the current value of investments held by the
With-Profits Fund and current circumstances. Non-profit business
written in the With-Profits Fund is valued consistently with
equivalent business written in shareholder-backed funds, and profit
on this business which has accrued to policyholders is included as
part of the with-profits contract liability. No policyholder
liability is held in respect of future enhancements to with-profits
liabilities from non-profit business.
The with-profits contracts are a combination of insurance and
investment contracts with discretionary participation features, as
defined by IFRS 4. The realistic basis requires the value of
with-profits policyholder liabilities to be calculated as the sum
of:
i. A with-profits benefits reserve (WPBR)
ii. Future policy-related liabilities (FPRL)
The WPBR is primarily based on the retrospective calculation of
accumulated asset shares with adjustments to reflect future
policyholder benefits and other charges and expenses. Asset shares
broadly reflect the policyholders' share of the With-Profits Fund
assets attributable to their policies. For certain classes of
business, the WPBR is instead calculated using a prospective bonus
reserve valuation, valuing future claims and expenses using the
expected future bonus rates.
The FPRL is comprised of other components of the liability
including a market-consistent valuation of costs of guarantees,
options and smoothing, less any related charges, and this amount is
determined using stochastic modelling techniques.
Assumptions used for the realistic, market-consistent valuation
of with-profits business typically do not contain margins, whereas
those used for the valuation of other classes of business (for
example, annuities) contain margins of prudence within the
assumptions. The main assumptions used in the prospective elements
of the with-profits policyholder liabilities are listed below:
- Assumptions relating to persistency and the take-up options
offered under certain with-profits contracts are set based on the
results of the most recent experience analysis looking at the
experience over recent years of the relevant business;
- Management actions under which the fund is managed in different scenarios;
- Maintenance and, for some classes of business, termination
expense assumptions are expressed as per policy amounts. They are
set based on the expenses incurred during the year, including an
allowance for ongoing investment expenditure, and are allocated
between entities and product groups in accordance with each
operation's internal cost allocation model;
- Expense inflation assumptions are set consistent with the
economic basis and based on the inflation swap spot curve;
- The contract liabilities for with-profits business also
require assumptions for mortality. These are set based on the
results of recent experience analysis.
At 30 June 2021, there are no significant external reinsurance
arrangements in place in respect of the With-Profits Fund's
liabilities.
Unallocated surplus
The unallocated surplus of the With-Profits Fund represents the
excess of the fund's assets over policyholder liabilities that have
yet to be appropriated between policyholders and shareholders. The
unallocated surplus is recorded wholly as a liability with no
allocation to equity. The annual excess/(shortfall) of income over
expenditure of the With-Profits Fund, after declaration and
attribution of the cost of bonuses to policyholders and
shareholders, is transferred to/(from) the unallocated surplus each
year through a charge/(credit) to the consolidated income
statement. The balance retained in the unallocated surplus
represents cumulative income arising on the with-profits business
that has not been allocated to policyholders or shareholders.
With-profits options and guarantees
Certain policies written in the Group's With-Profits Fund give
potentially valuable guarantees to policyholders, or options to
change policy benefits which can be exercised at the policyholders'
discretion.
Most with-profits contracts give a guaranteed minimum payment on
a specified date or range of dates or on death if before that date
or dates. For pensions products, the specified date is the
policyholder's chosen retirement date or a range of dates around
that date. For endowment contracts, guarantees apply at the
maturity date of the contract. For with-profits bonds it is often a
specified anniversary of commencement, in some cases with further
dates thereafter.
The main types of options and guarantees offered for
with-profits contracts are as follows:
- For conventional with-profits contracts, including endowment
assurance contracts and whole of-life assurance contracts, payouts
are guaranteed at the sum assured together with any declared
regular bonus;
- Conventional with-profits deferred annuity contracts have a
basic annuity per annum to which bonuses are added. At maturity,
the cash claim value will reflect the current cost of providing the
deferred annuity. Regular bonuses when added to with-profits
contracts usually increase the guaranteed amount;
- For unitised with-profits contracts and cash accumulation
contracts the guaranteed payout is the initial investment (adjusted
for any withdrawals, where appropriate), less charges, plus any
regular bonuses declared. If benefits are taken at a date other
than when the guarantee applies, a market value reduction may be
applied to reflect the difference between the accumulated value of
the units and the market value of the underlying assets;
- For certain unitised with-profits contracts and cash
accumulation contracts, policyholders have the option to defer
their retirement date when they reach maturity, and the terminal
bonus granted at that point is guaranteed;
- For with-profits annuity contracts, there is a guaranteed
minimum annuity payment below which benefit payments cannot fall
over the lifetime of the policies;
- Certain pensions products have guaranteed annuity options at
retirement, where the policyholder has the option to take the
benefit in the form of an annuity at a guaranteed conversion
rate.
10.1.2 Unit-linked business
For unit-linked contracts, the attaching liability reflects the
unit value obligation and, in the case of contracts with
significant insurance risk which are therefore classified as
insurance contracts, a provision for expense and mortality risk.
The latter component is determined by applying mortality
assumptions on a basis that is appropriate for the policyholder
profile. To calculate the non-unit reserves for unit-linked
insurance contracts, assumptions are set for maintenance expenses,
the unit growth rate and the valuation interest rate. The valuation
interest rate is derived from the yields of assets representative
of the returns that will be earned on the assets backing these
liabilities.
For those contracts where the level of insurance risk is
insignificant, the assets and liabilities arising under the
contracts are distinguished between those that relate to the
financial instrument liability, and the deferred acquisition costs
and deferred income that relate to the component of the contract
that relates to investment management. Deferred acquisition costs
and deferred income are recognised consistent with the level of
service provision.
Certain parts of the unit-linked business are reinsured
externally, either by way of fund reinsurance or by reinsuring
specific risk benefits. Where this is the case, the reinsurance
liability in respect of these reinsurance arrangements is valued in
a manner consistent with the valuation of the reinsurance
asset.
10.1.3 Annuities and other long-term business
The majority of the policyholder liabilities in the 'annuities
and other long-term business' component relate to annuity
contracts. The annuity liabilities are calculated as the expected
value of future annuity payments and expenses, discounted by a
valuation interest rate, having prudent regard to the assumptions
used.
On 14 March 2018, part of the annuity liability was reinsured
externally to Rothesay Life PLC, with effect from 31 December 2017.
In addition, some of the longevity risk in respect of the remaining
annuity business is reinsured externally. The reinsurance asset in
respect of these reinsurance arrangements is valued in a manner
consistent with the valuation of the underlying liabilities. As
discussed in Note 2.2.1 the assets and liabilities in respect of
the proposed sale of annuities to Rothesay Life PLC are classified
as held for sale at 30 June 2021.
The key assumptions used to calculate the policyholder liability
in respect of annuity business are as follows:
Mortality
Mortality assumptions for annuity business are set in light of
recent population and internal experience, with an allowance for
expected future mortality improvements. Given the long-term nature
of annuity business, annuitant mortality remains a significant
assumption in determining policyholder liabilities. The assumptions
used reference recent population mortality data, with specific risk
factors applied on a per policy basis to reflect the features of
the Group's portfolio.
No changes have been made to mortality assumptions in the six
months ended 30 June 2021. When we set our assumptions during 2020
we adopted a stronger than default calibration of the CMI 2018
model to allow for higher mortality improvements observed during
2019. The mortality improvement assumptions used are summarised in
the table below.
Long-term improvement Smoothing parameter (S(k)
Period ended Model version rate (i) ) (ii)
================ ============= ====================== =========================
For males: 2.25% pa For males: 7.75
30 June 2021 CMI 2018 For females: 2.00% pa For females: 8.25
================ ============= ====================== =========================
For males: 2.25% pa For males: 7.75
31 December 2020 CMI 2018 For females: 2.00% pa For females: 8.25
================ ============= ====================== =========================
(i) As at 30 June 2021 and 31 December 2020, the long-term
improvement rates shown reflected a 0.5% increase to all future
improvement rates as a margin for prudence.
(ii) The smoothing parameter controls the amount of smoothing by
calendar year when determining the level of initial mortality
improvements.
Increased mortality rates have continued to be observed due to
the COVID-19 pandemic, particularly in relation to the annuitant
population which has a higher than average age than the
non-annuitant population. However, the longer term implications for
mortality rates amongst the annuitant population are unknown at
this stage. No change has been made to the annuitant mortality
assumptions directly as a result of COVID-19, this is an area the
Group continues to monitor .
The mortality assumptions for in-force vested annuities also
cover annuities in deferment.
Valuation interest rates
Valuation interest rates used to discount the liabilities are
based on the yields as at the valuation date on the assets backing
the policyholder liabilities. For fixed interest securities, the
internal rate of return of the assets backing the liabilities is
used. Investment properties are valued using the redemption yield.
An adjustment is made to the yield on non risk-free fixed interest
securities and property to reflect credit risk. The credit risk
allowance comprises an amount for long-term best estimate defaults
and downgrades, a provision for credit risk premium, and where
appropriate an additional short-term allowance.
The credit risk allowance for the Group's shareholder-backed
annuity business as at 30 June 2021 was 46 bps per annum (31
December 2020: 46 bps) corresponding to a net of reinsurance
reserve of GBP795m (31 December 2020: GBP862m). For the annuity
business written in the With-Profits Fund, this amount was 41 bps
(31 December 2020: 43 bps) corresponding to a net of reinsurance
reserve of GBP346m (31 December 2020: GBP406m). The decrease in net
of reinsurance reserve is primarily due to the increase in yields
since 31 December 2020.
Expenses
Maintenance expense assumptions are expressed as per policy
amounts. They are set based on forecast expense levels, including
an allowance for ongoing investment expenditure and are allocated
between entities and product groups in accordance with the Group's
internal cost allocation model. A margin for prudence is added to
this amount. Expense inflation assumptions are set consistent with
the economic basis and based on the inflation swap spot curve.
Sensitivity
The sensitivity of IFRS profit after tax to changes in the above
assumptions, as at 31 December 2020 is shown in Note 34.2 of the
Annual Report and Accounts 2020. There have been no changes in the
Group's non-economic assumptions, including the longevity
assumptions, since 31 December 2020. Economic assumptions,
including tax have been updated to reflect prevailing market
conditions at 30 June 2021. There have been no fundamental changes
to the Group's methodology or estimation techniques which would
change the nature of the risk profile and the degree of sensitivity
to reasonably possible changes in these assumptions previously
disclosed .
10.2 Analysis of movements in policyholder liabilities and
unallocated surplus of the With-Profits Fund
The following tables show the movement in policyholder
liabilities and unallocated surplus of the With-Profits Fund by
business component. The analysis includes the impact of premiums,
claims and investment movements on policyholder liabilities. The
impact does not represent premiums, claims, and investment
movements as reported in the condensed consolidated income
statement. For example, the premiums shown below exclude any
deductions for fees/charges, as the table only shows the impact on
the insurance and investment contract liabilities and unallocated
surplus of the With-Profits Fund. Claims (surrenders, maturities
and deaths) represent the liability released rather than the claim
amount paid to the policyholder.
Shareholder-backed
funds and subsidiaries
===========================
With-profits Unit-linked Annuity Total Reinsurance Net total
sub-funds liabilities and other assets
(i) long-term
business
GBPm GBPm GBPm GBPm GBPm GBPm
============================== ============ =============== ========== ======= =========== ===========
At 1 January 2020 136,814 20,994 30,443 188,251 (11,958) 176,293
Comprising:
============================== ============ =============== ========== =======
Insurance contract liabilities 42,717 5,396 30,367 78,480
Investment contract
liabilities
with DPF 78,022 - 26 78,048
Investment contract
liabilities
without DPF 3 15,598 50 15,651
Unallocated surplus of the
With-Profits
Fund 16,072 - - 16,072
============================== ============ =============== ========== =======
Net flows:
Premiums 5,500 1,632 161 7,293
Surrenders (5,730) (2,214) (81) (8,025)
Maturities/deaths (4,114) (603) (2,077) (6,794)
============================== ============ =============== ========== =======
Net flows (4,344) (1,185) (1,997) (7,526)
Shareholders' transfers
post-tax (250) - - (250)
Switches (81) 81 - -
Investment related items and
other
movements (ii) 4,220 509 2,153 6,882
Foreign exchange differences 28 56 - 84
============================== ============ =============== ========== ======= =========== ===========
At 31 December 2020 / 1
January
2021 136,387 20,455 30,599 187,441 (11,761) 175,680
============================== ============ =============== ========== ======= =========== =========
Comprising:
============================== ============ =============== ========== =======
Insurance contract liabilities 41,172 4,987 30,491 76,650
Investment contract
liabilities
with DPF 79,592 - 31 79,623
Investment contract
liabilities
without DPF 2 15,468 77 15,547
Unallocated surplus of the
With-Profits
Fund 15,621 - - 15,621
============================== ============ =============== ========== =======
Net flows:
Premiums 2,241 1,075 88 3,404
Surrenders (3,336) (1,674) (34) (5,044)
Maturities/deaths (2,106) (298) (1,029) (3,433)
============================== ============ =============== ========== =======
Net flows (3,201) (897) (975) (5,073)
============================== ============ =============== ========== =======
Reclassification of reinsured
UK annuity contracts as held
for
sale - - (9,578) (9,578)
Shareholders' transfers
post-tax (145) - - (145)
Switches (14) 14 - -
Investment related items and
other
movements (ii) 5,358 586 (509) 5,435
Foreign exchange differences (303) - - (303)
============================== ============ =============== ========== ======= =========== ===========
At 30 June 2021 138,082 20,158 19,537 177,777 (1,569) 176,208
============================== ============ =============== ========== ======= =========== =========
Comprising:
============================== ============ =============== ========== =======
Insurance contract liabilities 40,144 5,069 19,396 64,609
Investment contract
liabilities
with DPF 81,786 - 34 81,820
Investment contract
liabilities
without DPF 2 15,089 107 15,198
Unallocated surplus of the
With-Profits
Fund 16,150 - - 16,150
============================== ============ =============== ========== =======
(i) Includes the PAC With-Profits Sub-Fund (WPSF), the Defined
Charge Participating Sub-Fund and the Scottish Amicable Insurance
Fund including the non-profit business written within these funds.
On 1 April 2021 the closed Scottish Amicable Insurance Fund (SAIF)
with-profits sub-fund merged with PAC's main WPSF and the assets
and liabilities of SAIF combined with those of the WPSF.
(ii) Investment related items and other movements include the
impact of assumption changes. For the shareholder-backed business,
assumption changes, including credit downgrade/default provisioning
and annuitant mortality, decreased policyholder liabilities by
GBP13m for the six months ended 30 June 2021 (31 December 2020:
GBP238m decrease). For the With-Profits Fund, the impact of
assumption changes for the six months ended 30 June 2021 was an
increase in policyholder liabilities of GBP11m (year ended 31
December 2020: GBP339m decrease), which was offset by a
corresponding decrease in unallocated surplus of the With-Profits
Fund.
Further analysis of the movement in the Group's insurance
contract liabilities, reinsurance asset, investment contract
liabilities and unallocated surplus of the With-Profits Fund is
provided below. The movement in these items is predominantly
allocated to the 'benefits and claims and movement in unallocated
surplus of the With-Profits Fund, net of reinsurance' line in the
condensed consolidated income statement, although certain movements
such as premiums received and claims paid on investment contracts
without discretionary participating features, are not charged to
the condensed consolidated income statement.
Unallocated
Investment surplus
Insurance contract of the Reinsurance
contract liabilities With-Profits assets
liabilities (ii) Fund (iii)
GBPm GBPm GBPm GBPm
=============================================== ============ ============ ============= =============
At 1 January 2020 78,480 93,699 16,072 (11,958)
=============================================== ============ ============ ============= ===========
Movement charged to the condensed consolidated
income statement (1,884) 2,280 (433) 203
Other movements including amounts included in
other comprehensive income (i) 19 (865) (11) (4)
Foreign exchange differences 35 56 (7) (2)
=============================================== ============ ============ ============= ===========
At 31 December 2020 / 1 January 2021 76,650 95,170 15,621 (11,761)
=============================================== ============ ============ ============= ===========
Movement charged to the condensed consolidated
income statement (2,408) 2,569 565 610
Other movements including amounts included in
other comprehensive income (i) (9,580) (722) (40) 9,578
Foreign exchange differences (53) 1 4 4
=============================================== ============ ============ ============= ===========
At 30 June 2021 64,609 97,018 16,150 (1,569)
=============================================== ============ ============ ============= ===========
(i) Other movements including amounts included in other
comprehensive income include premiums received and claims paid on
investment contracts without discretionary participating features,
which are recognised directly on the condensed consolidated
statement of financial position in accordance with IAS 39; changes
in the unallocated surplus of the With-Profits Fund resulting from
actuarial gains and losses on the Group's defined benefit pension
schemes, which are recognised directly in other comprehensive
income and balance sheet reallocations. The balance sheet
reallocations for the six months ended 30 June 2021 include the
reallocation of the UK annuity business to held for sale as
discussed in Note 2.
(ii) This comprises investment contracts with discretionary
participation features of GBP81,820m as at 30 June 2021 (31
December 2020: GBP79,623m) and investment contracts without
discretionary participation features of GBP15,198m as at 30 June
2021 (31 December 2020: GBP15,547m).
(iii) Includes reinsurers' share of claims outstanding of
GBP149m as at 30 June 2021 (31 December 2020: GBP149m).
The below tables show the 'Benefits and claims and movement in
unallocated surplus of the With-Profits Fund, net of reinsurance'
as shown in the condensed consolidated income statement. 'Benefits
and claims and movement in unallocated surplus of the With-Profits
Fund, net of reinsurance' comprises the movement charged to the
condensed consolidated income statement presented in the table
above, and the benefits and claims paid over the period, net of
amounts attributable to reinsurers.
For the six months
ended 30 June 2021
==========================================
Unallocated
surplus
Policyholder of the
liabilities With-Profits Reinsurance
(i) Fund assets
GBPm GBPm GBPm
============================================================ ============ ============= =============
Movement in policyholder liabilities and unallocated
surplus of the With-Profits Fund included in the condensed
consolidated income statement (161) (565) -
Movement in reinsurance asset included in consolidated
income statement - - (610)
Benefits and claims paid (6,659) - -
Benefits and claims attributable to external reinsurers - - 827
============================================================ ============ ============= ===========
Benefits and claims and movement in unallocated surplus
of the With-Profits Fund, net of reinsurance, as shown
in condensed consolidated income statement (6,820) (565) 217
============================================================ ============ ============= ===========
(i) Policyholder liabilities includes insurance contract
liabilities and investment contract liabilities.
For the six months
ended 30 June 2020
========================================
Unallocated
surplus
Policyholder of the
liabilities With-Profits Reinsurance
(i) Fund assets
GBPm GBPm GBPm
============================================================ ============ ============= ===========
Movement in policyholder liabilities and unallocated
surplus of the With-Profits Fund included in the condensed
consolidated income statement 4,895 1,200 -
Movement in reinsurance asset included in consolidated
income statement - - (33)
Benefits and claims paid (6,268) - -
Benefits and claims attributable to external reinsurers - - 823
============================================================ ============ ============= ===========
Benefits and claims and movement in unallocated surplus
of the With-Profits Fund, net of reinsurance, as shown
in condensed consolidated income statement (1,373) 1,200 790
============================================================ ============ ============= ===========
For the year ended
31 December 2020
==========================================
Unallocated
surplus
Policyholder of the
liabilities With-Profits Reinsurance
(i) Fund assets
GBPm GBPm GBPm
============================================================ ============ ============= =============
Movement in policyholder liabilities and unallocated
surplus of the With-Profits Fund included in the condensed
consolidated income statement (396) 433 -
Movement in reinsurance asset included in consolidated
income statement - - (203)
Benefits and claims paid (12,278) - -
Benefits and claims attributable to external reinsurers - - 1,680
============================================================ ============ ============= ===========
Benefits and claims and movement in unallocated surplus
of the With-Profits Fund, net of reinsurance as shown
in condensed consolidated income statement (12,674) 433 1,477
============================================================ ============ ============= ===========
11 Subordinated liabilities and other borrowings
As at As at
30 June 31 December
======== ==============
2021 2020
GBPm GBPm
==================================================== ======== ==============
Subordinated liabilities 3,711 3,729
Operational borrowings 133 157
Borrowings attributable to With-Profits Fund 4,643 4,381
==================================================== ======== ============
Total subordinated liabilities and other borrowings 8,487 8,267
==================================================== ======== ============
Subordinated liabilities
The Group's subordinated liabilities consist of subordinated
notes which were transferred from Prudential plc on 18 October 2019
and were recorded at fair value on initial recognition. The
transfer of the subordinated liabilities was achieved by
substituting the Company in place of Prudential plc as issuer of
the debt, as permitted under the terms and conditions of each
applicable instrument. All costs related to the transaction were
borne by Prudential plc.
As at 30 June As at 31 December
2021 2020
Principal Carrying Principal Carrying
amount amount amount amount
GBPm GBPm
================================================== ========= ======== ========= ========
5.625% Sterling fixed rate due on 20 October 2061 GBP750m 852 GBP750m 856
6.25% Sterling fixed rate due 20 October 2068 GBP500m 607 GBP500m 608
6.5% US Dollar fixed rate due on 20 October 2048 $500m 418 $500m 425
6.34% Sterling fixed rate due on 19 December 2063 GBP700m 851 GBP700m 853
5.56% Sterling fixed rate due on 20 July 2055 GBP600m 678 GBP600m 680
3.875% Sterling fixed rate due on 20 July 2049 GBP300m 305 GBP300m 307
================================================== ========= ======== ========= ========
Total subordinated liabilities 3,711 3,729
================================================== ========= ======== ========= ========
Subordinated notes issued by the Company rank below its senior
obligations and ahead of its preference shares and ordinary share
capital.
A description of the key features of each of the Group's
subordinated notes is as follows:
5.625% Sterling 6.25% Sterling 6.50% US 6.34% Sterling 5.56% Sterling 3.875% Sterling
fixed rate fixed rate Dollar fixed fixed rate fixed rate fixed rate
rate
=============== =============== =============== =============== =============== =============== ================
Principal GBP750m GBP500m $500m GBP700m GBP600m GBP300m
amount
=============== =============== =============== =============== =============== =============== ================
Issue date (i) 1 October 1 October 1 October 16 December 9 June 2015 8 July 2019
2018 2018 2018 2013 (amended (amended
10 June 10 June
2019) 2019)
=============== =============== =============== =============== =============== =============== ================
Maturity date 20 October 20 October 20 October 19 December 20 July 20 July
2051 2068 2048 2063 2055 2049
=============== =============== =============== =============== =============== =============== ================
Callable at par 20 October 20 October 20 October 19 December 20 July 20 July
at the option 2031 (and 2048 (and 2028 (and 2043 (and 2035 (and 2024, 20
of each each each each each July 2029
the Company semi-annual semi-annual semi-annual semi-annual semi-annual (and each
from interest interest interest interest interest semi-annual
payment payment payment payment payment interest
date date date date date payment
thereafter) thereafter) thereafter) thereafter) thereafter) date thereafter)
=============== =============== =============== =============== =============== =============== ================
Solvency II own Tier 2 Tier 2 Tier 2 Tier 2 Tier 2 Tier 2
funds treatment
===============
(i) The subordinated notes were issued by Prudential plc rather
than by the Company.
As at 30 June 2021, the principal amount of all subordinated
liabilities is expected to be settled after more than 12 months and
accrued interest of GBP41m (31 December 2020: GBP42m) is expected
to be settled within 12 months.
The following table reconciles the movement in subordinated
liabilities in the period:
For the For the
six months year
ended ended
30 June 31 December
2021 2020
GBPm GBPm
=========== ==============
At 1 January 3,729 3,767
Amortisation (14) (23)
Foreign exchange movements (4) (15)
=========================== =========== ============
At end of period 3,711 3,729
=========================== =========== ============
There were no repayments of principal on these loans during the
year. The amortisation of premium on the loans based on an
effective interest rate and the foreign exchange movement on the
translation of the subordinated liabilities denominated in US
dollar are both non-cash items.
12 Fair value methodology
12.1 Determination of fair value hierarchy
The fair values of assets and liabilities for which fair
valuation is required under IFRS are determined by the use of
current market bid prices for exchange-quoted investments, by using
quotations from independent third parties such as brokers and
pricing services, or by using appropriate valuation techniques.
Fair value is the amount for which an asset could be exchanged or a
liability settled in an arm's length transaction.
To provide further information on the approach used to determine
and measure the fair value of certain assets and liabilities, the
following fair value hierarchy categorisation has been used. This
hierarchy is based on the inputs to the fair value measurement and
reflects the lowest level input that is significant to that
measurement.
Level 1 - quoted prices (unadjusted) in active markets for
identical assets and liabilities
Level 1 principally includes exchange-listed equities, mutual
funds with quoted prices, exchange-traded derivatives such as
futures and options, and national government bonds, unless there is
evidence that trading in a given instrument is so infrequent that
the market could not be considered active. It also includes other
financial instruments where there is clear evidence that the
valuation is based on a traded price in an active market.
Level 2 - inputs other than quoted prices included within level
1 that are observable either directly (i.e. as prices) or
indirectly (i.e. derived from prices)
Level 2 principally includes corporate bonds and other national
and non-national government debt securities which are valued using
observable inputs, together with over-the-counter derivatives such
as forward exchange contracts and non-quoted investment funds
valued with observable inputs. It also includes investment contract
liabilities without DPF that are valued using observable
inputs.
Level 3 - significant inputs for the asset or liability are not
based on observable market data (unobservable inputs)
Level 3 principally includes investments in private equity
funds, directly held investment properties and investments in
property funds which are exposed to bespoke properties or risks and
investments which are internally valued or subject to a significant
number of unobservable assumptions. It also includes debt
securities which are rarely traded or traded only in privately
negotiated transactions and hence where it is difficult to assert
that their valuations have been based on observable market
data.
12.2 Valuation approach for level 2 assets and liabilities
A significant proportion of the Group's level 2 assets are
corporate bonds, structured securities and other national and
non-national government debt securities. These assets, in line with
market practice, are generally valued using independent pricing
services or quotes from third-party brokers. These valuations are
subject to a number of monitoring controls, such as monthly price
variances, stale price reviews and variance analysis on prices
achieved on subsequent trades.
Pricing services, where available, are used to obtain
third-party broker quotes. When prices are not available from
pricing services, quotes are sourced directly from brokers. The
Group seeks to obtain a number of quotes from different brokers so
as to obtain the most comprehensive information available on their
executability. Where quotes are sourced directly from brokers, the
price used in the valuation is normally selected from one of the
quotes based on a number of factors, including the timeliness and
regularity of the quotes and the accuracy of the quotes considering
the spreads provided. The selected quote is the one which best
represents an executable quote for the security at the measurement
date.
12.3 Level 3 assets and liabilities
12.3.1 Valuation approach for level 3
Investments valued using valuation techniques include financial
investments which by nature do not have an externally quoted price
based on regular trades, and financial investments for which
markets are no longer active as a result of market conditions e.g.
market illiquidity. The valuation techniques used include
comparison to recent arm's length transactions, reference to other
instruments that are substantially the same, discounted cash flow
analysis, option-adjusted spread models and, if applicable,
enterprise valuation. These techniques may include a number of
assumptions relating to variables such as credit risk and interest
rates. Changes in assumptions relating to these variables could
positively or negatively impact the reported fair value of these
instruments. When determining the inputs into the valuation
techniques used priority is given to publicly available prices from
independent sources when available, but overall the source of
pricing is chosen with the objective of arriving at a fair value
measurement that reflects the price at which an orderly transaction
would take place between market participants on the measurement
date.
Where certain debt securities are valued using broker quotes,
adjustments may be required in limited circumstances. This is
generally where it is determined that the third-party valuations
obtained do not reflect fair value (e.g. either because the value
is stale and/or the values are extremely diverse in range). These
are usually securities which are distressed or that could be
subject to a debt restructure or where reliable market prices are
no longer available due to an inactive market or market
dislocation. In these instances, prices are derived using internal
valuation techniques including those described below with the
objective of arriving at a fair value measurement that reflects the
price at which an orderly transaction would take place between
market participants on the measurement date. The techniques used
require a number of assumptions relating to variables such as
credit risk and interest rates. Examples of such variables include
an average credit spread based on the corporate bond universe and
the relevant duration of the asset being valued. The input
assumptions are determined based on the best available information
at the measurement dates. Securities valued in such manner are
classified as level 3 where these significant inputs are not based
on observable market data.
Certain debt securities were valued using matrix pricing, which
is based on assessing the credit quality of the underlying borrower
and allocating an internal credit rating which is unobservable. The
internal credit rating implicitly incorporates environmental,
social and governance (ESG) considerations through the analysts'
views of the industry and issuer. Under matrix pricing, these debt
securities are priced by taking the credit spreads on comparable
quoted public debt securities and applying these to the equivalent
debt securities, factoring in a specified liquidity premium. The
selection of comparable quoted public debt securities used to
determine the credit spread is based on a credit spread matrix that
takes into account the internal credit rating, maturity and
currency of the debt security.
The fair value estimates are made at a specific point in time,
based upon any available market information and judgements about
the financial instruments, including estimates of the timing and
amount of expected future cash flows and the credit standing of
counterparties. Such estimates do not reflect any premium or
discount that could result from offering for sale at one time a
significant volume of a particular financial instrument, nor do
they consider the tax impact of the realisation of unrealised gains
or losses from selling the financial instrument being fair valued.
In some cases, the disclosed value cannot be realised in immediate
settlement of the financial instrument. In accordance with the
Group Risk Framework, the estimated fair value of derivative
financial instruments valued internally using standard market
practices are subject to assessment against external
counterparties' valuations.
As at 30 June 2021, the Group held GBP42,022m of assets, net of
liabilities, at fair value which were classified as level 3 within
the fair value hierarchy (31 December 2020: GBP40,251m). This
included GBP1,301m of loans (31 December 2020: GBP1,366m) and
corresponding borrowings of GBP1,235m (31 December 2020: GBP1,301m)
held by a subsidiary of the Group, attaching to a portfolio of
buy-to-let mortgages financed largely by external third-party
(non-recourse) borrowings. The Group's exposure to this portfolio
is limited to the investments held by the WPSF. The fair value
movements of these loans and borrowings have no effect on
shareholders' profit and equity. The most significant
non-observable inputs to the mortgage fair value are the level of
future defaults and prepayments by the mortgage holders.
The investment properties of the Group are externally valued by
professionally qualified external valuers using the RICS valuation
standards. The Group's investment properties are predominantly
valued using an income capitalisation technique. This technique
calculates the value through the yield and rental value depending
on factors such as the lease length, building quality, covenants
and location. Typically these variables used are compared to recent
transactions with similar features to those being valued. The
valuation of investment property inherently captures the impact of
climate change if it were located in an area subject to climate
change events. The key inputs of yield and rental value are proxies
for a range of factors which will include climate change. The trend
is towards greener buildings achieving better rents and yields than
comparable buildings, all other factors being equal.
As the comparisons are not with properties that are virtually
identical to the Group's investment properties, adjustments are
made by the valuers where appropriate to the variables used.
12.3.2 Analysis of internally valued level 3 financial
instruments
Level 3 financial assets, net of financial liabilities, which
were internally valued as at 30 June 2021 were GBP11,153m (31
December 2020: GBP11,672m), representing 7.4% of the total
fair-valued financial assets net of financial liabilities (31
December 2019: 7.9%).
Internal valuations are inherently more subjective than external
valuations. These internally valued net assets and liabilities
primarily consist of the following items:
- Debt securities of GBP10,539m as at 30 June 2021 (31 December
2020: GBP11,149m), of which GBP8,830m (31 December 2020: GBP9,725m)
were valued using discounted cash flow models with an internally
developed discount rate. The remaining debt securities were valued
using other valuation methodologies such as enterprise valuation
and estimated recovery (such as liquidators' reports).
- Private equity investments in both debt and equity securities
of GBP304m as at 30 June 2021 (31 December 2020: GBP315m) were
valued internally using a discounted cash flow model. The most
significant inputs to the valuation are the forecast cash flows of
the underlying business, discount rate, and terminal value
assumption, all of which involve significant judgement. The
valuation is performed in accordance with International Private
Equity and Venture Capital Association valuation guidelines. These
investments are held by the Group's consolidated private equity
infrastructure funds.
- Equity release mortgage loans of GBP1,707m as at 30 June 2021
(31 December 2020: GBP1,777m) and a corresponding liability of
GBP396m (31 December 2020: GBP409m), which were valued internally
using discounted cash flow models. The inputs that are most
significant to the valuation of these loans are the discount rate,
the current property value, the assumed future property growth and
the assumed future annual property rental yields.
- Liabilities of GBP1,590m as at 30 June 2021 (31 December 2020:
GBP1,407m), for the third-party interest in consolidated funds in
respect of the consolidated investment funds, which are
non-recourse to the Group. These liabilities were valued by
reference to the underlying assets.
12.3.3 Governance of level 3
The Group's valuation policies, procedures and analyses for
instruments categorised as level 3 are overseen by business unit
committees as part of the Group's wider financial reporting
governance processes. The procedures undertaken include approval of
valuation methodologies, verification processes, and resolution of
significant or complex valuation issues. In undertaking these
activities, the Group makes use of the extensive expertise of its
Asset Management business. In addition, the Group has minimum
standards for independent price verification to ensure valuation
accuracy is regularly independently verified. Adherence to this
policy is monitored across the business units.
12.4 Fair value hierarchy for assets measured at fair value in
the condensed consolidated statement of financial position
The tables below presents the Group's assets measured at fair
value by level of the fair value hierarchy for each component of
business.
As at 30 June 2021
Level 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm
With-profits:
Investment property - - 17,302 17,302
Loans - - 1,430 1,430
Derivative assets 65 2,720 - 2,785
Equity securities and pooled investment funds 45,911 4,336 9,058 59,305
Debt securities 33,075 16,378 6,080 55,533
Total with-profits 79,051 23,434 33,870 136,355
Unit-linked:
Investment property - - 349 349
Loans - - - -
Derivative assets - 1 - 1
Equity securities and pooled investment funds 12,612 385 492 13,489
Debt securities 4,671 4,254 15 8,940
Total unit-linked 17,283 4,640 856 22,779
Annuity and other long-term business:
Investment property - - 1,446 1,446
Loans - - 1,707 1,707
Derivative assets - 626 - 626
Equity securities and pooled investment funds 6 - 2 8
Debt securities 6,229 5,001 7,356 18,586
Total annuity and other long-term business 6,235 5,627 10,511 22,373
Other:
Investment property - - - -
Loans - - - -
Derivative assets - 107 - 107
Equity securities and pooled investment funds 187 - 6 193
Debt securities 766 448 - 1,214
Total other 953 555 6 1,514
Group:
Investment property - - 19,097 19,097
Loans - - 3,137 3,137
Derivative assets 65 3,454 - 3,519
Equity securities and pooled investment funds 58,716 4,721 9,558 72,995
Debt securities 44,741 26,081 13,451 84,273
Total assets at fair value 103,522 34,256 45,243 183,021
As at 31 December 2020
Level 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm
With-profits:
Investment property - - 17,167 17,167
Loans - - 1,443 1,443
Derivative assets 112 4,698 - 4,810
Equity securities and pooled investment funds 43,920 3,560 7,562 55,042
Debt securities 19,443 30,563 5,637 55,643
Total with-profits 63,475 38,821 31,809 134,105
Unit-linked:
Investment property - - 409 409
Derivative assets 3 5 - 8
Equity securities and pooled investment funds 11,941 349 889 13,179
Debt securities 2,633 5,868 5 8,506
Total unit-linked 14,577 6,222 1,303 22,102
Annuity and other long-term business:
Investment property - - 1,530 1,530
Loans - - 1,777 1,777
Derivative assets - 778 - 778
Equity securities and pooled investment funds 2 - 2 4
Debt securities 3,141 10,191 6,942 20,274
Total annuity and other long-term business 3,143 10,969 10,251 24,363
Other:
Investment property - - - -
Loans - - - -
Derivative assets - 109 - 109
Equity securities and pooled investment funds 189 - 5 194
Debt securities 801 215 - 1,016
Total other 990 324 5 1,319
Group:
Investment property - - 19,106 19,106
Loans - - 3,220 3,220
Derivative assets 115 5,590 - 5,705
Equity securities and pooled investment funds 56,052 3,909 8,458 68,419
Debt securities 26,018 46,837 12,584 85,439
Total assets at fair value 82,185 56,336 43,368 181,889
12.5 Fair value hierarchy for liabilities measured at fair value
in the condensed consolidated statement of financial position
The table below presents the Group's liabilities measured at
fair value by level of the fair value hierarchy:
As at 30 June 2021
Level Level Level Total
1 2 3
GBPm GBPm GBPm GBPm
====================================================== ===== ====== ===== ========
Investment contract liabilities without discretionary
participation features - 15,198 - 15,198
Third-party interest in consolidated funds 7,664 4,132 1,590 13,386
Subordinated liabilities and other borrowings - - 1,235 1,235
Derivative liabilities 41 2,906 - 2,947
Accruals, deferred income and other liabilities - - 396 396
====================================================== ===== ====== ===== ======
Total liabilities at fair value 7,705 22,236 3,221 33,162
====================================================== ===== ====== ===== ======
As at 31 December 2020
Level Level Level Total
1 2 3
GBPm GBPm GBPm GBPm
====================================================== ===== ====== ===== ========
Investment contract liabilities without discretionary
participation features - 15,547 - 15,547
Third-party interest in consolidated funds 7,972 3,886 1,407 13,265
Subordinated liabilities and other borrowings - - 1,301 1,301
Derivative liabilities 37 3,423 - 3,460
Accruals, deferred income and other liabilities - - 409 409
Total liabilities at fair value 8,009 22,856 3,117 33,982
12.6 Transfers between levels
The Group's policy is to recognise transfers into and transfers
out of levels as at the end of each half-year reporting period,
except for material transfers, which are recognised as of the date
of the event or change in circumstances that caused the
transfer.
Transfers are deemed to have occurred when there is a material
change in the observed valuation inputs or a change in the level of
trading activities of the securities.
For the six months ended 30 June 2021
Financial assets and liabilities - Transfers
between levels
Equity securities
and pooled investment
funds Debt securities Total
GBPm GBPm GBPm
From level 1 to level 2 - 586 586
From level 1 to level 3 9 - 9
From level 2 to level 1 (i) - 15,372 15,372
From level 2 to level 3 171 1,776 1,947
From level 3 to level 1 371 - 371
From level 3 to level 2 33 133 166
For the year ended 31 December 2020
Financial Assets and Liabilities - Transfers
between levels
Equity securities
and pooled investment
funds Debt securities Total
GBPm GBPm GBPm
From level 1 to level 2 - 8,200 8,200
From level 1 to level 3 7 - 7
From level 2 to level 1 - 3,930 3,930
From level 2 to level 3 84 439 523
From level 3 to level 2 - 202 202
(i) The transfers in debt securities from level 2 to level 1 are
primarily driven by increased liquidity in the bond markets towards
the end of June 2021 as compared to the end of December 2020 and
refinements made to our levelling methodology.
12.7 Reconciliation of movements in level 3 assets and
liabilities
The movements during the year of level 3 assets and liabilities
held at fair value, excluding assets and liabilities held for sale,
are analysed in the tables below:
For the six months ended 30 June 2021
Total Transfer Transfers Transfers
gains/(losses) to held into out
At 1 in income Foreign for level of level At 30
Jan statement exchange Purchases Sales sale Settled Issued 3 3 Jun
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Level 3
assets:
Investment
property 19,106 282 (301) 364 (180) (174) - - - - 19,097
Loans 3,220 (61) (1) 67 (2) - (86) - - - 3,137
Equity
securities
and pooled
investment
funds 8,458 619 27 1,475 (797) - - - 180 (404) 9,558
Debt
securities 12,584 (575) - 448 (649) - - - 1,776 (133) 13,451
Total level 3
assets 43,368 265 (275) 2,354 (1,628) (174) (86) - 1,956 (537) 45,243
Level 3
liabilities:
Third-party
interest in
consolidated
funds 1,407 182 - - - - (115) 116 - - 1,590
Subordinated
liabilities
and other
borrowings 1,301 - - - - - (66) - - - 1,235
Other
liabilities 409 (9) - - - - (4) - - - 396
Total level 3
liabilities 3,117 173 - - - - (185) 116 - - 3,221
For the year ended 31 December 2020
Total Transfer Transfers Transfers
gains/(losses) to held into out
At 1 in income Foreign for level of level At 31
Jan statement exchange Purchases Sales sale Settled Issued 3 3 Dec
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============== ======== ======= ======== =========
Level 3
assets:
Investment
property 19,136 (752) 234 874 (281) (105) - - - - 19,106
Loans 3,339 36 - 9 (45) - (119) - - - 3,220
Equity
securities
and pooled
investment
funds 8,161 (141) 78 1,033 (764) - - - 91 - 8,458
Debt
securities 11,215 1,038 4 1,365 (1,296) - - 21 439 (202) 12,584
====== ============== ======== ======= ======== ======= ====== =========
Total level 3
assets 41,851 181 316 3,281 (2,386) (105) (119) 21 530 (202) 43,368
Level 3
liabilities:
Third-party
interest in
consolidated
funds 1,135 39 - - - - (486) 719 - - 1,407
Borrowings
and
subordinated
liabilities 1,422 - - - - - (121) - - - 1,301
Other
liabilities 390 26 - - - - (7) - - - 409
====== ============== ======== ======= ======== ======= ====== =========
Total level 3
liabilities 2,947 65 - - - - (614) 719 - - 3,117
====== ============== ======== ======= ======== ======= ====== =========
12.8 Unrealised gains and losses in respect of level 3 assets
and liabilities
Unrealised gains and losses recognised in the condensed
consolidated income statement in relation to assets and liabilities
classified as level 3 are analysed as follows:
For the For the For the
six months six months year
ended ended ended
30 June 30 June 31 December
2021 2020 2020
GBPm GBPm GBPm
============================================== =========== =========== ==============
Investment property 271 (687) (769)
Loans (61) 37 32
Equity securities and pooled investment funds 727 2 (550)
Debt securities (520) 600 1,030
Third party interest in consolidated funds 16 (54) (183)
Other financial liabilities (9) 24 26
=========== =========== ============
Total 424 (78) (414)
=========== =========== ============
12.9 Sensitivity of the fair value of level 3 instruments to
changes in significant inputs
The Group assesses the sensitivity of the fair value of level 3
assets to reasonably possible changes in the most significant
unobservable inputs. The table below provides a breakdown of assets
within the level 3 fair value hierarchy by investment type, the
sensitivity of the most significant unobservable inputs on their
fair value, and the impact on IFRS profit after tax and
shareholders' equity for those held within the shareholder
backed-funds.
At 30 June 2021
Impact on
IFRS profit
Held after tax
in Most Change and
Fair shareholder-backed significant in fair shareholders'
value funds Valuation unobservable value equity (vii)
GBPm GBPm technique input Sensitivity GBPm GBPm
Investment
property:
Property in Income Equivalent Decrease by
use 18,036 1,769 capitalisation yield 50bps 2,131 155
Increase by
50bps (1,719) (123)
Estimated Decrease by
rental value 10% (1,514) (67)
Increase by
10% 1,530 67
Property under Increase by
development 1,061 26 Fair value 10% 106 -
Decrease by
10% (106) -
Loans:
Discounted
Equity-release cash flow Discount Increase by
mortgages (i) 1,707 1,707 (ii) rate 50bps (143) (117)
Decrease by
50bps 158 128
Current
property Increase by
value 10% 46 37
Decrease by
10% (56) (46)
Assumed
annual
property Increase by
growth rate 100bps 137 112
Decrease by
100bps (193) (158)
Assumed
annual
property Increase by
rental yield 100bps (87) (71)
Decrease by
100bps 84 68
Other mortgage
and retail Broker quotes Increase by
loans 1,430 - (iii) Fair value 10% 143 -
Decrease by
10% (143) -
Equity
securities
and pooled
investment Net asset Net asset Increase by
funds (iv) 9,476 500 statements value 10% 948 1
Decrease by
10% (948) (1)
Infrastructure Discounted
fund cash flow Discount Increase by
investments 304 - (v) rate 10% (39) -
Decrease by
10% 44 -
Debt
securities:
(iv)
Private Discounted
placement cash flow Discount Increase by
loans 8,427 5,072 (vi) rate 85bps (1,003) (539)
Decrease by
85bps 1,247 676
Discounted
Retail income cash flow Discount Increase by
strips 403 342 (vi) rate 50bps (43) (30)
Decrease by
50bps 54 39
Broker quotes,
enterprise
Unquoted valuation,
corporate estimated Increase by
bonds 4,399 1,957 recovery Fair value 10% 440 158
Decrease by
10% (440) (158)
Total level
3 45,243 11,373
(i) The equity-release mortgages have a no-negative equity
guarantee ("NNEG") that caps the loan repayment in the event of
death, or entry into long-term care, to be no greater than the
proceeds from the sale of the property that the loans are secured
against.
(ii) Future cashflows are estimated based on assumptions,
including prepayment, death and entry into long-term care, and
discounted using an appropriate discount rate. The NNEG is based on
a Black-Scholes option pricing valuation, using assumptions
including the current property value, future property growth and
property rental yields, and is recognised as a deduction to the
value of the loan.
(iii) Quotes received from an external pricing service.
(iv) Excludes infrastructure fund investments.
(v) These investments are valued in accordance with the
International Private Equity and Venture Association valuation
guidelines (latest edition December 2018). Valuations are also
benchmarked against comparable infrastructure transactions. The
discount rate is made up of cash flows from dividends due in
respect of the equity investments and principal and interest from
loan notes in respect of debt investments.
(vi) The discount rate is made up of a risk-free rate and a
credit spread. The risk-free rate is taken from an appropriate gilt
of comparable duration and the spread is taken from a basket of
comparable securities.
(vii) Of the GBP11,373m (31 December 2020: GBP11,559m) of level
3 assets held in shareholder-backed funds, GBP856m (2020:
GBP1,303m) is held by unit-linked business. These assets are
included in the analysis presented however, as the investment risk
is borne by the unit-linked policyholders, there is no impact on
IFRS profit after tax and shareholder's equity. The impact on IFRS
profit after tax and shareholders' equity for the year ended 31
December 2020 as previously disclosed in the 2020 annual report and
accounts has been restated.
At 31 December 2020
Impact on
IFRS profit
Held after tax
in Most Change and
Fair shareholder-backed significant in fair shareholders'
value funds Valuation unobservable value equity (vii)
GBPm GBPm technique input Sensitivity GBPm GBPm
Investment
property:
Property in Income Equivalent Decrease by
use 17,790 1,914 capitalisation yield 50bps 2,078 157
Increase by
50bps (1,733) (126)
Estimated Decrease by
rental value 10% (1,476) (63)
Increase by
10% 1,417 63
Property under Increase by
development 1,316 25 Fair value 10% 132 -
Decrease by
10% (132) -
Loans:
Discounted
Equity-release cash flow Discount Increase by
mortgages (i) 1,777 1,777 (ii) rate 50bps (155) (127)
Decrease by
50bps 172 141
Current
property Increase by
value 10% 50 41
Decrease by
10% (59) (48)
Assumed
annual
property Increase by
growth rate 100bps 154 126
Decrease by
100bps (215) (176)
Assumed
annual
property Increase by
rental yield 100bps (94) (77)
Decrease by
100bps 91 74
Other mortgage
and retail Broker quotes Increase by
loans 1,443 - (iii) Fair value 10% 144 -
Decrease by
10% (144) -
Equity
securities
and pooled
investment Net asset Net asset Increase by
funds (iv) 8,377 896 statements value 10% 838 1
Decrease by
10% (838) (1)
Infrastructure Discounted
fund cash flow Discount Increase by
investments 315 - (v) rate 10% (36) -
Decrease by
10% 41 -
Debt
securities:
(iv)
Private Discounted
placement cash flow Discount Increase by
loans 9,298 5,521 (vi) rate 85bps (1,105) (597)
Decrease by
85bps 1,378 751
Discounted
Retail income cash flow Discount Increase by
strips 427 362 (vi) rate 50bps (47) (33)
Decrease by
50bps 60 42
Broker quotes,
enterprise
Unquoted valuation,
corporate estimated Increase by
bonds 2,625 1,064 recovery Fair value 10% 263 86
Decrease by
10% (263) (86)
Total level
3 43,368 11,559
12.10 Fair value of assets and liabilities at amortised cost
The tables below show the assets and liabilities carried at
amortised cost on the condensed consolidated statement of financial
position for which fair value is disclosed. The assets and
liabilities that are carried at amortised cost, where the carrying
value approximates the fair value, are excluded from the analysis
below:
As at 30 June 2021
Total Total
Level Level Level fair carrying
1 2 3 value value
GBPm GBPm GBPm GBPm GBPm
===== ===== ===== ====== ===========
Assets:
Loans - 649 2,222 2,871 2,793
===== ===== ===== ====== =========
Liabilities:
Subordinated liabilities and other borrowings - 7,422 86 7,508 7,252
===== ===== ===== ====== =========
As at 31 December 2020
Total Total
Level Level Level fair carrying
1 2 3 value value
GBPm GBPm GBPm GBPm GBPm
Assets:
Loans - 710 2,193 2,903 2,811
===== ===== ===== ====== =========
Liabilities:
Subordinated liabilities and other borrowings - 7,094 94 7,188 6,966
===== ===== ===== ====== =========
The estimated fair value of subordinated liabilities are based
on the quoted market offer price. The fair value of the other
assets and liabilities in the tables above have been estimated from
the discounted cash flows expected to be received or paid. Where
appropriate, an observable market interest rate has been used and
the assets and liabilities are classified within level 2.
Otherwise, they are included as level 3 assets or liabilities.
13 Contingencies and related obligations
13.1 Litigation and regulatory matters
The Group is involved in various litigation and regulatory
issues. While the outcome of such litigation and regulatory issues
cannot be predicted with certainty, the Directors believe that
their ultimate outcome will not have a material adverse effect on
the Group's financial condition, results of operations, or cash
flows.
In addition to the matters set out in Note 6 regarding the
portfolio dividend tax litigation, further information is provided
below in respect of the regulatory provision in relation to past
annuity sales.
PAC agreed with the Financial Conduct Authority ('FCA') to
review annuities sold without advice after 1 July 2008 to its
contract-based defined contribution pension customers and have also
been conducting a review of other similar but separate groups of
annuities sold after 1 July 2008 which were outside the scope of
the original review. The review examined whether customers were
given sufficient information about their potential eligibility to
purchase an enhanced annuity, either from PAC or another pension
provider. Significant progress has been made on this redress
exercise since 31 December 2020, and there are now only a small
number of potential remaining cases from the total population. At
31 December 2020 a provision of GBP49m was held, of which GBP14m
has been utilised during the period. Given the minimal number of
remaining cases, the residual provision of GBP35m has been released
in the period.
13.2 Guarantees
Guarantee funds provide for payments to be made to policyholders
on behalf of insolvent life insurance companies and are financed by
payments assessed on solvent insurance companies based on location,
volume and types of business. The estimated reserve for future
guarantee fund assessments is not significant, and adequate
reserves are available for all anticipated payments for known
insolvencies.
M&G plc acts as guarantor for certain property leases where
a group company is a lessee. The most material of these is the
guarantee provided in respect of the 10 Fenchurch Avenue lease
between Saxon Land B.V. and M&G Prudential Services
Limited.
M&G plc has acted as a guarantor for M&G Regulated
Entity Holding Company Limited to Royal London for any obligations
under the transaction documents for the purchase of Ascentric. This
guarantee will remain in place until 1 September 2021, a year
following completion.
The Group has also provided other guarantees and commitments to
third parties entered into in the normal course of business, but
the Group does not consider that the amounts involved are
significant.
13.3 Support for the With-Profits Fund by shareholders
PAC is liable to meet its obligations to with-profits
policyholders even if the assets of the with-profits sub-funds are
insufficient to do so. The assets, represented by the unallocated
surplus of the With-Profits Fund, in excess of amounts expected to
be paid for future terminal bonuses and related shareholder
transfers ('the excess assets') in the with-profits sub-funds could
be materially depleted over time by, for example, a significant or
sustained equity market downturn. In the unlikely circumstance that
the depletion of the excess assets within the with-profits
sub-funds was such that the Group's ability to satisfy
policyholders' reasonable expectations was adversely affected, it
might become necessary to restrict the annual distribution to
shareholders or to contribute shareholders' funds to the
with-profits sub-funds to provide financial support.
The following matters are of relevance with respect to the
With-Profits Fund:
13.3.1 Pension mis-selling review
The UK insurance regulator required all UK life insurance
companies to review sales of personal pensions policies for
potential mis-selling. Whilst PAC believed it met the requirements
of the FSA (the UK insurance regulator at that time) to issue
offers of redress to all impacted customers by 30 June 2002, there
is a population of customers who, whilst an attempt was made at the
time to invite them to participate in the review, may not have
received their invitation. These customers are being re-engaged, to
ensure they have the opportunity to take part in the review.
Currently a provision amounting to GBP258m as at 30 June 2021 (31
December 2020: GBP303m) is being held in relation to this within
insurance contract liabilities.
The key assumptions underlying the provisions are:
- Average cost of redress per customer.
- Proportion of provision (reserve rate) held for soft close
cases (where all reasonable steps have been taken to contact the
customer but the customer has not engaged with the review).
Sensitivities of the value of the provision to change in
assumptions are as follows:
As at As at
30 June 31 December
==============
2021 2020
Assumption Change in assumption GBPm GBPm
==============
increase/decrease
Average cost of redressal by 10% +/- 10 +/- 10
increase/decrease
Reserve rate for soft closed cases by 10% +/- 10 +/- 30
Costs arising from this review are met by the excess assets of
the with-profits sub-fund and hence have not been charged to the
asset shares used in the determination of policyholder bonus rates.
An assurance was given that these deductions from excess assets
would not impact PAC's bonus or investment policy for policies
within the with-profits sub-funds that were in force at 31 December
2003. This assurance does not apply to new business since 1 January
2004. In the unlikely event that such deductions would affect the
bonus or investment policy for the relevant policies, the assurance
provides that support would be made available to the sub-fund from
PAC's shareholder resources for as long as the situation continued,
so as to ensure that PAC's policyholders were not disadvantaged.
PAC's comfort in its ability to make such support available is
supported by the intra-group arrangements formalising the
circumstances in which M&G plc would make capital support
available to PAC.
13.3.2 With-profits options and guarantees
Certain policies within the With-Profits Fund include
potentially valuable guarantees for policyholders, or options to
change policy benefits which can be exercised at the policyholders'
discretion. These options and guarantees are valued as part of the
policyholder liabilities. Please refer to Note 10.1 for further
details on these options and guarantees.
14 Related party transactions
The nature of the related party transactions of the Group has
not changed from those described in the Group's consolidated
financial statements as at 31 December 2020.
There have been no related party transactions in the six months
to 30 June 2021 which have had a material effect on the results or
financial position of the Group.
15 Post balance sheet events
On 5 April 2021, M&G FA Limited, a wholly-owned subsidiary
of the Group agreed to acquire a further 0.13% of the share capital
of Prudential Portfolio Managers (South Africa) (Pty) Ltd (PPMSA)
for a cash consideration of GBP0.2m. On 2 July 2021 all the
substantive conditions relating to the agreement were completed and
the Group obtained control of PPMSA. Accordingly, its results will
be consolidated in the Group financial statements from 2 July
2021.
The transaction has resulted in M&G FA Limited's direct
holding in PPMSA to increase from 49.99% to 50.12%. The Group has
accounted for the investment as an associate using the equity
method in these condensed consolidated financial statements. As at
30 June 2021, the carrying value of the investment in PPMSA was
GBP34.4m and the Group's share of profit for the period was
GBP5.9m.
Furthermore, M&G Group Limited has provided a guarantee in
respect of an existing bank facility of the transaction
counterparty amounting to ZAR 220m, which will be secured against a
further 7% shareholding that the seller retains in PPMSA.
Supplementary information
Alternative performance measures
Overview of the Group's key performance measures
The Group measures its financial performance using a number of
key performance measures (KPM). Two of these measures, referred to
as alternative performance measures (APM), are derived from the
financial statements prepared in accordance with the IFRS financial
reporting framework or the Solvency II requirements, but are not
defined under IFRS or Solvency II. The APMs are used to complement
and not to substitute the disclosures prepared in accordance with
IFRS and Solvency II, and provide additional information on the
long-term performance of the Group.
All information included in this section does not form part of
the independent review performed by the external auditors.
The Group's KPMs are summarised below, along with which of these
measures are considered APMs by the Group.
Key performance measure Type Definition
IFRS result after tax KPM The IFRS result after tax demonstrates to our
shareholders the financial performance of the
Group during the relevant period on an IFRS
basis.
Adjusted operating profit APM, Adjusted operating profit before tax is the
before tax KPM Group's non-GAAP alternative performance measure,
which complements the IFRS result after tax.
Certain adjustments that are considered to
be non-recurring or strategic, or due to short-term
movements not reflective of longer-term performance
are made to the IFRS result before tax. Adjustments
are in respect of short-term fluctuations in
investment returns, costs associated with fundamental
one-off Group-wide restructuring and transformation,
profits or losses arising on corporate transactions
and profit/(loss) before tax from discontinued
operations.
The adjusted operating profit methodology is
described in Note 3.2, along with a reconciliation
of adjusted operating profit before tax to
the IFRS result after tax.
Savings and Asset Management KPM Savings and Asset Management net client flows
net client flows represent gross inflows less gross outflows
during the period. Gross inflows are new funds
from customers and clients. Gross outflows
are funds withdrawn by customers and clients.
Assets under management KPM Closing AUMA represents the total market value
and administration (AUMA) of all assets managed, administered or advised
on behalf of customers and clients at the end
of each financial period.
Assets managed by the Group include those managed
on behalf of our retail customers and institutional
and retail clients.
Assets administered by the Group includes assets
which we provide investment management services
for, in addition to assets we administer where
the customer has elected to invest in with
a third-party investment manager.
Assets under advice are advisory portfolios
where clients receive investment recommendations
such as Strategic Asset Allocation and model
portfolios but retain discretion over executing
the advice.
Shareholder Solvency II APM, The regulatory Solvency II capital position
coverage ratio KPM considers the Group's overall own funds and
Solvency Capital Requirements ('SCR').
The shareholder Solvency II coverage ratio
is the ratio of own funds to SCR, excluding
the contribution to own funds and SCR from
the Group's ring-fenced With-Profits Fund.
The shareholder Solvency II coverage ratio
is described in the "Solvency II capital position"
section.
Total capital generation KPM Surplus capital is the amount by which own
funds exceed SCR under Solvency II. Total capital
generation is the total change in Solvency
II surplus capital before dividends and capital
movements and capital generated from discontinued
operations.
Operating capital generation KPM Operating capital generation is the total capital
generation before tax, adjusted to exclude
market movements relative to those expected
under long-term assumptions and to remove other
non-recurring items, including shareholder
restructuring and other costs.
Adjusted operating profit before tax
(i) Adjusted operating profit/(loss) before tax by segment
Savings and
Asset Management Heritage Corporate Centre Total
For For For For
the the the the
For the year For the year For the year For the year
six months ended six months ended six months ended six months ended
ended 30 31 ended 30 31 ended 30 31 ended 30 31
June December June December June December June December
2021 2020 2020 2021 2020 2020 2021 2020 2020 2021 2020 2020
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Fee-based
revenues 565 541 1,146 41 39 74 - - - 606 580 1,220
Annuity margin - - - 157 139 438 - - - 157 139 438
With-profits
shareholder
transfer net
of hedging
gains/(losses) 46 24 44 108 110 207 - - - 154 134 251
Total adjusted
operating
income 611 565 1,190 306 288 719 - - - 917 853 1,909
Adjusted
operating
expenses (432) (382) (840) (36) (30) (79) (48) (75) (101) (516) (487) (1,020)
Other
shareholder
(loss)/profit (24) (26) (28) 12 40 59 (68) (76) (142) (80) (62) (111)
Share of profit
from joint
ventures and
associates (i) 6 5 10 - - - - - - 6 5 10
Adjusted
operating
profit/(loss)
before tax 161 162 332 282 298 699 (116) (151) (243) 327 309 788
(i) Excludes adjusted operating profit before tax from joint
ventures in the With-Profits Fund.
(ii) Adjusted operating profit/(loss) before tax by segment and
source
Corporate
Savings and Asset Management Heritage Centre
Asset
Management With-profits Other Annuities With-profits Other Other
For the six months GBPm GBPm GBPm GBPm GBPm GBPm GBPm
ended 30
June 2021
================== ============ ====== ========= ============ ===== ===========
Asset Management
fee-based
revenues 473 - - - - - -
Other fee-based
revenues - - 92 - - 41 -
==================
Fee-based revenues 473 - 92 - - 41 -
Annuity margin - - - 157 - - -
With-profits
shareholder
transfer
net of hedging
gains/(losses) - 46 - - 108 - -
Adjusted operating
income 473 46 92 157 108 41 -
Asset Management
operating
expenses (333) - - - - - -
Other operating
expenses - - (99) - - (36) (48)
==================
Adjusted operating
expenses - - (99) - - (36) (48)
Other shareholder
(loss)/profit - - (24) - - 12 (68)
Share of profit
from joint
ventures and
associates - - 6 - - - -
Adjusted operating
profit/(loss)
before tax 140 46 (25) 157 108 17 (116)
Corporate
Savings and Asset Management Heritage Centre
Asset
Management With-profits Other Annuities With-profits Other Other
For the six months GBPm GBPm GBPm GBPm GBPm GBPm GBPm
ended 30
June 2020
==================
Asset Management
fee-based
revenues 469 - - - - - -
Other fee-based
revenues - - 72 - - 39 -
==================
Fee-based revenues 469 - 72 - - 39 -
Annuity margin - - - 139 - - -
With-profits
shareholder
transfer
net of hedging
gains/(losses) - 24 - - 110 - -
Adjusted operating
income 469 24 72 139 110 39 -
Asset Management
operating
expenses (306) - - - - - -
Other operating
expenses - - (76) - - (30) (75)
==================
Adjusted operating
expenses (306) - (76) - - (30) (75)
Other shareholder
profit/(loss) - - (26) - - 40 (76)
Share of profit
from joint
ventures and
associates - - 5 - - - -
==================
Adjusted operating
profit/(loss)
before tax 163 24 (25) 139 110 49 (151)
==================
Corporate
Savings and Asset Management Heritage Centre
Asset
Management With-profits Other Annuities With-profits Other Other
For the year ended GBPm GBPm GBPm GBPm GBPm GBPm GBPm
31 December
2020
==================
Asset Management
fee-based
revenues 988 - - - - - -
Other fee-based
revenues - - 158 - - 74 -
==================
Fee-based revenues 988 - 158 - - 74 -
Annuity margin - - - 438 - - -
With-profits
shareholder
transfer
net of hedging
gains/(losses) - 44 - - 207 - -
Adjusted operating
income 988 44 158 438 207 74 -
Asset Management
operating
expenses (672) - - - - - -
Other operating
expenses - - (168) - - (79) (101)
==================
Adjusted operating
expenses (672) - (168) - - (79) (101)
Other shareholder
profit/(loss) - - (28) - - 59 (142)
Share of profit
from joint
ventures and
associates - - 10 - - - -
================== ============ ======= ========= ============ ===== =========
Adjusted operating
profit/(loss)
before tax 316 44 (28) 438 207 54 (243)
==================
Adjusted operating profit before tax arising from annuity margin
is further analysed in the table below:
For the six For the
months ended year ended
30 June 31 December
2021 2020 2020
Breakdown of contribution from annuity margin GBPm GBPm GBPm
======= ====== ==============
Return on excess assets and margin release 87 94 188
Asset trading and portfolio management actions 4 40 59
Longevity assumption changes - 23 217
Mismatching (losses)/profits (i) (15) 28 38
Other assumption and model changes (ii) 33 (15) (52)
Experience variances and model improvements 26 11 19
Other provisions and reserves 22 (42) (31)
=============================================== ====== ============
Shareholder annuities 157 139 438
=============================================== ====== ============
(i) Mismatching losses of GBP15m for the six months ended 30
June 2021 (30 June 2020: GBP28m profits, year ended 31 December
2020: GBP38m profits) relates to short-term mismatches between the
value of annuity liabilities and the long-term assets backing these
liabilities due to the impact of market movements.
(ii) Other assumptions and model changes of GBP33m for the six
months ended 30 June 2021 (30 June 2020: GBP(15m), year ended 31
December 2020: GBP(52m)) include assumption changes other than
those relating to longevity, including the impact of expense
assumption changes and the impact of improvements to models.
Adjusted operating profit before tax arising from other Savings
and Asset Management is further analysed in the table below:
For the six For the
months ended year ended
30 June 31 December
2021 2020 2020
Breakdown of other Savings and Asset Management adjusted GBPm GBPm GBPm
operating profit
======= ====== ==============
International business (i) 15 11 20
Investment income (ii) 5 (10) 5
Other (45) (26) (53)
=========================================================
Other Savings and Asset Management (25) (25) (28)
========================================================= ====== ============
(i) International business includes our share of profits from
our asset management business in South Africa which was accounted
for as an associate during the period, and profits from our
European savings businesses.
(ii) Investment income includes income arising in Asset
Management, primarily in respect of seed capital investments.
(iii) Reconciliation of adjusted operating profit before tax to
IFRS profit after tax
For the six For the
months ended year ended
30 June 31 December
==============
2021 2020 2020
GBPm GBPm GBPm
======= ====== ==============
Adjusted operating profit before tax 327 309 788
Short-term fluctuations in investment returns (549) 746 678
Restructuring and other costs (85) (22) (73)
IFRS profit attributable to non-controlling interests 3 2 4
====== ============
IFRS profit before tax attributable to equity holders (304) 1,035 1,397
====== ============
Tax charge attributable to equity holders 56 (209) (255)
====== ============
IFRS profit after tax attributable to equity holders (248) 826 1,142
====== ============
Assets under management and administration (AUMA) and net client
flows
(i) Detailed AUMA and net client flows
As at As at
31 December Gross Gross Net client Market/Other 30 June
2020 inflows outflows flows movements 2021
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
Institutional Asset Management 85.5 7.1 (4.9) 2.2 2.0 89.7
Retail Asset Management 64.2 7.9 (11.3) (3.4) 2.0 62.8
Retail Savings 81.8 3.8 (4.6) (0.8) 3.8 84.8
of which: PruFund 55.5 2.1 (2.8) (0.7) 2.5 57.3
Other 0.8 - - - (0.1) 0.7
Total Savings and Asset Management
(i) 232.3 18.8 (20.8) (2.0) 7.7 238.0
Shareholder annuities 35.3 - (0.8) (0.8) (1.6) 32.9
Traditional with-profits 84.3 0.2 (2.5) (2.3) 1.6 83.6
Other 14.1 - (0.2) (0.2) (0.3) 13.6
============ ======== ========= ========== ============ ========
Total Heritage 133.7 0.2 (3.5) (3.3) (0.3) 130.1
============ ======== ========= ========== ============ ========
Corporate assets 1.2 - - - 0.7 1.9
Group total 367.2 19.0 (24.3) (5.3) 8.1 370.0
(i) Included in total Savings and Asset Management AUMA of
GBP238.0 billion (30 June 2020: GBP208.0 billion, 31 December 2020:
GBP232.3 billion) is GBP6.8 billion (30 June 2020: GBP6.0 billion,
31 December 2020: GBP6.5 billion) of assets under advice.
As at As at
31 December Gross Gross Net client Market/Other 30 June
2019 inflows outflows flows movements 2020
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
======== ========= ========== ============ ==========
Institutional Asset Management 76.8 6.5 (3.7) 2.8 1.6 81.2
Retail Asset Management 74.9 8.4 (16.1) (7.7) (3.0) 64.2
Retail Savings 63.5 3.8 (3.0) 0.8 (2.5) 61.8
of which: PruFund 53.8 3.2 (2.6) 0.6 (2.1) 52.3
Other 0.7 - - - 0.1 0.8
Total Savings and Asset Management
(i) 215.9 18.7 (22.8) (4.1) (3.8) 208.0
============ ======== ========= ========== ============ ========
Shareholder annuities 35.5 - (0.9) (0.9) 1.2 35.8
Traditional with-profits 84.8 0.2 (2.5) (2.3) (2.5) 80.0
Other 13.7 - (0.1) (0.1) - 13.6
=================================== ============ ======== ========= ========== ============ ========
Total Heritage 134.0 0.2 (3.5) (3.3) (1.3) 129.4
=================================== ============ ======== ========= ========== ============ ========
Corporate assets 1.6 - - - (0.3) 1.3
======== ========= ========== ============ ========
Group total 351.5 18.9 (26.3) (7.4) (5.4) 338.7
======== ========= ========== ============ ========
As at As at
31 December Gross Gross Net client Market/Other 31 December
2019 inflows outflows flows movements 2020
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
======== ========= ========== ============ ==============
Institutional Asset Management 76.8 13.0 (7.9) 5.1 3.6 85.5
Retail Asset Management 74.9 15.0 (27.1) (12.1) 1.4 64.2
Retail Savings 63.5 6.8 (6.4) 0.4 17.9 81.8
of which: PruFund 53.8 5.2 (4.8) 0.4 1.3 55.5
Other 0.7 - - - 0.1 0.8
Total Savings and Asset
Management
(i) 215.9 34.8 (41.4) (6.6) 23.0 232.3
============ ======== ========= ========== ============ ============
Shareholder annuities 35.5 - (1.8) (1.8) 1.6 35.3
Traditional with-profits 84.8 0.3 (5.0) (4.7) 4.2 84.3
Other 13.7 0.1 (0.2) (0.1) 0.5 14.1
=============================== ============ ======== ========= ========== ============ ============
Total Heritage 134.0 0.4 (7.0) (6.6) 6.3 133.7
=============================== ============ ======== ========= ========== ============ ============
Corporate assets 1.6 - - - (0.4) 1.2
=============================== ============ ======== ========= ========== ============ ============
Group total 351.5 35.2 (48.4) (13.2) 28.9 367.2
=============================== ======== ========= ========== ============ ============
(ii) AUMA by asset class
As at 30 June 2021
On balance sheet AUMA External AUMA Total
Shareholder-backed Total
annuities on
and other balance Total
long-term Corporate sheet external Total
With-profits Unit-linked business assets AUMA Retail Institutional AUMA AUMA
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
============ ======== ====== ============= ========= =======
Investment
property 12.5 0.3 1.4 - 14.2 0.7 13.7 14.4 28.6
Reinsurance
assets - 0.1 1.4 - 1.5 - - - 1.5
Loans 1.6 - 2.2 - 3.8 - 11.5 11.5 15.3
Derivatives
(i) 1.3 - (0.5) - 0.8 0.1 (0.1) - 0.8
Equity
securities
and
pooled
investment
funds 70.3 11.1 - - 81.4 27.1 10.0 37.1 118.5
Deposits 12.5 0.9 1.1 - 14.5 - - - 14.5
Debt
securities 43.1 2.7 18.5 1.2 65.5 33.4 52.0 85.4 150.9
of which:
Corporate 31.5 1.6 12.9 1.2 47.2 20.3 30.0 50.3 97.5
of which:
Government 9.3 1.0 4.9 - 15.2 11.5 12.1 23.6 38.8
of which:
ABS 2.3 0.1 0.7 - 3.1 1.6 9.9 11.5 14.6
Cash and cash
equivalents 2.6 0.2 1.0 1.3 5.1 1.5 2.6 4.1 9.2
Other 0.7 0.1 9.9 - 10.7 - - - 10.7
Other AUMA 20.0
Total (ii) 144.6 15.4 35.0 2.5 197.5 62.8 89.7 152.5 370.0
(i) Derivative assets are shown net of derivative
liabilities.
(ii) Included in total AUMA of GBP370.0 billion (31 December
2020: GBP367.2 billion) is GBP6.8 billion (31 December 2020: GBP6.5
billion) of assets under advice.
As at 31 December 2020
On balance sheet AUMA External AUMA Total
Shareholder-backed Total
annuities on
and other balance Total
long-term Corporate sheet external Total
With-profits Unit-linked business assets AUMA Retail Institutional AUMA AUMA
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
============ =========== ================== ======== ====== ============= ========= =======
Investment
property 12.4 0.4 1.5 - 14.3 1.5 12.9 14.4 28.7
Reinsurance
assets - 0.1 11.6 - 11.7 - - - 11.7
Loans 1.6 - 2.3 - 3.9 - 11.5 11.5 15.4
Derivatives
(i) 2.7 - (0.3) - 2.4 (0.1) (0.2) (0.3) 2.1
Equity
securities
and
pooled
investment
funds 65.1 11.2 - - 76.3 25.7 6.1 31.8 108.1
Deposits 13.4 1.0 1.2 - 15.6 - - - 15.6
Debt
securities 43.4 2.8 20.2 1.0 67.4 35.0 52.7 87.7 155.1
of which:
Corporate 31.7 1.7 14.1 1.0 48.5 20.2 32.2 52.4 100.9
of which:
Government 9.0 1.0 5.3 - 15.3 13.7 12.2 25.9 41.2
of which:
ABS 2.7 0.1 0.8 - 3.6 1.1 8.3 9.4 13.0
Cash and cash
equivalents 3.6 0.2 1.0 0.9 5.7 2.1 2.5 4.6 10.3
Other 1.0 0.1 0.2 - 1.3 - - - 1.3
============ =========== ================== ======== ====== ========= =====
Other AUMA - - - - - - - - 18.9
============ =========== ================== ======== ====== ========= =====
Total (ii) 143.2 15.8 37.7 1.9 198.6 64.2 85.5 149.7 367.2
============ =========== ================== ======== ====== ========= =====
(iii) AUMA by geography
As at As at
30 June 31 December
2021 2020
GBPbn GBPbn
======================= ======== ==============
UK 306.5 306.9
Europe 47.6 44.6
Asia-Pacific 9.0 9.6
Middle East and Africa 5.8 5.2
Americas 1.1 0.9
======================= ======== ============
Total AUMA (i) 370.0 367.2
======== ============
(i) Included in total AUMA of GBP370.0 billion (31 December
2020: GBP367.2 billion) is GBP6.8 billion (31 December 2020: GBP6.5
billion) of assets under advice.
Solvency II capital position
Solvency II overview
The Group is supervised as an insurance group by the Prudential
Regulation Authority. Individual insurance undertakings within the
Group are also subject to the supervision of the Prudential
Regulation Authority (or other EU competent authorities) on a solo
basis under the Solvency II regime.
The Solvency II surplus represents the aggregated capital (own
funds) held by the Group less the Solvency Capital Requirement
(SCR). Own funds is the Solvency II measure of capital available to
meet losses, and is based on the assets less liabilities of the
Group, subject to certain restrictions and adjustments. The SCR is
calculated using the Group's internal model, which calculates the
SCR as the 99.5th percentile (or 1-in-200) worst outcome over the
coming year, out of 100,000 equally likely scenarios, allowing for
the dependency between the risks the business is exposed to.
Estimated and unaudited reconciliation of IFRS shareholders'
equity to Group Solvency II own funds
As at As at
30 June 31 December
2021 2020
GBPbn GBPbn
============
IFRS shareholders' equity 5.1 5.6
Add back unallocated surplus of the With-Profits Fund 16.2 15.6
Deduct goodwill and intangible assets (1.3) (1.3)
Net impact of valuing policyholder liabilities and reinsurance
assets on Solvency II basis (0.3) 0.3
Impact of introducing Solvency II risk margin (net of transitional
measures) (1.4) (1.5)
Impact of measuring assets and liabilities in line with Solvency
II principles 0.1 (0.1)
Recognise own shares 0.1 0.1
Other (0.2) (0.1)
============
Solvency II excess of assets over liabilities 18.3 18.6
============
Subordinated debt capital 3.7 4.0
Ring-fenced fund restrictions (7.4) (7.0)
Deduct own shares (0.1) (0.1)
Solvency II eligible own funds 14.5 15.5
The key items in the reconciliation are explained below:
- Unallocated surplus of the With-Profits Fund: this amount is
treated as a liability under IFRS, but considered surplus assets
under Solvency II.
- Goodwill and intangible assets: these assets are not
recognised under Solvency II as they are not readily available to
meet emerging losses.
- Policyholder liability and reinsurance asset valuation
differences: there are significant differences in the valuation of
technical provisions between IFRS and Solvency II. The most
material differences relate to the exclusion of prudent margins in
longevity assumptions under Solvency II, and also the use of
different discount rates, both in relation to the valuation of
annuity liabilities.
- Solvency II risk margin (net of transitional measures): the
risk margin is a significant component of technical provisions
required to be held under Solvency II. These additional
requirements are partially mitigated by transitional measures which
allow the impact to be gradually introduced over a period of 16
years from the introduction of Solvency II on 1 January 2016.
- Subordinated debt capital: subordinated debt is treated as a
liability in the IFRS financial statements and in determining the
excess of assets over liabilities in the Solvency II balance sheet.
However, for Solvency II own funds, the debt can be treated as
capital.
- Ring-fenced fund restrictions: any excess of the own funds
over the solvency capital requirements from the With-Profits Fund
is restricted as these amounts are not available to meet losses
elsewhere in the Group.
Composition of own funds
The Group's total estimated and unaudited own funds are analysed
by Tier as follows:
As at As at
30 June 31 December
2021 2020
GBPbn GBPbn
======== ============
Tier 1 (unrestricted) 10.7 11.4
Tier 1 (restricted) - -
Tier 2 3.7 4.0
Tier 3 0.1 0.1
Total own funds 14.5 15.5
The Group's Tier 2 capital consists of subordinated debt
instruments. The terms of these instruments allow them to be
treated as capital for the purposes of Solvency II. The instruments
were originally issued by Prudential plc, and subsequently
substituted to the parent company, as permitted under the terms and
conditions of each applicable instrument, prior to demerger. The
details of the Group's subordinated liabilities are shown in Note
11. The Solvency II value of the debt differs to the IFRS carrying
value due to a different basis of measurement on the respective
balance sheets.
The Group's Tier 3 capital of GBP0.1bn (31 December 2020: GBP0.1
billion) relates to deferred tax asset balances.
Estimated and unaudited shareholder view of the Solvency II
capital position
The Group focuses on a shareholder view of the Solvency II
capital position, which is considered to provide a more relevant
reflection of the capital strength of the Group.
The estimated and unaudited shareholder Solvency II capital
position for the Group as at 30 June 2021 and 31 December 2020 is
shown below:
As at As at
30 June 31 December
2021 2020
GBPbn GBPbn
Shareholder Solvency II own funds 10.8 10.6
Shareholder Solvency II SCR (5.4) (5.8)
Solvency II surplus 5.4 4.8
Shareholder Solvency II coverage ratio (i) 198% 182%
(i) Shareholder Solvency II coverage ratio has been calculated
using unrounded figures.
The Group's shareholder Solvency II capital position excludes
the contribution to own funds and SCR from the ring-fenced
With-Profits Fund. Further information on the ring-fenced
With-Profits Fund's capital position is provided in the 'Estimated
and unaudited With-Profits Fund view of the Solvency II capital
position' section.
In accordance with the Solvency II requirements, these results
include:
- A Solvency Capital Requirement which has been calculated using
the Group's internal model.
- Transitional measures, which are presented after assuming a
recalculation at the valuation date, using management's estimate of
the impact of operating and market conditions. As at 30 June 2021,
the recalculated transitional measures do not align to the latest
approved regulatory position and therefore the estimated and
unaudited Solvency II capital position will differ to the position
disclosed in the formal regulatory Quantitative Reporting
Templates.
- A matching adjustment for non-profit annuities, based on
approval from the Prudential Regulation Authority.
- M&G Group Limited and other undertakings carrying out
financial activities consolidated under local sectoral or notional
sectoral capital requirements.
Breakdown of the shareholder Solvency II SCR by risk type
As at As at
30 June 31 December
2021 2020
GBPbn GBPbn
======== ============
Equity 1.6 1.5
Property 0.9 0.9
Interest rate 0.4 0.4
Credit 3.1 3.5
Currency 1.0 0.9
Longevity 1.7 2.1
Lapse 0.3 0.2
Operational and expense 1.5 1.6
Sectoral (i) 0.5 0.5
Total undiversified 11.0 11.6
Diversification, deferred tax, and other (5.5) (5.8)
Shareholder SCR 5.5 5.8
(i) Includes entities included within the Group's Solvency II
capital position on a sectoral or notional sectoral basis, the most
material of which is M&G Group Limited.
Sensitivity analysis of the shareholder Solvency II coverage
ratio
The estimated sensitivity of the Group's shareholder Solvency II
coverage ratio to significant changes in market conditions are
shown below. All sensitivities are presented after an assumed
recalculation of transitional measures on technical provisions.
As at 30 June As at 31 December
2021 2020
Shareholder Shareholder
coverage coverage
Surplus ratio Surplus ratio
GBPbn % GBPbn %
Base (as reported) 5.4 198% 4.8 182%
20% instantaneous fall in equity markets 4.8 189% 4.3 175%
20% instantaneous fall in property markets 4.9 191% 4.4 175%
50 bp reduction in interest rates 5.3 190% 4.6 173%
100 bp widening in credit spreads 4.9 195% 4.3 178%
20% credit asset downgrade (i) 5.0 190% 4.4 175%
======= === ========
(i) Average impact of one full letter downgrade across 20% of
assets exposed to credit risk.
Estimated and unaudited With-Profits Fund view of the Solvency
II capital position
The With-Profits Fund view of the Solvency II capital position
represents the standalone capital strength of the Group's
ring-fenced With-Profits Fund. This view of Solvency II capital
takes into account the assets, liabilities, and risk exposures
within the ring-fenced With-Profits Fund, which includes the WPSF
and DCPSF. On 1 April 2021, SAIF merged with PAC's main WPSF and
the assets and liabilities of SAIF combined with those of the
WPSF.
The estimated and unaudited Solvency II capital position for the
Group under the With-Profits Fund view as at 30 June 2021 and 31
December 2020 is shown below:
As at As at
30 June 31 December
2021 2020
GBPbn GBPbn
With-Profits Fund Solvency II own funds 11.0 11.9
With-Profits Fund Solvency II SCR (3.6) (4.9)
With-Profits Fund Solvency II surplus 7.4 7.0
With-Profits Fund Solvency II coverage ratio (i) 301% 242%
(i) With-Profits Fund Solvency II coverage ratio has been
calculated using unrounded figures.
Estimated regulatory view of the Solvency II capital
position
The estimated and unaudited Solvency II capital position for the
Group under the 'regulatory' view is shown below:
As at As at
30 June 31 December
2021 2020
GBPbn GBPbn
Solvency II own funds 14.5 15.5
Solvency II SCR (9.1) (10.7)
Solvency II surplus 5.4 4.8
Solvency II coverage ratio (i) 159% 144%
(i) Solvency II coverage ratio has been calculated using
unrounded figures.
Capital generation
The level of surplus capital is an important financial
consideration for the Group. Capital generation measures the change
in surplus capital during the reporting period, and is therefore
considered a key measure for the Group. It is integral to the
running and monitoring of the business, capital allocation and
investment decisions, and ultimately the Group's dividend
policy.
The overall change in Solvency II surplus capital over the
period is analysed as follows:
Total capital generation is the total change in Solvency II
surplus capital before dividends and capital movements and capital
generated from discontinued operations.
Operating capital generation is the total capital generation
before tax, adjusted to exclude market movements relative to those
expected under long-term assumptions and to remove other
non-recurring items, including shareholder restructuring and other
costs as defined under adjusted operating profit before tax. It has
two components:
a. Underlying capital generation, which includes: the underlying
expected surplus capital from the in-force life insurance business;
the change in surplus capital as a result of writing new life
insurance business; the adjusted operating profit before tax and
associated capital movements from Asset Management; and other items
including head office expenses and debt interest costs.
b. Other operating capital generation, which includes non-market
related experience variances, assumption changes, modelling changes
and other movements.
Dividends and capital movements primarily represent external
dividends paid to shareholders and changes to the capital structure
of the Group, such as issuing or repaying debt instruments. Also
included within capital movements are the Solvency II impact of the
Group's share-based payment awards over and above the amount
expensed in respect of those awards, and the surplus utilised or
generated from transactions relating to the acquisition of business
as defined by IFRS.
The expected surplus capital from the in-force life insurance
business is calculated on the assumption of real-world investment
returns, which are determined by reference to the risk-free rate
plus a risk premium based on the mix of assets held for the
relevant business. For with-profits business, the assumed average
return was 4.0% for the six months ended 30 June 2021, 4.3% for the
six months ended 30 June 2020 and the year ended 31 December 2020.
For annuity business, the assumed average return on assets backing
capital was 1.15% for the six months ended 30 June 2021, 2.09% for
the six months ended 30 June 2020 and 2.09% for the year ended 31
December 2020.
The Group's capital generation results in respect of the six
months ended 30 June 2021 and 30 June 2020, and year ended 31
December 2020 are shown below, alongside a reconciliation of the
total movement in the Group's Solvency II surplus. The
reconciliation is presented showing the impact on the shareholder
Solvency II own funds and SCR, which excludes the contribution to
own funds and SCR from the Group's ring-fenced With-Profits Fund.
The shareholder Solvency II capital position, and how this
reconciles to the regulatory capital position, is described in
detail in the previous section of this supplementary
information.
Savings and Asset
Management Heritage Corporate Centre Total
For For For For For For For For
the the the the For the the For the the For
six six For the six six the six six the six six the
months months year months months year months months year months months year
ended ended ended ended ended ended ended ended ended ended ended ended
30 30 31 30 30 31 30 30 31 30 30 31
June June December June June December June June December June June December
2021 2020 2020 2021 2020 2020 2021 2020 2020 2021 2020 2020
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Underlying
capital
generation 176 186 417 182 209 446 (142) (132) (286) 216 263 577
Other
operating
capital
generation (4) 18 83 98 262 564 (1) (4) 88 93 276 735
Operating
capital
generation 172 204 500 280 471 1,010 (143) (136) (198) 309 539 1,312
Market
movements 600 (614) (118)
Restructuring
and other
costs (113) (20) (73)
Tax 73 (107) (126)
Total capital
generation 869 (202) 995
For the six months For the six months For the year
ended 30 June ended 30 June ended 31 December
2021 2020 2020
Own Own Own
funds SCR funds SCR funds SCR
(i) (i) Surplus (i) (i) Surplus (i) (i) Surplus
Reconciliation of movement
in
Group Solvency II surplus GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Underlying capital
generation
Savings and
Asset Asset
Management Management 140 4 144 163 (8) 155 316 (8) 308
With-profits 93 (67) 26 87 (69) 18 163 (75) 88
of which: In-force 89 (39) 50 76 (37) 39 151 (51) 100
of which: New
business 4 (28) (24) 11 (32) (21) 12 (24) (12)
Other 6 - 6 16 (3) 13 26 (5) 21
Savings and Asset
Management underlying
capital generation 239 (63) 176 266 (80) 186 505 (88) 417
Heritage With-profits 65 3 68 49 (9) 40 100 5 105
Shareholder annuity
and other 46 68 114 95 74 169 193 148 341
Heritage underlying
capital generation 111 71 182 144 65 209 293 153 446
Interest and
head
Corporate office cost (138) (4) (142) (134) 2 (132) (289) 3 (286)
======
Underlying capital
generation 212 4 216 276 (13) 263 509 68 577
======
Other operating capital
generation
Savings and Asset
Management (55) 51 (4) (9) 27 18 27 56 83
Heritage 1 97 98 152 110 262 297 267 564
Corporate Centre 3 (4) (1) 2 (6) (4) 82 6 88
======
Operating capital
generation 161 148 309 421 118 539 915 397 1,312
======
Market movements 340 260 600 (326) (288) (614) 283 (401) (118)
Restructuring
and other (99) (14) (113) (20) - (20) (73) - (73)
Tax 87 (14) 73 (141) 34 (107) (159) 33 (126)
======
Total capital generation 489 380 869 (66) (136) (202) 966 29 995
======
Dividends and capital
movements (293) - (293) (410) - (410) (644) (39) (683)
======
Total increase/(decrease)
in Solvency
II surplus 196 380 576 (476) (136) (612) 322 (10) 312
======
(i) Own funds and SCR movements shown as per the shareholder
Solvency II capital position, and do not include the own funds and
SCR in respect of the ring-fenced With-Profits Fund.
Financial ratios
Included in this section are details of how some of the
financial ratios used to help analyse the performance of the Asset
Management business are calculated.
(i) Cost/income ratio
Cost/income ratio is a measure of cost efficiency which analyses
costs as a percentage of revenue.
For the six months For the
ended year ended
30 June 31 December
2021 2020 2020
GBPm GBPm GBPm
====================================================
Total Asset Management operating expenses 333 306 672
Adjustment for revaluations (i) 2 1 2
Total Asset Management adjusted costs 335 307 674
====================================================
Total Asset Management fee-based revenue 473 469 988
Less: Performance fees (4) (3) (42)
====================================================
Total Asset Management underlying fee-based revenue 469 466 946
====================================================
Cost/income ratio (%) 71% 66% 71%
==================================================== ==== ======
(i) Reflects the revaluation of provisions relating to
performance based awards that are linked to underlying fund
performance. M&G Group hold units in the underlying funds to
hedge the exposure on these awards.
(ii) Average revenue margin
This represents the average fee revenue yield on fee business
and demonstrates the margin being earned on the assets we manage or
administer.
For the year ended
For the six months ended 30 June 31 December
2021 2020 2020
Average Revenue Average Revenue Average Revenue
AUMA Revenue margin AUMA Revenue margin AUMA Revenue margin
(i) (ii) (iii) (i) (ii) (iii) (i) (ii) (iii)
GBPbn GBPm bps GBPbn GBPm bps GBPbn GBPm bps
Retail Asset
Management 100 213 42 92 230 50 93 466 50
Institutional
Asset
Management 182 256 28 169 236 28 171 480 28
Total Asset
Management 282 469 33 261 466 36 264 946 36
(i) Average AUMA represents the average total market value of
all financial assets managed and administered on behalf of
customers during the financial period. Average AUMA is calculated
using a 13-point average of monthly closing AUMA for full-year
periods and seven-point average of monthly closing AUMA for
half-year periods. This includes internal AUMA in Retail Asset
Management of GBP42bn (30 June 2020: GBP29bn; 31 December 2020:
GBP32bn) and in Institutional Asset Management of GBP97bn (30 June
2020: GBP91bn; 31 December 2020: GBP91bn) which is not included in
the Retail and Institutional Asset Management lines within the
detailed AUMA tables.
(ii) Revenue margin is calculated by annualising underlying fee
based revenues earned, which excludes performance fees, in the
period divided by average AUMA for the period. Revenue includes
GBP129m of internal revenue (30 June 2020: GBP104m; 31 December
2020: GBP227m), of which GBP104m (30 June 2020: GBP89m, 31 December
2020: GBP188m) is included in Institutional Asset Management and
GBP25m (30 June 2020: GBP15m, 31 December 2020: GBP39m) in Retail
Asset Management.
(iii) Fee margin relates to the total margin for internal and
external revenue. Retail Asset Management external revenue margin
is 65 bps (30 June 2020: 68 bps, 31 December 2020: 70 bps) and
Institutional Asset Management external revenue margin is 36 bps
(30 June 2020: 38 bps, 31 December 2020: 37 bps). Total Asset
Management internal revenue margin is 19 bps (30 June 2020: 17 bps,
31 December 2020: 18 bps).
Credit risk
The Group's exposure to credit risk primarily arises from the
annuity portfolio, which holds large amounts of investments on
which a certain level of defaults and downgrades are expected.
While the with-profits and unit-linked funds have large holdings
of assets subject to credit risk, the shareholder results of the
Group are not directly exposed to credit defaults on assets held in
these components. The direct exposure of the Group's shareholders'
equity to credit default risk in other areas of the business is
small in the context of the Group. However, the shareholder is
indirectly exposed to credit risk through lower shareholder
transfers in respect of the with-profits business, and lower
charges levied in respect of the unit-linked and other components
of the business.
Debt securities
Debt securities held in respect of annuities and other long-term
business are analysed below by asset class:
As at As at
30 June 31 December
2021 2020
GBPm GBPm
======================== ======== ==============
Government bonds 4,972 5,354
Corporate bonds 12,866 14,113
Asset-backed securities 748 807
======== ============
Total debt securities 18,586 20,274
======================== ======== ============
Debt securities held in respect of annuities and other long-term
business are analysed below according to external credit ratings
[3] issued, with equivalent ratings issued by different ratings
agencies grouped together. Standard & Poor's ratings have been
used where available. For securities where Standard & Poor's
ratings are not immediately available those produced by Moody's and
then Fitch have been used as an alternative. Debt securities are
internally rated where no external credit rating is available.
As at As at
30 June 31 December
2021 2020
GBPm GBPm
======== ==============
AAA 2,590 2,274
AA+ to AA- 6,119 7,202
A+ to A- 5,859 6,639
BBB+ to BBB- 3,381 3,484
Below BBB- 637 675
======== ============
Total 18,586 20,274
======== ============
In the table above, AAA is the highest possible rating.
Investment grade financial assets are classified within the range
of AAA to BBB ratings. Financial assets which fall outside this
range are classified as below BBB.
Asset-backed securities
The annuities and other long-term business segment has holdings
in asset-backed securities (ABS) which are presented within debt
securities on the condensed consolidated statement of financial
position. These holdings in ABS comprise residential
mortgage-backed securities (RMBS), commercial mortgage-backed
securities (CMBS), collateralised debt obligations (CDO) funds and
other asset-backed securities. At 30 June 2021 the annuities and
other longer term business holdings in asset-backed securities was
GBP748m (31 December 2020: GBP807m). The majority of these asset
backed securities are UK securities.
Exposure to sovereign debt
The exposure of annuity and other long term business to
sovereign debt is analysed as follows:
As at As at
30 June 31 December
2021 2020
GBPm GBPm
======== ==============
Spain 46 57
France 69 22
Germany 113 137
Total Eurozone 228 216
United Kingdom 1,822 1,949
Other 177 180
======== ============
Total 2,227 2,345
======== ============
This table does not include non-central sovereign debt (Quasi
sovereign, Supranational and other public sector debt), therefore
does not agree to the Government debt balance within the debt
securities by industry disclosures that follow.
Exposure to debt securities issued by banks
The exposure of annuities and other long term business to debt
securities issued by banks is shown below by type of debt and also
by economy. Subordinated debt is a fixed interest debt that ranks
below other debt in order of priority for repayment if the issuer
is liquidated.
Holders are compensated for the added risk through higher rates
of interest. The senior debt ranks above subordinated debt in the
event of liquidation, whereas covered senior debt is also backed by
other assets in the event of insolvency. These debt tier
classifications are consistent with the treatment of capital for
regulatory purposes.
Subordinated
Senior debt debt
Total Total
senior Tier subordinated
Covered Senior debt 2 debt Total
As at 30 June 2021 GBPm GBPm GBPm GBPm GBPm GBPm
France 12 48 60 - - 60
Germany 3 - 3 81 81 84
Netherlands - 44 44 - - 44
Other Eurozone - 23 23 - - 23
Total Eurozone 15 115 130 81 81 211
United Kingdom 370 116 486 106 106 592
United States - 234 234 31 31 265
Other - 23 23 - - 23
Total 385 488 873 218 218 1,091
Senior debt Subordinated
debt
Total Total
senior Tier subordinated
Covered Senior debt 2 debt Total
As at 31 December 2020 GBPm GBPm GBPm GBPm GBPm GBPm
France 12 34 46 - - 46
Germany 3 - 3 90 90 93
Netherlands - 45 45 - - 45
Other Eurozone - - - - - -
Total Eurozone 15 79 94 90 90 184
United Kingdom 409 190 599 72 72 671
United States - 247 247 33 33 280
Other - 23 23 36 36 59
=======
Total 424 539 963 231 231 1,194
=======
Exposure of debt securities by sector
The exposure of annuities and other long term business to debt
securities is analysed below by sector:
As at As at
30 June 31 December
2021 2020
GBPm GBPm
Financial 5,825 6,317
Government 4,972 5,354
Real Estate 2,797 3,036
Utilities 2,432 2,727
Consumer 855 967
Industrial 619 709
Communications 392 431
Other 694 733
======== ============
Total 18,586 20,274
Glossary
Term Definition Term Definition
Adjusted Adjusted operating profit Chief Operating The Group
operating before tax is one of Decision Maker Executive
profit before the Group's key alternative Committee.
tax performance measures.
It is defined in the
alternative performance
measure section on page
52.
Alternative An APM is a financial Company/Parent M&G plc, a public
performance measure of historical Company limited
measure (APM) or future financial performance, company
financial position or incorporated in
cash flows, other than England and Wales
a financial measure defined with
under IFRS or under Solvency registered number
II regulations. 11444019
whose registered
office
is 10 Fenchurch
Avenue,
London EC3M 5AG,
United
Kingdom.
Asset-backed A security whose value Demerger The demerger of
securities (ABS) and income payments are the Group
derived from and collateralised from the
(or 'backed') by a specified Prudential Group
pool of underlying assets. in October 2019.
The pool of assets is
typically a group of
small and illiquid assets
that are unable to be
sold individually.
Asset management The asset management Director A Director of the
cost/income cost/income ratio represents Company.
ratio total operating expenses
excluding revaluation
of provisions for employee
performance awards divided
by total fee-based revenues,
excluding performance
fees.
Assets under Assets under management Earnings per Earnings per
management and and administration represents share (EPS) share (EPS)
administration the total market value is a commonly
(AUMA) of all financial assets used financial
managed, administered metric which can
or advised on behalf be used
of customers and clients. to measure the
profitability
and strength of a
company
over time. EPS is
calculated
by dividing
profit by
the number of
ordinary
shares. Basic EPS
uses
the weighted
average number
of ordinary
shares
outstanding
during the year.
Diluted
EPS adjusts the
weighted
average number of
ordinary
shares
outstanding to
assume conversion
of all
dilutive
potential
ordinary
shares, such as
share
options awarded
to employees.
Average fee The average fee margin Employee benefit An employee
margin is calculated from fee-based trust (EBT) benefit trust
revenues earned in the (EBT) is a trust
period, excluding performance set up
fees, divided by average to enable its
AUMA for the period. Trustee
It demonstrates the revenue to purchase and
margin that was earned hold shares
on the assets we manage to satisfy
and administer. employee
share-based
incentive plan
awards.
Board The Board of directors Fair value Fair value
of the Company. through through profit
profit or loss or loss (FVTPL)
(FVTPL) is an
IFRS measurement
basis
permitted for
assets and
liabilities which
meet
certain criteria.
Gains
or losses on
assets or
liabilities
measured at
FVTPL are
recognised
directly
in the condensed
consolidated
income statement.
Bonuses Bonuses refer to the FCA` Financial Conduct
non-guaranteed benefit Authority
added to participating - the body
life insurance policies responsible
and are the way in which for supervising
policyholders receive the conduct
their share of the profits of all financial
of the policies. There services
are normally two types firms and for the
of bonus: prudential
regulation of
* Regular bonus: expected to be added every year during those financial
the term of the policy. It is not guaranteed that a services firms
regular bonus will be added each year, but once it is not supervised
added, it cannot be reversed, also known as annual or by the Prudential
reversionary bonus; and Regulation
Authority (PRA),
such
as asset managers
* Final bonus: an additional bonus expected to be paid and
when policyholders take money from the policies. If independent
investment return has been low over the lifetime of financial
the policy, a final bonus may not be paid. Final advisers.
bonuses may vary and are not guaranteed.
Group The Company and
its subsidiaries.
Term Definition Term Definition
Group Executive The Group Executive Committee Operating capital Operating capital generation
Committee is composed of board generation is the total capital generation
officers and senior-level before tax, adjusted to
executive management. exclude market movements
It is the Group's most relative to those expected
senior executive decision-making under long-term assumptions
forum. and to remove other
non-operating
items, including shareholder
restructuring costs.
International International Financial Own funds Own funds refers to the
Financial Reporting Reporting Standards are Solvency II measure of
Standards (IFRS) accounting standards capital available to meet
issued by the International losses, and is based on
Accounting Standards the assets less liabilities
Board (IASB). The Group's of the Group, subject
consolidated financial to certain restrictions
statements are prepared and adjustments.
in accordance with IFRS
adopted pursuant to Regulation
(EC) No 1606/2002 as
it applies in the European
Union.
Key performance The Group measures its Prudential Regulation The PRA is the body responsible
measure (KPM) financial performance Authority (PRA) for the prudential regulation
using the following key and supervision of banks,
performance measures: building societies, credit
IFRS result after tax, unions, insurers and major
adjusted operating profit investment firms.
before tax, Savings and
Asset Management net
client flows, AUMA, shareholder
Solvency II coverage
ratio, total capital
generation and operating
capital generation.
Leverage ratio The leverage ratio is Prudential Assurance The Prudential Assurance
calculated as the nominal Company (PAC) Company Limited, a private
value of debt as a percentage limited company incorporated
of the Group's shareholder in England and Wales with
Solvency II own funds. registered number 00015454
whose registered office
is 10 Fenchurch Avenue,
London, EC3M 5AG, United
Kingdom
Long term incentive The part of an executive's Prudential Group Prudential plc and its
plan (LTIP) remuneration designed subsidiaries and subsidiary
to incentivise long-term undertakings.
value for shareholders
through an award of shares
with vesting contingent
on employment and the
satisfaction of stretching
performance conditions
linked to the Group's
strategy.
Merger and Transformation In August 2017, Prudential Prudential plc Prudential plc is a public
Programme plc announced the merger limited company incorporated
of its UK and Europe in England and Wales with
business with the asset registered number 1397169
manager M&G to form the whose registered office
Group (the Merger). In is 1 Angel Court, London
conjunction with the EC2R 7AG, United Kingdom.
Merger, and as part of
the execution of its
business strategy, the
Group is implementing
a transformation programme,
with a number of initiatives
and programmes. This
is expected to be completed
in 2022.
M&G Group Limited MGG is a private limited PruFund Our PruFund proposition
(MGG) company incorporated provides our retail customers
in England and Wales with access to smoothed
with registered number savings contracts with
00633480 whose registered a wide choice of investment
office is 10 Fenchurch profiles.
Avenue, London EC3M 5AG,
United Kingdom.
MGG is the holding company
of the Group's asset
management business,
M&G Investments.
Net client flows Net client flows represent Rothesay Life Rothesay Life PLC
gross inflows less gross
outflows. Gross inflows
are new funds from clients
and customers. Gross
outflows are money withdrawn
by clients and customers
during the period.
Non-profit business Contracts where the Scottish Amicable SAIF was a ring-fenced
policyholders Insurance Fund sub-fund of the With-Profits
are not entitled to a (SAIF) Fund following the acquisition
share of the company's of the mutually owned
profit and surplus, but Scottish Amicable Life
are entitled to other Assurance Society in 1997.
contractual benefits. The fund was solely for
Examples include pure the benefit of policyholders
risk policies (such as of SAIF. On 1 April 2021
fixed annuities) and SAIF merged with PAC's
unit-linked policies. main with-profits sub-fund
and the assets and liabilities
of SAIF combined with
those of the with-profits
sub-fund.
Term Definition Term Definition
Shareholder Shareholder Solvency Unallocated Unallocated surplus of
Solvency II II coverage ratio is surplus of the the With-Profits Fund
coverage ratio the ratio of own funds With-Profits represents the excess
to solvency capital requirement Fund of assets over policyholder
(SCR), excluding the liabilities that have
contribution to own funds yet to be appropriated
and SCR from the Group's between policyholders
ring-fenced With-Profits and shareholders.
Fund.
Solvency II A regime for the prudential Unit-linked A policy where the benefits
regulation of insurance policy are determined by the
companies that was introduced investment performance
by the EU on 1 January of the underlying assets
2016 in the unit--linked fund.
Solvency II Solvency II surplus represents With-profits Contracts where the policyholders
surplus the own funds held by business have a contractual right
the Group less the solvency to receive, at the discretion
capital requirement. of the company, additional
benefits based on the
profits of the fund, as
a supplement to any guaranteed
benefits.
Total capital Total capital generation With-Profits The Prudential Assurance
generation is the total change in Fund Company Limited's fund
Solvency II surplus capital where policyholders are
before dividends and entitled to a share of
capital movements. the profits of the fund.
Normally, policyholders
receive their share of
the profits through bonuses.
It is also known as a
participating fund as
policyholders have a participating
interest in the With-Profits
Fund and any declared
bonuses.
Transitional Transitional measures
measures on technical provisions
are an adjustment to
Solvency II technical
provisions, to smooth
the impact of the change
in the regulatory regime
on 1 January 2016. This
decreases linearly over
16 years following the
implementation of Solvency
II, but may be recalculated
in certain cases, subject
to agreement with the
PRA.
[1] The Group accepts new members to existing Corporate Pension
schemes and writes a small number of new annuity policies with
customers who have a pension issued by PAC.
[2] These cash flow hedges do not constitute hedge accounting
arrangements under IAS 39.
[3] The credit ratings, information or data contained in this
report which are attributed and specifically provided by Standard
& Poor's, Moody's and Fitch Solutions and their respective
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END
IR GZGGRLLFGMZM
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August 10, 2021 02:00 ET (06:00 GMT)
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