pru201603096k3.htm
 
SECURITIES AND EXCHANGE COMMISSION
 
 
Washington, D.C. 20549
 
 
FORM 6-K
 
 
REPORT OF FOREIGN PRIVATE ISSUER
 
 
Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934
 
 
For the month of March, 2016

 
 
PRUDENTIAL PUBLIC LIMITED COMPANY
 
 
(Translation of registrant's name into English)
 
 
LAURENCE POUNTNEY HILL,

LONDON, EC4R 0HH, ENGLAND
(Address of principal executive offices)


 
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.


Form 20-F X           Form 40-F


Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

 
Yes              No X


 
If "Yes" is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b): 82-



 

 
European Embedded Value (EEV) Basis Results

POST-TAX OPERATING PROFIT BASED ON LONGER-TERM INVESTMENT RETURNS

Results analysis by business area
     
2015 £m
2014 £m
   
Note
 
note (iii)
Asia operations
     
New business
3
1,490
1,162
Business in force
4
831
738
Long-term business
 
2,321
1,900
Eastspring Investments
 
101
78
Total
 
2,422
1,978
US operations
     
New business
3
809
694
Business in force
4
999
834
Long-term business
 
1,808
1,528
Broker-dealer and asset management
 
7
6
Total
 
1,815
1,534
UK operations*
     
New business
3
318
259
Business in force
4
545
476
Long-term business
 
863
735
General insurance commission
 
22
19
Total UK insurance operations
 
885
754
M&G
 
358
353
Prudential Capital
 
18
33
Total
 
1,261
1,140
Other income and expenditurenote (i)
 
(566)
(531)
Solvency II and restructuring costsnote (ii)
 
(51)
(36)
Results of the sold PruHealth and PruProtect businesses
 
11
Operating profit based on longer-term investment returns
 
4,881
4,096
         
Analysed as profit (loss) from:
     
New business*
3
2,617
2,115
Business in force*
4
2,375
2,048
Long-term business*
 
4,992
4,163
Asset management
 
484
470
Other results
 
(595)
(537)
   
4,881
4,096
*
In order to show the UK long-term business on a comparable basis, the 2014 comparative results exclude the contribution from the sold PruHealth and PruProtect businesses which is shown separately.

Notes
(i)  
EEV basis other income and expenditure represents the post-tax IFRS basis result less the unwind of expected margins on the internal management of the assets of the covered business (as explained in note 13(a)(vii)) and an adjustment for the shareholders’ share of the pension costs attributable to the with-profits business.
(ii)
Solvency II and restructuring costs comprise the net of tax charge recognised on an IFRS basis and the additional amount recognised on the EEV basis for the shareholders’ share incurred by the PAC with-profits fund.
(iii)
The comparative results have been prepared using previously reported average exchange rates for the year.

Basic earnings per share
   
 
2015
2014
Based on post-tax operating profit including longer-term investment returns (in pence)
191.2p
160.7p
Based on post-tax profit attributable to equity holders of the Company (in pence)
154.8p
170.4p
Average number of shares (millions)
2,553
2,549
 
POST-TAX SUMMARISED CONSOLIDATED INCOME STATEMENT
       
         
 
Note
2015 £m
 
2014 £m
Asia operations
 
2,422
 
1,978
US operations
 
1,815
 
1,534
UK operations*
 
1,261
 
1,140
Other income and expenditure
 
(566)
 
(531)
Solvency II and restructuring costs
 
(51)
 
(36)
Results of the sold PruHealth and PruProtect businesses
 
 
11
Operating profit based on longer-term investment returns
 
4,881
 
4,096
Short-term fluctuations in investment returns
5
(1,208)
 
763
Effect of changes in economic assumptions
6
57
 
(369)
Mark to market value movements on core borrowings
 
221
 
(187)
Gain on sale of PruHealth and PruProtect**
 
 
44
Costs of domestication of Hong Kong branch
 
 
(4)
Total non-operating (loss) profit
 
(930)
 
247
Profit for the year attributable to equity holders of the Company
 
3,951
 
4,343
*
In order to show the UK long-term business on a comparable basis, the 2014 comparative results exclude the contribution from the sold PruHealth and PruProtect businesses which is shown separately.
**
In November 2014, PAC completed the sale of its 25 per cent equity stake in the PruHealth and PruProtect businesses to Discovery Group Europe Limited resulting in a gain of £44 million in 2014.

MOVEMENT IN SHAREHOLDERS' EQUITY
         
       
Note
2015 £m
 
2014 £m
 
Profit for the year attributable to equity shareholders
 
3,951
 
4,343
 
Items taken directly to equity:
         
 
Exchange movements on foreign operations and net investment hedges
 
244
 
737
 
 
Dividends
 
(974)
 
(895)
 
 
New share capital subscribed
 
7
 
13
 
 
Shareholders' share of actuarial and other gains and losses on defined benefit
         
   
pension schemes
 
25
 
(11)
 
 
Reserve movements in respect of share-based payments
 
39
 
106
 
 
Treasury shares
 
(18)
 
(54)
 
 
Mark to market value movements on Jackson assets backing surplus and required capital
 
(76)
 
77
 
Net increase in shareholders’ equity
9
3,198
 
4,316
 
Shareholders’ equity at beginning of year:
         
 
As previously reported
9
29,161
 
24,856
 
 
Effect of the domestication of Hong Kong branch on 1 January 2014*
 
-
 
(11)
 
         
29,161
 
24,845
 
Shareholders’ equity at end of year
9
32,359
 
29,161
 
*
On 1 January 2014, the Hong Kong branch of PAC was transferred to separate subsidiaries established in Hong Kong. The overall EEV basis effect of £(11) million represents the cost of holding higher required capital levels in the stand-alone Hong Kong shareholder-backed long-term insurance business.

Comprising: 
31 Dec 2015 £m
 
31 Dec 2014 £m
   
Long-term
business operations
Asset
management
and other operations
Total  
 
Long-term
business
operations
Asset
management
and other operations
Total
   
note 9
           
Asia operations
13,876
306
14,182
 
12,545
274
12,819
US operations
9,487
182
9,669
 
8,379
157
8,536
UK insurance operations
9,647
22
9,669
 
8,433
19
8,452
M&G
-
1,774
1,774
 
-
1,572
1,572
Prudential Capital
-
70
70
 
-
74
74
Other operations
-
(3,005)
(3,005)
 
-
(2,292)
(2,292)
Shareholders’ equity at end of year
33,010
(651)
32,359
 
29,357
(196)
29,161
                 
Representing:
       
 
 
 
 
Net assets excluding acquired goodwill and
       holding company net borrowings
32,777
866
33,643
 
29,124
1,542
30,666
 
Acquired goodwill
233
1,230
1,463
 
233
1,230
1,463
 
Holding company net borrowings at market valuenote 7
-
(2,747)
(2,747)
 
-
(2,968)
(2,968)
 
33,010
(651)
32,359
 
29,357
(196)
29,161
 
SUMMARY STATEMENT OF FINANCIAL POSITION
     
             
     
Note
31 Dec 2015 £m
 
31 Dec 2014 £m
Total assets less liabilities, before deduction for insurance funds
 
340,666
 
326,633
Less insurance funds:*
       
 
Policyholder liabilities (net of reinsurers’ share) and unallocated surplus of with-profits funds
 
(327,711)
 
(314,822)
 
Less shareholders’ accrued interest in the long-term business
 
19,404
 
17,350
       
(308,307)
 
(297,472)
 Total net assets
 9
32,359
 
29,161
             
Share capital
 
128
 
128
Share premium
 
1,915
 
1,908
IFRS basis shareholders’ reserves
 
10,912
 
9,775
Total IFRS basis shareholders’ equity
 9
12,955
 
11,811
Additional EEV basis retained profit
 9
19,404
 
17,350
Total EEV basis shareholders’ equity (excluding non-controlling interests)
 9
32,359
 
29,161
*
Including liabilities in respect of insurance products classified as investment contracts under IFRS 4.


Net asset value per share
     
           
     
31 Dec 2015
 
31 Dec 2014
Based on EEV basis shareholders’ equity of £32,359 million (2014: £29,161 million) (in pence)
1,258p
 
1,136p
Number of issued shares at year end (millions)
2,572
 
2,568
           
Annualised return on embedded value*
17%
 
16%
*
Annualised return on embedded value is based on EEV post-tax operating profit, as a percentage of opening EEV basis shareholders’ equity.


NOTES ON THE EEV BASIS RESULTS

1 Basis of preparation

The EEV basis results have been prepared in accordance with the EEV Principles issued by the European Insurance CFO Forum in May 2004, subsequently supplemented by Additional Guidance on EEV Disclosure issued in October 2005. The impact of Solvency II is not reflected in these results in line with the guidance issued by the CFO Forum in October 2015 (see note 15 for further details). Where appropriate, the EEV basis results include the effects of adoption of EU-endorsed IFRS.

The directors are responsible for the preparation of the supplementary information in accordance with the EEV Principles. The auditors have reported on the 2015 EEV basis results supplement to the Company’s statutory accounts for 2015.  Their report was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006. Except for the change in presentation of the operating results for UK operations to show separately the contribution from the sold PruHealth and PruProtect businesses and the presentation of Prudential Capital as a separate segment, the 2014 results have been derived from the EEV basis results supplement to the Company’s statutory accounts for 2014. The supplement included an unqualified audit report from the auditors.

A detailed description of the EEV methodology and accounting presentation is provided in note 13.

2 Results analysis by business area

The 2014 comparative results are shown below on both actual exchange rates (AER) and constant exchange rates (CER) bases. The 2014 CER comparative results are translated at 2015 average exchange rates.

Annual premium and contribution equivalents (APE) note 16

   
2015 £m
 
2014 £m
 
% change
 
Note
   
AER
CER
 
AER
CER
Asia operations
 
2,853
 
2,237
2,267
 
28%
26%
US operations
 
1,729
 
1,556
1,677
 
11%
3%
UK operations*
 
1,025
 
834
834
 
23%
23%
Total*
3
5,607
 
4,627
4,778
 
21%
17%
*
In order to show the UK long-term business on a comparable basis, the 2014 comparative results exclude the contribution from the sold PruHealth and PruProtect businesses.

Post-tax operating profit
               
   
2015 £m
 
2014 £m
 
% change
 
Note
   
AER
CER
 
AER
CER
Asia operations
               
New business
3
1,490
 
1,162
1,168
 
28%
28%
Business in force
4
831
 
738
735
 
13%
13%
Long-term business
 
2,321
 
1,900
1,903
 
22%
22%
Eastspring Investments
 
101
 
78
79
 
29%
28%
Total
 
2,422
 
1,978
1,982
 
22%
22%
US operations
               
New business
3
809
 
694
748
 
17%
8%
Business in force
4
999
 
834
899
 
20%
11%
Long-term business
 
1,808
 
1,528
1,647
 
18%
10%
Broker-dealer and asset management
 
7
 
6
7
 
17%
-
Total
 
1,815
 
1,534
1,654
 
18%
10%
UK operations*
               
New business
3
318
 
259
259
 
23%
23%
Business in force
4
545
 
476
476
 
14%
14%
Long-term business
 
863
 
735
735
 
17%
17%
General insurance commission
 
22
 
19
19
 
16%
16%
Total UK insurance operations
 
885
 
754
754
 
17%
17%
M&G
 
358
 
353
353
 
1%
1%
Prudential Capital
 
18
 
33
33
 
(45)%
(45)%
Total
 
1,261
 
1,140
1,140
 
11%
11%
Other income and expenditure
 
(566)
 
(531)
(531)
 
(7)%
(7)%
Solvency II and restructuring costs
 
(51)
 
(36)
(36)
 
(42)%
(42)%
Results of the sold PruHealth and PruProtect
   businesses
 
-
 
11
11
 
(100)%
(100)%
Operating profit based on
    longer-term investment returns
 
4,881
 
4,096
4,220
 
19%
16%
                 
Analysed as profit (loss) from:
               
New business*
3
 2,617
 
2,115
2,175
 
24%
20%
Business in force*
4
 2,375
 
 2,048
 2,110
 
16%
13%
Total long-term business*
 
4,992
 
4,163
4,285
 
20%
16%
Asset management
 
484
 
470
472
 
3%
3%
Other results
 
(595)
 
(537)
(537)
 
(11)%
(11)%
   
4,881
 
 4,096
 4,220
 
19%
16%
*
In order to show the UK long-term business on a comparable basis, the 2014 comparative results exclude the contribution from the sold PruHealth and PruProtect businesses, which is shown separately.

Post-tax profit
               
                 
   
2015 £m
 
2014 £m
 
% change
 
Note
   
AER
CER
 
AER
CER
Operating profit based on
    longer-term investment returns
 
4,881
 
4,096
4,220
 
19%
16%
Short-term fluctuations in investment returns
 5
(1,208)
 
763
771
 
(258)%
(257)%
Effect of changes in economic assumptions
 6
57
 
(369)
(389)
 
115%
115%
Other non-operating profit (loss)
 
221
 
(147)
(147)
 
250%
250%
Total non-operating (loss) profit
 
(930)
 
247
235
 
(477)%
(496)%
Profit for the year attributable to
    shareholders
 
3,951
 
4,343
4,455
 
(9)%
(11)%

Basic earnings per share (in pence)
                   
                     
 
2015
   
2014
   
% change
       
AER
 
CER
   
AER
CER
Based on post-tax operating profit
    including longer-term investment returns
191.2
p
 
160.7
p
165.6
p
 
19%
15%
Based on post-tax profit
154.8
p
 
170.4
p
174.8
p
 
(9)%
(11)%

3 Analysis of new business contribution

(i)  
Group summary
               
   
2015
   
Annual premium and contribution equivalents (APE)
Present
value of new business premiums (PVNBP)
New business contribution
 
New business margin
     
APE
PVNBP
   
£m
£m
£m
 
%
%
   
note 16
note 16
note
     
Asia operationsnote (ii)
 2,853
 15,208
 1,490
 
 52
 9.8
US operations
 1,729
 17,286
 809
 
 47
 4.7
UK insurance operations
 1,025
 9,069
 318
 
 31
 3.5
Total
 5,607
 41,563
 2,617
 
 47
 6.3
               
   
2014
   
Annual premium and contribution equivalents (APE)
Present
value of new business premiums (PVNBP)
New business contribution
 
New business margin
     
APE
PVNBP
   
£m
£m
£m
 
%
%
   
note 16
note 16
note
     
Asia operationsnote (ii)
 2,237
 12,331
 1,162
 
 52
 9.4
US operations
 1,556
 15,555
 694
 
 45
 4.5
UK insurance operations*
 834
 7,305
 259
 
 31
 3.5
Total*
 4,627
 35,191
 2,115
 
 46
 6.0
*
In order to show the UK long-term business on a comparable basis, the 2014 comparative results exclude the contribution from the sold PruHealth and PruProtect businesses.

Note
The increase in new business contribution of £502 million from £2,115 million for 2014 to £2,617 million for 2015 comprises an increase on a CER basis of £442 million and an increase of £60 million for foreign exchange effects. The increase of £442 million on the CER basis comprises a contribution of £377 million for higher sales volumes, a £21 million effect of higher long-term interest rates (generated by the active basis of setting economic assumptions) (analysed as Asia £(2) million, US £20 million and UK £3 million) and a £44 million impact of pricing, product and other actions.

(ii)
Asia operations – new business contribution by territory

 
2015 £m
 
2014 £m
     
AER
CER
China
 30
 
27
29
Hong Kong
 835
 
405
436
India
 18
 
12
12
Indonesia
 229
 
296
282
Korea
 8
 
11
11
Taiwan
 28
 
29
30
Other
 342
 
382
368
Total Asia operations
 1,490
 
1,162
1,168

4 Operating profit from business in force

 
(i)   Group summary
         
 
2015 £m
 
Asia
operations
US
operations
UK
insurance
operations
Total
 
note (ii)
note (iii)
note (iv)
note
Unwind of discount and other expected returns
749
472
488
1,709
Effect of changes in operating assumptions
12
115
55
182
Experience variances and other items
70
412
2
484
Total
831
999
545
2,375
         
 
2014 £m
 
Asia
operations
US
operations
UK
insurance
operations
Total
 
note (ii)
note (iii)
note (iv)
note
Unwind of discount and other expected returns
648
382
410
1,440
Effect of changes in operating assumptions
52
86
138
Experience variances and other items
38
366
66
470
Total
738
834
476
2,048

Note
The movement in operating profit from business in force of £327 million from £2,048 million for 2014 to £2,375 million for 2015 comprises:
     
   
2015 £m
Increase in unwind of discount and other expected returns:
 
  Effects of changes in:
 
 
Interest rates
6
 
Foreign exchange
22
 
Growth in opening value and other items
241
   
269
Year-on-year change in effects of operating assumptions, experience variances and other items
58
Net increase in operating profit from business in force
327


 
 
(ii)  Asia operations

   
2015 £m
2014 £m
Unwind of discount and other expected returnsnote (a)
749
648
Effect of changes in operating assumptions:
   
 
Mortality and morbiditynote (b)
63
27
 
Persistency and withdrawalsnote (c)
(46)
(17)
 
Expense
(1)
(5)
 
Othernote (d)
(4)
47
   
12
52
Experience variances and other items:
   
 
Mortality and morbiditynote (e) 
58
23
 
Persistency and withdrawalsnote (f) 
20
44
 
Expensenote (g)
(32)
(27)
 
Other including development expenses
24
(2)
   
70
38
Total Asia operations
831
738

Notes
(a)  
The increase in unwind of discount and other expected returns of £101 million from £648 million for 2014 to £749 million for 2015 comprises an effect of £119 million for the growth in the opening in-force value, partially offset by a £(10) million decrease from changes in interest rates and an £(8) million decrease for foreign exchange effects.
(b)  
The 2015 credit of £63 million for mortality and morbidity assumptions mainly reflects the effect of lower projected mortality rates for traditional and linked business in Malaysia. The 2014 credit of £27 million reflected a number of offsetting items, including the effect of reduced projected mortality rates in Hong Kong.
(c)  
The 2015 charge of £(46) million for persistency assumption changes comprises positive and negative contributions from our various operations, with positive persistency updates on health and protection products being more than offset by negative effects for unit-linked business. The 2014 charge of £(17) million mainly reflected increased partial withdrawal assumptions on unit-linked business in Korea.
(d)  
The 2014 credit of £47 million for other assumption changes reflected a number of offsetting items, including modelling improvements and those arising from asset allocation changes in Hong Kong.
(e)  
The positive mortality and morbidity experience variance in 2015 of £58 million (2014: £23 million) mainly reflects better than expected experience in Hong Kong and Indonesia.
(f)  
The positive £20 million for persistency and withdrawals experience in 2015 (2014: £44 million) is driven mainly by favourable experience in Hong Kong.
(g)  
The expense experience variance in 2015 is negative £(32) million (2014: £(27) million). The variance principally arises in operations which are currently sub-scale (China, Malaysia Takaful and Taiwan) and from short-term overruns in India.

 
(iii)  US operations

   
2015 £m
2014 £m
Unwind of discount and other expected returnsnote (a)
472
382
Effect of changes in operating assumptions:
   
 
Persistencynote (b)
139
55
 
Other
(24)
31
   
115
86
Experience variances and other items:
   
 
Spread experience variancenote (c)
149
192
 
Amortisation of interest-related realised gains and lossesnote (d)
70
56
 
Othernote (e)
193
118
   
412
366
Total US operations
999
834

Notes
(a)  
The increase in unwind of discount and other expected returns of £90 million from £382 million for 2014 to £472 million for 2015 comprises a £56 million effect for the underlying growth in the in-force book, a £30 million foreign currency translation effect, and a £4 million impact of the 10 basis points increase in US 10-year treasury rates.
(b)  
The credit of £139 million in 2015 (2014: £55 million) for persistency assumption changes principally relates to reduced lapse rates for variable annuity business to more closely align to recent experience.
(c)  
The spread assumption for Jackson is determined on a longer-term basis, net of provision for defaults (see note 14 (ii)). The spread experience variance in 2015 of £149 million (2014: £192 million) includes the positive effect of transactions previously undertaken to more closely match the overall asset and liability duration. The reduction compared to the prior year reflects the effects of declining yields in the portfolio caused by the prolonged low interest rate environment.
(d)  
The amortisation of interest-related gains and losses reflects the fact that when bonds that are neither impaired nor deteriorating are sold and reinvested there will be a consequent change in the investment yield. The realised gain or loss is amortised into the result over the year when the bonds would have otherwise matured to better reflect the long-term returns included in operating profits.
(e)  
Other experience variances of £193 million in 2015 (2014: £118 million) include the effects of positive persistency experience and other favourable experience variances. The 2015 result benefits from higher levels of tax relief from prior period adjustments.

(iv)
UK insurance operations

     
2015 £m
2014 £m
Unwind of discount and other expected returnsnote (a)
488
410
Reduction in future UK corporate tax ratenote (b)
55
-
Othernote (c)
2
66
Total UK insurance operations
545
476

Notes                                                                      
(a)  
The increase in unwind of discount and other expected returns of £78 million from 2014 of £410 million to £488 million for 2015 comprises an effect of £66 million reflecting the underlying growth in the in-force book and a £12 million effect of the 20 basis points increase in gilt yields.
(b)  
The £55 million credit in 2015 for the change in UK corporate tax rates reflects the beneficial effect of applying lower corporation tax rates (note 14) to future life profits from in-force business in the UK.
(c)  
Other items of £2 million (2014: £66 million) comprise the following:

 
 
   
2015 £m
2014 £m
 
Longevity reinsurancenote (d)
(134)
(8)
 
Impact of specific management actions in second half of 2015 ahead of Solvency IInote (e)
75
-
 
Other itemsnote (f)
61
74
   
2
66

(d)  
During 2015 we extended our longevity reinsurance programme to cover an additional £6.4 billion of annuity liabilities at a net cost of £(134) million. Of this total, some £4.8 billion was transacted in the second half of 2015 at a net cost of £(88) million.
(e)  
The £75 million benefit arose from the specific management actions taken in the second half of 2015 to position the balance sheet more efficiently under the new Solvency II regime.
(f)  
The credit of £61 million for 2015 comprises assumption updates and experience variances for mortality, expense, persistency and other items.

5 Short-term fluctuations in investment returns

Short-term fluctuations in investment returns included in profit for the year arise as follows:

 
(i)   Group summary
     
 
2015 £m
2014 £m
Asia operationsnote (ii)
(206)
439
US operationsnote (iii)
(753)
(166)
UK insurance operationsnote (iv)
(194)
583
Other operationsnote (v)
(55)
(93)
Total
(1,208)
763

 
(ii)   Asia operations
The short-term fluctuations in investment returns for Asia operations comprise:
 
2015 £m
2014 £m
Hong Kong
(144)
178
Indonesia
(53)
35
Singapore
(104)
92
Taiwan
44
23
Other
51
111
Total Asia operationsnote
(206)
439

Note
For 2015, the charge of £(144) million in Hong Kong, £(53) million in Indonesia and £(104) million in Singapore principally arise from unrealised losses on bonds backing surplus assets driven by increases in long-term interest rates (as shown in note14(i)) and from the effect of falls in equity markets in the region. The credit of £44 million in Taiwan arises from unrealised gains on bonds following the decrease in long-term interest rates.

 
(iii)  US operations
The short-term fluctuations in investment returns for US operations comprise:
   
2015 £m
2014 £m
Investment return related experience on fixed income securitiesnote (a)
(17)
31
Investment return related impact due to changed expectation of profits on in-force
   variable annuity business in future periods based on current period
   separate account return, net of related hedging activity and other itemsnote (b)
(736)
(197)
Total US operations
(753)
(166)

 
Notes
(a)  
The (charge) credit relating to fixed income securities comprises the following elements:
–  
the impact on portfolio yields of changes in the asset portfolio in the year;
–  
the excess of actual realised gains and losses over the amortisation of interest-related realised gains and losses recorded in the profit and loss account; and
–  
credit experience (versus the longer-term assumption).
(b)  
This item reflects the net impact of:
–  
changes in projected future fees and future benefit costs arising from the effect of market fluctuations on the growth in separate account asset values in the current reporting period; and
–  
related hedging activity arising from realised and unrealised gains and losses on equity-related hedges and interest rate options, and other items.

(iv) UK insurance operations
The short-term fluctuations in investment returns for UK insurance operations comprise:

 
2015 £m
2014 £m
Shareholder-backed annuitynote (a)
(88)
310
With-profits, unit-linked and othernote (b)
(106)
273
Total UK insurance operations
(194)
583

 
Notes
(a)  
Short-term fluctuations in investment returns for shareholder-backed annuity business comprise:
–  
(losses) gains on surplus assets compared to the expected long-term rate of return reflecting (increases) reductions in corporate bond and gilt yields;
–  
the difference between actual and expected default experience; and
–  
the effect of mismatching for assets and liabilities of different durations and other short-term fluctuations in investment returns.
(b)  
The £(106) million fluctuation in 2015 for with-profits, unit-linked and other business represents the impact of achieving a 3.1 per cent pre-tax return on the with-profits fund (including unallocated surplus) compared to the assumed rate of return of 5.4 per cent (2014: total return of 9.5 per cent compared to assumed rate of 5.0 per cent). This line also includes the effect of a partial hedge of future shareholder transfers expected to emerge from the UK’s with-profits sub-fund entered into to protect future shareholder with-profit transfers from  declines in the UK equity market.

 
(v) Other operations
Short-term fluctuations in investment returns for other operations of £(55) million (2014: £(93) million) include unrealised value movements on investments held outside our main life operations.

6 Effect of changes in economic assumptions

The effects of changes in economic assumptions for in-force business included in the profit for the year arise as follows:

(i)   Group summary
   
     
 
2015 £m
2014 £m
Asia operationsnote (ii)
(148)
(269)
US operationsnote (iii)
109
(77)
UK insurance operationsnote (iv)
96
(23)
Total
57
(369)

(ii)  Asia operations
   
The effect of changes in economic assumptions for Asia operations comprises:
   
     
 
2015 £m
2014 £m
Hong Kong
100
(121)
Indonesia
(15)
25
Malaysia
(30)
11
Singapore
(50)
(42)
Taiwan
(97)
(21)
Other
(56)
(121)
Total Asia operationsnote
(148)
(269)

Note
The negative 2015 effect in Malaysia, Indonesia and Singapore reflects the impact of valuing future health and protection profits at higher discount rates, driven by the increase in long-term interest rates in these countries (see note 14(i)). The negative effect in Taiwan is driven by a decrease in fund earned rates reflecting the decline in long-term interest rates and changes to the asset portfolio mix. The positive impact in Hong Kong is driven by the effect of higher assumed future fund earned rates for participating business.

(iii)  US operations
 
The effect of changes in economic assumptions for US operations comprises:

 
2015 £m
2014 £m
Variable annuity business
104
(228)
Fixed annuity and other general account business
5
151
Total US operationsnote
109
(77)

 
Note
For 2015, the credit of £109 million mainly reflects the increase in the assumed separate account return and reinvestment rates for variable annuity business, following the 10 basis points increase in the US treasury rate (2014: decrease of 90 basis points), resulting in higher projected fee income and a decrease in projected benefit costs.

(iv)
UK insurance operations
The effect of changes in economic assumptions for UK insurance operations comprises:

 
2015 £m
2014 £m
Shareholder-backed annuity businessnote (a)
(56)
352
With-profits and other businessnote (b)
152
(375)
Total UK insurance operations
96
(23)

 
Notes
(a)
For shareholder-backed annuity business the overall negative (2014: positive) effect reflects the change in the present value of projected spread income arising mainly from the increase (2014: reduction) in the risk discount rates as shown in note 14(iii).
(b)
The credit of £152 million in 2015 reflects the net effect of changes in fund earned rates and risk discount rates (as shown in note 14 (iii)), driven by the 20 basis points increase in gilt rates (2014: decrease of 130 basis points), together with the impact from changes in the composition of the asset portfolio.

7 Net core structural borrowings of shareholder-financed operations

 
31 Dec 2015 £m
 
31 Dec 2014 £m
 
IFRS
basis
Mark to
market
value
adjustment
EEV
basis at
market
value
 
IFRS
basis
Mark to
market
value
adjustment
EEV
basis at
market
value
Holding company* cash and short-term investments
(2,173)
-
(2,173)
 
(1,480)
-
(1,480)
Core structural borrowings – central fundsnote
4,567
353
4,920
 
3,869
579
4,448
Holding company net borrowings
2,394
353
2,747
 
2,389
579
2,968
Core structural borrowings – Prudential Capital
275
-
275
 
275
-
275
Core structural borrowings – Jackson
169
55
224
 
160
42
202
Net core structural borrowings of shareholder-financed operations
2,838
408
3,246
 
2,824
621
3,445
*
Including central finance subsidiaries.

Note
In June 2015, the Company issued core structural borrowings of £600 million 5.00 per cent subordinated notes due in 2055. The proceeds, net of discount adjustment and costs, were £590 million.

8 Analysis of movement in free surplus

For EEV covered business, free surplus is the excess of the regulatory basis net assets for EEV reporting purposes (net worth) over the capital required to support the covered business. Where appropriate, adjustments are made to the net worth so that backing assets are included at fair value rather than cost so as to comply with the EEV Principles. Free surplus for asset management operations and the UK general insurance commission is taken to be IFRS basis post-tax earnings and shareholders’ equity.

 
(i)   Underlying free surplus generated
The 2014 comparative results are shown below on both actual exchange rates (AER) and constant exchange rates (CER) bases. The 2014 CER comparative results are translated at 2015 average exchange rates.
               
 
2015 £m
 
2014 £m
 
% change
     
AER
CER
 
AER
CER
Asia operations
             
Underlying free surplus generated from in-force
    life business
985
 
860
851
 
15%
16%
Investment in new businessnotes (ii)(a), (ii)(g)
(413)
 
(346)
(352)
 
(19)%
(17)%
Long-term business
572
 
514
499
 
11%
15%
Eastspring Investmentsnote (ii)(b)
101
 
78
79
 
29%
28%
Total
673
 
592
578
 
14%
16%
US operations
             
Underlying free surplus generated from in-force
    life business
 1,426
 
 1,191
 1,284
 
20%
11%
Investment in new businessnote (ii)(a)
(267)
 
(187)
(201)
 
(43)%
(33)%
Long-term business
1,159
 
 1,004
 1,083
 
15%
7%
Broker-dealer and asset managementnote (ii)(b)
7
 
6
7
 
17%
 -
Total
1,166
 
1,010
1,090
 
15%
7%
UK insurance operations*
             
Underlying free surplus generated from in-force
    life business
878
 
637
637
 
38%
38%
Investment in new businessnote (ii)(a)
(65)
 
(65)
(65)
 
 -
 -
Long-term business
813
 
572
572
 
42%
42%
General insurance commissionnote (ii)(b)
22
 
19
19
 
16%
16%
Total
835
 
591
591
 
41%
41%
M&Gnote (ii)(b)
358
 
353
353
 
1%
1%
Prudential Capitalnote (ii)(b)
18
 
33
33
 
(45)%
(45)%
Underlying free surplus generated
3,050
 
2,579
2,645
 
18%
15%
               
Representing:
             
Long-term business:*
             
Expected in-force cashflows (including expected return on net assets)
2,730
 
 2,374
 2,436
 
15%
12%
Effects of changes in operating assumptions,
    operating experience variances and other
    operating items
559
 
314
336
 
78%
66%
Underlying free surplus generated from
    in-force life business
3,289
 
2,688
2,772
 
22%
19%
Investment in new businessnotes (ii)(a), (ii)(g)
(745)
 
(598)
(618)
 
(25)%
(21)%
Total long-term business*
2,544
 
2,090
2,154
 
22%
18%
Asset management and general insurance
    commissionnote (ii)(b)
506
 
489
491
 
3%
3%
Underlying free surplus generated
3,050
 
2,579
2,645
 
18%
15%
*
In order to show the UK long-term business on a comparable basis, the 2014 comparative results exclude the contribution from the sold PruHealth and PruProtect businesses.

(ii) Movement in free surplus
         
                 
 
2015 £m
 
2014 £m
Long-term business and asset management operations
 Long-term business
Asset management and UK general insurance commission
Free surplus of long-term business, asset management and UK general insurance commission
 
Free surplus of
 long-term business, asset management and UK general insurance commission
 
note 10
note (b)
     
Underlying movement:*
         
 
Investment in new businessnotes (a), (g)
(745)
-
(745)
 
(598)
 
Business in force:
         
   
Expected in-force cash flows (including expected return
   on net assets)
2,730
506
3,236
 
2,863
   
Effects of changes in operating assumptions, operating
   experience variances and other operating items
559
-
559
 
314
       
2,544
506
3,050
 
2,579
Disposal of Japan Life businessnote (h)
23
-
23
 
-
Gain on sale of PruHealth and PruProtect
-
-
-
 
130
Other non-operating itemsnote (c)
(407)
(53)
(460)
 
(266)
       
2,160
453
2,613
 
2,443
Net cash flows to parent companynote (d)
(1,271)
(354)
(1,625)
 
(1,482)
Exchange movements, timing differences and other itemsnote (e)
560
159
719
 
130
Net movement in free surplus
1,449
258
1,707
 
1,091
Balance at beginning of year:
         
 
As previously reported
4,193
866
5,059
 
4,003
 
Effect of domestication of Hong Kong branch**
-
-
-
 
(35)
Balance at end of yearnote (g)
5,642
1,124
6,766
 
5,059
                 
Representing:
         
 
Asia operations
1,503
245
1,748
 
1,560
 
US operations
1,567
166
1,733
 
1,557
 
UK operations
2,572
713
3,285
 
1,942
   
5,642
1,124
6,766
 
5,059
                 
Balance at beginning of year:
         
 
Asia operations
1,347
213
1,560
 
1,379
 
US operations
1,416
141
1,557
 
1,074
 
UK operations
1,430
512
1,942
 
1,550
   
4,193
866
5,059
 
4,003
*
In order to show the UK long-term business on a comparable basis, the 2014 comparative underlying movement in free surplus excludes the contribution from  the sold PruHealth and PruProtect businesses.
**
On 1 January 2014, the Hong Kong branch of PAC was transferred to separate subsidiaries established in Hong Kong. The 2014 EEV basis results included opening adjustments arising from the transfer of capital that was previously held within the UK business in respect of the Hong Kong branch operations and additional capital requirements arising from the newly established subsidiaries with an overall effect of £(35) million.

 
Notes
(a)
Free surplus invested in new business represents amounts set aside for required capital and acquisition costs.
(b)
Free surplus for asset management operations and the UK general insurance commission is taken to be IFRS basis post-tax earnings and shareholders’ equity.
(c)
Non-operating items are principally short-term fluctuations in investment returns and the effect of changes in economic assumptions for long-term business operations.
(d)
Net cash flows to parent company for long-term business operations reflect the flows as included in the holding company cash flow at transaction rates.
(e)
Exchange movements, timing differences and other items represent:
   
2015 £m
   
Long-term
business
Asset management
and UK general
insurance commission
Total
 
Exchange movementsnote 10
67
3
70
 
Mark to market value movements on Jackson assets backing surplus and required capitalnote 9
(76)
(76)
 
Shareholders' share of actuarial and other gains and losses on defined benefit pension schemes
14
8
22
 
Other itemsnote (f)
555
148
703
   
560
159
719

(f)
Other items include the effect of intra-group loans, contingent loan repayments as shown in note 10(i), timing differences arising on statutory transfers and other non-cash items. For 2015, other items for long-term business include the effect of a classification change of £702 million from Other operations to UK insurance operations in order to align with Solvency II segmental reporting.
(g)
Investment in new business includes the annual amortisation charge of amounts incurred to secure exclusive distribution rights through our bancassurance partners at a rate that reflects the pattern in which the future economic benefits are expected to be consumed by reference to new business levels. Included within the overall free surplus balance of our Asia life entities is £287 million representing unamortised amounts incurred to secure exclusive distribution rights through bancassurance partners. These amounts exclude £971 million of Asia distribution rights intangibles that are financed by loan arrangements from central companies, the costs of which are allocated to the Asia life segment as the amortisation cost is incurred.
(h)
The credit of £23 million in free surplus in 2015 reflects the release of required capital and transfer of value of in-force business on the completion of the sale of the Japan Life business (see note 10).

9 Reconciliation of movement in shareholders’ equity

     
2015 £m
     
Long-term business operations
Other operations
Group
Total
     
Asia operations
US
operations
UK
insurance operations
Total
long-term business
operations
     
     
     
     
note (i)
     
note (i)
 
Operating profit (based on longer-term
   investment returns)
           
Long-term business:
           
 
New businessnote 3
1,490
809
318
2,617
-
2,617
 
Business in forcenote 4
831
999
545
2,375
-
2,375
     
2,321
1,808
863
4,992
-
4,992
Asset management
-
-
-
-
484
484
Other results
-
(1)
(28)
(29)
(566)
(595)
Operating profit based on longer-term
   investment returns
2,321
1,807
835
4,963
(82)
4,881
Total non-operating (loss) profit
(354)
(654)
(98)
(1,106)
176
(930)
Profit for the year
1,967
1,153
737
3,857
94
3,951
Other items taken directly to equity
           
Exchange movements on foreign operations
   and net investment hedges
(157)
510
-
353
(109)
244
Intra-group dividends (including statutory transfers) and
    investment in operationsnote (ii)
(472)
(465)
(215)
(1,152)
1,152
-
External dividends
-
-
-
-
(974)
(974)
Other movementsnote (iii)
(7)
(14)
692
671
(618)
53
Mark to market value movements on Jackson
   assets backing surplus and required capital
-
(76)
-
(76)
-
(76)
Net increase in shareholders’ equity
1,331
1,108
1,214
3,653
(455)
3,198
Shareholders' equity at beginning of year
12,312
8,379
8,433
29,124
37
29,161
Shareholders’ equity at end of year
13,643
9,487
9,647
32,777
(418)
32,359

Representing:
           
Statutory IFRS basis shareholders’ equity:
           
 
Net assets (liabilities)
3,723
4,154
5,118
12,995
(1,503)
11,492
 
Goodwill
-
-
-
-
1,463
1,463
Total IFRS basis shareholders’ equity
3,723
4,154
5,118
12,995
(40)
12,955
Additional retained profit (loss) on an EEV basisnote (iv)
9,920
5,333
4,529
19,782
(378)
19,404
EEV basis shareholders’ equity
13,643
9,487
9,647
32,777
(418)
32,359
Balance at beginning of year:
           
Statutory IFRS basis shareholders’ equity:
           
 
Net assets (liabilities)
3,315
4,067
3,785
11,167
(819)
10,348
 
Goodwill
-
-
-
-
1,463
1,463
Total IFRS basis shareholders’ equity
3,315
4,067
3,785
11,167
644
11,811
Additional retained profit (loss) on an EEV basisnote (iv)
8,997
4,312
4,648
17,957
(607)
17,350
EEV basis shareholders’ equity
12,312
8,379
8,433
29,124
37
29,161

Notes
(i)  
For the purposes of the table above, goodwill of £233 million (2014: £233 million) related to Asia long-term operations is included in Other operations.
(ii)  
Intra-group dividends (including statutory transfers) represent dividends that have been declared in the year and amounts accrued in respect of statutory transfers. Investments in operations reflect increases in share capital. The amounts included in note 8 for these items are as per the holding company cash flow at transaction rates. The difference primarily relates to intra-group loans, timing differences arising on statutory transfers and other non-cash items.
(iii)  
Other movements include the effect of a classification change of £702 million from Other operations to UK insurance operations in order to align with Solvency II segmental reporting, which has no overall effect on the Group’s EEV. Other movements also includes a credit of £25 million (2014: a charge of £(11) million) for the shareholders’ share of actuarial and other gains and losses on the defined benefit pension schemes.
(iv)  
The additional retained loss on an EEV basis for Other operations primarily represents the mark to market value adjustment for holding company net borrowings of a charge of £(353) million (2014: £(579) million), as shown in note 7.

10 Reconciliation of movement in net worth and value of in-force for long-term business
                 
   
2015 £m
               
Total
           
Value of
 
long-term
   
Free
Required
Total net
 
in-force
 
business
   
surplus
capital
 worth
 
business
 
operations
   
note  8
     
note (iii)
   
Group
             
Shareholders’ equity at beginning of year
4,193
4,556
8,749
 
20,375
 
29,124
New business contributionnote (ii)
(745)
493
(252)
 
2,869
 
2,617
Existing business – transfer to net worth
2,611
(355)
2,256
 
(2,256)
 
Expected return on existing businessnote 4
119
129
248
 
1,461
 
1,709
Changes in operating assumptions and experience variancesnote 4
588
88
676
 
(10)
 
666
Solvency II and restructuring costs
(29)
(29)
 
 
(29)
Operating profit based on longer-term investment returns
2,544
355
2,899
 
2,064
 
4,963
Disposal of Japan Life business
23
(48)
(25)
 
25
 
Other non-operating items
(407)
(216)
(623)
 
(483)
 
(1,106)
Profit from long-term business
2,160
91
2,251
 
1,606
 
3,857
Exchange movements on foreign operations and net investment hedges
67
57
124
 
229
 
353
Intra-group dividends (including statutory transfers) and investment in
       operationsnote (i)
(1,373)
(1,373)
 
221
 
(1,152)
Other movementsnote (v)
595
595
 
 
595
Shareholders’ equity at end of year
5,642
4,704
10,346
 
22,431
 
32,777
                 
Representing:
             
Asia operations
             
Shareholders’ equity at beginning of year
1,347
1,327
2,674
 
9,638
 
12,312
New business contributionnote (ii)
(413)
124
(289)
 
1,779
 
1,490
Existing business – transfer to net worth
974
(77)
897
 
(897)
 
Expected return on existing businessnote 4
30
43
73
 
676
 
749
Changes in operating assumptions and experience variancesnote 4
(19)
65
46
 
36
 
82
Operating profit based on longer-term investment returns
572
155
727
 
1,594
 
2,321
Disposal of Japan Life business
23
(48)
(25)
 
25
 
Other non-operating items
61
(6)
55
 
(409)
 
(354)
Profit from long-term business
656
101
757
 
1,210
 
1,967
Exchange movements on foreign operations and net investment hedges
(21)
(42)
(63)
 
(94)
 
(157)
Intra-group dividends and investment in operations
(472)
(472)
 
 
(472)
Other movements
(7)
(7)
 
 
(7)
Shareholders’ equity at end of year
1,503
1,386
2,889
 
10,754
 
13,643
US operations
               
Shareholders’ equity at beginning of year
1,416
1,710
3,126
 
5,253
 
8,379
 
New business contributionnote (ii)
(267)
284
17
 
792
 
809
 
Existing business – transfer to net worth
1,064
(196)
868
 
(868)
 
 
Expected return on existing businessnote 4
42
49
91
 
381
 
472
 
Changes in operating assumptions and experience variancesnote 4
321
22
343
 
184
 
527
 
Solvency II and restructuring costs
(1)
(1)
 
 
(1)
 
Operating profit based on longer-term investment returns
1,159
159
1,318
 
489
 
1,807
 
Other non-operating items
(541)
(162)
(703)
 
49
 
(654)
 
Profit from long-term business
618
(3)
615
 
538
 
1,153
 
Exchange movements on foreign operations and net investment hedges
88
99
187
 
323
 
510
 
Intra-group dividends
(465)
(465)
 
 
(465)
 
Other movements
(90)
(90)
 
 
(90)
 
Shareholders’ equity at end of year
1,567
1,806
3,373
 
6,114
 
9,487
 
UK insurance operations
               
Shareholders’ equity at beginning of year
1,430
1,519
2,949
 
5,484
 
8,433
 
New business contributionnote (ii)
(65)
85
20
 
298
 
318
 
Existing business – transfer to net worth
573
(82)
491
 
(491)
 
 
Expected return on existing businessnote 4
47
37
84
 
404
 
488
 
Changes in operating assumptions and experience variancesnote 4
286
1
287
 
(230)
 
57
 
Solvency II and restructuring costs
(28)
(28)
 
 
(28)
 
Operating profit based on longer-term investment returns
813
41
854
 
(19)
 
835
 
Other non-operating items
73
(48)
25
 
(123)
 
(98)
 
Profit from long-term business
886
(7)
879
 
(142)
 
737
 
Intra-group dividends (including statutory transfers)note (i)
(436)
(436)
 
221
 
(215)
 
Other movementsnote (v)
692
692
 
 
692
 
Shareholders’ equity at end of year
2,572
1,512
4,084
 
5,563
 
9,647
 

Notes
(i)
For UK insurance operations, the amounts shown for intra-group dividends (including statutory transfers) in free surplus of £(436) million and in the value of in-force of £221 million include the impact of intragroup contingent loan repayments during the year. Contingent loan funding represents amounts whose repayment to the lender is contingent upon future surpluses emerging from certain contracts specified under the arrangement. If insufficient surplus emerges on those contracts, there is no recourse to other assets of the Group and the liability is not payable to the degree of shortfall.
(ii)
New business contribution per £1 million of free surplus invested:
     
2015 £m
 
2014 £m
     
Asia
operations
US
operations
UK
insurance
operations
Total long-term
business
operations
 
Asia
operations
US
operations
UK
insurance
operations*
Total long-term
business
operations
 
Post-tax new business contributionnote 3
1,490
809
318
2,617
 
1,162
694
259
2,115
 
Free surplus invested in new business
(413)
(267)
(65)
(745)
 
(346)
(187)
(65)
(598)
 
Post-tax new business contribution per
    £1 million of free surplus invested
3.6
3.0
4.9
3.5
 
3.4
3.7
4.0
3.5
*
In order to show the UK long-term business on a comparable basis, the 2014 comparatives exclude the contribution from the sold PruHealth and PruProtect businesses.

(iii)
The value of in-force business comprises the value of future margins from current in-force business less the cost of holding required capital as shown below:
                       
     
31 Dec 2015 £m
 
31 Dec 2014 £m
     
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
 
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
 
Value of in-force business before
   deduction of cost of capital and
   time value of guarantees
11,280
7,355
5,817
24,452
 
10,168
5,914
5,756
21,838
 
Cost of capital
(438)
(229)
(254)
(921)
 
(417)
(199)
(272)
(888)
 
Cost of time value of guaranteesnote (iv)
(88)
(1,012)
(1,100)
 
(113)
(462)
(575)
 
Net value of in-force business
10,754
6,114
5,563
22,431
 
9,638
5,253
5,484
20,375

(iv)
The increase in the cost of time value of guarantees for US operations from £(462) million in 2014 to £(1,012) million in 2015 primarily relates to variable annuity business, mainly arising from the level of equity market performance.
(v)
Other movements for UK insurance operations include the effect of a classification change, as discussed in note 9(iii).

11 Expected transfer of value of in-force business to free surplus

The discounted value of in-force business and required capital can be reconciled to the 2015 and 2014 totals in the tables below for the emergence of free surplus as follows:

 
2015 £m
 
2014 £m
Required capitalnote 10
4,704
 
4,556
Value of in-force (VIF)note 10
22,431
 
20,375
Add back: deduction for cost of time value of guaranteesnote 10
1,100
 
575
Expected cash flow from sale of Japan Life business
-
 
(23)
Other itemsnote
(1,948)
 
(1,382)
Total
26,287
 
24,101

Note
‘Other items’ represent amounts incorporated into VIF where there is no definitive timeframe for when the payments will be made or receipts received. In particular, other items includes the deduction of the value of the shareholders’ interest in the estate, the value of which is derived by increasing final bonus rates so as to exhaust the estate over the lifetime of the in-force with-profits business. This is an assumption to give an appropriate valuation. To be conservative this item is excluded from the expected free surplus generation profile below.

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 embedded value reporting and so are subject to the same assumptions and sensitivities.

The table below shows how the VIF generated by the in-force business and the associated required capital is modelled as emerging into free surplus over future years.

   
2015 £m
   
Expected period of conversion of future post tax distributable earnings
and required capital flows to free surplus
 
2015 Total as shown above
1-5 years
6-10 years
11-15 years
16-20 years
21-40 years
40+ years
Asia operations
11,858
3,916
2,552
1,669
1,115
2,055
551
US operations
8,740
4,361
2,752
1,129
383
115
UK insurance operations
5,689
2,097
1,498
962
576
544
12
Total
26,287
10,374
6,802
3,760
2,074
2,714
563
 
100%
40%
26%
14%
8%
10%
2%
               
   
2014 £m
   
Expected period of conversion of future post tax distributable earnings
and required capital flows to free surplus
 
2014 Total as shown above
1-5 years
6-10 years
11-15 years
16-20 years
21-40 years
40+ years
Asia operations
10,859
3,660
2,289
1,553
1,026
1,874
457
US operations
7,471
3,867
2,298
873
334
99
UK insurance operations
5,771
2,111
1,464
973
606
604
13
Total
24,101
9,638
6,051
3,399
1,966
2,577
470
 
100%
40%
25%
14%
8%
11%
2%
12 Sensitivity of results to alternative assumptions

(a)           Sensitivity analysis – economic assumptions

The tables below show the sensitivity of the embedded value as at 31 December and the new business contribution after the effect of required capital for 2015 and 2014 to:

—  
1 per cent increase in the discount rates;
—  
1 per cent increase and decrease in interest rates, including all consequential changes (assumed investment returns for all asset classes, market values of fixed interest assets, risk discount rates);
—  
1 per cent rise in equity and property yields;
—  
10 per cent fall in market value of equity and property assets (embedded value only);
—  
The statutory minimum capital level (by contrast to EEV basis required capital), (for embedded value only);
—  
5 basis point increase in UK long-term expected defaults; and
—  
10 basis point increase in the liquidity premium for UK annuities.

In each sensitivity calculation, all other assumptions remain unchanged except where they are directly affected by the revised economic conditions.

New business contribution
                 
   
2015 £m
 
2014 £m
   
Asia operations
US operations
UK insurance operations
Total
long-term
business
operations
 
Asia operations
US operations
UK insurance operations*
Total
long-term
business
operations
New business contributionnote 3
1,490
809
318
2,617
 
1,162
694
259
2,115
Discount rates – 1% increase
(260)
(38)
(40)
(338)
 
(176)
(27)
(38)
(241)
Interest rates – 1% increase
28
80
7
115
 
13
61
(15)
59
Interest rates – 1% decrease
(78)
(127)
(9)
(214)
 
(52)
(101)
19
(134)
Equity/property yields – 1% rise
73
95
20
188
 
46
73
12
131
Long-term expected defaults – 5 bps increase
(8)
(8)
 
(10)
(10)
Liquidity premium – 10 bps increase
16
16
 
20
20
*
In order to show the UK long-term business on a comparable basis, the 2014 comparative results exclude the contribution from the sold PruHealth and PruProtect businesses.

Embedded value of long-term business operations
             
   
31 Dec 2015 £m
 
31 Dec 2014 £m
   
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
 
Asia
operations
US
operations
UK
insurance
operations
 Total
long-term
business
operations
Shareholders' equitynote 9
13,643
9,487
9,647
32,777
 
12,312
8,379
8,433
29,124
Discount rates – 1% increase
 (1,448)
 (271)
 (586)
 (2,305)
 
 (1,214)
 (268)
 (602)
 (2,084)
Interest rates – 1% increase
 (380)
 (46)
 (328)
 (754)
 
 (462)
 (232)
 (362)
 (1,056)
Interest rates – 1% decrease
132
 (93)
426
465
 
211
16
452
679
Equity/property yields – 1% rise
506
514
271
1,291
 
435
365
282
1,082
Equity/property market values – 10% fall
 (246)
 (411)
 (373)
 (1,030)
 
 (221)
 (129)
 (380)
 (730)
Statutory minimum capital
148
162
4
314
 
129
139
4
272
Long-term expected defaults – 5 bps increase
 (141)
 (141)
 
 (139)
 (139)
Liquidity premium – 10 bps increase
282
282
 
278
278

The sensitivities shown above are for the impact of instantaneous changes on the embedded value of long-term business operations and include the combined effect on the value of in-force business and net assets at the balance sheet dates indicated. If the change in assumption shown in the sensitivities were to occur, then the effect shown above would be recorded within two components of the profit analysis for the following year. These are for the effect of economic assumption changes and short-term fluctuations in investment returns. In addition to the sensitivity effects shown above, the other components of the profit for the following year would be calculated by reference to the altered assumptions, for example new business contribution and unwind of discount, together with the effect of other changes such as altered corporate bond spreads. In addition for changes in interest rates, the effect shown above for Jackson would also be recorded within the fair value movements on assets backing surplus and required capital which are taken directly to shareholders’ equity.

(b)           Sensitivity analysis – non-economic assumptions

The tables below show the sensitivity of embedded value as at 31 December and the new business contribution after the effect of required capital for 2015 and 2014 to:

—  
10 per cent proportionate decrease in maintenance expenses (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 (a 10 per cent sensitivity on a base assumption of 5 per cent would represent a lapse rate of 4.5 per cent per annum); and
—  
5 per cent proportionate decrease in base mortality and morbidity rates (ie increased longevity).

New business contribution
             
                     
   
2015 £m
 
2014 £m
   
Asia operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
 
Asia operations
US
operations
UK
insurance
operations*
Total
long-term
business
operations
New business contributionnote 3
1,490
809
318
2,617
 
1,162
694
259
2,115
Maintenance expenses – 10% decrease
28
8
2
38
 
23
8
3
34
Lapse rates – 10% decrease
112
25
9
146
 
88
27
6
121
Mortality and morbidity – 5% decrease
50
1
(13)
38
 
52
2
(20)
34
Change representing effect on:
                 
 
Life business
50
1
1
52
 
52
2
1
55
 
UK annuities
(14)
(14)
 
 -
 -
(21)
(21)
*
In order to show the UK long-term business on a comparable basis, the 2014 comparatives exclude the contribution from the sold PruHealth and PruProtect businesses.

Embedded value of long-term business operations
             
                     
   
31 Dec 2015 £m
 
31 Dec 2014 £m
   
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
 
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
Shareholders' equitynote 9
13,643
9,487
9,647
32,777
 
12,312
8,379
8,433
29,124
Maintenance expenses – 10% decrease
153
80
68
301
 
136
71
56
263
Lapse rates – 10% decrease
508
394
75
977
 
422
354
67
843
Mortality and morbidity – 5% decrease
449
172
(299)
322
 
433
163
(347)
249
Change representing effect on:
                 
 
Life business
449
172
11
632
 
433
163
9
605
 
UK annuities
(310)
(310)
 
(356)
(356)

13 Methodology and accounting presentation

(a) Methodology

Overview
The embedded value is the present value of the shareholders’ interest in the earnings distributable from assets allocated to covered business after sufficient allowance has been made for the aggregate risks in that business. The shareholders’ interest in the Group’s long-term business comprises:
—  
the present value of future shareholder cash flows from in-force covered business (value of in-force business), less deductions for:
 
–  the cost of locked-in required capital; and
 
–  the time value of cost of options and guarantees;
—  
locked-in required capital; and
—  
the shareholders’ net worth in excess of required capital (free surplus).

The value of future new business is excluded from the embedded value.

Notwithstanding the basis of presentation of results (as explained in note 13(b)(iii)) no smoothing of market or account balance values, unrealised gains or investment return is applied in determining the embedded value or profit. Separately, the analysis of profit is delineated between operating profit based on longer-term investment returns and other constituent items (as explained in note 13(b)(i)).

(i) Covered business
The EEV 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 insurance operations, for which the value of new and in-force contracts is attributable to shareholders. The post-tax EEV basis results for the Group’s covered business are then combined with the post-tax IFRS basis results of the Group’s other operations. Under the EEV Principles, the results for covered business incorporate the projected margins of attaching internal asset management, as described in note 13(a)(vii).

The definition of long-term business operations is consistent with previous practice and comprises those contracts falling under the definition for regulatory purposes together with, for US operations, contracts that are in substance the same as guaranteed investment contracts (GICs) but do not fall within the technical definition.

Covered business comprises the Group’s long-term business operations, with two exceptions:
—  
the closed Scottish Amicable Insurance Fund (SAIF) which is excluded from covered business. SAIF is a ring-fenced sub-fund of the Prudential Assurance Company (PAC) long-term fund, established by a Court approved Scheme of Arrangement in October 1997. SAIF is closed to new business and the assets and liabilities of the fund are wholly attributable to the policyholders of the fund.
—  
the presentational treatment of the Group’s principal defined benefit pension scheme, the Prudential Staff Pension Scheme (PSPS). The partial recognition of the surplus for PSPS is recognised in ‘Other’ operations.
 
 
A small amount of UK group pensions business is also not modelled for EEV reporting purposes.

(ii)  Valuation of in-force and new business
The embedded value results are prepared incorporating best estimate assumptions about all relevant factors including levels of future investment returns, expenses, persistency, mortality and morbidity (as described in note 14). These assumptions are used to project future cash flows. The present value of the future cash flows is then calculated using a discount rate which reflects both the time value of money and the non-diversifiable risks associated with the cash flows that are not otherwise allowed for.

New business
In determining the EEV basis value of new business, premiums are included in projected cash flows on the same basis of
distinguishing annual and single premium business as set out for statutory basis reporting.

New business premiums reflect those premiums attaching to covered business, including premiums for contracts classified as
investment products for IFRS basis reporting. New business premiums for regular premium products are shown on an annualised basis. Internal vesting business is classified as new business where the contracts include an open market option.

The post-tax contribution from new business represents profits determined by applying operating assumptions as at the end of the year.

For UK immediate annuity business and single premium Universal Life products in Asia, primarily in Singapore, the new business contribution is determined by applying economic assumptions reflecting point-of-sale market conditions. This is consistent with how the business is priced as crediting rates are linked to yields on specific assets and the yield is locked in when the assets are purchased at the point of sale of the policy. For other business within the Group, end-of-year economic assumptions are used.

New business profitability is a key metric for the Group’s management of the development of the business. In addition, post-tax new business margins are shown by reference to annual premium equivalents (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 new business amounts and one-tenth of single new business amounts. PVNBP is calculated as equalling single premiums plus the present value of expected premiums of new regular premium business, allowing for lapses and other assumptions made in determining the EEV new business contribution.

Valuation movements on investments
With the exception of debt securities held by Jackson, investment gains and losses during the year (to the extent that changes in capital values do not directly match changes in liabilities) are included directly in the profit for the year and shareholders’ equity as they arise.

The results for any covered business conceptually reflect the aggregate of the IFRS results and the movements on the additional shareholders’ interest recognised on the EEV basis. Thus the start point for the calculation of the EEV results for Jackson, as for other businesses, reflects the market value movements recognised on the IFRS basis.

However, in determining the movements on the additional shareholders’ interest, the basis for calculating the Jackson EEV result acknowledges that, for debt securities backing liabilities, the aggregate EEV results reflect the fact that the value of in-force business instead incorporates the discounted value of future spread earnings. This value is not affected generally by short-term market movements on securities that, broadly speaking, are held for the longer term.

Fixed income securities backing the free surplus and required capital for Jackson are accounted for at fair value. However, consistent with the treatment applied under IFRS for Jackson securities classified as available-for-sale, movements in unrealised appreciation (depreciation) on these securities are accounted for in equity rather than in the income statement, as shown in the movement in shareholders’ equity.

(iii)  Cost of capital
A charge is deducted from the embedded value for the cost of capital supporting the Group’s long-term business. This capital is referred to as required capital. The cost is the difference between the nominal value of the capital and the discounted value of the projected releases of this capital allowing for investment earnings (post-tax) on the capital.

The annual result is affected by the movement in this cost from year to year 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 in the fund is already discounted to reflect its release over time and no further adjustment is necessary in respect of required capital.

(iv)  Financial options and guarantees

Nature of financial options and guarantees in Prudential’s long-term business
Asia operations
Subject to local market circumstances and regulatory requirements, the guarantee features described below in respect of UK business broadly apply to similar types of participating contracts principally written in Hong Kong, Singapore and Malaysia. Participating products have both guaranteed and non-guaranteed elements.

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 accrue at rates set at inception and do not vary subsequently with market conditions.

US operations (Jackson)
The principal financial options and guarantees in Jackson are associated with the fixed annuity and variable annuity (VA) lines of business.

Fixed annuities provide that, at Jackson’s discretion, it may reset the interest rate credited to policyholders’ accounts, subject to a guaranteed minimum. The guaranteed minimum return varies from 1.0 per cent to 5.5 per cent for both years, depending on the particular product, jurisdiction where issued, and date of issue. For 2015, 87 per cent (2014: 86 per cent) of the account values on fixed annuities are for policies with guarantees of 3 per cent or less. The average guarantee rate is 2.6 per cent (2014: 2.7 per cent).

Fixed annuities also present a risk that policyholders will exercise their option to surrender their contracts in periods of rapidly rising interest rates, possibly requiring Jackson to liquidate assets at an inopportune time.

Jackson issues VA contracts where it contractually guarantees to the contract holder either: a) return of no less than total deposits made to the contract adjusted for any partial withdrawals; b) total deposits made to the contract adjusted for any partial withdrawals plus a minimum return; or c) the highest contract value on a specified anniversary date adjusted for any withdrawals following the specified contract anniversary. These guarantees include benefits that are payable at specified dates during the accumulation period (Guaranteed Minimum Withdrawal Benefit (GMWB)), as death benefits (Guaranteed Minimum Death Benefits (GMDB)) or as income benefits (Guaranteed Minimum Income Benefits (GMIB)). These guarantees generally protect the policyholder’s value in the event of poor equity market performance. Jackson hedges the GMDB and GMWB guarantees through the use of equity options and futures contracts, and fully reinsures the GMIB guarantees.

Jackson also issues fixed index annuities that enable policyholders to obtain a portion of an equity-linked return while providing a guaranteed minimum return. The guaranteed minimum returns are of a similar nature to those described above for fixed annuities.

UK insurance operations
For covered business the only significant financial options and guarantees in the UK insurance operations arise in the with-profits fund.

With-profits products provide returns to policyholders through bonuses that are smoothed. There are two types of bonuses - annual and final. Annual bonuses are declared once a year and, once credited, are guaranteed in accordance with the terms of the particular product. Unlike annual bonuses, final bonuses are guaranteed only until the next bonus declaration. The PAC with-profits fund also held a provision on the Pillar I Peak 2 basis of £47 million at 31 December 2015 (31 December 2014: £50 million) to honour guarantees on a small number of guaranteed annuity option products.

The Group’s main exposure to guaranteed annuity options in the UK is through the non-covered business of SAIF. A provision on the Pillar I Peak 2 basis of £412 million was held in SAIF at 31 December 2015 (31 December 2014: £549 million) to honour the guarantees. As described in note 13(a)(i), the assets and liabilities are wholly attributable to the policyholders of the fund. Therefore the movement in the provision has no direct impact on shareholders.

Time value
The value of financial options and guarantees comprises two parts. One is given by a deterministic valuation on best estimate assumptions (the intrinsic value). The other part arises from the variability of economic outcomes in the future (the time value). Where appropriate, a full stochastic valuation has been undertaken to determine the time value of the 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, for example, separate modelling of individual asset classes but with an allowance for correlation between the various asset classes. Details of the key characteristics of each model are given in notes 14(iv), (v) and (vi).

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 reversionary and terminal 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 actually available to management. For the PAC with-profits fund, the actions assumed are consistent with those set out in the Principles and Practices of Financial Management which explains how regular and final bonus rates within the discretionary framework are determined, subject to the general legislative requirements applicable.

(v) Level of required capital
In adopting the EEV Principles, Prudential has based required capital on its internal targets subject to it being at least the local statutory minimum requirements. For with-profits business written in a segregated life fund, as is the case in Asia and the UK, the capital available in the fund is sufficient to meet the required capital requirements. For shareholder-backed business the following capital requirements apply:
—  
Asia operations: the level of required capital has been set to an amount at least equal to the higher of local statutory requirements and the internal target;
—  
US operations: the level of required capital has been set at 250 per cent of the risk-based capital required by the National Association of Insurance Commissioners (NAIC) at the Company Action Level (CAL); and
—  
UK insurance operations: the capital requirements are set to an amount at least equal to the higher of Solvency I Pillar I and Pillar II requirements for shareholder-backed business of UK insurance operations as a whole.

(vi) With-profits business and the treatment of the estate
The proportion of surplus allocated to shareholders from the PAC with-profits fund has been based on the present level of 10 per cent. The value attributed to the shareholders’ interest in the estate is derived by increasing final bonus rates (and related shareholder transfers) so as to exhaust the estate over the lifetime 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. Similar principles apply, where appropriate, for other with-profits funds of the Group’s Asia operations.

(vii) Internal asset management
The new business and in-force results from long-term business include the projected value of profits or losses 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 year profits from the management of both internal and external funds. EEV basis shareholders’ other income and expenditure is adjusted to deduct the unwind of the expected internal asset management profit margin for the year. The deduction is on a basis consistent with that used for projecting the results for covered insurance business. Group operating profit accordingly includes the variance between actual and expected profit in respect of management of the covered business assets.

 
(viii) Allowance for risk and risk discount rates

Overview
Under the EEV Principles, discount rates used to determine the present value of future cash flows are set by reference to risk-free rates plus a risk margin. The risk margin should reflect any non-diversifiable risk associated with the emergence of distributable earnings that is not allowed for elsewhere in the valuation. Prudential has selected a granular approach to better reflect differences in market risk inherent in each product group. The risk discount rate so derived does not reflect an overall Group market beta but instead reflects the expected volatility associated with the cash flows for each product category in the embedded value model.

Since financial options and guarantees are explicitly valued under the EEV methodology, discount rates under EEV are set excluding the effect of these product features.

The risk margin represents the aggregate of the allowance for market risk, additional allowance for credit risk where appropriate, 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 an equity risk premium. Except for UK shareholder-backed annuity business (as explained below) such an approach has been used for the Group’s businesses.

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 cash flows. These are determined by considering how the profits from each product are affected by changes in expected returns on various asset classes. By converting this into a relative rate of return it is possible to derive a product-specific beta.

Product level betas reflect the most recent product mix to produce appropriate betas and risk discount rates for each major product grouping.

Additional credit risk allowance
The Group’s methodology is to allow appropriately for credit risk. The allowance for total credit risk is to cover:
—  
expected long-term defaults;
—  
credit risk premium (to reflect the volatility in downgrade and default levels); and
—  
short-term downgrades and defaults.

These allowances are initially reflected in determining best estimate returns and through the market risk allowance described above. However, for those businesses largely backed by holdings of debt securities these allowances in the projected returns and market risk allowances may not be sufficient and an additional allowance may be appropriate.

The practical application of the allowance for credit risk varies depending upon the type of business as described below:

Asia operations
For Asia operations, the allowance for credit risk incorporated in the projected rates of return and the market risk allowance are sufficient. Accordingly no additional allowance for credit risk is required.

The projected rates of return for holdings of corporate bonds comprise the risk-free rate plus an assessment of long-term spread over the risk-free rate.

US operations (Jackson)
For Jackson business, the allowance for long-term defaults is reflected in the risk margin reserve (RMR) charge which is deducted in determining the projected spread margin between the earned rate on the investments and the policyholder crediting rate.

The risk discount rate incorporates an additional allowance for credit risk premium and short-term downgrades and defaults as shown in note 14(ii). In determining this allowance a number of factors have been considered. These factors, in particular, include:
—  
How much of the credit spread on debt securities represents an increased credit risk not reflected in the RMR long-term default assumptions, and how much is liquidity premium (which is the premium required by investors to compensate for the risk of longer-term investments which cannot be easily converted into cash, and converted at the fair market value). In assessing this effect, consideration has been given to a number of approaches to estimating the liquidity premium by considering recent statistical data; and
—  
Policyholder benefits for Jackson fixed annuity business are not fixed. It is possible in adverse economic scenarios to pass on a component of credit losses to policyholders (subject to guarantee features) through lower investment return rates credited to policyholders. Consequently, it is only necessary to allow for the balance of the credit risk in the risk discount rate.

The level of the additional allowance is assessed at each reporting period to take account of prevailing credit conditions and as the business in force alters over time. The additional allowance for variable annuity business has been set at one-fifth of the non-variable annuity business to reflect the proportion of the allocated holdings of general account debt securities.

The level of allowance differs from that for UK annuity business for investment portfolio differences and to take account of the management actions available in adverse economic scenarios to reduce crediting rates to policyholders, subject to guarantee features of the products.

UK operations
(1) Shareholder-backed annuity business
For Prudential’s UK shareholder-backed annuity business, Prudential has used a market consistent embedded value (MCEV) approach to derive an implied risk discount rate which is then applied to the projected best estimate cash flows.

In the annuity MCEV calculations, as the assets are generally held to maturity to match long duration liabilities, the future cash flows are discounted using the swap yield curve plus an allowance for liquidity premium based on Prudential’s assessment of the expected return on the assets backing the annuity liabilities after allowing for:
—  
expected long-term defaults, derived as a percentage of historical default experience based on Moody’s data for the period 1970 to 2009, and the definition of the credit rating assigned to each asset held is the second highest credit rating published by Moody’s, Standard & Poor’s and Fitch;
—  
a credit risk premium, derived as the excess over the expected long-term defaults, of the 95th percentile of historical cumulative defaults based on Moody’s data for the period 1970 to 2009, and subject to a minimum margin over expected long-term defaults of 50 per cent;
—  
an allowance for a 1-notch downgrade of the asset portfolio subject to credit risk; and
—  
an allowance for short-term downgrades and defaults.

For the purposes of presentation in the EEV results, the results on this basis are reconfigured. Under this approach the projected earned rate of return on the debt securities held is determined after allowing for expected long-term defaults and, where necessary, an additional allowance for an element of short-term downgrades and defaults to bring the allowance in the earned rate up to best estimate levels. The allowances for credit risk premium, 1-notch downgrade and the remaining element of short-term downgrade and default allowances are incorporated into the risk margin included in the discount rate, shown in note 14(iii).

(2) With-profits fund non-profit annuity business
For UK non-profit annuity business including that attributable to the PAC with-profits fund, the basis for determining the aggregate allowance for credit risk is consistent with that applied for UK shareholder-backed annuity business (as described above). The allowance for credit risk for this business is taken into account in determining the projected cash flows to the with-profits fund, which are in turn discounted at the risk discount rate applicable to all of the projected cash flows of the fund.

(3) With-profits fund holdings of debt securities
The UK with-profits fund holds debt securities as part of its investment portfolio backing policyholder liabilities and unallocated surplus. The assumed earned rate for with-profit holdings of corporate bonds is defined as the risk-free rate plus an assessment of the long-term spread over gilts, net of expected long-term defaults. This approach is similar to that applied for equities and properties for which the projected earned rate is defined as the risk-free rate plus a long-term risk premium.

Allowance for non-diversifiable non-market risks
The majority of non-market and non-credit risks are considered to be diversifiable. Finance theory cannot be used to determine the appropriate component of beta for non-diversifiable non-market risks since there is no observable risk premium associated with it that is akin to the equity risk premium. Recognising this, a pragmatic approach has been applied.

A base level allowance of 50 basis points is applied to cover the non-diversifiable non-market risks associated with the Group’s businesses. For the Group’s US business and UK business other than shareholder-backed annuity, no additional allowance is necessary. For UK shareholder-backed annuity business a further allowance of 50 basis points is used to reflect the longevity risk which is of particular relevance. For the Group’s Asia operations in China, Indonesia, the Philippines, Taiwan, Thailand and Vietnam, additional allowances are applied for emerging market risk ranging from 100 to 250 basis points.

(ix) Foreign currency translation
Foreign currency profits and losses have been translated at average exchange rates for the year. Foreign currency assets and liabilities have been translated at year end rates of exchange. The principal exchange rates are shown in note A1 of the IFRS statements.

(x) Taxation
In determining the post-tax profit for the year 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 cash flows to determine the value of in-force business are calculated using rates that have been announced and substantively enacted by the end of the reporting year.

(xi) Inter-company arrangements
The EEV results for covered business incorporate annuities established in the PAC non-profit sub-fund from vesting pension polices in SAIF (which is not covered business). The EEV results also incorporate the effect of the reinsurance arrangement of non-profit immediate pension annuity liabilities of SAIF to PRIL. In addition, the free surplus and value of in-force business are calculated after taking account of the impact of contingent loan arrangements between Group companies (movements in the contingent loan liability are reflected via the projected cash flows in the value of in-force and the related funding is reflected in free surplus).

(b) Accounting presentation

(i) Analysis of post-tax profit
To the extent applicable, the presentation of the EEV post-tax profit for the year is consistent in the classification between operating and non-operating results with the basis that the Group applies for the analysis of IFRS basis results. Operating results reflect underlying results including longer-term investment returns (which are determined as described in note 13(b)(ii) below) and incorporate the following:
—  
new business contribution, as defined in note 13(a)(ii);
—  
unwind of discount on the value of in-force business and other expected returns, as described in note 13(b)(iii) below;
—  
the impact of routine changes of estimates relating to non-economic assumptions, as described in note 13(b)(iv) below; and
—  
non-economic experience variances, as described in note 13(b)(v) below.

In order to show the UK long-term business result on a comparable basis, the presentation of 2014 results has been adjusted to show the results of the sold PruHealth and PruProtect businesses separately.

Non-operating results comprise the recurrent items of:
—  
short-term fluctuations in investment returns;
—  
the mark to market value movements on core borrowings; and
—  
the effect of changes in economic assumptions.

In addition, non-operating profit includes:
—  
the effect on free surplus generated from the disposal of the Japan Life business in 2015;
—  
the gain on sale of the PruHealth and PruProtect businesses in 2014; and
—  
the costs associated with the domestication of the Hong Kong branch which became effective on 1 January 2014.

Total profit 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.

(ii) Investment returns included in operating profit
For the investment element of the assets covering the net worth of long-term insurance business, investment returns are recognised in operating results at the expected long-term rate of return. These expected returns are calculated by reference to the asset mix of the portfolio. For the purpose of calculating the longer-term investment return to be included in the operating result of the PAC with-profits fund of UK operations, where assets backing the liabilities and unallocated surplus are subject to market volatility, asset values at the beginning of the reporting period are adjusted to remove the effects of short-term market movements as explained in note 13(b)(iii) below.

For the purpose of determining the long-term returns for debt securities of US operations for fixed annuity and other general account business, a risk margin charge is included which reflects the expected long-term rate of default based on the credit quality of the portfolio. For Jackson, interest-related realised gains and losses are amortised to the operating results over the maturity period of the sold bonds and for equity-related investments, a long-term rate of return is assumed, which reflects the aggregation of end-of-year risk-free rates and equity risk premium. For US variable annuity separate account business, operating profit includes the unwind of discount on the opening value of in-force adjusted to reflect end-of-year projected rates of return with the excess or deficit of the actual return recognised within non-operating profit, together with the related hedging activity.

For UK annuity business, rebalancing of the asset portfolio backing the liabilities to policyholders may, from time to time, take place to align it more closely with the internal benchmark of credit quality that management applies. Such rebalancing will result in a change in the projected yield on the asset portfolio and the allowance for default risk. The net effect of these changes is included in the result for the year.

(iii) Unwind of discount and other expected returns
The unwind of discount and other expected returns is determined by reference to:
—  
the value of in-force business at the beginning of the year (adjusted for the effect of current period economic and operating assumption changes); and
—  
required capital and surplus assets.

In applying this general approach, the unwind of discount included in operating profit for the with-profits business of UK insurance operations is determined by reference to the opening value of in-force, as adjusted for the effects of short-term investment volatility due to market movements (ie smoothed). In the summary statement of financial position and for total profit reporting, asset values and investment returns are not smoothed. At 31 December 2015  the shareholders’ interest in the smoothed surplus assets used for this purpose only, were £58 million lower (31 December 2014: £194 million lower) than the surplus assets carried in the statement of financial position.

(iv) Effect of changes in operating assumptions
Operating profit includes the effect of changes to non-economic assumptions on the value of in-force at the end of the year. For presentational purposes the effect of change is delineated to show the effect on the opening value of in-force as operating assumption changes, with the experience variance subsequently being determined by reference to the end-of-year assumptions (see note 13(b)(v) below).

(v) Operating experience variances
Operating profit includes the effect of experience variances on non-economic assumptions, such as persistency, mortality and morbidity, expenses and other factors, which are calculated with reference to the end-of-year assumptions.

(vi) Effect of changes in economic assumptions
Movements in the value of in-force business at the beginning of the year caused by changes in economic assumptions, net of the related change in the time value of cost of options and guarantees, are recorded in non-operating results.

14 Assumptions

Principal economic assumptions
The EEV basis results for the Group’s operations have been determined using economic assumptions where the long-term expected rates of return on investments and risk discount rates are set by reference to year end rates of return on government bonds. Expected returns on equity and property asset classes and corporate bonds are derived by adding a risk premium, based on the Group’s long-term view, to the risk-free rate.

The total profit that emerges over the lifetime of an individual contract as calculated using the embedded value basis is the same as that calculated under the IFRS basis. Since the embedded value basis reflects discounted future cash flows, under this 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 year.

(i) Asia operationsnotes (b), (c)
                             
                               
 
Risk discount rate %
 
10-year government
bond yield %
 
Expected
long-term Inflation %
 
New business
 
In force
   
 
31 Dec 2015
 
31 Dec 2014
 
31 Dec 2015
 
31 Dec 2014
 
31 Dec 2015
 
31 Dec 2014
 
31 Dec 2015
 
31 Dec 2014
China
9.4
 
10.2
 
9.4
 
10.2
 
2.9
 
3.7
 
2.5
 
2.5
Hong Kongnotes (b), (c)
3.7
 
3.7
 
3.7
 
3.7
 
2.3
 
2.2
 
2.3
 
2.3
Indonesia
12.8
 
12.0
 
12.8
 
12.0
 
8.9
 
7.9
 
5.0
 
5.0
Korea
6.1
 
6.7
 
5.7
 
6.5
 
2.1
 
2.6
 
3.0
 
3.0
Malaysianote (c)
6.6
 
6.6
 
6.7
 
6.6
 
4.2
 
4.1
 
2.5
 
2.5
Philippines
11.3
 
10.8
 
11.3
 
10.8
 
4.6
 
4.0
 
4.0
 
4.0
Singaporenote (c)
4.3
 
4.3
 
5.1
 
5.0
 
2.6
 
2.3
 
2.0
 
2.0
Taiwan
4.0
 
4.2
 
3.9
 
4.1
 
1.0
 
1.6
 
1.0
 
1.0
Thailand
9.3
 
9.5
 
9.3
 
9.5
 
2.5
 
2.7
 
3.0
 
3.0
Vietnam
13.8
 
14.0
 
13.8
 
14.0
 
7.1
 
7.2
 
5.5
 
5.5
Total weighted risk discount ratenote (a)
5.9
 
6.9
 
6.4
 
6.6
               

Notes
(a)
The weighted risk discount rates for Asia operations shown above have been determined by weighting each country’s risk discount rates by reference to the post-tax EEV basis new business result and the closing value of in-force business. The changes in the risk discount rates for individual Asia territories reflect the movements in government bond yields, together with the effects of movements in the allowance for market risk and changes in product mix.
(b)
For Hong Kong the assumptions shown are for US dollar denominated business. For other territories, the assumptions are for local currency denominated business.
(c)
Equity risk premiums in Asia range from 3.5 per cent to 8.6 per cent (2014: from 3.5 per cent to 8.7 per cent). The mean equity return assumptions for the most significant equity holdings of the Asia operations were:
 

   
31 Dec 2015 %
 
31 Dec 2014 %
 
Hong Kong
6.3
 
6.2
 
Malaysia
10.2
 
10.1
 
Singapore
8.6
 
8.3

(ii)  US operations
       
               
         
31 Dec 2015 %
 
31 Dec 2014 %
Assumed new business spread margins:*
       
 
Fixed annuity business:**
       
   
January to June issues
 
1.25
 
1.5
   
July to December issues
 
1.5
 
1.5
 
Fixed index annuity business:
       
   
January to June issues
 
1.5
 
2.0
   
July to December issues
 
1.75
 
2.0
 
Institutional business
 
0.7
 
0.7
Allowance for long-term defaults included in projected spreadnote 13 (a)(viii)
 
0.24
 
0.25
Risk discount rate:
       
 
Variable annuity:
       
   
Risk discount rate
 
6.8
 
6.9
   
Additional allowance for credit risk included in risk discount ratenote 13 (a)(viii)
 
0.2
 
0.2
 
Non-variable annuity:
       
   
Risk discount rate
 
3.9
 
3.9
   
Additional allowance for credit risk included in risk discount ratenote 13 (a)(viii)
 
1.0
 
1.0
 
Weighted average total:
       
   
New business
 
6.7
 
6.7
   
In force
 
6.2
 
6.2
US 10-year treasury bond rate at end of year
 
2.3
 
2.2
Pre-tax expected long-term nominal rate of return for US equities
 
6.3
 
6.2
Expected long-term rate of inflation
 
2.8
 
2.8
Equity risk premium
 
4.0
 
4.0
S&P equity return volatilitynote (v)
 
18.0
 
18.0
*
including the proportion of variable annuity business invested in the general account and fixed index annuity business, the assumed spread margin grades up linearly by 25 basis points to a long-term assumption over five years.
**
including the proportion of variable annuity business invested in the general account.

(iii)  UK insurance operations
     
           
     
31 Dec 2015 %
 
31 Dec 2014 %
Shareholder-backed annuity business:
     
Risk discount rate:note
     
 
New business
5.7
 
6.5
 
In force
7.4
 
6.9
Pre-tax expected long-term nominal rate of return for shareholder-backed annuity business:note
     
 
New business
3.5
 
4.1
 
In force
3.5
 
3.2
Other business:
     
Risk discount rate:*
     
 
New business
5.6
 
5.5
 
In force
5.7
 
5.9
Pre-tax expected long-term nominal rates of investment return:
     
 
UK equities
6.4
 
6.2
 
Overseas equities
6.3 to 9.4
 
6.2 to 9.0
 
Property
5.2
 
4.9
 
15-year gilt rate
2.4
 
2.2
 
Corporate bonds
4.1
 
3.8
Expected long-term rate of inflation
3.1
 
 3.0
Equity risk premium
4.0
 
4.0
*
The 2014 risk discount rates exclude the sold PruHealth and PruProtect businesses.

Note
For shareholder-backed annuity business, the movements in the pre-tax long-term nominal rates of return and risk discount rates for new and in-force businesses reflect the effect of changes in asset yields (based on average yields for new business).

Stochastic assumptions
Details are given below of the key characteristics of the models used to determine the time value of the financial options and guarantees as referred to in note 13(a)(iv).

(iv)
Asia operations
—  
The stochastic cost of guarantees is primarily of significance for the Hong Kong, Korea, Malaysia, Singapore and Taiwan operations.
—  
The principal asset classes are government and corporate bonds.
—  
The asset return models are similar to the models as described for UK insurance operations below.
—  
The volatility of equity returns ranges from 18 per cent to 35 per cent, and the volatility of government bond yields ranges from 0.9 per cent to 2.3 per cent for both years.

(v)
US operations (Jackson)
—  
Interest rates and equity returns are projected using a log-normal generator reflecting historical market data.
—  
Corporate bond returns are based on treasury yields plus a spread that reflects current market conditions.
—  
The volatility of equity returns ranges from 18 per cent to 27 per cent, and the standard deviation of interest rates ranges from 2.2 per cent to 2.5 per cent for both years.

 
(vi)  UK insurance operations
—  
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 bond return plus a mean-reverting spread.
—  
Property returns are also modelled on a risk-free bond return plus a risk premium with a stochastic process reflecting total property returns.
—  
The standard deviation of equities and property ranges from 15 per cent to 20 per cent for both years.

Operating assumptions

Best estimate assumptions
Best estimate assumptions are used for the cash flow projections, 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.

Assumptions required in the calculation of the value of 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, but also reflect expected future experience. Where relevant, when calculating the time value of financial options and guarantees, policyholder withdrawal rates vary in line with the emerging investment conditions according to management’s expectations.

Expense assumptions
Expense levels, including those of service companies that support the Group’s long-term business operations, are based on internal expense analysis investigations and are appropriately allocated to acquisition of new business and renewal of in-force business. Exceptional expenses are identified and reported separately. For mature business, it is Prudential’s policy not to take credit for future cost reduction programmes until the savings have been delivered. For businesses which are currently sub-scale (China, Malaysia Takaful and Taiwan), and India (where the business model is being adapted as the industry continues to adjust to regulatory changes), expense overruns are reported where these are expected to be short-lived.

For Asia operations, the expenses comprise costs borne directly and recharged costs from the Asia regional head office, that are attributable to covered business. The assumed future expenses for these operations also include projections of these future recharges. Development expenses are charged as incurred.

Corporate expenditure, which is included in other income and expenditure, comprises:
—  
expenditure for Group head office, to the extent not allocated to the PAC with-profits funds, together with Solvency II implementation and restructuring costs, which are charged to the EEV basis results as incurred; and
—  
expenditure of the Asia regional head office that is not allocated to the covered business or asset management operations which is charged as incurred. These costs are primarily for corporate related activities and are included within corporate expenditure.

Tax rates
The assumed long-term effective tax rates for operations reflect the incidence of taxable profits and losses in the projected cash flows as explained in note 13(a)(x).

The local standard corporate tax rates applicable for the most significant operations are as follows:

Standard corporate tax rates
 
%
Asia operations:
   
Hong Kong
 
16.5*
Indonesia
 
25.0
        Malaysia
 
2015: 25.0; from 2016: 24.0
Singapore
 
17.0
US operations
 
35.0
UK operations**
 
2015: 20.0; from 2017: 19.0; from 2020: 18.0
*
16.5 per cent on 5 per cent of premium income
**
The impact of the reductions in future UK corporate tax rates on the opening value of in-force business is £55 million as shown in note 4(iv)(b).

15 Effect of Solvency II on EEV basis results on 1 January 2016

The Solvency II framework is effective from 1 January 2016. For our operations in Asia and the US there is no impact on the EEV results since Solvency II does not act as the local constraint on the ability to distribute profits to the Group. The EEV basis results and profile of free surplus generation for these businesses will continue to be driven by local regulatory and target capital requirements.

For the UK insurance operations Solvency II will impact the EEV results as it changes the local regulatory valuation of net worth and capital requirements, affecting  the components of the EEV and the expected profile of free surplus generation. In line with guidance provided by the CFO Forum in October 2015, the impact of Solvency II on the UK EEV has not been included in the results presented in this section. An early estimate on the likely impact of Solvency II on the EEV net worth and value of in-force business is provided in section D of the additional unaudited information.

16 New business premiums and contributionsnote (i)

 
Single
 
Regular
 
Annual premium and contribution equivalents (APE)
 
 Present value of new business premiums (PVNBP)
                 
note 13(a)(ii)
 
note 13(a)(ii)
 
2015 £m
 
2014 £m
 
2015 £m
 
2014 £m
 
2015 £m
 
2014 £m
 
2015 £m
 
2014 £m
Group insurance operations
                             
Asia
 2,120
 
 2,272
 
 2,641
 
 2,010
 
 2,853
 
 2,237
 
 15,208
 
 12,331
US
 17,286
 
 15,555
 
 -
 
 -
 
 1,729
 
 1,556
 
 17,286
 
 15,555
UKnote (iv)
 8,463
 
 6,681
 
 179
 
 166
 
 1,025
 
 834
 
 9,069
 
 7,305
Group totalnote (iv)
 27,869
 
 24,508
 
 2,820
 
 2,176
 
 5,607
 
 4,627
 
 41,563
 
 35,191
                               
Asia insurance operations
                   
 
     
 
Cambodia
 -
 
 -
 
 8
 
 3
 
 8
 
 3
 
 38
 
 16
Hong Kong
 546
 
 419
 
 1,158
 
 603
 
 1,213
 
 645
 
 7,007
 
 3,861
Indonesia
 230
 
 280
 
 303
 
 357
 
 326
 
 385
 
 1,224
 
 1,619
Malaysia
 100
 
 117
 
 201
 
 189
 
 211
 
 201
 
 1,208
 
 1,284
Philippines
 146
 
 121
 
 44
 
 39
 
 59
 
 51
 
 287
 
 248
Singapore
 454
 
 677
 
 264
 
 289
 
 309
 
 357
 
 2,230
 
 2,683
Thailand
 69
 
 92
 
 88
 
 74
 
 95
 
 83
 
 422
 
 392
Vietnam
 6
 
 4
 
 82
 
 61
 
 83
 
 61
 
 343
 
 247
SE Asia operations including
    Hong Kong
 1,551
 
 1,710
 
 2,148
 
 1,615
 
 2,304
 
 1,786
 
 12,759
 
 10,350
Chinanote (ii)
 308
 
 239
 
 111
 
 81
 
 142
 
 105
 
 739
 
 550
Korea
 182
 
 212
 
 123
 
 92
 
 141
 
 113
 
 780
 
 609
Taiwan
 45
 
 83
 
 127
 
 116
 
 131
 
 124
 
 442
 
 462
Indianote (iii)
 34
 
 28
 
 132
 
 106
 
 135
 
 109
 
 488
 
 360
Total Asia insurance operations
 2,120
 
 2,272
 
 2,641
 
 2,010
 
 2,853
 
 2,237
 
 15,208
 
 12,331
US insurance operations
                             
Variable annuities
 11,977
 
 10,899
 
 -
 
 -
 
 1,198
 
 1,090
 
 11,977
 
 10,899
Elite Access (variable annuity)
 3,144
 
 3,108
 
 -
 
 -
 
 314
 
 311
 
 3,144
 
 3,108
Fixed annuities
 477
 
 527
 
 -
 
 -
 
 48
 
 53
 
 477
 
 527
Fixed index annuities
 458
 
 370
 
 -
 
 -
 
 46
 
 37
 
 458
 
 370
Wholesale
 1,230
 
 651
 
 -
 
 -
 
 123
 
 65
 
 1,230
 
 651
Total US insurance operations
 17,286
 
 15,555
 
 -
 
 -
 
 1,729
 
 1,556
 
 17,286
 
 15,555
UK and Europe insurance operationsnote (iv)
                             
Individual annuities
 565
 
 1,065
 
 -
 
 -
 
 57
 
 106
 
 565
 
 1,065
Bonds
 3,327
 
 2,934
 
 -
 
 -
 
 333
 
 294
 
 3,328
 
 2,937
Corporate pensions
 175
 
 92
 
 135
 
 138
 
 152
 
 147
 
 600
 
 592
Individual pensions
 1,185
 
 508
 
 32
 
 22
 
 150
 
 72
 
 1,295
 
 595
Income drawdown
 1,024
 
 352
 
 -
 
 -
 
 102
 
 35
 
 1,024
 
 352
Other products
 679
 
 20
 
 12
 
 6
 
 80
 
 9
 
 749
 
 54
Total Retailnote (iv)
 6,955
 
 4,971
 
 179
 
 166
 
 874
 
 663
 
 7,561
 
 5,595
Wholesale
 1,508
 
 1,710
 
 -
 
 -
 
 151
 
 171
 
 1,508
 
 1,710
Total UK and Europe insurance
     operationsnote (iv)
 8,463
 
 6,681
 
 179
 
 166
 
 1,025
 
 834
 
 9,069
 
 7,305
Group totalnote (iv)
 27,869
 
 24,508
 
 2,820
 
 2,176
 
 5,607
 
 4,627
 
 41,563
 
 35,191

Notes
(i)    
The tables shown above are provided as an indicative volume measure of transactions undertaken in the reporting year that have the potential to generate profits for shareholders. The amounts shown are not, and not intended to be, reflective of premium income recorded in the IFRS income statement.
(ii)    New business in China is included at Prudential’s 50 per cent interest in the China life operation.
(iii)   New business in India is included at Prudential’s 26 per cent interest in the India life operation.
(iv)
The 2014 UK and Europe insurance operations comparatives have been adjusted to exclude the contribution from the sold PruHealth and PruProtect businesses (APE sales of £23 million and PVNBP of £166 million), following the disposal of our 25 per cent interest in the businesses in November 2014.


Additional Unaudited Financial Information

A New Business

BASIS OF PREPARATION

The format of the schedules is consistent with the distinction between insurance and investment products as applied for previous financial reporting periods. With the exception of some US institutional business, products categorised as ‘insurance’ refer to those classified as contracts of long-term insurance business for regulatory reporting purposes, ie falling within one of the classes of insurance specified in part II of Schedule 1 to the Regulated Activities Order under Prudential Regulation Authority regulations.

The details shown for insurance products include contributions for contracts that are classified under IFRS 4 ‘Insurance Contracts’ as not containing significant insurance risk. These products are described as investment contracts or other financial instruments under IFRS. Contracts included in this category are primarily certain unit-linked and similar contracts written in UK Insurance Operations, and Guaranteed Investment Contracts and similar funding agreements written in US Operations.

New business premiums for regular premium products are shown on an annualised basis. Internal vesting business is classified as new business where the contracts include an open market option. New business premiums reflect those premiums attaching to covered business, including premiums for contracts designed as investment products for IFRS reporting.

Investment products referred to in the tables for funds under management are unit trusts, mutual funds and similar types of retail fund management arrangements. These are unrelated to insurance products that are classified as investment contracts under IFRS 4, as described in the preceding paragraph, although similar IFRS recognition and measurement principles apply to the acquisition costs and fees attaching to this type of business.

Post-tax New Business Profit has been determined using the European Embedded Value (EEV) methodology set out in our EEV basis results supplement.

In determining the EEV basis value of new business written in the period policies incept, premiums are included in projected cash flows on the same basis of distinguishing annual and single premium business as set out for statutory basis reporting.

Annual premium equivalent (APE) sales are subject to rounding.

Notes to Schedules A(i) to A(ix)

(1)
Prudential plc reports its results using both actual exchange rates (AER) and constant exchange rates (CER) so as to eliminate the impact of exchange translation.

 
 Local currency: £
 
Full year 2015*
Full year 2014*
Full year 2015 vs Full year 2014  appreciation (depreciation) of local currency against GBP*
 
 China
 
 Average Rate
 9.61
 10.15
6%
 
 Closing Rate
 9.57
 9.67
1%
 
 Hong Kong
 
 Average Rate
 11.85
 12.78
8%
 
 Closing Rate
 11.42
 12.09
6%
 
 India
 
 Average Rate
 98.08
 100.53
2%
 
 Closing Rate
 97.51
 98.42
1%
 
 Indonesia
 
 Average Rate
 20,476.93
 19,538.56
 (5)%
 
 Closing Rate
 20,317.71
 19,311.31
 (5)%
 
 Malaysia
 
 Average Rate
 5.97
 5.39
 (10)%
 
 Closing Rate
 6.33
 5.45
 (14)%
 
 Singapore
 
 Average Rate
 2.10
 2.09
 (0)%
 
 Closing Rate
 2.09
 2.07
 (1)%
 
 Thailand
 
 Average Rate
 52.38
 53.51
2%
 
 Closing Rate
 53.04
 51.30
 (3)%
 
 US
 
 Average Rate
 1.53
 1.65
8%
 
 Closing Rate
 1.47
 1.56
6%
 
 Vietnam
 
 Average Rate
 33,509.21
 34,924.62
4%
 
 Closing Rate
 33,140.64
 33,348.46
1%
*Average rate is for the 12 month period to 31 December.

(1a)
Insurance new business for overseas operations are converted using the year-to-date average exchange rate applicable at the time (AER). The sterling results for individual quarters represent the difference between the year-to-date reported sterling results at successive quarters and will include foreign exchange movements from earlier periods.
(1b)
Insurance new business for overseas operations for 2014 has been calculated using constant exchange rates (CER).
(1c)
Constant exchange rates have been used to calculate insurance new business for overseas operations for all periods in 2014 and 2015.
(2)
Annual Equivalents, calculated as regular new business contributions plus 10 per cent of single new business contributions, are subject to rounding. Present value of new business premiums (PVNBPs) are calculated as equalling single premiums plus the present value of expected premiums of new regular premium business. In determining the present value, allowance is made for lapses and other assumptions applied in determining the EEV new business profit.
(3)
Balance includes segregated and pooled pension funds, private finance assets and other institutional clients. Other movements reflect the net flows arising from the cash component of a tactical asset allocation fund managed by PPM South Africa.
(4)
New business in India is included at Prudential's 26 per cent interest in the India life operation.
(5)
Balance Sheet figures have been calculated at the closing exchange rate.
(6)
New business in China is included at Prudential's 50 per cent interest in the China life operation.
(7)
Mandatory Provident Fund (MPF) product sales in Hong Kong are included at Prudential's 36 per cent interest in Hong Kong MPF operation.
(8)
Investment flows for the year exclude year-to-date Eastspring Money Market Funds (MMF) gross inflows of £89,553 million (2014: £67,749 million) and net inflows of £1,066 million (2014: £10 million). Investment flows for the discrete fourth quarter exclude MMF gross inflows of £19,176 million (2014: £17,353 million) and net inflows of £304 million (2014: net outflows of £(48) million).
(9)
Excludes Curian Variable Series Trust funds (internal funds under management).
(10)
Total Group Investment Operations funds under management exclude MMF funds under management of £6,006 million at 31 December 2015 (31 December 2014: £4,801 million).
(11)
The 2014 UK and Europe insurance operations comparatives have been adjusted to exclude PruHealth and PruProtect APE sales of £23 million, new business profit of £11 million and PVNBP of £166 million, following the disposal of our 25 per cent interest in the businesses in November 2014.

Schedule A(i) – New Business Insurance Operations (Actual Exchange Rates)

                                 
   
Single
 
Regular
 
Annual Equivalents(2)
 
PVNBP(2)
   
2015
2014
   
2015
2014
   
2015
2014
   
2015
2014
 
   
YTD
YTD
+/- (%)
 
YTD
YTD
+/- (%)
 
YTD
YTD
+/- (%)
 
YTD
YTD
+/- (%)
   
£m
£m
   
£m
£m
   
£m
£m
   
£m
£m
 
Group Insurance Operations
                               
Asia (1a)
 
 2,120
 2,272
(7)%
 
 2,641
 2,010
31%
 
 2,853
 2,237
28%
 
 15,208
 12,331
23%
US(1a)
 
 17,286
 15,555
11%
 
 -
 -
N/A
 
 1,729
 1,556
11%
 
 17,286
 15,555
11%
UK(11)
 
 8,463
 6,681
27%
 
 179
 166
8%
 
 1,025
 834
23%
 
 9,069
 7,305
24%
Group Total (11)
 
 27,869
 24,508
14%
 
 2,820
 2,176
30%
 -
 5,607
 4,627
21%
 
 41,563
 35,191
18%
     
 
   
 
 
   
 
 
   
 
 
 
Asia Insurance Operations(1a)
                               
Cambodia
 
 -
 -
N/A
 
 8
 3
167%
 
 8
 3
167%
 
 38
 16
138%
Hong Kong
 
 546
 419
30%
 
 1,158
 603
92%
 
 1,213
 645
88%
 
 7,007
 3,861
81%
Indonesia
 
 230
 280
(18)%
 
 303
 357
(15)%
 
 326
 385
(15)%
 
 1,224
 1,619
(24)%
Malaysia
 
 100
 117
(15)%
 
 201
 189
6%
 
 211
 201
5%
 
 1,208
 1,284
(6)%
Philippines
 
 146
 121
21%
 
 44
 39
13%
 
 59
 51
16%
 
 287
 248
16%
Singapore
 
 454
 677
(33)%
 
 264
 289
(9)%
 
 309
 357
(13)%
 
 2,230
 2,683
(17)%
Thailand
 
 69
 92
(25)%
 
 88
 74
19%
 
 95
 83
14%
 
 422
 392
8%
Vietnam
 
 6
 4
50%
 
 82
 61
34%
 
 83
 61
36%
 
 343
 247
39%
SE Asia Operations
 
 1,551
 1,710
(9)%
 
 2,148
 1,615
33%
 
 2,304
 1,786
29%
 
 12,759
 10,350
23%
 inc. Hong Kong
                               
China(6)
 
 308
 239
29%
 
 111
 81
37%
 
 142
 105
35%
 
 739
 550
34%
Korea
 
 182
 212
(14)%
 
 123
 92
34%
 
 141
 113
25%
 
 780
 609
28%
Taiwan
 
 45
 83
(46)%
 
 127
 116
9%
 
 131
 124
6%
 
 442
 462
(4)%
India(4)
 
 34
 28
21%
 
 132
 106
25%
 
 135
 109
24%
 
 488
 360
36%
Total Asia Insurance Operations
 
 2,120
 2,272
(7)%
 
 2,641
 2,010
31%
 
 2,853
 2,237
28%
 
 15,208
 12,331
23%
     
 
   
 
 
   
 
 
   
 
 
 
US Insurance Operations(1a)
   
 
   
 
 
   
 
 
   
 
 
 
Variable annuities
 
 11,977
 10,899
10%
 
 -
 -
N/A
 
 1,198
 1,090
10%
 
 11,977
 10,899
10%
Elite Access (variable annuity)
 
 3,144
 3,108
1%
 
 -
 -
N/A
 
 314
 311
1%
 
 3,144
 3,108
1%
Fixed annuities
 
 477
 527
(9)%
 
 -
 -
N/A
 
 48
 53
(9)%
 
 477
 527
(9)%
Fixed index annuities
 
 458
 370
24%
 
 -
 -
N/A
 
 46
 37
24%
 
 458
 370
24%
Wholesale
 
 1,230
 651
89%
 
 -
 -
N/A
 
 123
 65
89%
 
 1,230
 651
89%
Total US Insurance Operations
 
 17,286
 15,555
11%
 
 -
 -
N/A
 
 1,729
 1,556
11%
 
 17,286
 15,555
11%
                                 
UK & Europe Insurance Operations(11)
                               
Individual annuities
 
 565
 1,065
(47)%
 
 -
 -
N/A
 
 57
 106
(46)%
 
 565
 1,065
(47)%
Bonds
 
 3,327
 2,934
13%
 
 -
 -
N/A
 
 333
 294
13%
 
 3,328
 2,937
13%
Corporate pensions
 
 175
 92
90%
 
 135
 138
(2%)
 
 152
 147
3%
 
 600
 592
1%
Individual pensions
 
 1,185
 508
133%
 
 32
 22
45%
 
 150
 72
108%
 
 1,295
 595
118%
Income drawdown
 
 1,024
 352
191%
 
 -
 -
N/A
 
 102
 35
191%
 
 1,024
 352
191%
Other products
 
 679
 20
3,295%
 
 12
 6
100%
 
 80
 9
789%
 
 749
 54
1,287%
Total Retail
 
 6,955
 4,971
40%
 
 179
 166
8%
 
 874
 663
32%
 
 7,561
 5,595
35%
Wholesale
 
 1,508
 1,710
(12)%
 
 -
 -
N/A
 
 151
 171
(12)%
 
 1,508
 1,710
(12)%
Total UK & Europe Insurance Operations
 
 8,463
 6,681
27%
 
 179
 166
8%
 
 1,025
 834
23%
 
 9,069
 7,305
24%
Group Total (11)
 
 27,869
 24,508
14%
 
 2,820
 2,176
30%
 
 5,607
 4,627
21%
 
 41,563
 35,191
18%

Schedule A(ii) – New Business Insurance Operations (Constant Exchange Rates)

Note:
In schedule A(ii) constant exchange rates have been used to calculate insurance new business for overseas operations for 2014.

                             
 
Single
 
Regular
Annual Equivalents(2)
 
PVNBP(2)
 
2015
2014
   
2015
2014
 
2015
2014
   
2015
2014
 
 
YTD
YTD
+/- (%)
 
YTD
YTD
+/- (%)
YTD
YTD
+/- (%)
 
YTD
YTD
+/- (%)
 
£m
£m
   
£m
£m
 
£m
£m
   
£m
£m
 
Group Insurance Operations
                           
Asia (1a) (1b)
 2,120
 2,300
(8)%
 
 2,641
 2,037
30%
 2,853
 2,267
26%
 
 15,208
 12,502
22%
US(1a) (1b)
 17,286
 16,768
3%
 
 -
 -
N/A
 1,729
 1,677
3%
 
 17,286
 16,768
3%
UK(11)
 8,463
 6,681
27%
 
 179
 166
8%
 1,025
 834
23%
 
 9,069
 7,305
24%
Group Total (11)
 27,869
 25,749
8%
 
 2,820
 2,203
28%
 5,607
 4,778
17%
 
 41,563
 36,575
14%
                             
Asia Insurance Operations(1a) (1b)
                           
Cambodia
 -
 -
N/A
 
 8
 3
167%
 8
 3
167%
 
 38
 17
124%
Hong Kong
 546
 452
21%
 
 1,158
 651
78%
 1,213
 696
74%
 
 7,007
 4,164
68%
Indonesia
 230
 267
(14)%
 
 303
 340
(11)%
 326
 367
(11)%
 
 1,224
 1,545
(21)%
Malaysia
 100
 105
(5)%
 
 201
 170
18%
 211
 181
17%
 
 1,208
 1,158
4%
Philippines
 146
 127
15%
 
 44
 41
7%
 59
 54
9%
 
 287
 260
10%
Singapore
 454
 673
(33)%
 
 264
 287
(8)%
 309
 354
(13)%
 
 2,230
 2,664
(16)%
Thailand
 69
 94
(27)%
 
 88
 76
16%
 95
 85
12%
 
 422
 401
5%
Vietnam
 6
 4
50%
 
 82
 63
30%
 83
 63
32%
 
 343
 258
33%
SE Asia Operations
 1,551
 1,722
(10)%
 
 2,148
 1,631
32%
 2,304
 1,803
28%
 
 12,759
 10,467
22%
inc. Hong Kong
                           
China(6)
 308
 252
22%
 
 111
 86
29%
 142
 111
28%
 
 739
 581
27%
Korea
 182
 213
(15)%
 
 123
 92
34%
 141
 113
25%
 
 780
 610
28%
Taiwan
 45
 85
(47)%
 
 127
 119
7%
 131
 128
2%
 
 442
 475
(7)%
India(4)
 34
 28
21%
 
 132
 109
21%
 135
 112
21%
 
 488
 369
32%
Total Asia Insurance Operations
 2,120
 2,300
(8)%
 
 2,641
 2,037
30%
 2,853
 2,267
26%
 
 15,208
 12,502
22%
                             
US Insurance Operations(1a) (1b)
                           
Variable annuities
 11,977
 11,749
2%
 
 -
 -
N/A
 1,198
 1,175
2%
 
 11,977
 11,749
2%
Elite Access (variable annuity)
 3,144
 3,351
(6)%
 
 -
 -
N/A
 314
 335
(6)%
 
 3,144
 3,351
(6)%
Fixed annuities
 477
 568
(16)%
 
 -
 -
N/A
 48
 57
(16)%
 
 477
 568
(16)%
Fixed index annuities
 458
 398
15%
 
 -
 -
N/A
 46
 40
15%
 
 458
 398
15%
Wholesale
 1,230
 702
75%
 
 -
 -
N/A
 123
 70
76%
 
 1,230
 702
75%
Total US Insurance Operations
 17,286
 16,768
3%
 
 -
 -
N/A
 1,729
 1,677
3%
 
 17,286
 16,768
3%
                             
UK & Europe Insurance Operations(11)
                           
Individual annuities
 565
 1,065
(47)%
 
 -
 -
N/A
 57
 106
(46)%
 
 565
 1,065
(47)%
Bonds
 3,327
 2,934
13%
 
 -
 -
N/A
 333
 294
13%
 
 3,328
 2,937
13%
Corporate pensions
 175
 92
90%
 
 135
 138
(2)%
 152
 147
3%
 
 600
 592
1%
Individual pensions
 1,185
 508
133%
 
 32
 22
45%
 150
 72
108%
 
 1,295
 595
118%
Income drawdown
 1,024
 352
191%
 
 -
 -
N/A
 102
 35
191%
 
 1,024
 352
191%
Other products
 679
 20
3,295%
 
 12
 6
100%
 80
 9
789%
 
 749
 54
1,287%
Total Retail
 6,955
 4,971
40%
 
 179
 166
8%
 874
 663
32%
 
 7,561
 5,595
35%
Wholesale
 1,508
 1,710
(12)%
 
 -
 -
N/A
 151
 171
(12)%
 
 1,508
 1,710
(12)%
Total UK & Europe Insurance Operations
 8,463
 6,681
27%
 
 179
 166
8%
 1,025
 834
23%
 
 9,069
 7,305
24%
Group Total (11)
 27,869
 25,749
8%
 
 2,820
 2,203
28%
 5,607
 4,778
17%
 
 41,563
 36,575
14%

Schedule A(iii) – Total Insurance New Business APE – By Quarter (Actual Exchange Rates)

 
2014
 
2015
 
 
Q1
Q2
Q3
Q4
 
Q1
Q2
Q3
Q4
 
 
£m
£m
£m
£m
 
£m
£m
£m
£m
 
Group Insurance Operations
                   
Asia (1a)
 507
 489
 548
 693
 
 681
 685
 655
 832
 
US(1a)
 432
 439
 364
 321
 
 400
 457
 421
 451
 
UK (11)
 230
 189
 209
 206
 
 169
 341
 252
 263
 
Group Total (11)
 1,169
 1,117
 1,121
 1,220
 
 1,250
1,483
 1,328
 1,546
 
                     
Asia Insurance Operations(1a)
                   
Cambodia
 -
 1
 1
 1
 
 2
 1
 3
 2
 
Hong Kong
 128
 130
 166
 221
 
 246
 273
 283
 411
 
Indonesia
 86
 98
 80
 121
 
 93
 90
 64
 79
 
Malaysia
 43
 48
 48
 62
 
 54
 51
 47
 59
 
Philippines
 11
 11
 13
 16
 
 14
 15
 15
 15
 
Singapore
 87
 85
 86
 99
 
 72
 81
 71
 85
 
Thailand
 25
 17
 18
 23
 
 28
 20
 21
 26
 
Vietnam
 11
 12
 16
 22
 
 13
 21
 21
 28
 
SE Asia Operations inc. Hong Kong
 391
 402
 428
 565
 
522
552
 525
 705
 
China(6)
 38
 19
 23
 25
 
 56
33
26
27
 
Korea
 26
 22
 32
 33
 
 31
43
38
29
 
Taiwan
 24
 30
 34
 36
 
 28
33
32
38
 
India(4)
 28
 16
 31
 34
 
 44
24
34
33
 
Total Asia Insurance Operations
 507
 489
 548
 693
 
 681
685
 655
 832
 
                     
US Insurance Operations(1a)
                   
Variable annuities
 317
 297
 260
 216
 
 272
334
307
285
 
Elite Access (variable annuity)
 69
 80
 80
 82
 
 74
92
81
67
 
Fixed annuities
 12
 15
 14
 12
 
 11
12
12
13
 
Fixed index annuities
 8
 10
 10
 9
 
 10
11
11
14
 
Wholesale
 26
 37
 -
 2
 
 33
8
10
72
 
Total US Insurance Operations
 432
 439
 364
 321
 
 400
457
 421
 451
 
                     
UK & Europe Insurance Operations(11)
                   
Individual annuities
 36
 27
 23
 20
 
 14
14
15
14
 
Bonds
 63
 67
 77
 87
 
 76
80
83
94
 
Corporate pensions
 40
 39
 38
 30
 
 33
43
31
45
 
Individual pensions
 12
 15
 21
 24
 
 27
35
38
50
 
Income drawdown
 5
 7
 11
 12
 
 14
25
32
31
 
Other products
 1
 3
 2
 3
 
 5
27
21
27
 
Total Retail
 157
 158
 172
 176
 
 169
224
220
261
 
Wholesale
 73
 31
 37
 30
 
 -
117
32
2
 
Total UK & Europe Insurance Operations
 230
 189
 209
 206
 
 169
341
 252
 263
 
Group Total(11)
 1,169
 1,117
 1,121
 1,220
 
 1,250
1,483
 1,328
 1,546
 

Schedule A(iv) – Total Insurance New Business APE – By Quarter (2014 at Constant Exchange Rates)

Note:
In schedule A(iv) constant exchange rates have been used to calculate insurance new business for overseas operations for all periods in 2014. Discrete quarters in 2015 are presented on actual exchange rates.

 
2014
 
2015
 
 
Q1
Q2
Q3
Q4
 
Q1
Q2
Q3
Q4
 
 
£m
£m
£m
£m
 
£m
£m
£m
£m
 
Group Insurance Operations
                   
Asia(1b)
 517
 500
 560
 690
 
 681
 685
 655
 832
 
US(1b)
 468
 483
 398
 328
 
 400
 457
 421
 451
 
UK (11)
 230
 189
 209
 206
 
 169
 341
 252
 263
 
Group Total(11)
 1,215
 1,172
 1,167
 1,224
 
 1,250
1,483
 1,328
 1,546
 
                     
Asia Insurance Operations(1b)
                   
Cambodia
 -
 1
 1
 1
 
 2
1
3
2
 
Hong Kong
 139
 141
 184
 232
 
 246
273
283
411
 
Indonesia
 82
 94
 76
 115
 
 93
90
64
79
 
Malaysia
 40
 43
 42
 56
 
 54
51
47
59
 
Philippines
 11
 13
 13
 17
 
 14
15
15
15
 
Singapore
 87
 85
 86
 96
 
 72
81
71
85
 
Thailand
 26
 18
 18
 23
 
 28
20
21
26
 
Vietnam
 11
 14
 16
 22
 
 13
21
21
28
 
SE Asia Operations inc. Hong Kong
 396
 409
 436
 562
 
 522
552
 525
 705
 
China(6)
 40
 21
 25
 25
 
 56
33
26
27
 
Korea
 27
 22
 32
 32
 
 31
43
38
29
 
Taiwan
 25
 31
 35
 37
 
 28
33
32
38
 
India(4)
 29
 17
 32
 34
 
 44
24
34
33
 
Total Asia Insurance Operations
 517
 500
 560
 690
 
 681
685
 655
 832
 
                     
US Insurance Operations(1b)
                   
Variable annuities
 343
 327
 285
 220
 
 272
334
307
285
 
Elite Access (variable annuity)
 75
 88
 87
 85
 
 74
92
81
67
 
Fixed annuities
 13
 16
 15
 13
 
 11
12
12
13
 
Fixed index annuities
 9
 11
 11
 9
 
 10
11
11
14
 
Wholesale
 28
 41
 -
 1
 
 33
8
10
72
 
Total US Insurance Operations
 468
 483
 398
 328
 
 400
457
 421
 451
 
                     
UK & Europe Insurance Operations(11)
                   
Individual annuities
 36
 27
 23
 20
 
 14
14
15
14
 
Bonds
 63
 67
 77
 87
 
 76
80
83
94
 
Corporate pensions
 40
 39
 38
 30
 
 33
43
31
45
 
Individual pensions
 12
 15
 21
 24
 
 27
35
38
50
 
Income drawdown
 5
 7
 11
 12
 
 14
25
32
31
 
Other products
 1
 3
 2
 3
 
 5
27
21
27
 
Total Retail
 157
 158
 172
 176
 
 169
224
 220
 261
 
Wholesale
 73
 31
 37
 30
 
 -
117
32
2
 
Total UK & Europe Insurance Operations
230
189
209
206
 
169
341
252
263
 
Group Total(11)
1,215
1,172
1,167
1,224
 
1,250
1,483
1,328
1,546
 

Schedule A(v) – Total Insurance New Business APE – By Quarter (2015 and 2014 at Constant Exchange Rates)

Note:
In schedule A(v) constant exchange rates have been used to calculate insurance new business for overseas operations for all periods in 2014 and 2015 ie the average exchange rate for the year ended 31 December 2015 is applied to each discrete quarter for 2014 and 2015.

 
2014
 
2015
 
 
Q1
Q2
Q3
Q4
 
Q1
Q2
Q3
Q4
 
 
£m
£m
£m
£m
 
£m
£m
£m
£m
 
Group Insurance Operations
                   
Asia(1c)
 517
 500
 560
 690
 
 661
 676
 675
 841
 
US(1c)
 468
 483
 398
 328
 
 396
 459
 427
 447
 
UK (11)
 230
 189
 209
 206
 
 169
 341
 252
 263
 
Group Total(11)
 1,215
 1,172
 1,167
 1,224
 
 1,226
1,476
 1,354
 1,551
 
                     
Asia Insurance Operations(1c)
                   
Cambodia
 -
 1
 1
 1
 
 2
1
3
2
 
Hong Kong
 139
 141
 184
 232
 
 244
273
287
409
 
Indonesia
 82
 94
 76
 115
 
 88
88
68
82
 
Malaysia
 40
 43
 42
 56
 
 50
48
49
64
 
Philippines
 11
 13
 13
 17
 
 13
15
16
15
 
Singapore
 87
 85
 86
 96
 
 70
81
71
87
 
Thailand
 26
 18
 18
 23
 
 26
20
23
26
 
Vietnam
 11
 14
 16
 22
 
 13
20
22
28
 
SE Asia Operations inc. Hong Kong
 396
 409
 436
 562
 
 506
546
 539
 713
 
China(6)
 40
 21
 25
 25
 
 56
32
27
27
 
Korea
 27
 22
 32
 32
 
 30
41
41
29
 
Taiwan
 25
 31
 35
 37
 
 27
33
32
39
 
India(4)
 29
 17
 32
 34
 
 42
24
36
33
 
Total Asia Insurance Operations
 517
 500
 560
 690
 
 661
676
 675
 841
 
                     
US Insurance Operations(1c)
                   
Variable annuities
 343
 327
 285
 220
 
 269
336
310
283
 
Elite Access (variable annuity)
 75
 88
 87
 85
 
 73
92
83
66
 
Fixed annuities
 13
 16
 15
 13
 
 11
12
12
13
 
Fixed index annuities
 9
 11
 11
 9
 
 10
11
12
13
 
Wholesale
 28
 41
 -
 1
 
 33
8
10
72
 
Total US Insurance Operations
 468
 483
 398
 328
 
 396
459
 427
 447
 
                     
UK & Europe Insurance Operations(11)
                   
Individual annuities
 36
 27
 23
 20
 
 14
14
15
14
 
Bonds
 63
 67
 77
 87
 
 76
80
83
94
 
Corporate pensions
 40
 39
 38
 30
 
 33
43
31
45
 
Individual pensions
 12
 15
 21
 24
 
 27
35
38
50
 
Income drawdown
 5
 7
 11
 12
 
 14
25
32
31
 
Other products
 1
 3
 2
 3
 
 5
27
21
27
 
Total Retail
157
158
172
176
 
 169
224
 220
 261
 
Wholesale
 73
 31
 37
 30
 
 -
117
32
2
 
Total UK & Europe Insurance Operations
230
189
209
206
 
169
341
252
263
 
Group Total(11)
1,215
1,172
1,167
1,224
 
1,226
1,476
1,354
1,551
 

Schedule A(vi) – Investment Operations – By Quarter (Actual Exchange Rates)

   
2014
 
2015
 
   
Q1
Q2
Q3
Q4 
 
Q1
Q2
Q3
Q4
 
   
£m
£m
£m
£m 
 
£m
£m
£m
£m
 
Group Investment Operations
                     
Opening FUM
 
143,916
147,914
153,849
157,533
 
162,380
169,345
163,488
155,365
 
Net Flows:(8)
 
2,571
4,123
2,893
2,930
 
2,990
(804)
(2,314)
(909)
 
 - Gross Inflows
 
12,146
14,045
12,847
13,670
 
17,512
14,566
11,839
10,553
 
 - Redemptions
 
(9,575)
(9,922)
(9,954)
(10,740)
 
(14,522)
(15,370)
(14,153)
(11,462)
 
Other Movements
 
1,427
1,812
791
1,917
 
3,975
(5,053)
(5,809)
2,230
 
Total Group Investment Operations(10)
 
147,914
153,849
157,533
162,380
 
169,345
163,488
155,365
156,686
 
                       
M&G
                     
Retail
                     
Opening FUM
 
67,202
68,981
71,941
73,012
 
74,289
75,673
69,158
63,464
 
Net Flows:
 
1,291
2,493
1,531
1,371
 
558
(3,976)
(3,939)
(3,501)
 
 - Gross Inflows
 
7,305
7,468
6,801
7,414
 
8,592
5,672
3,760
3,076
 
 - Redemptions
 
(6,014)
(4,975)
(5,270)
(6,043)
 
(8,034)
(9,648)
(7,699)
(6,577)
 
Other Movements
 
488
467
(460)
(94)
 
826
(2,539)
(1,755)
838
 
Closing FUM
 
68,981
71,941
73,012
74,289
 
75,673
69,158
63,464
60,801
 
                       
Comprising amounts for:
                     
   UK
 
42,199
42,392
41,756
40,705
 
41,143
38,701
36,457
35,738
 
   Europe (excluding UK)
 
25,244
27,927
29,622
31,815
 
32,675
28,726
25,388
23,524
 
   South Africa
 
1,538
1,622
1,634
1,769
 
1,855
1,731
1,619
1,539
 
   
68,981
71,941
73,012
74,289
 
75,673
69,158
63,464
60,801
 
                       
Institutional(3)
                     
Opening FUM
 
58,787
59,736
60,830
61,572
 
62,758
63,838
64,242
63,845
 
Net Flows:
 
152
275
138
(164)
 
122
921
1,243
1,564
 
 - Gross Inflows
 
1,655
2,894
2,295
2,185
 
3,712
2,449
3,312
3,053
 
 - Redemptions
 
(1,503)
(2,619)
(2,157)
(2,349)
 
(3,590)
(1,528)
(2,069)
(1,489)
 
Other Movements
 
797
819
604
1,350
 
958
(517)
(1,640)
195
 
Closing FUM
 
59,736
60,830
61,572
62,758
 
63,838
64,242
63,845
65,604
 
                       
Total M&G Investment Operations
 
128,717
132,771
134,584
137,047
 
139,511
133,400
127,309
126,405
 
                       
PPM South Africa FUM included in Total M&G
 
4,720
4,815
4,905
5,203
 
5,456
5,108
4,628
4,365
 
                       
Eastspring - excluding MMF(8)
                     
Third Party Retail(7)
                     
Opening FUM
 
16,109
16,753
18,259
19,893
 
21,893
25,687
26,017
24,175
 
Net Flows:
 
540
1,063
1,127
1,640
 
2,133
2,102
225
391
 
 - Gross Inflows
 
2,546
3,285
3,583
3,760
 
5,007
6,082
4,439
3,726
 
 - Redemptions
 
(2,006)
(2,222)
(2,456)
(2,120)
 
(2,874)
(3,980)
(4,214)
(3,335)
 
Other Movements
 
104
443
507
360
 
1,661
(1,772)
(2,067)
975
 
Closing FUM(5)
 
16,753
18,259
19,893
21,893
 
25,687
26,017
24,175
25,541
 
                       
Third Party Institutional Mandates
                     
Opening FUM
 
1,818
2,444
2,819
3,056
 
3,440
4,147
4,071
3,881
 
Net Flows:
 
588
292
97
83
 
177
149
157
637
 
 - Gross Inflows
 
640
398
168
311
 
201
363
328
698
 
 - Redemptions
 
(52)
(106)
(71)
(228)
 
(24)
(214)
(171)
(61)
 
Other Movements
 
38
83
140
301
 
530
(225)
(347)
222
 
Closing FUM(5)
 
2,444
2,819
3,056
3,440
 
4,147
4,071
3,881
4,740
 
                       
Total Eastspring Investment Operations
 
19,197
21,078
22,949
25,333
 
29,834
30,088
28,056
30,281
 
                       
US
                     
Curian - FUM(5) (9)
 
6,781
6,948
7,421
7,933
 
8,557
8,078
4,526
1,891
 

Schedule A(vii) – Total Insurance New Business Profit (Actual Exchange Rates)

 
2014
 
2015
 
 
Q1
Q2
Q3
Q4
 
Q1
Q2 
Q3
Q4
 
 
YTD
YTD
YTD
YTD
 
YTD
YTD
YTD
YTD
 
 
£m
£m
£m
£m
 
£m
£m
£m
£m
 
                     
New Business Profit(1a)
                   
Total Asia Insurance Operations
243
494
775
1,162
 
309
664
976
 1,490
 
Total US Insurance Operations
195
376
530
694
 
153
371
557
809
 
Total UK & Europe Insurance Operations(11)
88
139
200
259
 
34
155
231
318
 
Group Total (11)
526
1,009
1,505
2,115
 
496
1,190
1,764
2,617
 
                     
Annual Equivalent(1a) (2)
                   
Total Asia Insurance Operations
507
996
1,544
2,237
 
681
1,366
2,021
2,853
 
Total US Insurance Operations
432
871
1,235
1,556
 
400
857
1,278
1,729
 
Total UK & Europe Insurance Operations(11)
230
419
628
834
 
169
510
762
1,025
 
Group Total(11)
1,169
2,286
3,407
4,627
 
1,250
2,733
4,061
5,607
 
                     
New Business Margin (NBP as % of APE)
                   
Total Asia Insurance Operations
48%
50%
50%
52%
 
45%
49%
48%
52%
 
Total US Insurance Operations
45%
43%
43%
45%
 
38%
43%
44%
47%
 
Total UK & Europe Insurance Operations
38%
33%
32%
31%
 
20%
30%
30%
31%
 
Group Total
45%
44%
44%
46%
 
40%
44%
43%
47%
 
                     
PVNBP(1a) (2)
                   
Total Asia Insurance Operations
2,690
5,378
8,408
12,331
 
3,643
7,340
10,847
15,208
 
Total US Insurance Operations
4,323
8,703
12,352
15,555
 
3,998
8,574
12,782
17,286
 
Total UK & Europe Insurance Operations(11)
2,024
3,644
5,459
7,305
 
1,450
4,524
6,815
9,069
 
Group Total(11)
9,037
17,725
26,219
35,191
 
9,091
20,438
30,444
41,563
 
                     
New Business Margin (NBP as % of PVNBP)
                   
Total Asia Insurance Operations
9.0%
9.2%
9.2%
9.4%
 
8.5%
9.0%
9.0%
9.8%
 
Total US Insurance Operations
4.5%
4.3%
4.3%
4.5%
 
3.8%
4.3%
4.4%
4.7%
 
Total UK & Europe Insurance Operations
4.3%
3.8%
3.7%
3.5%
 
2.3%
3.4%
3.4%
3.5%
 
Group Total
5.8%
5.7%
5.7%
6.0%
 
5.5%
5.8%
5.8%
6.3%
 

Schedule A(viii) – Total Insurance New Business Profit (2014 at Constant Exchange Rates)

Note:
In schedule A(viii) constant exchange rates have been used to calculate insurance new business for overseas operations for all periods in 2014. The year-to-date amounts for 2015 are presented on actual exchange rates.

 
2014
 
2015
 
 
Q1
Q2
Q3
Q4
 
Q1
Q2 
Q3 
Q4
 
 
YTD
YTD
YTD
YTD
 
YTD
YTD
YTD
YTD
 
 
£m
£m
£m
£m
 
£m
£m
£m
£m
 
                     
New Business Profit(1b)
                   
Total Asia Insurance Operations
 245
 499
 785
 1,168
 
309
664
976
 1,490
 
Total US Insurance Operations
 211
 411
 579
 748
 
153
371
557
809
 
Total UK & Europe Insurance Operations(11)
 88
 139
 200
 259
 
34
155
231
318
 
Group Total(11)
544
1,049
1,564
2,175
 
496
1,190
1,764
2,617
 
                     
Annual Equivalent(1b) (2)
                   
Total Asia Insurance Operations
517
1,017
1,577
2,267
 
681
1,366
2,021
2,853
 
Total US Insurance Operations
468
951
1,349
1,677
 
400
857
1,278
1,729
 
Total UK & Europe Insurance Operations(11)
230
419
628
834
 
169
510
762
1,025
 
Group Total(11)
1,215
2,387
3,554
4,778
 
1,250
2,733
4,061
5,607
 
                     
New Business Margin (NBP as % of APE)
                   
Total Asia Insurance Operations
47%
49%
50%
52%
 
45%
49%
48%
52%
 
Total US Insurance Operations
45%
43%
43%
45%
 
38%
43%
44%
47%
 
Total UK & Europe Insurance Operations
38%
33%
32%
31%
 
20%
30%
30%
31%
 
Group Total
45%
44%
44%
46%
 
40%
44%
43%
47%
 
                     
PVNBP(1b) (2)
                   
Total Asia Insurance Operations
2,740
5,493
8,587
12,502
 
3,643
7,340
10,847
15,208
 
Total US Insurance Operations
4,682
9,506
13,493
16,768
 
3,998
8,574
12,782
17,286
 
Total UK & Europe Insurance Operations(11)
2,024
3,644
5,459
7,305
 
1,450
4,524
6,815
9,069
 
Group Total(11)
9,446
18,643
27,539
36,575
 
9,091
20,438
30,444
41,563
 
                     
New Business Margin (NBP as % of PVNBP)
                   
Total Asia Insurance Operations
8.9%
9.1%
9.1%
9.3%
 
8.5%
9.0%
9.0%
9.8%
 
Total US Insurance Operations
4.5%
4.3%
4.3%
4.5%
 
3.8%
4.3%
4.4%
4.7%
 
Total UK & Europe Insurance Operations
4.3%
3.8%
3.7%
3.5%
 
2.3%
3.4%
3.4%
3.5%
 
Group Total
5.8%
5.6%
5.7%
5.9%
 
5.5%
5.8%
5.8%
6.3%
 

Schedule A(ix) – Total Insurance New Business Profit (2015 and 2014 at Constant Exchange Rates)

Note:
In schedule A(ix) constant exchange rates have been used to calculate insurance new business
 
for overseas operations for all periods in 2014 and 2015, ie the average exchange rates for the year ended 31 December 2015 are applied to each period for 2014 and 2015.

 
2014
 
2015
 
 
Q1
Q2
Q3
Q4
 
Q1
Q2 
Q3
Q4
 
 
YTD
YTD
YTD
YTD
 
YTD
YTD
YTD
YTD
 
 
£m
£m
£m
£m
 
£m
£m
£m
£m
 
Post-tax analysis
                   
                     
New Business Profit(1c)
                   
Total Asia Insurance Operations
 245
 499
 785
 1,168
 
 299
 651
 972
 1,490
 
Total US Insurance Operations
 211
 411
 579
 748
 
 152
 370
 558
 809
 
Total UK & Europe Insurance Operations(11)
 88
 139
 200
 259
 
 34
 155
 231
 318
 
Group Total(11)
544
1,049
1,564
2,175
 
485
1,176
1,761
2,617
 
                     
Annual Equivalent(1c) (2)
                   
Total Asia Insurance Operations
517
1,017
1,577
2,267
 
661
1,337
2,012
2,853
 
Total US Insurance Operations
468
951
1,349
1,677
 
396
855
1,282
1,729
 
Total UK & Europe Insurance Operations(11)
230
419
628
834
 
169
510
762
1,025
 
Group Total(11)
1,215
2,387
3,554
4,778
 
1,226
2,702
4,056
5,607
 
                     
New Business Margin (NBP as % of APE)
                   
Total Asia Insurance Operations
47%
49%
50%
52%
 
45%
49%
48%
52%
 
Total US Insurance Operations
45%
43%
43%
45%
 
38%
43%
44%
47%
 
Total UK & Europe Insurance Operations
38%
33%
32%
31%
 
20%
30%
30%
31%
 
Group Total
45%
44%
44%
46%
 
40%
44%
43%
47%
 
                     
PVNBP(1c) (2)
                   
Total Asia Insurance Operations
2,740
5,493
8,587
12,502
 
3,539
7,190
10,799
15,208
 
Total US Insurance Operations
4,682
9,506
13,493
16,768
 
3,960
8,547
12,815
17,286
 
Total UK & Europe Insurance Operations(11)
2,024
3,644
5,459
7,305
 
1,450
4,524
6,815
9,069
 
Group Total(11)
9,446
18,643
27,539
36,575
 
8,949
20,261
30,429
41,563
 
                     
New Business Margin (NBP as % of PVNBP)
                   
Total Asia Insurance Operations
8.9%
9.1%
9.1%
9.3%
 
8.4%
9.1%
9.0%
9.8%
 
Total US Insurance Operations
4.5%
4.3%
4.3%
4.5%
 
3.8%
4.3%
4.4%
4.7%
 
Total UK & Europe Insurance Operations
4.3%
3.8%
3.7%
3.5%
 
2.3%
3.4%
3.4%
3.5%
 
Group Total
5.8%
5.6%
5.7%
5.9%
 
5.4%
5.8%
5.8%
6.3%
 


B Reconciliation of expected transfer of value of in-force business and required capital to free surplus

The tables below show how the value of in-force business (VIF) generated by the in-force long-term business and the associated required capital is modelled as emerging into free surplus over the next 40 years. Although a small amount (less than 3 per cent) of the Group’s embedded value emerges after this date, analysis of cash flows emerging in the years shown in the tables is considered most meaningful. The modelled cash flows use the same methodology underpinning the Group’s embedded value reporting and so are subject to the same assumptions and sensitivities used to prepare our 2015 results.
 
 
The impact of Solvency II which is effective from 1 January 2016 is not reflected in the analysis below in line with the guidance issued by the CFO Forum. The new regulatory regime will not impact the free surplus generation profile of our operations in Asia and the US as Solvency II does not act as the local constraint on the ability to distribute profits to the Group. For these businesses free surplus generation will continue to be driven by local regulatory and target capital requirements. For the UK insurance operations Solvency II will alter free surplus generation and an early estimate is provided in section D of the additional unaudited information.

In addition to showing the amounts, both discounted and undiscounted, expected to be generated from all in-force business at 31 December 2015, the tables also present the expected future free surplus to be generated from the investment made in new business during 2015 over the same 40-year period.

Expected transfer of value of in-force business (VIF) and required capital to free surplus
     
   
2015 £m
   
Undiscounted expected generation from
all in-force business at 31 December*
 
Undiscounted expected generation from
2015 long-term new business written*
Expected period of emergence
Asia
US
UK
Total
 
Asia
US
UK
Total
2016
1,015
1,120
486
2,621
 
148
276
28
452
2017
962
991
510
2,463
 
140
120
28
288
2018
926
951
506
2,383
 
150
131
29
310
2019
905
970
503
2,378
 
134
65
29
228
2020
871
1,018
499
2,388
 
139
106
33
278
2021
889
982
498
2,369
 
123
106
31
260
2022
887
921
489
2,297
 
128
88
29
245
2023
871
894
491
2,256
 
124
157
28
309
2024
844
755
478
2,077
 
118
140
29
287
2025
817
680
466
1,963
 
123
129
29
281
2026
800
606
454
1,860
 
105
110
26
241
2027
789
512
437
1,738
 
109
95
24
228
2028
766
447
424
1,637
 
102
85
24
211
2029
740
386
411
1,537
 
100
76
23
199
2030
724
328
398
1,450
 
108
69
22
199
2031
699
276
383
1,358
 
96
55
21
172
2032
681
272
373
1,326
 
94
48
20
162
2033
661
166
353
1,180
 
91
42
20
153
2034
648
130
331
1,109
 
89
35
20
144
2035
636
102
313
1,051
 
94
30
18
142
2036-2040
3,020
190
1,255
4,465
 
429
48
81
558
2041-2045
2,659
-
1,081
3,740
 
396
-
104
500
2046-2050
2,342
-
470
2,812
 
368
-
43
411
2051-2055
2,056
-
261
2,317
 
350
-
26
376
Total free surplus expected to
                 
 
emerge in the next 40 years
26,208
12,697
11,870
50,775
 
3,858
2,011
765
6,634
*
The analysis excludes amounts incorporated into VIF at 31 December 2015 where there is no definitive timeframe for when the payments will be made or receipts received. In particular it excludes the value of the shareholders' interest in the estate. It also excludes any free surplus emerging after 2055.

The above amounts can be reconciled to the new business amounts as follows:
           
 
2015 £m
   
Asia
US
UK
Total
Undiscounted expected free surplus generation for years 2016 to 2055
3,858
2,011
765
6,634
Less: discount effect
(2,138)
(725)
(392)
(3,255)
Discounted expected free surplus generation for years 2016 to 2055
1,720
1,286
373
3,379
Discounted expected free surplus generation for years 2055+
153
-
2
155
Less: Free surplus investment in new businessnote 8
(413)
(267)
(65)
(745)
Other items**
30
(210)
8
(172)
Post-tax EEV new business profitnote 3
1,490
809
318
2,617
**
Other items represent the impact of the time value of options and guarantees on new business, foreign exchange effects and other non-modelled items. Foreign exchange effects arise as EEV new business profit amounts are translated at average exchange rates and the expected free surplus generation uses year end closing rates.

The undiscounted expected free surplus generation from all in-force business at 31 December 2015 shown below can be reconciled to the amount that was expected to be generated as at 31 December 2014 as follows:
                         
Group
2015
2016
2017
2018
2019
2020
 
Other
 
Total
 
   
£m
£m
£m
£m
£m
£m
 
£m
 
£m
 
2014 expected free surplus generation
   for years 2015 - 2054
 2,513
 2,336
 2,228
 2,141
 2,179
 2,079
 
 33,666
 
 47,142
 
Less: Amounts expected to be realised
   in the current year
(2,513)
               
(2,513)
 
Add: Expected free surplus to be
   generated in year 2055*
             
 355
 
 355
 
Foreign exchange differences
 
 29
 28
 27
 31
 27
 
(165)
 
(23)
 
New business
 
 452
 288
 310
 228
 278
 
 5,078
 
 6,634
 
Operating movements
 
 5
 35
 25
 50
 29
 
(392)
 
(820)
 
Non-operating and other movements
 
(201)
(116)
(120)
(110)
(25)
     
2015 expected free surplus generation
   for years 2016 - 2055
 -
 2,621
 2,463
 2,383
 2,378
 2,388
 
 38,542
 
 50,775
 
                         
Asia
2015
2016
2017
2018
2019
2020
 
Other
 
Total
 
   
£m
£m
£m
£m
£m
£m
 
£m
 
£m
 
2014 expected free surplus generation
   for years 2015 - 2054
 953
 920
 883
 846
 819
 796
 
 19,360
 
 24,577
 
Less: Amounts expected to be realised
   in the current year
(953)
           
 -
 
(953)
 
Add: Expected free surplus to be
    generated in year 2055*
             
 315
 
 315
 
Foreign exchange differences
 
(23)
(22)
(19)
(19)
(20)
 
(466)
 
(569)
 
New business
 
 148
 140
 150
 134
 139
 
 3,147
 
 3,858
 
Operating movements
 
 3
 -
(20)
 6
(15)
 
(827)
 
(1,020)
 
Non-operating and other movements
 
(33)
(39)
(31)
(35)
(29)
     
2015 expected free surplus generation
   for years 2016 - 2055
 -
 1,015
 962
 926
 905
 871
 
 21,529
 
 26,208
 
                         
US
2015
2016
2017
2018
2019
2020
 
Other
 
Total
 
   
£m
£m
£m
£m
£m
£m
 
£m
 
£m
 
2014 expected free surplus generation
   for years 2015 - 2054
 1,054
 902
 844
 792
 866
 801
 
 5,271
 
 10,530
 
Less: Amounts expected to be realised
   in the current year
(1,054)
               
(1,054)
 
Add: Expected free surplus to be
   generated in year 2055*
                     
Foreign exchange differences
 
 52
 50
 46
 50
 47
 
 301
 
 546
 
New business
 
 276
 120
 131
 65
 106
 
 1,313
 
 2,011
 
Operating movements
 
 4
 22
 30
 35
 40
 
 762
 
 664
 
Non-operating and other movements
 
(114)
(45)
(48)
(46)
 24
     
2015 expected free surplus generation
   for years 2016 - 2055
 -
 1,120
 991
 951
 970
 1,018
 
 7,647
 
 12,697
 
                       
UK
2015
2016
2017
2018
2019
2020
 
Other
 
Total
   
£m
£m
£m
£m
£m
£m
 
£m
 
£m
2014 expected free surplus generation
   for years 2015 - 2054
 506
 514
 501
 503
 494
 482
 
 9,035
 
 12,035
Less: Amounts expected to be realised
   in the current year
(506)
               
(506)
Add: Expected free surplus to be
   generated in year 2055*
             
 40
 
 40
New business
 
 28
 28
 29
 29
 33
 
 618
 
 765
Operating movements
 
(2)
 13
 15
 9
 4
 
(327)
 
(464)
Non-operating and other movements
 
(54)
(32)
(41)
(29)
(20)
   
2015 expected free surplus generation
   for years 2016 - 2055
 -
 486
 510
 506
 503
 499
 
 9,366
 
 11,870
*
Excluding 2015 new business.

At 31 December 2015 the total free surplus expected to be generated over the next five years (2016 to 2020 inclusive), using the same assumptions and methodology as those underpinning our 2015 embedded value reporting was £12.2 billion, an increase of £1.2 billion from the £11.0 billion expected over the same period at the end of 2014.

This increase primarily reflects the new business written in 2015, which is expected to generate £1,556 million of free surplus over the next five years.

At 31 December 2015 the total free surplus expected to be generated on an undiscounted basis in the next 40 years is £50.8 billion, up from the £47.1 billion expected at the end of 2014 reflecting the effect of new business written across all three business operations of £6.6 billion and a positive foreign exchange translation effect of £0.4 billion. These positive effects have been offset by a £(0.8) billion adverse effect reflecting operating, market assumption changes and other items. In Asia, these principally reflect the impact of falls in equity market returns and bond values. In the US these mainly reflect higher future separate account growth due to the increase in interest rates, together with improved persistency. Offsetting these positive impacts is the negative effect of lower than expected separate account growth in the year due to broadly flat equity market returns in 2015. In the UK, these mainly arise from the effect of longevity reinsurance transactions entered into during the year and the effect of a partial hedge to protect future shareholder with-profits transfers from declines in UK equity markets. The longevity reinsurance transactions executed this year had the effect of accelerating the generation of future free surplus into 2015. The overall growth in the Group’s undiscounted value of free surplus reflects our ability to write both growing and profitable new business.

Actual underlying free surplus generated in 2015 from life business in-force at the end of 2015 was £3.3 billion including £0.6 billion of changes in operating assumptions and experience variances. This compares with the expected 2015 realisation at the end of 2014 of £2.5 billion. This can be analysed further as follows:
           
 
Asia
US
UK
Total
 
 
£m
£m
£m
£m
 
Transfer to free surplus in 2015
974
1,064
573
2,611
 
Expected return on free assets
30
42
47
119
 
Changes in operating assumptions and experience variances
(19)
320
258
559
 
Underlying free surplus generated from
     in-force life business in 2015
985
1,426
878
3,289
 
           
2015 free surplus expected to be generated at
    31 December 2014
953
1,054
506
2,513
 
                     
The equivalent discounted amounts of the undiscounted expected transfers from in-force business and required capital into free surplus shown previously are as follows:
     
   
2015 £m
 
 
Discounted expected generation from all
in-force business at 31 December
 
Discounted expected generation from
long-term 2015 new business written
Expected period of emergence
Asia
US
UK
Total
 
Asia
US
UK
Total
2016
969
1,081
457
2,507
 
141
267
28
436
2017
851
902
452
2,205
 
122
110
25
257
2018
766
817
424
2,007
 
122
112
24
258
2019
701
785
395
1,881
 
103
52
24
179
2020
629
776
369
1,774
 
101
79
25
205
2021
597
706
347
1,650
 
84
76
22
182
2022
558
625
320
1,503
 
83
58
20
161
2023
512
574
302
1,388
 
75
97
18
190
2024
464
459
276
1,199
 
68
81
18
167
2025
421
388
253
1,062
 
66
71
17
154
2026
388
330
232
950
 
52
56
14
122
2027
362
261
209
832
 
51
45
13
109
2028
333
216
190
739
 
45
38
12
95
2029
304
177
174
655
 
42
32
11
85
2030
282
145
157
584
 
43
27
10
80
2031
258
118
142
518
 
37
20
9
66
2032
239
113
129
481
 
34
16
8
58
2033
220
62
115
397
 
32
13
7
52
2034
206
49
101
356
 
30
11
7
48
2035
192
41
89
322
 
31
9
6
46
2036-2040
807
115
289
1,211
 
126
16
23
165
2041-2045
565
-
183
748
 
97
-
22
119
2046-2050
403
-
51
454
 
76
-
7
83
2051-2055
280
-
21
301
 
59
-
3
62
Total discounted free surplus expected to emerge in the next 40 years
11,307
8,740
5,677
25,724
 
1,720
1,286
373
3,379

The above amounts can be reconciled to the Group’s financial statements as follows:
 
 
2015 £m
Discounted expected generation from all in-force business for years 2016-2055
25,724
Discounted expected generation from all in-force business for years after 2055
563
Discounted expected generation from all in-force business at 31 December 2015note 11
26,287
Add: Free surplus of life operations held at 31 December 2015notes 8,10
5,642
Less: Time value of guaranteesnote 11
(1,100)
Other non-modelled itemsnote 11
1,948
Total EEV for life operationsnote 10
32,777

C Foreign currency source of key metrics

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

Free surplus and IFRS 2015 results

 
Underlying free surplus generated
Pre-tax operating
profit
Shareholders'
funds
 
%
%
%
 
note (2)
notes (2),(3),(4)
notes (2),(3),(4)
US$ linked(1)
11
16
14
Other Asia currencies
11
17
19
Total Asia
22
33
33
UK sterling(3),(4)
40
25
46
US$ (4)
38
42
21
Total
100
100
100

EEV 2015 results
     
   
 Post-tax new
business profits
Post-tax
operating profit
Shareholders'
funds
   
%
%
%
     
notes (2),(3),(4)
notes (2),(3),(4)
US$ linked(1)
 44
 38
 30
Other Asia currencies
 13
 12
 14
Total Asia
 57
 50
 44
UK sterling(3),(4)
12
13
32
US$(4)
31
37
24
Total
100
100
100

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

D Effect of Solvency II on EEV basis results on 1 January 2016

(i)  
Group summary

The Solvency II framework is effective from 1 January 2016. For our operations in Asia and the US there is no impact on the EEV results since Solvency II does not act as the local constraint on the ability to distribute profits to the Group. The embedded value and profile of free surplus generation for these businesses will continue to be driven by local regulatory and target capital requirements. For the UK insurance operations Solvency II will impact the EEV results as it changes the local regulatory valuation of net worth and capital requirements, affecting the components of the EEV and the expected profile of free surplus generation. In line with guidance provided by the CFO Forum in October 2015, the impact of Solvency II on the UK EEV has not been included in the main supplementary reporting. An early estimate on the likely impact of Solvency II on the EEV net worth and value of in-force business, together with the impact on free surplus generation is provided in this section of the additional unaudited information.

The impact of Solvency II on the EEV net worth and value of in-force business reported on 1 January 2016 are shown below:

Adjustment to shareholders' equity at 1 January 2016
     
Long-term insurance operations
Total EEV £m
 
As reported at 31 December 2015note 10
32,777
 
Opening adjustment at 1 January 2016
 
 
     Solvency II impact on net worth
3,108
 
     Solvency II impact on net VIF
(3,412)
 
Total opening adjustments at 1 January 2016note
(304)
Long-term insurance operations as at 1 January 2016
32,473

Note
The Solvency II framework requires technical provisions to be valued on a best estimate basis and capital requirements to be risk-based. It also requires the establishment of a risk margin (which for business in-force at 31 December 2015 can be broadly offset by transitional measures). As a result of applying this framework the EEV net worth increased by £3,108 million following the release of the prudent regulatory margins previously included under Solvency I, and also from the recognition within net worth of a portion of future shareholder transfers expected from the with-profits fund. The higher net worth is mirrored by increases in required capital reflecting the higher solvency capital requirements of the new regime.

The net value of in-force business (VIF) is correspondingly impacted as follows:
·  
the release of prudent regulatory margins and recognition of a portion of future shareholders transfers within Net Worth leads to a corresponding reduction in VIF;
·  
the run-off of the risk margin, net of transitional measures, is now captured in VIF;
·  
the cost of capital deducted from gross VIF increases as a result of higher Solvency II capital requirements;

The overall impact of these changes is to reduce the value of in-force by £3,412 million. The overall impact on the Group’s EEV of the above changes is a reduction of £304 million.

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

The tables below show how the UK value of in-force business and the associated required capital is expected to emerge into free surplus over the next 40 years. A comparison is shown between the current Solvency I and Solvency II regimes. A small amount (less than 3 per cent) of the Group’s embedded value emerges after this date. The modelled cashflows use the methodology underpinning the Group’s embedded value reporting, updated under Solvency II.


(a) Undiscounted expected generation from all in-force business at 31 December 2015 is as follows:
     
Expected period of emergence
Undiscounted expected generation 2015 £m
 
UK insurance operations
 
Group Total
 
As reported
Solvency II basis
Difference
 
As reported
Solvency II basis
Difference
2016
486
 527
 41
 
2,621
 2,662
 41
2017
510
 560
 50
 
2,463
 2,513
 50
2018
506
 549
 43
 
2,383
 2,426
 43
2019
503
 542
 39
 
2,378
 2,417
 39
2020
499
 535
 36
 
2,388
 2,424
 36
2021
498
 539
 41
 
2,369
 2,410
 41
2022
489
 531
 42
 
2,297
 2,339
 42
2023
491
 526
 35
 
2,256
 2,291
 35
2024
478
 513
 35
 
2,077
 2,112
 35
2025
466
 504
 38
 
1,963
 2,001
 38
2026
454
 493
 39
 
1,860
 1,899
 39
2027
437
 475
 38
 
1,738
 1,776
 38
2028
424
 462
 38
 
1,637
 1,675
 38
2029
411
 447
 36
 
1,537
 1,573
 36
2030
398
 429
 31
 
1,450
 1,481
 31
2031
383
 410
 27
 
1,358
 1,385
 27
2032
373
 505
 132
 
1,326
 1,458
 132
2033
353
 479
 126
 
1,180
 1,306
 126
2034
331
 446
 115
 
1,109
 1,224
 115
2035
313
 416
 103
 
1,051
 1,154
 103
2036-2040
1,255
 1,614
 359
 
4,465
 4,824
 359
2041-2045
1,081
 1,228
 147
 
3,740
 3,887
 147
2046-2050
470
 539
 69
 
2,812
 2,881
 69
2051-2055
261
 292
 31
 
2,317
 2,348
 31
Total free surplus expected to
             
    emerge in the next 40 years
11,870
13,561
 1,691
 
50,775
52,466
 1,691

(b) The equivalent discounted amounts of the undiscounted totals shown above are as follows:
     
Expected period of emergence
Discounted expected generation 2015 £m
 
UK insurance operations
 
Group Total
 
As reported
Solvency II basis
Difference
 
As reported
Solvency II basis
Difference
2016
457
 513
 56
 
2,507
 2,563
 56
2017
452
 524
 72
 
2,205
 2,277
 72
2018
424
 491
 67
 
2,007
 2,074
 67
2019
395
 462
 67
 
1,881
 1,948
 67
2020
369
 433
 64
 
1,774
 1,838
 64
2021
347
 412
 65
 
1,650
 1,715
 65
2022
320
 384
 64
 
1,503
 1,567
 64
2023
302
 359
 57
 
1,388
 1,445
 57
2024
276
 331
 55
 
1,199
 1,254
 55
2025
253
 306
 53
 
1,062
 1,115
 53
2026
232
 282
 50
 
950
 1,000
 50
2027
209
 257
 48
 
832
 880
 48
2028
190
 235
 45
 
739
 784
 45
2029
174
 215
 41
 
655
 696
 41
2030
157
 195
 38
 
584
 622
 38
2031
142
 176
 34
 
518
 552
 34
2032
129
 208
 79
 
481
 560
 79
2033
115
 186
 71
 
397
 468
 71
2034
101
 166
 65
 
356
 421
 65
2035
89
 146
 57
 
322
 379
 57
2036-2040
289
 501
 212
 
1,211
 1,423
 212
2041-2045
183
 279
 96
 
748
 844
 96
2046-2050
51
 116
 65
 
454
 519
 65
2051-2055
21
 52
 31
 
301
 332
 31
Total free surplus expected to
             
    emerge in the next 40 years
5,677
7,229
 1,552
 
25,724
27,276
 1,552

(c) The above amounts can be reconciled to the Group’s financial statements as follows:
       
Reconciliation of discounted expected free surplus generation to EEV
   
 
As
reported
£m
Solvency II basis
£m
Impact
£m
Discounted expected generation from all in-force business for years 2016-2055
25,724
27,276
1,552
Discounted expected generation from all in-force business for years after 2055
563
578
15
Discounted expected generation from all in-force business at 31 December 2015
26,287
27,854
1,567
Add: Free surplus of life operations held at 31 December 2015
5,642
3,958
(1,684)
Less: Time value of guarantees
(1,100)
(1,100)
-
Other non-modelled items
1,948
1,761
(187)
Total EEV for insurance operations
32,777
32,473
(304)
       
Representing:
     
Asia
13,643
13,643
-
US
9,487
9,487
-
UK
9,647
9,343
(304)
Total EEV for insurance operations
32,777
32,473
(304)



          
 
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.




 
 
Date 09 March 2016
 
 
PRUDENTIAL PUBLIC LIMITED COMPANY
   
 
By: /s/ Nic Nicandrou
   
 
Nic Nicandrou
 
CFO