Notes V-X

V: Policyholder liabilities

Analysis of movement in policyholder liabilities and unallocated surplus of with-profits funds

Group insurance operations

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  Insurance operations £m
Half year 2013 movements UK US Asia Total
Comprising:        
– Policyholder liabilities on the condensed consolidated statement of financial position* 133,912 92,261 31,501 257,674
– Unallocated surplus of with-profits funds on the condensed consolidated statement of financial position 10,526 63 10,589
– Group’s share of policyholder liabilities of joint ventures 3,100 3,100
At 1 January 2013 144,438 92,261 34,664 271,363
Premiums 3,880 8,208 3,266 15,354
Surrenders (2,315) (2,420) (1,652) (6,387)
Maturities/Deaths (3,883) (620) (430) (4,933)
Net flows (2,318) 5,168 1,184 4,034
Shareholders’ transfers post tax (102) (18) (120)
Investment-related items and other movements 2,411 2,038 5 4,454
Foreign exchange translation differences 211 6,748 1,292 8,251
Reclassification of Japan Life business as held for sale (970) (970)
Acquisition of Thanachart Life 487 487
At 30 June 2013 144,640 106,215 36,644 287,499
Comprising:        
– Policyholder liabilities on the condensed consolidated statement of financial position 133,290 106,215 33,223 272,728
– Unallocated surplus of with-profits funds on the condensed consolidated statement of financial position 11,350 84 11,434
– Group’s share of policyholder liabilities of joint ventures 3,337 3,337
Half year 2012 movements*        
Comprising:        
– Policyholder liabilities on the condensed consolidated statement of financial position* 127,024 69,189 28,110 224,323
– Unallocated surplus of with-profits funds on the condensed consolidated statement of financial position 9,165 50 9,215
– Group’s share of policyholder liabilities of joint ventures 2,752 2,752
At 1 January 2012 136,189 69,189 30,912 236,290
Premiums 4,062 7,303 2,641 14,006
Surrenders (2,378) (2,083) (1,252) (5,713)
Maturities/Deaths (3,819) (451) (294) (4,564)
Net flows (2,135) 4,769 1,095 3,729
Shareholders’ transfers post tax (110) (15) (125)
Investment-related items and other movements 4,276 1,906 1,055 7,237
Foreign exchange translation differences (83) (600) (227) (910)
At 30 June 2012 138,137 75,264 32,820 246,221
Comprising:        
– Policyholder liabilities on the condensed consolidated statement of financial position* 128,387 75,264 29,856 233,507
– Unallocated surplus of with-profits funds on the condensed consolidated statement of financial position 9,750 52 9,802
– Group’s share of policyholder liabilities of joint ventures 2,912 2,912
Average policyholder liability balances        
Half year 2013 133,601 99,238 35,993 268,832
Half year 2012 127,705 72,227 31,815 231,747

* The 2012 comparative results in the consolidated statement of financial position have been adjusted retrospectively from those previously published for the application of the new accounting standards described in note B.
† Averages have been based on opening and closing balances and adjusted for acquisitions and disposals in the period and exclude unallocated surplus of with-profits funds and adjusted for corporate transactions in the period.
‡ The Group’s investment in joint ventures are accounted for on an equity method and the Group’s share of the policyholder liabilities as shown above relate to the joint venture life business in China, India and of the Takaful business in Malaysia.

The items above represent the amount attributable to changes in policyholder liabilities and unallocated surplus of with-profits funds as a result of each of the components listed. The policyholder liabilities shown include investment contracts without discretionary participation features (as defined in IFRS 4) and their full movement in the year. The items above are shown gross of reinsurance.

The analysis includes the impact of premiums, claims and investment movements on policyholders’ liabilities. The impact does not represent premiums, claims and investment movements as reported in the income statement. For example, the premiums shown above will exclude any deductions for fees/charges and claims represent the policyholder liabilities provision released rather than the claim amount paid to the policyholder.

UK insurance operations

A reconciliation of the total policyholder liabilities and unallocated surplus of with-profits funds of UK insurance operations is as follows:

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      Other shareholder-backed funds and subsidiaries    
Half year 2013 movements SAIF and PAC with-profits sub-fund
£m
  Unit-linked liabilities
£m
Annuity and other long-term business
£m
  Total
£m

* Averages have been based on opening and closing balances and exclude the unallocated surplus of the with-profits funds.

Notes

  1. Net outflows increased from £2,135 million in the first half of 2012 to £2,318 million for the same period in 2013, driven by an increase in the net outflows of the with-profits business reflecting lower sales of with-profits bonds in the period. The levels of inflows/outflows for unit-linked business is driven by corporate pension schemes with transfers in or out from one or two schemes influencing the level of flows in the year. Excluding these transactions, the net flow in the unit-linked business for the first half of 2013 is broadly consistent to the same period in 2012.
  2. Investment-related items and other movements of £2,411 million across fund types reflected the strong growth in the equity market in the first half of 2013, partly offset by the impact on liabilities of rising long-term bond yields.
Comprising:            
– Policyholder liabilities 84,407   22,197 27,308   133,912
– Unallocated surplus of with-profits funds 10,526     10,526
At 1 January 2013 94,933   22,197 27,308   144,438
Premiums 1,790   1,428 662   3,880
Surrenders (1,063)   (1,227) (25)   (2,315)
Maturities/Deaths (2,709)   (326) (848)   (3,883)
Net flowsnote (a) (1,982)   (125) (211)   (2,318)
Shareholders’ transfers post tax (102)     (102)
Switches (104)   104  
Investment-related items and other movementsnote (b) 1,614   1,067 (270)   2,411
Foreign exchange translation differences 211     211
At 30 June 2013 94,570   23,243 26,827   144,640
Comprising:            
– Policyholder liabilities 83,220   23,243 26,827   133,290
– Unallocated surplus of with-profits funds 11,350     11,350
Half year 2012 movements          
Comprising:      
– Policyholder liabilities 80,976   21,281 24,767   127,024
– Unallocated surplus of with-profits funds 9,165     9,165
At 1 January 2012 90,141   21,281 24,767   136,189
Premiums 2,044   1,064 954   4,062
Surrenders (1,071)   (1,247) (60)   (2,378)
Maturities/Deaths (2,649)   (314) (856)   (3,819)
Net flowsnote (a) (1,676)   (497) 38   (2,135)
Shareholders’ transfers post tax (110)     (110)
Switches (131)   131  
Investment-related items and other movementsnote (b) 2,900   343 1,033   4,276
Foreign exchange translation differences (83)     (83)
At 30 June 2012 91,041   21,258 25,838   138,137
Comprising:    
– Policyholder liabilities 81,291   21,258 25,838   128,387
– Unallocated surplus of with-profits funds 9,750     9,750
Average policyholder liability balances*    
Half year 2013 83,814   22,720 27,067   133,601
Half year 2012 81,134   21,269 25,302   127,705

US insurance operations

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Half year 2013 movements Variable annuity separate account liabilities
£m
Fixed annuity, GIC and other business
£m
Total
£m

* Averages have been based on opening and closing balances.

Notes

  1. Movements in the period have been translated at an average rate of US$1.54/£1.00 (30 June 2012: US$1.58/£1.00). The closing balance has been translated at a closing rate of US$1.52/£1.00 (30 June 2012: US$1.57/£1.00; 31 December 2012: US$1.63/£1.00). Differences upon retranslation are included in foreign exchange translation differences.
  2. Net flows in the first half of 2013 were £5,168 million compared with £4,769 million in the first half of 2012, driven largely by increased new business volumes in the US business.
  3. The £2,323 million of investment-related items and other movements for variable annuity separate account liabilities for the first six months in 2013 reflects the increase in US equity market and partly offset by the reduction in bond values during the period. Fixed annuity, GIC and other business investment and other movements primarily reflects interest credited to the policyholder account in the period net of falls in technical provisions held for the guarantees issued with variable annuity business.
At 1 January 2013 49,298 42,963 92,261
Premiums 5,665 2,543 8,208
Surrenders (1,352) (1,068) (2,420)
Maturities/Deaths (259) (361) (620)
Net flowsnote (b) 4,054 1,114 5,168
Transfers from general to separate account 715 (715)
Investment-related items and other movementsnote (c) 2,323 (285) 2,038
Foreign exchange translation differencesnote (a) 3,664 3,084 6,748
At 30 June 2013 60,054 46,161 106,215
Half year 2012 movements
At 1 January 2012 37,833 31,356 69,189
Premiums 5,060 2,243 7,303
Surrenders (1,024) (1,059) (2,083)
Maturities/Deaths (194) (257) (451)
Net flowsnote (b) 3,842 927 4,769
Transfers from general to separate account 708 (708)
Investment-related items and other movementsnote (c) 1,557 349 1,906
Foreign exchange translation differencesnote (a) (315) (285) (600)
At 30 June 2012 43,625 31,639 75,264
Average policyholder liability balances*
Half year 2013 54,676 44,562 99,238
Half year 2012 40,729 31,498 72,227

Asia insurance operations

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Half year 2013 movements With-profits business
£m
Unit-linked liabilities
£m
Other
£m
Total
£m

* The 2012 comparative results in the consolidated statement of financial position have been adjusted retrospectively from those previously published for the application of the new accounting standards described in note B.
† Averages have been based on opening and closing balances and exclude unallocated surplus of the with-profits funds, and adjusted for corporate transactions in the period.
‡ The Group’s investment in joint ventures are accounted for on an equity method and the Group’s share of the policyholder liabilities as shown above relate to the joint venture life businesses in China, India and of the Takaful business in Malaysia.

Notes

  1. Movements in the period have been translated at the average exchange rate for the six months ended 30 June 2013. The closing balance has been translated at the closing spot rates as at 30 June 2013. Differences upon retranslation are included in foreign exchange translation differences.
  2. Net flows have increased to £1,184 million in the first half of 2013 reflecting increased premium flows from new business and growth in the in-force books offset by higher surrenders and maturities in the with-profits business.
  3. The surrenders for shareholder-backed business in the first half of 2013, are broadly consistent with the equivalent period in 2012 once allowance is made for the movements in investment markets and foreign exchange. For with-profits business, surrenders, maturities and deaths have increased from £499 million in half year 2012 to £742 million in half year 2013, primarily as a result of an increased number of policies within Hong Kong and Singapore reaching their five year anniversary and maturity, the point at which some product features trigger.
  4. Investment-related items and other movements for with-profits business for the first six months of 2013 principally represents unrealised losses on bonds, following the rise in long-term bond yields within the with-profits funds. This has been partly offset by gains in the unit-linked funds from the improvement in equity markets in the period.
  5. The acquisition of Thanachart Life reflects the liabilities acquired at the date of acquisition.
  6. The liabilities of the Japanese life operation at 30 June 2013 have been removed from policyholder liabilities following its reclassification as held for sale at that date.
Comprising:        
– Policyholder liabilities on the condensed consolidated statement of financial position* 13,388 11,969 6,144 31,501
– Unallocated surplus of with-profits funds on the condensed consolidated statement of financial position 63 63
– Group’s share of policyholder liabilities of joint ventures 2,059 1,041 3,100
At 1 January 2013 13,451 14,028 7,185 34,664
Premiums:        
New business 144 883 334 1,361
In-force 743 664 498 1,905
887 1,547 832 3,266
Surrendersnote (c) (458) (1,043) (151) (1,652)
Maturities/Deathsnote (c) (284) (22) (124) (430)
Net flowsnote (b) 145 482 557 1,184
Shareholders’ transfers post tax (18) (18)
Investment-related items and other movementsnote (d) (544) 341 208 5
Reclassification of Japan business held for salenote (f) (377) (593) (970)
Acquisition of Thanachart Lifenote (e) 487 487
Foreign exchange translation differencesnote (a) 707 370 215 1,292
At 30 June 2013 13,741 14,844 8,059 36,644
Comprising:        
– Policyholder liabilities on the condensed consolidated statement of financial position 13,657 12,783 6,783 33,223
– Unallocated surplus of with-profits funds on the condensed consolidated statement of financial position 84 84
– Group’s share of policyholder liabilities of joint ventures 2,061 1,276 3,337
Half year 2012 movements*        
Comprising:        
– Policyholder liabilities on the condensed consolidated statement of financial position* 12,593 10,101 5,416 28,110
– Unallocated surplus of with-profits funds on the condensed consolidated statement of financial position 50 50
– Group’s share of policyholder liabilities of joint ventures 1,914 838 2,752
At 1 January 2012 12,643 12,015 6,254 30,912
Premiums:        
New business 110 638 297 1,045
In-force 593 617 386 1,596
703 1,255 683 2,641
Surrendersnote (c) (303) (819) (130) (1,252)
Maturities/Deaths (196) (16) (82) (294)
Net flows 204 420 471 1,095
Shareholders’ transfers post tax (15) (15)
Investment-related items and other movements 558 325 172 1,055
Foreign exchange translation differencesnote (a) 6 (167) (66) (227)
At 30 June 2012 13,396 12,593 6,831 32,820
Comprising:        
– Policyholder liabilities on the condensed consolidated statement of financial position* 13,344 10,643 5,869 29,856
– Unallocated surplus of with-profits funds on the condensed consolidated statement of financial position 52 52
– Group’s share of policyholder liabilities of joint ventures 1,950 962 2,912
Average policyholder liability balances        
Half year 2013 13,522 14,625 7,846 35,993
Half year 2012 12,969 12,304 6,542 31,815

W: Share capital, share premium and own shares

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  Number of ordinary shares Share capital
£m
Share premium
£m
Issued shares of 5p each fully paid:      
At 1 January 2012 2,548,039,330 127 1,873
Shares issued under share option schemes 8,209,568 14
At 30 June 2012 2,556,248,898 127 1,887
Issued shares of 5p each fully paid:      
At 1 January 2012 2,548,039,330 127 1,873
Shares issued under share option schemes 9,203,022 1 16
At 31 December 2012 2,557,242,352 128 1,889
Issued shares of 5p each fully paid:      
At 1 January 2013 2,557,242,352 128 1,889
Shares issued under share option schemes 2,036,258 1
At 30 June 2013 2,559,278,610 128 1,890

Amounts recorded in share capital represent the nominal value of the shares issued. The difference between the proceeds received on issue of shares, net of issue costs, and the nominal value of shares issued is credited to the share premium account.

At 30 June 2013, there were options outstanding under Save As You Earn schemes to subscribe for shares as follows:

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  Number of shares
to subscribe for
Share price range Exercisable
by year
from to
30 June 2013 9,014,837 288p 629p 2018
30 June 2012 8,181,704 288p 572p 2017
31 December 2012 9,396,810 288p 629p 2018

Transactions by Prudential plc and its subsidiaries in Prudential plc shares

The Group buys and sells Prudential plc (own shares) either in relation to its share schemes or via transactions undertaken by authorised investment funds that the Group is deemed to control. Further information about these transactions is set out below.

The cost of own shares of £71 million as at 30 June 2013 (30 June 2012: £101 million; 31 December 2012: £97 million) is deducted from retained earnings. The Company has established trusts to facilitate the delivery of shares under employee incentive plans and savings-related share option schemes. At 30 June 2013, 4.2 million (30 June 2012: 6.5 million; 31 December 2012: 8.0 million) Prudential plc shares with a market value of £45 million (30 June 2012: £49 million; 31 December 2012: £69 million) were held in such trusts all of which are for employee incentive plans.

In half year 2013, the Company purchased the following number of shares in respect of employee incentive plans.

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  Number of shares purchased*
(in millions)
Cost
£m
Half year 2013 2.9 31.4
Half year 2012 5.8 44.2
Full year 2012 9.4 76.1

* The maximum number of shares held during half year 2013 was 8.0 million which was at the beginning of the period.

None of the shares were held by a qualifying employee share ownership trust at 30 June 2013 (30 June 2012: 0.1 million; 31 December 2012: none). The shares held by the trust at 30 June 2012 were subsequently fully distributed on maturity of savings-related share option schemes.

The Group has consolidated a number of authorised investment funds where it is deemed to control these funds under IFRS. Some of these funds hold shares in Prudential plc. The total number of shares held by these funds at 30 June 2013 was 4.2 million (30 June 2012: 8.3 million; 31 December 2012: 4.5 million) and the cost of acquiring these shares of £26 million (30 June 2012: £50 million; 31 December 2012: £27 million) is included in the cost of own shares. The market value of these shares as at 30 June 2013 was £46 million (30 June 2012: £56 million; 31 December 2012: £39 million).

During half year 2013 these funds made net disposals of 268,411 Prudential shares (30 June 2012: 357,340; 31 December 2012: 4,143,340) for a net decrease of £1.6 million to book cost (30 June 2012: net decrease of £2.6 million; 31 December 2012: net decrease of £25.1 million).

All share transactions were made on an exchange other than the Stock Exchange of Hong Kong.

Other than set out above the Group did not purchase, sell or redeem any Prudential plc listed securities during half year 2013 or 2012.

X: Business acquisitions

(a) Acquisition of Thanachart Life Assurance Company Limited and bancassurance partnership agreement with Thanachart Bank

On 3 May 2013, the agreement Prudential plc, through its subsidiary Prudential Life Assurance (Thailand) Public Company Limited (Prudential Thailand), entered into in November 2012 to establish an exclusive 15-year partnership with Thanachart Bank Public Company Limited (Thanachart Bank) to develop jointly their bancassurance business in Thailand was launched. At the same time, Prudential Thailand completed the acquisition of 100 per cent of the voting interest in Thanachart Life Assurance Company Limited (Thanachart Life), a wholly-owned life insurance subsidiary of Thanachart Bank. This transaction builds on Prudential’s strategy of focusing on the highly attractive markets of South-east Asia and is in line with the Group’s multichannel distribution strategy.

The consideration for the transaction is THB 18.981 billion (£412 million), of which THB 17.500 billion (£380 million) was settled in cash on completion in May 2013 with a further payment of THB 0.946 billion (£20 million), for adjustments to reflect the net asset value as at completion date, paid in July 2013. In addition a deferred payment of THB 0.535 billion (£12 million) is payable 12 months after completion. Included in the total consideration of THB 18.981 billion (£412 million) was the cost of the distribution rights associated with the exclusive 15-year bancassurance partnership agreement with Thanachart Bank.

The purchase consideration paid was equivalent to the fair value of the acquired assets and liabilities assumed. No goodwill has been recognised.

In addition to the purchase consideration, the Group incurred £4 million of acquisition related costs, of which £3 million was recognised as an expense in the consolidated income statement in the second half of 2012 and the remaining £1 million recognised in half year 2013.

Assets acquired and liabilities assumed at the date of acquisition

The fair value of the acquired assets and liabilities are shown in the table below.

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  Fair value recognised at acquisition date
£m
Assets  
Acquired value of in-force business 21
Investments (principally debt securities) 642
Cash and cash equivalents 4
Other assets (including distribution rights) 293
Total assets 960
   
Liabilities  
Insurance contract liabilities 487
Other non-insurance liabilities 61
Total liabilities 548
Net assets acquired and liabilities assumed 412
Purchase consideration (including £32 million of deferred consideration) 412

Insurance contract liabilities were valued consistent with Prudential’s existing IFRS valuation basis for the Thailand Life business, determined in accordance with methods prescribed by local GAAP adjusted to comply, where necessary, with UK GAAP. In accordance with IFRS 3 ‘Business Combinations’, an acquired value of in-force business has been recognised.

Included within the identifiable assets as shown above are loans and other debtors acquired with fair values of £6 million. These values represent the gross contractual amounts all of which are expected to be collected.

The condensed consolidated statement of cash flows contains a £376 million net cash outflow in respect of the acquisition of Thanachart Life and the cost of the distribution rights representing cash consideration paid of £380 million less cash and cash equivalents acquired of £4 million.

Impact of the acquisition on the results of the Group

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  Actual £m Proforma £m
  Post-acquisition period from
3 May to
30 June 2013
Estimated
Half year 2013 note (i)

Notes

  1. The proforma shows the estimation of the Thanachart Life business’ contribution to the Group’s consolidated revenue and profit before tax for the period if the acquisition had occurred on 1 January 2013. In determining these amounts, it has been assumed that the fair value adjustments which arose on the date of acquisition would have been the same as if the acquisition had occurred on 1 January 2013. These amounts have been determined using actual results for the four-month period to 2 May 2013 and the post-acquisition results from 3 May to 30 June 2013.
  2. The amortisation of acquisition accounting adjustments represents the amortisation of the acquired value of in-force business.
Revenue 15 102
Operating profit based on longer-term investment returns 6 18
Short-term fluctuations in investment returns (1) (1)
Amortisation of acquisition accounting adjustmentsnote (ii) (1) (2)
Profit before tax 4 15

(b) Acquisition of Reassure America Life Insurance Company in 2012

On 4 September 2012, the Group through its indirect wholly-owned subsidiary, Jackson completed the acquisition of 100 per cent issued share capital of SRLC America Holding Corp. and its primary operating subsidiary, Reassure America Life Insurance Company (REALIC). REALIC is a US-based insurance company whose business model was to acquire, through purchase or reinsurance, closed blocks of insurance business, primarily life assurance risks. REALIC did not and does not write new business.

The purchase consideration, which remains subject to final agreement under the terms of the transaction with Swiss Re, is £370 million (US$587 million). At the date these condensed financial statements were approved the fair value of the identifiable acquired assets and liabilities and the consideration were subject to finalisation. In accordance with accounting guidance for business combinations, the Company will continue to review the balance sheet and record required adjustments, for up to a 12-month period following the acquisition close date, in order to reflect updated information. Any measurement period adjustments determined to be material will be applied retrospectively to the acquisition date in the Company’s consolidated financial statements and depending on the nature of the adjustment, the Company’s results subsequent to the acquisition period could be affected.

The condensed consolidated statement of cash flows contained a £224 million net cash outflow in full year 2012 in respect of this acquisition representing cash consideration of £371 million less cash and cash equivalents acquired of £147 million.

 
 

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