REG - Prudential PLC Prudential Fdg(Asia) - Prudential plc – FY23 Results – EEV
20/03/2024 11:45
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RNS Number : 5126H Prudential PLC 20 March 2024
European Embedded Value (EEV) basis results
EEV results highlights
2023 2022
AER CER
$m $m % change $m % change
New business profit (note (i)) 3,125 2,184 43% 2,149 45%
Annual premium equivalent (APE) (note (i)) 5,876 4,393 34% 4,287 37%
New business margin (APE) (%) 53% 50% +3pp 50% +3pp
Present value of new business premiums (PVNBP) 28,737 22,406 28% 22,080 30%
Operating free surplus generated (notes (i)(ii)) 2,007 2,193 (8)% 2,173 (8)%
Operating free surplus generated from in-force insurance and asset management 2,740 2,760 (1)% 2,725 1%
business (notes (i)(ii))
EEV operating profit (notes (i)(iii)) 4,546 3,952 15% 3,901 17%
EEV operating profit, net of non-controlling interests 4,526 3,923 15% 3,872 17%
Operating return on average EEV shareholders' equity, net of non-controlling 10% 9%
interests (%)
Closing EEV shareholders' equity, net of non-controlling interests 45,250 42,184 7% 42,038 8%
Closing EEV shareholders' equity, net of non-controlling interests per share 1,643¢ 1,534¢ 7% 1,529¢ 7%
(in cents)
Notes
(i) Results are presented before deducting the amounts attributable to
non-controlling interests. This presentation is applied consistently
throughout this document, unless stated otherwise.
(ii) Operating free surplus generated is for long-term and asset management
businesses only and is stated before restructuring and IFRS 17 implementation
costs, centrally incurred costs and eliminations.
(iii) Group EEV operating profit is stated after restructuring and IFRS 17
implementation costs, centrally incurred costs and eliminations.
European Embedded Value (EEV) basis results
Basis of preparation
IFRS profit for insurance contracts largely reflects the level of services
provided for a given period. Unearned future profits expected on those same
insurance contracts are contained in a separate liability called the
contractual service margin. These future profits have been derived on a risk
neutral basis (including a liquidity premium), namely without allowing for the
real world investment return that will be earned on the assets held. By
contrast, EEV reflects all future profits, with no equivalent liability to the
contractual service margin, but values those profits on a risk adjusted real
world basis, namely allowing for the future investment returns that are
expected to be earned by the assets held but uses a higher discount rate that
allows for the uncertainties in these cash flows. The value of future new
business is excluded from the embedded value.
The EEV Principles provide consistent definitions of the components of EEV, a
framework for setting assumptions and an approach to the underlying
methodology and disclosures. The EEV Principles were designed to provide
guidance and common principles that could be understood by both users and
preparers alongside prescribing a minimum level of disclosures to enable users
to understand an entity's methodology, assumptions and key judgements as well
as the sensitivity of an entity's EEV to key assumptions. Results prepared
under the EEV Principles represent the present value of the shareholders'
interest in the post-tax future profits (generally on a local statutory basis)
expected to arise from the current book of long-term business, after
sufficient allowance has been made for the aggregate risks in the business.
The shareholders' interest in the Group's long-term business is the sum of the
shareholders' total net worth and the value of in-force business.
For the purposes of preparing EEV results, insurance joint ventures and
associates are included at the Group's proportionate share of their embedded
value and not at their market value. Asset management and other non-insurance
subsidiaries, joint ventures and associates are included in the EEV results at
the Group's proportionate share of IFRS shareholders' equity, with central
Group debt shown on a market value basis. Further information is contained in
note 5.
Key features of the Group's EEV methodology include:
Economic assumptions: The projected post-tax profits assume a level of future
investment return and are discounted using a risk discount rate. Both the risk
discount rate and the investment return assumptions are updated at each
valuation date to reflect current market risk-free rates, such that changes in
market risk-free rates impact all projected future cash flows. Risk-free
rates, and hence investment return assumptions, are based on observable market
data, with current market risk-free rates assumed to remain constant and do
not revert to longer-term rates over time. Different products will be
sensitive to different assumptions, for example, participating products or
products with guarantees are likely to benefit disproportionately from higher
assumed investment returns.
Time value of financial options and guarantees: Explicit quantified allowances
are made for the time value of financial options and guarantees (TVOG). The
TVOG is determined by weighting the probability of outcomes across a large
number of different economic scenarios and is typically less applicable to
health and protection business that generally contains more limited financial
options or guarantees. At 31 December 2023, the TVOG is $(290) million
(31 December 2022: $(151) million). The magnitude of the TVOG at 31 December
2023 would be approximately equivalent to a 6 basis point (2022: 3 basis
point) increase in the weighted average risk discount rate.
Allowance for risk in the risk discount rates: Risk discount rates are set
equal to the risk-free rate at the valuation date plus product-specific
allowances for market and non-market risks. Risks that are explicitly captured
elsewhere, such as via the TVOG, are not included in the risk discount rates.
The allowance for market risk is based on a product-by-product assessment of
the sensitivity of shareholder cash flows to varying market returns. This
approach reflects the inherent market risk in each product group and results
in lower risk discount rates for products where the majority of shareholder
profit is uncorrelated to market risk and appropriately higher risk discount
rates for products where there is greater market exposure for shareholders.
For example, for health and protection products, which represent 51 per cent
of the value of in-force business (31 December 2022: 51 per cent) and 40 per
cent of new business profit (31 December 2022: 43 per cent), the major sources
of shareholder profits are underwriting profits or fixed shareholder charges
which have low market risk sensitivity. The proportion of health and
protection business varies with interest rates as well as the mix of business
sold in the current period.
The construct of UK-style with-profits or similar participating funds in some
business units, representing 27 per cent of the value of in-force (31 December
2022: 26 per cent) and 14 per cent of new business profit (31 December 2022:
18 per cent), reduce the market volatility of both policyholder and
shareholder cash flows due to smoothed bonus declarations and for some markets
the presence of an estate. Accordingly, 78 per cent of the value of in-force
(31 December 2022: 77 per cent) is products with low market risk sensitivity
and this is reflected in the overall risk discount rate.
For unit-linked products where fund management charges fluctuate with the
investment return, a portion of the profits will typically be more sensitive
to market risk due to the higher proportion of equity-type assets in the
investment portfolio resulting in a higher risk discount rate. This business
represents 13 per cent of the value of in-force (31 December 2022: 17 per
cent) and 4 per cent of the value of new business profit (31 December 2022: 11
per cent) which limits the impact on the overall risk discount rate.
The remaining parts of the business, 9 per cent of the value of in-force
business (31 December 2022: 6 per cent) and 42 per cent of the value of new
business (31 December 2022: 28 per cent), relate to other products not covered
by the above. The high proportion of new business in the current period
reflects the higher proportion of savings product in Hong Kong as the border
reopened.
The allowance for non-market risk comprises a base Group-wide allowance of 50
basis points plus additional allowances for emerging market risk where
appropriate. At 31 December 2023, the total allowance for non-market risk is
equivalent to a $(3.0) billion (31 December 2022: $(2.8) billion) reduction,
or around (7) per cent (31 December 2022: (7) per cent) of the embedded value.
Movement in Group EEV shareholders' equity
2023 $m 2022 $m
Note Insurance Other Group Group
and asset (central) total total
management operations
operations
New business profit 1 3,125 - 3,125 2,184
Profit from in-force business 2 1,779 - 1,779 2,358
Long-term business 4,904 - 4,904 4,542
Asset management 254 - 254 234
Operating profit from long-term and asset management businesses 5,158 - 5,158 4,776
Other income (expenditure) 5 - (420) (420) (542)
Operating profit (loss) before restructuring and IFRS 17 implementation costs 5,158 (420) 4,738 4,234
Restructuring and IFRS 17 implementation costs (72) (120) (192) (282)
Operating profit (loss) for the year 5,086 (540) 4,546 3,952
Short-term fluctuations in investment returns 2 (62) (8) (70) (6,874)
Effect of changes in economic assumptions 2 (589) - (589) (1,571)
(Loss) profit attaching to corporate transactions - (22) (22) 57
Mark-to-market value movements on core structural borrowings 6 - (153) (153) 865
Non-operating results (651) (183) (834) (7,523)
Profit (loss) for the year 4,435 (723) 3,712 (3,571)
Non-controlling interests share of (profit) (20) - (20) (29)
Profit (loss) for the year attributable to equity holders of the Company 4,415 (723) 3,692 (3,600)
Equity items:
Foreign exchange movements on operations (135) 1 (134) (1,195)
Intra-group dividends and investment in operations (note (i)) (1,702) 1,702 - -
External dividends - (533) (533) (474)
New share capital subscribed - 4 4 (4)
Other movements (note (ii)) 118 (81) 37 (127)
Net increase (decrease) in shareholders' equity 2,696 370 3,066 (5,400)
Shareholders' equity at beginning of year (note (v)) 40,262 1,922 42,184 47,584
Shareholders' equity at end of year 42,958 2,292 45,250 42,184
Contribution to Group EEV:
At end of year:
Long-term business 2 41,528 - 41,528 38,857
Asset management and other 5 663 2,292 2,955 2,565
Shareholders' equity, excluding goodwill attributable to equity holders 42,191 2,292 44,483 41,422
Goodwill attributable to equity holders 767 - 767 762
Shareholders' equity at end of year 42,958 2,292 45,250 42,184
At beginning of year:
Long-term business (note (v)) 2 38,857 - 38,857 44,875
Asset management and other 5 643 1,922 2,565 1,931
Shareholders' equity, excluding goodwill attributable to equity holders 39,500 1,922 41,422 46,806
Goodwill attributable to equity holders 762 - 762 778
Shareholders' equity at beginning of year (note (v)) 40,262 1,922 42,184 47,584
2023 2022
EEV shareholders' equity per share (in cents) (note (iii)) Insurance Other Group Group
and asset (central) total total
management operations
operations
At end of year:
Based on shareholders' equity, net of goodwill attributable to equity holders 1,532¢ 83¢ 1,615¢ 1,507¢
Based on shareholders' equity at end of year 1,560¢ 83¢ 1,643¢ 1,534¢
At beginning of year:
Based on shareholders' equity, net of goodwill attributable to equity holders 1,437¢ 70¢ 1,507¢ 1,696¢
Based on shareholders' equity at beginning of year 1,464¢ 70¢ 1,534¢ 1,725¢
2023 2022
EEV basis basic earnings per share (note (iv)) Before non-controlling interests After non- Basic Basic
controlling earnings earnings
interests per share per share
$m $m cents cents
Based on operating profit 4,546 4,526 165.1¢ 143.4¢
Based on profit (loss) for the year 3,712 3,692 134.7¢ (131.6)¢
Notes
(i) Intra-group dividends represent dividends that have been paid in the
year. Investment in operations reflects movements in share capital.
(ii) Other movements include reserve movements in respect of valuation
changes on the retained interest in Jackson prior to its disposal in 2023,
share-based payments, treasury shares and intra-group transfers between
operations that have no overall effect on the Group's shareholders' equity.
(iii) Based on the number of issued shares at 31 December 2023 of 2,754
million shares (31 December 2022: 2,750 million shares).
(iv) Based on weighted average number of issued shares of 2,741 million
shares in 2023, which excludes those held in employee share trusts (2022:
2,736 million shares).
(v) Balance at the beginning of the year after the adoption of HK RBC.
Movement in Group free surplus
Operating free surplus generation is the financial metric we use to measure
the internal cash generation of our business operations and for our life
operations is generally based on (with adjustments as discussed below) the
capital regimes that apply locally in the various jurisdictions in which the
Group operates. It represents amounts emerging from the in-force business
during the year, net of amounts reinvested in writing new business. For asset
management businesses, it equates to post-tax adjusted operating profit for
the year. For insurance business, free surplus is generally based on (with
adjustments including recognition of certain intangibles and other assets that
may be inadmissible on a regulatory basis) the excess of the regulatory basis
net assets (EEV total net worth) over the EEV capital required to support the
covered business. For shareholder-backed businesses, the level of EEV required
capital has been based on the Group Prescribed Capital Requirements (GPCR)
used in our GWS (Group Wide Supervision) reporting as set out in note 7.1(e).
Adjustments are also made to enable free surplus to be a better measure of
shareholders' resources available for distribution as described in the
reconciliation to GWS surplus as disclosed in note I(i) of the Additional
unaudited financial information. For asset management and other non-insurance
operations (including the Group's central operations), free surplus is taken
to be IFRS shareholders' equity, net of goodwill attributable to shareholders,
with central Group debt recorded as free surplus to the extent that it is
classified as capital resources under the Group's capital regime. A
reconciliation of EEV free surplus to the GWS shareholder capital surplus over
group minimum capital requirements is also set out in note I(i) of the
Additional unaudited financial information.
2023 $m 2022 $m
Note Insurance Other Group Group
and asset (central) total total
management operations note (i)
operations
Expected transfer from in-force business 2,635 - 2,635 2,406
Expected return on existing free surplus 234 - 234 347
Changes in operating assumptions and experience variances (383) - (383) (227)
Operating free surplus generated from in-force long-term business 2,486 - 2,486 2,526
Investment in new business (note (i)) (733) - (733) (567)
Long-term business 2 1,753 - 1,753 1,959
Asset management 254 - 254 234
Operating free surplus generated from long-term and asset management 2,007 - 2,007 2,193
businesses
Other income (expenditure) - (420) (420) (542)
Restructuring and IFRS 17 implementation costs (72) (120) (192) (277)
Operating free surplus generated 1,935 (540) 1,395 1,374
Non-operating free surplus generated (note (ii)) (188) (35) (223) (1,924)
Free surplus generated for the year 1,747 (575) 1,172 (550)
Equity items:
Net cash flows paid to parent company (note (iii)) (1,611) 1,611 - -
External dividends - (533) (533) (474)
Foreign exchange movements on operations (25) 1 (24) (316)
New share capital subscribed - 4 4 (4)
Other movements and timing differences 27 10 37 (127)
Net movement in free surplus before non-controlling interests and before net 138 518 656 (1,471)
subordinated debt redemption
Net subordinated debt redemption 6 - (421) (421) (1,699)
Net movement in free surplus before non-controlling interests 138 97 235 (3,170)
Change in amounts attributable to non-controlling interests (9) - (9) (10)
Balance at beginning of year (note (iv)) 6,678 5,551 12,229 15,409
Balance at end of year 6,807 5,648 12,455 12,229
Representing:
Free surplus excluding distribution rights and other intangibles 5,663 2,855 8,518 8,390
Distribution rights and other intangibles 1,144 2,793 3,937 3,839
Balance at end of year 6,807 5,648 12,455 12,229
2023 $m 2022 $m
Contribution to Group free surplus: Note Insurance Other Group Group
and asset (central) total total
management operations
operations
At end of year:
Long-term business 2 6,144 - 6,144 6,035
Asset management and other 5 663 5,648 6,311 6,194
Free surplus at end of year 6,807 5,648 12,455 12,229
At beginning of year:
Long-term business (note (iv)) 2 6,035 - 6,035 7,320
Asset management and other 5 643 5,551 6,194 8,089
Free surplus at beginning of year (note (iv)) 6,678 5,551 12,229 15,409
Notes
(i) Free surplus invested in new business primarily represents acquisition
costs and amounts set aside for required capital.
(ii) Non-operating free surplus generated for other (central) operations
represents the post-tax IFRS basis short-term fluctuations in investment
returns, the movement in the mark-to-market value adjustment on core
structural borrowings which did not meet the qualifying conditions as set out
in the Insurance (Group Capital) Rules and gain or loss on corporate
transactions for other entities.
(iii) Net cash flows to parent company reflect the cash remittances as
included in the holding company cash flow at transaction rates. The difference
to the intra-group dividends and investment in operations in the movement in
EEV shareholders' equity primarily relates to intra-group loans, other
non-cash items, and foreign exchange.
(iv) Balance at the beginning of the year after the adoption of HK RBC.
Notes on the EEV basis results
1 Analysis of new business profit and EEV for insurance business operations
2023
New Annual Present New New Closing EEV
business premium value of new business business shareholders'
profit equivalent business margin margin equity,
(NBP) (APE) premiums (APE) (PVNBP) excluding
(PVNBP) goodwill
$m $m $m % % $m
CPL (Prudential's share) 222 534 2,020 42% 11% 3,038
Hong Kong 1,411 1,966 10,444 72% 14% 17,702
Indonesia 142 277 1,136 51% 13% 1,509
Malaysia 167 384 1,977 43% 8% 3,709
Singapore 484 787 5,354 61% 9% 7,896
Growth markets and other 699 1,928 7,630 36% 9% 7,674
Total long-term operations 3,125 5,876 28,561 53% 11% 41,528
2022 (AER)
New Annual Present New business New business Closing EEV
business premium value of new margin margin shareholders'
profit equivalent business (APE) (PVNBP) equity,
(NBP) (APE) premiums excluding
(PVNBP) goodwill
$m $m $m % % $m
CPL (Prudential's share) 387 884 3,521 44% 11% 3,259
Hong Kong 384 522 3,295 74% 12% 16,576
Indonesia 125 247 1,040 51% 12% 1,833
Malaysia 159 359 1,879 44% 8% 3,695
Singapore 499 770 6,091 65% 8% 6,806
Growth markets and other 630 1,611 6,580 39% 10% 6,688
Total long-term operations 2,184 4,393 22,406 50% 10% 38,857
2022 (CER)
New Annual Present New business New business Closing EEV
business premium value of new margin margin shareholders'
profit equivalent business (APE) (PVNBP) equity,
(NBP) (APE) premiums excluding
(PVNBP) goodwill
$m $m $m % % $m
CPL (Prudential's share) 368 840 3,346 44% 11% 3,195
Hong Kong 384 523 3,296 73% 12% 16,568
Indonesia 122 240 1,014 51% 12% 1,853
Malaysia 154 347 1,813 44% 8% 3,542
Singapore 512 791 6,254 65% 8% 6,921
Growth markets and other 609 1,546 6,357 39% 10% 6,616
Total long-term operations 2,149 4,287 22,080 50% 10% 38,695
Note
The movement in new business profit from long-term operations is analysed as
follows:
$m
2022 new business profit 2,184
Foreign exchange movement (35)
Sales volume 796
Effect of changes in interest rates and other economic assumptions (37)
Business mix, product mix and other items 217
2023 new business profit 3,125
2 Analysis of movement in net worth and value of in-force business for
insurance business operations
2023 $m 2022 $m
Free Required Net Value of Embedded Embedded
surplus capital worth in-force business value value
note (i) note (i)
Balance at beginning of year after adoption of HK RBC 6,035 5,556 11,591 27,266 38,857 44,875
New business contribution (733) 582 (151) 3,276 3,125 2,184
Existing business - transfer to net worth 2,635 (261) 2,374 (2,374) - -
Expected return on existing business (note (ii)) 234 236 470 1,652 2,122 2,559
Changes in operating assumptions, experience variances and other items (383) (70) (453) 110 (343) (201)
(note(iii))
Operating profit before restructuring and IFRS 17 implementation costs 1,753 487 2,240 2,664 4,904 4,542
Restructuring and IFRS 17 implementation costs (55) - (55) - (55) (116)
Operating profit 1,698 487 2,185 2,664 4,849 4,426
Non-operating result (note (iv)) (188) (36) (224) (427) (651) (8,469)
Profit (loss) for the year 1,510 451 1,961 2,237 4,198 (4,043)
Non-controlling interests share of (profit) loss (2) (1) (3) (10) (13) (22)
Profit (loss) for the year attributable to equity holders of the Company 1,508 450 1,958 2,227 4,185 (4,065)
Foreign exchange movements (21) (22) (43) (93) (136) (1,146)
Intra-group dividends and investment in operations (1,502) - (1,502) - (1,502) (999)
Other movements (note (v)) 124 - 124 - 124 192
Balance at end of year 6,144 5,984 12,128 29,400 41,528 38,857
(i) Total embedded value
The total embedded value for long-term business operations at the end of each
year, excluding goodwill attributable to equity holders, can be analysed as
follows:
31 Dec 2023 $m 31 Dec 2022 $m
Value of in-force business before deduction of cost of capital and time value 30,436 28,126
of options and guarantees
Cost of capital (746) (709)
Time value of options and guarantees (note) (290) (151)
Net value of in-force business 29,400 27,266
Free surplus 6,144 6,035
Required capital 5,984 5,556
Net worth 12,128 11,591
Embedded value 41,528 38,857
Note
The time value of options and guarantees (TVOG) arises from the variability of
economic outcomes in the future and is, where appropriate, calculated as the
difference between an average outcome across a range of economic scenarios,
calibrated around a central scenario, and the outcome from the central
economic scenario, as described in note 7.1(d). At 31 December 2023, the TVOG
is $(290) million, with the substantial majority arising in Hong Kong.
(ii) Expected return on existing business
The expected return on existing business comprises the expected unwind of
discounting effects on the opening value of in-force business and required
capital (after allowing for updates to economic and operating assumptions) and
the expected return on existing free surplus, as described in note 7.2(c). The
movement in this amount compared to the prior year from long-term operations
is analysed as follows:
$m
2022 expected return on existing business 2,559
Foreign exchange movement (28)
Effect of changes in interest rates and other economic assumptions (513)
Growth in opening value of in-force business and other items 104
2023 expected return on existing business 2,122
(iii) Changes in operating assumptions, experience variances and other items
Overall, the total impact of operating assumption changes, experience
variances and other items in 2023 was $(343) million (2022: $(201) million),
comprising changes in operating assumptions of $85 million in 2023 (2022: $32
million) and experience variances and other items of $(428) million (2022:
$(233) million).
(iv) Non-operating results
The EEV non-operating result from long-term operations can be summarised as
follows:
2023 $m 2022 $m
Short-term fluctuations in investment returns (note (i)) (62) (6,893)
Effect of change in economic assumptions (note(ii)) (589) (1,571)
Loss attaching to corporate transactions - (5)
Non-operating results (651) (8,469)
Notes
(i) Short-term fluctuations in investment returns of $(62) million mainly
reflect the impact of lower than expected equity returns in some regions
broadly offset by higher than expected bond gains, following the decrease in
interest rates in many markets during the year.
(ii) The charge of $(589) million for the effect of changes in economic
assumptions primarily arises from decreases in interest rates and credit
spreads in some markets, resulting in lower fund earned rate that impact
future cashflows, partially offset by the positive effect of lower risk
discount rates. The effects and impacts vary between businesses and products.
(v) Other reserve movements
Other movements include reserve movements in respect of intra-group loans and
other intra-group transfers between operations that have no overall effect on
the Group's shareholders' equity.
3 Sensitivity of results for insurance business operations
(a) Sensitivity analysis - economic assumptions
The tables below show the sensitivity of the new business profit and the
embedded value for insurance business operations to:
- 1 per cent and 2 per cent increases in interest rates and 0.5 per cent
decrease in interest rates. This allows for consequential changes in the
assumed investment returns for all asset classes, market values of fixed
interest assets, local statutory reserves, capital requirements and risk
discount rates (but excludes changes in the allowance for market risk);
- 1 per cent rise in equity and property yields;
- 1 per cent and 2 per cent increases in the risk discount rates. The main
driver for changes in the risk discount rates from period to period is changes
in interest rates, the impact of which is expected to be partially offset by a
corresponding change in assumed investment returns, the effect of which is not
included in the risk discount rate sensitivities. The impact of higher
investment returns can be approximated as the difference between the
sensitivity to increases in interest rates and the sensitivity to increases in
risk discount rates;
- For embedded value only, 20 per cent fall in the market value of equity
and property assets; and
- For embedded value only, holding the group minimum capital requirements
(GMCR) under the GWS Framework in contrast to EEV required capital based on
the group prescribed capital requirements (GPCR). This reduces the level of
capital and therefore the level of charge deducted from the embedded value for
the cost of locked-in required capital. This has the effect of increasing EEV.
The sensitivities shown below are for the impact of instantaneous and
permanent changes (with no trending or mean reversion) on the embedded value
of long-term business operations and include the combined effect on the value
of in-force business and net assets (including derivatives) held at the
valuation dates indicated. The results only allow for limited management
actions, such as changes to future policyholder bonuses, where applicable. If
such economic conditions persisted, the financial impacts may differ to the
instantaneous impacts shown below. In this case, management could also take
additional actions to help mitigate the impact of these stresses. No change in
the mix of the asset portfolio held at the valuation date is assumed when
calculating sensitivities, while changes in the market value of those assets
are recognised. The sensitivity impacts are expected to be non-linear. To aid
understanding of this non-linearity, impacts of both a 1 per cent and 2 per
cent increase to interest rates and risk discount rates are shown.
If the changes in assumptions shown in the sensitivities were to occur, the
effects shown below would be recorded within two components of the profit
analysis for the following period, namely the effect of changes in economic
assumptions and short-term fluctuations in investment returns. In addition to
the sensitivity effects shown below, the other components of the profit for
the following period would be calculated by reference to the altered
assumptions at the end of that period, for example, new business profit and
expected return on existing business are calculated with reference to end of
period economic assumptions.
New business profit from insurance business
2023 $m 2022 $m
New business profit 3,125 2,184
Sensitivity to alternative economic assumptions:
Interest rates and consequential effects - 2% increase (175) 220
Interest rates and consequential effects - 1% increase (88) 134
Interest rates and consequential effects - 0.5% decrease 35 (97)
Equity/property yields - 1% rise 139 160
Risk discount rates - 2% increase (917) (551)
Risk discount rates - 1% increase (529) (309)
Embedded value of insurance business
31 Dec 2023 $m 31 Dec 2022 $m
Embedded value (note) 41,528 38,857
Sensitivity to alternative economic assumptions:
Interest rates and consequential effects - 2% increase (4,154) (3,988)
Interest rates and consequential effects - 1% increase (2,172) (2,067)
Interest rates and consequential effects - 0.5% decrease 1,133 1,058
Equity/property yields - 1% rise 1,856 1,884
Equity/property market values - 20% fall (1,863) (1,840)
Risk discount rates - 2% increase (8,015) (7,371)
Risk discount rates - 1% increase (4,516) (4,155)
Group minimum capital requirements 117 117
Note
Embedded value includes Africa operations following the change in the Group's
operating segments in 2023. In the context of the Group, Africa's results are
not materially impacted by the above sensitivities.
New business sensitivities vary with changes in business mix and APE sales
volumes. In particular, the directional movements in the new business profit
interest rate sensitivities from 31 December 2022 to 31 December 2023 reflect
the significantly higher new business levels in 2023 along with a greater
proportion of sales to Hong Kong.
For a 1 per cent increase in assumed interest rates, the $(2,172) million
negative effect comprises a $(4,516) million negative impact of increasing the
risk discount rate by 1 per cent, partially offset by a $2,344 million benefit
from assuming 1 per cent higher investment returns. Similarly, for a 2 per
cent increase in assumed interest rates the $(4,154) million negative effect
comprises a $(8,015) million negative impact of increasing the risk discount
rates by 2 per cent, partially offset by a $3,861 million benefit from higher
assumed investment returns. Finally, for a 0.5 per cent decrease in assumed
interest rates, there would be a $1,133 million positive effect reflecting the
benefit of a 0.5 per cent reduction in risk discount rates being partially
offset by lower assumed investment returns. These offsetting impacts are
sensitive to economics and the net impact can therefore change from period to
period depending on the current level of interest rates.
In order to illustrate the impact of varying specific economic assumptions,
all other assumptions are held constant in the sensitivities above and
therefore, the actual changes in embedded value, were these economic effects
to materialise, may differ from the sensitivities shown. For example, market
risk allowances would likely be increased within the risk discount rate if
interest rates increased by 1 per cent, leading to a reduction of $(1,969)
million (compared with the $(2,172) million impact shown above). However, if
interest rates actually decreased by 0.5 per cent, it would lead to a $1,043
million increase (compared with the $1,133 million increase shown above).
(b) Sensitivity analysis - non-economic assumptions
The tables below show the sensitivity of the new business profit and the
embedded value for long-term business operations to:
- 10 per cent proportionate decrease in maintenance expenses (for example,
a 10 per cent sensitivity on a base assumption of $10 per annum would
represent an expense assumption of $9 per annum);
- 10 per cent proportionate decrease in lapse rates (for example, a 10 per
cent sensitivity on a base assumption of 5.0 per cent would represent a lapse
rate of 4.5 per cent per annum); and
- 5 per cent proportionate decrease in base mortality (ie increased
longevity) and morbidity rates.
New business profit from insurance business
2023 $m 2022 $m
New business profit 3,125 2,184
Maintenance expenses - 10% decrease 61 48
Lapse rates - 10% decrease 212 134
Mortality and morbidity - 5% decrease 114 99
Embedded value of insurance business
31 Dec 2023 $m 31 Dec 2022 $m
Embedded value 41,528 38,857
Maintenance expenses - 10% decrease 440 411
Lapse rates - 10% decrease 1,806 1,533
Mortality and morbidity - 5% decrease 1,514 1,300
4 Expected transfer of value of in-force business and required capital to free
surplus for long-term business operations on a discounted basis
The table below shows how the value of in-force business (VIF) and the
associated required capital for long-term business operations are projected as
emerging into free surplus over future years. Cash flows are projected on a
deterministic basis and are discounted at the appropriate risk discount rate.
The modelled cash flows use the same methodology underpinning the Group's EEV
reporting and so are subject to the same assumptions and sensitivities. The
projected emergence of VIF and required capital into free surplus in 2023 will
be the starting point for expected free surplus generation next year, after
updating for operating and economic assumption changes. See note I(v) of the
additional financial information for further detail.
Total Expected period of conversion of future post-tax distributable earnings and
required capital flows to free surplus at 31 Dec
expected
Emergence 1-5 years 6-10 years 11-15 years 16-20 years 21-40 years 40+ years
2023 ($m) 35,223 9,897 6,744 4,884 3,749 7,590 2,359
(%) 100% 28% 19% 14% 11% 21% 7%
2022 ($m) 32,648 9,764 6,038 4,360 3,424 6,910 2,152
(%) 100% 30% 19% 13% 10% 21% 7%
The required capital and value of in-force business for long-term business
operations can be reconciled to the total discounted emergence of future free
surplus shown above as follows:
31 Dec 2023 $m 31 Dec 2022 $m
Required capital (note 2) 5,984 5,556
Value of in-force business (VIF) (note 2) 29,400 27,266
Other items (*) (161) (174)
Long-term business operations 35,223 32,648
*'Other items' represent the impact of the TVOG and amounts incorporated into
VIF where there is no definitive time frame for when the payments will be made
or receipts received. These items are excluded from the expected free surplus
generation profile above.
5 EEV basis results for other (central) operations
EEV results for other income and expenditure represents the post-tax IFRS
results for other (central) operations (before restructuring and IFRS 17
implementation costs). It mainly includes interest costs on core structural
borrowings and corporate expenditure for head office functions that are not
recharged/allocated to the insurance and asset management business.
Certain costs incurred within the head office functions are recharged to the
insurance operations and recorded within the results for those operations. The
assumed future expenses within the value of in-force business for insurance
operations allow for amounts expected to be recharged by the head office
functions on a recurring basis. Other costs that are not recharged to the
insurance operations are shown as part of other income and expenditure for the
current period and are not included within the projection of future expenses
for in-force insurance business.
In line with the EEV Principles, the allowance for the future costs of
internal asset management services within the EEV results for long-term
insurance operations excludes the projected future profits generated by any
non-insurance entities within the Group in providing those services (ie the
EEV for long-term insurance operations includes the projected future profit or
loss from asset management and service companies that support the Group's
covered insurance businesses). Following the implementation of IFRS 17, a
similar adjustment is made to eliminate the intra-group profit within the
results of central operations.
The EEV shareholders' equity for other operations is taken to be IFRS
shareholders' equity, with central Group debt shown on a market value basis.
Free surplus for other operations is taken to be IFRS shareholders' equity,
net of goodwill attributable to equity holders, with central Group debt
recorded as free surplus to the extent that it is classified as capital
resources under the Group's capital regime. Under the GWS Framework, debt
instruments issued at the date of designation which met the transitional
conditions set by the Hong Kong IA are included as GWS eligible group capital
resources. In addition, debt issued since the date of designation which met
the qualifying conditions as set out in the Insurance (Group Capital) Rules
are also included as GWS eligible group capital resources.
Shareholders' equity for other operations can be compared across metrics as
shown in the table below.
2023 $m 2022 $m
IFRS shareholders' equity 2,018 1,495
Mark-to-market value adjustment on central borrowings (note 6) 274 427
EEV shareholders' equity 2,292 1,922
Debt instruments treated as capital resources 3,356 3,629
Free surplus of other (central) operations 5,648 5,551
6 Net core structural borrowings of shareholder-financed businesses
31 Dec 2023 $m 31 Dec 2022 $m
IFRS Mark-to EEV IFRS Mark-to EEV
basis -market basis at basis -market basis at
value market value market
adjustment value adjustment value
note (ii) note (iii) note (ii) note (iii)
Holding company cash and short-term investments (note (i)) (3,516) - (3,516) (3,057) - (3,057)
Central borrowings:
Subordinated debt 2,297 (205) 2,092 2,286 (306) 1,980
Senior debt 1,636 (69) 1,567 1,975 (121) 1,854
Total central borrowings 3,933 (274) 3,659 4,261 (427) 3,834
Net core structural borrowings of shareholder-financed businesses 417 (274) 143 1,204 (427) 777
Notes
(i) Holding company includes centrally managed Group holding companies and
service companies.
(ii) As recorded in note C5.1 of the IFRS consolidated financial statements.
(iii) The movement in the value of core structural borrowings includes
redemptions in the year and foreign exchange effects for pounds sterling
denominated debts. The movement in the mark-to-market value adjustment can be
analysed as follows:
2023 $m 2022 $m
Mark-to-market value adjustment at beginning of year (427) 438
Credit (charge) included in the income statement 153 (865)
Mark-to-market value adjustment at end of year (274) (427)
7 Methodology and accounting presentation
7.1 Methodology
(a) Covered business
The EEV basis results for the Group are prepared for 'covered business' as
defined by the EEV Principles. Covered business represents the Group's
long-term insurance business (including the Group's investments in joint
venture and associate insurance operations), for which the value of new and
in-force contracts is attributable to shareholders.
The EEV results for the Group's covered business are then combined with the
post-tax IFRS results of the Group's asset management and other operations
(including interest costs on core structural borrowings and corporate
expenditure for head office functions that is not recharged/allocated to the
insurance operations), with an adjustment to deduct the unwind of expected
margins on the internal management of the assets of the covered business.
Under the EEV Principles, the results for covered business incorporate the
projected margins of attaching internal asset management, as described in note
(g) below.
(b) Valuation of in-force and new business
The EEV basis results are prepared incorporating best estimate assumptions
about all relevant factors including levels of future investment returns,
persistency, mortality, morbidity and expenses, as described in note 8(c).
These assumptions are used to project future cash flows. The present value of
the projected future cash flows is then calculated using a discount rate, as
shown in note 8(a), which reflects both the time value of money and all other
non-diversifiable risks associated with the cash flows that are not otherwise
allowed for.
The total profit that emerges over the lifetime of an individual contract as
calculated under the EEV basis is the same as that calculated under the IFRS
basis. Since the EEV basis reflects discounted future cash flows, under the
EEV methodology the profit emergence is advanced, thus more closely aligning
the timing of the recognition of profit with the efforts and risks of current
management actions, particularly with regard to business sold during the
period.
New business
In determining the EEV basis value of new business, premiums are included in
projected cash flows on the same basis of distinguishing regular and single
premium business as set out in the Group's new business sales reporting.
New business premiums reflect those premiums attaching to the covered
business, including premiums for contracts classified as investment contracts
under IFRS 17. New business premiums for regular premium products are shown on
an annualised basis.
New business profit represents profit determined by applying operating and
economic assumptions as at the end of the period. New business profitability
is a key metric for the Group's management of the development of the business.
In addition, new business margins are shown by reference to annual premium
equivalent (APE) and the present value of new business premiums (PVNBP). These
margins are calculated as the percentage of the value of new business profit
to APE and PVNBP. APE is calculated as the aggregate of regular premiums on
new business written in the period and one-tenth of single premiums. PVNBP is
calculated as the aggregate of single premiums and the present value of
expected future premiums from regular premium new business, allowing for
lapses and the other assumptions made in determining the EEV new business
profit.
(c) Cost of capital
A charge is deducted from the embedded value for the cost of locked-in
required capital supporting the Group's long-term business. The cost is the
difference between the nominal value of the capital held and the discounted
value of the projected releases of this capital, allowing for post-tax
investment earnings on the capital.
The EEV results are affected by the movement in this cost from period to
period, which comprises a charge against new business profit and generally a
release in respect of the reduction in capital requirements for business in
force as this runs off.
Where required capital is held within a with-profits long-term fund, the value
placed on surplus assets within the fund is already adjusted to reflect its
expected release over time and so no further adjustment to the shareholder
position is necessary.
(d) Financial options and guarantees
Nature of financial options and guarantees
Participating products, principally written in the Chinese Mainland, Hong
Kong, Malaysia, Singapore and Taiwan, have both guaranteed and non-guaranteed
elements. These products provide returns to policyholders through bonuses that
are smoothed. There are two types of bonuses: regular and final. Regular
bonuses are declared once a year and, once credited, are guaranteed in
accordance with the terms of the particular products. Final bonuses are
guaranteed only until the next bonus declaration.
There are also various non-participating long-term products with guarantees.
The principal guarantees are those for whole-of-life contracts with floor
levels of policyholder benefits that typically accrue at rates set at
inception and do not vary subsequently with market conditions. Similar to
participating products, the policyholder charges incorporate an allowance for
the cost of providing these guarantees, which, for certain whole-of-life
products in Hong Kong, remains constant throughout varying economic
conditions, rather than reducing as the economic environment improves and vice
versa.
Time value
The value of financial options and guarantees comprises the intrinsic value
(arising from a deterministic valuation on best estimate assumptions) and the
time value (arising from the variability of economic outcomes in the future).
Where appropriate (ie where financial options and guarantees are explicitly
valued under the EEV methodology), a full stochastic valuation has been
undertaken to determine the time value of financial options and guarantees.
The economic assumptions used for the stochastic calculations are consistent
with those used for the deterministic calculations. Assumptions specific to
the stochastic calculations reflect local market conditions and are based on a
combination of actual market data, historic market data and an assessment of
long-term economic conditions. Common principles have been adopted across the
Group for the stochastic asset models, such as separate modelling of
individual asset classes with an allowance for correlations between various
asset classes. Details of the key characteristics of each model are given in
note 8(b).
In deriving the time value of financial options and guarantees, management
actions in response to emerging investment and fund solvency conditions have
been modelled. Management actions encompass, but are not confined to,
investment allocation decisions, levels of regular and final bonuses and
credited rates. Bonus rates are projected from current levels and varied in
accordance with assumed management actions applying in the emerging investment
and fund solvency conditions. In all instances, the modelled actions are in
accordance with approved local practice and therefore reflect the options
available to management.
(e) Level of required capital and net worth
In adopting the EEV Principles, Prudential has based required capital on the
applicable local statutory regulations, including any amounts considered to be
required above the local statutory minimum requirements to satisfy regulatory
constraints.
For shareholder-backed businesses, the level of required capital has been
based on the GPCR.
- For CPL, the level of required capital follows the approach for embedded
value reporting issued by the China Association of Actuaries (CAA) reflecting
the C-ROSS regime. The CAA has started a project to assess whether any changes
are required to the embedded value guidance in the Chinese Mainland given
changes in regulatory rules, regulations and the external market environment
since the standard was first issued. To date, no outcomes have been proposed
by the CAA and Prudential has made no change to its EEV basis for CPL in 2023.
At such time that there is a new basis, Prudential will consider the effect of
proposals.
- For Hong Kong participating business, the HK RBC regime recognises the
value of future shareholder transfers on an economic basis as available
capital with an associated required capital. Within EEV, the shareholder value
of participating business continues to be recognised as VIF with no
recognition within free surplus and no associated required capital.
- For Singapore life operations, the level of net worth and required
capital is based on the Tier 1 Capital position under the risk-based capital
framework (RBC2), which removes certain negative reserves permitted to be
recognised in the full RBC2 regulatory position applicable to the Group's GWS
capital position, in order to better reflect free surplus and its generation.
Free surplus is the shareholders' net worth in excess of required capital. For
the Hong Kong business, the HK RBC framework requires liabilities to be valued
on a best estimate basis and capital requirements to be risk based. EEV free
surplus excludes regulatory surplus that arises where HK RBC technical
provisions are lower than policyholder asset shares or cash surrender values
to more realistically reflect how the business is managed.
(f) With-profits business and the treatment of the estate
For the Group's relevant operations, the proportion of surplus allocated to
shareholders from the with-profits funds has been based on the applicable
profit distribution between shareholders and policyholders. The EEV
methodology includes the value attributed to the shareholders' interest in the
residual estate of the in-force with-profits business. In any scenarios where
the total assets of the life fund are insufficient to meet policyholder claims
in full, the excess cost is fully attributed to shareholders. As required,
adjustments are also made to reflect any capital requirements for with-profits
business in excess of the capital resources of the with-profits funds.
(g) Internal asset management
In line with the EEV Principles, the long-term business EEV includes the
projected future profit from asset management and service companies that
support the Group's covered insurance businesses. The results of the Group's
asset management operations include the current period profit from the
management of both internal and external funds. EEV basis shareholders' other
income and expenditure is adjusted to deduct the expected profit anticipated
to arise in the current period in the opening VIF from internal asset
management and other services. This deduction is on a basis consistent with
that used for projecting the results for covered insurance business.
Accordingly, Group operating profit includes the actual profit earned in
respect of the management of these assets.
(h) Allowance for risk and risk discount rates
Overview
Under the EEV Principles, discount rates used to determine the present value
of expected future cash flows are set by reference to risk-free rates plus a
risk margin.
The risk-free rates are largely based on local government bond yields at the
valuation date and are assumed to remain constant and do not revert to
longer-term rates over time.
The risk margin reflects any non-diversifiable risk associated with the
emergence of distributable earnings that is not allowed for elsewhere in the
valuation. In order to better reflect differences in relative market risk
volatility inherent in each product group, Prudential sets the risk discount
rates to reflect the expected volatility associated with the expected future
shareholder cash flows for each product group in the embedded value model,
rather than at a Group level.
Where financial options and guarantees are explicitly valued under the EEV
methodology, risk discount rates exclude the effect of these product features.
The risk margin represents the aggregate of the allowance for market risk and
allowance for non-diversifiable non-market risk. No allowance is required for
non-market risks where these are assumed to be fully diversifiable.
Market risk allowance
The allowance for market risk represents the beta multiplied by the equity
risk premium.
The beta of a portfolio or product measures its relative market risk. The risk
discount rates reflect the market risk inherent in each product group and
hence the volatility of product-specific cash flows. These are determined by
considering how the profit from each product is affected by changes in
expected returns across asset classes. By converting this into a relative rate
of return, it is possible to derive a product-specific beta. This approach
contrasts with a top-down approach to market risk where the risks associated
with each product are not directly reflected in the valuation basis.
The Group's methodology allows for credit risk in determining the best
estimate returns and through the market risk allowance, which covers expected
long-term defaults, a credit risk premium (to reflect the volatility in
downgrade and default levels) and short-term downgrades and defaults.
Allowance for non-diversifiable non-market risks
The majority of non-market and non-credit risks are considered to be
diversifiable. The allowance for non-market risk comprises a base Group-wide
allowance of 50 basis points plus additional allowances for emerging market
risk where appropriate. The level and application of these allowances are
reviewed and updated based on assessment of the Group's exposure and
experience in the markets.
At 31 December 2023, the total allowance for non-diversifiable non-market risk
is equivalent to a $(3.0) billion, or (7) per cent, reduction to the embedded
value of insurance business operations.
(i) Foreign currency translation
Foreign currency profits and losses have been translated at average exchange
rates for the period. Foreign currency transactions are translated at the spot
rate prevailing at the date of the transactions. Foreign currency assets and
liabilities have been translated at closing exchange rates. The principal
exchange rates are shown in note A1 of the Group IFRS financial statements.
(j) Taxation
In determining the post-tax profit for the period for covered business, the
overall tax rate includes the impact of tax effects determined on a local
regulatory basis. Tax payments and receipts included in the projected future
cash flows to determine the value of in-force business are calculated using
tax rates that have been announced and substantively enacted by the end of the
reporting period.
7.2 Accounting presentation
(a) Analysis of post-tax profit
To the extent applicable, the presentation of the EEV profit or loss for the
period is consistent with the classification between operating and
non-operating results that the Group applies for the analysis of IFRS results.
Operating results are determined as described in note (b) below and
incorporate the following:
- New business profit, as defined in note 7.1(b) above;
- Expected return on existing business, as described in note (c) below;
- The impact of routine changes of estimates relating to operating
assumptions, as described in note (d) below; and
- Operating experience variances, as described in note (e) below.
In addition, operating results include the effect of changes in tax
legislation, unless these changes are one-off and structural in nature, or
primarily affect the level of projected investment returns, in which case they
are reflected as a non-operating result.
Non-operating results comprise:
- Short-term fluctuations in investment returns;
- Mark-to-market value movements on core structural borrowings;
- Effect of changes in economic assumptions; and
- The impact of corporate transactions, if any, undertaken in the year.
Total profit or loss in the period attributable to shareholders and basic
earnings per share include these items, together with actual investment
returns. The Group believes that operating profit, as adjusted for these
items, better reflects underlying performance.
(b) Investment returns included in operating profit
For the investment element of the assets covering the total net worth of
long-term insurance business, investment returns are recognised in operating
results at the expected long-term rates of return. These expected returns are
calculated by reference to the asset mix of the portfolio.
(c) Expected return on existing business
Expected return on existing business comprises the expected unwind of
discounting effects on the opening value of in-force business and required
capital and the expected return on existing free surplus. The unwind of
discount and the expected return on existing free surplus are determined after
adjusting for the effect of changes in economic and operating assumptions in
the current period on the embedded value at the beginning of the period, for
example, the unwind of discount on the value of in-force business and required
capital is determined after adjusting both the opening value and the risk
discount rates for the effect of changes in economic and operating assumptions
in the current period.
(d) Effect of changes in operating assumptions
Operating profit includes the effect of changes to operating assumptions on
the value of in-force business at the end of the reporting period. For
presentational purposes the effect of changes is delineated to show the effect
on the opening value of in-force business as operating assumption changes,
with the experience variances subsequently being determined by reference to
the assumptions at the end of the reporting period, as discussed below.
(e) Operating experience variances
Operating profit includes the effect of experience variances on operating
assumptions, such as persistency, mortality, morbidity, expenses and other
factors, which are calculated with reference to the assumptions at the end of
the reporting period.
(f) Effect of changes in economic assumptions
Movements in the value of in-force business at the beginning of the period
caused by changes in economic assumptions, net of the related changes in the
time value of financial options and guarantees, are recorded in non-operating
results.
8 Assumptions
(a) Principal economic assumptions
The EEV results for the Group's covered business are determined using economic
assumptions where both the risk discount rates and long-term expected rates of
return on investments are set with reference to risk-free rates of return at
the end of the reporting period. Both the risk discount rate and expected
rates of return are updated at each valuation date to reflect current market
risk-free rates, with the effect that changes in market risk-free rates impact
projected future cash flows. The risk-free rates of return are largely based
on local government bond yields and are assumed to remain constant and do not
revert to longer-term rates over time. The risk-free rates of return are shown
below for each of the Group's insurance operations. Expected returns on equity
and property assets and corporate bonds are derived by adding a risk premium
to the risk-free rate based on the Group's long-term view and, where relevant,
allowing for market volatility.
As described in note 7.1(h), risk discount rates are set equal to the
risk-free rate at the valuation date plus allowances for market risk and
non-diversifiable non-market risks appropriate to the features and risks of
the underlying products and markets.
Risks that are explicitly allowed for elsewhere in the EEV basis, such as via
the cost of capital and the time value of options and guarantees, as set out
in note 2(i), are not included in the risk discount rates.
Risk discount rate % 10-year government bond yield % Equity return
(geometric) %
New business In-force business
31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec
2023 2022 2023 2022 2023 2022 2023 2022
CPL 7.1 7.4 7.1 7.4 2.6 2.9 6.6 6.9
Hong Kong (note (i)) 4.7 4.8 5.5 5.5 3.9 3.9 7.4 7.4
Indonesia 9.0 10.0 9.9 10.6 6.7 7.3 11.0 11.5
Malaysia 5.6 5.8 6.2 6.5 3.8 4.1 7.3 7.6
Philippines 12.3 14.5 12.3 14.5 6.1 7.3 10.3 11.5
Singapore 4.6 5.0 4.8 5.2 2.7 3.1 6.2 6.6
Taiwan 3.3 3.5 4.2 4.0 1.3 1.3 5.3 5.3
Thailand 10.0 10.0 10.0 10.0 2.8 2.7 7.0 7.0
Vietnam 3.7 6.9 4.1 6.7 2.3 5.0 6.6 9.3
Total weighted average (new business)(note (ii)) 5.6 6.9 n/a n/a 3.8 4.2 7.2 7.5
Total weighted average (in-force business) (note (ii)) n/a n/a 5.9 6.4 3.6 4.0 7.1 7.6
Notes
(i) For Hong Kong, the assumptions shown are for US dollar denominated
business. For other businesses, the assumptions shown are for local currency
denominated business.
(ii) Total weighted average assumptions have been determined by weighting
each business's assumptions by reference to the EEV basis new business profit
and the closing net value of in-force business. The changes in the risk
discount rates for individual businesses reflect the movements in the local
government bond yields, changes in the allowances for market risk (including
as a result of changes in asset mix), and, if applicable, non-diversifiable
non-market risk, and changes in product mix.
(iii) Expected long-term inflation assumptions range from 1.5 per cent to
5.5 per cent for both years shown above.
(b) Stochastic assumptions
Details are given below of the key characteristics of the models used to
determine the time value of financial options and guarantees as referred to in
note 7.1(d).
- The stochastic cost of guarantees is primarily of significance for the
Hong Kong, Vietnam, Taiwan, Singapore and Malaysia businesses;
- The principal asset classes are government bonds, corporate bonds and
equity;
- Interest rates are projected using a stochastic interest rate model
calibrated to the current market yields;
- Equity returns are assumed to follow a log-normal distribution;
- The corporate bond return is calculated based on a risk-free return plus
a mean-reverting spread;
- The volatility of equity returns ranges from 17 per cent to 35 per cent
for both years; and
- The volatility of government bond yields ranges from 1.1 per cent to 2.0
per cent for both years.
(c) Operating assumptions
Best estimate assumptions are used for projecting future cash flows, where
best estimate is defined as the mean of the distribution of future possible
outcomes. The assumptions are reviewed actively and changes are made when
evidence exists that material changes in future experience are reasonably
certain. Where experience is expected to be adverse over the short term, a
provision may be established.
Assumptions required in the calculation of the time value of financial options
and guarantees, for example relating to volatilities and correlations, or
dynamic algorithms linking liabilities to assets, have been set equal to the
best estimates and, wherever material and practical, reflect any dynamic
relationships between the assumptions and the stochastic variables.
Demographic assumptions
Persistency, mortality and morbidity assumptions are based on an analysis of
recent experience, and reflect expected future experience. When projecting
future cash flows for medical reimbursement business that is repriced
annually, explicit allowance is made for expected future premium inflation and
separately for future medical claims inflation.
Expense assumptions
Expense levels, including those of the service companies that support the
Group's long-term business, are based on internal expense analysis and are
appropriately allocated to acquisition of new business and renewal of in-force
business. For mature business, it is Prudential's policy not to take credit
for future cost reduction programmes until the actions to achieve the savings
have been delivered. Expense overruns are reported where these are expected to
be short-lived, including businesses that are growing rapidly or are
sub-scale.
Expenses comprise costs borne directly and costs recharged/allocated from the
Group head office functions in London and Hong Kong that are attributable to
the long-term insurance (covered) business. The assumed future expenses for
the long-term insurance business allow for amounts expected to be
recharged/allocated by the head office functions.
Corporate expenditure, which is included in other income and expenditure,
comprises expenditure of the Group head office functions in London and Hong
Kong that is not recharged/allocated to the long-term insurance or asset
management operations, primarily for corporate related activities that are
charged as incurred, together with restructuring and IFRS 17 implementation
costs incurred across the Group.
Tax rates
The assumed long-term effective tax rates for operations reflect the expected
incidence of taxable profit or loss in the projected future cash flows as
explained in note 7.1(j). The local standard corporate tax rates applicable
are as follows:
%
CPL 25.0
Hong Kong 16.5% on 5% of premium income
Indonesia 22.0
Malaysia 24.0
Philippines 25.0
Singapore 17.0
Taiwan 20.0
Thailand 20.0
Vietnam 20.0
9 Insurance new business
Single premiums Regular premiums Annual premium equivalents (APE) Present value of new business premiums (PVNBP)
2023 $m 2022 $m 2023 $m 2022 $m 2023 $m 2022 $m 2023 $m 2022 $m
CPL (note (i)) 487 1,254 485 759 534 884 2,020 3,521
Hong Kong 235 842 1,942 438 1,966 522 10,444 3,295
Indonesia 230 250 254 222 277 247 1,136 1,040
Malaysia 93 99 375 350 384 359 1,977 1,879
Singapore 989 2,628 688 507 787 770 5,354 6,091
Growth markets:
Africa 8 9 157 148 158 149 326 308
Cambodia 1 - 18 18 18 18 74 69
India (note (ii)) 270 273 206 196 233 223 1,145 1,148
Laos - - - - - - 2 1
Myanmar - - 6 3 6 3 19 6
Philippines 56 61 170 176 175 182 612 615
Taiwan 132 157 882 486 895 503 3,308 1,835
Thailand 143 150 232 220 246 235 999 932
Vietnam 19 99 195 288 197 298 1,321 1,666
Total 2,663 5,822 5,610 3,811 5,876 4,393 28,737 22,406
Notes
(i) New business in CPL is included at Prudential's 50 per cent interest
in the joint venture.
(ii) New business in India is included at Prudential's 22 per cent interest
in the associate.
(iii) The table above is provided as an indicative volume measure of
transactions undertaken in the reporting period that have the potential to
generate profit for shareholders. The amounts shown are not, and not intended
to be, reflective of revenue recorded in the IFRS consolidated income
statement.
10 Post balance sheet events
Dividends
The second interim dividend for the year ended 31 December 2023, which was
approved by the Board of Directors after 31 December 2023, is described in
note B5 of the Group IFRS consolidated financial statements.
Share repurchase programme to neutralise 2023 employee and agent share scheme
issuance
On 16 January 2024, the Company announced that the share repurchase programme
in respect of 3,851,376 ordinary shares that it announced on 5 January 2024
and commenced on 8 January has been completed. The purpose of the share
repurchase programme was to offset dilution from the vesting of awards under
employee and agent share schemes during 2023. The Company has repurchased
3,851,376 ordinary shares in aggregate (representing 0.14 per cent of the
total number of ordinary shares in issue at the end of the year (as disclosed
in note C8)) at a volume weighted average price of £8.2676 per ordinary share
for a total consideration of approximately £32 million.
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